2021 (1) TMI 822 - AT - Income Tax

Disallowance of wage arrears u/s 40a(ia) - contingent liability or not - non deduction of TDS - assessee created an adhoc provision for wage arrears - HELD THAT - There is no dispute with regard to the fact that there was negotiations between the assessee bank and employees unions for wage revision on the basis of recommendation of 6th Pay Commission of State Government w.e.f. 01.01.2006. It is also not in dispute that the State Government has constituted a committee to examine the demands of employees union and accordingly, a committee has been constituted under the leadership of Registrar of Co-operative Societies, Government of Tamil Nadu. After negotiations and deliberations with employees union, a settlement had been reached, as per which the assessee bank and employees unions have agreed to revise the wages w.e.f 01.01.2006, but monetary benefit arising out of revision shall be w.e.f 01.01.2007. Based on the above inputs, the assessee has anticipated liability in respect of wage arrears to its employees for the impugned assessment years the said liability is contingent liability. We find that the findings of the AO appears to be misplaced both facts and in law because liability of wage arrears is a real one for the services which have already been rendered and therefore, was definitely in the nature of arrears for such unpaid salary and had definitely arisen and therefore, in fact, it had a present obligation as a result of past events of the works or services already carried out by the employees entailing an outflow of resources to settle such obligation as per contractual agreement between employees and management. Liability has been provided in books of accounts when it was accrued for the impugned assessment years for the services rendered and hence the same cannot be considered as contingent in nature or unascertained liability, merely for the reason that the said liability was quantified and paid in subsequent financial years. The learned CIT(A) after considering the relevant facts has rightly deleted the addition made by the AO towards disallowance of provision for wage arrears. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of wage arrears under Section 40(a)(ia) of the Income Tax Act.
2. Nature of liability for wage arrears – whether it is contingent or ascertained.

Detailed Analysis:

1. Disallowance of Wage Arrears under Section 40(a)(ia):
The primary issue revolves around the disallowance of wage arrears amounting to ?5,57,77,696/- for the assessment year 2010-11. The Revenue contended that the provision for wage arrears was ad-hoc and disbursed only in the subsequent financial year, thus should not be allowed as a deduction under Section 40(a)(ia) of the Income Tax Act. The Assessing Officer (AO) argued that the liability was unascertained and contingent, as the final quantum was paid in subsequent years.

2. Nature of Liability for Wage Arrears:
The core of the dispute lies in determining whether the liability for wage arrears was contingent or ascertained. The AO held that the liability was contingent, as it was based on estimates and not finalized during the relevant assessment years. The assessee, a co-operative bank, argued that the liability was ascertained and accrued in the relevant years based on negotiations and recommendations of the 6th Pay Commission.

Tribunal's Findings:
1. Provision for Wage Arrears:
- The Tribunal noted that the assessee had made a provision for wage arrears based on reasonable estimation, considering the ongoing negotiations and recommendations for wage revision effective from 01.01.2006.
- The liability was considered real and had arisen due to services already rendered by the employees, thus constituting an ascertained liability.

2. Judicial Precedents:
- The Tribunal referenced the Supreme Court decision in Bharat Earth Movers Ltd. 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 is quantified and discharged at a future date.
- The Tribunal also cited the case of Haryana Agro Industries Corporation Limited and Kerala State Financial Enterprises, supporting the view that provisions made on an accrual basis are allowable deductions.

3. Board Instructions:
- The Tribunal considered the Board's Instruction No.17/2008, which specifies that only accrued or ascertained liabilities are deductible. The Tribunal found that the wage arrears were an ascertained liability, as they were based on past services rendered and a reasonable estimate of the liability.

4. CIT(A)'s Decision:
- The CIT(A) had directed the AO to delete the disallowance, concluding that the liability for wage arrears was not contingent but ascertained. The CIT(A) reasoned that the liability had arisen from past events (services rendered) and was not dependent on future events.
- The Tribunal upheld the CIT(A)'s decision, agreeing that the liability was certain and estimable with reasonable accuracy, thus allowable under the Income Tax Act.

5. Conclusion:
- The Tribunal dismissed the Revenue's appeal, affirming that the provision for wage arrears was an ascertained liability and deductible in the relevant assessment years. The appeals for both assessment years 2009-10 and 2010-11 were dismissed.

Summary:
The Tribunal concluded that the provision for wage arrears made by the assessee was an ascertained liability, arising from past services rendered by employees, and thus allowable as a deduction under the Income Tax Act. The appeals filed by the Revenue were dismissed, and the order of the CIT(A) was upheld.