Commercially run nonprofits must pay employee bonuses

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Delhi High Court has held that grant of a certificate under section 80-G of the Income Tax Act, 1961 (ITA), which allows deductions for donations or funds to institutes established for charitable purposes, would not automatically lead to an exemption from purview of the Payment of Bonus Act, 1965, which excludes employees working with hospitals that are “established not for purposes of profit”.

In the Batra Hospital Employees Union v Batra Hospital & Medical Research case, Delhi High Court adjudicated on appeal filed by the Batra Hospital Employees Union challenging an award passed by the Industrial Tribunal-I, Delhi, which had held that the 1965 act would not apply to Batra hospital on the ground that it had not been established for earning a profit.

While interpreting the expression “established not for purposes of profit”, the court observed that the provision must be interpreted expansively rather than restrictively. Rejecting the reliance placed by the hospital on the exemption granted to it under section 80-G (5) of the ITA, the court noted that the object and purpose of the ITA and the Payment of Bonus Act, are completely distinct from each other.

The court thus allowed the writ petition and set aside the award. It held that the question of whether an institution is established “not for the purpose of profit” cannot be decided merely by referring to the original intent and purpose for which it may have been set up. If any institution is making profits, given the object of the 1965 act, it would not be possible to treat it as an institution “established not for the purpose of profit”. The making of profit has an indelible nexus with the payability of bonus. “Ploughing back” the profits made into the institution itself, for maintenance or otherwise, would equally not be a justification to avoid liability under the 1965 act. The earning of profits is what matters, and not the manner in which the earned profits are distributed. An organization that is run on commercial lines, cannot be regarded as “established not for the purpose of profit”.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.