Rajasthan High Court - Jaipur
Principal Commissioner Of I T Ajmer vs Erstwhile Raj Gramin Bank Alwar on 24 October, 2017
Author: K.S. Jhaveri
Bench: K.S. Jhaveri
HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT
JAIPUR
D.B. Income Tax Appeal No. 127 / 2016
Principal Commissioner Of I T Ajmer
----Appellant
Versus
Erstwhile Raj Gramin Bank, Alwar C/o. Baroda Rajasthan Kshetriya
Gramin Bank, Ajmer.
----Respondent
_____________________________________________________
For Appellant(s) : Ms. Parinitoo Jain
For Respondent(s) : Mr. Dinesh Kumar
_____________________________________________________
HON'BLE MR. JUSTICE K.S. JHAVERI
HON'BLE MR. JUSTICE VIJAY KUMAR VYAS
Judgment
24/10/2017
1. By way of this appeal, the appellant has challenged the
judgment and order of the Tribunal whereby the Tribunal has
allowed the appeal of the assessee.
2. This court while admitting the appeal on 07.09.2016 framed
the following questions of law:-
"1. Whether the Tribunal was legally justified in
reversing the findings of the CIT(A) and allowing
the deduction of Rs.140 lacs claimed on account
of ad-hoc provision for pay revision of employees
specifically when the Act provides for taxation of
real income and not the book income?
2. Whether the Tribunal was legally justified in
reversing the findings of the CIT(A) and allowing
the deduction specifically when the liability to pay
would accrue and become allowable as a
deduction in the year when agreement/settlement
is reached and signed by the bank with the
employees and till then the provision is not
allowable?"
(2 of 9)
[ITA-127/2016]
3. Learned counsel for the appellant contended that the
Tribunal has seriously committed an error in reversing the finding
recorded by CIT(A) which reads as under:-
"4.10 It is seen that the provision made by the
bank for pay revision of employees in the books of
accounts over a period of 2-3 years, will remain
only a provision till the liability to pay the revised
pay arises. The liability to pay would arise only
when an agreement/settlement is reached by the
bank with the employees. The agreement with the
employees would entail determining the quantum
of pay revision which is to be given to each
employee and also the date from which the pay
revision would become effective. Therefore, the
liability would accrue only in the year in which such
an agreement is signed by the bank. Before this
period/year, any provision made by bank for this
purpose would only remain a provision, which
would be desirable on the grounds of prudence,
conservatism and good governance. But this
practice and the amount debited in the accounts on
account of any provision is not allowable as a
deduction under the Income tax Act. The case laws
cited by the appellant are distinguishable on facts.
4.11 I place reliance on the following judgements,
which were not placed before my ld. Predecessor
while deciding the appeal on this issue in the
preceding year.
(i) Hon'ble Supreme Court has held in a landmark
judgment in the case of M/s Shree Sajjan Mills Ltd.
V/s CIT 156 ITR 585 that no deduction is to be
allowed on account of any provision made for
gratuity to meet out the obligation for payment of
dues to the employees. It has further observed that
"The expression "provision" has not been defined in
the Act and is not used in any artificial sense but in
its ordinary meaning. This is clear from the words
(whether called as such or by any other name)
occurring in the sub-section. According to Webster,
"provision", in its ordinary sense, means
"something provided for future use".
The Principle that fiscal statutes should be strictly
construed does not rule out the application of the
principles of reasonable construction to give effect
to the purpose or intention of any particular
provision as apparent from the scheme of the Act,
(3 of 9)
[ITA-127/2016]
with the assistance of such external aids as are
permissible under the law"
(ii) Hon'ble Supreme Court has also laid down this
principle in the case of M/s Gemini Cashew Sales
Corporation 65 ITR 643 and observed that "Where
accounts are maintained on the mercantile system,
if liability to make the payment has arisen during
the time the business is carried on, it may
oppropriately be regarded as expenditure. But
where the liability is, during the whole of the period
that the business is carried on, wholly contingent
and does not raise any definite obligation during
the time that the business is carried on, it cannot
fall within the expression "expenditure laid out or
expended whilly and exclusively" for the purpose of
the business.
Two cases illustrative of the principle may be
noticed. It was held by the Madras High Court in
CIT v. Indian Metal and Metallurgical Corporation
that a provision made in the annual accounts
maintained by an employer setting apart by way of
a reserve to meet the liability, if any, to which the
employer may become subject in the vent of
retrenching workmen because of the necessity of
retrenchment of the services of the staff, was not a
liability in praesenti in the year of account, but was
only a contingent liability which may arise on the
happening of a particular contingency and was not
allowable as a deduction in assessment of tax. This
court in dealing with a case under the Wealth-tax
Act in Standard Mills Co. Ltd. v. Commissioner of
Wealth tax held that a liability under the award of
the Industrial Court to pay gratuity to its imployees
at certain rates on death while in service, or on
voluntary retirement or resignation after fifteen
years 'continuous service, or on termination of
service after certain specified periods, but not if the
employee was dismissed for dushonesty or
misconduct, was a mere contingent liability which
arose only when the employment of the employee
was determined by death, incapacity, retirement or
resignation: the liability did not exist in
praesenti....."
(iii) Hon'ble Bombay High Court has observed in
the case of M/s Phalton Sugar Works Ltd. V/s CIT
162 ITR 622 that "The question before us is not
whether an assessee, maintaining books of account
on the mercantile system, is entitled to claim
deduction in the year in which the liability arose
notwithstanding the fact that he was disputing his
liability, but whether it is open to such an assessee
to claim the deduction not in the year in which the
(4 of 9)
[ITA-127/2016]
liability arose but in the year in which the dispute
about it was finally adjudicated upon or settled.
The judgment of the Supreme Court in Swadeshi
Cotton and Flour Mills Privae Ltd.'s case [1964] 53
ITR 134 and the two judgments of the Allahabad
High Court referred to above provide a pointer. In
our view, where a liability arising out of a
contractual obligation is disputed, the assessee is
entitled, in the assessment year relevant to the
previous year in which the dispute is finally
adjudicated upon or settled, to claim a deduction in
that behalf..."
(iv) Hon'ble Supreme Court has clearly laid out the
distinction between actual liability and a future
liability and in the case of M/s Indian Mollasses Co.
(P) Ltd. 37 ITR 66 has observed as under:-
"The income-tax law does not allow as expenses all
the deductions a prudent trader would make in
computing his profits. The money may be
expended on grounds of commercial expediency
but not of necessity. The test of necessity is
whether the intention was to earn trading receipts
or to avoid future recurring payments of a revenue
character. Expenditure in this sense is equal to
disbursement which, to use a homely phrase,
menas something which comes out of the trader's
pocket. Thus, in finding out what profits there be,
the normal accountancy practice may be to allow
as expense any sum in respect of liabilities which
have accrued over the accounting period and to
deduct such sums from profits. But the income-tax
laws do not take every such allowance as
legitimate for purposes of tax. A distinction is made
between an actual liability in praesentiand a liability
de futurowhich, for the time being, is only
contingent. The former is deductible but not the
latter. The case which illustrates this distinction is
Peter Merchant Ltd. V. Stedeford. No doubt, that
case was decided under the system of income tax
laws prevalent in England, but the distinction is
real. What a prudent trader sets apart to meet a
liability, not actually present but only contigent,
cannot bear the character of expense till the
liability becomes real.
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.
4.12 Thus, considering the essence of the
proposition laid out by the Hon'ble Supreme Court,
(5 of 9)
[ITA-127/2016]
I hold that no deduction is allowable to the
appellant on account of any adhoc provision made
in the books of accounts on account of pay Revision
of employees. This amount would accrue and
become allowable as a deduction only in the year of
agreement for pay revision having been signed by
the Bank with the representative of employees. Any
amount set aside by the bank every year for this
purpose would only qualify as a measure of good
governance and in accounting terms as a principle
of conservatism. Therefore, the disallowance of Rs.
14 lacs made by the AO at 10% of the amount of
Rs. 140 lacs debited in the accounts is enhanced to
the extent of 100% of the amount claimed on this
account."
4. He contended that Tribunal while considering the matter
observed as under:-
"4.3. We have heard rival contentions and
perused the material available on record. The ld.
A/R of the assessee contended that in the
immediately preceding assessment year 2009-10
the claim of the assessee in respect of provision
of pay revision of employees was accepted by the
ld. CIT (A) after taking into consideration the
judgments of Hon'ble High Courts and the ITAT.
The ld. D/R could not controvert the 7 ITA No.
169/JP/2015 A.Y. 2010-11. Erstwhile Rajasthan
Gramin Bank Ltd vs. DCIT claim of the assessee.
The AO has only disallowed Rs. 14.00 lacs i.e.
10% of the adhoc provision made by the
appellant in the books of account. Against the
said disallowance, the assessee was in appeal
before ld. CIT (A). The ld. CIT (A) after issuing
the show cause notice under section 251(2) of the
IT Act, sought reply from the assessee as to why
the provisional amount of Rs. 140 lacs made for
pay revision be not disallowed. The assessee has
filed the reply. We have gone through the reply. It
is an undisputed fact that the pay revision of the
employees is an on going process in respect of
bank employees. The pay revision of Rs 140 lacs
was made on the basis of pay revision due as on
1.11.2007 as 9th Bipartite Settlement. The
settlement was effected between the concerned
parties i.e. Management and Union of Employees
in the financial year under consideration. On the
basis of agreement, the payments were also
made to the employees from the effective date.
Therefore, the conclusion of ld. CIT (A) that there
(6 of 9)
[ITA-127/2016]
was no crystallized liability and no agreement was
arrived at between the parties, is without any
merit. The appellant is a Gramin Bank sponsored
by Punjab National Bank and having the trapping
of scheduled bank. The appellant is also governed
by the instructions issued by the RBI in this
regard. In our opinion, the employees are entitled
to the revision of the pay not when the report of
the commission or committee is submitted to the
management, but the employees are entitled to
the revised pay from the date when it is found to
be due and payable. The submission of report or
acceptance of the report has no basis to say that
it was not due and will only become due when the
pay revision is accepted by the employees. In our
view, the employees 8 ITA No. 169/JP/2015 A.Y.
2010-11. Erstwhile Rajasthan Gramin Bank Ltd
vs. DCIT are entitled to revised pay from the date
it was due and payable by the employer. However,
the quantum may vary, as in the present case,
initially the revision was estimated @ 13.25%,
however, later on it was crystallized @ 17.5%.
The provision in the present case was made on
the basis of 13.25%, however, later on it was
required to be revised and in fact revised @
17.5%. Therefore, we do not find any merit in the
conclusion draw by ld. CIT (A).Thus the orders of
ld. CIT (A) as well as AO are hereby set aside. We
also find that the case of the assessee is covered
by the decision of the ITAT Jaipur Bench in the
matter of Jhalawar Kendriya Sahakari Bank Ltd.
vs. ACIT in ITA No. 1032/JP/2011 dated
14.08.2014 whereby the claim of the assessee
was allowed. Respectfully following the decision of
Coordinate Bench of the ITAT, we set aside the
orders of the lower authorities and allow the claim
of the assessee by deleting the disallowance."
4. Counsel for the respondent has relied upon the decision of
Delhi High Court in case of Commissioner or Income Tax
V/s Bharat Heavy Electrical (2013) 352 ITR 0088(Delhi)
wherein it has been held as under:-
"6. In this case, the Tribunal had noticed that there
was no dispute as regards the terms of employment of
the workers and officers. The only question was the
exact quantification of the compensation or wage
revision. The Tribunal also held that provision for wage
revision was based on past experience, interim Pay
(7 of 9)
[ITA-127/2016]
Commission of government employees, previous Pay
Commission's reports of public sector employees,
union demands and other relevant factors. The
Tribunal also held that with the expiry of one wage
settlement or ITA Nos.278, 807, 1578 & 312/2010
Page 5 agreement, invariably, there is a time lag when
another fresh wage revision agreement is negotiated
and entered. The deduction claimed for that period
cannot be termed as contingent because the wage and
the probable revision or rates of revision would be
within the fair estimation of the employer. In this case,
BHEL had the benefit of past experience of such pay
revisions. Its liability could not be characterized as
contingent but was in fact ascertained; the
quantification, however, had not happened."
5. Counsel for the respondent has also relied upon the decision
of Kerala High Court in case of C. N. Ramachandran Nair &
T. R. Ramachandran Nair, JJ. In I. T. Appeal No. 216/2001
219 CTR 0147 wherein it has been held as under:-
2. We have heard learned standing counsel
appearing for the Revenue and Shri Baiachandran,
learned senior counsel appearing for the respondent
assessee. Learned standing counsel referred to the decision of the Calcutta High Court in CIT vs. Teesta Valley Co. Ltd. (1991) 187 ITR 657 (Cal) and the decision of the Bombay High Court in Tyresoles Goa (P) ltd vs. CIT (1992) 101 CTR(Bom)349 : (1992) 193 ITR 649 (Bom), and contended that the liability in this case is contingent in nature and therefore not an admissible deduction. The assessee, on the other hand, relied on the decision of the Supreme Court in Bharat Earth Movers Vs. CIT(2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC), the decision of the Rajasthan High Court in CIT vs. Premier Vegetable Products (1996) 133CTR (Raj) 372 : (1997) 227 ITR 931 (Raj) and the decision of the Bombay High Court in CIT Vs. United Motors (India) Ltd. (1990) 181 ITR 347 (Bom), and contended that liability for increased wages, though ascertained and discharged in the subsequent year being liability of the previous year is an prevailing between the management and the employees expired on 31st July, 1992,i.e. during the previous year. Therefore, the employees were entitled to wage revision from 1st August, 1992 onwards. It is quite normal and particularly in the case of Government Companies, wage settlement involves (8 of 9) [ITA-127/2016] protracted negotiations taking time and even though agreement is entered later, it always takes effect from the date of expiry of the previous settlement. In fact, It is only on this understanding and expection that the employees continue to work without any demand for immediate increase of wages after the expiry of the existing settlement.
3. Even though learned standing counsel for the Revenue contended that contractual arises only on the date of signing the agreement, we are unable to accept this argument in this case. In the normal course, an agreement called settlement as increase in wages takes effect from the date of expiry of the previous settlement and this case is no exception to it. What is important is not the date of signing the agreement nor the later approval granted by the Government, but the effective date of commencement of the wage revision under the agreement. There is no dispute that the wage increase was granted as a continuous measure from the date of expiry of the previous settlement, i.e. w.e.f. 1st August, 1992. Therefore, the liability for wage increase really accrued for the respondent assessee w.e.f. 1st August, 1992. The assessee is entitled to claim deduction of such wage increase attributable upto the end of the previous year, no matter exact amount was ascertained and payment made later. In the decision of the Supreme Court referred to above, it is made very clear that what is to be considered is whether the liability is attributable to the previous year of the next years. Even though the other two decisions cited by the assessee are not directly on the point, the principles laid down therein are applicable to be facts of the case, It is clear from the orders that by the time the accounts were finalised and returns were filed, the assessee had ascertained the actual liability attributable to the previous year and therefore the actual amount payable only was claimed based on mercantile system of account followed by the assessee.
6. We have heard both the parties.
7. Taking into consideration the observations made by the Tribunal in Paragraph 4.3 and the fact that decision which is referred by the Tribunal has gone on low tax effect, in our considered opinion in view of the decision of Delhi High Court and (9 of 9) [ITA-127/2016] Kerala High Court(Supra), the view taken by the Tribunal is just and proper.
8. The issue is answered in favour of the assessee against the department.
9. The appeal stands dismissed.
(VIJAY KUMAR VYAS),J. (K.S.JHAVERI),J.
B.M.G/Gourav/49