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.
(3.) 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.;