Income Tax Appellate Tribunal - Bangalore
Bharat Electronics Ltd. vs Deputy Commissioner Of Income Tax. on 21 August, 1995
Equivalent citations: (1996)56TTJ(BANG)353
ORDER
S. BANDYOPADHYAY, A. M. :
The first ground in this appeal filed by the assessee relates to non-allowance of depreciation on certain items of machinery at the claimed rate of 50%. For allowance of depreciation at the above-mentioned higher rate, it is necessary that the assessee files requisite certificate from the Department of Science and Technology in accordance with s. 32. Since no such certificate was filed, the AO allowed depreciation at the normal rate of 33.33% only. The action of the AO was confirmed at the first appellate stage.
Before us, the learned counsel for the assessee states that although an application was duly made by the assessee, the Department of Science & Technology has not yet, however, issued the requisite certificate and hence, the delay is attributable fully to the said Department. It is thus prayed that a direction be given to allow depreciation at the higher rate when the certificate is actually obtained and filed with the AO. We consider this plea on the part of the assessee to be very much reasonable. Although, therefore, for the time being, we uphold the action of the lower authorities, at the same time again, we direct that depreciation at the higher rate of 50% be allowed to the assessee when the assessee files that requisite certificate before the AO.
2. The assessee claimed depreciation on certain building whose title had not, till the end of the relevant previous year, been transferred in the names of the assessee. The AO, therefore, did not allow depreciation on the said building inasmuch as the building was not being legally owned by the assessee. The action of the AO was upheld by the CIT(A).
We approve of the actions of the lower authorities in this regard by following the two decisions of the Karnataka High Court in the cases of CIT vs. Bharat Gold Mines Ltd. (1991) 192 ITR 639 (Kar) and Ramkumar Mills (P) Ltd. vs. CIT (1989) 180 ITR 464 (Kar).
3. The next ground relates to the claim of the assessee for allowance of the amount of executive wages alleged to be payable to the extent of Rs. 7,59,03,000. The AO states in the assessment order that a provision for revision of executive wages amounting to the abovementioned sum, which again consists of Rs. 3,89,42,000 pertaining to the prior period was made in the accounts. It was contended by the assessee that the provision had been made on the basis of the Cabinet note from the Ministry of Industry, dt. 26th Sept., 1989. The, AO, however, observed that till the last date of the relevant accounting year i.e., 31st March, 1990, no Cabinet approval was actually received by the assessee-company. He furthermore noted that subsequently in the next year only, the Cabinet approval was given and the amount was paid. The AO thus held that the amount was nothing but of the nature of contingent liability as on 31st March, 1990. He furthermore discussed that unless the Cabinet would have approved the proposal, no revision could have been effected by the company and since the revision was based on the happening of certain event i.e., the Cabinet approval, which did not take place, during the course of the relevant accounting year, the expenditure could not be said to be an allowable expenditure. In that view, the AO disallowed the claim of the assessee. The CIT(A) also agreed with the above view of the AO and confirmed the disallowance.
Before us, the learned counsel for the assessee has strongly contended that actually the liability towards payment of further amount of wages and salaries in accordance with revision in the pay scales of the executives of the company, has got to be considered as an accrued liability and not a contingent liability and, therefore, the liability is required to be allowed. He drew our attention to the printed accounts of the company for the relevant year in which the amount has been debited to the salaries, wages, etc., payable to the employees and also included within the head "other liabilities" forming an item under the general head "current liabilities". He has furthermore shown to us that the amount has been included neither in "provisions" nor in "contingent liabilities" also being shown in the aforesaid printed accounts. We find in this connection that the contention of the assessee on this issue is correct. At the same time again, item No. 27 of the notes forming part of the accounts for the year ended 31st March, 1990, shown in the printed accounts book clearly shows that the employees remuneration includes provision for executive wage revision of 79,503(000). Thus it appears that although the company might not have shown the amount to be included within "provision" or "contingent liabilities", actually however, the company meant the amount to be of the nature of provision only.
The learned counsel for the assessee has also drawn our attention to the "Cabinet note", dt. 26th Sept., 1989. He argues that this Cabinet note forms the basis of considering that the revision in the pay scales of the executives of the company was a certainty and merely a formality of the nature of approval by the Cabinet was required to materialise the proposal already in the air and known to everybody. He furthermore states that the letter dt. 4th April, 1990, of the Addl. Secretary, Bureau of Public Enterprises, Ministry of Industry, was merely of the nature of communicating the abovementioned decision of the Cabinet. He thus contends that the liability must be considered to have accrued during the relevant previous year only. He also argues that the liability was actually an ascertained liability. He draws our attention to the discussions made by the Supreme Court in the case of Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC) at page 54. Our attention has been drawn to the following observations made by the Supreme Court in the said case :
"Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration."
He has furthermore contended that the above principle was thereafter affirmed in several decisions like the one of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 132 ITR 559 (SC) and of the Madras High Court in the case of CIT vs. S. A. E. (I) (P) Ltd. (1985) 153 ITR 269 (Mad). It is furthermore contended by him that the principle had actually been recognised even by the House of Lords in the case of Southern Railway of Peru Ltd. vs. Owen (1957) 32 ITR 737 (HL). It is, thus, finally argued that inasmuch as the liability not only did accrue but was also an ascertained liability and that only its quantification was to be done in future, the liability has got to be allowed in this year. Alternatively, it was claimed by him that at least a portion of the relevant liability being Rs. 3.89 crores pertaining to the relevant year should be allowed.
4. The learned Departmental Representative, on the other hand, refers to the alleged "cabinet note", dt. 26th Sept., 1989. He shown to us that this is certainly not a Cabinet note but merely a secret draft note prepared by the Ministry of Industry, Department of Public Enterprises (Bureau of Public Enterprises). By referring to several passages of the said note, to which we shall refer at a later stage, the learned Departmental Representative has tried to argue that this note is actually nothing but merely of the nature of communication by the Ministry of Industry to the assessee-company and similar other companies asking them to put forward their respective claims relating to revision of wage of their employees. He has furthermore argued that this particular note has got no bearing on the affairs of the assessee-company, which is actually a Government company under the Ministry of Defence, Department of Defence Production and Supplies. The Departmental Representative also argues that even the above mentioned letter dt. 4th April, 1990, was also not a conclusive one and that however, ultimately the communication dt. 22nd Feb., 1991, from the Ministry of Defence, Department of Defence Production and Supplies addressed to the Chairman & Managing Director of the assessee-company can be considered to have the effect of declaring and also approving the revised scales for the employees of the assessee-company.
4(a). In this connection, the learned Departmental Representative has relied on the decision of the Allahabad High Court in the case of New Victoria Mills Co. Ltd. vs. CIT (1966) 61 ITR 395 (All) in which it has been held that though under the mercantile system of accounting all items of credit are brought into credit immediately they become legally due and before they are actually received, and all expenditure is debited, for which a legal liability has been incurred before it is actually disbursed, yet before a credit or debit entry can legitimately be made in the accounts it must be shown that a certain enforceable liability has accrued or arisen. The Allahabad High Court held furthermore that such liability must be one that has been ascertained and capable of being enforced by the person in whose favour the debit has been raised. The learned Departmental Representative argues in this connection that it was not possible for the employees of the assessee-company to claim any portion of the revised or increased salaries simply under the authority of the secret note of the Ministry of Defence, dt. 26th Sept., 1989, or even of the letter dt. 4th April, 1990, issued by the Bureau of Public Enterprises. On the other hand, he argues that the liability became an enforceable liability by virtue of the communication of the Ministry of Defence, Department of Defence Production and Supplies, dt. 22nd Feb., 1991, and on that date alone, the liability can be considered to have become an accrued and ascertained liability.
4(b). The learned Departmental Representative has also referred to the discussions made by the Supreme Court at page 194 of its reported judgment in the case of Nonsuch Tea Estate Ltd. vs. CIT (1975) 98 ITR 189 (SC) to the effect that in a case of appointment of certain company as managing agents, where the approval of the Central Government is required to be taken, the appointment becomes effective and the companys liability to pay the remuneration of the managing agents accrues only after the actual approval of the Government is given. We, are, however, not agreeable with this particular proposition raised by the learned Departmental Representative. In the case as reported at (1975) 98 ITR 189 (SC) (supra), it was a question of requirement of statutory approval as per the Companies Act. In the present case, however, approval of the Government towards revision in the pay scales of the employees of Government companies is required not in terms of the Companies Act or any other statute, but only under the existing administrative guidelines issued by the Government.
4(c). The learned Departmental Representative has furthermore argued in this connection that even the letter dt. 4th April, 1990, issued by the Bureau of Public Enterprises merely asked for proposals from the assessee relating to revision of the pay-scales on which approval of the Government could be communicated later on. He states that as per the instructions contained in the said communication dt. 4th April, 1990, the assessee-company came up with its own proposal as communicated in its proposal letters dt. 30th April, 1990, and 27th Oct., 1990. He also argues that the fact that the balance sheet of the assessee claiming the impugned liability was signed on 27th Sept., 1990, i.e., before sending of the final proposal after one month from that date, clearly shows that the inclusion of the liability in the accounts of the assessee had been made merely on the basis of a guesswork and not by taking into consideration any ascertained liability. The learned Departmental Representative has also relied on a catena of decisions of different Courts in support of his contention that contingent and unascertained liabilities are not allowable as expense.
5. When we examine all the relevant materials placed on our record in a dispassionate manner, we find that the claim of the assessee is merely based on certain expectations and not on the basis of any definite material. There is no doubt about the fact that a talk about revision in the pay-scales of the executives of the Government companies was very much in air and it was also a certainty that there would be some upward revision in such pay-scales, inasmuch as the economy had already shown an inflationary trend. However, how much would be the upward revision in such pay-scales and from which date such revised pay-scales would be effective, was very much a matter of speculation, and was subject to finalisation of the proposals in this regard and according of final approval by the Government of India to a definite proposal in that regard. As observed by us above the approval by the Government of India may not be a statutory requirement in this case but at the same time for all practical purposes, the said approval was very much necessary for giving effect to a proposal for upward revision of the pay scales of the employees of Government companies. The materials before us also show that even the proposal itself was very much in a nascent stage and had not at all taken any final shape. The draft note of the Cabinet as prepared by the Ministry of Industry, Department of Public Enterprises (Bureau of Public Enterprises) dt. 26th Aug., 1989, on which so much reliance has been placed by the assessees side, was merely a secret note prepared in the Government Department and was not supposed to be known to anybody outside the corridors of the Central Government office in which the Ministry of Industry was located. Para, 5 of the said note referred to an earlier Cabinet note, dt. 23rd June, 1989, submitted on the HPPC Report containing one of the proposals for consideration of the Cabinet to revise the pay-scales of executives with a view to maintain the relativity between the emoluments of the executives and workers leaving the DA issue to be decided by the Government on the recommendations of the tripartite DA committee. It is clearly stated therein that the Cabinet had not taken any decision on that proposal.
5(a). Para, 7 of the aforesaid secret note again stated that the proposed model scales of pay corresponding to the existing typical scales of pay were indicated in the Annexure-I both for executives below the Board level and those on the Board. It is important to note in this connection that none of the revised scales proposed in the said Annexure I ultimately correspond to the actual scales under the revised pay structure as approved by the Government. The aforesaid secret note also expressed the hope that the Pay revision of the officers could take effect from 1st Jan., 1987, and be effective for a period of five years. Finally, it was stated that inasmuch as there were wide variations amongst the public sector enterprises in the various allowances and perks available to the executives, the issue of allowances and the perks could be examined by a working group consisting of senior Government officers and selected chief executives of PSEs. It was furthermore stated towards the end that pending the examination by that group there should not be any upward revision of these allowances and perks. It is clear from the above discussions that the above mentioned draft note dt. 26th Sept., 1989 only contained certain tentative proposal and there could be no question of any finality about revision of the pay-scales including the allowances and perks of the employees of the Government companies simply on the basis of this note.
5(b). On the other hand, the communication dt. 4th April, 1990, of Shri Suresh Kumar, Addl. Secretary, Bureau of Public Enterprises, Ministry of Industry, also made discussions about the pending pay revision for the executives. Para, 14 of the said communication reads as below :
"14. Proposals received from each individual enterprise are required to be approved by the Government, i.e. the Administrative Ministry acting in consultation with the EPE. It is, therefore, requested that the proposals received from the public enterprises under your administrative control may be examined expeditiously and forwarded on the file with the comments and observations of the FA/IFW to the BPE, so that approval of the Government could be communicated."
6. It is clear from above that this communication did nothing but inviting concrete proposals along with comments, etc., from the respective public enterprises. In no way can, therefore, it be said that this communication dt. 4th April, 1990 brought about actual revision of the pay scales of the aforesaid employees of PSEs.
In accordance with the abovementioned communication, the assessee-company submitted its own proposal suggesting certain pay-scales for its employees by its communication dt. 30th April, 1990. This was amended/revised/modified/ strengthened by another communication dt. 27th Oct., 1990. Finally, however, the revision of pay-scales of executives and non-unionised supervisors was declared under the communication dt. 22nd Feb., 1991, of the Govt. of India, Ministry of Defence, Department of Defence Production and Supplies. As observed already, the pay-scales actually prescribed therein were somewhat different from those suggested in the earlier proposals. It has, therefore, got to be considered that the enforceable liability towards payment of increased salary and perks to the employees of the assessee-company arose on the basis of this communication alone. Hence, we are of the view that the liability accrued and became an ascertained liability only on the date when this communication was made i.e., 22nd Feb., 1991, and not before that.
7. Let us now examine the citations relied upon by both the sides. The Supreme Court decision in the case of Metal Box Company of India Ltd. (supra) related to a specific matter only viz., question of considering estimated liability under a scheme of gratuity. It is well-known now that although gratuity does not become actually payable unless the employees retire or die, yet at the same time, the liabilities on that account are considered to be accruing on the basis of the working by the employees from year to year. Such gratuity liabilities, therefore, if scientifically evaluated, are considered as accrued liabilities and allowed as expenses in the income-tax assessment. The same view was taken by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra). The Madras High Court decision in the case of S. A. E. (India) (P) Ltd. (supra) also related to allowance of gratuity liability worked out an actuarial basis. The principle with regard to allowance of gratuity liability cannot be considered to be applicable to all matters. So far as payment of arrears of salary to the employees is concerned, the liability must be considered to arise only when the pay scales are revised and not before that. Hence, the different decisions as relied upon by the learned counsel for the assessee do not seem to be having much application.
A brief examination of the several decisions relied on by the learned Departmental Representative may also be made :
(a) CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC) : It was held in this case that an employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication.
(b) CIT vs. Amrit Banaspati & Co. (1966) 59 ITR 388 (All) : The Court held that the assessee as employer followed the mercantile system of accounting; the liability of the employer towards the allowance payable to the employees arose only when it was finally settled amicably or by industrial adjudication and the claim to deduction was admissible only in the year when the liability under the award was finally determined.
(c) Mysore Lamp Works Ltd. vs. CIT (1990) 185 ITR 96 (Kar) : The Karnataka High Court held that the amount to be added back under s. 15(1) of the payment of Bonus Act, 1965, is not to discharge any present liability at all and that the provision is attracted only in case there is an allocable surplus during a particular accounting year. It furthermore held that the setting apart of the amount in this connection is not a payment at all in respect of an accrued or definite liability and furthermore that depending upon the contingency, that amount may revert back to the employer absolutely for being utilised as he pleases and hence, the amount cannot be treated as an expenditure at all and is not deductible under s. 37 of the Act.
(d) CIT vs. Bharat Earth Movers Ltd. (1995) 211 ITR 515 (Kar) : With regard to the question of allowability of the provision made to meet liability of encashment of earned leave, the Karnataka High Court held that the accumulated leave can be encashed only at the time of happening of event envisaged under conditions of service of employees and hence, such liability being merely of the nature of a contingent liability, cannot be allowed.
(e) Rajasthan State Mines & Minerals Ltd. vs. CIT (1994) 208 ITR 1010 (Raj) : It was held that 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.
(f) CIT vs. Instrumentation Ltd. (1987) 167 ITR 354 (Raj) : Here also, it was held that the "expenditure" is what is paid out and is something which is gone irretrievably. The earlier ratio as pronounced at (1994) 208 ITR 1010 (Raj) (supra) about income-tax law making a distinction between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent was reiterated.
(g) CIT vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC) : Here also, the principle that a liability contingent on the happening of certain events is not allowable, was enunciated.
We, thus find that all the abovementioned case, laws merely emphasise one principle that a liability which has not actually accrued but is only a contingent liability cannot be allowed. The contingent liability, when at a future point of time, becomes an actual and accrued liability, would however be allowable at that future point of time. The learned counsel for the assessee has tried to argue in this connection that the fact that the balance sheet was signed by the assessee even before sending the proposal to the Government, shows that the liability had become final to be taken into consideration in the accounts of the assessee. We are, however, not able to agree with this argument. What was taken into consideration in the accounts of the assessee was merely a provision based on certain proposals put forward by the assessee. The proposal became an accomplished fact only on issue of the approval letter prescribing the actual revised pay-scales by the Government on 22nd Feb., 1991. We, therefore finally hold that, the entire liability under consideration did accrue on 22nd Feb., 1991. So far as the year under our present consideration is concerned, not any portion of the liability can be allowed inasmuch as the liability was merely of the nature of a contingent liability till the end of the relevant accounting year. The alternative plea of the assessee also cannot be accepted inasmuch as the revised pay-scales came at a later date and hence, the arrears of salary etc., even pertaining to the current year also became payable on 22nd Feb., 1991, only and not during this year. Hence, we uphold the action of the lower authorities in disallowing the claim of the assessee.
8. The assessee was having a branch at New York through which it was purchasing certain materials there. The stock of such materials remaining at the New York office as at the last day of the relevant accounting year was evaluated by the assessee on the basis of the exchange rate prevailing at the time of sanction of Rupee Imprest Fund. The AO, however, held that the foreign transactions were required to be valued as at the end of the accounting period at the exchange rate prevailing at the time of closing of the accounting period. Following the said method, the AO made an addition of Rs. 54,612 to the value of the stock under consideration. The CIT(A) also sustained the addition.
9. Before us, the learned counsel for the assessee has strongly contended that the assessee-company was evaluating its closing stock from year to year on the basis of the actual cost of the materials purchased and furthermore that this practice was accepted till asst. yr. 1988-89. He stated that in asst. yr. 1989-90, however, revaluation in the line as adopted in the present year, was made by the AO by taking into consideration the exchange rate as on the last date of the accounting year. The learned counsel for the assessee stated that however, the CIT(A) had given relief on this issue in asst. yr. 1989-90. He, however, admitted that from asst. yr. 1991-92 onwards, the assessee-company itself changed its method and brought it in the line of the Departmental contention. In support of his argument that the addition is not tenable on this issue, he relied on the decision of the Madras High Court in the case of Asher Textiles Ltd. vs. CIT (1952) 22 ITR 125 (Mad) and of the Supreme Court in the case of Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC).
The learned Departmental Representative, on the other hand, asserted that the method of valuation had been changed even in asst. yr. 1988-89 and an addition was made in that year also, which was later on sustained by the CIT(A). He relied on the arguments given by the AO and the CIT(A) and pressed for sustenance of the addition.
The Madras High Court held in the case of Asher Textiles Ltd. (supra) that when evaluating the closing stock of a trader according to the market value or cost price, whichever is lower at the option of the trader, the cost price should be taken as meaning "original cost price" and not a notional cost price. The Supreme Court again held in the case of Investment Ltd. (supra) that a taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. The Supreme Court furthermore held that a method of accounting adopted by the trader consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. At the same time again, the Supreme Court furthermore held the method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom.
In the instant case, the assessee purchased the relevant materials in New York, certainly at Dollar price. There cannot be any question about the proposition that for evaluating the closing stock of such materials, the cost price of the materials should be taken into consideration at the assessees option. The problem, however, remains at which value the Dollar price is required to be converted into rupee for Indian Income-tax purposes. It is not known whether the assessee converted the value of the Dollar price into rupee price immediately on the purchase of the materials and went on maintaining the price of the materials in term of rupee in its accounts since then. If such be the case, the assessees contention that the rupee price at which the materials had been purchased alone should be taken into consideration in its closing stock is to be accepted. If however, the facts be that the assessee did not convert the Dollar price of the materials purchased immediately on such purchases having been made into rupee and maintained the account of such materials in terms of Dollar only till the last date of the accounting year, in that case there cannot be any two opinion about converting the said Dollar price into rupee value at the exchange rate as prevalent on the aforesaid last date of the accounting year. However, the facts in this regard are not at all clear. We therefore, remit this matter back to the file of the AO for ascertaining the actual facts about maintenance of accounts relating to purchase of materials at New York viz., whether at Dollar price or at rupee price and to take appropriate actions thereafter in accordance with the factual findings and our discussions made above.
10. Ground No. 10 relating to quantification of the opening stock was not pressed by the learned counsel for the assessee. Hence, this ground is being dismissed.
11. It has also been conceded by the learned counsel for the assessee that the grounds Nos. 11 and 12 relating to sustenance of the interest charged under s. 234B and of the additional tax levied under s. 143(1A) respectively, are merely consequential in nature and hence, they do not deserve any specific attention. We, therefore, direct that only consequential effects be given with regard to these two grounds.
12. In the result, the appeal filed by the assessee may be considered to be only partially allowed to the abovementioned extent.