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3. In first appeal, the CIT(A) found that there was a pre-existing approved gratuity fund. A provision for payment to such fund would be qualified for deduction under s. 40A(7)(b)(i) of the Act. Even if no provisions were made, it would be allowable according to the first appellate authority under s. 36(1)(v) of the Act, which authorises the allowance of '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. He was of the opinion that under mercantile system of accounting 'paid' includes payable sum. He also relied on s. 43(2) in order to take this view. He pointed out that it is a statutory liability. Accordingly he directed allowance of excess of incremental liability over the prima paid as further deduction for both the years.

6. Before us, the learned senior standing counsel appearing for the Department submitted that after coming into force of s. 40A(7) of the Act, introduced by Finance Act, 1975, w.e.f. 1st April, 1973, unless the assessee makes a provision in his books of account for its incremental gratuity liability on the basis of actuarial valuation, the assessee is not entitled to claim any deduction under this head. The learned senior standing counsel further submitted that in the present case the assessee has not made any provision in its books of account for payment of incremental gratuity liability made on the basis of actuarial valuation. It was further submitted that after s. 40A(7) was introduced w.e.f. 1st April, 1973, it is not possible for the assessee to claim any deduction with regard to the gratuity payment made to an approved gratuity fund created under deed of irrevocable trust. The learned senior standing counsel also pointed out that s. 40A(7) of the Act will have the overriding effect in the matter of allowing gratuity liability with regard to any further provisions in the Act. In order to support his contention, the learned senior standing counsel relied upon the decision of the Supreme Court in Shree Sajjan Mills Ltd. vs. CIT , and yet another decision of this Court rendered in ITO vs. Palani Andavar Mills Ltd. (1996) 218 ITR 364 (Mad).

7. On the other hand, the learned counsel appearing for the assessee submitted that it is no doubt true that the assessee has not made any provision in the books of account for payment of incremental gratuity liability based on actuarial valuation. According to the learned counsel, the incremental liability is allowable as deduction under s. 36(1)(v) of the Act. It was further submitted that even if no provisions were made, it would be allowable under s. 36(1)(v) which authorises the allowance of 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 its employees, under an irrevocable trust. The learned counsel further submitted that the assessee was following mercantile system of accounting under which 'paid' includes 'payable'. To support this view he relied upon s. 43(2) of the Act. According to the learned counsel the gratuity liability is both statutory and contractual in assessee's case and since the assessee is maintaining accounts on mercantile basis, there was no doubt that incremental liability was a charge on assessee's profits, whether provision as such is made or not. According to the learned counsel such a charge would constitute a provision made within the meaning of s. 40A(7)(b)(i) of the Act. Therefore, according to the learned counsel for the assessee the incremental liability is allowable as a deduction both under s. 40A(7) as well as under s. 36(1)(v) of the Act.