Document Fragment View

Matching Fragments

4. The AO did not dispute the revenue nature of the expenditure. However, taking into consideration several clauses of the scheme he came to the conclusion that the liability for Part II payment did not accrue during the year. Also referring to cl. 2(B)(ii) of the scheme, the AO concluded that assessee's liability under Part II was wholly and clearly contingent upon certain specific conditions being fulfilled and hence according to him it was a contingent liability. Hence he disallowed assessee's claim to the extent of Part II payment amounting to Rs. 48,05,871.

14. Paragraph 3.1 of the Accounting Standard 4(As-4) on Contingencies and Events Occurring After the Balance Sheet Date defines the term 'Contingency' as follows :

"A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events."

15. In the present case, whether an employee is entitled to Part II compensation or not can be known only 10 months after the date of his retirement. Hence, as per the definition given by ICAI itself, the liability under Part II is a contingent liability.

16. Further, para 5.1 of As-4 reads as follows :

"The accounting treatment of a contingent loss is determined by the expected outcome of the contingency. If it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements."

17. Earlier, we have already held Part II liability to be a contingent liability. The ICAI has recommended the provision of such a liability on grounds of prudence. Now prudent accounting is one thing and determination of income for tax purposes is another. One may be almost sure that a certain liability will arise on the happening or non-happening of an event, and from the viewpoint of the management, it may be prudent to set apart a specified amount, but undoubtedly, the liability has not arisen till the happening or non-happening of the event.

24. Similarly, the case of Rallis India (supra) decided by the Calcutta Bench of the Tribunal is also quite distinguishable. In the said case, under the voluntary retirement scheme (VRS) formulated by the assessee-company, the concerned employees were to be paid monthly pension. The assessee's liability was actuarially determined at Rs. 3,68 crores. The entire liability was claimed as deduction but was disallowed by the Department, inter alia, on the ground that under the scheme, the assessee could stop or withhold payment if an employee who had taken retirement under VRS had acted in a manner prejudicial to the interest of the company. The Tribunal held that the liability to pay pension in future years was not a contingent liability but was a real, definite and ascertained liability. The Tribunal further observed that the clause empowering the assessee to stop or withhold the payment did not make the liability contingent upon any particular event. Here lies the difference. In the present case, the liability is contingent upon a particular event of not accepting employment in a similar unit within 10 months. In Rallis' case (supra) the Tribunal also observed that it was only the payment which was contingent upon the good behaviour of the employee. The same is not the case in the present appeal. The agreement itself states that "the above additional amount of compensation and the special payment shall accrue and become payable only to those employees who have not accepted employment ......... for the period of ten months ........". "Good behaviour" in Rallis' case (supra) is too general and quite subjective as against the objective and specific condition of not taking employment in a competitor's unit within a period of 10 months. Thus the case of Rallis India (supra), in our opinion, is not applicable to the present case.