2014 (6) TMI 1089 - AT - Income Tax

Provision made for arrears of salary - according to this assessee, this provision is allowable as deduction because the assessee has been maintaining its books of account on mercantile system of accounting - HELD THAT - Liability in question was not crystallized during the year. At the same time, we also find force in the submissions of the ld. A.R. that in view of the fact that the assessee has been following mercantile system of accounting and the system of accounting as approved by AS-29 issued by the ICAI. This provision can also be allowed. Reliance has been placed by the CIT on the decision of Rotork Controls 2009 (5) TMI 16 - SUPREME COURT which was also relied on by the A.O. Therefore, we would like to restore the entire issue to the file of the A.O. Therefore, we do the same and restore the issue to the file of the A.O. with the direction that he shall decide this issue afresh by considering each and every aspect of the arguments raised on behalf of the assessee and after taking into consideration various aspects of the issue - Allow ground raised for statistical purpose.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the provision for manager salary security fund set apart for the primary agricultural societies is allowable as a deduction.
• Whether the provision for arrears of salary from 01/01/2004 to 31/03/2008 is allowable as an expense for the year under consideration.
• Whether the provision for arrears of salary amounting to Rs. 40 lakhs provided in the year under consideration for earlier years can be allowed as business expenditure.
• Whether the actual payment of gratuity should be allowed against the provision made by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Provision for Manager Salary Security Fund

• Relevant legal framework and precedents: The Tribunal referred to its own previous order in the assessee's case for A.Y. 2007-08, where a similar disallowance was made and subsequently allowed.
• Court's interpretation and reasoning: The Tribunal found that the liability to pay the salary security fund accrues when acceptance is received from the Registrar, not at the time of agreement execution.
• Key evidence and findings: The Tribunal noted that the liability was created under statutory directions and was consistent with the Tribunal's earlier decision.
• Application of law to facts: The Tribunal applied the principle that liability crystallizes in the year of approval, following the decision of the Hon'ble Apex Court in Nonsuch Tea Estate Ltd. vs CIT.
• Treatment of competing arguments: The Tribunal favored the assessee's argument, allowing the provision as it was consistent with statutory directions.
• Conclusions: Ground Nos. 1, 2, and 3 were allowed, and the impugned addition was deleted.

Issue 2: Provision for Arrears of Salary

• Relevant legal framework and precedents: The Tribunal considered Accounting Standard (AS) 29 and the Supreme Court's decision in Rotork Controls India P. Ltd vs. CIT.
• Court's interpretation and reasoning: The Tribunal acknowledged that the provision could be allowed under mercantile accounting principles and AS-29, which mandates recognizing liabilities when certain conditions are met.
• Key evidence and findings: The Tribunal noted that the provision was made based on a reasonable estimate, and the exact amount was not known at the time.
• Application of law to facts: The Tribunal found that the provision met the criteria under AS-29 and could be allowed as a deduction.
• Treatment of competing arguments: The Tribunal considered both the assessee's and the department's arguments, ultimately deciding to restore the issue to the A.O. for fresh consideration.
• Conclusions: Ground Nos. 4, 5, and 6, along with the additional ground, were allowed for statistical purposes, with the issue restored to the A.O.

Issue 3: Gratuity Payment

• Relevant legal framework and precedents: The provision for gratuity was considered under section 40A(7) of the Income Tax Act.
• Court's interpretation and reasoning: The Tribunal did not specifically address this issue in detail, as it was not pressed by the assessee.
• Key evidence and findings: Not applicable, as the issue was not pressed.
• Application of law to facts: Not applicable.
• Treatment of competing arguments: The issue was not contested.
• Conclusions: Ground No. 7 was dismissed as it was not pressed.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The liability to pay in respect of salary settlement actually accrues at the very point of time when its acceptance is received from the registrar."
• Core principles established: Liabilities crystallize in the year of approval, and provisions can be allowed under mercantile accounting when they meet AS-29 criteria.
• Final determinations on each issue: The provision for manager salary security was allowed, the provision for arrears of salary was restored to the A.O. for fresh consideration, and the issue of gratuity payment was dismissed as not pressed.