Accrual of liability for salary provision due to Pay Commission recommendations upheld; deduction allowed on accounting basis

Provision for projected salary increase due to implementation of a pay commission was held to be an accrued liability because the obligation arose from services already rendered and the employer was bound to implement sanctioned recommendations; therefore the provision was estimable based on past practice and allowed as a deduction. The liability's quantification pending formal government sanction did not render it contingent, and consistent historical accounting practice and the binding nature of the pay commission recommendations supported allowance of the provision.

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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.

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