2020 (10) TMI 1195 - AT - Income Tax

Liability for payment of arrears of salary - Implementation of the 6th Pay Commission to his employees - Certain liability - HELD THAT - Assessee company calculated his liability and made provision in his books of accounts and claimed as expenditure which are placed in the record. The liability calculated by the assessee company was a fixed liability which was to be paid to its employees towards arrear salary which cannot be also taken back from the employees. As a certain liability for the impugned assessment year. The assessee company can make provision for the certain liability which is certainly to be paid therefore the assessee company has rightly made provision for the arrears of salary in his books of accounts. This is a necessary expenditure which is required to be deducted from the profit of the assessee company for the impugned assessment year while calculating the taxable profit because the liability has been imposed by the State Government of Odisha. Assessee has calculated exact figure which has to be paid in different instalments later on as per instructions from the State Government Odisha which actually has been paid to the assessee s employees. Case laws relied on by the ld. DR are also not applicable in the present facts of the case. In view of this we are of the opinion that the ld. CIT(A) is not justified in confirming the addition made by the AO in this regard. Accordingly we set aside the impugned order passed by the CIT(A) and allow the grounds of appeal of the assessee.

Summary

Issues Involved:
1. Legality of the disallowance of ?20.05 crores provision made by the assessee for pay revision arrears.
2. Determination of whether the provision was an ascertained liability or a contingent liability.
3. Applicability of Accounting Standard-4 (AS-4) in the context of events occurring after the balance sheet date.

Issue-wise Detailed Analysis:

1. Legality of the Disallowance of ?20.05 Crores Provision:
The assessee challenged the addition of ?20.05 crores, disallowed by the AO based on the direction of revisionary proceedings under Section 263 of the Income Tax Act, 1961. The AO deemed the provision as a contingent liability, relying on the Supreme Court judgment in Molasses Company Private Limited vs. CIT (1959) 37 ITR 66 (SC). The CIT(A) upheld this view, confirming the disallowance on the grounds that the provision was made in anticipation of orders passed after the end of the financial year 2008-09. The Tribunal, however, disagreed, noting that the liability for pay revision was a fixed liability imposed by the State Government of Odisha and thus was an ascertained liability. Consequently, the Tribunal allowed the appeal, setting aside the CIT(A)'s order.

2. Determination of Whether the Provision was an Ascertained Liability or a Contingent Liability:
The core issue was whether the provision of ?20.05 crores was an ascertained liability or a contingent liability. The AO and CIT(A) treated it as a contingent liability since the relevant orders for pay revision were issued after the end of the financial year. The Tribunal, however, found that the liability was known and fixed at the time of finalizing the accounts as per the Accounting Standard issued by ICAI. The Tribunal emphasized that the liability was imposed by the State Government of Odisha and was mandatory, thus qualifying it as an ascertained liability.

3. Applicability of Accounting Standard-4 (AS-4):
The Tribunal considered the applicability of AS-4, which addresses events occurring after the balance sheet date but before the approval of financial statements. The assessee argued that the provision was made in accordance with AS-4, as the books were still open when the Government of Odisha issued the pay revision notification. The Tribunal agreed with the assessee, noting that the provision was made based on a known liability due to the pay revision declared by OPTCL and approved by the Government of Odisha. The Tribunal concluded that the provision was correctly made and allowable under Section 37(1) of the Income Tax Act.

Conclusion:
The Tribunal allowed the appeal, concluding that the provision of ?20.05 crores for pay revision arrears was an ascertained liability and not a contingent liability. The Tribunal set aside the orders of the AO and CIT(A), holding that the provision was made in compliance with AS-4 and was a necessary expenditure deductible from the assessee's taxable profit for the relevant assessment year. The appeal was thus allowed in favor of the assessee.