SHREE SAJJAN MILLS LTD.versusCOMMISSIONER OF INCOME TAX, M.P, BHOPAL AND ANR,

                                                              593


                     SllREE SAJJAN MILLS LTD,                       A
                                 v.
                   COMMISSIONER OF INCOME TAX,
                      M.P, BHOPAL AND ANR,

                          OCTOBER 8, 1985
                                                                    B
 [V.D. TULZAPURKAR, SABYASACHI MUKHARJI AND RANGANATH MISRA, JJ,]

      Income Tax Act 1961, ss. 40A (7), 36 (1) (v) and 37 (1) -
Deduction - Payment of Gratuity - ·Whether deduction can be
claimed under any other provision under the head 11 business or
profession" without complying with the requirements of s. 40A (7)   c
(b) - Distinction between an actual liability in praesenti and a
liability de f uturo explained.

      Interpretation of statutes - Taxing statutes - Principle of
reasonable construction -·Applicability of -
                                                                    D
      Words and Phrases - 11 Provision11 - Meaning of.

     The appellant-assessee is a public limited company. The
relevant assessment year in C,A, No. 4222 of 1984 is 1973-74,
With the coming into force of the Payment of Gratuity Act, 1972
with effect from 16th September 1972 a statutory liability was      E
created on the assessee to pay gratuity to its employees and the
appellant arranged for actuarial determination of its liability,
Pendin,; determination of such an actuarial valuation, the
assessee made a provision of Rs, 20 lacs against the total
accruing liability till the date of the preparation of the
balance sheet. At the time of filing of the return of income for
the assessment year 1973-74, the assessee added back this           F
provision forgratuity amounting to Rs. 20 lacs and claimed
deduction of the total liability of Rs. 48,59,431 which was the
actuarial determination of liability on the ground that the
provisions of s.40A (7) of the Income Tax Act 1961 were not
applicable.
                                                                    G
       The Income-Tax Officer disallowed the claim on the ground
that there was non-compliance with the requirements of section
40A (7) of the Act, and allowed deduction only to the extent of
JiCtual payment which csme to Rs. 24,366 towards payment of
gratuity to the employees during the relevant accounting year.
                                                                    H
    594               SUPREME COURT REPORTS       [1985] SUPP,3 S.C.R,


A         Against the aforesaid order of the Income-tax Officer, an
    appeal waa preferred before the Appellate Assistant Commissioner
    who held that provisions of section 40A (7) did not constitute
    any bar to the assessee's claim for deduction u/s 37 of the Act
    aa the assessee had not made any provision in its books in
    respect of the 81110unt of gratuity determined actuarially and the
B   provision of Rs. 20 lacs had also been added bac~ in the state-
    ment of income. The Appellate Assistant Commissioner, however,
    allowed deduction of Rs, 30,25,662 on this head which according
    to him constituted the assessee 's liability for the relevant
    accounting year.

          The Revenue appealed to the Tribunal which held that the
C   sum of Rs. 20 lacs could not be allowed aa deduction, but, the
    balance of Rs. 28,59,431 for which no provision waa made in the
    books was allowable under section 37(1) of the Act.

          In the reference to the High Court under section 256(1) of
    the Act at the instance of the Revenue, it was held that the
    Tribunal waa not juatified in allowing the deduction of Rs.
D   28,59,431 under section 37 of the Act out of the total Rs.
    48,59,431 made by the assessee towards liability for gratuity on
    the ground that in view of the non-obstante clause in section 40A
    of the Act, no deduction was permissible under section 37 for the
    assessee's liability for payment of gratuity to its employees
    without complying with the provisions of sub-section (7)(a) of
E   section 40A of the Act. A similar question of law arose in the
    other appeal where the appellant - aasessee is the same.

          Dismissing the appeals to this Court,
                                                                         1
          HELD: l(i) Payment of gratuity aa COlllDlnly understood is
F   the payment made to the employee by the employer on his retire-
    ment or termination of his service for any reason. It is made
    voluntarily by the employer as a regular practice or pressure of
    trade or business either under an agreement with the employees or
    on the understanding of the trade and after the enactment of the
    Payment of Gratuity Act, 1972 whicn came into force on 16th
G   September, 1972 as a statutory liability under the said Act.
    Although payment of gratuity is made on retirement or termination
    of service, it was not for the service rendered during the year
    in which the payment is made but it is made in consideration of
    the entire length of service and its ascertainment a.'ld computa-
    tion depend upon several factors. (608 H; 609 A-B]
H
          l(ii) The right to receive the payment accrued to the
    employees on their retirement or termination of their services
                      SAJJAN MILLS v. C.I.T.                  595


and the liability to pay gratuity became the accrued liability of    A
the assessee when the employees retire or their services were
terminated. Until then the right to receive gratuity is a
contingent right and the liability to pay gratuity continues to
be a contingent liability qua the employer. Since the aoount of
gratuity payable in any given year would be a variable aoount
depending upon the number of employeea who would be entitled to      B
receive the payment during the year, the aoount being a large one
in one year and a small one in another year, the employer often
finds it desirable and/or convenient to set apart for future use
a sum every year to meet the contingent liability as a provision
for gratuity or a fund for gratuity. He might create an approved
gratuity fund for the exclusive benefit of his employees under an    C
irrevocable trust and make contributions to such fund every year.
Contingent liabilities do not constitute expenditure and cannot
be the subject matter of deduction even under the mercantile
system of accounting. Expenditure which was deductible for income
tax purposes is towards a liability actually existing at the time
but setting apart money which might become expenditure on the        D
happening of an event is not expenditure. (609 C-<;]

      l(iii) The position till the provisions of section 40A(7)
were inserted in the Act in 1973 was as follows :-

      1. Payments of gratuity actually made to the employee on       E
his retirement or termination of his service were expenditure
incurred. for the purpose of business in the year in which the
payments were made and allowed under section 37 of the Act.

.     2. Provision made for payment of gratuity which would
become due and payable in t~e previous year was allowed as an
upenditure of the previous year on accrued basis when mercantile     F
system was followed by the assessee.

       3. Provision made by setting ·aside an advance sum every.
,..,, to meet the contingent liability and gratuity as and when it
accrued by way of provision for gratuity or by way of reserve or
fund for gratuity was not allowed as an expenditure of the year      G·
in which such sum was set apart.

      4. Contribution made to an approved gratuity fund in the
previous year was allowed as deduction under section 36(l)(v).

      5. Provision made in the Profit and Loss Account for the
estimated present value of the contingent liability properly         H
    596              SUPREME COURT REPORTS       [1985] SUPP.3 s.c.R.

A
    ascertained and diacounted on an accrued baaia as falling on the
    asaessee in the year of account could be deductible either under
    aection 28 or section 37 of the Act. [610 E-H; 611 A]

          l(iv) As there were several method& which the assaaaee
B   might choose to adopt in meetiug his liability to pay gratuity,
    the treatment whicb he would receive under the Iru:ome-tax Act
    would depend upon the method adopted by him. The aaaesaee ia only
    under an obligation to pay gratuity when it became dne and
    payable. The other method& adopted by the assessee for meeting
    the liability for gratuity as and when it aroae are proviaiona or
    arraugemente made by him at his option. It is not obligatory on
c   him to make any such provision and if no such arraugement or
    proviaion was made, no question arose to coD8ider its
    deductibility or allowance under the Act. [611 B-C]

          2(i) On a plain construction of clause (a) of sub-section
    (7) of section 40A of the Act, it means that whatever is provided
    for future use by the assessee out of the gross profits of the
D   year of account for payment of gratuity to employees on their
    retirement or on the termination of their services would not be
    allowen as deduction in the computation of profits and gains of
    the year of account. The provision of clause (a) was made subject
    to clause ( b) • The embargo is on deductions of amounts provided
    for future use in the year of account for meetiug the ultimate
E   liability to payment of gratuity. Clause (b)(i) excludes from the
    operation of clause (a) contribution to an approved gratuity fund
    any amount provided for or set apart for payment of gratuity
    whicb would be payable duriug the year of account. Clause ( b)
    (ii) deals with a situation that the assessee might provide by
    the spread over method and provides that such provision would be
F   excluded from the operation of clause (a) provided the three
    conditions laid down by the sub-clauses are satisfied. [612 E-H]

          2(ii) The expression 'provision' in clause (a) of the said
    sub-section has not been defined in the Act and is not used in
    any artificial sense but in its ordinary meaning. This is clear
G   from the words (whether called as such or by any other name)
    occurring in sub-section. 'Provision' in its ordinary senae means
    'somethiug provided for future use•. [612 D]

          2(iii) Sectiou 40A is in Chapter IV which deala with
    computation of total income. It is with the marginal note under
H   the headiug "expenses or payments not deductible in certain
    circ1DDStances", The headiug of this section ia a clear indication
                       SAJJAN MILLS v. C,I,T,                   597


that certain payment and expenses which would be otherwise             A
deductible would not be deductible except in certain circumstan-
ces indicated in the section. This is abundantly made clear by
the non-obstante expression used in sub-section (l) of section
40A. The provision of section 40A shall have effect notwithstand-
ing anything to the contrary contained in any other provision of
the Act. Payments or provisions for deduction could have been          B
eligible for deduction or could have been deducted either under
section 28 or under section 37 of the Act. But the use of the
non-obstante expression makes it clear that if there is any
legislative base dealing with the provisions for gratuity then
the same would be applicable iu spite of and notwithstanding any
other provisiou of the Act. [608 B-E]                                  C

      ,2(iv) Read with the marginal notes of section 40A the
non-obstante clause of sub-section (l) of section 40A has' an
overriding effect over the provisions of any other section.
Expenditures or allowances which are deductible under any other
provision relating to the head 'Business or profession' will be        D
disallowed in cases to which these provisions of the section
apply. The submission of the appellant-assessee that if no provi-
sion is made by the assessee for gratuity, still the same will be
deductible and s. 40A(7) will have no application, would defeat
the very purpose and object of s. 40A(7) and render it nugatory.
(608 E-G]                                                              E

      3. The principle that fiscal atatutes should be strictly
construed does not rule out the application of the principles of
reasonable construction to give effect to the purpose or
intention of any particular provisions as apparent from the
scheme of the Act with the assistance of such external aids as
are permissible under the law. (614 G]                                 F

      "Webster's English Dictionary referred to.

        Yazir Sultan Yobscco Co. LU. Etc. Etc. v. C.-i&Bioner of
~ Tax, Andhra Pradesh, Hyderabad,        [1982] l S.C.R. 789 at 800
& 804 • 132 I.T.R. 559 at 568, Metal Box Cclat>anY of India LU. v.     G
'J:heir Woi:ben, 73 I,T.R. 53 at 67-68. and Indian llola8aes Co. (P)
LU. v. Comri88looer of Income Tax, West Bengal, 37 I.T.R. 66 at
pages 76 & 80. relied upon.

      Peoples &lgineeriDg & Motor Works LU. v. C<wrissioaer of
Income Tax, West Bengal-II, 130 I.T.R. 174 and eo.dasiooer of
Inc...-tax, Central-\', Calcutta v. llew Sndeshi llUls of              H
Ahmedabad LU., 147 I.T.R. 163 approved.
    598               SUPllEME COURT REPORTS     [1985] SUPP.3 s.c.R.

A         Tata Iron & Steel Co. Ltd. v. D.V. Bapat, lDCaE Tax
    Officer, Caopanies Circle l (2) ..i.ay and Anr., 101 1.T.R. 292
    and c.1.T. ierala v. High Land Produce eo. Ltd., 102 l.T.R. 803
    distinguished.

           Kedarnath Jute Mfg. Co. Ltd. v. Con'ssioner of lDcolle-tax
B   (Central), Calcutta, 82 l.T.R. 363 and ramfsstoner of IDCaE
    Tax, lladras (Central) v. Andbra Prabba P. Ltd. 123 l.T.R. 760 at
    772 and Swadeshi Cotton llilla eo. Ltd. v. 1.T.o., 1978 112 I.T.R.
    1038 (All) referred to.

          CIVIL APPELLATE JURISDICTION     Ci Vil Appeal Nos. 4221-22
    (NT) of 1984.
c
          From the Judgment and Order dated 29.11.1982 of the Madhya
    Pradesh High Court in Misc. Civil Gase No. 240, 263 of 1980.

          Soli J, Sorabjee, P.H. Parekh, P.K. Manohar and s. Ganesh
    for the Appellant.
D        V. S. Desai, Gauri Shankar and Miss A. Subhashini for the
    Respondents.

          The Judgment of the Court was delivered by

          SABYASACHI MUKHARJI, J. These appeals by special leave
E   arise from the judgment and order of the High Court of Madhya
    Pradesh dated 29th November, 1982, in reference under Section
    256(1) of the Income-tax Act, 1961 (hereinafter referred to as
    the 'Act'). The assessee is a public limited company. The related
    assessment year in Appeal No. 4221 of 1984 is 1974-75. In Appeal
    No. 4222 of 1984, the assessment year is 1973-74. The relevant
F   accounting years ended on 31st March, 1974 and 31st March, 1973
    respectively.

          For the assessment year 1974-75, the assessee company
    sought to deduct a sum of Rs. 18,37,727 towards the amount of
    gratuity payable to its employees and worked out actuarially. The
G   break up of this liability was as follows :- for periods ending
    on 31st March, 1972, 31st March, 1973 and 31st March, 1974,
    assessee's liability was worked out at Rs. 64,31,286. Out of this
    amount, provision had been made during these years to the tune
    of Rs. 45,93,559. No provision had been made for the balance
    amount of Rs. 18,37,727. The claim for deduction was set up on
H   the ground that this liability was ascertained by actuarial
         SAJJA.~ MILLS v.   C.I.T. [SABYASACHI MUKHARJI, J.]    599


valuation and was deductible under section 37(1) of the Act. The       A
Income-tax Officer allowed the deduction of a sum of Rs. 2,65,872
only which was actually paid by the assessee and the rest was
disallowed on the ground of non-compliance with the provisions of
section 40A(7) of the Act. The assessee preferred an appeal but
the same was dismissed by the Commissioner of Income-tax
(Appeals). The assessee thereafter preferred a second appeal to        B
the Tribunal. 'Ille Tribunal, for the reasons m:!'ntioned, held that
for the assessment year relating to 1973-74, actuarially ascer-
tained liability for gratuity especially arising under the
Payment of Gratuity Act, 1972 was an allowable deduction. The
Tribunal had consistently taken the view that the assessee would
not be eligible for deduction under section 37 in respect of such      c
liability to the extent of the provision made by the assessee in
its account without simultaneously conforming to the requirements
of secti'>n 40A( 7). Where however, the actuarially . determined
liability was not provide~ for or was in excess of the provision
made by the assessee in the books of account, the relevant amount
could be allowed as liability under section 37 as the provisions       D
of section 40A(7) would not reach it.

      In the assessment of 1974-75, the Tribunal referred to the ·
facts and observed that increased liability of Rs. 15,71,855 had
been claimed by the asses see without any provision made in
respect thereof in the books of account. In the circumstances,         E
they upheld the claim of the assessee for Rs. 15, 71,855 and
directed the Income-tax Officer to allow this sum as a liability.

      At the instance of the revenue, the following questions
were referred to the High Court, namely :

           "(l) Whether, on the facts and in the circumstances of      F
           the case; the tribunal was right in law in allowing
           the deduction of Rs. 15,71,855 under section 37 of the
           I.T. Act, 1961 out of the sum of Rs. 28,59,431 for
           which provision was made towards liability for
           gratuity?
                                                                       G
           (2) Whether, on the facts and in the circumstances of
           the case, the Tribunal was right in law in holding
           that section 40A(7) is attracted only in respect of
           the provision made in the books of account and that
           the balance liability claimed i.e. Rs •. 15,71,855
           towards gratuity is admissible under sec. 37 of the
           Income Tax Act, 1961."                                      H
    600              SUPREME COURT REPORTS      [1985] SUPP.3 s.c.R.


A   and for the reasons mentioned, for the assessment year 1973-74
    which is the subject matter of the next appeal and following the
    said decision, the High Court held that the assessee was not
    entitled to deduction on account of its liability for gratuity
    under the Payment of Gratuity Act, 1972 without complying with
    the provisions of section 40A(7) of the Act and accordingly
B   answered both the questions in the negative and against the
    assessee. This decision is the subject matter of Appeal No. 4221
    (NT) of 1984.

          Civil Appeal NO. 4222 (NT) of 1984 arises out of the
    assessment year 1973-74. The High Court observed that the
    assessee company had entered into agreements with the Workers
c   Union for payment of gratuity by the 31st March, 1972. Company's
    practice was to account for gratuity on cash basis as and when
    paid. The company had made a provision in its books of account
    for payment of gratuity to its employees to the extent of Rs.
    20,0U,UUO during the relevant accounting year. With the coming
    into force of the Payment of Gratuity Act, 1972 with effect from
    16th September, 1972, a statutory liability was created of the
D   company to pay gratuity to its employees as per the provisions of
    the said Act. The assessee company, therefore, arranged for
    actuarial quantification of its liability for gratuity to its
    employees. Pending the determination of such an actuarial
    valuation, the assessee had made a provision of Rs. 20,00,000
    against the total accruing liability till the date of the
E   preparation of the balance-sheet. At the time of the filing of
    the return of income for the assessment year 1973-74, the
    assessee added back this provision for gratuity amounting to
    Rs. 20,00,000 and claimed the total liability of Rs. 48,59,431
    which was the actuarial determination of liability arising under
     the Payment of Gratuity Act, 1972 in the relevant accounting
F   year.

          Before the Income-tax Officer, the assessee claimed
    deduction of the entire liability of Rs. 49,59,431 as determined
    actuarially. It was contended that the provisions of section
    4UA(7) of the Act were not applicable. The Income-tax Offtcer had
G   disallowed the claim on the ground that there was non-compliance
    with the requirements of section 40(A)(7) of the Act. The
    Income-tax Officer allowed deduction only to the extent of actual
    payment made towards gratuity to the employees during the
    relevant accounting year. This amount came to Rs. 24,366. The
    assessee preferred .an appeal against the Income-tax Office":',
    order before the Appellate Assistant Coumissioner. The Appellate
             SAJJAN MILLS v. c.I. T. [SABYASACHI MUKllAR.JI, J.]   601


    Assistant commissioner was of the view that provision$ of section    A
    40(A)(7) did not constitute any bar to the assessee's claim for
    deduction as the assessee had not made any provision in its books
    in respect of the amount of gratuity determined actuarially and
    the provision of Rs. 20,00,000 had also been added back in the
    statement of income. However, the Appellate Assistant Comis-
    sioner allowed cteduction of Rs. 30, 25, 662 on this head which      B
    according to him constituted assessee' s liability for the
    relevant accounting year.

         The revenue appealed against this decision. IL was contended
    that the assessee was not entitled to any deduction for gratuity
    except the amount actually paid because there was non-compliance     C
    with the statutory provisions of section 40A(7) of the Act. The
    Tribunal held that the total liability for gratuity actuarially
    determined for the accounting year was Rs. 48,59,431. However,
    the assessee had made a provision of Rs. 20,00,000 without
    complying with the requirements of section 40A(7) of the Act and,
    therefore, this sum of Rs. 20 lakhs could not be allowed as          D
    deduction. But the balance of Rs. 28,59,431 for which no
    provision was made in the books was allowable under section 37(1)
    of the Act.

         At the instance of the revenue, the following question for
    this year was referred to the High Court :                           E

               "Whether, on the facts and in the circumstances of the
               case, the Tribunal was justified in allowing the
               deduction of Rs. 28,59,431 under section 37 of the
               Income Tax Act, 1961 out of the total Rs, 48,59,431
•              made by the assessee towards liability for gratuity?"
                                                                         F
         Section 40A was inserted by the Finance Act, 1968 with
    effect from lat April, 1968. It is necessary to set out the
    relevant provisions of section 40A:

               "40A. Expenses or payments not deductible in certain
               circwnstances - (1) The provisions of this section        G
               shall have effect notwithstanding anything to the
               contrary contained in any other provision of this Act
               relating to the computation of income under the head
               to the computation of income under the head "Profits
               and gains of business or profession".

               ......................................................    II
    602          SUPREPIE COURT REPORTS       [1985] SUPP.3 s.c.R.

A         (7)(a) Subject to th3 provioions of clause (b), no
          deduction shall be allowed in respect of any provision
          (whether called as such or by any other naae) made by
          the assessee for the payaent of gratuity to his
          eqiloyees on their retireaent or on temination of
          their employaent for any reason .
B
          (b) Nothing in clause (a) shall apply in relation to:-

          (i) any provision made by the assessee for the purpose
          of payaent of a sum by way of any contribution towards
          an approved gratuity fund, or for the purpose of
          payaent of any gratuity, that has become payable
c         during the previous year;

          (ii) any provision made by the assessee for the
          previous year relevant to any assessaent year
          CO!Jlllencing on or after the 1st day of April, 1973, but
          before the 1st day of April, 1976, to the extent the
          amount of such provision does not exceed the
D         admissible amount, if the following conditions are
          fulfilled, namely :-

          ( l) the provision is made in accordance with an
          actuarial valuation of the ascertainable liability of
          the assessee for payaent of gratuity to his eqilnyees
E         on their retireaent or on termination of their
          employaent for any reason;

          (2) the assessee creates an approved gratuity fund for
          the exclusive benefit of his employees under an
          irrevocable trust, the application for the approval of
F         the fund having been made before the 1st day of
          January, 1976; and

          (3) a sum equal to at least fifty per cent of the
          admissible amount, or where any amount has been
          utilised out of such provision for the purpose of
G         payaent of any gratuity before the creation of the
          approved gratuity fund, a sum equal to at least fifty
          per cent of the admissible amount as reduced by the
          amount so utilised, is paid by the assessee by way of
          contribution to the approved gratuity fund before the
          1st day of April, 1976, and the balance of the
H         admissible amount or, as the case may be, the balance
         SAJJAN MILLS V• c.r.T. [SABYASACHI MUKHARJI, J.]      603


           of the admissible a11X>unt as reduced by the a11X>unt so   A
           utilised, is paid by the assessee by way of such
           contribution before the 1st day of April, 1977,"

      According to the High Court, section 40A had an overriding
effect on the other provisions relating to the computation of
income under the head "profits and gains of business or               B
profession". This meant that while computing income under the
head "profits and gains of business or profession" and allowing
various deductions provided for under the Act, requirements of
40A would be mandatory in respect of the matters covered there-
under. The High Court was of the view that sub-section (7) of
section 40A referred to deductions on account' of payment of          c
gratuity to the employees of an assessee and section 37 which was
the residuary section for allowance of expenditure would not be
applicable. The High Court agreed with the view expressed by the
Calcutta High Court in the case of Peoples Engineering & Motor
Woi:ks Ltd. v. Comd.ssioner of locome Tu, West Bengal - II, 130
I.T.R. 174.                                                           D

     The High Court was also of the view that if, therefore, an
assessee claimed deduction on account of accrual of liability for
gratuity, the same will be hit by the bar under sub-section
(7)(a) of section 40A of the Act irrespective of the fact whether
the account books of the assessee referred to this liability or       E
not.

     The High Court was further of the opinion that in view of
the non obstante clause in section 40A of the Act, no deduction
was permissible under section 37 of the Act for the assessee's
liability for payment of gratuity to its employees without
complying with the provisions of sub-section (7)(a) of section        F
40A of the Act. The question was, therefore, answered in the
negative and against the assessee.

      On behalf of the assessee in these appeals it was submitted
·with reference to section 40A(7) of the Act that the said section
 was a provision of disallowance and but for the said section,        G
 provisions made by an assessee for payment of gratuity could be
 claimed as deduction under section 37 of the Act as expenditure
 incurred wholly and exclusively for the purpose of the assessee's
 business. Alternatively, it was urged that such a provision would
 have been claimed as deduction generally in determining the true
.profits and gains of business which could be subjected to tax
 under section 28 of the Act. It was emphasised on behalf of the      H
    604               SUPREME COURT REPORTS       [1985] SUPP.3 s.c.R.

A   assessee that deduction in respect of gratuity could be claimed
    de hors section 40A(7) which in effect provided for the
    disallowance of the deduction in respect of gratuity in certain
    circumstances. Therefore, it was urged on behalf of the assessee
    that this provision should be very strictly construed. And so
    construed, section 40A(7) could only apply if the assessee had
B   made provision for payment of gratuity and only to the extent of
    the amount of such provision.

          It was emphasised that the expre.ssion 'Provision made by the
    assessee' is a term of accounting and signified that the assessee
    had set apart the amount in his books of account for meeting the
    liability known to exist on the date of the balance-sheet. Conse-
c   quently if no amount had been specifically set apart in the books
    of account of the assessee for meeting the liability of gratuity,
    it cl:Juld not be said that there was any provision made by the
    assessee for the payment of gratuity. Reliance in this connection
    was placed on the observations of this Court in Vazir Sultan
    Tobacco. Ltd. Etc. Etc. v. Cooml.BS:loner of Income Tax, Andhra
    Prade911, Hyclerabad, [1982] 1 s.c.R. 789 at 800 & 804 ~ 132
D   I.T.R. 559 at 568. at 800 & 804. It was submitted that a
    provision could be made only after an amount was specifically set
    apart in the books of account by debiting the profit and loss
    account for meeting a certain liability. It was then urged that
    the language and the scheme of the Act supported the aforesaid
    submission namely;
E
          (a) that section 40A(7)(b) (ii) drew a clear distinction
    between 'provision made by the assessee •••• for payment of
    gratuity' and 'amount admissible as deduction on account of
    gratuity'. This showed clearly that the making of a claim by the
    assessee for deduction on account of gratuity could not be
F   equated with the making of a provision.

          (b) The words 'made by the assessee' following the word
    'provision' were also very significant and clearly indicated that
    an amount 1111Bt be set apart specifically by the assessee for
    meeting the liability for gratuity.
G
          (c) If the legislature at all wanted to equate a deduction
    in respect of gratuity with a provision made for payment of
    gratuity section 40A(7) would have been worded differently,
    namely;
H              "No deduction shall be allowed in respect of any
               liability for the payment of gratuity •••• •
         SAJJAN MILLS v. c.1.T, [SABYASACHI MUKllARJl, J,]             605


     (d) The expression 'provision made by the assessee' occurs              A
in section 40A(7) no less than seven times. These words must
therefore be given their due meaning and effect and could not
be treated as redundant.

     ( e) Explanation 11 to section 40A( 7) referred to amount
being paid .to an employee in a subsequent year out of the                   B
provision of gratuity. This provision was intelligible and
meaningful only if 'provision' was understood to mean the setting
apart of an amount in the books of account. So as to make funds
available for disbursement.

     (f) Section 36(l)(vii a) of the Act provided for deduction              C
in respect of the provision for doubtful debts made by certain
financial institutions. There was no doubt that 'provision' in
section 36(l)(vii a) of the Act meant an amount specifically set
apart in the books of account of the assessee to meet the loss on
doubtful debts. The word 'provision' in section 40A(7) must also
receive the same meaning, according to the assessee.                         D

     (g) Section 34(3)(a) spoke of the creation of a develo!'ll"nt
rebate . reserve by debiting the Profit and Loss Account and
crediting the Reserve Account. Thus, the Income-tax Act itself
contemp.lated,   according   to   the   assessee,   a   Reserve   as    an
appropriation or earmarking of profits by making entries for this            E
purpose in the books of account.

     (h) The other clauses of section 40A spoke of 'expenditure'
and 'allowance'. But section 40A struck a different note and used
the word 'provision'. Consequently 'provision' could not be
equated with 'expenditure' or 'allowance' or 'deduction'.
                                                                             F
     In interpreting a taxing statute, it was submitted on behalf
of the assessee, equitable considerations were entirely out of
place, nor could taxing statute be interpreted on any
presumptions or assumptions. The Court must look squarely at the
words of the statute and interpret these. lt should interpret a
taxing statute in the light of what was clearly expressed and it             G
could not imply anything which was not expressed; it could not
import provisions into the statute so as to supply any assumed
deficiency, nor could it refuae to give effect to the plain and
clear meaning of the words on the ground that strange and
anomalous consequences might arise.
     It was, therefore, urged on behalf of the assessee that the             H
judgment under appeal of the High Court was erroneous for the
following reasons :
    606               SUPREME COURT REPORTS        [1~85]   SUPP.3 s.c.R.


A        (a) that it regarded a claim for deduction of gratuity in
    the income-true assessment as tantamounting to the making of a
    provision by the assessee in his books of account, and

         (b) it proceeded on the unwarranted assumption that the
    Companies Act mandatorily required a company to make a provision
a   for gratuity, and failure to make such a provision constituted a
    violation of the Companies Act, and such a company should not be
    permitted to take advantage of its own wrong.

         It was submitted that there was no provision in the
    Companies Act or in the accounting practice making it mandatory
    for a company to get an actuarial valuation of its gratuity
C   liability or to make a provision for the same in its books of
    account. The Company Law Board had put this matter beyond doubt
    under circulars on several occasions specially by Circular No.
    13/77 dated 21st November, 1977, which provided that a company
    might either make a provision for gratuity or might merely
    indicate the fact of the liability for gratuity by appending a
    note at the foot of the accounts. Further, the Institute of
D   Chartered Accountant had also issued a publication titled 'state-
    ment on treatment of Retirement Gratuity' which also clarified
    that a company need not make any provision for gratuity. These
    submissions were elaborated with reference to certain books on
    accowitancy.

E        Our attention was drawn to the observations of this Court in
    the case of lletal llclx Calpauy of IDd:la Ltd. v. l'beir Workmen, 73
    I.T.R. 53 at 67-68, which were reiterated and referred to in the
    decision of this Court in Vazir Sultan Tobacco Co. Ltd. v.
    Comm:l.ssiooer of Iocaoe Tax (supra). In these appeals we are not
    concerned with       the distinction between        'provision'   and
F   'reserves' . We are concerned with the true meaning and purport of
    the expression "provision made by the assessee". This Court in
    Vazir Sultan's case observed at page 569 referring to the
    observations in the case of lletal llclx :

               "The distinction between a provision and a reserve is
G              in commercial accountancy fairly well known. Provi-
               sions made against anticipated losses and contingen-
               cies are charges against prof its and, therefore, to be
               taken into account against gross receipts in the P. &
               L. account and the balance-sheet. On the other hand,
               reserves are appropriations of profits, the assets by
H              which they are represented being retained to form part
         SAJJAN MILl..S v. c.I.T. [SABYASACllI MUKHARJI, J.]   607


           of the capital employed in the business. Provisions       A
           are usually shown in the balance-sheet by way of
           deductions from the assets in respect of which they
           are made whereas general reserves and reserve funds
           are shown as part of the proprietor's interest. (See
           Spicer and Pegler' s Book keeping and Accounts, 15th
                                                                     B
           Edn'. P· 42)."

     It was emphasised 'hat the concept of provision applied not
only in respect of companies but also to individual assessees.

     Reliance was also placed on the observations of this Court
in Kedarnath Jute Mfg. Co. Ltd. v. Colllllissioner of 1ocome-tas     c
(Central), Calcutta, 82 I.T.R. 363, where it was emphasised that
whether an assessee was entitled to a particular deduction or not
depended on the provision of law relating thereto and not on the
view that the assessee might take of his rights; nor could the
existence or absence of entires in the books of account be
decisive or conclusive in the matter. The assessee who was           D
maintaining accounts on the mercantile system was fully justified
in claiming deduction of the aioount of sales tax which it was,
under the law, liable to pay during the relevant accounting year.

     Counsel was emphatic that there was no obligation. cast on
any assessee either by any law or even by the canons of              E
accounting practice to make any provision in the books of account
in respect of the liability to pay gratuity. Consequently, an
assessee might claim as deduction in his income-tax assessment
the liability in respect of gratuity even though he might not
have made any provision or other entry in his books of account in
respect of gratuity.
                                                                     F
     It was the assessee's case that section 40A(7) was not a
complete code in respect of gratuity. Section 40A contained only
a series of specific and limited disallowances. If an item of
expenditure was not covered by section 40A, it was not as if it
could not be claimed as deduction at all. On the contrary, i f
section 40A did not apply, there was no bar at all to claiming       G
the expenditure as deduction either under section 28 or under
section 37 provided it was incurred wholly and exclusively for
the purpose of business. It was further submitted that section
40A(7) could not possibly be considered to be a complete code
with regard to the allowance of deduction for gratuity, inter
alia, because section 40A(7) merely provided for disallowance if
                                                                     H
provision of gratuity was made by the assessee. It does not say
    608              SUPl\EME COURT REPORTS     [1985] SUPP.3 s.c.R.


    that no deduction will be allowed in respect of gratuity unless
A   and until certain conditions were fulfilled.

         Section 40A is in Chapter IV which deals with computation of
    total income. It is under the sub-heading of a group of sections
    dealing with the computation of profits and gains of business or
    profession. The said group of section begin with section 28 and
    go upto section 40D. Section 40A is with the marginal note under
    the heading "Expenses or payments not deductible in certain
    circumstances". If the marginal note or heading is any
    indication, and it certainly is a relevant factor to be taken
    into consideration in construing the ambit of the section, then     ~
    these payments mentioned therein are not deductible according to
    the statute in certain circumstances. Therefore, the heading of
c   this section is a clear indication that certain payments and
    expenses which would be otherwis.e deductible would not be
    deductible except in certain circumstances indicated in the
    section. This is abudantly made clear by the non-obstante
    expression used in sub-section (1) of section 40A. As noted
    before, the provisions of section 40A shall have effect
    notwithstanding anything to the contrary contained in any other
D
    provision of the Act. Payments of deductions or provision for
    deduction could have been eligible for deduction or could have
    been deducted either under section 28 or under section 37 of the
    Act. But the use of the non-obstante expression makes it clear       ~
    that if there is any legislative base dealing with the provisions       1
    for gratuity then the same would be applicable in spite of and        ,
E
    notwithstanding any other provision of the Act. Read with the
    marginal notes of section 40A, the non-obstante clause of
    sub-section (1) of section 40A has an overriding effect over the        j
    provisions of any other section by providing that the provisions
    of the section will have effect notwithstanding anything to the
    contrary contained in any other provision relating to the
F
    computation of income under the head "Profits and gains of
    business or profession". Expenditures or allowances which are
    deductible under any other provision relating to        the head
     'Business or profession 1 ·will be disallowed in cases to which
    these provisions of the section apply. This sub-clause was
    inserted by Finance Act, 1975 with retrospective effect from
G
    1.4.1973. It is necessary to appreciate the purpose and object
    intended to be achieved by this sub-section in order to arrive at
    the true meaning of the provision.

         Payment of gratuity as commonly understood is the payment
    made to the employee by the employer on his retirement or           ..
H
    termination of his service for any reason. It is made voluntarily   '111111
         SAJJAN MlLLS v. C,l, T. [SABYASACHl MUKHAR.Jl, J,]        609

                                                                         A
by the employer as a regular practice or pressure of trade or
business either under an agreement with the employees or on the
understanding of the trade and after the enactment of the Payment
of Gratuity Act, 1972 which came into force on 16th September,
1972, as a statutory liability under the said Act. Although
payment of gratuity is made on retirement C1r: termination of            B
service, it was not for the service rendered during the year in
which the payment is· m:.ide hut it is made in consid"ration of ·the
entire length of service and its ascertainment and computation
depend upon several factors.

     The right to receive the payment accrued to the employees on        c
their retirement or termination of their services and the
liability to pay gratuity became the accrued liability of the
assessee when the employees retired or their services, were
terminated. Until then the right to receive gratuity is a
contingent right and the liability to pay gratuity continues to
be a contingent liability qua the employer. An employer might pay        D
gratuity when the employee retires or his service is terminated
and claim the payment made as an expenditure incurred for the
purpose of business under section 37. He might, if he followed
the mercantile system, provide for the payment of gratuity which
became payable during the previous year and claim it as an
expenditure on the accrued basis under section 37 of the said            E
Act. Since the amount of gratuity payable in any given year would
be a variable amount depending upon the number of employees who
would be entitled to receive the payment during the year, the
amount being a large one in one year and a small one in another
year, the employer often finds it desirable and/or convenient to
set apart for future use a sum every year to meet the contingent
liability as a provision fo~ gratuity or a fund for gratuity. He         F
might create an approved gratuity fund for the exclusive benefit
of his employees under an irrevocable trust and make contribu-
tions to such fund every year.    Contingent liabilities do not
constitute expenditure and can not be     the   subject   matter    of
deduction   even   under   the mercantile system of       accounting.
Expenditure which was deductible for income tax purposes is              G
towards a liability actually existing at the time but setting
apart money which might become expenditure on the happening of
an event is not expenditure. (See in this connection the observ-
ations ·of this Court in Indian. Molasses Co. (P) Ltd. v.
ec.inssioner of Inc...-tax, West llengal), 37 I. T. R, 66 at pages
76 & 80. A distinction is of ten made between an actual liability
in praesenti and a liability de futuro, which for the time being         H
is only contingent. The former is deductible but not the latter.
        610              SUPREME COURT REPORTS       [1985] SUPP.3 s.c.R.


             Amounts set apart by way of provision or by way of a reaerve
A
        or fund to meet the liability of gratuity as and when it becomes
        payable will not be deductible allowance or expenditure. Where,
        however, an approved gratuity fund is created for the exclusive
        benefit of the employees under an irrevocable trust, contribution
        made to the fund during the year of account will be allowed to be
        deducted under section 36(1)(v).
B
             In Metal Box Campany of India v. 'Ibeir Worlmen (supra), this
        Court held that contingent liabilities discounted and valued as
        necessary could be taken into account as trading expenses if
        these were sufficiently certain to be capable of being valued. An
        estimated liability under a gratuity scheme even if it amounted
        to a contingent liability if properly ascertainable and its
c       present value was fairly discounted was deductible from the gross
        profits while preparing the profit and loss account. In view of
        this decision and other decisions that followed it, it became
        permissible for an assessee if he so chose to provide in his
        profits and loss account for the estimated liability under a
        gratuity scheme by ascertaining its present value on accrued
        basis and claiming it as an ascertained liability to !>.. deducted
D
        in the computation of the profits and gains of the previous year.

             It would thus be apparent from the analysis aforesaid that
        the position till the provisions of section 40A(7) were inserted
        in the Act in 1973 was as follows :-
E
        (1) Payments of gratuity actuslly made to the employee on his
        retirement or termination of his services were expenditure
        incurred for the purpose of business in the year in which the
        payments were made and allowed under section 37 of the Act.

        (2) Provisions made for payment of gratuity which would become
F
        due and payable in the previous year was allowed as an
        expenditure of the previous year on accrued basis when mercantile
        system was followed by the assessee.

         (3) Provisions made by setting aside an advance sum every year
         to meet the contingent liability and gratuity as and when it
    G
         accrued by way of provision for gratuity or by way of reserve or
         fund for gratuity was not allow~d as an expenditure of the year
         in which such sum was set apart.

         (4) Contribution made to an approved gratuity fund in the
         previous year was allowed as deduction under section 36(l)(v).
    H
         SllJJAN MILLS v. C.I.T, [SABYASACHI MUKllARJI, J,]        611


(5) Provision made in the Profit and Lo"6 Account for the
                                                                         A
estimated present value of the contii.gent liability properly
ascertained and discounted on an accrued basis as falling on the
assessee in the year of account could be deductible either under
section 28 of section 37 of the Act.

     As there were several methods which the assessee might
                                                                         B
choose to adopt in meeting his liability to pay gratuity, the
treatment which he would receive under the Income-tax Act would
depend upon the method adopted by him. The assessee is only under
an obligation to pay gratuity when it became due and payable. The
other methods adopted by the assessee for meeting the liability
for gratuity as and when it arose are provisions or arrangements
made by him at his option. It ·is 'not .obligatory on him to make
                                                                         c
any such provision and if no such arrangement or provision was
made, no question arose to consider its deductibility or
allowance under the Act.

     The intention of the legislature in enacting the provision
                                                                         D
of section 40(A)(7) would be apparent from the notes on clauses
of the amendment where in paragraph 46, after referring to the
provisions of section 37(1) and section 36(l)(v) of the Act, it
was observed (98 I.T.R. Statutes p. 194), inter alia, as
follows :-
                                                                         E
          "A reading of these two provisions clearly shows that
          the intention has always been that deduction in
          respect of gratuities should be allowed either in the
          year in which the gratuity is actually paid or in the
          year in which contributions are made to an approved
          gratuity fund. A doubt has been expressed that the
           relevant   provisions,    as   presently worded,   do   not
                                                                         F
          secure the underlying objective and that a provision
          made by a taxpayer in his accounts in respect of esti-
          mated service gratuity payable to employees will be
          deductible in computing the taxable income in a case
          where the provision has been made on a scientific
           basis in the form of an actuarial valuation. In order
                                                                         G
           to remove u~certainty in the matter, it is proposed to
           specifically provide in the law that no deduction will
           be allowed, in the computation of profits and gains of
           a business or profession, in respect of any reserve
           created or provision made for the payment of gratuity
           to the employees on retirement or on termination of
           employment for any       reason.   This restriction will,
                                                                         H
    612              SUPROO! COURT REPORTS       [1985] SUPP.3 s.c.R.

A              however, not apply in relation to a provision made for
               the purpose of payment of a sum by way of contribution
               towards an approved gratuity fund that has become
               payable during the relevant account year, on for the
               purpose of meeting actual liability in respect of
               payment of gratuity to the employees that has arisen
B              during auch year.''

         This intention and the purpose of the legislature was
    carried into effect by inserting sub-section (7) in section 40A
    by ensuring the overriding effect over the other provisions of
    the Act. Therefore, in interpreting or in trying to find out the
    meaning of that provision, one should, if possible and in this
C   case it is not at all straining, give effect to that intention
    and not to make a nonsense of that intention. Clause (a) of the
    said sub-section provides that no deduction will be allowed in
    respect of any provision (whether called as such or by any othar
    name) made by the assessee for the payment of gratuity to his
    employees on their retirement or termination of their services
    for any reason. The expression 'provision' has not been defined
D   in the Act and it is not used in any artificial sense but in it&
    ordinary meaning. This is clear from the words (whether called as
    such or by any other name) occurring in sub-section. According to
    Webster, 'provision' in its ordinary sense means 'something
    provided for future use'.

E         On a plain construction of clause (a) of sub-section (7) of
    section 40A of the Act, what it means is that whatever is
    provided for future use by the assessee out of the gross profits
    of the year of account for payment of gratuity to employees on
    their retirement or on the termination of their services would
    not be allowed as deduction in the computation of profits and
F   gai'lS of the year of account. The provision of clause (a) was
    made subject to clause (b). The embargo is on deductions of
    amounts provided for future use in the year of account fov
    meeting the ultimate liability to payment of gratuity. Clause (b)
    (i) excludes from the operation of clause (a) contribution to an
    approved gratuity fund and amount provided for or set apart for
G   payment of gratuity which would be payable during the year of
    account. Clause (b)(ii) deals with a situation that the assessee
    might provide by the spread-over method and provides that such
    provision would be excluded from the operation of clause (a)
    provided the three conditions laid down by the sub-clauses are
    satisfied.
H                                  •
          The submission of the assessee is that if no provision is
    made by the assessee for gratuity, still the . same will be
         SAJJAN MILLS v. c. r. T, [SABYASACHI MUKllARJI, J,]   613


deductible and section 40A(7) will have no application, would        A
defeat the very purpose and object of section 40A( 7) and render
it nugatory. The interpretation as suggested by the assessee
would entitle the assessee who made no provision to claim
deduction whereas an assessee who made a provision would not get
deduction unless the requirements laid down in the sub-section
are fulfilled. This interpretation, if accepted, will lead to a      B
curious result, and if one may venture to say an absurd result,
and even where the assessee has not chosen to adopt the
spread-over method and has not provided for the present value.of
the contingent liability attributable to the year of account by
charging it on the profits of the year, the assessee would still
be entitled to claim as deduction from the gross prof its of the     c
year the said estimated liability which he could have provided
for but he has not chosen to do so.

     Where the intention of the legislature in enacting the
provision in question was to put an embargo on the deduction, the
interpretation suggested by the assessee defeats that purpose.       D
     Kedarnath Jute Mfg. Co. Ltd. v. C.l.T. referred to herein-
before dealt with a different situation. The accrual of sales-tax
liability in that case did not depend on the option of the
assessee to make or not to make it for the year. The case of
Bombay High Court in Tata Iron & Steel Co. Ltd. v. D.V. Bapat,       E
lncome-tal< Officer, Companies Circle I (2), Bombay and Anr., 101
I.T.R. 292, was a case on which reliance was placed on behalf of
the assessee where provision was made ~ut was a case before the
enactment of section 40A( 7) arising out of the assessment year
1972-73. Similarly C.I.T. l'erala v. High Land Produce Co. Ltd.,
102 I.T.R. 803, another decision relied on by the assessee was,
where a provision was made. It arose out of the assessment year      F
1970-71 before the enactment of section 40A(7 ), These are the
cases upon which the assessee had relied. Another case upon which
the assessee relied was Swadesbi Cotton Milla Co. Ltd. v.
Iru:ome-Tax Officet, Special Circle 'A' Ward, Kanpur (supra). This
case arose out of assessment year 1973-7~ to which the provision
of section 40A(7) was applicable. The Allahabad High Court how-      G
ever took the view that bar created by the said provision did not
apply since the conditions laid down had to be fulfilled in
future. It did not take into consideration the provision of
section 155(13) of the Act. Madras High Court in ec-tssioner of
Income-Tax, Madras (Central) v. Audhra Prabba P. Ltd., 123 I. T.R.
760 at 772, has doubted the decision of the Allahabad High Court
in 112 I. T.R, 1038 and further observed that the question of        H
deductibility of a claim for gratuity liability could not be
allowed on general principles under any provisions of the Act.
     614                   SUPREME COURT REPORTS     [1985] SUPP.3 s.c.R.

            The aforesaid difficulties in accepting the contentions
A   · urged on behalf of the assessee were highlighted by the Calcutta
      High Court in the case of Peoples Eng:! neeriDg & Motor Works Lt(l.
      v. Comnissioner of Income-Tax West Bengal - ll, (supra), It was
      pointed out that payment of gratuity was a statutory liability
      created under the Payment of Gratuity Act, 1972. It could
      normally be said to have arisen for the carrying on of business.
B     However, for gratuity to be deductible under the Act, must fulfil
      the conditions laid down in section 40A(7), The deduction could
      not· be allowed on general principles under any other section of
      the Act because sub-section (l) of section 40A makes it clear
      that the provisions of the section shall have effect notwith-
      standing anything · to the contrary contained in any other
      provision of the Act relating to the computation of income under
                11
     the head        Profits and gains of business or profession 11 or in
c    other words it means that section 40A would have effect notwith-
     standing anything contained in sections 30 to 39 of the Act.

          This position was again reiterated by the Calcutta High
     Court in the case of Comnissioner of Income Tax, Central-V,
     Calcutta v. New Swadeshi Hills of Abmedabad Ltd., 147 I.T.R. 163,
D
     where it was explained at page 172 of the report that prohibition
     in section 40A(7) was on deduction in respect of any provision
     (whether called as such or by any other name) made by the
     assessee for the payment of gratuity. The amplitude of the
     section was indicated by the use of the expression "whether
     called as such or by any other name." It was further reiterated
E
     that the interpretation suggested on behalf of the assessee would
     lead to a conclusion which would be extra-ordinary and repugnant
     to commonsense. It will also cause grave injustice to the
     assessees who have been prudent enough to set apart a sum for
     payment of gratuity.

          The principle that fiscal statutes should be strictly
F
     construed does not rule out the application of the principles of
     reasonable construction to give effect to the purpose or
     intention of any particular provision as apparent from the scheme
     of the Act, with the assistance of such external aids as are
     permissible under the law.
G
          For the aforesaid reasons, it is not possible to accept the
     assessee's contentions. The questions referred to the High Court
     were therefore rightly answered in negative by the High Court.
     The appeals, accordingly, fail and are dismissed with costs.

H



     M,L,A,                                             Appeals dismissed.