B.A. Khan, J.
1. The Income-tax Appellate Tribunal, Indore Bench, has referred the following question, stated to be a question of law arising out of its order dated April 25, 1995, passed in I.T.A. No. 981/Ind of 1990 for our opinion :
'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in law in allowing the gratuity claim of the assessee for the pre-nationalisation period amounting to Rs. 94,36,506, particularly when compensation for the takeover of the sick mills were, inter alia, decided after taking into account the liability of the gratuity for the pre-nationalisation period ?'
2. The assessee is a corporation owned by the Government of Madhya Pradesh. It took over all the assets of sick textile mills as per their value shown in the balance-sheet as on March 31, 1974, pursuant to the Sick Textile Undertakings (Nationalisation) Act, 1974. It also took over certain liabilities as envisaged in the Act. The corporation later claimed a deduction of Rs. 94,36,506 for the assessment year 1984-85 on account of the gratuity paid to the employees of the sick units, taken over by it. Its claim was denied by the Assessing Officer primarily on the ground that a major portion of the gratuity in respect of the pre-nationalisation period was not met out of the income of the year under assessment and that this liability up to that date was met out of the amount recoverable from the sick textile unit.
3. The assessee took an appeal against this, but failed and the Commissioner of Income-tax (Appeals) affirmed the Assessing Officer's order. The assessee, thereafter, carried the matter to the Tribunal and explained that while taking over the sick units, it had taken over the gratuity liability of the units also which was estimated at Rs. 5,48,86,706 and the provision for this amount was made at the time of take over of such units. It further pointed out that over the period, the gratuity paid to the employees and the provisions so made used to diminish and that is how a sum of Rs. 88,36,568 was paid out of the said provision to the employees of the sick units, who were in service of corporation. Similarly, an amount of Rs. 5,99,938 was paid to such employees by way of gratuity who had retired during the relevant year. This payment was reflected in the profit and loss account of the corporation and was not made out of the provision made at the time of the take over of the sick units. Reliance was placed upon a judgment of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT : 1986ECR276(SC) .
4. The Tribunal felt satisfied and accepted this explanation and also the assessee's claim and observed thus :
'We have considered the rival submissions. It is not in dispute that the assessee-corporation had taken over certain sick textile mills along with certain specified liabilities including the liability to pay gratuity. The evidence on record shows that such liability was estimated at Rs. 5,48,86,706 and in the books of account provision was made for the same. The deduction during the year under consideration is claimed on the basis of actual payment. In the circumstances, we see no reason as to why deduction claimed should not be allowed. It is well settled that a provision is an appropriation of money for a known and existing liability. It is not necessary that such liability is quantified, but it must certainly be a known and existing liability.'
5. There appears to be much ado about nothing. It transpires that the assessee had actually paid an amount of Rs. 1,43,05,352 to its employees during the relevant accounting year. This included Rs. 94,36,506 in respect of pre-nationalisation period and Rs. 48,68,846 for the post-nationalisation period. As regards the pre-nationalisation period a sum of Rs. 88,36,568 was debited to the account styled as 'provision for gratuity' which was created initially at the time of nationalisation of sick units and an amount of Rs. 5,99,938 was debited to the profit and loss account of the respective mills on account of their reserve having been exhausted.
6. It is true that the amount paid related to the pre-nationalisation period was not drawn from the income of the relevant year under assessment. But that does not militate against the fact that the corporation had taken over the liability of the sick units also at the time of nationalisation and had made approved provision for gratuity at that time. Therefore, it was not a case where any provision or reserve or fund was created or made to meet the liability of gratuity as it became payable in future which could be said to be hit by the provisions of Section 40A of the Act. On the contrary it was a case of the gratuity amount related to the pre-nationalisation period having been debited to the approved gratuity reserve which was in fact, paid to the employees during the year under assessment. It is also not a case where the sick units had claimed this amount prior to or after the nationalisation. Therefore, the Tribunal had rightly allowed the deduction by treating the provision as an appropriation of money for a known and existing liability. It would be advantageous in this regard to refer to the observations of the Supreme Court in Shree Sajjan Mills' case : 1986ECR276(SC) observing thus (page 601) :
'On a plain construction of Clause (a) of Sub-section (7) of Section 40A 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 serviceswould not be allowed as deduction in the computation of profits and gains of the year of account. The provision of Clause (a) was made subject to Clause (b). The embargo is on deductions of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of Clause (a) contribution to an approved gratuity fund an amount provided for or set apart for payment of gratuity which would be payable during the year of account.'
7. The present case falls in the latter category because the assessee-corpo-ration had made a provision of a reserve at the time of the nationalisation of the sick textile units out of which gratuity was paid to the employees over a period of time and also during the year under assessment. Therefore, it was not a case where the assessee had made a provision for payment of gratuity to its employees on their retirement or termination of their services for future use out of its gross profits for the year of account which falls within the prohibition zone in terms of Clause (a) of Sub-section (7) of Section 40A of the Act.
8. We would, thus, find ourselves in agreement with the view taken by the Tribunal on the issue holding that the amount in question was allowable for deduction notwithstanding that the compensation for the take over of sick- mills was decided after taking into account the liability for gratuity for the pre-nationalisation period.
9. The question is accordingly answered in the affirmative and in favour of the assessee.