THE CENTRAL CO-OPERATIVE BANK LTD.,BHILWARA vs. DCIT, BHILWARA

At the outset, the ld. AR submitted that the assessee does not wish to press Ground No. 3 of its appeal. Hence, the same is dismissed as not pressed.

Regarding Ground No. 1 and 2, the ld. AR submitted that the Registrar Co-operative Societies, Jaipur vide order no. 46(5)/SAVIRA/Bank-2/2009 part – 2 dated 10.02.2012 has directed the assessee to apply terms & conditions for staff/officers of the Central Co- operative bank Ltd., Bhilwara as per 14th pay agreement execution. Accordingly, it was agreed to pay arrears w.e.f. 01.01.2009 & the detail of such payments / provisions are as under:-

It was submitted that out of above provisions pertaining to period F.Y. 2011-12 and earlier years w.e.f. 01.01.2009, an amount of Rs. 1,99,91,560/- for salary arrears, Rs. 9,07,239/- for surrender leave payment and Bonus & ex-gratia of Rs. 7,41,300/- have been paid as per vouchers enclosed. The A.O. has just denied the claim of assessee for such provisions for the reason that the agreement letter is signed by the concerned management and staff on 16.04.2012 & the actual payments are not made by the assessee in the A.Y. 2012-13.

It was submitted that no care for following facts & legal aspects has been considered. It was submitted that the assessee though follows “Mercantile System of Accounting” where the income & expenses accrued / due theory applies. But it is a matter of “Determination & Crystallization of Liability” as “Going Concern” of business is more important in “Business Expediency” even if such “Mercantile Accounting” follows. In support, reliance was placed on Delhi SMCC Construction India Ltd. V/s ACIT (2013) 38 taxman.com 146 (Del) where it was held that expenses of earlier years allowable in current year if crystallized during the year and the decision of Hon’ble Rajasthan High Court in case of M/s Chambel Fertilizers And Chemicals Ltd. V/s JCIT Range-2, Kota (D.B. Appeal No. 52/2018 dated 31.07.2018) where it was held that to understand when the liability “Crystallized”, when the liability is “Determined” is more important.

It was submitted that to understand the legal situation in the present facts, the following documents / government orders need to be considered:

It was submitted that according to all such sanctions, documents, the 14th Pay commission was applicable after the conclusion of 13th Pay Commission and accordingly, the arrears were to be paid w.e.f. 01.01.2009. Since the liability though pertains to prior period but “Crystallized” & “Determined” during the year hence it is an ascertained liability for the year & has to be allowed in the year irrespective of year of payment. In the instant case, it was submitted that it is clear that the liability of such payments of arrears have arisen in F.Y. 2011-12 (A.Y. 2012-13) & all the facts were before the A.O. / Ld. CIT(A) to deduce the facts.

It was submitted that the Ld. CIT(A) has considered only such part which pertains to the year under consideration & has allowed a 5 The Central Co-operative Bank Ltd. vs. DCIT, Bhilwara deduction of Rs. 67,13,839/- out of total addition of Rs. 1,70,50,000/- made by the AO. It was submitted that the addition so sustained by the ld CIT(A) amounting to Rs 1,03,36,161/- may thus be set-aside and necessary relief be provided to the assessee.

Per contra, the ld. CIT/DR drawn our reference to the findings of the Assessing Officer and submitted that no doubt, the Registrar, Co- operative Society has directed the assessee to fulfill the wage compromise agreement. However, the agreement between the labour and the assessee management was only signed on 16.04.2012 and even no payments were made by the assessee during the financial year relevant to assessment year 2012-13. It was accordingly submitted that it was a case of provisions towards arrear of salaries which has not crystallized during the year under consideration and has been rightly disallowed by the Assessing Officer.

It was further submitted that the ld. CIT(A) on further examination has held that the amount of Rs. 67,13,839/- pertains to the impugned assessment year and the same was allowed by him and the balance addition of Rs. 1,03,36,161/- was confirmed. It was accordingly submitted that there is no infirmity in the order so passed by the ld. CIT(A) and therefore, the grounds taken by the assessee be dismissed.

Before we proceed to examine the rival contentions, it would be appropriate to refer to the findings of the ld. CIT(A) which are contained at para 4.1, 4.2 and 4.3 of his order which reads as under:-

We have heard the rival contentions and perused the material available on record. It is noted that out of total provision for arrears of salary of Rs. 1,99,91,560/-, the ld CIT(A) has allowed the claim towards provision for leave salary of Rs. 67,13,839/- for the reason that the same is quantified and crystallized liability pertaining to A.Y 2012-13. The Revenue is not in appeal against allowability of said provision of Rs 67,13,839/- and the same has thus attained finality.

The limited issue therefore for consideration before us is allowability of remaining provision towards arrears of salary amounting to Rs 1,03,36,161/- and for that, what is relevant to determine is what is the relevant point of time the liability of the assessee towards arrears of salary has actually crystallized and not the year to which such arrears of salary pertains. Where the liability has crystallized during the financial year relevant to impugned assessment year, it shall be allowed in the hands of the assessee irrespective of the year to which it pertains. However, where the liability has crystallized during the subsequent financial year, it shall be eligible for allowance in the subsequent assessment year even though a part of it pertains to the year under consideration. The principle of crystallization of liability is inherent in the mercantile system of accounting and has been well

In the instant case, if we look at the sequence of events, we find that there are directions issued by Registrar, co-operative societies on 10.02.2012 to implement 14th pay commission recommendations, thereafter, following such directions, the Board of Directors of the assessee co-operative bank passed a resolution on 11.04.2012 for implementing the 14th pay commission recommendations, thereafter, an agreement has been executed between the assessee co-operative bank and its employees and staff members on 16.04.2012 towards implementation of the 14th pay commission recommendations and finally, major payments towards arrears of salary have happened during November 2012. We therefore find that the liability of the assessee co- operative bank to implement 14th pay commission recommendation arose on adoption of resolution at its meeting of the Board of Directors read along with execution of agreement with its employees and staff members. Prior to these two significant events which happened during the financial year 2012-13, it cannot be said that the assessee cooperative bank has decided to implement and enforce 14th pay commission recommendation in respect of its employees and on same analogy, prior to these two significant events, even the employees were not having any legally enforceable claim to implement 14th pay commission recommendation against the assessee co-operative bank.

It may be that these two significant events have happened within a month of close of the current financial year 2011-12 and being significant in nature and happened prior to finalization and audit of the financial statements for the current financial year, the assessee co- operative bank by way of prudence and as may be advised by its auditors decided to provide for such liability in the financial statements, however, the same doesn’t necessary meant and understood to mean that in all such cases, where liabilities and provisions are provided basis significant event subsequent to close of the financial year will result in crystallization of liability and allowable during the same financial year. The AO is well within his jurisdiction to examine all such claims and the assessee is required to justify such claims and demonstrate with reasonable verifiable evidence that such liability has crystallized during the year under consideration.

In light of aforesaid discussion and in the entirety of facts and circumstances of the case, the grounds so taken by the assessee co-

Ground No. 4 is regarding charging of interest u/s 234B, 234C & 234D. No specific argument has been taken before us and in any case, charging of interest being consequential in nature, the ground does not require any separate adjudication.