# SllREE SAJJAN MILLS LTD v. COMMISSIONER OF INCOME TAX, M.P, BHOPAL AND ANR - **Citation:** [1985] Supp. 3 S.C.R. 593 - **Court:** Supreme Court of India - **Decided:** 1985-10-08 - **Case number:** Civil Gase No. 240, 263 of 1980 - **Bench:** V.D. Tulzapurkar, Sabyasachi Mukharji, Ranganath Misra - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/sllree-sajjan-mills-ltd-v-commissioner-of-income-tax-m-p-bhopal-and-anr-9169 - **Pages:** 22 ## Headnote 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 11business or profession" without complying with the requirements of s. 40A (7) (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 - Words and Phrases - 11Provision 11 - 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 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 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. 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. A B c D E F G 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 statement 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. D E 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. 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 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, HELD: l(i) Payment of gratuity aa COlllDlnly understood is F the payment made to the employee by the employer on his retirement 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. H Although payment of gratuity is made on retirement or termination of service, it was ## Text _Characters 0–39,643 of 53,821. This is a partial read: ask again with offset=39643 for what follows._ SllREE SAJJAN MILLS LTD, v. COMMISSIONER OF INCOME TAX, M.P, BHOPAL AND ANR, OCTOBER 8, 1985 593 [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 11business or profession" without complying with the requirements of s. 40A (7) (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 - Words and Phrases - 11Provision 11 - 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 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 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. 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. A B c D E F G 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 statement 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. D E 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. 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 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, HELD: l(i) Payment of gratuity aa COlllDlnly understood is F the payment made to the employee by the employer on his retirement 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. H 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 computation depend upon several factors. (608 H; 609 A-B] l(ii) The right to receive the payment accrued to the employees on their retirement or termination of their services 1 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 A 596 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R. 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 circumstances 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 notwithstanding 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 provision 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. Cn 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? (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 G 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 Comissioner 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?" 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 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". ...................................................... F G II A B c D E F G H 602 SUPREPIE COURT REPORTS [1985] SUPP.3 s.c.R. (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) 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 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 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 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 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 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 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 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 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 thereunder. The High Court was of the view that sub-section (7) of section 40A referred to deductions on account' of payment of 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. 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 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 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, 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 A B c D E F G H A B c D E F G H 604 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R. 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 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. Consequently 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 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; (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 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. (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; "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'. 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 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. F G 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 'statement 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, 7 3 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. Provisions made against anticipated losses and contingencies 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 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 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 (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 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 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. 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, if section 40A did not apply, there was no bar at all to claiming 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 provision of gratuity was made by the assessee. It does not say A B c D E F G H A c D E F G H 608 SUPl\EME COURT REPORTS [1985] SUPP.3 s.c.R. that no deduction will be allowed in respect of gratuity unless 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 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 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 , 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 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 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 . termination of his service for any reason. It is made voluntarily '111 SAJJAN MlLLS v. C,l, T. [SABYASACHl MUKHAR.Jl, J,] 609 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 A 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 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 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 3 7. 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 Act.