The payment of bonus up to 20% of salary/wages made in pursuance of an agreement is an allowable deduction under the first proviso to Section 36(1)(ii) of the Income-tax Act, 1961. The entire contribution to the gratuity fund is allowable as a deduction under Section 43B of the Income-tax Act, 1961.

Ajit K. Sengupta, J.

1. IN this reference under Section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1985-86 :

"1. Whether, on the facts and in the circumstances of the case, as there was no full allocable surplus during the year as per the provisions of the Payment of Bonus Act, 1965, the Tribunal was correct in law in holding that the bonus payment up to 20% of salaries/wages made in pursuance of an agreement was an allowable deduction under the first proviso to Section 36(1)(ii) of the Income-tax Act, 1961? 2. Whether the Tribunal was correct in law in holding that the bonus paid in excess of the amount permissible under the provisions of the Payment of Bonus Act was an allowable deduction under the first proviso to Section 56(1)(ii) of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire contribution of Rs. 9,99,500 to the gratuity fund would be allowable as a deduction under Section 43B of the Income-tax Act, 1961?"

2. THE first and second questions pertain to the same issue as to whether the bonus payment made exceeding 20 per cent, of the salary and wages is an allowable deduction or not under the first proviso to Section 36(1)(ii) of the Income-tax Act, 1961. THE brief facts relating to the aforesaid questions are stated hereafter. There was an agreement between the assessee company and its employees during the relevant accounting year. In accordance with the said agreement, the assessee-company paid bonus amounting to Rs. 7,25,235. It claimed the same as deduction in the computation of its total income. The Income-tax Officer examined the books of account of the assessee-company and found that the allocable surplus during the year was only Rs. 9,80,536 and that surplus was eligible for payment of bonus. In the absence of full allocable surplus, he allowed the payment of bonus as deduction at the rate of 8.33% amounting to Rs. 6,50,000 only. He disallowed the difference between Rs. 7,25,235 and Rs. 6,50,000. The assessee-company, being aggrieved by the order of the Income-tax Officer, took the dispute before the Commissioner of Income-tax (Appeals) who directed the Income-tax Officer to allow the actual payment of bonus of Rs. 7,25,235 as against Rs. 6,50,000 The Department brought the dispute before the Tribunal. The Tribunal held that, irrespective of whether the allocable surplus was more or less, the bonus paid up to 20 per cent, in pursuance of the agreement was allowable as deduction under the first proviso to Section 36(1)(ii) of the Income-tax Act, 1961.

3. THIS issue came up for consideration in Income-tax Reference No. 35 of 1983 in the case of CIT v. Shaw Wallace and Co. Ltd. where the judgment was delivered on August 22, 1989. A similar question also came up for consideration in Income-tax Reference No. 336 of 1987 in the case of CIT v. Holman Climax Manufacturing Ltd. where the judgment was delivered on February 5, 1991. Following the said decisions, we answer the first and second questions in the affirmative and in favour of the assessee.

4. WE now turn to the third question. The third question relates to allow ability of contribution of Rs. 9,99,560 to the gratuity fund. The payment of Rs. 9,99,560 was made to the gratuity fund as contribution. The said payment includes the initial as well as annual contributions. That is allowable under Section 36(1)(v) of the Income-tax Act, 1961, read with rules 103 and 104 of the Income-tax Rules. The assessee-company claimed the said payment as an allowable deduction under Section 43B of the Income-tax Act irrespective of the year to which the liability related. It was also contended that the provisions of Section 40A(7) of the Act had no application as it was an actual payment and not a provision. The Income-tax Officer did not accept the submissions on behalf of the assessee-company. He