2008 (2) TMI 383 - HC - Income Tax

Assessee engaged in kury business and financing. The wage settlement with the employees expired on 31.7.1992 i.e. towards the middle of the previous year relevant for the assessment year 1993-94. Negotiations for settlement were going on in the previous year and the actual agreement approving wage increase with effect from 1.8.1992 was signed on 9.6.1993. This was approved by the Government by order dated 20.10.1993. The assessee claimed increased wages payable to the employees during the previous year as a deduction in the return filed for the assessment year 1993-94. The assessing officer disallowed the claim on the ground that liability arose under the agreement approved by the Government in the succeeding year. - Held that deduction allowed as claimed by the assessee on the ground 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 accounting followed by the assessee.

Summary

Issues:
- Appeal by Revenue under Section 260A of the Income Tax Act against deduction of wage increase payable by the assessee to employees.
- Disallowance of claim by assessing officer based on liability arising in the succeeding year.
- Tribunal's decision allowing the deduction and Revenue's appeal against it.

Analysis:
1. The appeal filed by the Revenue under Section 260A of the Income Tax Act challenged the deduction of around Rs.1.86 crores towards wage increase payable by the assessee to the employees during the previous year. The dispute arose from an agreement signed in the subsequent year, where negotiations for wage settlement were ongoing in the previous year. The assessing officer disallowed the claim on the grounds that the liability arose under the agreement approved by the Government in the succeeding year. The Commissioner of Income Tax (Appeals) upheld the disallowance, leading the assessee to file a second appeal to the Tribunal.

2. The Tribunal found that although the liability was ascertained and paid through the agreement approved in the succeeding year, it was, in fact, a liability of the previous year and thus allowable. The Revenue contended that the liability was contingent and therefore not admissible as a deduction, citing decisions from the Calcutta and Bombay High Courts. On the other hand, the assessee relied on decisions from the Supreme Court and various High Courts to support the claim that the liability for increased wages, though settled in the subsequent year, was attributable to the previous year and hence deductible.

3. The High Court analyzed the situation, noting that wage settlements often involve protracted negotiations, with agreements taking effect from the expiry date of the previous settlement. The effective date of commencement of the wage revision under the agreement was deemed crucial, with the liability for wage increase accruing to the assessee from the date the previous settlement expired. The Court emphasized that the key consideration was whether the liability was attributable to the previous year, regardless of when it was ascertained and settled. Based on the principles established in relevant legal precedents, the Court concluded that the Tribunal was justified in allowing the claim, leading to the dismissal of the Revenue's appeal.