1981 (9) TMI 160 - AT - Income Tax

Issues Involved:
1. Whether the liability for workmen's compensation accrued in the assessment year 1978-79.
2. Whether the Commissioner was correct in invoking section 263 of the Income-tax Act, 1961.
3. The validity of the provision for workmen's compensation under the mercantile system of accounting.

Detailed Analysis:

Issue 1: Whether the liability for workmen's compensation accrued in the assessment year 1978-79.

The primary issue is whether the liability of Rs. 7,56,236.10 for workmen's compensation accrued in the assessment year 1978-79. The assessee argued that the liability arose as soon as the personal injury occurred to the workmen under section 3 of the Workmen's Compensation Act, 1923. The Commissioner, however, contended that the liability did not accrue until it was quantified by the Commissioner under section 19 of the 1923 Act.

The Tribunal referred to the Supreme Court's decision in Pratap Narayan Deo v. Shrinivas Sapata AIR 1970 SC 222, which held that the employer's liability to pay compensation arises as soon as the injury occurs, and not when it is quantified by the Commissioner. Similarly, the Bombay High Court in Margardita Gomes v. Mackinnon Mackenzie (P.) Ltd. AIR 1968 Bom. 328 held that the liability to pay compensation is created immediately upon the occurrence of an accident causing injury to the workman.

Based on these precedents, the Tribunal concluded that the liability of Rs. 7,56,236.10 accrued in the assessment year 1978-79 when the personal injuries occurred, despite the fact that the claims were contested and not yet quantified by the Commissioner.

Issue 2: Whether the Commissioner was correct in invoking section 263 of the Income-tax Act, 1961.

The Commissioner invoked section 263, arguing that the assessment order was erroneous and prejudicial to the interests of the revenue because the liability had not accrued in the year under consideration. The Tribunal examined the provisions of the Workmen's Compensation Act, 1923, and the relevant case law to determine the correctness of this invocation.

The Tribunal found that the liability for compensation arose as soon as the injury occurred, irrespective of whether it was quantified. Therefore, the initial allowance of the provision by the Income Tax Officer (ITO) was not erroneous. Consequently, the invocation of section 263 by the Commissioner was found to be incorrect.

Issue 3: The validity of the provision for workmen's compensation under the mercantile system of accounting.

The assessee followed the mercantile system of accounting, which requires liabilities to be accounted for when they accrue, not when they are paid. The Tribunal noted that under this system, the liability for workmen's compensation should be recognized in the year the injury occurs, aligning with the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), which supports recognizing liabilities as they accrue.

The Tribunal concluded that the assessee was justified in making a provision for the liability of Rs. 7,56,236.10 in its books for the year under consideration. The fact that the liability was contested did not negate its accrual under the mercantile system of accounting.

Conclusion:

The Tribunal allowed the appeal by the assessee, holding that the liability for workmen's compensation accrued in the assessment year 1978-79. The invocation of section 263 by the Commissioner was found to be incorrect, and the provision for the liability under the mercantile system of accounting was validated. Consequently, the stay petition by the assessee became infructuous and was rejected.

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