Income Tax Appellate Tribunal - Delhi
Dy. Cit vs Central Government Employees Consumer ... on 20 January, 2006
ORDER
S.C. Tiwari, Accountant Member
1. This appeal has been filed by the revenue on 20-6-2002 against the order of the learned Commissioner (Appeals)-XXIII, New Delhi dated 5-3-2002 in the case of the assessee in relation to assessment order under Section 143(3) for assessment year 1998-99. In this appeal the revenue has taken the following ground of appeal:
On the facts and in the circumstances of the case, the Ld. Commissioner (Appeals) has erred in deleting the addition of Rs. 72,00,000 which was only a provision pending revision and there is no tenet under the Income Tax Act wherein unascertained liabilities could be allowed as a deduction.
2. Facts of the case leading to this ground of appeal briefly are that as per the audit report for the year ended 31-3-1998 the assessee had provided for a sum of Rs. 72 lakhs under the head 'Salaries and wages', pending revision. On further enquiry the assessing officer learnt that this liability had been provided for in relation to wage revision implemented with effect from 1-7-1997. However, the liability on account of wage revision had not been ascertained and had not accrued during the year ended 31-3-1998. The learned assessing officer, therefore, held that the sum of Rs. 72 lakhs provided for by the assessee was not an allowable expenditure for assessment year 1998-99.
3. During the course of appeal before the learned Commissioner (Appeals) the assessee submitted that in the meeting of the Board of Directors a decision was taken on 28-9-1998 that revision of salary be given with effect from 1-4-1997. This decision of the Board did not require approval of the Government because the assessee running Kendriya Bhandar, was an autonomous body. On these submissions the learned Commissioner (Appeals) decided the matter in following words :
I have considered the submission of the appellant and the reasoning of the assessing officer. There can be no doubt that if any wage revision had become due as per the 5th Pay Commission and the negotiated settlement with the Workers' Union, the appellant was required to pay the same. The payment could be accounted for either on mercantile basis that is when the liability to pay accrued or on cash basis when the actual payment was made. In this case the liability could have been claimed either in assessment year 1998-99 on mercantile basis or in the subsequent year on payment basis. The appellant has chosen to account for the liability on accrual basis. Since the appellant is following a mixed system of accounting as per the assessment order the provision of the liability on accrual basis A is accepted. Therefore, it is held that the addition of Rs. 72 lakhs made by the assessing officer by disallowing the provision for salary payment was not tenable. The addition of Rs. 72 lakhs is deleted.
4. Aggrieved by this order revenue is in appeal before us. During the course of hearing before us the learned D.R. argued that in this case the decision that had been taken earlier was to revise the pay and wages with effect from1-7-1999. However, subsequently the Board of Directors decided to effect pay revision from 1 -7-1997. The decision to revise pay with effect from 1 -7-1997 had not been taken till the end of the previous year under assessment i.e., on31-3-1998. That being so no liability had been incurred by the assessee nor any liability had accrued against the assessee in relation to revise pay as on 31-3-1998. Such liability accrued only after the end of the previous year under assessment. For that reason the assessee could not claim deduction of any amount by way of provisions for revised pay and wages scales for the assessment year 1998-99.
5. The learned A.R. argued that the employees of the assessee had been agitating for a revision of their pay and wages even during the accounting year under assessment. Then; was indication for revision of pay and the consideration of the matter had already started on or before 31-3-1998.Under these circumstances it could not be said that there was no accrual of liability during the financial year 1997-98. The liability had already accrued and it was quantified later on. The learned AR of the assessee argued that various decisions of the Board of Directors taken during the financial year 1998-99 until the date when the accounts of the assessee for the financial year 1997-98 were finalized, could be taken note of while working out income and expenditure of the assessee for the financial year 1997-98. In support of this contention the learned AR of the assessee placed strong reliance on Accounting Standard 4 from the Institute of Chartered Accountants of India. He further argued that in view of Government order S.O. 69(E) issued under the provisions of Section 145(2) E of the Act, the Accounting Standard issued by the Institute of Chartered Accountants of India was binding on assessing authorities and was required to be given effect to by us. The learned AR of the assessee argued that as per Accounting Standard 4, the assessee was required to take note of significant events occurring after the balance-sheet date if they brought about any change in the income and expenditure or assets and liabilities of the assessee for the period covered by the balance-sheet. The learned AR argued that it was the requirement of the Company Law also that the information regarding happening of such events is recorded in the accounts of the assessee.
6. In support of various contentions the learned A.R. placed reliance on the judgments in Calcutta Co. Ltd. v. CIT ; CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. ; CWT v. Standard Vacuum Oil Co. Ltd. ;Metal Box Co. of India Ltd. v. Their Workmen and Kalekhan Mohammed Hanif v. CIT .
7. We have carefully considered the rival submission. At the outset we may state that from a perusal of Government S.O. No. 69(E) dated 25-1-1996 we find that the Central Government notified Accounting Standard 1 and Accounting Standard 2. Both these Accounting Standards do not, in terms lay down that the effect of all future events should be given while preparing the accounts of the current period. It is totally incorrect to say that Accounting Standard 4 issued by the Institute of Chartered Accountants of India has been adopted by the Central Government under the provisions of Section 145(2) of Income Tax Act by S.O. 69(E) dated 25-1-1996. We do not see any assistance to the case of the assessee before us from the aforesaid S.O. 69(E). We may further state that we see hardly any assistance to the case of the assessee before us from the Accounting Standard issued by the Institute of Chartered Accountants of India because the facts of the case of the assessee are on an altogether different footing. In the case of the assessee the Board of Directors took a conscious decision that no revision of pay should be made for the period prior to 1-4-1999 as revealed by Minutes of the 65th meeting of the Board of Directors held on 28-9-1998 for Agenda item No. 6. However, in the meeting held on 28-9-1998 the Board decided that the scales of pay may be revised with effect from 1-7-1997 instead of 1 -7-1999 and the next wage revision would be due on 1-7-2002. Thus, the very decision to revise the pay scales came into existence after 31-3-1998 i.e., end of the previous year under assessment before us. We, therefore, do not see force in the argument of the assessee that the liability of payment of extra pay as per the revised pay scales had already accrued during the financial year 1997-98 but quantified or determined subsequently. The fact of the matter is that there was no liability to pay any extra amount by way of revised pay as on 31-3-1998 and such liability accrued for the first time during the financial year 1998-99 when a decision was taken to revise the pay scales with effect from 1-7-1997 instead of 1 -7-1999 as per the earlier decision. Coming now to the Accounting Standard 4 issued by the Institute of Chartered Accountants of India we find that while it lays down that events occurring after the balance-sheet date may be taken into consideration, the Accounting Standard 4 lays down certain parameters for the same. Clause 7.1 of the Accounting Standard reads as under :
7.1 The amount at which a contingency is stated in the financial statements is based on the information which is available at the date on which the financial statements are approved. Events occurring after the balance sheet date that indicate that an asset may have been impaired, or that a liability may have existed, at the balance sheet date are, therefore, taken into account in identifying contingencies and in determining the amounts at which such contingencies are included in financial statements.
Further Clause 8.3 of the Accounting Standards states as under:
Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. An example is the decline in market value of investments between the balance sheet date and the date on which the financial statements are approved. Ordinary fluctuations in market values do not normally relate to the condition of the investments at the balance sheet date, but reflect circumstances which have occurred in the following period.
Besides, Clause 13 of the Accounting Standards states as under :
Assets and liabilities should be adjusted for events occurring after the g balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance or existence or substratum of the enterprise) is not appropriate.
It is, thus, seen that events occurring after the balance-sheet should be indicative of a liability existing at the balance-sheet date, but noticed subsequently or the same should be relating to conditions existing at the balance-sheet date. The Accounting Standard 4 says that adjustment to assets and liabilities for events occurring after the balance sheet date would not be appropriate if such events do not relate to conditions existing at the balance-sheet date. By way of illustration it is stated that decline in the market value of investments subsequent to the balance-sheet would be an event not relating to conditions existing at the balance-sheet date. In the case of the assessee the condition existing at the balance-sheet date i.e. 31-3-1998 was, at best, the revision of pay being contemplated with effect from 1-7-1999. There was no indication otherwise of any revised pay scales payable by the assessee for the period 1-7-1997 to 31-3-1998.
8. As to the case laws relied upon by the learned A.R. of the assessee, the same pertains to the well known principles laid down by the Hon'ble Apex Court and other High Courts in India that if the liability is incurred, it has to be allowed as deduction in the year in which the liability is incurred even if the same is not quantified or is payable at a future date. But in the present case we have found that the liability itself had been incurred by the assessee only during the financial year 1998-99.
9. In view of the discussion in the foregoing paragraphs, we are of the view that the learned assessing officer was justified in adding back the sum of Rs. 72 lakhs provided for in the accounts of the assessee and the learned Commissioner (Appeals) erred in directing the allowance of the same to the assessee. We, therefore, reverse the order of the learned Commissioner (Appeals) on this point and restore the assessment order as made by the assessing officer.
10. In the result, this appeal filed by the revenue is allowed.