2006 (1) TMI 538 - AT - Income Tax

Summary

Issues:
Appeal against deletion of provision for unascertained liabilities as deduction.

Analysis:
1. The appeal was filed by the revenue against the deletion of a provision for unascertained liabilities as a deduction in the assessment order under section 143(3) for the assessment year 1998-99. The assessee had provided for a sum of Rs. 72 lakhs under 'Salaries and wages', pending revision, in the audit report for the year ended 31-3-1998. The Assessing Officer disallowed this provision, stating that the liability on account of wage revision had not been ascertained and accrued during the relevant year.

2. The learned CIT(Appeals) considered the submissions of the appellant and the reasoning of the Assessing Officer. It was noted that the liability could have been accounted for either on a mercantile basis when it accrued or on a cash basis when payment was made. As the appellant followed a mixed system of accounting, the provision of the liability on an accrual basis was accepted. The addition of Rs. 72 lakhs was deleted by the CIT(Appeals) as it was considered a valid deduction.

3. The revenue contended during the appeal that the decision to revise pay and wages was taken after the end of the previous year under assessment, and thus no liability had been incurred or accrued during the relevant period. The assessee argued that indications for pay revision existed during the accounting year under assessment, and the consideration for revision had started before the end of the year.

4. The Tribunal analyzed the contentions and referred to Accounting Standard 4, stating that adjustments to assets and liabilities for events occurring after the balance sheet date should relate to conditions existing at the balance sheet date. It was found that the decision to revise pay scales came into existence after the end of the previous year under assessment, and no liability existed as of 31-3-1998. The Tribunal held that the Assessing Officer was justified in disallowing the provision, reversing the CIT(Appeals) order.

5. The Tribunal also addressed the case laws cited by the assessee, emphasizing that the liability must be incurred to be allowed as a deduction, even if not quantified or payable immediately. In this case, the liability for the revised pay scales was found to have been incurred only during the financial year 1998-99, not in the relevant assessment year. Consequently, the Tribunal allowed the revenue's appeal and restored the assessment order made by the Assessing Officer.