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 . v. CIT : 82ITR363(SC) , 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 provided in Section 10 or the maximum bonus payable under Section 11, a statutory liability is cast on the employer to pay the amount in the accounting year. Both the ITO and the Appellate Tribunal have disallowed the claim on the ground that provision had not been made by the assessee for the amount in question. This view cannot be upheld for the reason that it is contrary to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. : 82ITR363(SC) . In that case, although the Supreme Court was concerned with the case arising under the Sales Tax Act, the principles laid down therein are equally applicable here. For, the liability for both, sales tax and bonus, arises in the accounting year in question. Once such a liability arises, Kedarnath Jute Mfg. Co.'s case is authority for the proposition that an assessee following the mercantile system is entitled to a deduction of such liability in the year in which it arises, irrespective of the fact as to whether it had made entries in its account books. Thus, the fact that the assessee had not made provision for the bonus liability was inconsequential.
3. Counsel for the revenue urged that the matter should be sent back for an inquiry as to whether the amount of Rs. 40,610 claimed by the assessee was, in fact, the amount of bonus payable under Section 11 of the Act. It was urged that the amount in question represented the allocable surplus and not the liability created under Section 11 of the Act. The contention does not appeal to us. It is clear from the order of the AAC that the amount of Rs. 40,610 was not the allocable surplus worked out by the auditors, but was the liability under the Payment of Bonus Act for the period April 1, 1971, to 31st March, 1972. Further, it is clear from the orders passed by the ITO and the AAC, and that of the Appellate Tribunal, that it has never been the department's case that the liability under the Payment of Bonus Act was less than Rs. 40,610. This being so, we do not think it appropriate to permit an investigation in this respect, for, there does not appear to be any dispute on this point.
4. Counsel for the revenue drew our attention to two cases, one New Victoria Mills Co. Ltd. v. CIT : 61ITR395(All) and the other Kanpur Tannery Ltd. v. CIT : 34ITR863(All) and urged that the amount in question should not be allowed in the assessment year. None of these cases can be appropriately applied to the facts of the present case. In New Victoria. Mills' case : 61ITR395(All) , the question arose regarding the deducibility of bonus where the accounts were maintained on the mercantile system. It was held following the decision of the Supreme Court in CIT v. Swadeshi Cotton and Flour Mills Private Ltd. : 53ITR134(SC) , that before a claim for bonus can be allowed even on the mercantile system of accounting, the following conditions must be satisfied:
(a) that the workmen are entitled to make a claim to profit bonus if certain conditions stood satisfied ;
(b) the workmen have to make a claim from year to year ;
(c) that such claim was made and it has either been settled amicably or by industrial adjudication ; and
(d) if there is a loss or if no claim is made, no bonus will be permissible.
5. The test laid down for the allowability of non-statutory bonus in that case, cannot be applied to the statutory liability created by Sections 10 and 11 of the Payment of Bonus Act which is analogous to a liability for payment of sales tax. The case of Kanpur Tannery Ltd. : 34ITR863(All) is also not in point, for, in that case, the statutory liability arose only after ascertainment by an order passed by a competent officer. Here the liability is created by the statute itself, and no formal order is needed.
6. We, accordingly, answer the question in the negative, in favour of the assessee and against the department. The assessee is entitled to costs which are assessed at Rs. 200. The counsel's fee is also assessed at the same figure.