TaxTMI Login
Just a moment...
Press 'Enter' to add multiple search terms. Rules for Better Search
of 
of 
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of of 
All Case Laws
of of All Case Laws
Note
Bookmark
Share
Don't have an account? Register Here
of <h1>Accrual of liability for salary provision due to Pay Commission recommendations upheld; deduction allowed on accounting basis</h1> Provision for projected salary increase due to implementation of a pay commission was held to be an accrued liability because the obligation arose from ... Disallowing the provision created towards salary on account of the expected increase in annual personnel cost arising from the implementation of the Sixth Pay Commission - Accrual of liability - HELD THAT:- Assessee is a Government of Maharashtra undertaking and is bound to implement the recommendations of the Pay Commission as and when sanctioned by the State Government. It is also evident from the record that the assessee has consistently followed the same method of creating provisions towards salary revision since financial year 1976–77, based on past experience and a reasonable estimation of the enhanced liability. The provision in question was created in respect of services already rendered by the employees during the relevant previous year, and only the quantification of the enhanced salary was deferred to a future date, subject to formal approval. The liability, therefore, had accrued during the year under consideration and cannot be characterised as contingent in nature. The contention of the revenue that the liability crystallised only upon formal sanction by the Government of Maharashtra does not detract from the fact that the obligation to revise salaries had its origin in the relevant accounting year and was capable of being estimated with reasonable certainty, based on historical data and established practice. The mere deferment of approval or payment does not render the liability contingent. In view of the consistent accounting practice followed by the assessee, the binding nature of the Pay Commission recommendations, and the settled legal position that a provision for an accrued but unquantified liability is allowable as a deduction, we find no justification for the disallowance of the provision - Appeal filed by the assessee is allowed. Issues: Whether the provision of Rs. 2,00,00,000/- made by the assessee in the assessment year 2007-08 towards anticipated salary increase on account of implementation of the Sixth Pay Commission is an allowable deduction or is a contingent liability not deductible.Analysis: The provision was created for services already rendered in the relevant previous year, with only quantification deferred pending formal sanction; the assessee has a long-standing, consistent accounting practice of creating such provisions based on historical data and reasonable estimation; the assessee, being a State Government undertaking, is bound to implement Pay Commission recommendations when sanctioned; precedents establish that where a business liability has its origin in the accounting year and is capable of being estimated with reasonable certainty, the liability is not contingent even if quantification or payment occurs later; the revenue contention that crystallisation only on formal government sanction renders the liability contingent was examined against the facts of consistent practice, the binding nature of pay revisions for the assessee, and controlling authorities on accrued liabilities and estimation.Conclusion: The provision of Rs. 2,00,00,000/- is an allowable deduction and the disallowance is set aside; decision is in favour of the assessee.
TaxTMI 
TaxTMI 
