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7. In order to decide the controversy raised in this case, it is necessary to set out the relevant provisions in respect of gratuity made in the I.T. Act :

"36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28--...
(v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit, of his employees under an irrevocable trust;"
(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment 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 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 payment 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 admissible amount or, as the case may be, the balance of the admissible amount as reduced by' the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977..."

8. It is not necessary to set out the Explanation to the section for our present purpose.

9. In the memorandum explaining the provisions in the Finance Bill, 1975, the underlying purpose of Section 40A(7) was explained thus (See page 194 of 98 ITR (St.)):

"Deduction in respect of reserves created or provisions made for payment of gratuity to employees.--Under Section 36(1)(v) of the Income-tax Act, a deduction is allowed, in computing the taxable profits and gains of a business or profession, in respect of any sum paid by the taxpayer as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. Further, Section 37(1) provides that any expenditure, other than the expenditure of the nature described in Sections 30 to 36, laid out or expended wholly or exclusively for the purpose of the business or profession, will be allowed as deduction in computing the taxable profits. 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 secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated 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 to remove uncertainty 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, 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, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during such year."

18. The liability to pay gratuity is a statutory liability which falls upon an assessee in the course of carrying on of its business activities and is clearly an expenditure laid out wholly and exclusively for the purpose of the assessee's business. The only question that arises in 'this case is in what manner and in which year will the assessee get the benefit of this deduction.

19. Section 36(1)(v) specifically provides that any payment by way of contribution- towards an approved gratuity fund created by an assessee for the exclusive benefit of his employees under an irrevocable trust shall be allowed as deduction in computing the assessee's business income.