Gopalan Nambiyar, C.J.
1. This case has been referred to a Full Bench to settle the conflict that is felt to exist between the Division Bench ruling of this court in the High Land Produce Co. Ltd.'s case : 102ITR803(Ker) and the decisions in Haji Aziz and Abdul Shakoor Bros. case : 1983ECR1942D(SC) and the Malayalam Plantations Ltd.'s case : 53ITR140(SC) on the one hand, and the unreported Division Bench ruling in ITR No. 66 of 1975 (CIT v. Pratap Cashew Co. (P.) Ltd.--since reported at page 733 supra) on the other. Some of the other decisions relating to the point were also noticed in the reference order made by the Division Bench and it was felt that the matter required consideration by a Full Bench.
2. The facts are stated in the statement of the case sent up by the Income-tax Appellate Tribunal, Cochin Bench. The assessment year is 1971-72, the accounting year being the period from September 1, 1969, to August 31, 1970. The assessee is a company which has a registered officein Kerala, which went into voluntary liquidation on March 23, 1970. On March 7, 1970, it sold its stock and machinery to one Sudarsan Trading Company for a consideration of Rs. 20,09,962. The purchaser agreed to take over the services of such of the assessee's employees to whom the provisions of the Industrial Disputes Act applied. At the time of the sale on March 7, 1970, by virtue of the provisions of the Kerala Industrial Employees' Payment of Gratuity Act, 1970, the assessee had incurred liability for the payment of gratuity to its workers with effect from February 18, 1970. When the Act was brought into operation the said gratuity was estimated at Rs. 4,44,988, the correctness of which was not disputed. The liability of the company for the amount calculated at Rs. 4,44,988 as gratuity was agreed to be paid by the purchaser of the company at a future date. The consideration for the same included adjustment of this amount against the purchase price payable by the Sudarsan Trading Company to the assessee. The balance amount alone was paid so that as far as the assessee was concerned, there was accord and satisfaction of the amount of the calculated amount of gratuity. It has been found that this arrangement was with the consent of the concerned workers. For the relevant assessment year, the assessee claimed a deduction of the sum of Rs. 4,44,988 as a business expenditure under Section 37 of the Act. The claim was disallowed by the ITO. But on appeal, it was allowed by the AAC. On further appeal by the revenue, the order of the AAC was sustained. The Tribunal has sent up the following question of law for our determination.
'Whether the expenditure of Rs. 4,44,988 is an expenditure incurred wholly and exclusively for the purpose of the business within the meaning of Section 37(1) of I.T. Act, 1961, as it applied to the assessment year 1971-72?'
3. Section 37(1) of the I.T. Act reads:
'37. (1) Any expenditure (not being expenditure of the nature described in Sections 30 - 36 and Section 80VV) and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.
4. In order to qualify for deduction under the Act it is necessary to show that the amount in question was 'laid out or expended wholly or exclusively' for the purpose of the business of the assessee. The nature of the liability to pay gratuity fell to be considered by a Division Bench of this court in CIT v. High Land Produce Co. Ltd. : 102ITR803(Ker) . The Division Bench referred among others, to the two rulings of the Supreme Court, viz., Kesoram Industries and Cotton Mills Ltd. v. CRT : 59ITR767(SC) and Standard Mills Co. Ltd. v. CWT : 63ITR470(SC) . It also considered the decision in Indian Molasses Co. (P.) Ltd. v. CIT : 37ITR66(SC) and the principle of the decision of the House of Lords in Southern Railway of Peru Ltd. v. Owen  AC 334;  32 ITR 737, approved by the Supreme Court in Metal Box Company of India's case : (1969)ILLJ785SC . In the light of the principle of these decisions the Division Bench took the view that the liability to pay gratuity was a contingent liability, but an estimate of liability was ascertainable with substantial accuracy and can be taken into account for arriving at the true profits and gains of the assessee ; and that the principle of the decision of the House of Lords in Southern Railway of Peru Ltd. v. Owen  AC 334; 32 ITR 737, approved by the Supreme Court in Metal Box Company's case : (1969)ILLJ785SC must govern the payment of gratuity under the Gratuity Act. The proposition thus set out by this court, based on sound precedent, must be accepted.
5. But in the reference order directing this case to be placed before a Full Bench, it was felt that the principle of certain decisions to which we shall immediately call attention, had not received consideration either by the Tribunal or in some of the decisions of this court which we have referred to earlier. Our attention was called to the Supreme Court's pronouncement in Haji Aziz and Abdul Shakoor Bros.'s case : 1983ECR1942D(SC) and the Malayalam Plantations Ltd.'s case : 53ITR140(SC) . In the earlier of these cases, it was observed (p. 359):
'A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in von Glehn's case  2 KB 553 an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has actep in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such.'
6. The principle was reaffirmed in the Malayalam Plantations' case : 53ITR140(SC) . In making the reference to a Full Bench, the DivisionBench felt that this aspect of the matter had not been considered by theDivision Bench in High Land Produce Co.'s case : 102ITR803(Ker) ,nor by the later Diyision Bench in the unreported judgment in I.T. Ref.No. 66 of 1975 (CIT v. Pratap Cashew Co. (P.) Ltd.--since reported atpage 733 supra).''
7. We have examined the position fully and completely with the aid of the counsel. We are satisfied that the relevant aspects have received treatment and discussion from the Tribunal and that its finding has been arrived at after taking into account the relevant aspects which have to be considered on the point.
8. Counsel for the revenue attempted to argue before us that the claim for deduction of the amount in question falls under Section 36(1)(iv) of the I.T. Act and for that reason it is not an admissible item of deduction under Section 37 of the Act. No such contention seems to have been advanced before the Tribunal; and on the facts disclosed before us, we are unable to find that the claim falls under Section 36(1)(iv) of the Act, and for that reason, the assessee is dissentitled to claim exemption under Section 37 of the Act. Counsel for the revenue cited several rulings before us in support of his contention that a claim for deduction under Section 37 of the Act or the corresponding provision, viz., Section 10(2)(xv) of the earlier 1922 Act, can be successfully laid only if the claim does not fall within any one of the specific provisions of the Act. No authority is needed for this position. The section itself is clear. But none of the decisions cited by counsel for the revenue go to the extent of stating that a claim which cannot satisfy the requirements of any one of the specific sections must be defeated under the residuary Section (Section 37) of the Act on the ground that it could well have been fitted into any one of the specific sections. We are unable to sustain this objection of counsel for the revenue.
9. Counsel for the assessee drew our attention to the decision of the Supreme Court in Sree Meenakshi Mills Ltd.'s case : 63ITR207(SC) for the proposition that the deductibility of an amount under Section 37 depends essentially on the nature of the proceedings or the nature of the claim sought to be deducted. In Indian Copper Corporation Ltd. v. CIT : 38ITR544(Patna) , it was laid down that in order to sustain the claim for deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922, there was no need for the assessee to show a direct correlation in point of time between the expenditure incurred and the profits earned. Ramaswami C. J. who spoke for the court observed (at p. 555):
'It was however, submitted by the learned standing counsel that if the payment was to be deducted under Section 10(2)(xv) of the Indian Income-tax Act, it must be made for the purpose of earning the profits and there must be a direct nexus between the payment of the amount and the earning of the profits. It is, however, necessary to notice that in Section 10(2)(xv) of the Indian Income-tax Act the expression used is 'any expenditure laid out or expended wholly and exclusively for the purpose of such, business'. This expression was introduced by the Amendment Act of 1939, and before the amendment the expression used was 'incurredsolely for the purpose of earning such profits'. The formula now used in Section 10(2)(xv) is wider than the formula used before the 1939 amendment. In my opinion it is not necessary that there should be any direct correlation in point of time between the expenditure and the earning of any profits. I have already stated that a sum of money may be spent not because of necessity or with a view to direct and immediate benefit to business, but if the expenditure is made on the ground of commercial expediency and indirectly to facilitate the carrying on of the business, it may still be expenditure made wholly and exclusively for the purpose of the business and so fall within the ambit of Section 10(2)(xy) of the Indian Income-tax Act. This view is borne out by the decision of the Australian High Court in Nevill and Co. Ltd. v. Federal Commissioner of Taxation 56 CLR 290 where Latham C.J. observed at page 301 as follows: 'No expenditure, strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessable income. If it is not a capital expenditure it should be deducted in ascertaining the taxable income of the taxpayer'.' The decision was followed by the Madras High Court in Binodiram Batchand's case : 48ITR548(MP) . Another decision quite in point is that of the Allahabad High Court in Madho Mahesh Sugar Mills (P.] Ltd. v. CIT  92 ITR 503. The court had to deal with a provision for payment of gratuity, under a Government order which provided that gratuity would be payable to an employee not only in respect of his future services but also for his past services. In order to ascertain the quantum of liability as on the date the order came into effect, the past services of the employees were also taken into account. Although no part of the gratuity may have been made payable by the assessee in any of the earlier years, the gratuity ascertained cm an, actuarial calculation after the Government order was held to be a liability in praesenti, capable of ascertainment, and was a permissible business expenditure in the assessment year concerned. The decision is quite in point. The principle of the decision was followed by the Delhi High Court in Delhi Flour Mills Co. Ltd.'s case : 95ITR151(Delhi) and also by the Bombay High Court in India United Mills Ltd.'s case : 98ITR426(Bom) . Our High Court has taken the same view in High Land Produce Co.'s case : 102ITR803(Ker) and in the unreported judgment in ITR No. 66 of 1975 (CIT v. Pratap Cashew Co. (P.) Ltd.--since reported at page 733 supra). In the light of these decisions, we find no force in the contention ofthe counsel for the revenue that the incurring of expenditure for payment of gratuity much ahead of the actual time for payment of the gratuity would not amount to an expenditure incurred 'wholly and exclusively for the purpose of the business'.
10. It was contended that the Tribunal has not dealt with or considered the question whether the provision for payment of gratuity was an amount 'wholly and exclusively incurred' for the purpose of the business. We are unable to agree. The matter has been discussed by the Tribunal in paras. 3 and 4 of its order, and at the end of para. 4, the Tribunal clearly found that the payment of liability, to which the employer was subject under the Gratuity Act, to the workers was an expenditure wholly and exclusively laid out or expended for the purpose of the business. In para. 5 of the statement of facts, the Tribunal set out the same view. Counsel for the revenue contended that the decision of the Madras High Court in Stanes Motors (South India] Ltd. v. CIT : 100ITR341(Mad) had taken a contrary view on identical facts. Assuming it had, in the light of the principles of the decisions which we have referred to and examined already, we are unable to sustain the submission of the counsel.
11. In the result, we answer the question in the affirmative, i.e., against the revenue and in favour of the assessee.
12. A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Tribunal.