1989 (9) TMI 73 - HC - Income Tax

Accrued liability for revised wages qualifies as revenue expenditure deductible under Section 37(1) for prior assessment year

HC upheld the Tribunal's decision allowing deduction of the assessee's payment of revised salary and dearness allowance to its workmen for AY 1972-73. It ... Deduction - payment pertained to the salary and dearness allowance given by the assessee to its workmen for the year under consideration - Whether, the amount was an allowable revenue deduction in the assessment of the assessee for the accounting period relevant to the assessment year 1972-73 ? - HELD THAT:- The awards that had governed the terms and conditions of service of the assessee's workmen were terminated. The assessee's board of directors took note of this and made provision of a sum of Rs. 1,00,000 in respect of the impending liability that arose, pursuant to the termination, on account of the revision in the service conditions of its workmen. This was done in the manner of a prudent businessman who knew that the service conditions would have to be bettered. The liability was rightly recognised as having accrued and it was provided for. The provision itself would have been allowable as a deduction. It was not allowed. Instead, the quantified liability in the aggregate sum of Rs. 76,680, though it was discharged subsequent to the close of the previous year with which we are concerned, must be allowed as a deduction. The payment in that aggregate sum was made by the assessee to its workmen for the services that were rendered by them during the previous year under consideration. Such expenditure was incurred for the purpose of earning the income of the previous year and must be deducted. The Tribunal was justified in the view that it took. Accordingly, the question is answered in the affirmative and in favour of the assessee. Issues involved: The judgment involves determining the allowability of a revenue deduction amounting to Rs. 76,680 in the assessment of the assessee for the accounting period relevant to the assessment year 1972-73.Summary:The High Court of Bombay considered a reference u/s 256(1) of the Income-tax Act, 1961, made by the Revenue regarding the deduction of Rs. 76,680 in the assessment year 1972-73. The assessee, an agent for Tata motor vehicles sales, had made a provision of Rs. 1,00,000 in anticipation of liability due to changes in workmen's service conditions. Subsequently, settlements were reached with the trade union, resulting in payments to workmen totaling Rs. 76,680. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the deduction, citing that the liability was not ascertained during the relevant accounting year. However, the Income-tax Appellate Tribunal allowed the deduction, following the principle that the liability accrued during the year under consideration, even though the payment was made in a subsequent year.Dr. Balasubramanian, counsel for the Revenue, argued that the liability did not accrue until after the relevant previous year, citing the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363. The Court distinguished this argument by stating that the provision made by the assessee for the impending liability indicated the recognition of the accrued liability, which should have been allowed as a deduction. The Court upheld the Tribunal's decision, emphasizing that the payment to workmen was for services rendered during the previous year and was incurred to earn income, thus qualifying for deduction.In conclusion, the Court answered the question in the affirmative, in favor of the assessee, allowing the deduction of Rs. 76,680.