1. The only ground in the present appeal filed by the assessee is that the Commissioner (Appeals) erred in confirming the decision of the ITO that the assessee was not eligible for deduction of the entire initial contribution of Rs. 4,14,000 payable to the trustees of the approved gratuity fund created for the benefit of the employees.
2. In the assessment proceedings, the assessee claimed deduction for gratuity contribution of Rs. 4,85,000 consisting of initial contribution of Rs. 4,14,000 to the gratuity fund created for the purpose and annual contribution of Rs. 71,000. The trust was recognised by the Commissioner with effect from 1-7-1977. Para 4(1) of the Commissioner's letter to the trustee of the fund permitted them to make the initial contribution to the fund in five annual instalments commencing from the year in which the fund came into effect. The ITO, therefore, allowed deduction only in respect of one-fifth of the initial contribution amounting to Rs. 82,400 in addition to the annual contribution of Rs. 71,000. The claim for the balance was rejected.
3. The assessee appealed before the Commissioner (Appeals). But having failed before him for the reasons mentioned by the Commissioner (Appeals) in his order, the assessee is in appeal before the Tribunal.
4. Reliance is placed on the order of the Tribunal in IT Appeal No.2937 (Bom.) of 1979, dated 24-4-1981 and other appeals in the case of ITO v. Hoechst Pharmaceuticals Ltd. [Since Reported in  7 LTD 267 (Bom.)] and vice versa. In that case the Tribunal had held that where the assessee had made a provision for the balance of contribution payable to the approved gratuity fund, the assessee was eligible for deduction on account of the claim before arriving at the taxable profits. The assessee has also claimed the deduction as admissible under Section 36(1)(v) of the Income-tax Act, 1961 ('the Act'). On behalf of the revenue, reliance was placed on the Calcutta High Court decision in the case of Hindustan Aluminium Carpn. Ltd. v. CIT  144 ITR 474 wherein the learned judges of the Calcutta High Court had held that in view of the provisions of Section 40A(7) of the Act where the amount was claimed as gratuity payable to the employees, but the amount had not been transferred to a fund and had not gone irretrievably out of the coffers of the assessee, such an amount was not deductible.
5. We have carefully considered the facts and circumstances of the case and the arguments on either side. The undisputed facts are that the assessee had set up a trust in the accounting period for payment of gratuity to its employees. The initial amount payable to the trust was Rs. 4,14,000. While recognising this trust with effect from 1-7-1977, the Commissioner by his letter dated 18-8-1978 permitted the assessee to pay the initial contribution in five annual instalments commencing from the year in which the fund bad come into effect. The question is whether the assessee was eligible for deduction of the entire amount of the initial contribution in the determination of the total income of the assessee for the year under consideration.
6. Under the scheme of the Act, where the assessee claims any deduction for the purpose of payment of gratuity to the employees, if he has made actual payment to an approved gratuity fund set up for the purpose, he will be eligible for the deduction under Section 36(1)(v). If he does not make the payment, but he merely makes a provision for the amount, then he has to satisfy the conditions laid down under Section 40A(7) before claiming the deduction. Under the terms of Section 36(1)(v), the assessee is eligible for deduction in respect of any sum paid by it as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefits of the employees under an irrevocable trust. We find that the term 'paid' has been defined under Section 43(2) of the Act to mean actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'Profits and gains of business or profession'. The assessee has not made the actual payment to the trustees of the entire amount. Only one-fifth of the amount has been actually paid. The question is about the balance, which is in dispute before us. It is for consideration whether the assessee could be deemed to have paid as defined under Section 43(2). In this connection, we find that some guidance is available from the Delhi High Court decision in the case of CIT v. Delhi Cloth and General Mills Co. Ltd.  127 ITR 11. The learned judges of the Delhi High Court were called upon to interpret the provisions of Section 10(4)(c) of the Indian Income-tax Act, 1922. They were concerned with the admissibility of the amounts contributed to the provident fund as an allowable expenditure. The ITO had rejected the assessee's claim in that case on the plea that no actual payment or transfer of the amount was made and the assessee-company had merely opened a ledger account in the name of provident fund and the funds contributed by the company were transferred to this account. According to the ITO, this did not amount to an actual payment and did not entitle the assessee to a deduction.
The Delhi High Court, however, held that under the relevant trust deed the assets of the trust including the contributions made to the fund by the members as well as the company, accumulations or accretions to the fund by way of interest or otherwise and any securities purchased with the accumulations or accretions, vested in the trustees of the members.
The terms of the trust deed, read with the rules and regulations created a liability against the assessee-company in that case in respect of the amounts which it had to contribute to the fund every year. This liability created under the terms of the trust deed in the context of the fact that the assessee-company was following the mercantile system of accounting, amounted to payment or expenditure within the meaning of Section 10(2)(xv). In the instant case also, there is a trust deed, a copy of which is placed before us, according to which, the assessee is required to make payment to the trust as per the rules of the trust agreed upon by the assessee. The liability has also been incurred. The assessee is maintaining the books of account on mercantile basis. Therefore, in our opinion, the assessee's case is fully covered by the Delhi High Court decision in the case of Delhi Cloth & General Mills Co. Ltd. (supra).
7. Even assuming that the assessee is not deemed to have paid the amount to the trust, the assessee is eligible for deduction under Section 40A(7)(b)(i) As stated earlier, the assessee has set up a gratuity fund by an irrevocable trust. Irrespective of whether the assessee has made actual provision or not, the assessee is liable to make the payment to the fund. This liability amounted to a provision as explained by the Tribunal Special Bench in its decision dated 12-6-1981 in IT Appeal No. 1599 (Mad.) of 1977-78 in the case of Soft Beverages (P.) Ltd. v. Second ITO  1 SOT 311 (Mad.). As the learned members have proceeded to explain, in the normal parlance provision denotes itself as something provided for. It is not uncommon that one usually asks another person whether he has made any provision for his daughter's marriage or for the son's education, etc. Therefore, the provision made does not refer to the provision made in the books of account. Normally, meaning of 'provision made' would cover for all the liabilities which remain undischarged at the close of the previous year. Even the expression 'accounts' is wider than the expression 'books of account'. It is not correct to state that it is the liability that gets a deduction, it is the expenditure which creates a liability, that gets deducted. The assessee had an accrued liability for the balance amount of initial contribution payable to the fund. It has claimed the amount in the income-tax proceedings as a provision has been made. Once the provision is in respect of the payment to an approved fund, the claim has to be allowed under Section 40A(7)(b)(i).
Thus, in our opinion, the assessee is eligible for deduction under Section 36(1)(v) proceeding on the basis of our finding that the assessee has made the payment constructively as required under Section 43(2). Even if it is held that the assessee has not made the payment as explained above, a provision has been made as explained in the Tribunal Special Bench decision in the case of Soft Beverages (P.) Ltd. (supra).
In the circumstances, it has to be held to be admissible under Section 40A(7)(b)(i) As to the reliance on behalf of the revenue on the Calcutta High Court decision in the case of Hindustan Aluminium Corpn.
Ltd. (supra), in the first place, it is not clear whether it was a case where the assessee had created an approved gratuity fund. Further, the case has not been examined under the provisions of Section 36(1)(v).
Therefore, in our opinion, the dictum laid down by the Calcutta High Court has no application to the facts of the present case.