This appeal is filed by Income-tax Officer against order of Commissioner (A) and cross-objection is by assessee. Income-tax Officer feels aggrieved by direction of Commissioner (A) to allow deduction of sum of Rs. 3,25,988 representing initial contribution to be made to gratuity fund. 2. assessee-company debited its profit and loss account by sum of Rs. 3,72,424 towards gratuity liability. Of this, sum of Rs. 3,25,988 represented provision for payment of initial contribution of gratuity as per actuarial valuation and balance represented amount paid during year. While Income- tax Officer allowed deduction for payment made during year, he declined to allow provision made for gratuity of Rs. 3,25,988 on ground that it was only provision made for payment of gratuity and there was prohibition imposed by section 40A (7) with effect from 1-4-1973 to allow deductions for provisions made towards gratuity. Income-tax Officer observed that even though gratuity liability was allowable deduction u/s 36(1) (iv) of Income-tax Act, said section was superseded with effect from 1-4-1973 by enacting section 40A (7) of Income-tax Act. assessee relied upon decision of Madras High Court in case of CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 but Income-tax Officer held that this decision was not applicable to facts of assessee's case. Another main reason shown by th Income-tax Officer was that though liability in respect of Rs. 3,25,988 was for initial contribution, it related to earlier years and therefore could not be allowed as deduction in year under appeal. 3. When matter reached Commissioner (A) on appeal, apart from reiterating contentions taken before Income-tax Officer emphasis was laid upon decision of Madras High Court in case of Andhra Prabha (P.) Ltd. (supra) to urge that provision was allowable as deduction and that Income tax Officer misread provisions of Income-tax Act and misappreciated Madras High Court decision. Commissioner (A) found force in arguments of assessee and following decision of Madras High Court held that assessee was entitled to deduction in following words: "It would appear from judgement of Madras High Court that words 'that has become payable during previous year ' refer to payment of any gratuity' and not to ' any contribution towards approved fund', which would, therefore include initial contribution towards gratuity fund. I am, therefore, of opinion that appellant is entitled for deduction on account of provision for initial contribution to approved gratuity fund under sub- clause (i) of clause (b) of sub-section (7) of section 40A. " It would thus be seen that Commissioner (A) took view that initial contribution towards gratuity fund also would be permissible deduction under provisions of section 40A (7) notwithstanding that that section imposed prohibition on allowance of contributions to gratuity fund. It is against this order of Commissioner (A) that present appeal is directed. 4. During course of arguments learned departmental representative by making pointed reference to decision of Supreme Court in case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 submitted that Supreme Court also laid down that if provisions of section 40A (7) were not complied with, no provision made towards gratuity fund would be allowed as deduction and in view of this authoritative interpretation placed upon section 40A (7) by Supreme Court, which is law of land, Commissioner (A) could not be said to be right in holding that amount was admissible as deduction. It was also submitted that he was not justified in placing reliance upon decision of Madras High Court in Andhra Prabha (P.) Ltd.'s case (supra). learned departmental representative also referred us to decision of Allahabad High Court in case of Addl. CIT v. Balrampur Raj Electric Supply Co. [1981] 128 ITR 615. He also referred us to observations made by learned author Chaturvedi and Pithisaria (third Edition) at pages 1213, 1523 and 1524. 5. On other hand, learned counsel for assessee submitted that t h e very Supreme Court decision on which reliance was placed by departmental representative to support their view, actually supported assessee's view. He pointed out that Income-tax Officer disallowed claim on ground that it related to earlier years but even so under Income - tax Rules 103 and 104 initial contribution made to gratuity fund is always allowable as deduction, initial contribution would always relate to back years and therefore Income-tax Officer went against very spirit of Rules when he disallowed claim of assessee. He also pointed out that Madras High Court had correctly interpreted law and it could not be said that Commissioner (A) was wrong in relying on it. He also submitted that purpose of enacting section 40A (7) is no doubt to put embargo on allowance of provisions made for payment of gratuity not because was not allowable as deduction but because gratuity payment, till it materialises, remains contingent liability and it was to provide for disallowance of contingent liability that section 40A (7) was enacted. At same time, contributions that became due for payment to approved gratuity funds having become ascertained and accrued liabilities, care was taken to see that provisions made for payment of such contributions which had become due was allowed as deduction. This is case where liability to pay contribution arose and provision made in accounts to discharge that liability. It is not same as provision made for payment of future liability. While future liability for gratuity could be said to be contingent liability, liability that had already accrued for payment even though of back years as per provisions of gratuity fund could not be said to be of same character and nature. This distinction was recognised and was pointed out by Supreme Court in its decision in Shree Sajjan Mills Ltd.'s case (supra). Therefore, Commissioner (A) was right in allowing claim of assessee. 6. We have carefully considered these submissions made to us. As we have already mentioned earlier, provision made for gratuity of Rs. 3,25,988 was towards provision made for contribution towards gratuity fund approved b y Commissioner of income-tax. gratuity fund was constituted by assessee with effect from 27-3-1978, which was very much within accounting year. Commissioner of Income-tax was approached for grant of approval. H e granted approval by his letter dated 17-4-1980 but with retrospective effect from day fund was constituted, namely, 27-3-1978. Thus fund in accounting year was approved gratuity fund. amount of Rs. 3,25,988 to be contributed by way of initial contribution was arrived at on basis of actuarial valuation. It could not be said therefore that it was only estimate without reference to reality or scientific method. Section 40A (7) provides: "40A. (7) (a) Subject to 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 assessee for 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 assessee for purpose of payment of of sum by way of any contribution towards approved gratuity fund, or for purpose of payment of any gratuity, that has become payable during previous year; (ii) any provision made by assessee for previous year relevant to any assessment year commencing on or after 1st day of April, 1973, but before 1st day of April, 1976, to extent amount of such provision does n o t exceed admissible amount, if following conditions are fulfilled, namely: (1) provision is made in accordance with actuarial valuation of ascertainable liability of assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason; (2) assessee creates approved gratuity fund for exclusive benefit of his employees under irrevocable trust, application for approval of fund having been made before 1st day of January, 1976; and (3) sum equal to at least fifty percent of admissible amount, or where any amount has been utilised out of such provision for purpose of payment of any gratuity before creation of approved gratuity fund, sum equal to at least fifty percent of admissible amount as reduced by amount so utilised, is paid by assessee by way of contribution to approved gratuity fund before 1st day of April, 1976, and balance of admissible amount or, as case may be, balance of admissible amount as reduced by amount so utilised, is paid by assessee by way of such contribution before amount so utilised, is paid by assessee by way of such contribution before 1st day of April, 1977. Explanation 1: For purpose of sub-clause (b) of this sub-section 'admissible amount' means amount of provision made by assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to extent such amount does not exceed amount calculated at rate of eight and one-third percent of salary [as defined in clause (h) Rule 2 of part of Fourth schedule] of each year of his service in respect of which such provision is made. Explanation 2: For removal of doubts, it is hereby declared that where any provision made by assessee for payment of gratuity of his employees on their retirement, or on termination of in computing income of assessee for any assessment year, any sum paid out of such provision by way of contribution towards approved gratuity fund or by way of gratuity to any employee shall not be allowed as deduction in computing income of assessee of previous year in which sum is so paid." Thus this section provides total ban on deduction of any provision made by whatever name called for payment of gratuity to employees on their retirement or on termination of their employment for any reason but exception was made to this total prohibition in certain circumstances, which were enumerated in clause (b). They are if provision is made by assessee for purpose of payment of sum by way of any contribution towards approved gratuity fund or for purpose of payment of any gratuity, that has become payable during previous year. We will not deal here with other provisions of provided in clause (b) (ii). Then ban imposed by clause (a) would not apply. Thus clause (b) speaks of provision made by assessee for purpose of payment of sum by way of any contribution towards approved gratuity fund or for purpose of payment of any gratuity but further condition that it imposed was that contribution or payment must have become payable during previous year. In other words, if liability to make payment to approved gratuity fund has arisen, then even if provision is made to provide for that contribution, that provision will not be considered to be mere provisions for contingent liability. question that has therefore to be asked in this case is whether by grant of approval by commissioner of Income-tax to gratuity fund, under provisions governing gratuity fund, liability to make contribution had arisen or not? If it had arisen, it became payable during previous year and any provision made to discharge that liability is covered by clause (b) and not by clause (a) and therefore became payable. departmental representative did not agree before us that under approval granted by commissioner of Income-tax with retrospective effect, payment of contribution to gratuity fund had not become ascertained liability as distinct from contingent liability spoken of in clause (a) and that liability has to be allowed as deduction under clause (b). initial contribution that has to be made under provisions of gratuity fund, has now become payable during previous year although it relates to earlier years. Once gratuity fund arises as consequence of grant of approval to gratuity fund, question for purpose of clause (b) would not be, whether contribution related to earlier years or not, but question would be whether liability arose in previous year or not. That was why clause (b) provided for two situations where provision could be made; one for purpose of payment of sum by way of any contribution towards approved gratuity fund and second i s for purpose of payment of sum by way of any contribution towards approved gratuity fund and second is for purpose of payment of any gratuity. In other words, if provision is to be made for purpose of payment by way of any contribution, that contribution can be either initial contribution it must necessarily relate to earlier years would not arise but in both cases question of ascertainment on scientific lines would and should arise. In this case provision for contribution was made on basis of actuarial report, which was not in dispute and which means that amount of contribution for purpose of making provision was arrived at on scientific and relational basis. liability to pay that provision made for that contribution has arisen in this previous year and it cannot be said that provision made for that contribution is not allowable u/s 40A (7) (b). Section 40A (7) would apply only if provision is made for future payment of gratuity to employees either retiring or about to retire. As we have mentioned earlier clause (b) is exception carved out for this general bar on allowance on deduction for provisions made to gratuity fund. In this context, observations made by supreme court in shree sajjan Mills Ltd.'s case (supra) may be noticed. Quoting from head-notes: "On plain construction of clause (a) of section 40A (7) of IT Act, 1961, whatever is provided for future use by assessee out of gross profits of year of account for payment of gratuity to employees on year of account for payment of gratuity to employees on their retirement or on termination of their services would not be allowed as deduction in computation of profits and gains of year of account, unless respective conditions specified in clause (b) were fulfilled. expression 'provision made by assessee' is not used in any artificial sense, e.g., of setting apart specifically by assessee for meeting liability for gratuity in his account books, but in its ordinary sense. embargo under clause (a) contribution to approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during year of account. Clause (b) (ii) deals with situation where assessee might provide by spread-over method and provides that such provision would be excluded from operation of clause (a) provided three conditions laid down by sub-clauses are satisfied." It will be seen from this head-note extracted from judgment of Supreme Court that SUpreme Court pointed out that clause (b) (i) excludes from operation of clause (a) contribution to approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during year of account. We have therefore to see whether provision made for contribution to contribution to approved gratuity fund had become payable during year of account or not. To repeat what we have said earlier, this is cardinal question that arises in this case and in our view liability to make contribution to that gratuity fund arose in accounting year as direct consequence of grant of approval to gratuity fund. We may also here notice Rule 104 of Income-tax Rules. It provides: "104 Initial contributions: amount to be allowed as deduction on account of initial contribution which employer may make in respect of past services of employee admitted to benefits of fund shall not exceed 8-1/3 per cent of employee's salary for each year of his past service with employer." We may also notice Rule 103 of Income-tax Rules, which provides for t h e deduction of ordinary annual contributions. That rule says that ordinary annual contribution by employer to fund shall be made on reasonable basis as may be approved by COmmissioner of Income-tax having regard to length of service of each employee concerned so, however, that such contribution shall not exceed 8-1/3 per cent of salary of each employee during that year. Thus Rule 104 provides that amount to be allowed as deduction on account of initial contribution can be computed at 8-1/3 per cent of employee's salary for each year of his past service with employer. This indicates that amounts payable for past services are also covered by expression "initial contribution' and entire amount of initial contribution to approved gratuity fund should necessarily take into consideration past services of each employee, which means contributions to be made in respect of back years. When Rule itself provides that amount payable in respect of back years is to be taken into account, it is perhaps not correct on part of Income-tax Officer to say that since initial contributions included contributions made for past services, amount became inadmissible. We are, therefore, of opinion that clause (b) of section 40A (7) read with Rule 104 of Income- tax Rules, clearly postulates allowance as deduction amount paid by way of initial contributions to approved gratuity fund, only condition being that that must become payable during previous year. In absence of anything brought to our notice to show that amount had not become payable and only reason shown being that initial contribution related to earlier years, which is not in accordance with spirit of Rule 104 of Income-tax Rules, we are of opinion that Commissioner (Appeals) is right in his conclusion. We, therefore, endorse his view. 7. second ground raised by revenue was that on facts and in circumstances of case, learned Commissioner (Appeals) was not justified in deleting addition of Rs. 7,302 made by Income-tax Officer towards commission paid to M/s. Chhabra Auto Industries. If we turn to order of Commissioner (A), this is all what he had observed in deleting addition of Commissioner (A), this is all what he had observed in deleting addition made by Income-tax Officer: "M/s Chhabra Auto Industries were not examined by ITO at any stage. T h e disallowance of Rs. 7,302 on account of commission paid to them is, therefore, deleted." But what we not find from record is that despite several opportunities provided to assessee said person was never produced before Income-tax Officer, on other hand, this is what Income-tax Officer had observed in regard to this: "The nature of commission payment to M/s Chhabra Industries was of same nature as to other two parties mentioned above. Assessee had filed affidavit of M/s Jagjeet Singh partner of Mr. Jagjeet SIngh in support of its claim of services rendered, hence representative of assessee was asked to produce SHri Jagjeet Singh for cross-examination. Representative of assessee had not been able to produce Shri Jagjeet Singh and hence affidavit of Sh. Jagjeet Singh is ignored initio and it is informed that no services were rendered by M/s Chhabra Industries like earlier two cases." It is very clear from order of Income-tax Officer that Shri Jagjeet Singh was not produced before Income-tax Officer for verification on points averred in affidavit. Income-tax Officer cannot therefore be found fault with for not examining Shri Jagjeet Singh. This therefore, appears to be case where assessee failed to lead proper evidence in support of its claim. Commissioner (A), in our opinion, is therefore not justified in saying that payment was allowable even though Shri Jagjeet Singh was called for examination but did not appear before Income-tax Officer. fault did not therefore lie with Income-tax Officer. We therefore reverse his order on this issue and restore that of Income-tax Officer. 8. points raised in cross-objection were not particularly pressed before us and therefore nothing survives before us to consider cross- objection. 9. In result, appeal is allowed in part whereas cross-objection stands dismissed. *** INCOME TAX OFFICER v. AUTO METERS LTD.