TaxTMI 
TaxTMI 
2021 (1) TMI 822
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.... made u/s 40a(ia) of the Act for AY 2010-11 respectively. ii. The Id. CIT(A) ought to have appreciated the fact that the assessee created an adhoc provision for wage arrears amounting to Rs. 5,57,77,696/- in the FY 2009-10. However, the said amount had been disbursed only in the FY 2010-11. iii. The ld CIT(A) ought to have considered the Boards Instruction No.17/2008 dated 26.11-28 before allowing the appeal of the assessee. iv. The ld. CIT(A) ought to have appreciated the fact that the relied upon decision by him are distinguishable from the facts and circumstances of the present case. v.The ld. CIT(A) failed to consider the fact that the liability to pay salary arrears did not arise or accrue in the Fl 2009-10 relevant to AY 2010-11. vi. For the above grounds and any other ground that may be adduced during the appellate proceedings, the order of the CIT(A) may be set aside and the assessment order of the AU may be restored." 3. Brief facts of the case are that the assesse a co-operative bank filed its return of income for the assessment year 2009-10 and 2010-11 declaring total income of Rs. 38,55,67,390/- and Rs. 47,42,79,4....
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.... on 25.08.2010 .The said settlement was signed by the management and representatives of employees union on 30.08.2010 and as per the said settlement, the monetary benefits arising out of revision of pay shall be w.e.f 01.01.2007. Therefore, the assessee bank in anticipation of wage revision has made reasonable estimation of liability for each assessment year and the same has been provided for in the books of account and hence the same cannot be considered as contingent in nature. 4. The Assessing Officer was not convinced with the explanation furnished by the assessee and according to him, liability provided in the books of account for wage arrears is an unascertained liability which cannot be allowed as deduction. The Assessing Officer observed that the essence of accrual is reasonable certainty and possible quantification of liability, in the event of agreement pending finalization, the assessee's calculation for liability accruing to it has not been finalized and hence, the liability has not been crystallized and therefore, it is contingent liability which is not allowable u/s.37(1) of the Act. The Assessing Officer has discussed the issue at length in light of certain judici....
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.... allowed although the liability may have to be quantified and discharged at future date . Therefore, he opined that amount provided for provision for wage arrears is an ascertained liability which is accrued to impugned assessment years, even though the same has been quantified and paid in subsequent financial years. Accordingly, learned CIT(A) deleted the additions made for disallowance of provisions of wage arrears. The relevant findings of the learned CIT(A) are as under:- "5. Now, I have carefully gone through the undisputed / uncontroverted facts marshalled and presented by the AO/AR as also the relevant and supporting evidence by the respective rival parties but on a relative and comparative consideration of the same, I am persuaded by the more substantive and meritorious reasoning adduced by the AR on the issue at hand. 6. From the assessment order is clear that the main reason why the AO has disallowed the aforesaid provision for wage arrears, is that according to him, it was a contingent liability and also that it lacked reasonable certainty and possible quantification. To buttress the above proposition the AID has relied on the cases of (i) Shre....
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....ld therefore be allowable even if the negotiations with the State Govt. / Registrar of Cooperative Societies for revising the pay scale of the employees had not been finalized / qualified fully. 6.2 Further ITAT Kolkata in the case of Allahabad Bank vs ACIT 2175/Kol/2009 vide order dated 16.03.2016 has held that according to AS 29 issued by the ICAI provision is a liability which can be measured only by using a substantial degree of estimation and a liability is a present obligation of the enterprise arising from past events the settlement of Which a expected to result in an outflow from the enterprise of resource embodying economic benefits and according to para 14 of AS 29 provision should be recognized when (a) an enterprise has a present obligation as a result of past events. b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and c) a reliable estimate can be made or the obligation 7. It is not the case of the AO here, that the liability of wage arrears is not a real one for services which has already been rendered and therefore definitely was in the nature of arrears ....
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....or the Increase of payment of such salary / wages in keeping with the Pay Commission recommendations and its implementation to the State Govt. employees also and not on the basic fact of the arisen present liability and not contingent on the finalization on the said agreement as erroneously held by the AO. 8. Now, it has been held in the case of Haryana Agro Industries Corporation Limited f2017) 82 taxmann.com 220 that since the assessee following the mercantile system of accounting and the provision on account of arrears for salary payment was made in the accounts on the aCcn1al basis, the disallowance made by the Assessing Officer was not justified" 9. Further prudence is one of the basic assumptions on which accounts are maintained. The term prudence is defined as: "A concept of care and caution used in accounting according to which (in view of uncertainty attached to figure events) profits are not anticipated, but recognized only when realized, though not necessarily in cash. Under this concept, provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the l....
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....s case, there is no liability accrued for the impugned assessment years because negotiations between the assessee bank and employees unions were not finalized and consequently, it cannot be said that liability accrued for wage arrears for the impugned assessment years. 8. The learned AR for the assesse, on the other hand, strongly supporting the order of the learned CIT(A) submitted that the case is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs.CIT (supra), where it was held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although liability may have to be quantified and discharged at future date. In this case, liability has certainly arisen for the impugned assessment years because wage arrears has to be paid for the services rendered by the employees, as per terms of appointment/ employment and therefore, liability to compensate the services already rendered by way of resource was very much existing liability and was not a contingent, even though the same was not finalized during the relevant assessment years. 9. We have heard both t....
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.... and therefore, liability to compensate the employees for the services already rendered was very much existing liability and was not contingent on the happening of any future event or agreement, but on the result of past events/works already rendered. This view is supported by the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs.CIT (supra), where the Hon'ble Court held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date and what should be certain is incurring of liability and it should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. If these requirements are satisfied, the liability could not be contingent one which is present though to be discharged at future date and it does not make any difference in future date on which liability shall have to be discharged . 10. In this case, on perusal of facts, we find that there is no dispute with regard to the fact that wage arrears needs to be paid to the employees for the services already rendered for....