Patna High Court
Commissioner Of Income-Tax vs Nirmal Kumar Bose And Bros. on 17 July, 1979
Equivalent citations: [1979]119ITR537(PATNA)
JUDGMENT Brishketu Saran Sinha, J.
1. Under Section 256(1) of the I.T. Act, the Income-tax Appellate Tribunal, "A" Bench (hereinafter referred to as the "Tribunal"), has framed, for the opinion of this court, the following question :
"Whether, on the facts and in the circumstances of the case, the provision made for payment of additional wages was an admissable deduction ?"
2. The assessment years in question are 1969-70 and 1970-71. The respondent-assessee, a registered firm at the relevant period, was engaged in the business of raising coal from a colliery known as West Katras Colliery, As the deductions claimed related to two years, there were two separate proceedings which were heard by the Tribunal in a consolidated manner. The cases were I.T.A, Nos. 744 and 745 (Pat) of 1972-73. The question of law arising out of both these cases and a consolidated statement of the cases has been referred by the Tribunal.
3. It appears that a Wage Board was constituted on August 10, 1962, which submitted its recommendation on December 23, 1966. The Government decided to implement the recommendation of the Wage Board on August 15, 1967. It further appears that the respondent pleaded their inability to pay wages in accordance with such recommendation, which resulted in an industrial dispute, being raised between the respondent and its workmen, which was referred to an Industrial Tribunal under the provisions of the Industrial Disputes Act, 1947.
4. In accordance with the recommendations made by the Wage Board, the respondent in its return for the year 1969-70 claimed as deduction not only a sum of Rs. 3,96,712, which it paid to its workers but also a sum of Rs. 2,38,577, which was payable to them under the recommendation of the Wage Board. Similarly, for the year 1970-71, apart from the wages actually paid, the assessee claimed a further amount of Rs. 2,27,349, which had to be paid as wages. The ITO rejected the claim of the assessee as inadmissible. The assessee went up in appeal and the AAC of Income-tax, Dhanbad, by an order dated May 2, 1972, upheld the order of the ITO and rejected the assessee's claim for the aforesaid deductions, on the ground that the actual payment had not been made and the provisions were made without any reason. The order of the AAC is annex. "C". Aggrieved by the aforesaid order, the assessee filed two appeals before the Tribunal which were heard together and disposed of by an order dated June 28, 1974, passed in I.T.A. Nos. 744 and 745 (Pat) of 1972-73. The Tribunal set aside the orders of the ITO and the AAC of Income-tax and held that the assessee was entitled to claim the aforesaid deductions, as it followed the mercantile system of accounting. Aggrieved by the decision of the Tribunal, the CIT asked for a reference to be made under Section 256(1) of the I.T. Act, which has been done by the Tribunal.
5. In support of this reference, it has been urged by the senior standing counsel for the revenue that the Tribunal was not justified in holding that those deductions were admissible deductions inasmuch as those were not accrued or determined liability. According to the learned counsel, it was only a case of contingent liability, which is dependent upon a decision of the Industrial Tribunal for its adjudication.
6. Mercantile system of accounting has been explained to mean "a system which brings into accrued what is due, immediately it becomes legally due and before it is actually received and brings into a debited expenditure the amount for which legal liability has been incurred before it is actually disbursed". It is, therefore, abundantly clear that in the mercantile system, if a legal liability has been incurred it is shown in the year of accounting although there has been no disbursement.
7. The senior standing counsel has, however, urged that there was no legal liability in this case because, as I have already said earlier, the question whether payment would be made in accordance with the recommendation of the Wage Board was the subject-matter of adjudication. It might be true that merely because the recommendations of a Wage Board have been accepted by the Government, such recommendations are not necessarily enforceable against a particular group of industries or industry and it can at times be challenged by a particular unit on various grounds. It does not, however, follow that a recommendation made by the Wage Board which has been accepted by the Government cannot, in any circumstance, become a legal liability.
8. Therefore, the question which has got to be considered is as to what were the relevant materials on which the Tribunal has come to the conclusion that the deductions are admissible. In the instant case, the deduction would be admissible if it is an accrued liability inasmuch as, admittedly, the payments have not been made. The Tribunal, in holding that the liability was an accrued liability for which the assessee rightly made provision by debiting it in its account, has taken the following circumstances into consideration :
(a) The Wage Board on December 23, 1966, had recommended the payment of additional wages and the Government had taken a decision to implement it from August 15, 1967.
(b) In the auditors' report, it is clearly stated that extra payment of salarly and wages have to be made to the workers and according to the Central Wage Board Award the amounts have been mentioned in the books of account, which has been treated as a liability in the balance-sheet.
(c) There was a strike notice served by the workers against the assessee for implementation of the Wage Board's recommendation.
(d) Certain correspondence relating to the claim of the workers for the additional wages, which had been considered in referring the dispute to the Industrial Tribunal.
9. On all these considerations, the Tribunal came to the conclusion that those liabilities were accrued liabilities. It is obvious, therefore, that in coming to the conclusion that those amounts were accrued liability, the Tribunal has taken into consideration the facts and circumstances of the case and has come to that conclusion as a finding of fact. It should also be noticed that the Tribunal has pointed out that the assessee, before the Industrial Tribunal, has not denied its liability to pay the additional wages but has pleaded its inability to pay.
10. The senior standing counsel by reference to Workmen of Shri Bajrang Jute Mitts Ltd. v. Employers of Shri Bajrang Jute Mills Ltd. [1970] 37 FJR 253 ; AIR 1970 SC 878 and Management of the Kirlampudi Sugar Mills Ltd. v. Industrial Tribunal [1971] 2 LLJ 491, has urged that even when there are recommendations of the Wage Board, which have been accepted by the Government, it does not necessarily follow that they must be implemented by the different units concerned inasmuch as the units might show that for various reasons they are not in a position to implement it. That position cannot be assailed, for example, if it is found that the recommendations of the Wage Board are not in accordance with the principles settled by the Supreme Court. Similarly, a unit might successfully show that it is beyond its financial capacity to pay in accordance with the recommendation of the Wage Board. However, as I have pointed out above, in the case before us the Tribunal has not come to the conclusion that the liabilities were incurred liability, merely on the ground that there was a recommendation of the Wage Board which has been accepted by the Government, The Tribunal took various other circumstances into consideration and has come to the conclusion that it was an accrued liability. Therefore, those decisions are not of much assistance to the revenue.
11. Reliance was also placed on the case of CIT v. Swadeshi Cotton and Flour Mills Private Ltd. [1964] 53 ITR 134 (SC). In that case, the employees claimed profit bonus for the year 1947, that is to say, long before the Payment of Bonus Act came into force. This claim was the subject-matter of adjudication and after the decision under the provisions of the Industrial Disputes Act, profit bonus was paid in 1949. It was held 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. And, hence, the claim was allowed for the calendar year 1949 and not for the calendar year 1947. It will, therefore, appear that in the circumstances of that case it was held that the claim for profit bonus was not an incurred liability in 1947. This decision is also distinguishable.
12. It was next contended on behalf of the revenue that the finding of fact arrived at by the Tribunal that it was an accrued liability is a finding based on extraneous consideration and is, therefore, perverse. The revenue cannot be permitted to raise this question at this stage before us, in view of the fact that it did not ask for a submission of case by the Tribunal on the question that its finding, that it was a case of proven or accrued liability, is perverse.
13. In the result, the answer to the question referred is in the affirmative and against the revenue. In the circumstance of the case, I assess the costs of this application to be Rs. 150 payable by the revenue to the respondent.
Shiveshwar Prasad Sinha, J.
14. I agree.