Bombay High Court
Commissioner Of Income-Tax vs United Motors (India) Ltd. on 12 September, 1989
Equivalent citations: [1990]181ITR347(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT S.P. Bharucha, J.
1. This reference under section 256(1) of the Income-tax Act, 1961, is made at the instance of the Revenue. The only question that is referred reads thus :
"Whether, on the facts and in the circumstances of the case, the amount of Rs. 76,680 was an allowable revenue deduction in the assessment of the assessee for the accounting period relevant to the assessment year 1972-73 ?"
2. The reference pertains to the assessment year 1972-73 for which the previous year ended on December 31, 1971.
3. The assessee is an agent for the sale of Tata motor vehicles. It also carries on business in repairing motor vehicles. The terms and conditions of service of workmen employed by the assessee were governed by awards. On October 7, 1970, the trade union representing the workmen of the assessee gave notice to the assessee terminating the awards with effect from two months thereafter. The assessee's board of directors noted this at a meeting held on November 25, 1970. A provision was made for Rs. 1,00,000, in view of the impending liability on account of the change of service considerations of the assessee's workmen, in the accounts for the year under consideration. Negotiations between the assessee and the trade union resulted in settlements dated May 2 and October 6, 1972. Pursuant thereto, the assessee paid the sum of Rs. 28,600 to its workmen in the months of May and June, 1972, on account of salary, etc. Later, another ad hoc payment of Rs. 48,000 was made to the workmen pursuant to the said settlements. The assessee claimed the deduction of the aggregate sum of Rs. 76,680 in its assessment for the year under consideration. The Income-tax Officer rejected the claim on the ground that the payment in the aggregate sum of Rs. 76,680 was made after the close of the concerned accounting year and that the liability in that behalf had not been ascertained during that year. The Appellate Assistant Commissioner, to whom the assessee appealed, based his decision on much the same ground. the Income-tax Appellate Tribunal, before whom the assessee filed a second appeal, took a contrary view. It noted that there was no dispute that the payment of Rs. 76,680 pertained to the salary and dearness allowances given by the assessee to its workmen for the year under consideration, i.e., for the services rendered by them for the carrying on of the business of the assessee for the year under consideration. Following the decision of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, the Tribunal found that the liability in the matter of payment of salary, etc., to the workmen of the assessee for the services rendered by them to the assessee in running its business for the year under consideration had accrued during the year under consideration and had to be deducted, being expenditure for the purpose of earning the receipts during the year, even though the liability pursuant to the settlements was discharged in a subsequent year.
4. It is not in dispute that the provision of Rs. 1,00,000 made by the assessee in its accounts for the year under consideration for discharging the impending liability on account of the revision in the service conditions of its workmen had not been allowed as a deduction in its assessment for the year under consideration.
5. Dr. Balasubramanian, learned counsel for the Revenue, submitted that the payment of the aggregate sum of Rs. 76,680 had been made by the assessee after the close of the relevant previous year, that the liability in that behalf had not been ascertained during the previous year and that there was no indication during the previous year of what the liability would be. He sought to distinguish the judgment in the case of Calcutta Co. Ltd. on the ground that in the instant case the liability had not accrued until after the relevant previous year. Dr. Balasubramanian placed reliance upon the judgment of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363.
6. In the case of Calcutta Co. Ltd. , the assessee had purchased lands and sold them in plots fit for building purposes, undertaking to develop them. When the plots were sold, the assessee undertook to carry out the development within a stated period. In its accounts, it debited an estimated sum as expenditure for the development that it had undertaken to carry out. This expenditure was disallowed. It was held by the Supreme Court that the undertaking to carry out developments on the land imported a liability which accrued on the dates of the deeds of sale, though it was to be discharged at a future date. It was an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business. The difficulty in the estimation thereof did not covert the accrued liability into a conditional one. Profits or gains had to be understood in a commercial sense. There could be no computation of profits and gains until the expenditure necessary for earning the receipts was deducted therefrom, whether the expenditure was actually incurred or the liability in respect thereof had accrued but was to be discharged at some future date. In Kedarnath Jute Mfg. Co.'s case , it was held that the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose, although the liability could not be enforced till quantification was effected by assessment proceedings. The liability for payment of tax was independent of the assessment.
7. The gravamen of Dr. Balasubramanian's case is that the liability had not accrued to the assessee in respect of payment to its workmen until after the close of the relevant previous year. This does not appear to us to be, upon the facts, a sustainable proposition. The awards that had governed the terms and conditions of service of the assessee's workmen were terminated. The assessee's board of directors took note of this and made a provision of a sum of Rs. 1,00,000 in respect of the impending liability that arose, pursuant to the termination, on account of the revision in the service conditions of its workmen. This was done in the manner of a prudent businessman who knew that the service conditions would have to be bettered. The liability was rightly recognised as having accrued and it was provided for. The provision itself would have been allowable as a deduction. It was not allowed. Instead, the quantified liability in the aggregate sum of Rs. 76,680, though it was discharged subsequent to the close of the previous year with which we are concerned, must be allowed as a deduction. The payment in that aggregate sum was made by the assessee to its workmen for the services that were rendered by them during the previous year under consideration. Such expenditure was incurred for the purpose of earning the income of the previous year and must be deducted.
8. The Tribunal was justified in the view that it took. Accordingly, the question is answered in the affirmative and in favour of the assessee.
9. No order as to costs.