Income Tax Appellate Tribunal - Patna
Tata-Yodogawa Ltd. vs Deputy Commissioner Of Income-Tax on 12 June, 1995
Equivalent citations: [1996]56ITD194(PAT)
ORDER
V.K. Sinha, Accountant Member
1. This is an appeal filed by the assessee. The main dispute, before us, contained in Ground Nos. 4 and 5, relates to the computation of income under Section 115J of the Income-tax Act, 1961 and whether a sum of Rs. 21,27,993 should be added to the net profit as per Profit & Loss Account for determining the "book profit" under Section 115J of the Act.
2. Section 115J of the Act was applicable from the assessment years (A.Y.) 1988-89 to A.Y. 1990-91. We are concerned here with A.Y. 1989-90, when the provisions were applicable. It is laid down in Sub-section (1) of Section 115J that where, in the case of certain companies, the total income, as computed under the I.T. Act, 1961, is less than 30% of its "book profit", the total income of such assessee chargeable to tax in the relevant previous year shall be deemed to an amount equal to 30% of such "book profit". Thereafter, it is laid down in Sub-section (1A) that every assessee, being a company, shall, for the purposes of Section 115J, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956.
3. Thereafter, an Explanation below Section 1153 of the Act lays down that "book profit" means the net profit as shown in the Profit & Loss Account for the relevant previous year prepared under Sub-section (1A) as increased by items described from Clauses (a) to (h). For our purpose, the material clause is Clause (c), i.e., the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.
4. The Assessing Officer (A.O.) was concerned with the above provisions of law in the assessment proceeding. He noted that the assessee is a company, having business of manufacture of steel rolls, Ingots and Billets, wire rods, etc. There was also income from dividends. The return of income showed 'Nil' income whereas the "book profits" were shown at Rs. 4,98,080. The A.O. first computed the income as per Income-tax Act. For this purpose, he noticed that the assessee has claimed a deduction of Rs. 21,27,993 as interim relief to employees. It was explained to him that the amount represented dues to the employees in respect of prior period up to 31 -3-1988, consequent upon the decision taken by the Management as per Circular dated 13-4-1989 issued to all the Supervisors and workers. The particulars were given as below :
(i) Transport subsidy from Rs.
1-4-1986 to 31-3-1988 1,12,566
(ii) Stagnation increment from
1-4-1987 to 31-3-1988 74,025
(iii) Interim relief from
1-4-1986 to 31-3-1987 19,41,402
------------
21,27,993
------------
5. The details were also explained in Note No. 10 on the Balance Sheet and Profit & Loss Account of the assessee-company and is reproduced below:
The Wage agreement entered into by the Company with the Union of Employees expired on 31-3-1987. Pending finalisation of general wage revision, the Company has been paying an ad hoc interim relief from 1-4-1987 which have been charged to the Profit & Loss Accounts for 1987-88 and 1988-89. On employees' representations, the management has since granted interim relief for the period 1-1-1986 to 31-3-1987. This, together with certain other benefits, relating to earlier years, amounting in all to Rs. 21,27,993 has been charged to the Profit and Loss Account for the year 1988-89 vide Item 9 thereof.
6. The assessee stated further that the accounts for the financial year 1988-89, ending on 31st March, 1989, were finalised on 26th June, 1989, and since the liability was determined and known, the same had been taken into account in the accounts for the Financial Year 1988-89. It was claimed that while finalising the accounts, the events occurring after the Balance Sheet date, if they are materially affecting the accounts, will also have to be considered as per generally accepted accounting practice.
7. The A.O. was not satisfied with the reply. He distinguished the case law cited before him and observed that the payment did not relate to the previous year, in question, nor was made during the previous year. It was, therefore, not allowable in the year. The provision had been created by a Circular issued by the Management on 13-4-1989, after the close of the accounting year. If at all the provision was to be allowed, it should be allowed in the financial year 1989-90. In this connection, he observed that the assessee has already taken care of the provisions while filing the return for the next year, i.e., A.Y. 1990-91. A deduction of Rs. 21.2 lakhs had been claimed in the return for A.Y. 1990-91. For these reasons, he added the sum of Rs. 21,27,993 to the assessee-company's income. However, even after the addition, the total income was "Nil" on account of deduction for depreciation.
8. The A.O., thereafter, calculated the "book profits" under Section 115J of the I.T. Act, 1961. Here he added the sum of Rs. 21,27,993 again to the net profit as per Profit & Loss Account, but without any discussion. The relative part of the assessment order is reproduced below :
Calculation Under Section 115J of I.T. Act Rs. Net profit as per Profit & Loss account 16,60,269 Add: Interim relief to employees for prior period being not allowable as deduction 21,27,993 ------------ Adjusted book profit Under Section 115J 37,88,262 30% of the adjusted book profit 11,36,479
9. Since the total income as per Income-tax Act, which was nil, was less than 30% of the "book profits" which was Rs. 11,36,479, the A.O. deemed the total income to be Rs. 11,36,479 under the provisions of Section 115J of the Act.
10. The dispute, before us, is confined to the addition of the sum of Rs. 21,27,993 to the net profit as per Profit & Loss Account in calculation under Section 115J.
11. The CIT(A) confirmed the addition in a brief order. He noted that the assessee had itself asked for deduction in the next year, i.e., A.Y. 1990-91 of an amount of Rs. 21,27,993 and, therefore, the assessee had itself accepted the disallowance. He also observed that the agreement, in question, took place on 13-4-1989 and was an agreement between the Company and its employees not involving any third party, for grant of interim relief. He, therefore, upheld the addition made by the A.O. and rejected the assessee's ground of appeal. The assessee is aggrieved by this decision and is now in appeal before us.
12. The ld. counsel for the assessee had first invited our attention to the assessment order for the next year, i.e., A.Y. 1990-91 contained in the paper book. Here again, the total income had been computed as per Income-tax Act and found to be nil In this computation, the A.O. had allowed deduction of Rs. 21,27,993 being interim relief, etc., to employees debited in the accounts for A.Y.. 1989-90. He made an observation that the amount was disallowed in A.Y. 1989-90 on the ground that the same had been determined as payable in A.Y. 1990-91. The ld. counsel submitted that so far there was no grievance. However, separately when the "book profits" were calculated as per Section 115 J, no deduction was allowed for interim relief, etc., for Rs. 21,27,993. The ld. counsel submitted, therefore, that the genuineness and bona fide of the amounts were not in doubt but the assessee had not received deduction for the amount either in A.Y. 1989-90 or in A.Y. 1990-91 as far as computation under Section 115J was concerned.
13. The ld. counsel, thereafter, invited our attention to the Accounting Standard No. 4 (AS-4) issued by the Council of the Institute of Chartered Accountants of India on "Contingencies and events occurring after the Balance Sheet date". According to para 3.2, two types of events occurring after the Balance Sheet date can be identified :
(a) those that provide further evidence of conditions that existed at the balance sheet date, and
(b) those that are indicative of conditions that arose subsequent to the balance sheet date.
14. Thereafter, our attention was invited to paragraphs 8.2 and 8.3, relevant extracts from which are reproduced below :
8.2 Adjustments to assets and liabilities are required for significant events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date.
8.3 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.
15. The ld. counsel, thereafter, invited our attention to the Accounting Standard 5 (AS-5) issued by the Council of the Institute of the Chartered Accounts of India on "Prior period and extraordinary items and changes in Accounting Policies". Prior period items were defined in para 3.1 as under:
3.1 'Prior period items' are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.
16. Thereafter, our attention was invited to the following Instructions in AS-5 contained in para 5 :
5. Prior Period Items 5.1 Prior period items are generally infrequent in nature. They should not be confused with accounting estimates which are, by their nature, approximations that may need correction as additional information becomes known in subsequent periods. The charge or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately, does not constitute the correction of an error but a change in estimate. Such an item is not treated as a prior period item.
5.2 Prior period items are included in the statement of profit and loss for the current period but a separate disclosure of all such items is made so that their impact on the current profit or loss can be perceived. Such disclosure complies with the requirements of statutes, wherever applicable.
17. In view of above Instructions issued by an expert body, the ld. counsel for the assessee submitted before us that the addition could be made of the sum of Rs. 21,27,993 to the "book profits" in the computation under Section 115J of the Act.
18. It was further submitted that the contention would be in consonance with Parts II and III of Schedule VI to the Companies Act, 1956. In support of this contention, our attention was invited to Sub-section (3) of Section 32AB of the Act relating to Investment deposit account. Here also, the profits were to be computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956, and Guidance Notes issued by the Institute of Chartered Accounts of India which had examined the matter in the "Compendium of Guidance Notes Volume II". Relevant extract of para 5.3 of the above Compendium is given below :
5.3 The provisions of Part II of Schedule VI to the Companies Act, have to be applied in the context of the method of accounting following by the assessee. If cash method of accounting is followed it will not be necessary to make a provision for outstanding income or outstanding liabilities. If mercantile method of accounting is followed, it will not be necessary to make a provision for outstanding income or outstanding liabilities. If mercantile method of accounting is followed, it will be necessary to make provision for all outstanding income and outstanding liabilities in the accounts. In order to present a 'true and fair view' of the profit or loss of the eligible business or profession under the mercantile method, it will be necessary to ensure that all statutory liabilities (e.g., excise duty, sales tax, bonus, gratuity) are adequately provided. As regards contractual liabilities which are in dispute, it is necessary that adequate provision to the extent of the amount admitted by the assessee is made in the accounts and the balance amount is shown by way of a note to the accounts. Similarly, debts which have become bad and are not recoverable should be written off or adequate provision for the same should be made in the accounts. If an assessee has not made provision for known liabilities or losses and the same are indicated in the notes to accounts, it will be necessary to make appropriate adjustment while determining the figure of net profit as per audited accounts for the purpose of Section 32AB(3). It is suggested that all such known liabilities and losses not provided for in the accounts should be deducted from the figure of profit when the accounts are maintained on the mercantile method of accounting. If the assessee is following a mixed (hybrid) system of accounting and any item of income/expenditure is being accounted for on cash basis consistently it will not be necessary to make the above adjustments in respect of such income/expenditure on accrual basis. It will, however, be necessary to disclose in the accounts the fact relating to the method of accounting followed in respect of such items of income/expenditure. Similarly, prior period income/ expenditure, which if adjusted in the accounts below the line should also be added/deducted from the figure of profit loss shown above the line if the same has not been adjusted against the profits/losses of the earlier years to which the income/expenditure relates for determination of profit of eligible business under Section 32AB.
19. The ld. counsel, thereafter, submitted that not only the Guidance Notes of the expert body supported the assessee's contention but also the decisions of the Courts. He relied on the following decisions to which we will revert in greater detail later on :
(i) Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC);
(ii) Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC);
(iii) Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC);
(iv) CIT v. U.B.S. Publishers & Distributors [1984] 147 ITR 114 (AIL);
(v) CIT v. Ashwini Kumar & Co. [1989] 45 Taxman 193 (Cal.);
(vi) CIT v. Marshell Sons & Co. (I) Ltd. [1994] 72 Taxman 124 (Cal.);
(vii) Saroj Aggarwal v. CIT [1985] 156 ITR 497 (SC);
(viii) CIT v. J.H. Gotla [1985] 156 ITR 323 (SC);
(ix) CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC); and
(x) Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.) (SB).
20. In reply to a query from the Bench, the ld. counsel for the assessee submitted, before us, that the sum of Rs. 21,27,993 could not be added under Explanation (c) below Section 115J of the Act, since it was an ascertained liability and not a contingent liability. According to him, the liability was ascertained and it was only the quantification thereof which was done on 13-4-1989 by the Circular and, therefore, it was covered under the case laws relied upon by him and not hit by Explanation (c) below Section 115J of the Act.
21. In reply to other query from the Bench, whether his claim extended to amounts payable for the period prior to A.Y. 1988-89, the ld. counsel submitted that all prior period expenses were deductible, even if they related to earlier years and again invited our attention to Accounting Standard-5, relevant extract of which has been reproduced above. For these reasons, he submitted that the addition of Rs. 21,27,993, made by the A.O., to the "book profits" should be deleted.
22. The ld. D.R., on the other hand, submitted before us that the liability for the Interim Relief, etc., was only a contingent one during the year and came into existence and was also ascertained on 13-4-1989 when the Circular was issued by. the Management. He reiterated that the assessee had claimed a deduction in the computation of income filed with the return for the next year, i.e., A.Y. 1990-91 and due deduction had already been allowed in that year .in the computation of total income. He relied on the following decisions to which we will revert in greater detail later on:
(i) CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC);
(ii) Laxmi Devi Sugar Mills v. CIT [1993] 200 ITR 603 (SC); and
(iii) CIT v. Burlop Commercial (P.) Ltd. [1993] 200 ITR 605 (Cal.).
23. In reply, the ld. counsel for the assessee contended that all the three cases were distinguishable. The first two cases dealt with the special provisions for deduction for "profit bonus". In the third case, there was damages for breach of contract and award of the arbitrator was made after end of the accounting year. It was evident that the liability arose in the next year. However, as he had explained earlier, in the present case, the liability had arisen in the earlier year but was only quantified on 13-4-1989. He, therefore, submitted that this case did not help the Revenue.
24. We have heard the rival submissions carefully and perused the material on record. At the outset, it may be stated that whether any deduction should be allowed for the sum of Rs. 21,27,993 in the computation under Section 115 J for the next year, i.e., A.Y. 1990-91, is not an issue before us in the present appeal. If the assessee is aggrieved by the denial of deduction, then channels are available in law for redressal of the grievance. However, we cannot adjudicate upon the question which is relevant for A.Y. 1990-91, and will confine ourselves to the issue before us for A.Y. 1989-90.
25. We shall now take up the Accounting Standard 4, issued by the Council of the Institute of Chartered Accountants of India. A distinction has been drawn for events occurring after the Balance Sheet, between those that provide further evidence of conditions that existed on the balance sheet date and those that are indicative of the conditions that arose subsequent to the balance sheet date. In some cases, adjustments are considered proper and in other cases they are not considered proper. In our opinion, it will not be useful, in the present case, to analyse the language used for the distinction. Such an analysis may be useful in a general case but in the present case, we are bound by specific provisions of law and must .adhere to them. These are contained in Explanation (c) below Section 115J of the Act, according to which, the "book profits" have to be increased by :
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
26. We, therefore, do not consider it necessary to go into Accounting Standard 4 for our present purpose.
27. Similar stress has been laid by the ld. counsel for the assessee on Accounting Standard (A.S. 5) regarding prior period items, extract from which have already been given above. However, the statement itself clarifies that it does not deal with tax implication of prior items. Relevant extract of para 2 is given below :
2. This statement does not deal with the tax implications of prior period items, extraordinary items and changes in accounting policies and estimates for which appropriate adjustments will have to be made depending on the circumstances. It also does not deal with adjustments arising out of revaluation of assets.
28. The "Compendium of Guidance Notes" Vol. II has also been relied upon in connection with "book profits". As per Parts II and III of Schedule VI to the Companies Act, 1956, in the context of Section 32AB of the Act. Relevant extract of para 5.3 has already been given above. For mercantile system of accounting it is stated that as regards contractual liabilities which are in dispute, it is necessary that adequate provision 'to the extent of the amount admitted by the assessee' is made in the accounts and the balance amount is shown by way of a note to the accounts. Thus, it becomes a question of fact depending on the circumstances of each case whether provision to the extent of the amount admitted by the assessee has been made in the accounts for the year under consideration. We shall deal with this matter again, in this context, after reverting to the case laws cited by both the sides.
29. The first case relied upon by the ld. counsel for the assessee is that of Calcutta Co. Ltd. 's (supra). In that case, the appellant bought lands and sold them in plots undertaking to develop them by laying down roads, providing a drainage system and installing lights, etc. It was held that the undertaking to carry out the developments was unconditional and imparted a liability on the appellant which accrued on the date of the sale deeds. It was, thus, an accrued liability. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one, because it was always open to arrive at a proper estimate. The estimated amount of expenditure was, therefore, an admissible deduction for arriving at the profits. We find that it was on the facts of the case that it was held that the liability had already accrued and, therefore, even though, it was discharged at a future date, it could be deducted.
30. In the case of Metal Box Co. India Ltd. (supra), it was held that an estimated liability under a scheme of gratuity, if properly ascertainable and its present value is fairly discounted, is deductible from the gross receipts while preparing the profit and loss Account. As such a provision provides for a known liability of which the amount can be determined with substantial accuracy. This decision was referred to subsequently in the case of Shri Sajjan Mills Ltd. (supra)where the law before introduction of statutory restrictions under Section 40A(7) of the Act. regarding gratuities were being considered. It was held that contingent liabilities did not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Nevertheless, provisions made in the Profit & Loss Account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account, could be deducted either under Section 28 or under Section 37 of the Act. We find that here, the specific matter under consideration was gratuity. It was a situation where payment was made on retirement of termination of services but was not for the services rendered during the year in which payment was made but was made in consideration of the entire length of service. Such peculiar circumstances did not exist in the present case where the payment has been made for transport subsidy, stagnation increment and interim relief. The guidelines and instructions in these two cases, therefore, do not help the assessed
31. The next case relied upon is that of U.B.S. Publishers & Distributors' case (supra). In this case, the assessee was importing books from foreign countries and the price was to be paid in foreign currency. The liability to foreign suppliers was converted into Indian rupees at the end of each year on the basis of then existing rate. A devaluation of the Indian rupee took place on 6-6-1966, six days after the end of the previous year. It was held that the liability to pay in foreign currency had accrued when the books were imported and did not come out as a result of the devaluation. Though the devaluation took place six days after the end of the previous year, the assessee was justified in determining its liability on the basis of the actual figure available, particularly when the accounts for the year had not been finalised. The loss on account of devaluation was held to be an allowable deduction. We find that the crux of the matter was the finding of fact that the liability to pay in foreign currency had accrued when the books were imported and only the quantification took place later. In fact, the decisions of the Supreme Court in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 and Swadeshi Cotton & Flour Mills (P.) Ltd. 's case (supra) were distinguished on the ground that in the first case, the right accrued and in the second case, the liability accrued in the subsequent year. Thus we find that the crux of the matter again is a finding of fact whether the liability had already accrued in the matter, before us, for A.Y. 1989-90 or whether it accrued on 13-4-1989, i.e., A.Y. 1990-91.
32. The next case relied upon is that of Hindustan Housing & Land Development Trust Ltd. (supra). In this case, the assessee had business of dealing in lands, part of which was acquired compulsorily. Additional compensation was fixed by an Arbitrator but there was an appeal by the Government against the award. It was held that the right to enhance compensation is inchoate right and the additional compensation did not accrue when amount awarded was disputed by Government by filing appeal. The ld. counsel has specifically brought to our notice the following observations of the Supreme Court:
It is sufficient to point out that there is a clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles.
33. We would respectfully follow the distinction made in the above passage. However, it again boils down to a finding of fact whether the right of the workers to receive payment was in dispute and was not a question of merely quantification of the amount to be received.
33.2 The next case relied upon by the ld. counsel of the assessee is of Ashwini Kumar & Co. 's case (supra). It is a very brief judgment of one page. The facts were that final settlement in regard to land revenue, etc.,., was "communicated to the assessee" immediately after close of the accounting period and as accounts were still open, a provision was made for this liability. It was held that the assessee was entitled to claim deduction under Section 37(1) of the Act following mercantile system of accounting. We find that the final settlement in regard to land revenue, etc., was only communicated to the assessee after the close of the accounting period, but nowhere it has been mentioned that the final settlement itself was made after the close of the accounting period. A communication of something which has occurred earlier is different from the occurrence itself. The case, therefore, does not help the assessee.
33.3 Reliance has also been placed on the decision of the Calcutta High Court in the case of Marshall Sons & Co. (I) Ltd. (supra). In this case, managerial remuneration relating to earlier years was sanctioned by the Government after the end of the accounting year. It was held that the assessee was entitled to make necessary adjustment in its books of account after the close of the accounting year and claim the expenditure as deduction under Section 37(1) of the Act. We find that the decision was given on peculiar facts of this case. It was submitted on behalf of the assessee that the controversy raised by the Department whether deduction should be allowed in A.Y. 1963-64 or 1965-65 was academic, since there was no tax effect and no loss of revenue involved. Reliance was placed on the observations of the Supreme Court in Saroj Aggarwal's case (supra) that the facts should be viewed in natural perspective having regard to the compulsion of the circumstances of a case. Too hypertechnical or legalistic approach should be avoided. Attention was also invited to the observations of the Supreme Court in J.H. Gotla's case (supra) that if a strict and literal construction of the statute leads to an absurd result, then if another construction is possible apart from the strict literal construction, that construction should be preferred to the strict literal construction. It was further submitted before the High Court that the assessee-company had been duly assessed at a net business loss of Rs. 10,80,779 in A.Y. 1963-64, after disallowing the assessee's claim for deduction of Rs. 15,800. In other words, the sum of Rs. 15,800 when allowed in this year only went to increase the business loss for A.Y. 1963-64 and ultimately the amount was carried forward to the next year for allowance in A.Y. 1964-65. The Hon'ble High Court accepted the contention that in these facts and circumstances the controversy raised by the Department was only academic and the question was answered in favour of the assessee. We find that the peculiar facts and circumstances of the case led to the decision, but the facts and circumstances of the present case are not similar. In the present case income has been assessed in A.Y. 1988-89 under Section 115J of the Act and it is not a case where the controversy is only academic. The decision relied upon, therefore, does not help the assessee.
33.4 Lastly, reliance has been placed on the decision of the Special Bench of the Tribunal in case in Sutlej Cotton Mills Ltd. (supra). In this case, it was held that the A.O. did not have any power to disturb "book profits" prepared in accordance with the provisions of Part II and Part III of the VIth Schedule to the Companies Act, 1956. However, this contention does not carry much weight. The A.O. has not disturbed the "book profits" computed in accordance with the Part II and Part III of Schedule VI to the Companies Act, 1956, but only increased it as permitted by Explanation (c) below Section 115J of the Act. Thus the case does not help the assessee.
34. We will now take up the case laws relied upon by the ld. D.R. The principles laid down in Swadeshi Cotton & Flour Mills (P.) Ltd. 's case (supra) has been reiterated in the case of Luxmi Devi Sugar Mills (supra). It is brief judgment and it will be useful to reproduce the relevant extracts as below:
The assessment year concerned is 1961-62, the relevant accounting year being the year ending on September 19, 1960. The workers had raised a dispute demanding bonus. The dispute was referred on September 7, 1960, to a Committee formed for this purpose by the Government. A tripartite conference was proposed to be held in which the said issue was to be decided. On the basis of the recommendations of the said bodies, the Government issued a notification on December 23, 1960, declaring that the workers are entitled to bonus. This notification, it is evident, was issued after the closing of the said accounting year of the assessee and it is by this notification that the liability to pay bonus was created. During the accounting year relevant to the assessment year 1961-62, the assessee had made a provision in a sum of Rs. 1,01,530 towards bonus and claimed deduction of the said amount in its assessment proceedings. Its claim was disallowed and it is this issue which was ultimately referred to the High Court.
The accounting year concerned herein is one prior to the coming into force of the Bonus Act. Therefore, there was no existing liability upon the assessee to pay bonus during the said accounting year. In other words, during the relevant accounting year, the liability to pay bonus had not fastened on to the assessee. The liability itself was created subsequent to the closing of the accounting year. In such a situation, merely because the assessee has made a provision for meeting such a contingent liability, it is not entitled to deduction of the said amount under Section l0(2)(x), read with Section 10(5), of the Indian Income-tax Act, 1922. This is indeed the decision of this Court in CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134. The same view has been taken in another decision of this Court in CIT v. Kalyanmal Mills Ltd. [1964] 53 ITR 573. For the above reasons, the appeal fails and is dismissed.
35. In the case of Swadeshi Cotton & Flour Mills (P.) Ltd. (supra), there was a further observation 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.
36. We are unable to accept the contention of the ld. counsel for the assessee that the ratio of this decision should be confined to "profit bonus" and not to other kind of liability. In our opinion, the ratio will extend to other contractual liabilities also. In fact, that is what the "Compendium of Guidance Notes" Volume II itself has laid down in para 5.3, which we have reproduced above. It is stated that as regards contractual liabilities which are in dispute, it is necessary that adequate provision to the extent of the amount admitted by the assessee is made in the accounts and the balance amount is shown by way of a note to the account.
37. In the case of Burlop Commercial (P.) Ltd. (supra), there was a claim for damages of breach of contract and the award of the arbitrator was made after the end of the accounting year. It was held that the liability arose only after the end of the accounting year. Here again, the crux of the matter is finding of fact when the liability actually arose.
38. In order to arrive at this finding of fact, it is necessary to take a closer look at the Circular dated 13-4-1989 issued by the Management, i.e., Managing Director and addressed to all the supervisors and workers. The introductory part thereof is reproduced below :
A considerable number of supervisors and workers have been approaching the management individually and in groups with a request for payment of interim relief arrears, stagnation increment, review of transport subsidy, etc. The management is conscious of the fact that the workers and supervisors have been contributing their might to improve production and productivity and also maintain industrial harmony. Due to financial exigencies, however, it has not been possible to immediately respond to the request because the Company is under financial strain. However, in keeping with the philosophy of the company to meet the legitimate aspirations of its employees, it has been decided to take a generous view of the matter and grant the following:
39. A query was made from the Bench whether there was any resolution of the Board of Directors or any minutes of the meetings with the workers. However, we were informed that there was neither any such resolution nor any such minutes, though there were discussions with the workers on several occasions. The fact that there were discussions is also borne out by the first sentence of the Circular. After careful consideration, we are of the opinion that there was no unconditional undertaking by the Management for payment of the above amounts, as was the case in Calcutta Co. Ltd. (supra). It is also not a case where the payment of the above amounts accrued the moments the workers and supervisors met the management, as has been argued by the ld. counsel for the assessee. The facts of the case are, therefore, quite distinguishable from the facts in the case of U.B.S. Publishers & Distributors (supra). It was open to the management either not to make any payment, to make a higher payment, not to pay arrears or to pay arrears. In such a fluctuating situation it must be held that the liability became ascertained only on 13-4-1989 when the circular was issued. Thus following respectfully the ratio laid down by the Supreme Court in Swadeshi Cotton & Flour Mills (P.) Ltd.'s case (supra) and Laxmi Devi Sugar Mills' case (supra); Hindustan Housing & Land Development Trust Ltd's case (supra) as well as the decision of the Calcutta High Court in Burlop Commercial (P.) Ltd. 's case (supra), we hold that the liability was not ascertained in A.Y. 1988-89 and, therefore, the "book profits" should be increased by the sum of Rs. 21,27,993 by virtue of Explanation (c) below Section 115 J of the Act. Accordingly, the decision of the CIT(A) is confirmed and this ground of appeal of the assessee is rejected.
40. to 45. [These paras are not reproduced here as they involve minor issues].