Allocable Surplus

Introduction

Allocable surplus is a central technical concept under the Payment of Bonus Act, 1965 (PBA). It determines the quantum of profits out of which bonus is distributable to employees. Precise computation of allocable surplus — and its interaction with concepts such as available surplus, set‑offs for past losses and transfers to reserves — is a perennial source of litigation between employers and employees. For practitioners advising managements, unions or tribunals, mastery of how allocable surplus is defined and calculated is a prerequisite to winning disputes over bonus entitlements.

Core Legal Framework

• Statute: Payment of Bonus Act, 1965.
• Definition: The Act provides a statutory definition of “allocable surplus”. In plain statutory language: allocable surplus means sixty per cent of the available surplus in the case of a banking company and sixty‑seven per cent of the available surplus in the case of any other establishment.
• (See the definition clause of the Act where “allocable surplus” is defined; read conjunctively with the definition of “available surplus”.)
• Key complementary provisions to consult when computing or disputing allocable surplus:
• Definitions of “available surplus” and “gross profits” in the Act (these determine the starting point).
• Provisions authorising set‑off of past years’ losses and transfers to reserves (which reduce available surplus).
• Provisions fixing minimum and maximum bonus (statutory minimum of 8.33% of salary/wages and statutory maximum of 20% of salary/wages subject to allocable surplus).
• Procedural provisions — claims, inspection, appeals and penalties — under the Act.
• Note on sources: computation frequently requires reading the Act with reference to the company’s audited financial statements and relevant accounting standards. Income‑tax adjustments and Companies Act (or banking regulation) mandated transfers must also be examined.

Practical Application and Nuances

How allocable surplus functions in practice
1. Two‑step computation
– Step 1 — Determine available surplus: Start with gross profits of the accounting year. Reduce by items allowed by the PBA (e.g., set‑offs for past losses, permissible deductions, bona fide transfers to reserves where permitted). The residual is the available surplus.
– Step 2 — Apply the statutory percentage: For banks take 60% of available surplus; for all other establishments take 67% of available surplus — that result is the allocable surplus available for distribution among eligible employees.
2. Interaction with statutory minimum/maximum
– Employees are statutorily entitled to a minimum bonus (8.33% of salary/wages) and a maximum bonus (20% of salary/wages). Even if allocable surplus is large, the employer need not pay more than 20% to any employee. Conversely, if allocable surplus is too small to fund the 8.33% minimum, the employer must demonstrate that allocable surplus is insufficient; otherwise a claim for minimum bonus will succeed.
3. Set‑offs and bona fide transfers — what reduces available surplus
– Permissible set‑offs typically include prior year losses carried forward and specified transfers to reserves if the Act allows them. The key inquiry is whether the transfer or deduction is bona fide and correctly authorised under law and accounting standards; artificial diminution of available surplus by unauthorised transfers will be struck down.
– Treat inter‑year adjustments (e.g., prior period expenses, tax adjustments) carefully: disclosure in accounts and auditor’s working papers is critical.
4. Evidence to establish or challenge allocable surplus
– For employers: audited financial statements, auditor’s certificate specifically computing available and allocable surplus, board resolutions authorising transfers to reserves, tax computations and working papers showing set‑offs.
– For employees/unions: challenge the genuineness of transfers (minutes, board resolutions, contemporaneous audit notes), compare book profits with cash‑flow, scrutinise non‑recurring items and extraordinary write‑offs, attack misclassification of revenue/expenditure that reduces gross profits.
5. Example computation (simplified)
– Gross profits: Rs. 100 crore
– Less permissible deductions & set‑offs (past losses, bona fide transfers): Rs. 20 crore
– Available surplus: Rs. 80 crore
– Allocable surplus (non‑banking establishment): 67% of 80 crore = Rs. 53.6 crore
– This Rs. 53.6 crore is the pool to be distributed among eligible employees subject to individual minimum/maximum caps and statutory distribution formula.
6. Practical points in litigation and adjudication
– Auditor’s certificate is persuasive but not decisive; courts/tribunals will examine substance over form.
– Employers must justify transfers/reserves: whether they were in compliance with company law, banking regulations (if applicable), and bona fide commercial reasons.
– Where allocations are disputed, tribunals often remit to accounting experts or order re‑computation by an independent accountant.
7. Industry‑specific issues
– Banking companies: special regulatory overlay (banking regulations and RBI directions) may require or constrain transfers; interact with reserve requirements and prudential provisioning that impact available surplus.
– Companies with cyclical profits: employers may seek carry‑forward of losses; employees will scrutinise whether losses are bona fide or taxable adjustments.

Landmark Judgments

(Practitioners should read the full text of these decisions for propositions and factual matrices before relying on them.)
1. On bona fides of transfers to reserves and set‑offs
– Several higher‑court decisions have emphasised that transfers to reserves which are colourable devices to avoid payment of bonus will not be permitted. Courts look at the purpose and continuity of such transfers, corporate records, board minutes and regulatory compliances.
– Practical principle: bona fide commercial need and contemporaneous board authorisation are critical; after‑the‑event justifications are weak.
2. On computation methodology: “substance over form”
– Judicial pronouncements hold that the statutory scheme requires a real assessment of profits available for distribution, and superficial classification in profit & loss accounts will be examined. Independent expert accounting evidence is often decisive in appellate courts.
3. On bank vs non‑bank distinction
– Courts have recognised the special status of banking companies (60% rule) and the need to factor in banking regulatory requirements while computing allocable surplus for banks.

(Practitioners: consult current databases for the latest and controlling appellate decisions in your jurisdiction — Supreme Court, relevant High Courts — that interpret the specifics cited above, because outcomes often turn on fine factual distinctions and updates in law.)

Strategic Considerations for Practitioners

For employers / management counsel
– Document everything before year end: board resolutions approving transfers, rationales tied to business needs, contemporaneous minutes and auditors’ sign‑offs.
– Engage the auditors early and obtain a clear auditor’s certificate calculating available and allocable surplus with working papers.
– If adverse economic circumstances underpin reserve transfers, compile supporting forecasts, budgets and regulatory pressures (e.g., RBI circulars for banks).
– In negotiations, consider settlement frameworks based on cash‑flow phases, staggered payments or ex gratia payments to avoid prolonged litigation.

For employee / union counsel
– Scrutinise audit working papers and board minutes; attack transfers that are ad hoc, undocumented, or motivated solely to avoid bonus payments.
– Seek interim relief where bonus is necessary for subsistence and employer’s cash flows permit partial payments.
– Use expert forensic accounting to identify adjustments, non‑recurring write‑offs and round‑tripping of expenses that reduce gross profits.
– Remember the statutory floor (8.33%) — compel employer to demonstrate insufficiency of allocable surplus rather than simply asserting commercial constraints.

Common pitfalls and how to avoid them
– Pitfall (employer): relying solely on post‑hoc justifications for transfers to reserves. Remedy: contemporaneous documentation and independent expert rationales.
– Pitfall (employee): assuming auditor certificate is final. Remedy: commission independent accounting analysis; investigate underlying transactions.
– Pitfall (both): ignoring the cap/minimum interplay. Remedy: always compute per‑employee entitlement under both formulas (statutory minimum/maximum and pro‑rata from allocable surplus) and reconcile.

Procedure and dispute resolution tips
– Before adjudication, attempt conciliation under labour laws — many bonus disputes settle when financials are transparently exchanged.
– If matter proceeds to adjudication, ask the tribunal for directions for expert re‑computation or appointment of court‑appointed accountant to avoid multiple appeals on accounting questions.
– Preserve and tender full ledgers, trial balance, tax computations and board minutes — failure to produce primary documents weakens positions.

Conclusion

Allocable surplus is the linchpin of bonus disputes: it converts accounting profits into the legally distributable pool. For employers, the challenge is to justify legitimate reductions of available surplus (set‑offs and reserves) with contemporaneous, verifiable commercial reasons and compliant governance. For employees, the route to recovery runs through forensic scrutiny of accounts and effective use of expert evidence to show that reductions are artificial. Practically, success in bonus litigation depends less on abstract principles and more on documentary evidence, credible accountant testimony, and tactical use of tribunal processes (conciliation, court‑appointed experts). Always cross‑check statutory computations against accounting standards, company law/regulatory mandates and the latest judicial pronouncements in your jurisdiction.