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2015 (4) TMI 152 - AT - Income TaxRevision u/s 263 - AO has allowed deduction of ₹ 809.86 lakhs under the head salaries, wages and allowances for provision made pending finalisation of Pay Revision of employees which had become due from 01.01.1997 and this liability which accrues on account of pay revision, is neither ascertainable nor had been approved during the P.Y. relevant to the A.Y. 1999-2000 - Held that - Applying the propositions laid down in the binding judgement of CIT vs. DLF Ltd. (2012 (9) TMI 626 - DELHI HIGH COURT) considered the judgement of Malabar Industrial Co. 2000 (2) TMI 10 - SUPREME Court there is no element of unsustainability in the order of the AO, as far as the allowing of the deduction of the provision made in salaries for impending pay revision is concerned. Thus the invocation of jurisdiction u/s 263 of the Act by the Ld.CIT is bad in law. - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Allowability of deduction for provision made for pay revision. 3. Determination of whether the liability for pay revision had accrued during the relevant assessment year. Issue-wise Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The primary issue is whether the Commissioner of Income Tax (CIT) correctly invoked jurisdiction under Section 263 of the Income Tax Act. The assessee argued that the assessment order was neither erroneous nor prejudicial to the interest of revenue. The CIT had initiated proceedings under Section 263 on the grounds that the assessment order was erroneous and prejudicial to the interests of revenue because the Assessing Officer (AO) had allowed a deduction for a provision made for pay revision, which the CIT claimed was not ascertainable or approved during the relevant period. 2. Allowability of Deduction for Provision Made for Pay Revision: The assessee contended that the provision for pay revision was an allowable deduction as it was contractual in nature and not contingent. The assessee relied on Accounting Standards AS 4 and AS 6, and the Supreme Court judgment in Bharat Earth Movers vs. CIT, which held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed even if the liability may have to be quantified and discharged at a future date. The CIT rejected these arguments, stating that the liability could not be quantified with certainty before an agreement was entered into with the employees. 3. Determination of Whether the Liability for Pay Revision Had Accrued During the Relevant Assessment Year: The assessee argued that the liability for pay revision had accrued based on past experience, union demands, and other factual criteria, even though the preliminary MOU was not drawn up during the year. The CIT, however, held that the liability for pay revision could only be considered as having arisen in the accounting year if there was an agreement or minimum offer made by the management. Judgment Analysis: Jurisdiction under Section 263: The Tribunal held that the CIT had incorrectly invoked jurisdiction under Section 263. The Tribunal noted that the AO had adopted a possible view, which was supported by various judicial precedents. The Tribunal cited the Supreme Court judgment in CIT vs. Max India Ltd., which held that where two views are possible and the AO has taken one view, the CIT cannot invoke Section 263 merely because he does not agree with the AO's view. Allowability of Deduction: The Tribunal referred to several judicial precedents, including CIT vs. Bharat Heavy Electrical Ltd., CIT vs. Kerala State Financial Enterprises Ltd., and Tata Communications Ltd. vs. JCIT, which supported the assessee's claim that a provision for pay revision, based on past experience and other relevant factors, is an allowable deduction. The Tribunal emphasized that the liability for pay revision was not contingent but was based on a reasonable estimation of the liability that had accrued during the year. Accrual of Liability: The Tribunal concluded that the provision for pay revision was allowable as a deduction. It noted that the negotiations for pay revision had started during the relevant year, and the liability was known to have accrued from the effective date of commencement. The Tribunal held that the provision for salary was not a contingent liability but was in respect of the outcome of the decision of the Department of Public Enterprises. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the CIT had incorrectly invoked jurisdiction under Section 263 and that the provision for pay revision was an allowable deduction. The Tribunal emphasized that the AO's view was a possible and sustainable view, and the CIT's invocation of Section 263 was not justified. The appeal was allowed, and the order of the CIT was set aside.
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