Read the article below in 15 Indian languages by selecting your preferred language using the translation tool in the top left corner of the screen.
The Supreme Court of India, in a judgment delivered on April 2, 2025, has affirmed the entitlement of employees to receive bonus payments under the Payment of Bonus Act, 1965 (the “Bonus Act ”), even when employed by charitable trusts involved in commercial manufacturing activities. The Court’s decision in Worth Trust v. Govt. of Tamil Nadu & Ors. (2025) clarifies that the charitable nature of an organization does not exempt it from compliance with labor welfare legislation when its operations fall within the purview of commercial manufacturing.
Background of the Case
Worth Trust, a charitable organization based in Vellore, Tamil Nadu, was established to provide vocational training and employment to individuals cured of leprosy and persons with disabilities. Over time, the Trust expanded its activities to include the operation of production units manufacturing industrial goods, generating surplus income. The Trust maintained that this income was reinvested into its charitable endeavors.
In 1987, employees of the Trust filed a complaint seeking statutory bonus payments under the Bonus Act for the years 1984 to 1987. The Trust argued that it was exempt from such payments under Section 32(v)(a) of the Act, as it was a non-profit charitable institution originally established with the Swedish Red Cross. The Trust also cited its practice of making voluntary ex-gratia payments to its employees.
The Assistant Commissioner of Labour ruled in favor of the employees, determining that the Trust’s industrial operations constituted systematic commercial activity, thereby attracting the provisions of the Bonus Act. This decision was upheld by the Madras High Court and subsequently by the Supreme Court in 2009. The Supreme Court, in its earlier ruling, affirmed that the Trust was not entitled to exemption under the Act and was obligated to pay statutory bonuses, emphasizing that charitable status does not override labor law obligations when an organization engages in commercial production.
Key Findings of the Supreme Court (2025)
In its recent judgment, the Supreme Court reiterated and elaborated upon these principles, providing further clarity for non-profit organizations:
-
Applicability of the Bonus Act to Charitable Trusts : The Supreme Court unequivocally affirmed that the Payment of Bonus Act, 1965, applies to all factories, as defined under Section 1(3)(a) of the Act, regardless of whether they are operated by charitable or non-profit trusts. The Court emphasized that the categorization of an establishment as a “factory” under the Factories Act, coupled with its engagement in manufacturing activities, necessitates compliance with the Bonus Act. The nature of ownership, whether charitable or otherwise, is immaterial to this determination.
-
Nature of Activities and Commercial Character of the Trust : While acknowledging Worth Trust’s initial establishment as a charitable organization focused on rehabilitation, the Court observed that the Trust had, since 1985, engaged in commercial manufacturing activities, including the production of automobile and industrial machine parts. These activities generated a surplus, establishing the Trust as a commercially operational factory subject to the provisions of the Bonus Act. The Court also noted the Trust’s severance of ties with the Swedish Red Cross Society in 1989.
-
Entitlement of Workmen to Statutory Bonus : The Court held that the individuals employed by the Trust fall within the definitions of “employee” and “workman” under the Factories Act and the Bonus Act. Consequently, they are entitled to receive statutory bonus payments, as mandated by Sections 10 and 11 of the Bonus Act, which prescribe minimum and maximum bonus thresholds. This entitlement exists irrespective of the Trust’s charitable origins, as the employees function within a regular employer-employee relationship in an industrial context.
-
Rejection of Exemption Under Section 32(v)(a) : The Court rejected the Trust’s contention that it was exempt under Section 32(v)(a) of the Bonus Act, which excludes institutions such as the Indian Red Cross Society. The Court found that the Trust lacked the requisite legal or institutional connection to the Indian Red Cross Society and could not be classified as an institution of a similar nature. The Court emphasized the statutory establishment and distinct public character of the Indian Red Cross Society.
-
Rejection of Exemption Under Section 32(v)(c) : The Court also denied the Trust’s claim for exemption under Section 32(v)(c) of the Act, which applies to institutions “not established for purposes of profit.” The Court determined that the Trust, by virtue of its sustained engagement in commercial manufacturing and profit-generating activities since 1985, did not meet the criteria for such an exemption. The Court affirmed that the Trust’s continued charitable work does not negate its identity as an industrial and profit-generating entity.
-
Ex-Gratia Payments are Not a Substitute for Statutory Bonus: The Trust argued that its voluntary ex-gratia payments to employees should be considered as a basis for avoiding bonus payments. The Court categorically rejected this argument, asserting that bonus is a statutory right, distinct from voluntary or charitable payments. While ex-gratia payments may be adjusted against statutory bonus obligations, they cannot substitute for or be used to evade these legal obligations.
-
Final Directions and Dismissal of Appeal: The Supreme Court upheld the Tribunal’s award of a minimum 8.33% bonus, along with the High Court’s modification permitting the adjustment of previously paid ex-gratia amounts. The Court dismissed the Trust’s appeal and directed it to pay the bonus from the year 1996–97 onwards, ensuring compliance with the Bonus Act within one month of the judgment.
Implications for Non-Profit Organizations
This judgment has significant implications for charitable trusts and non-profit organizations that engage in commercial activities. Section 11(4A) of the Income Tax Act, 1961, permits charitable trusts to conduct businesses, provided that the business is incidental to the trust’s objectives and separate books of account are maintained. While profit-making is permissible, profit motive is not, and all income must be applied exclusively towards the trust’s charitable purposes.
The Supreme Court’s ruling reinforces the following principles for such organizations:
-
Non-Profit Status ≠ Exemption from Labor Laws: The Court has clarified that the status of a charitable trust or non-profit organization does not automatically exempt it from compliance with the Bonus Act. If such an organization operates factories or commercial ventures, it is subject to the same labor law obligations as any other industrial establishment, particularly when profits or surplus are generated, even if these are utilized for charitable purposes.
-
Commercial Activities Impose Statutory Obligations: When a non-profit organization engages in manufacturing, trading, or any profit-generating activity, even if incidental to its charitable work, it is required to comply with all applicable statutes, including the Factories Act, the Employees Provident Fund Act, the Employees’ State Insurance Act, and the Bonus Act. The Court’s decision to apply the Bonus Act was primarily based on the nature of the work (factory-based production) and the generation of surplus income from such activities.
-
Restrictive Interpretation of Section 32(v)(a): The exemption provided under Section 32(v)(a) of the Bonus Act, which applies to the Indian Red Cross Society and similar institutions, has been interpreted narrowly. The Court held that Worth Trust could not claim exemption under this provision merely due to its historical association with the Swedish Red Cross or its engagement in welfare activities. To qualify for exemption under this clause, an institution must be statutorily established and centrally governed, akin to the Indian Red Cross Society.
-
Rejection of Exemption Under Section 32(v)(c): The Court also rejected claims for exemption under Section 32(v)(c), which pertains to institutions “not established for the purpose of profit.” The Court stated that once a non-profit organization undertakes sustained commercial operations through factories that generate income, it cannot invoke this clause to avoid its statutory obligations to employees. Charitable intent alone is insufficient if the operational execution involves commercial activities.
-
Recognition of Workers’ Rights in Hybrid Structures : The judgment reaffirms that the statutory rights of workers, such as the right to a minimum bonus, cannot be denied solely because they are employed by a charitable trust. The Court emphasized that even employees who are rehabilitated individuals or persons with disabilities, when employed by a welfare-oriented organization, are considered workers under the law and are entitled to the same benefits as any other employee in a factory setting.
-
Impact on Similar Institutions Engaged in Vocational Rehabilitation: Organizations involved in rehabilitation and skill training through production units or commercial activities, such as those working with disabled persons, individuals cured of leprosy, or marginalized communities, must now re-examine their compliance frameworks. If these activities are factory-based or profit-generating, the organization is obligated to compute and disburse bonuses in accordance with the Act, and cannot rely solely on discretionary ex-gratia payments.
Conclusion
This judgment serves as a crucial reminder to the non-profit sector, particularly those organizations with income-generating verticals. Non-governmental organizations that operate production units, workshops, or service delivery businesses under their charitable umbrella must ensure that they comply with all applicable labor regulations. Reliance solely on charitable objectives or the reinvestment of surplus into social programs will not suffice as a defense in cases involving commercial-scale operations. This ruling underscore the principle that charitable organizations cannot evade statutory liabilities once they engage in commercial enterprise.