ALLAHABAD BANK,KOLKATA vs. THE PCIT, KOLKATA-2, KOLKATA, KOLKATA

That, on facts as well as on law, the Learned Principal Commissioner of Income Tax, Kol - 2 has erred in passing the impugned order under section 263 and setting aside the assessment order passed by the Learned Assessing Officer under section 143(3) ignoring the submissions made by the appellant in response to the notice under section 263.

Subsequently, the assessee has also raised following additional ground of appeal:- "That in the facts and circumstances of the appellant and also on law the Learned Principal Commissioner of Income Tax, Kol - 2 has erred in first concluding that provision for liability of wage arrears amounting to Rs. 153 crores is not allowable and is required to be added back and thereafter directing the Learned Assessing Officer to examine the issue thereby making it impossible for the Learned Assessing Officer to apply his mind independently and judiciously".

The Prl.CIT on an examination of assessment records found that the Assessee has made a provision of Rs.122,00,00,000/- during F.Y 2008-09 added the same to the total income of Assesee for A.Y 2009-10 and deducted the same as written back for A.Y 2010-11. According to Prl.CIT, the provision made and written back thereon is not allowable as a deduction, accordingly, exercising jurisdiction u/sec 263 of the Act issued notice to the assessee. In response to which, the Assessee filed copy of extract of 9th Bipartite Settlement dt:27- 04-2010 and copies of vouchers issued by the Bank showing payment of wages. Considering the said documents, the Prl. CIT was of the opinion that the AO did not make any enquires and did not examine the allowability of deduction as shown in the computation of income. Thereby, the Prl.CIT set aside the assessment order dt:28-03-2013 for A.Y 2010-11 to the extent the claim as discussed above and directed the AO to examine the issue with reference to the documents submitted in proceedings initiated u/s.263 of the Act.

Aggrieved by the order of Prl.CIT, in this appeal the learned AR submits that pending finalisation of wage revision a provision was made during financial year 2009-10 and referred to the point 17.4 to substantiate the same placed at page number 139 of annual report book and also referred to the page number 40 paper book and submitted a memo was issued by the Chief manager to all AGMs to create a provision towards wage/salary revision in view of the bipartite settlement. The learned AR also drew our attention to the page number 25 of the paper book to show the breakup of provision made in view of the wage areas settlement. The learned AR further submits that the said issue was covered by the order of Tribunal in assessee’s own case for AY’s 2005 – 06 and 06 – 07 which is placed at page number 100 of paper book.

The learned DR submits that the Prl.CIT has given a direction only to the AO for examination of such documents which were produced in proceedings initiated u/s. 263 of the Act. Further he submits that the respondent revenue contesting the order of Tribunal as relied on by the learned AR as it was delivered based on some facts. The learned DR further argued that the assessee claimed a provision involving of these 122 crores in its computation of income and the AO did not examine the issue relating to 908 crores and the same was not referred at .17.4 of annual report. The learned DR submits that the new agreement was said to have entered in 2005 and there is a gap of 5 years from 2005 – 06 and 2010–11 and the order of Prl. CIT is valid wherein there was only a direction to the AO to conduct an enquiry and it is a Limited enquiry.

The Ld.AR submits that in reply to the arguments of Ld.DR, the Assessee by inadvertent mistake added Rs.122,00,00,000/- to its income in A.Y.2009-10 and to that effect the Assessee filed an additional ground seeking deduction of such amount before the Tribunal. Allahabad Bank 4

Heard rival submissions and perused the material evidence on record. The Tribunal for A.Y 2005-06 & 06-07 in Assessee’s own case held that the wage revision at 13% for the year under consideration is a liability and a provision can be made with reasonable certainty. The relevant portion of which reproduced herein below:

Now we take up the Revenue’s appeal for A.Y. 2005-06 being Grounds No. 1 & 2 of which involve a common issue relating to the deletion by the ld. CIT(Appeals) of the addition of Rs.138.83 crores .made by the Assessing Officer on account of provision for salary arrears.

In the return of income filed for the year under consideration, a deduction of Rs.138.83 crores was claimed by the assessee on account of provision for salary arrears. In this connection, it was submitted on behalf of the assessee before the Assessing Officer that the last wage agreement entered into with the employees had already expired on 31.10.2002 and the revision of salary and wages of Officers and workmen was due from 01.11.2002. The negotiation for revision between the Bank and the Union of Staff and Officers’ Association was in progress during the year under consideration and as per advice of Indian Banks’ Association, an understanding was reached with the Workmen Union and Officers’ Associations on wage revision. It was submitted that even though the final agreement was not executed during the year under consideration, provision of Rs.138.83 crores was made in the accounts based estimate of such liability made by the Management and duly verified by the statutory auditors. These submissions made by the assessee in support of its claim for deduction on account of provision for salary arrears were not found acceptable by the Assessing Officer. According to him, since the expenditure on account of salary arrears was not quantified, the provision made for the same was in the nature of unascertained liability and the assessee was not entitled to claim deduction for the same. Accordingly, he disallowed the deduction claimed by the assessee on account of provision for salary arrears.

The disallowance made by the Assessing Officer on account of its claim for deduction towards provision for salary arrears was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submission made by the assessee as well as the material available on record, the ld. CIT(Appeals) deleted the said disallowance for the following reasons given in his impugned order:- Allahabad Bank 5 “I have gone through the submissions of the appellant and also the order of the A.O. According to the Accounting standard 29 issued by the ICAI "provision" is a liability which can be measured only by using a substantial degree of estimation. A "liability" is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. According to paragraph 14 of (AS) 29, a provision should be recognized when: A) An enterprise has a present obligation as a result of past event B) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and C) A reliable estimate can be made out of the obligation. If the above conditions are made, provision should be recognized in the financial statements. It is an accepted principle that the salary/wage accrued daily, weekly, monthly as per the contract of appointment. The liability of the bank to pay salary and wages at the revised rates commenced from the date of expiry of the agreement. The liability to compensate the employees for the services rendered is an existing liability. There is an every probability of outflow of resources on account of salary increase. The basis of estimate made by the bank is also reliable and was not disputed by the A.O. Recently the Hon’ble Apex Court in the case of Rotork Controls India (P) Limited –vs.- CIT (2009) 180 Taxman 422 (SC) has held that a provision to qualify for recognition and deduction, there must be a present obligation arising from past event, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible. This decision was rendered by the Honorable Supreme Court in connection with the provision made by the assessee for obligation under warranty contraction careful analysis of this decision, it can be seen that the Court has taken into cognizance AS 29 of ICAI in deciding whether a provision for expenditure is allowable or not. Following the above decision of the Supreme court, the ITAT, Nagpur bench in the case of Western Coalfields limited v ACIT, 2009-TIOL-589-ITAT-NAGPUR has allowed deduction in respect of provision for incremental wages made on estimated basis on account of pending National Coal Wage agreement -IV for A.Y. 2002-2003. In my opinion provision for wage arrears made by the bank in the financial year 2004-2005 satisfies all the conditions prescribed in AS 29. Hence the A.O is directed to allow the provision for wage arrears and this ground of appeal is allowed”. Allahabad Bank 6

The ld. D.R. submitted that there was no basis given by the assesese on which the amount of salary arrears payable to the staff and Officers’ could reasonably be quantified and in the absence of the same as well as any specific event that occurred during the year under consideration showing that the liability on account of salary arrears had crystallized, the provision made by the assesese for salary arrears represented unascertained liability which was not allowable as deduction, as rightly held by the Assessing Officer. He contended that the ld. CIT(Appeals), however, overlooked these relevant aspects highlighted by the Assessing Officer and allowed the claim of the assessee by relying on the decisions of the Hon’ble Supreme Court in the case of Bharat Earth Movers (supra) and Rotork Controls India (P) Limited (supra), which are distinguishable on facts. He contended that in both these cases decided by the Hon’ble Supreme Court, the provision was made for the present liability, whereas in the case of the assessee, the liability on account of salary arrears was not pertaining to the year under consideration alone, but the same pertained to A.Y. 2003-04 and 2004-05 also. He has submitted that the decision of Hyderabad Bench of ITAT in the case of Andhra Pradesh Gramin Vikas Bank (ITA Nos. 51 & 88/HYD/2015 dated 10.04.2015), on the other hand, is directly applicable to the facts of the present case and strongly relied on the same in support of the Revenue’s case on this issue.

The ld. counsel for the assessee, on the other hand, submitted that the salary and wage revision was due from 01.11.2002 and it, therefore, cannot be disputed that the liability on account of such wage revision had already accrued. He submitted that the Bi-partite talks between Indian Banks Associations and Employees’ Union were almost at the final stage as on 31.03.2005 and on the basis of negotiations that had taken place and an understanding that had reached, the liability was estimated by the assessee at 13% on account of wage arrears. He contended that the fact that as per the agreement finally entered into in May, 2005, a wage revision of 13.25% was agreed is sufficient to show that the provision made by the assessee at 13% represented a liability, which could be reasonably estimated. He submitted that a similar issue involved in the case of ABP Company Limited –vs.- ACIT has been decided by the Coordinate Bench of this Tribunal in favour of the assesese in similar facts and circumstances vide its order reported in 78 TTJ (CAL) 158.

We have considered the rival submissions and also perused the relevant material available on record. It is observed that the Salary and Wage Revision Agreement entered into by the assessee-Bank with its Staff and Officers earlier had already expired on 31.10.2002 and, therefore, the new revision was due right from 01.11.2002. The liability on account of salary arrears thus had already accrued and the issue that is required to be considered is whether it was Allahabad Bank 7 possible to ascertain or quantify the same with reasonable certainty in the year under consideration. In this regard, it is observed that the negotiations between Indian Banks Association and Employees’ Union had already taken place and the final understanding was almost reached during the year under consideration, which is evident from the fact that the final agreement for revision was entered into in the month of May, 2005 itself, i.e. immediately after the end of the year under consideration. The fact that the revision was finally settled with 13.25% in May, 2005 also goes to show that the provision made by the assessee for such revision at 13% in the year under consideration was a liability, which could be ascertained with reasonable certainty.

In support of the Revenue’s case on this issue, the ld. D.R. has relied on the decision of the Hyderabad Bench of this Tribunal in the case of Andhra Pradesh Gramin Vikas Bank. It is, however, observed that the same is distinguishable on facts, inasmuch as, the liability on account of salary arrears in the said case had arisen as a result of proceedings held on 24.07.2010, i.e. much later than the closure of the relevant year under consideration and this being the undisputed position, the Tribunal held that the said liability having neither arisen nor discharged during the relevant year was not allowable as deduction.

In the case of IBP Company Limited (supra), the fact situation involved, on the other hand, was similar to the case of the assessee inasmuch as, the Pay Scale and other benefits of the Officers were due for revision w.e.f. 1 st August, 1997 and the exercise to revise the same was already in progress. The basis of such revision was ultimately accepted by the Government and it was on this basis that the assessee- company had worked out the liability in respect of the same. In these facts and circumstances, it was held by the Coordinate Bench of this Tribunal that the provision for increase in salaries and wages made by the assessee on the basis of Bureau of Public Enterprise Guidelines in assessment year 1989-90 was not for contingent liability and the reasonable provision for such liability was required to be taken into account for arriving at the commercial profit. In arriving at this conclusion, the Tribunal relied on the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Limited –vs.- CIT reported in 245 ITR 428, wherein it was held by the Hon’ble Apex Court that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. It was held that what should be certain is the incurring of the liability which should be capable of being estimated with reasonable certainty though the actual quantification may not be possible. It was held that if these requirements are satisfied, the liability is not a contingent one but it is a liability in Allahabad Bank 8 presenti. In our opinion, the ratio of these judicial pronouncements is clearly applicable to the facts of the present case and respectfully following the same, we uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for deduction on account of provision for salary arrears. Grounds No. 1 & 2 of the Revenue’s appeal are accordingly dismissed.

The co-ordinate Bench above, while giving relief to the Assessee considered the final agreement for revision of wages said to have entered between Indian Banks Association and Employees’ Union and held a provision is maintainable with reasonable certainty. The Coordinate Bench also, by relying on the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Limited –vs.- CIT reported in 245 ITR 428, wherein it was held by the Hon’ble Apex Court that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date and held that what should be certain is the incurring of the liability which should be capable of being estimated with reasonable certainty though the actual quantification may not be possible, thereby the Co-ordinate Bench held that the Assessee is entitled to claim the deduction against a provision made for such wage revision.

In the light of the above decision which drew support from the decision of Hon’ble Supreme Court in the case of Bharat Earth Movers Limited –vs.- CIT, we are of the view, that the Assessee is entitled to claim deduction of provision of Rs.122,00,00,000/- in the year under consideration, but, however, taking into consideration, the documents as filed by the Assessee in the proceedings u/s. 263 wherein the said documents came up for scrutiny for the first time and it is also Allahabad Bank 9 noticed, as rightly pointed out by the Prl.CIT that nothing was examined by the AO on such provision from the assessment order, in view of the same, we remand the case to the file of AO for fresh consideration keeping in view of the documents i.e copy of extract of 9th Bipartite Settlement dt:27-04-2010 and copies of vouchers issued by the Bank showing payment of wages and to pass such order as indicated above, therefore, the order of Prl.CIT is justified and grounds raised by the Assessee are allowed for statistical purposes.

In the result, the appeal filed by the assessee is allowed for statistical purposes.