THE COMMISSIONER OF INCOME TAX, TRICHUR vs. M/S.KERALA STATE FINANCIAL ENTERPRISES L

We have heard learned Standing Counsel appearing for the Revenue and Shri P. Balachandran, learned Senior counsel appearing for the respondent assessee. Learned Standing Counsel referred to the decision of the Calcutta High Court in Commissioner of Income Tax v. Teesta Valley Co. Ltd. (187 I.T.R. 657) and the decision of the Bombay High Court in Tyresoles Goa Pvt. Ltd. v. Commissioner of Income Tax (193 ITR 649) and contended that the liability in this case is contingent in nature and therefore not an admissible deduction. The assessee on the other hand, relied on the decision of the Supreme Court in Bharath Earth Movers v. Commissioner of Income Tax (245 ITR 428), the decision of the Rajasthan High Court in C.I.T. v. Premier Vegetable Products ( 227 ITR 931) and the decision of the Bombay High Court in United Motors India Ltd. v. Commissioner of Income Tax (181 ITR 347) and contended that liability for increased wages, though ascertained and discharged in the subsequent year being liability of the previous year is an allowable deduction. It is the -3- admitted fact that wage settlement that was prevailing between the management and the employees expired on 31.7.1992, i.e. during the previous year. Therefore, the employees were entitled to wage revision from 1.8.1992 onwards. It is quite normal and particularly in the case of Government companies, wage settlement involves protracted negotiations taking time and even though agreement is entered later, it always takes effect from the date of expiry of the previous settlement. In fact, it is only on this understanding and expectation the employees continue to work without any demand for immediate increase of wages after the expiry of the existing settlement.

Even though learned Standing Counsel for the Revenue contended that contractual liability arises only on the date of signing the agreement, we are unable to accept this argument in this case. In the normal course, an agreement called settlement as increase in wages takes effect from the date of expiry of the previous settlement and this case is no exception to it. What is important is not the date of signing the agreement nor the later approval granted by the Government, but the effective date of commencement of the wage revision under the agreement. There is no dispute that the wage increase was granted as a continuous measure from the date of expiry of the previous settlement, i.e. with effect from 1.8.1992. Therefore, the liability for wage increase really accrued for the respondent- assessee with effect from 1.8.1992. The assessee is entitled to claim -4- deduction of such wage increase attributable upto the end of the previous year, no matter exact amount was ascertained and payment made later. In the decision of the Supreme Court referred to above, it is made very clear that what is to be considered is whether the liability is attributable to the previous year or not and it is immaterial if the actual liability was ascertained and settled only in the next year. Even though the other two decisions cited by the assessee are not directly on the point, the principles laid down therein are applicable to the facts of this case. It is clear from the orders that by the time 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. (C.N. Ramachandran Nair, Judge.) (T.R. Ramachandran Nair, Judge.)