2017 (11) TMI 129 - HC - Income Tax

Deduction claimed on account of ad-hoc provision for pay revision of employee - accrual of liability - year of assessment - taxation of real income or the book income - Whether the Tribunal was legally justified in reversing the findings of the CIT(A) and allowing the deduction claimed on account of ad-hoc provision for pay revision of employees? - test of necessity - Held that - Conclusion of ld. CIT (A) that there 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 are entitled to revised pay from the date it was due and payable by the employer. See Commissioner or Income Tax V/s Bharat Heavy Electrical (2012 (9) TMI 515 - DELHI HIGH COURT) - Decided against revenue

Summary

Issues Involved:
1. Whether the Tribunal was legally justified in reversing the findings of the CIT(A) and allowing the deduction of ?140 lacs claimed on account of ad-hoc provision for pay revision of employees.
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.

Issue-Wise Detailed Analysis:

1. Deduction of ?140 lacs for Ad-hoc Provision for Pay Revision:
The appellant challenged the Tribunal's decision to allow the deduction of ?140 lacs for pay revision of employees, which was initially disallowed by the CIT(A). The CIT(A) had held that the provision made by the bank for pay revision over a period of 2-3 years would remain only a provision until the liability to pay the revised pay arises, which would only occur when an agreement/settlement is reached by the bank with the employees. The CIT(A) relied on several judgments, including the landmark Supreme Court case of *M/s Shree Sajjan Mills Ltd. v. CIT*, which emphasized that provisions for future use do not qualify as deductible expenses under the Income Tax Act. The CIT(A) further cited *M/s Gemini Cashew Sales Corporation* and *M/s Indian Mollasses Co. (P) Ltd.*, which clarified the distinction between actual liabilities and contingent liabilities, stating that only actual liabilities are deductible.

2. Accrual of Liability and Allowability of Deduction:
The Tribunal, however, reversed the CIT(A)'s findings, observing that the pay revision of employees is an ongoing process and that the provision made was based on the due pay revision as of 1.11.2007 under the 9th Bipartite Settlement. The Tribunal noted that the settlement was effected in the financial year under consideration and payments were made from the effective date. It concluded that the liability was crystallized when the pay revision was due and payable, not merely upon the signing of the agreement. The Tribunal referenced the ITAT Jaipur Bench decision in *Jhalawar Kendriya Sahakari Bank Ltd. v. ACIT*, which supported the claim of the assessee by allowing similar deductions.

Supporting Judgments:
The respondent's counsel cited the Delhi High Court decision in *Commissioner of Income Tax v. Bharat Heavy Electricals*, which held that the provision for wage revision based on past experience and other relevant factors is not contingent but ascertained, with quantification pending. Additionally, the Kerala High Court in *C.N. Ramachandran Nair & T.R. Ramachandran Nair, JJ.* supported the view that wage revision liabilities, though ascertained and discharged later, are attributable to the previous year.

Conclusion:
The High Court, after hearing both parties, upheld the Tribunal's decision, finding it just and proper. The court agreed with the Tribunal's observations and the supporting judgments from the Delhi and Kerala High Courts, concluding that the liability for pay revision was due and payable from the effective date, making the provision allowable as a deduction. The issue was answered in favor of the assessee, and the appeal was dismissed.