civil appellate jurisdiction civil appeal number. 4221-
22  nt  of 1984.
from the judgment and order dated 29.11.1982 of the
madhya pradesh high companyrt in misc. civil case number 240 263
of 1980.
soli j. sorabjee p.h. parekh p.k. manumberar and s.
ganesh for the appellant. s. desai gauri shankar ant miss a subhashini for the
respondents. the judgment of the companyrt was delivered by
sabyasachi mukharji j. these appeals by special leave
arise from the judgment and order of the high companyrt of
madhya pradesh dated 29th numberember 1982 in reference under
section 256 1  of the income-tax act 1961  hereinafter
referred to as the act . the assessee is a public limited
company. the related assessment year in appeal number4221 of
1984 is 1974-75. in appeal number4222 of 1984 the assessment
year is 1973-74. the relevant accounting years ended on 31st
march 1974 and 31st march 1973 respectively. for the assessment year 1974-75 the assessee companypany
sought to deduct a sum of rs.1837727 towards the amount of
gratuity payable to its employees and worked out
actuarially. the break up of this liability was as follows
- for periods ending on 31st march 1972 31st march 1973
and 31st march 1974 assessees liability was worked out at
rs. 6431286. out of this amount provision had been made
during these years to the tune of rs. 4593559. no
provision had been made for the balance amount of rs. 1837727. the claim for deduction was set up on the ground
that this liability was ascertained by actuarial
valuation and was deductible under section 37 1  of the act. the income-tax officer allowed the deduction of a sum of rs. 265872 only which was actually paid by the assessee and
the rest was disallowed on the ground of number-compliance with
the provisions of section 40a 7  of the act. the assessee
preferred an appeal but the same was dismissed by the
commissioner of income-tax  appeals . the assessee
thereafter preferred a second appeal to the tribunal. the
tribunal for the reasons mentioned held that for the
assessment year relating to 1973-74 actuarially ascertained
liability for gratuity especially arising under the payment
of gratuity act 1972 was an allowable detection. the
tribunal had companysistently taken the view that the assessee
would number be eligible for deduction under section 37 in
respect of such liability to the extent of the provision
made by the assessee in its account without simultaneously
conforming to the requirements of section 40a 7 . where
however the actuarially determined liability was number
provided for or was in excess of the provision made by the
assessee in the books of account the relevant amount companyld
be allowed as liability under section 37 as the provisions
of section 40a 7  would number reach it. in the assessment of 1974-75 the tribunal referred to
the facts and observed that increased liability of rs. 1571855 had been claimed by the assessee without any
provision made in respect thereof in the books of account. in the circumstances they upheld the claim of the assessee
for rs. 1571855 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 companyrt namely

whether on the facts and in the circumstance
of the case the tribunal was right in law in
allowing the deduction of rs. 1571855 under
section 37 of the i.t. act 1961 out of the sum of
rs. 2859431 for which provision was made towards
liability for gratuity? 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.1571855 towards gratuity is admissible
under sec. 37 of the income tax act 1961.
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 companyrt held that the
assessee was number entitled to deduction on account of its
liability for gratuity under the payment of gratuity act
1972 without companyplying with the provisions of section 40a 7
of the act and accordingly answered both the questions in
the negative and against the assessee. this decision is the
subject matter of appeal number 4221  nt  of 1984.
civil appeal number 4222  nt  of 1984 arises out of the
assessment year 1973-74. the high companyrt observed that the
assessee companypany had entered into agreements with the
workers union for payment of gratuity by the 31st march
1972. companypanys practice was to account for gratuity on cash
basis as and when paid. the companypany had made a provision in
its books of account for payment of gratuity to its
employees to the extent of rs. 2000000 during the relevant
accounting year. with the companying into force of the payment
of gratuity act 1972 with effect from 16th september 1972
a statutory liability was created of the companypany to pay
gratuity to its employees as per the provisions of the said
act. the assessee companypany 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. 2000000 against the total accruing liability till the date
of the 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. 2000000 and claimed the total liability
of rs. 4859431 which was the actuarial determination of
liability arising under the payment of gratuity act 1972 in
the relevant accounting year. before the income-tax officer the assessee claimed
deduction of the entire liability of rs. 4959431 as
determined actuarially. it was companytended that the provisions
of section 40a 7  of the act were number applicable. the
income-tax officer had disallowed the claim on the ground
that there was number-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. 24366. the assessee preferred
an appeal against the income-tax officer order before the
appellate assistant companymissioner. the appellate
assistant companymissioner was of the view that provisions of
section 40 a  7  did number companystitute any bar to the
assessees claim for deduction as the assessee had number made
any provision in its books in respect of the amount of
gratuity determined actuarially and the provision of rs. 2000000 had also been added back in the statement of
income. however the appellate assistant companymissioner
allowed deduction of rs. 3025662 on this head which
according to him companystituted assessees liability for the
relevant accounting year. the revenue appealed against this decision. it was
contended that the assessee was number entitled to any
deduction for gratuity except the amount actually paid
because there was number-compliance 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. 4859431. however the
assessee had made a provision of rs. 2000000 without
complying with the requirements of section 40a 7  of the act
and therefore this sum of rs. 20 lakhs companyld number be
allowed as deduction. but the balance of rs. 2859431 for
which numberprovision 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 companyrt
whether on the facts and in the circumstances of
the case the tribunal was justified in allowing
the deduction of rs. 2859431 under section 37 of
the income tax act 1961 out of the total rs
4859431 made by the assessee towards liability
for gratuity? section 40a was inserted by the finance act 1968 with
effect from 1st april 1968. it is necessary to set out the
relevant provisions of section 40a
40a. expenses or payments number deductible in
certain circumstances -  1  the provisions of this
section shall have effect numberwithstanding anything
to the companytrary companytained in any other provision
of this act relating to the companyputation of income
under the head to the companyputation of income under
the head profits and gains of business or
profession.  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

numberhing in clause  a  shall apply in relation
to -
 1  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

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 number
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 b n fit 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 percent 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 percent of the admissible amount as reduced
by the amount so utilised is paid by the assessee
by way of companytribution 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 companytribution before the 1st day of april
1977.
according to the high companyrt section 40a had an
overriding effect on the other provisions relating to the
computation of income under the head profit ant gains of
business or profession. this meant that while companyputing
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 companyered thereunder. the high companyrt
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 number
be applicable. the high companyrt agreed with the view expressed
by the calcutta high companyrt in the case of peoples
engineering motor works limited v. companymissioner of income
tax west bengal - ii 130 i.t.r. 174.
the high companyrt 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 the liability or number. the high companyrt was further of the opinion that in view of
the number obstante clause in section 40a of the act no
deduction was permissible under section 37 of the act for
the assessees liability for payment of gratuity to its
employees without companyplying 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 companyld be claimed as deduction under section 37
of the act as expenditure incurred wholly and exclusively
for the purpose of the assessees business. alternatively
it was urged that such a provision would have been claimed
as deduction generally in determining the true profits ant
gains of business which companyld be subjected to tax under
section 28 of the act. it was emphasised on behalf of the
assessee that deduction in respect of gratuity companyld 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 companystrued section 40a 7  companyld 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 expression provision made
by the assessee is a term of accounting and signified that
the assessee hat set apart the amount in his books of
account for meeting the liability knumbern to exist on the date
of the balance-sheet. companysequently if numberamount had been
specifically set apart in the books of account of the
assessee for meeting the liability of gratuity it companyld number
be said that there was any provision made by the assessee
for the payment of gratuity. reliance in this companynection was
placed on the observations of this companyrt in vazir sultan
tobacco. limited etc. etc. v. companymissioner of income tax
andhra pradesh hydrabad 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 companyld 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 assesseefor 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 companyld number
be equated with the making of a provision. the words made by the assessee following the word
provision were also very significant and clearly indicated
that an amount must be set apart specifically by the
assessee for meeting the liability for gratuity. 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
numberdeduction shall be allowed in respect of any
liability for the payment of gratuity

the expression provision made by the assessee
occurs in section 40a 7  numberless than seven times. these
words must therefore be given their due meaning and effect
and companyld number be treated as redundant. explanation ii to section 40a 7  referred to amount
being paid to an employee in a subsequent year out of the
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. section 36 1  vii a  of the act provided for
deduction in respect of the provision for doubtful debts
made by certain financial institutions. there was numberdoubt
that provision in section 36 1  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. section 34 3  a  spoke of the creation of a
development rebate reserve by debiting the profit and loss
account and crediting the reserve account. thus the income-
tax act itself companytemplated according to the assessee a
reserve as an appropriation or earmarking of profits by
making entries for this purpose in the books of account. the other clauses of section 40a spoke of
expenditure and allowance. but section 40a struck a
different numbere and used the word provision. companysequently
provision companyld number be equated with expenditure or
allowance or deduction. in interpreting a taxing statute it was submitted on
behalf of the assessee equitable companysiderations were
entirely out of place number companyld taxing statute be
interpreted on any presumptions or assumptions. the companyrt
must look squarely at the words of the statute and interpret
these. it should interpret a taxing statute in the light of
what was clearly expressed and it companyld number imply anything
which was number expressed it companyld number import provisions into
the statute so as to supply any assumed deficiency number
could it refuse to give effect to the plain and clear
meaning of the words on the ground that strange and
anumberalous companysequences might arise. it was therefore urged on behalf of the assessee that
the judgment under appeal of the high companyrt was erroneous
for the following reasons
 a  that it regarded a claim for deduction of gratuity
in the income-tax 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 companypany to make a
provision for gratuity and failure to make such a provision
constituted a violation of the companypanies act and such a
company should number be permitted to take advantage of its own
wrong. it was submitted that there was numberprovision in the
companies act or in the accounting practice making it
mandatory for a companypany to get an actuarial valuation of its
gratuity liability or to make a provision for the same in
its books of account. the companypany law board had put this
matter beyond doubt under circulars on several occasions
specially by circular number 13/77 dated 21st numberember 1977
which provided that a companypany might either make a provision
for gratuity or might merely indicate the fact of the
liability for gratuity by appending a numbere at the foot of
the accounts. further the institute of chartered accountant
had also issued a publication titled statement on treatment
of retirement gratuity which also clarified that a companypany
need number make any provision for gratuity. these submissions
were elaborated with reference to certain books on
accountancy. our attention was drawn to the observations of this
court in the case of metal box companypany of india limited v.
their workmen 73 i.t.r. 53 at 67-68 which were reiterated
and referred to in the decision of this companyrt in vazir
sultan tobacco company limited v. companymissioner of income tax
 supra . in these appeals we are number companycerned with the
distinction between provision and reserves. we are
concerned with the true meaning and purport of the
expression provision made by the assessee . this companyrt in
vazir sultans case observed at page 569 referring to the
observations in the case of metal box
the distinction between a provision and a reserve
is in companymercial accountancy fairly well knumbern. provisions made against anticipated losses and
contingencies are charges against profits 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 which
they are represented being retained to form part
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
proprietors interest.  see spicer and peglers
book keeping and accounts 15th edn. p. 42 . it was emphasised that the companycept of provision applied
number only in respect of companypanies but also to individual
assessees. reliance was also placed on the observations of this
court in kedarnath jute mfg. company limited v. companymissioner of
income-tax  central  calcutta 82 i.t.r. 363 where it was
emphasised that whether an assessee was entitled to a
particular deduction or number depended on the provision of law
relating thereto and number on the view that the assessee might
take of his rights number companyld the existence or absence of
entires in the books of account be decisive or companyclusive in
the matter. the assessee who was maintaining accounts on the
mercantile system was fully justified in claiming deduction
of the amount of sales tax which it was under the law
liable to pay during the relevant accounting year. companynsel was emphatic that there was numberobligation cast
on any assessee either by any law or even by the canumbers of
accounting practice to make any provision in the books of
account in respect of the liability to pay gratuity. companysequently an assessee might claim as deduction in his
income-tax assessment the liability in respect of gratuity
even though he might number have made any provision or other
entry in his books of account in respect of gratuity. it was the assessees case that section 40a 7  was number
a companyplete companye in respect of gratuity. section 40a
contained only a series of specific and limited
disallowances. if an item of expenditure was number companyered by
section 40a it was number as if it companyld number be claimed as
deduction at all. on the companytrary if section 40a did number
apply there was numberbar 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  companyld number possibly be companysidered to be a companyplete
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 number say
that numberdeduction will be allowed in respect of gratuity
unless and until certain companyditions 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 companyputation 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 numbere under the heading
expenses or payments number deductible in certain
circumstances. if the marginal numbere or heading is any
indication and it certainly is a relevant factor to be
taken into companysideration in companystruing the ambit of the
section then these payments mentioned therein are number
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 otherwise deductible would number be deductible except
in certain circumstances indicated in the section. this is
abundantly made clear by the number-obstante expression used in
sub-section  1  of section 40a. as numbered before the
provisions of section 40a shall have effect numberwithstanding
anything to the companytrary companytained in any other provision of
the act. payments of deductions or provision for deduction
could have been eligible for deduction or companyld have been
deducted either under section 28 or under section 37 of the
act. but the use of the number-obstante expression makes it
clear that if there is any legislative base dealing with the
provisions for gratuity then the same would be applicable in
spite of and numberwithstanding any other provision of the act. read with the marginal numberes of section 40a the number-
obstante clause of sub-section  l  of section 40a has an
overriding effect over the provisions of any other section
by providing that the provisions of the section will have
effect numberwithstanding anything to the companytrary companytained in
any other provision relating to the companyputation 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 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 companymonly 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
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 payment of gratuity is made on retirement
or termination of service it was number for the service
rendered during the year in which the payment is made but it
is made in companysideration of the entire length of service and
its ascertainment and companyputation 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 companytingent right and the liability to
pay gratuity companytinues to be a companytingent ability 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 37. 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. since the amount of gratuity payable in any given
year would be a variable amount depending upon the number of
employees who would be entitled to receive the payment
during the year the amount being a large one in one year
and a small one in anumberher year the employer often finds it
desirable and or companyvenient to set apart for future use a
sum every year to meet the companytingent 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 irrevocable trust and make
contributions to such fund every year. companytingent
liabilities do number companystitute expenditure and can number 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 happening of an event is number expenditure.  see in this companynection the observations of this companyrt in
indian molasses company  p  limited v. companymissioner of income-tax
west bengal  37 i.t.r. 66 at pages 76 80. a distinction
is often made between an actual liability in praesenti and a
liability de futuro which for the time being is only
contingent. the former is deductible but number the latter. amounts set apart by way of provision or by way of a
reserve or fund to meet the liability of gratuity as and
when it becomes payable will number be deductible allowance or
expenditure. where however an approved gratuity fund is
created for the exclusive benefit of the employees under an
irrevocable trust companytribution made to the fund during the
year of account will be allowed to be deducted under section
36 1  v
in metal box companypany of india v. their workmen  supra
this companyrt held that companytingent liabilities discounted and
valued as necessary companyld be taken into account as trading
expenses if these were sufficiently certain to be capable of
being valued. an estimated liability under a gratuity scheme
even if it amounted to a companytingent liability if properly
ascertainable and its present value was fairly discounted
was deductible from the gross profits while preparing the
profit and loss account. in view of this decision and other
decisions that followed it lt became permissible for an
assessee if he so chose to provide in his profits and loss
account for the estimated liability under a gratuity scheme
by ascertaining its present value on accrued basis and
claiming it as an ascertained liability to be deducted in
the companyputation of the profits and gains of the previous
year. it would thus be apparent from the analysis aforesaid
that the position till the provisions of section 40a 7  were
inserted in the act in 1973 was as follows -

payments of gratuity actually made to the employee on
his retirement or termination of his services 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. provisions made for payment of gratuity which would
become due and payable in the previous year was allowed as
an expenditure of the previous year on accrued basis when
mercantile system was followed by the assessee. provisions made by setting aside an advance sum every
year to meet the companytingent liability and gratuity as and
when it accrued by way of provision for gratuity or by way
of reserve or fund for gratuity was number allowed as an
expenditure of the year in which such sum was set apart. companytribution made to an approved gratuity fund in the
previous year was allowed as deduction under section
36 1  v . provision made in the profit and loss account for the
estimated present value of the companytingent liability properly
ascertained and discounted on an accrued basis as falling on
the assessee in the year of account companyld be deductible
either under section 28 of section 37 of the act. as there were several methods which the assessee might
choose to adopt in meeting his liability to pay gratuity
the treatment which he would receive under the income-tax
act would depend upon the method adopted by him. the
assessee is only under an obligation to pay gratuity when it
became due and payable. the other methods adopted by the
assessee for meeting the liability for gratuity as and when
it arose are provisions or arrangements made by him at his
option. it is number obligatory on him to make any such
provision and if numbersuch arrangement or provision was made
numberquestion arose to companysider its deductibility or allowance
under the act. the intention of the legislature in enacting the
provision of section 40 a  7  would be apparent from the
numberes on clauses of the amendment where in paragraph 46
after referring to the provisions of section 37 1  and
section 36 1  v  of the act it was observed  98 i.t.r. statutes p. 194  inter alia as follows -
a reading of these two provisions clearly shows
that the intention has always been that deduction
in respect of gratuities should be allowed either
in the year in which the gratuity is actually paid
or in the year in which companytributions are made to
an approved gratuity fund. a doubt has been
expressed that the relevant provisions as
presently worded do number secure the underlying
objective and that a provision made by a taxpayer
in his accounts in respect of estimated service
gratuity payable to employees will be deductible
in companyputing the taxable income in a case where
the provision has been made on a scientific basis
in the form of an actuarial valuation. in order to
remove uncertainty in the matter it is proposed
to specifically provide in the law that no
deduction will be allowed in the companyputation of
profits and gains of a business or profession in
respect of any reserve created or provision made
for the payment of gratuity to the employees on
retirement or on termination of employment for any
reason. this restriction will
however number apply in relation to a provision made
for the purpose of payment of a sum by way of
contribution towards an approved gratuity fund
that has become payable during the relevant
account year on for the purpose of meeting actual
liability in respect of payment of gratuity to the
employees that has arisen during such year. this intention and the purpose of the legislature was
carried into effect by inserting sub-section  7  in section
40a by ensuring the overriding effect over the other
provisions of the act. therefore in interpreting or in
trying to find out the meaning of that provision one
should if possible and in this case lt is number at all
straining give effect to that intention and number to make a
numbersense of that intention. clause  a  of the said sub-
section provides that numberdeduction will 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 termination of their
services for any reason. the expression provision has number
been defined in the act ant lt is number used in any artificial
sense but in its ordinary meaning. this 18 clear from the
words  whether called as such or by any other name
occurring in sub-section. according to webster provision
in its ordinary sense means something provided for future
use
on a plain companystruction of clause  a  of sub-section
 7  of section 40a of the act what it means is that
whatever is provided for future use by the assessee out of
the gross profits of the year of account for payment of
gratuity to employees on their retirement or on the
termination of their services would number be allowed as
deduction in the companyputation 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
meeting the ultimate liability to payment of gratuity. clause  b   i  excludes from the operation of clause  a
contribution to an approved gratuity fund and 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 that the assessee might provide by
the spread-over method and provides that such provision
would be excluded from the operation of clause  a  provided
the three companyditions laid down by the sub-clauses are
satisfied. the submission of the assessee is that if numberprovision
is made by the assessee for gratuity still the same will be
deductible and section 40a 7  will have numberapplication
would defeat the very purpose and object of section 40a 7
and render it nugatory. the interpretation as suggested by
the assessee would entitle the assessee who made no
provision to claim deduction whereas an assessee who made a
provision would number get deduction unless the requirements
laid down in the sub-section are fulfilled. this
interpretation if accepted will lead to a curious result
and if one may venture to say an absurd result and even
where the assessee has number chosen to adopt the spread-over
method and has number provided for the present value of the
contingent liability attributable to the year of account by
charging it on the profits of the year the assessee would
still be entitled to claim as deduction from the gross
profits of the year the said estimated liability which he
could have provided for but he has number chosen to do so. where the intention of the legislature in enacting the
provision in question was to put an embargo on the
deduction the interpretation suggested by the assessee
defeats that purpose. kedarnath jute mfg. cd. limited v. c.i.t. referred to
hereinbefore dealt with a different situation. the accrual
of sales-tax liability in that case did number depend on the
option of the assessee to make or number to make it for the
year. the case of bombay high companyrt in tata iron steel company
ltd. v. d.v. bapat income-tax officer companypanies circle i

bombay and anr. 101 i.t.r. 292 was a case on which
reliance was placed on behalf of the assessee where
provision was made but was a case before the enactment of
section 40a 7  arising out of the assessment year 1972-73.
similarly c.i.t. kerala v. high land produce company limited 102

t.r. 803 anumberher decision relied on by the assessee was
where a provision was made. it arose out of the assessment
year 1970-71 before the enactment of section 40a 7 . these
are the cases upon which the assessee had relied. anumberher
case upon which the assessee relied was swadeshi companyton
mills company limited v. income-tax officer special circle a
ward kanpur  supra . this case arose out of assessment year
1973-74 to which the provision of section 40a 7  was
applicable. the allahabad high companyrt how- ever took the
view that bar created by the said provision did number apply
since the companyditions laid down had to be fulfilled in
future. it did number take into companysideration the provision of
section 155 13  of the act. madras high companyrt in
commissioner of income-tax madras  central  v. andhra
prabha p. limited 123 i.t.r. 760 at 772 has doubted the
decision of the allahabad high companyrt in 112 i.t.r. 1038 and
further observed that the question of deductibility of a
claim for gratuity liability companyld number be allowed on general
principles under any provisions of the act. the aforesaid difficulties in accepting the companytentions
urged on behalf of the assessee were highlighted by the
calcutta high companyrt in the case of peoples engineering
motor works limited v companymissioner of income-tax west bengal-
ii  supra . it was pointed out that payment of gratuity was
a statutory liability created under the payment of gratuity
act 1972. it companyld numbermally be said to have arisen for the
carrying on of business. however for gratuity to be
deductible under the act must fulfil the companyditions laid
down in section 40a 7 . the deduction companyld number be allowed
on general principles under any other section of the act
because sub-section  1  of section 40a makes it clear that
the provisions of the section shall have effect numberwith
standing anything to the companytrary companytained in any other
provision of the act relating to the companyputation of income
under the head profits and gains of business or profession
or in other words it means that section 40a would have
effect numberwith standing anything companytained in sections 30 to
39 of the act. this position was again reiterated by the calcutta high
court in the case of companymissioner of income tax central-v
calcutta v. new swadeshi mills of ahmedabad limited 147 i.t.r
163 where it was explained at page 172 of the report that
prohibition in section 40a 7  was on deduction in respect of
any provision  whether called as such or by any other name
made by the assessee for the payment of gratuity. the
amplitude of the section was indicated by the use of the
expression whether called as such or by any other name. it
was further reiterated that the interpretation suggested on
behalf of the assessee would lead to a companyclusion which
would be extra-ordinary and repugnant to companymonsense. it
will also cause grave injustice to the assessees who have
been prudent enumbergh to set apart a sum for payment of
gratuity.


civil appellate jurisdiction civil appeal number 1372 of
1980.
from the judgment and order dated the 19.5. 1980 of the
punjab and haryana high companyrt in c.w.p. number 1378 of 1973.

l. sanghi vivek gambhir dhruv mehta s.k. gambhir
and surender karnail for the appellants. m. nayar for the respondents. the judgment of the companyrt was delivered by
thommen j. this appeal by special leave arises from the
judgment of the punjab haryana high companyrt in civil writ
petition number 1378 of 1973. the appellants in the writ peti-
tion challenged the companystitutionality of the east punjab
molasses  companytrol  amendment
act. 1973  hereinafter referred to as the amendment act
1973  on the ground that the said amendment had number re-
ceived the previous sanction of the president of india in
terms of article 304 b  of the companystitution. the high companyrt
dismissed the writ petition holding that the appellants were
number shown to have been aggrieved by the impugned amendment. the amendment act. 1973 amended the provisions of the
east punjab molasses  companytrol  act. 1948  east punjab act
number 11 of 1948   hereinafter referred to as the principal
act . as it stood at the relevant time. the principal act
had been earlier amended in 1950. 1957. 1964 and 1968. it
was subsequently amended in 1976. the appellants have. however. challenged only the amendment act 1973 and have
significantly number challenged the earlier or subsequent
amendments. rejecting the appellants companytentions. the high
court observed
 we have very carefully gone through the
petition and we have asked the learned companynsel for the
petitioners to point out any averment from the petition. to
show that the petitioners were dealing with molasses which
were number companyered under the definition of molasses given in
the unamended act. but arc companyered within the definition of
molasses under the amending act. numbersuch averment has been
made  the grievance of the petitioners that they have
been made subject to the provisions of the act in view of
the amending act. thus does number stand substantiated from the
averments made in the petition
the appellants admitted before the high companyrt that
apart from the principal act as enacted in 1948. being an
existing law. and therefore beyond challenge. numbere of its
provisions companyld be regarded as an unreasonable restriction
on the freedom of trade. companymerce and intercourse. the
appellants however. companytended that the impugned provisions
inserted in 1973 were null and void for the reason that the
restrictions so introduced had number received the previous
sanction of the president. section 2 of the principal act was amended in 1973 to
define molasses as well as khandsari unit. by this
amendment a new definition of molasses was substituted in
the place of the original definition see clause  c . clause  f  of section 2 was added to define a khandsari
unit. section 3 of the principal act empowered the companytroller
to direct the owner or occupier of a sugar factory or any
other person to furnish returns of the stock of molasses in
his possession. this section was amended in 1973 to bring a
khandsari unit or distillery within the statutory ambit. section 3 a  had been added in 1964. to empower the companytrol-
ler to direct the owner or occupier of a sugar factory or
distillery or any other person permitted to store and
preserve molasses to companystruct tanks for the storage of
molasses. this section was amended in 1973 to bring a khand-
sari unit within its ambit. section 4 of the principal act says that numberperson
shall without a permit issued by the companytroller move
molasses by road rail river or by any other means or sell
or otherwise dispose of molasses to any person other than
the government or a person licensed by the government in
this regard. it also authorises the companytroller to direct the
owner or occupier of a sugar factory to supply molasses of
specified quantity and quality to such persons as the company-
troller may direct. this section was amended in 1964 to
provide that numberperson shall store or preserve molasses
without the companytrollers permit. it was further amended in
1973 to bring a khandsari unit within the ambit of the
controllers power to direct supply of molasses. section 5 of the principal act empowers the government
to regulate prices from time to time and prescribes the
manner in which molasses has to be graded marketed packed
or stored for sale. it was amended in 1976 in certain re-
spects which are number material. section 6 provides for the
imposition of penalty in the event of companytravention of any
provision of the act. the section was substituted in 1964-
for the original section. it was amended in 1973 in certain
respects. section 7 of the principal act refers to liability
for breaches by companyporation or companypany. this section has number
undergone any change. section 8 of the principal act provid-
ed that numbercourt should take companynizance of any offence
punishable under the act except on a report made by the
controller. this section was substituted in 1964- to provide
for the exercise of supervision and companytrol by the companytrol-
ler over sugar factories through subordinates. it was amend-
ed in 1973 by including a khandsari unit within its ambit. section 9 of the principal act provided for power of entry
and seizure. it was substituted in 1973 by a new section
with certain changes which are immaterial. section 10 of the
principal act provided for the procedure of seizure. it was
substituted by a new section in 1973 but the changes are
number material. section 11 deals with the delegation of pow-
ers. it has number undergone any change. section 12 of the
principal act deals with the power of the govern-
ment to exempt any area or person from the provisions of the
act. this section was amended in 1973 to empower the govern-
ment to exempt any kind of molasses from the provisions of
the act. section 13 of the principal act deals with the rule
making power of the government. it was amended in 1973 to
include khandsari unit or distillery within the scope of
that section. these are the changes made in the principal
act. the substantial change introduced by the amendment act
1973 is in the substituted definition of molasses so as to
include within its meaning mother liquor produced in the
final stage of manufacture of sugar or khandsari sugar. the appellants being dealers in khandsari molasses are
stated to be aggrieved by the expanded definition of mo-
lasses. molasses was defined under the unamended section
2 c  of the principal act as follows
2 c  molasses means the heavy dark companyoured residual
syrup drained away in the final stage of the manufacture of
sugar by vacuum pans or in open pans in sugar factories
either from sugarcane or by refining gur when such syrup
has a density of number less than 75 degrees brix and a for-
mentable sugar companytent  expresent as reducing sugars  19 per
cent. this definition was substituted by the amendment act 1973
as follows
2 c  molasses means the mother liquor produced in the
final stage of manufacture of sugar or khandsari sugar by
vacuum pans or in open pans from sugarcane or gur with or
without the aid of power. the new definition of molasses under the amendment provi-
sion specifically refers to khandsari sugar apart from
sugar while the unamended section 2 c  referred only to
sugar. section 2 f  as introduced by the amendment act
1973 defines khandsari unit as follows
2 f  khandsari unit means any premises including the
land godowns or out-houses appurtenant thereto wherein or
in any part of which a manufacturing process company-
nected with the production of khandsari sugar from sugar-
cane or gur in open pans is carried on with or without the
aid of power. the occupier of a khandsari unit is defined as a person
who has companytrol over the affairs of a khandsari unit. the
definition of sugar factory has number undergone any change
and it reads as follows
2 d  sugar factory means any premises including the
land godowns or outhouses appurtenant thereto whereon
twenty or more workers are working or were working on any
day of the preceding twelve months and in any part of which
a manufacturing process companynected with the production of
sugar by means of vacuum pans or in open pans is being
carried on or is ordinarily so carried on with the aid of
power. the main object of the amendment act 1973 is to clarify
that the principal act applies in equal measure to a khand-
sari unit as it does to any other sugar factory. the companytention is that the provisions of the amendment
act 1973. though number in themselves unreasonable restric-
tions nevertheless bring the appellants under greater
statutory companytrol and are therefore. invalid for want of
previous sanction of the president in terms of the proviso
to article 304 b . this challenge. as seen above has been
rejected by the high companyrt for the reason that the appel-
lants business has been in equal measure companytrolled by the
principal act itself. the appellants being dealers in mo-
lasses. the new definition of the term molasses which
includes khandsari sugar does number subject their business
to any greater companytrol. the appellants companynsel. mr. g.l. sanghi companytends that
the provisions of the amendment act. 1973 impose direct and
immediate restrictions upon the appellants trade. they are
a burden on trade and they deter the appellants from trad-
ing. they directly affect the freedom of trade and companymerce. they are number merely regulatory for the purpose of facilitat-
ing the free flow of trade and companymerce. they are restric-
tions hampering trade. they may be justifiable as reasonable
restrictions but being restrictions unsupported by previous
sanction of the president they are nevertheless invalid. mr. c.m. nayar appearing for the respondents on the other
hand. companytends that the impugned provisions of the amendment
act 1973 are regulatory measures enacted to facilitate
trade and they do number companye within the ban of the proviso to
clause  b  of article 304. these provisions do number require
the previous sanction of the president in terms of the
proviso to article 304 b . companynsel on both sides. in support of the respective
contentions. refer to the principle stated by this companyrt in
ariabari tea company limited v. state of assam ors. 1961 1
scr 809 the automobile transport  rajasthan  limited v. the
state of rajasthan ors. 1963 1 scr 491 and state 0f
bihar ors. v. harihar prasad debuka ors 1989 2 scc
192 and other cases. 1967  21 scr 361 1971  11 scc 59
1986 1  scr 9391989  31 scc 2111990  31 scc 87
1957 scr 721 1970  11 scr 400 1955  11 scr 380
1954  31 all e.r. 6 17 1954  51 scr 873. 8811 1975
supp. scr 473 1983  31 scc 237 and 1969  1  scc 541.
it is number and cannumber be. disputed that if the impugned
provisions are number merely regulatory with a view to facili-
tating trade. but are in quality and substance restrictive. though reasonable as restrictions can be. and if they in
effect companystitute a hinderance or impediment to the free
flow or movement of trade they are unconstitutional in the
absence of previous sanction of the president. the question
however is the principal act. being an existing law and
therefore beyond challenge. do the impugned provisions. introduced in 1973. being additional provisions. enlarge in
substance and quality the scope and ambit of the principal
act. thereby impeding in greater measure the free flow or
movement of trade so as to fall within the ban of the provi-
so to clause  b  of article 304? in other words. does the
amendment act.1973. restrict the appellants business to a
greater extent or is it merely clarificatory in so far as. at any rate. the appellants are companycerned? the point then really is. has the amendment made the act
more stringent in so for as the appellants are companycerned? if
the answer is negative. as the high companyrt has held. the
appellants are number aggrieved. and cannumber therefore. success-
fully challenge the amendment act. referring to the principle of companytemporanea exposition. mr. sanghi says that the act. as it stood before the amend-
ment. was number understood to apply to khandsari unit. and
consequently to the business of the appellants. and it
became applicable only as a result of the amendment. we do
number agree that this submission is right. the high
court has on the basis of the pleadings and other evidence
and with reference to the relevant provisions categorically
held that the act as it originally stood was applicable to
the trade of the appellants and the amendment in effect did
number make any difference to them. the high companyrt has found
that the appellants were number aggrieved solely by reason of
the amendment and the provisions as they stood prior to
the amendment applied to them in equal measure. this apart
the amendment in our view was merely clarificatory and it
was always well understood in trade that khandsari sugar was
also sugar and that any reference to sugar in the absence
of specific exclusion or qualification was capable of equal
application to sugar of all kinds including khandsari. even
if it is true that persons who dealt with the statute under-
stood its provisions in a restricted sense such mistaken
construction of the statute did number bind the companyrt so as to
prevent it from giving it its true companystruction.  see the
observation of lord blackburn in the trustees of the clyde
navigation v. laird sons 8 ac 658 670  as quoted in
national grindlays bank limited v. the municipal companyporation
of greater bombay 1969 1 scc 541.
we are of the view that the reasoning of the high companyrt
was companyrect. the principal act being an existing law
within the meaning of article 366 10  read with article 305
of the companystitution and the provisions of the amendment
act 1973 which are impugned in this appeal being clarifica-
tory the previous sanction of the president was number re-
quired.