TaxTMI 
TaxTMI 
1987 (12) TMI 68
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....hat the IAC had wrongly allowed a deduction of Rs. 38,56,828 in his directions u/s. 144B and consequently erred in enhancing the amount of the income assessed to that extent. Certain facts need to be stated. There was a dispute between the assessee-company and its workers and a settlement was arrived at and reduced to writing in a memorandum of settlement dated 13-2-1971. The terms of the agreement provided that the agreement shall come into force from 1-1-1971 and shall bind the parties, i.e., the employer and the workmen for a period of three years, i.e., till 31-12-1973. The wage scales of different grades of workers were fixed and the agreement also provided for terms of payment of dearness allowance, accommodation, etc. It would appear that Dr. Datta Samant, the then President of Brihan Mumbai General Kamgar Union, issued a strike notice to the Mg. Director of the company on 4-6-1973 and the workers went on strike from 15-6-1973. The management of the company issued a general notice on 19-6-1973 advising its workers to stop the strike and report for work. On 18-6-1973, the Union, by a letter of the same date, enclosed a charter of demands and the company.addressed a lett....
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.... A reference was made to the order dated 10-9-1974 passed by the Industries & Labour Department of the Govt. of Maharashtra referring the matter for adjudication on the subject mentioned in the Schedule therein to the effect that all the workmen whose names were given in the Annexure should be reinstated with full back wages and continuity of service. This order required the management to refer to the Tribunal the demand to reinstate 340 workers with full back wages. It was passed on 10-9-1974. 2.1 On 22-12-1980, the appellant received letter from their solicitors, Bhaishankar Kanga & Girdharilal, in which it was stated by them that Mr. Talegawkar had come across two reported cases, namely, Santoshkumari Gupta v. State Bank of Patiala 1980 (2) LLJ 72 and Gujarat Steel Tubes Ltd. 1980 (1) LLJ 137. On perusal of these cases, the solicitors were of the view that the cases filed by them against the workers in IT Ref. Nos. 125 & 274 of 1974 were likely to go against them and that therefore they would have to provide for a provision with regard to back wages and other fringe benefits in respect of the workmen for the entire period from 1973 to 1980 and continue to make such provisio....
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....eld and the following decisions were taken unanimously : "(1) That while filing the Income-tax Return for the relevant period the liability in the amount of Rs. 2,20,00,000 which is arrived at as per calculations of Actuaries Report, be claimed only from the Income-tax Return and no mention of like amount be made anywhere in the annual accounts or in the Directors' Report or in the Auditor's Report. (2) A General Reserve No. II in the amount of Rs. 2,20,00,000 be created into the accounts of the year ended 31-12-1980." To give effect to these decisions, three resolutions were passed, first of which, which is relevant for our purpose, reads as under : "Resolved that the balance left, after the provision of dividend from the Net Profit, to the tune of Rs. 2,20,00,000 and Rs. 13,004.21 be transferred to the General Reserve No. II and General Reserve No. I respectively. " The profit & loss account for the year ended 31-12-1980 shows a profit of Rs. 2,39,33,004.21 after provision of taxation of Rs. 32,60,000. The amount of Rs. 2,20,00,000 which was said to be the liability payable by way of back wages to the striking workers was not debited to the profit & loss account bu....
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....er appeal was, in fact, treated as a reserve for the subsequent years and transferred and utilised as such when there was a split in the manufacturing divisions of the company. 4. On the above facts, Shri Harish, the learned counsel for the assessee, argued that General Reserve No. 2 shown in the accounts for the year ended 31-12-1980 was actually a provision for labour liability which accrued during the year in view of the Supreme Court decision in Gujarat Steel Tubes Ltd.'s case. The company had never made any such provision in the earlier years from 1974 to 1979 in view of an earlier decision of the Supreme Court in Oriental Textile Finishing Mills v. Labour Court AIR 1972 SC 277. Shri Harish drew our pointed attention to para 12 of this decision. The Supreme Court in effect held that in that case there was a persistent and obdurate refusal by the workmen to join duty notwithstanding the fact that the management had done everything possible to persuade them to come back to work but they had without any sufficient cause refused and which in the view of the Court would constitute misconduct and justify the termination of their service. The Supreme Court, therefore, held that th....
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....i Harish further argued that there was no distinction between reserve and provision. He finally relied on a few authorities. He first cited the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 which, according to him, supported his argument that there is no distinction between reserve and provision. Thereafter, he relied on the decision of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand [1976] 105 ITR 618. In this case, the High Court held that an assessee who follows the mercantile system of accounting is entitled to claim a deduction even though the expenditure is not claimed. It is enough if the liability for such expenditure accrues. For similar proposition, he relied on another decision of the Allahabad High Court in the case of Motilal Padampat Sugar Mills v. CIT [1977] 106 ITR 988. He particularly relied on the finding of the Court that the fact that the assessee did not make appropriate entries in its books of account to get the amount in reserve account though its accounts were maintained on mercantile basis would not make any difference and that the entries in the books of account are not determi....
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....3 (page 692 of Vol. III of paper book) showed an excess of assets over liabilities transferred to Echjay Forgings (P.) Ltd. of Rs. 1,03,50,437. The subsidiary company had (as stated earlier) claimed deduction of an amount of Rs. 20,70,000 under settlement wages account for the year ended 31-12-1983 in respect of the same liability. Shri Tiwari argued that so far as the appellant-company was concerned, there was in fact a cessation of liability for payment of back wages if not offered anything by way of income for such cessation or remission or liability. Shri Tiwari's next contention was that there was no change in the legal position relating to the Industrial Disputes Act during the year 1980. All the sections of the Industrial Disputes Act to which references were made by Shri Harish were on the statute book during the year of account and in the earlier years and the judgment of the Court which was given on the facts and circumstances of that particular case did not in terms create a commercial liability in the case of a third party particularly when there is no dispute regarding the provisions of law and what is decided is a mixed question of facts and law. Shri Tiwari relied on....
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.... the Tribunal and payments made subsequent to such settlement were claimed as deduction in the year of payment. Shri Tiwari illustrated this point by drawing our attention to Note 2 of Schedule 19 of the balance sheet of the appellant-company for the year ended December 1983. There is a reference in this Note to the fact ended December 1983. There is a reference in this Note to the fact that lease rent on plant & machinery leased out to Enchjay Forgings (P.) Ltd. will be accounted for on receipt basis. Alternatively and without prejudice, Shri Tiwari argued that even if it is assumed that the system of accounting followed by the assessee was mercantile, the year in which the liability in respect of back wages really accrued has to be ascertained. It was Shri Tiwari's submission that this liability did not arise in this year but was claimed in the accounting year ended 31-12-1980 as a shame of tax planning because this was a year of exceptionally high profits. Shri Tiwari has given figures of net profit as per the audited accounts for calendar year 1980 and seven earlier calendar years to prove that the profits never exceeded Rs. 80 lacs any time and Rs. 79.65 lacs in 1977-78. They ....
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....spring directly from the statute. A statutory liability is a liability which arises by virtue of a statute like a levy or tax imposed by State or a Central or a cess imposed by a municipal body. In support of this proposition, Shri Tiwari relied on Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33 (All.), CIT v. Ratlam Strawboard (P.) Ltd. [1985] 152 ITR 425 (MP) and CIT v. R. V. Brigs & Co. (P.) Ltd. [1985] 155 ITR 495 (Cal.). In order to claim a deduction for liability there should be a definite obligation to pay a debt owed to someone. Further, a personal liability must be shown to have accrued. Further, a personal liability must be shown to have accrued. Shri Tiwari relied on a decision of the Supreme Court in CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 to elaborate what should be considered as tests of accrual of personal liability. He pointed out that the assessee's stand was not consistent and the assessee cannot be allowed to take two separate stands before two different authorities - CIT v. O. P. N. Arunachala Nadar [1983] 141 ITR 620 (Mad.) -and pointed out that the so-called actuarial valuation relied upon by the assessee was not in fac....
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....r 1979 were audited on 20-5-1980 and the assessment order was made in 1982. The assessee could well have made the claim for liability for the assessment year 1980-81 itself. There cannot be a suspension of operation of the Supreme Court judgment. This only proved that there was no substance in the argument of the counsel for the appellant. As regards the report of the actuary, Shri Tiwari pointed out that it is not mentioned anywhere that this is an actuarial valuation. No method of valuation is given, no working, no parameters, no rate of discounting is spelt out anywhere. The possibility of a settlement between the management and workers has not been taken into account by the actuary. The actuary had also not indicated what percentage of back wages would be awarded. Finally, Shri Tiwari argued that this was a well-designed scheme for tax avoidance and the ratio of the decision of the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 was clearly applicable to the facts of the present case. Alternatively and without prejudice, Shri Tiwari argued that all the years' liabilities cannot be allowed in one year and relied on the following four decisions of the Supreme Court....
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....ts or in law that this liability arose in this year and that this was a statutory liability which accrued during the year or that what was debited in the books as a provision for liability represented the liability for this books as a provision for liability for this year. The facts that have come before us amply show that this.was intended to be treated as reserve and was in fact so treated in subsequent year by the company as reserve was utilised for transferring the excess of assets over liabilities to the subsidiary company. The conduct of the assessee established that this amount was never utilised for payment of wages or never intended to be so utilised. On the other hand, the assessee was always claiming deduction for wages when they were actually paid and even in respect of the present liability the subsidiary of the assessee claimed deduction as and when settlement with workers were arrived at and payments made. We are also satisfied that nothing had happened during the year of account for the assessee to claim such liability and if the decision of the Supreme Court was the event that gave rise to such liability, such event took place in 1979, i.e. in the earlier accountin....
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....e out by the strike notice dated 4-6-1973 (Page 310 of Vol. IL of assessee's compilation). This notice was followed by a charter of demands dated 18-6-1973 and the matter was ultimately referred to the Industrial Tribunal on 25-4-1974. The award of the Industrial Tribunal had to come during the relevant accounting period and even before the Tribunal could decide this matter, the assessee had started settling cases with the workers who were discharged and to whom payments were made. In fact, in the memorandum of settlement that was drawn between the management and the workermen, the very first clause of the terms of the settlement makes reference to the fact that cases of about 69 persons were settled since the dispute started during the period of 8 years. The relevant portion of the terms of the settlement reads as under : "1. It is agreed by the Union that since 69 employees have already settled their dispute of reinstatement as contained in the Reference (IT) No. 272 of 1974 by accepting their legal dues during the period of 8 years, the Union odes not desire to pursue their case further in the Court and has further agreed not to take any objection if the Court is willing to s....
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....s cited before the Supreme Court in Gujarat Steel Tubes Ltd's case, the Supreme Court observed at page 1929 of the report as under: "We fail to see how it runs counter to the established principle. The Court, in fact, held that even where the strike is illegal, before any action was taken with a view to punishing the strikers a domestic enquiry must be held ............ the court agreed with the view of the Court in India General Navigation & Railway Co. Ltd. case (AIR 1960 SC 219) and re-affirmed the principle that mere taking part in an illegal strike without anything further would not necessarily justify the dismissal of all the workers taking part in the strike and that if the employer, before dismissing a workman, gave him sufficient opportunity of explaining his conduct and no question adjudication the propriety of such dismissal to look into the sufficiency or otherwise of the evidence led ........" It would be clear that the Supreme Court in that case endorsed the view taken by it in India General Navigation & Railway Co. Ltd.'s case. A detail reference to this case has already been made hereinabove while recording the arguments of the Departmental Representative sinc....
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.... or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination." Then again this is not a statutory liability inasmuch as it does not spring from a statute. Ordinarily, a statutory liability like sales tax, excise duty or income-tax is liability imposed by a statute which provides specifically for a charging section, for machinery of assessment of the levy, its collection, recovery and enforcement. The wages required to be paid by a management to the workers are not governed by Industrial Disputes Act. It is a dispute between the workers and the management which is dealt with by various sections of the Industrial Disputes Act. The very facts that the assessee could settle most of the cases with the workers even before the award of the Tribunal was reached would indicate that this was essentially a contractual liability. The modus operand followed by the assessee even from the year the strike started, i.e. from 1974, was to carry on negotiations with the workers and, as stated by the assessee's counsel buy them off by settlement of their claims so that th....
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.... of discharged workers out of court by getting them to agree to a certain amount of compensation. We also find that such compensation when paid has been claimed as a deduction in the subsequent years on actual of Rs. 2,20,00,000 was in fact appropriation out of profits. It was never intended as a provisions for liability and never utilised as such in the subsequent years. In any case, this was not a liability arising this year and could not be a charge on this year's profits. 12. The figures of profits cited before us do indicate that this year was a year of exceptionally high profits. Having appropriated a large chunk of these profits as reserves, the directors of the company went about methodically attempting to create evidence in the form of solicitor's letter, actuary's report and the various Board resolutions to support their claim of deduction of this large amount as liability for back wages. There is not an iota of evidence that this appropriation was any time intended to be used or was in fact used for payment of wages. In fact, whatever that has come before us is to the.contrary. We would, therefore, accept all the arguments advanced on behalf of the department, reject ....
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....s been given, we reject this argument and confirm the order of CIT(A) on the issue also. 16. Ground No. 5th and ground No. 6th where not pressed and are therefore dismissed as such. 17. Grounds No. 7 challenges the CIT (A)'s order confirming the disallowance of Rs. 19,295 incurred on the death anniversary of the Chairman. It would appear that he amount of Rs. 19,295 included an amount of Rs. 8,920 being food served to Child Aid Society. Shri Harish argued that the expenditure was incurred as a part of social obligation of the company. We are not satisfied that such expenditure had anything to do with the carrying on of the business. A substantial part of the expenditure was in the nature of charity or donation incurred on the occasion of the death anniversary of the founder Chairman. It has not been proved that the company had incurred any other type of expenditure to meet its social obligations in accordance with its alleged objectives mentioned in the Memorandum & Articles of Association of the company. We therefore, are not satisfied that this is an admissible expenditure. This disallowance is upheld. 18. The next grounds (ground No. 8) challenges the disallowance of ex....
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....under sec. 35B(I)(b)(vii). The CIT (A) had dealt with this issue in paras 84-85 of his order. This ground is connected with the preceding ground. We have already held that the expenditure on T. A. Pai has been rightly treated by IAC vide his directions under sec. 144B (4). We have also held that the expenditure on Furfurol Project has been proved to be of a revenue nature relating to the business of the company. In view of these finding, we would confirm the consequential finding of the CIT (A) (Vide para 85 of his order) that no relief under section 35B is available. 23. Grounds Nos. 13 and 14 were not pressed and are therefore dismissed as such. 24. Ground No. 15 is directed against CIT (A) conferring the disallowance of expenditure incurred on the maintains of accommodation at Rajkot. Shri Harish brought to our notice a decision of the Madras High Court in the case of CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619. The Madras High Court held that where an accommodation is maintained, either is located, for the directors and other employees of the assessee, any expenditure incurred for the maintenance of such accommodation cannot be brought within the scope of sec. 37(3) of th....
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....e proceedings. He argued only the appeal for the assessment year 1981-82, which has been dealt with at length in the preceding paragraphs. The other two appeals are therefore dismissed for non-prosecution. 29. In the result, appeal for assessment year 1981-82 is allowed in part and those for assessment years 1978-79 and 1979-80 are dismissed. Per K. R. Dixit, Judicial Member - I agree with the view of the learned brother (Accountant Member). However, regarding the assessee's claim for deduction of an amount of Rs. 2,20,00,000 in respect of back wages I would like to add a few lines. 2. The crucial issue is whether the deduction can be allowed on the basis of the Supreme Court decision which came in 1980. Now, basis of the Supreme Court decision which came in 1980. Now, first of all, that decision is not in the assessee's case. Therefore, it is not as if the Supreme Court has given a direction in the assessee's cases so as to give rise to the liability. If the decision is applicable in the assessee's case, the Industrial Tribunal would have to apply it and then the liability would arise. Even assuming for the sake of argument that the Supreme Court decision was applicable i....