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4. Learned Standing Counsel appearing for the Revenue contended that the Tribunal failed to consider the fact that the service weightage paid was neither a gratuity nor a payment to any welfare fund. The Tribunal also failed to consider the applicability of Section 40A(9) of the Income Tax Act to the facts of the case herein. Consequently, the order suffers from serious illegality and hence, liable to be set aside.

5. Learned Standing Counsel appearing for the Revenue took us through the provisions of Section 40A(9), 43B(b) as well as to the definition of "paid" in Section 43(2) of the Income Tax Act and submitted that the assessee was having service weightage scheme even prior to this assessment year. Under the Scheme, on the eve of retirement, the employees would be given retirement benefits, calculated on the basis of last drawn salary and other relief for three days multiplied by the number of years of service put in, in the organisation. Evidently, the scheme is not one which falls for consideration under Section 36(1)(iv) or 36(1)(v) of the Income Tax Act. Section 40A of the Income Tax Act is a specific provision, which speaks about expenses or payment not deductible under certain circumstances. He submitted that under Section 40A(9), no deduction would be allowed in respect of any sum paid by the assessee, as an employer, towards the setting up or formation of, or as contribution to, any fund, or trust, or other institution for any purpose, the only exception being where the sum is paid for the purposes and to the extent provided by or under Clause (iv) or (iva) or (v) of sub-section (1) of Section 36, or as required by or under any other law for the time being in force. Going by Section 36 read with sub-section (2) of Section 43, the only deduction considered are the actual payment made as by way of contribution towards pension scheme, as referred to under Section 80CCD, or by way of contribution to an approved gratuity fund created under an irrevocable trust or a sum paid as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to the limit, as may be prescribed, for the purpose of recognising the Provident Fund or approved superannuation fund, as the case may be.

"16.1 Sums contributed by an employer to a recognised provident fund, an approved supernnuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc. the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund,trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law."

23. Section 36(1) (iv) is with reference to the payment to a sum towards recognised provident fund or an approved superannuation fund, subject to the limits prescribed for the purpose of recognising the provident fund or approving the superannuation fund. Section 36(1)(iva) states that in the case of contribution to a pension scheme as referred to in Section 80CCD, the permissible deduction is to the extent that it does not exceed 10% of the salary of the employee in the previous years; Section 36(1)(v) states that the deduction is on the contribution towards approved gratuity fund created by the employer for the exclusive benefit of his employees under an irrevocable trust.

28. On the question as to whether such appropriation amounted to 'reverse or provision' and whether the assessee could deduct the estimated liability in the Profit and Loss account while working out the net profits, the Supreme Court considered Schedule VI to the Companies Act and held as follows:

"18. That there is no rule against providing for any such contingent liability but on the contrary such a provision is permissible can be seen from the form of balance-sheet in Schedule VI to the Companies Act, 1956 where provisions for taxation, dividends. provident fund schemes, staff benefit schemes and other items for which a company is contingently liable are to be treated as current liabilities and, therefore, dubitable against the gross receipts. Schedule VI, Part 2, lays down the requirements of profit and loss account and el. 3 (ix) of it provides that a profit and loss account shall set out amongst other things the aggregate of amounts set aside or provisions made for meeting. specific liabilities, contingencies or commitments. But the contention was that though Schedule VI to the Companies Act may permit a provision for contingent liabilities, the Income-tax Act, 1961 does not, for under sec. 36(v) the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards an' approved gratuity fund created by him for the exclusive benefits of his employees under an irrevocable trust This argument is plainly incorrect because sec. 36 deals with expenditure deductible from out of the taxable income already assessed and not with deductions which are to be made while making the P & L account. In our view, an estimated liability under gratuity schemes such as the ones before us, even if it amounts to a contingent liability and is not a debt under the Wealth Tax Act if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P & L account. It is recognised in trading circles and we find no rule or direction in the Bonus Act which prohibits such a practice."