TaxTMI 
TaxTMI 
2015 (4) TMI 152
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....venue, for the reason that the AO has allowed deduction of Rs. 809.86 lakhs under the head "salaries, wages and allowances" for "provision" made pending finalisation of Pay Revision of employees which had become due from 01.01.1997. He was of the view that this liability which accrues on account of pay revision, is neither ascertainable nor had been approved during the P.Y. relevant to the A.Y. 1999-2000. In reply the assessee contended that the expenditure is contractual in nature and that it is not a contingent liability. Reliance was placed on Accounting Standards AS 4 and AS 6 as well as the judgement of Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT, reported in 245 ITR 428 (SC). The submissions of the assessee company were recorded as under. "(i) The expenditure provided is contractual in nature and was not contingent. Since the accounts were being maintained on mercantile system of accounting, therefore, provision made for pay revision was an allowable deduction. (ii) The reliance was placed on AS 4(i) and 6(b) claiming that provision has to be made for all known liabilities even if these cannot be determined with certainty. The assessee also submitted th....
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....e CIT erred in holding that deduction ofRs.809.86 lacs allowed by A.O. being the provision for pay revision to be effective from 1.1.1997 was not allowable because the liability had not accrued. 4. That on facts and circumstances of the case and in law, the CIT erred in holding that liability towards pay revision would arise only after the agreement entered into with the employees in respect of pay revision. That the appellant craves leave to add, alter, amend or vary any of the grounds either at before the hearing of appeal." 4. We have heard Shri Rohit Jain, the Ld.Counsel for the assessee and Ms.Sulekha Verma, Ld.CIT, D.R. on behalf of the Revenue. 5. Mr.Rohit Jain, the Ld.Counsel for the assessee submitted that the sole ground on which the Ld.CIT invoked his power of jurisdiction u/s 263 of the Act is that the liability in question has not accrued during the year and that the liability was also not ascertainable during the year, for the reason that even the preliminary MOU was not drawn up during the year. He argued that the assessee had, based on past experience, demands of the unions, and many other factual criteria, had estimated the outgo that the assessee has to incur t....
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.... was constituted for holding discussions with the Representatives of Employees for formulating an approach of the Board of Directors, towards the pending pay revision w.e.f. 1.1.1997. The Department of Public Enterprises issued an office memo on 14.1.1999, authorising the Public Sector Undertaking to start wage revision negotiations with the workers. It was there after on 17.8.1999, that the annual accounts of the company were certified by the Directors, wherein a provision for the above pay revision liability, was made in the accounts. The issue is whether a provision made towards impugned pay revision is allowable as a deduction or not. 8.1. The Hon'ble Delhi High Court in the case of CIT vs. BHEL Ltd. (supra) at para 6 and 7 held as follows. "6. In this case, the Tribunal had dnoticed that there was no dispute as regards the terms of employment of the workers and officers. The only question was the exact quantification of the compensation or wage revision. The Tribunal also held that provision for wage revision was based on past experience, interim Pay Commission of government employees, previous Pay Commission's reports of public sector employees, union demands and other rele....
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....e the accounts were finalised and returns were filed, the assessee had ascertained the actual liability attributable to the previous year and therefore the actual amount payable only was claimed based on mercantile system of accounting followed by the assessee. We are therefore of the view that the Tribunal was perfectly justified in allowing the claim. The appeal therefore fails and the same is accordingly dismissed." 8.3. The Mumbai Bench of the ITAT in the case of Tata Communications Ltd. Vs. JCIT (supra) at para 6 has held as follows: "6. We have considered the rival submissions and perused the Orders of the lower authorities and also gone through the judicial decisions cited by the Counsel for the assessee. It is not in dispute that salary and wages accrue daily, weekly, fortnightly or monthly as per the contract of the employment. This is so as services is rendered in praesenti, the liability of the employer to compensate the employees for the services rendered also accrues in praesenti. A perusal of the Orders of the lower authorities show that what is actually in dispute is the quantification of compensation. As the assessee is a PSU, the pay revision depends upon the de....
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....s as the services rendered are in presentee. Ground No.3 is accordingly allowed." 8.4. In our considered view, though the date of signing of the M.O.U. i.e. 24.09.2000, which is done after the approval of the Department of Public Enterprises, the negotiations were completed during the year and the liability was known as liability accrued from the effective date of commencement. It is also to be noted that the provision for salary was not a contingent liability. It was in respect of the outcome of the decision of the DPE." 8.5. Consistent with the views taken by the Jurisdictional High Court as well as Hon'ble Kerala High Court, we hold that the provision for wages made towards impending pay revision, should be allowed as a deduction. The Ld.CIT has not made any effort to prove that the quantum of provision made is unrealistic or imaginary. Under these circumstances we hold that the claim of the assessee is allowable. 8.6. In this case we are on the issue as to whether the Ld.CIT has properly invoked his powers u/s 263 of the Act, the Hon'ble Delhi High Court in the case of CIT vs. DLF Ltd. (supra) considered the judgement of Hon'ble Supreme Court in the case of Malabar Industria....
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....the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified. 11. The second contention has to be rejected in view of the finding of fact recorded by the High Court. It was not shown at any stage of the proceedings, that the amount in question was fixed or quantified as loss of agricultural income and admittedly it is not so found by the Tribunal. The further question whether it will be agricultural income within the meaning of section 2(1A) of the Act as elucidated by this court in CIT v. Raja Benoy ....