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Income Tax Appellate Tribunal, MUMBAI BENCHES “D ” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2007-08. The appeal is directed against the order u/s 263 of the Income Tax Act 1961, (the ‘Act’) of the Commissioner of Income Tax (CIT)-LTU, Mumbai .
The sole ground raised by the assessee in this appeal is that the CIT erred in holding that the assessment order dated 30.11.2009 passed by the AO was erroneous and prejudicial to the interest of revenue and thereby passing an order u/s 263 of the Act. Without prejudice to the above, it is stated that the CIT has erred in directing the AO to make an addition of Rs. 14.40 crores being the provision in respect of revised salaries / wages to the total income of the assessee on the ground that it was a provision for a contingent liability.
The CIT on verification of the assessment records noticed that as per Schedule XVI being notes forming parts of accounts on ‘contingent liabilities not provided for’ (para 13 being the disclosure as per AS 29 on provisions, contingent assets), Rs. 14.40 crores have been provided for. The note below table 1 in para 13 mentions that these provisions are made on estimated basis in respect of certain liabilities expected out of renewal of contract post their expiry during the year. In response to the show-cause notice u/s 263, the assessee filed a reply vide letter dated 14.03.2012 which has been extracted by the CIT at page 2 of the order u/s 263 dated 16.03.2012 passed by him. The CIT concluded that the provision of Rs. 14.40 crores made by the assessee on estimated basis in respect of liability towards salaries and wages is not an ascertained liability. Such contingent provisions are not allowable expenses. Therefore, he set aside the order passed by the AO with a direction to modify it by adding the amount of Rs. 14.40 crores to the total income of the assesse.
The learned counsels of the assessee submit that pending approvals from the Govt. of India in respect of the pay revision as on 31.03.2007, the assessee-company made a provision of Rs. 14.40 crores on an estimated basis for the revised staff salaries and workers’ wages for the period 1.1. 2007 to 31.03.2007. Since the assessee could estimate the quantum of such enhanced liability, this estimate was arrived at by increasing the current salaries / wages by a standard rate of 12%. Thus it is submitted that the amount in question pertaining to the year under consideration was correctly provided for and claimed as a deduction while computing its total income for the year under consideration. The ld. counsels of the assessee placed reliance on the decision in CIT vs. Kerala State Financial Enterprise Ltd. (2008) 219 CTR 147 (Kerala); Western Coalfields Ltd. vs ACIT (2009) 124 TTJ 659; IBP Co. Ltd. vs ACIT (2003) 129 Taxman 26 (Kolkata) (MAG); TATA Communications Ltd. vs. ACIT (2013) 151 TTJ (Mum - Trib); GAIL India Ltd. vs. CIT (2016) 69 taxmann.com 50 (Delhi – Trib), NMDC Ltd. vs. JCIT (2006) 98 ITD 278 (Hyd), Neyveli Lignite Corporation Ltd. vs. ACIT (2005) 93 TTJ (Chennai) 685; Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC).
The learned DR supported the order passed by the CIT. Reliance was placed by him in M/s. Crompton Greaves vs. CIT (ITA No. 1994/Mum/2013 & ITA No. 2836/Mum/2014).
We have heard the rival submissions and perused the material on record. The assessee is a Govt. company engaged in the business of manufacturing and marketing of fertilizers and chemical products. As per Schedule XVI being notes forming part of accounts on ‘’contingent liabilities not provided for’’, (para 13 being disclosure as per AS 29 on provisions, contingent assets), Rs. 14.40 crores have been provided for. The amount involved is Rs. 14.40 crores being the provisions in respect of revised salaries / wages. We shall begin with the decisions relied on by the ld. counsels of the assessee.
In the case of Kerala State Financial Enterprise Ltd (supra), the assessee’s wage settlement with its employees had expired on 31.07.1992. Negotiations for wage settlement were going on in previous year and actual agreement approving wage increase w.e.f. 01.08.1992 was signed on 09.06.1993 which was approved by Government by order dated 20.10.1993. Assessee claimed increased wages payable to its employees as a deduction in return filed for the A.Y. 1993-94. The AO disallowed the claim on the ground that liability arose under agreement approved by Government in succeeding year. The Tribunal however allowed assessee’s claim. The Hon'ble High Court held that in a case of instant nature, what is important is not date of signing agreement nor later approval granted by Government, but effective date of commencement of wage revision under agreement. The Hon'ble High Court also held that since there was no dispute that wage increase was granted as a continuous nature from date of expiry of previous settlement, i.e. w.e.f. 01.08.1992, the assessee was entitled to claim deduction of such wage increase attributable up to end of relevant previous year, no matter exact amount was ascertained and paid later on.
In the case of Western Coalfields Ltd. (supra), it has been held: “Provision made by the assessee-company for payment of incremental wages under National Coal Wage Agreement represents an accrued liability which is to be quantified and discharged at a future date as the services had been already rendered by the concerned employees, the earlier agreement had expired and negotiations for the revision had started, and it cannot be treated as a contingent liability merely because the directions for making such provision were received after the closure of the financial year.”
In the case of IBP Co. Ltd.(supra), it has been held that in the instant case in principle a decision was already in existence to increase the salaries, in accordance with certain guidelines, and the decision was only required to be taken for formal approval by the Government. When the Government of India, absolute owner of the assessee-company decided to increase the salaries with effect from a certain date and in accordance with certain norms, liability of such increase had definitely arisen. It could not be said to be a contingent liability. The provision for liability was worked out on the basis of BPE guidelines and therefore, it could not be devoid of legally sustainable basis also. Thus it was held that in view of the above, the authorities below erred in declining deduction on account of provision for increase in salaries and wages.
In TATA Communications Ltd. (supra), it has been held that where the assessee was a public sector undertaking, claim of provision of salary on the basis of impending pay revision (in view of pay commission report) should be allowed.
A similar view has been taken in GAIL India Ltd. (supra), NMDC Ltd. (supra), Neyveli Lignite Corporation Ltd. (supra).
The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) has held that the phrase ‘’prejudicial to the revenue’’ must be read in conjunction with an erroneous order.
6.1 The learned DR relied on the order of the in M/s. Crompton Greaves (supra) wherein it has been held that in the absence of enquiry, examination and verification of the claim of the assessee- company for deduction of provisions for warranty, sales tax and excise duty and liquidated damages amounting to Rs. 17.72 crores, the CIT has rightly passed the order u/s 263 setting aside the assessment order dated 28.12.2010 passed u/s 143(3) of the Act as erroneous insofar as prejudicial to the interest of revenue.
6.2 We find that in the instant case the issue was whether the provision in respect of revised salaries / wages amounting to Rs. 14.40 crores was contingent liability or ascertained liability. It is not a question of provisions for warranty, sales tax and excise duty and liquidated damages as in the case of M/s Crompton Greaves (supra) relied on by the learned DR. 6.3 We find that in the instant case, the salaries / wages are fixed by the Govt. of India after considering the recommendations of Pay Commission and are generally revised after a period of 10 years. The previous pay revision was in effect for a period of 10 years i.e. till 31.12.2006 and though the next pay revision had become due on 01.01.2007, the Committee announced the revised pay guidelines only on 26.11.2008. Therefore it was the duty of the assessee- company to provide for the wage / salary revision vis-a-vis its employees for the period 01.01.2007 to 31.03.2007. This has to be done mandatorily as per mercantile system of accounting. We may refer to the notification u/s 145(2) prescribing accounting standards to be followed by all assessees following mercantile system of company. As per it “Provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information’’.
We also find that the instant case is squarely covered by the decisions mentioned at para 6 here-in- above.
6.4 In view of the forgoing reasons, the order of the CIT passed u/s 263 is set aside and the order of the AO is restored.
7 In the result the appeal filed by the assessee is allowed.
Order pronounced in the open court on 21/12/2016