Judgment :- S. M. ALI MOHAMED J. This reference under section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"), has been made by the Income-tax Appellate Tribunal, Madras Bench "A", on the following three questions for the opinion of this court, namely "1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 1, 56, 098 which represented the accrued liability of the assessee for the payment of gratuity to its employees based on actuarial valuation pertaining to the accounting year ended March 31, 1974 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in coming to the conclusion that the assessee had not satisfied the requirements of section 40A(7)(b) of the Income-tax Act for claiming deduction of the provision for gratuity amounting to Rs. 4, 30, 245 made in the company's accounts for the year ended March 31, 1974, over and above the sum of Rs. 1, 56, 098 which represented the liability for the payment of gratuity for the accounting year ended March 31, 1974 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 4, 30, 245 which represented the provision made by the assessee-company in its accounts for the year ended March 31, 1974, for payment of gratuity to its employees based on actuarial valuation ?" * The relevant facts of the case are as follows The assessee is a public limited company. The reference relates to the assessment year 1974-75, the relevant previous year being the financial year ending on March 31, 1974. Till the end of March 31, 1973, the assessee-company did not derive any taxable income, having sustained heavy losses for the earlier year. The assessee-company had carried forward depreciation allowance and development rebate. After the passing of the Payment of Gratuity Act, the assessee-company worked out its actuarial liability for the payment of gratuity as on March 31, 1973, at Rs. 4, 30, 245. The assessee-company had carried forward depreciation allowance and development rebate. After the passing of the Payment of Gratuity Act, the assessee-company worked out its actuarial liability for the payment of gratuity as on March 31, 1973, at Rs. 4, 30, 245. The assessee's claim for deduction of this amount for the assessment year 1973-74 was not allowed by the Income-tax Officer, who held that it was a contingent liability and that only the actual amount of gratuity paid to an approved gratuity fund would be an admissible deduction under section 36(1)(v). For the accounting year, relevant to the assessment year 1974-75, the assessee made substantial profits and it adjusted the unabsorbed depreciation of the earlier years as well as the depreciation for the current year. The assessee found that its liability to pay gratuity in respect of its working for the previous year for this assessment year on actuarial valuation was only Rs. 1, 56, 098. Consequent on the adjustment of the earlier years and current years depreciation and development rebate of the earlier years, the assessee declared a nil income for the assessment year 197475. However, the assessee created a development rebate reserve of Rs. 3 lakhs in its accounts for the year ended March 31, 1974, and claimed before the Income-tax Officer the deduction for the sum of Rs. 1, 56, 098 being the actuarial valuation of the incremental liability and development rebate brought forward from earlier years. The assessee had created a provision for gratuity amounting to Rs. 4, 30, 245 in the accounts for the accounting year ended March 31, 1974. It also created a trust and applied for the approval of the trust. The Commissioner of Income-tax, by his order dated March 9, 1979, approved the assessee's gratuity fund with effect, from December 22, 1975. However, the assessee had not made payments to the gratuity fund as envisaged under section 40A(7), viz., the payments which should have been made in respect of the amount contemplated under section 40A(7)(b)(ii) in two instalments before April 1, 1976, and April 1, 1977The Income-tax Officer did not allow the assessee's claim for deduction of the incremental liability to gratuity of Rs. 1, 56, 098 on the ground that the provisions of section 40A(7) are not satisfied. The Income-tax Officer, however, allowed the actual payment of gratuity of a sum of Rs. 32, 448. 1, 56, 098 on the ground that the provisions of section 40A(7) are not satisfied. The Income-tax Officer, however, allowed the actual payment of gratuity of a sum of Rs. 32, 448. It would appear that there was no claim by the assessee regarding the other sum of the gratuity provision of Rs. 4, 30, 245 The assessee-company preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner agreed with the assessment order of the Income-tax Officer. The assessee-company preferred an appeal to the Tribunal. The Tribunal rejected the contentions of the assessee-company in the following words "The assessee had claimed three amounts before us. The first amount is the incremental liability of Rs. 1, 56, 098 for gratuity relating to the working of the assessee for this assessment year. The second amount of Rs. 4, 30, 245 was the actuarial liability as on March 31, 1973, as on the last day of the preceding accounting year. The third amount is the balance of development rebate of Rs. 5, 26, 936. The assessee had to create a provision for gratuity in order to take the benefit, of section 40A(7) which was introduced by the Finance Act, 1975. It created a provision of Rs. 4, 30, 425 but failed to make the payments as contemplated under section 40A(7). It has been urged before us that because the fund was actually approved by the Commissioner of Income-tax after the relevant dates given in section 40A(7), the assessee was not in a position to make the payments to the gratuity fund. A perusal of section 40A(7) shows that the assessee would come under that provision if it had created a gratuity fund and applied for the recognition of such fund before December 31, 1975, and had also made the payments as contemplated under the provisions. It is not necessary for satisfying the condition that the approval should have been given by the Commissioner of Income-tax before December 31, 1975. It is only necessary for an assessee to apply for the approval before December 31, 1975, after creating a gratuity fund. The explanation given on behalf of the assessee for not making the payments before the stipulated dates cannot therefore be accepted. The fact remains that the assessee has not satisfied the requirements of section 40A(7). It is only necessary for an assessee to apply for the approval before December 31, 1975, after creating a gratuity fund. The explanation given on behalf of the assessee for not making the payments before the stipulated dates cannot therefore be accepted. The fact remains that the assessee has not satisfied the requirements of section 40A(7). The assessee cannot, therefore get the benefit of section 40A(7) for the deduction of the provision made by itIt has been urged that both the amounts of Rs. 4, 30, 245 and Rs. 1, 56, 098 cannot in any event be considered to be a liability for this assessment year. The sum of Rs. 4, 30, 245 was admittedly a liability relating to the preceding assessment year, namely, 1973-74. The assessee, in fact, had claimed that liability for that assessment year and on the basis that it was a liability for that assessment year and on the basis that the Payment of Gratuity Act came into force in the previous year for that assessment year. That amount cannot, therefore, be considered to be a liability for this assessment year in any event. We, therefore, confirm the action of the lower authorities in not allowing the deduction of the claim for the sum of Rs. 4, 30, 245. We also reject the claim of the assessee made before us for the deduction of the other sum of Rs. 1, 56, 098 because after the introduction of section 40A(7), the question of considering the allowability of a liability to pay gratuity cannot be considered under section 37." * In this reference, we are concerned with the above three questions relating to gratuity. It is contended by Mr. S. A. Balasubramaniam, learned counsel for the assessee-company, that as the assessee-company has created a gratuity fund and has set apart a sum of Rs. 4, 30, 245, the assessee-company has complied with the provisions of section 40A(7) of the Act. With regard to a further sum of Rs. 1, 56, 089 is concerned, it is a liability allowable under section 37 of the Act. On the other hand, Mr. N. V. Balasubramaniam, learned counsel for the Revenue, submitted that there is no error of law in the order of the Appellate Tribunal holding that the assessee-company has not complied with section 40A(7) of the Act. 1, 56, 089 is concerned, it is a liability allowable under section 37 of the Act. On the other hand, Mr. N. V. Balasubramaniam, learned counsel for the Revenue, submitted that there is no error of law in the order of the Appellate Tribunal holding that the assessee-company has not complied with section 40A(7) of the Act. We are unable to accept the above contentions of learned counsel for the assessee. In CIT v. Indira Cotton Mills (P.) Ltd. (Tax Case No. 1155 of 1981, dated October 19, 1994), a Division Bench of this court to which one of us (Mishra J.) was a party, has observed as follows ". . . . the Legislature felt the need of a law to provide to the employees a terminal lump sum benefit called ' gratuity ', and Parliament enacted the Payment of Gratuity Act, 1972 * In the Chapter which contained/contains provisions for computation of total income for the purposes of imposition of tax, a provision is specifically introduced by section 7 of the Finance Act of 1968 specifying the expenses or payments not deductible in certain circumstances. (section 40A of the Act). (section 40A of the Act). Sub-section (7) of this section has made a specific provision in these words ' (7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason(b) Nothing in clause (a) shall apply in relation to--- (i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment 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 assessment year commencing 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 (1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment 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 payment 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 of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the lst day of April, 1977 Explanation 1. ---For the purposes of sub-clause (ii) of clause (b) of this sub-section, "admissible amount" means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary (as defined in clause (h) of rule 2 of Part A of the Fourth Schedule) of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is madeExplanation 2. ---For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.' Sub-section (1) of this section 40A of the Act contained/contains a provision that 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 ' Profits and gains of business or profession '. Clause (b) of sub-section (7) of section 40A, which extended in the relevant year of assessment to the assessee of any deduction in the computation of total income chargeable under the head, ' Profits and gains of business or profession ', in relation to any provision made by it for the purposes of payment of a sum by way of any contribution towards an approved gratuity fund or for the purpose of payment of any gratuity that had/has become payable during the previous year relevant to the assessment year 1973-74, i.e., assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, deduction to the extent of the amount not exceeding the admissible amount on fulfilling conditions (1) the provision was/is made in accordance with the actual valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or/on termination of their employment for any reason ;(2) on the assessee creating 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 lst day of January, 1976 ; and (3) by paying to the said fund a sum equal to at least fifty per cent. of the admissible amount, or where any amount had been utilised out of such provision for the purpose of payment 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, before the lst day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised by way of such contribution before the lst day of April, 1977 It will only be a repetition of a principle that has been stated so many times by the courts that the payment of gratuity is a statutory liability created under the Payment of Gratuity Act, 1972, and it can normally be said to have arisen in the carrying on of business and for gratuity to be deductible under the Income-tax Act, 1961, it must fulfil the conditions laid down in section 40A(7) of the Act. ( see Peoples Engineering and Motor Works Ltd. v. CIT. ( see Peoples Engineering and Motor Works Ltd. v. CIT. The provisions of section 40A of the Act will have effect notwithstanding anything to the contrary contained in any other provisions of the Act relating to the computation of income under the head, ' Profits and gains of business or profession '. They would have effect notwithstanding anything contained in sections 30 to 39 of the Act and as prescribed under clause (a) of sub-section (7) thereof no deduction shall be allowed in respect of any provision whether called as such or by any other name made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. This provision, however, is subject to the prescription contained in clause (b) thereof. Clause (b)(i) excludes from the operation of clause (a) contribution to an approved gratuity fund and the amount provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee makes provision by the spread over method and provides that such provision would be excluded from the operation of clause (a) provided the three conditions laid down by the aforementioned sub-clause are satisfied, that is : (i) the provision being made in accordance with an actuarial valuation of the ascertainable liability ; (ii) the assessee creating an approved gratuity fund for the exclusive benefit of the employees under an irrevocable trust ; and (iii) at least 50 per cent. of the admissible amount has been paid by the assessee by way of contribution to the gratuity fund before April 1, 1976, and the balance of the amount paid on or before April 1, 1977. The last two conditions, it is conceded, are satisfied. The first, however, has to be understood in the light of the first Explanation that the admissible amount of deduction should not exceed 8-1/3 per cent. The last two conditions, it is conceded, are satisfied. The first, however, has to be understood in the light of the first Explanation that the admissible amount of deduction should not exceed 8-1/3 per cent. of the salary of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made and the second Explanation, where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as deduction in computing the income of the assessee of the previous year in which the sum is so paidThe relevancy of the second Explanation in the matter before us cannot be denied, but on the facts that are made available to us, it is certain that the assessee has not been allowed any deduction in computing the income for the assessment year 1972-73 or any previous year on account of payment of gratuity to the employees. The assessee has made the provision in accordance with an actuarial valuation of the ascertainable liability for payment of gratuity to its employees on their retirement or on termination of their employment for any reason during the said financial year and the statutory liability, that is, the liability where the employee retired previous to the enforcement of the Payment of Gratuity Act, or thereafter but before March 31, 1973, crystallised only in the financial year 1972-73 In Shree Sajjan Mills Ltd. v. CIT the Supreme Court has dealt with this aspect of the law and stated "' Although payment of gratuity is made on retirement or termination of service, it is not for the services 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 and computation depend upon several factors. The right to receive the payment accrues to the employees on their retirement or termination of their services and the liability to pay gratuity becomes an accrued liability of the assessee, when the employees retire or their services are 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 Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure" * Testing the facts of the case on the touchstone of the law as above, had the assessee claimed deduction in respect of contingent liabilities, i.e., the right to receive the payment is yet to accrue to the employees, it obviously had made a wrong claim. It is not in dispute before us, however, that the claim is made only of such amount of gratuity to which employees on their retirement or termination of their service had become entitled. The claim is in respect of a liability that under the Payment of Gratuity Act, the assessee was obliged to discharge for such employees who had already retired or otherwise been superannuated or whose services had already been terminated before March 31, 1973. For payment of gratuity to such employees, it made the funds available in the irrevo cable trust which had been created in accordance with the requirement of section 40A(7)(b)(ii) of the Act We are of the view that the above three questions referred to this court regarding payment of gratuity are covered by the above ruling of this court. In the instant case, the assessee-company has made a provision for a sum of Rs. 4, 30, 425, but has failed to transfer the said amount to the approved gratuity fund as contemplated under section 40A(7) of the Act. In the instant case, the assessee-company has made a provision for a sum of Rs. 4, 30, 425, but has failed to transfer the said amount to the approved gratuity fund as contemplated under section 40A(7) of the Act. In view of the above, we are of the opinion that the assessee-company has not complied with the condition given under section 40A, sub-section (7) of the Act and the Income-tax Appellate Tribunal is right in rejecting the contention of the assessee-company that it has complied with the provisions of sub-section (7) of section 40A of the Act with regard to the claim of deduction of the assessee for a sum of Rs. 4, 30, 245. The Tribunal has also rightly rejected the claim of the assessee for the other sum of Rs. 2, 56, 098 on the ground that after introduction of section 40A(7) of the Act, the question of allowability of a liability to pay gratuity cannot be considered under section 37 of the Act. In view of the above, we answer the questions Nos. 1 to 3 in the affirmative against the assessee and in favour of the Revenue. Upon the facts and circumstances of the case, there shall be no order as to costs.