An assessee following the mercantile system of accounting is entitled to a deduction for bonus liability under the Payment of Bonus Act, 1965, in the year in which it arises, irrespective of the fact whether it had made entries in its account books.

C.S.P. Singh, J.

1. THE Tribunal has referred the following question of law for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of the disputed amount of Rs. 13,692 on the ground that such expenditure was not provided for in the books of account maintained by it on the mercantile system of accounting and that such amount was also not actually paid during the relevant year of account ? "

2. THE assessment year involved is 1972-73. The assessee is a firm carrying on the business of manufacture and sale of machinery parts for sugar mills and also of repair work maintaining its books of account on mercantile system, the previous year being the financial year ending on 31st of March, 1972. In that year, the asseseee had madea provision to the extent of Rs. 26,918 towards payment of bonus. This was made to cover the liability brought forward of the erstwhile HUF which carried on business till the assessment year 1971-72. In the course of the assessment proceedings, the assessee contended that it was entitled to deduction for an amount of Rs. 40,610 for which the assessee had become liable under the Payment of Bonus Act, 1965. In support of this claim it filed a computation made by its accountant, who after working out the surplus under Section 2(4) of the Bonus Act, fixed the liability at that amount. The ITO rejected the claim holding that the assessee was entitled only to a deduction of Rs. 26,918 as, in its books, it had made a provision for that amount. The assessee appealed and the AAC following the decision of the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, directed the ITO to allow the further amount of Rs. 13,692. The matter was then taken up by the revenue before the Appellate Tribunal. The Tribunal found that the assessee had not made a provision for this amount in its account books during the year of account. On these facts, it disallowed the assessee's claim in respect of Rs. 13,692. It observed that this amount should be allowed as a deduction in the year in which the assessee made a provision for it or paid it. As has been seen the dispute in the present case is in respect of the liability for the payment of bonus under the Payment of Bonus Act, 1965. Section 10 makes it obligatory for every employer to pay a minimum bonus equal to 4% of the salary or wage earned by the employee during the accounting year or forty rupees, whichever is higher, irrespective of the fact whether profits had been made or not. In the present case, we are not concerned with the minimum bonus, for, it appears that the assessee had made profits in the year in question which exceeded the amount of minimum bonus payable under Section 10. The matter is governed by Section 11 of the Act. Under that provision, in cases where the allocable surplus exceeds the amount of minimum bonus payable under Section 10, the employer is liable to pay to every employee in the accounting year bonus which is proportionate to the salary or wages earned by the employee during the accounting year subject to a maximum of twenty per cent. of such salary or wage. Section 2(4) defines allocable surplus to mean sixty-seven per cent. of the available surplus in an accounting year or sixty per cent. of such available surplus in an accounting year depending on whether the employer has made arrangements for the declaration and payment of dividends within India as prescribed under Section 194 of the I.T. Act. The method of computation of the available surplus is given in Sections 5 and 6 of the Act. Broadly speaking, the gross profit of the year has to be calculated and from that certain deductions as set out in Section 6 have to be made to arrive at the available surplus. This available surplus forms the basis for calculating the allocable surplus. It would be seen that whether it be the minimum bonus as