PRINCIPAL COMMISSIONER OF I T AJMER vs. ERSTWHILE RAJ GRAMIN BANK ALWAR

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 127 / 2016 Principal Commissioner Of I T Ajmer ----Appellant Versus Erstwhile Raj Gramin Bank, Alwar C/o. Baroda Rajasthan Kshetriya Gramin Bank, Ajmer. ----Respondent _____________________________________________________ For Appellant(s) : Ms. Parinitoo Jain For Respondent(s) : Mr. Dinesh Kumar _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 24/10/2017 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee. 2. This court while admitting the appeal on 07.09.2016 framed the following questions of law:- “1. Whether the Tribunal was legally justified in reversing the findings of the CIT(A) and allowing the deduction of Rs.140 lacs claimed on account of ad-hoc provision for pay revision of employees specifically when the Act provides for taxation of real income and not the book income? 2. Whether the Tribunal was legally justified in reversing the findings of the CIT(A) and allowing the deduction specifically when the liability to pay would accrue and become allowable as a deduction in the year when agreement/settlement is reached and signed by the bank with the employees and till then the provision is not allowable?”

(2 of 9) [ITA-127/2016] 3. Learned counsel for the appellant contended that the Tribunal has seriously committed an error in reversing the finding recorded by CIT(A) which reads as under:- “4.10 It is seen that the provision made by the bank for pay revision of employees in the books of accounts over a period of 2-3 years, will remain only a provision till the liability to pay the revised pay arises. The liability to pay would arise only when an agreement/settlement is reached by the bank with the employees. The agreement with the employees would entail determining the quantum of pay revision which is to be given to each employee and also the date from which the pay revision would become effective. Therefore, the liability would accrue only in the year in which such an agreement is signed by the bank. Before this period/year, any provision made by bank for this purpose would only remain a provision, which would be desirable on the grounds of prudence, conservatism and good governance. But this practice and the amount debited in the accounts on account of any provision is not allowable as a deduction under the Income tax Act. The case laws cited by the appellant are distinguishable on facts. 4.11 I place reliance on the following judgements, which were not placed before my ld. Predecessor while deciding the appeal on this issue in the preceding year. (i) Hon'ble Supreme Court has held in a landmark judgment in the case of M/s Shree Sajjan Mills Ltd. V/s CIT 156 ITR 585 that no deduction is to be allowed on account of any provision made for gratuity to meet out the obligation for payment of dues to the employees. It has further observed that "The expression "provision" has not been defined in the Act and is not used in any artificial sense but in its ordinary meaning. This is clear from the words (whether called as such or by any other name) occurring in the sub-section. According to Webster, "provision", in its ordinary sense, means "something provided for future use". The Principle that fiscal statutes should be strictly construed does not rule out the application of the principles of reasonable construction to give effect to the purpose or intention of any particular provision as apparent from the scheme of the Act,

(3 of 9) [ITA-127/2016] with the assistance of such external aids as are permissible under the law" (ii) Hon'ble Supreme Court has also laid down this principle in the case of M/s Gemini Cashew Sales Corporation 65 ITR 643 and observed that "Where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may oppropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression "expenditure laid out or expended whilly and exclusively" for the purpose of the business. Two cases illustrative of the principle may be noticed. It was held by the Madras High Court in CIT v. Indian Metal and Metallurgical Corporation that a provision made in the annual accounts maintained by an employer setting apart by way of a reserve to meet the liability, if any, to which the employer may become subject in the vent of retrenching workmen because of the necessity of retrenchment of the services of the staff, was not a liability in praesenti in the year of account, but was only a contingent liability which may arise on the happening of a particular contingency and was not allowable as a deduction in assessment of tax. This court in dealing with a case under the Wealth-tax Act in Standard Mills Co. Ltd. v. Commissioner of Wealth tax held that a liability under the award of the Industrial Court to pay gratuity to its imployees at certain rates on death while in service, or on voluntary retirement or resignation after fifteen years 'continuous service, or on termination of service after certain specified periods, but not if the employee was dismissed for dushonesty or misconduct, was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation: the liability did not exist in praesenti....." (iii) Hon'ble Bombay High Court has observed in the case of M/s Phalton Sugar Works Ltd. V/s CIT 162 ITR 622 that "The question before us is not whether an assessee, maintaining books of account on the mercantile system, is entitled to claim deduction in the year in which the liability arose notwithstanding the fact that he was disputing his liability, but whether it is open to such an assessee to claim the deduction not in the year in which the

(4 of 9) [ITA-127/2016] liability arose but in the year in which the dispute about it was finally adjudicated upon or settled. The judgment of the Supreme Court in Swadeshi Cotton and Flour Mills Privae Ltd.'s case [1964] 53 ITR 134 and the two judgments of the Allahabad High Court referred to above provide a pointer. In our view, where a liability arising out of a contractual obligation is disputed, the assessee is entitled, in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled, to claim a deduction in that behalf..." (iv) Hon'ble Supreme Court has clearly laid out the distinction between actual liability and a future liability and in the case of M/s Indian Mollasses Co. (P) Ltd. 37 ITR 66 has observed as under:- "The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, menas something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesentiand a liability de futurowhich, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. V. Stedeford. No doubt, that case was decided under the system of income tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contigent, cannot bear the character of expense till the liability becomes real. Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. 4.12 Thus, considering the essence of the proposition laid out by the Hon'ble Supreme Court,

(5 of 9) [ITA-127/2016] I hold that no deduction is allowable to the appellant on account of any adhoc provision made in the books of accounts on account of pay Revision of employees. This amount would accrue and become allowable as a deduction only in the year of agreement for pay revision having been signed by the Bank with the representative of employees. Any amount set aside by the bank every year for this purpose would only qualify as a measure of good governance and in accounting terms as a principle of conservatism. Therefore, the disallowance of Rs. 14 lacs made by the AO at 10% of the amount of Rs. 140 lacs debited in the accounts is enhanced to the extent of 100% of the amount claimed on this account.” 4. He contended that Tribunal while considering the matter observed as under:- “4.3. We have heard rival contentions and perused the material available on record. The ld. A/R of the assessee contended that in the immediately preceding assessment year 2009-10 the claim of the assessee in respect of provision of pay revision of employees was accepted by the ld. CIT (A) after taking into consideration the judgments of Hon’ble High Courts and the ITAT. The ld. D/R could not controvert the 7 ITA No. 169/JP/2015 A.Y. 2010-11. Erstwhile Rajasthan Gramin Bank Ltd vs. DCIT claim of the assessee. The AO has only disallowed Rs. 14.00 lacs i.e. 10% of the adhoc provision made by the appellant in the books of account. Against the said disallowance, the assessee was in appeal before ld. CIT (A). The ld. CIT (A) after issuing the show cause notice under section 251(2) of the IT Act, sought reply from the assessee as to why the provisional amount of Rs. 140 lacs made for pay revision be not disallowed. The assessee has filed the reply. We have gone through the reply. It is an undisputed fact that the pay revision of the employees is an on going process in respect of bank employees. The pay revision of Rs 140 lacs was made on the basis of pay revision due as on 1.11.2007 as 9th Bipartite Settlement. The settlement was effected between the concerned parties i.e. Management and Union of Employees in the financial year under consideration. On the basis of agreement, the payments were also made to the employees from the effective date. Therefore, the conclusion of ld. CIT (A) that there

(6 of 9) [ITA-127/2016] was no crystallized liability and no agreement was arrived at between the parties, is without any merit. The appellant is a Gramin Bank sponsored by Punjab National Bank and having the trapping of scheduled bank. The appellant is also governed by the instructions issued by the RBI in this regard. In our opinion, the employees are entitled to the revision of the pay not when the report of the commission or committee is submitted to the management, but the employees are entitled to the revised pay from the date when it is found to be due and payable. The submission of report or acceptance of the report has no basis to say that it was not due and will only become due when the pay revision is accepted by the employees. In our view, the employees 8 ITA No. 169/JP/2015 A.Y. 2010-11. Erstwhile Rajasthan Gramin Bank Ltd vs. DCIT are entitled to revised pay from the date it was due and payable by the employer. However, the quantum may vary, as in the present case, initially the revision was estimated @ 13.25%, however, later on it was crystallized @ 17.5%. The provision in the present case was made on the basis of 13.25%, however, later on it was required to be revised and in fact revised @ 17.5%. Therefore, we do not find any merit in the conclusion draw by ld. CIT (A).Thus the orders of ld. CIT (A) as well as AO are hereby set aside. We also find that the case of the assessee is covered by the decision of the ITAT Jaipur Bench in the matter of Jhalawar Kendriya Sahakari Bank Ltd. vs. ACIT in ITA No. 1032/JP/2011 dated 14.08.2014 whereby the claim of the assessee was allowed. Respectfully following the decision of Coordinate Bench of the ITAT, we set aside the orders of the lower authorities and allow the claim of the assessee by deleting the disallowance.” 4. Counsel for the respondent has relied upon the decision of Delhi High Court in case of Commissioner or Income Tax V/s Bharat Heavy Electrical (2013) 352 ITR 0088(Delhi) wherein it has been held as under:- “6. In this case, the Tribunal had noticed 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

(7 of 9) [ITA-127/2016] Commission of government employees, previous Pay Commission's reports of public sector employees, union demands and other relevant factors. The Tribunal also held that with the expiry of one wage settlement or ITA Nos.278, 807, 1578 & 312/2010 Page 5 agreement, invariably, there is a time lag when another fresh wage revision agreement is negotiated and entered. The deduction claimed for that period cannot be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer. In this case, BHEL had the benefit of past experience of such pay revisions. Its liability could not be characterized as contingent but was in fact ascertained; the quantification, however, had not happened.” 5. Counsel for the respondent has also relied upon the decision of Kerala High Court in case of C. N. Ramachandran Nair & T. R. Ramachandran Nair, JJ. In I. T. Appeal No. 216/2001 219 CTR 0147 wherein it has been held as under:- 2. We have heard learned standing counsel appearing for the Revenue and Shri Baiachandran, learned senior counsel appearing for the respondent assessee. Learned standing counsel referred to the decision of the Calcutta High Court in CIT vs. Teesta Valley Co. Ltd. (1991) 187 ITR 657 (Cal) and the decision of the Bombay High Court in Tyresoles Goa (P) ltd vs. CIT (1992) 101 CTR(Bom)349 : (1992) 193 ITR 649 (Bom), 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 Bharat Earth Movers Vs. CIT(2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC), the decision of the Rajasthan High Court in CIT vs. Premier Vegetable Products (1996) 133CTR (Raj) 372 : (1997) 227 ITR 931 (Raj) and the decision of the Bombay High Court in CIT Vs. United Motors (India) Ltd. (1990) 181 ITR 347 (Bom), and contended that liability for increased wages, though ascertained and discharged in the subsequent year being liability of the previous year is an prevailing between the management and the employees expired on 31st July, 1992,i.e. during the previous year. Therefore, the employees were entitled to wage revision from 1st August, 1992 onwards. It is quite normal and particularly in the case of Government Companies, wage settlement involves

(8 of 9) [ITA-127/2016] 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 expection that the employees continue to work without any demand for immediate increase of wages after the expiry of the existing settlement. 3. Even though learned standing counsel for the Revenue contended that contractual 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. w.e.f. 1st August, 1992. Therefore, the liability for wage increase really accrued for the respondent assessee w.e.f. 1st August, 1992. The assessee is entitled to claim 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 of the next years. Even though the other two decisions cited by the assessee are not directly on the point, the principles laid down therein are applicable to be facts of the 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 account followed by the assessee. 6. We have heard both the parties. 7. Taking into consideration the observations made by the Tribunal in Paragraph 4.3 and the fact that decision which is referred by the Tribunal has gone on low tax effect, in our considered opinion in view of the decision of Delhi High Court and

(9 of 9) [ITA-127/2016] Kerala High Court(Supra), the view taken by the Tribunal is just and proper. 8. The issue is answered in favour of the assessee against the department. 9. The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S.JHAVERI),J. B.M.G/Gourav/49