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Section 40: Audit of accounts of employers not being corporations or companies

The Code on Wages, 2019 (Act No. 29 of 2019) • Official Statutory Text & Plain English Practice Guide

Statutory Mandate
Chapter IV: Payment of Bonus
Competent Labour Forum
Act No. 29 of 2019
Section 39 All 67 Sections of Code on Wages, 2019 Section 41

Legal Commentary & Landmark Judgments: Section 40

Section 40 of the Code on Wages, 2019 establishes the competitive market parity test for the public sector, mandating that public sector establishments producing goods or rendering services in commercial competition with private sector entities are brought under the statutory bonus regime if competitive revenue equals or exceeds twenty per cent of their gross annual income.

  • The 20% Competitive Gross Income Threshold: A public sector establishment (as defined in Section 2(m)) is generally exempt from Chapter IV bonus obligations unless it sells goods produced/manufactured by it or renders services in competition with private sector establishments. If income from such competitive sales or services, or both, is not less than 20% of its gross income for that accounting year, the entire bonus chapter applies in full force.
  • Statutory Continuity and Lock-In Effect: Sub-section (2) establishes a statutory continuity rule: once an establishment in the public sector becomes subject to Chapter IV by crossing the 20% competitive threshold, it continues to be governed by the bonus provisions for subsequent accounting years until it conclusively demonstrates that its competitive income has fallen below the 20% mark.
  • Operational Parity with Private Sector Enterprises: When the 20% threshold is satisfied, the public sector unit loses any sovereign or administrative immunity regarding bonus. It becomes legally obligated to calculate gross profits, determine allocable surplus, pay minimum bonus (8.33%) and maximum bonus (20%), and comply with timeframes under Section 39 on an identical footing with private corporate employers.
Key Landmark Precedents:
  • Workmen of Hindustan Lever Ltd. v. Management (1984) 1 SCC 392: The Supreme Court held that statutory labor welfare protections cannot be diluted through formalistic corporate categorizations where public commercial activities directly parallel private sector trade.
  • Steel Authority of India Ltd. v. National Union Waterfront Workers (2001) 7 SCC 1: The Supreme Court affirmed that public sector undertakings engaging in commercial and industrial activities are subject to general labor standards and statutory welfare obligations unless explicitly exempted by valid legislative decree.
  • Central Coalfields Ltd. v. State of Jharkhand (2005) 7 SCC 492: The Supreme Court established that commercial operations of public sector units must conform strictly to statutory timelines and adjudicatory mechanisms under wage and bonus legislation.
Courtroom Practice & Strategic Litigation Guidance:

Public Sector Undertakings (PSUs), government corporations, and municipal commercial boards must conduct an annual gross revenue audit segmenting competitive commercial revenue from non-competitive sovereign/statutory revenue. If commercial sales/services touch 20%, bonus reserves must be created in the balance sheet. In industrial disputes raised by PSU unions under Section 46, PSUs resisting bonus claims must produce audited segment financial reports proving non-satisfaction of the 20% statutory threshold.

Section 39 All 67 Sections of Code on Wages, 2019 Section 41