1977 (4) TMI 86 - AT - Income Tax

Summary

Issues:
- Whether the AAC erred in ordering the deduction of additional liability for wages payable to workers as per the Industrial Tribunal's award?
- Whether the liability had accrued even though it was disputed in appeal before the High Court?
- Whether the exact quantification of the liability is necessary for deduction?
- Whether the assessee is entitled to deduction under the mercantile system of accounting even if the liability was disputed and not quantified?
- Whether the failure to make a provision in the books of account bars the assessee from claiming a deduction for accrued liability?
- Whether the liability needs to be paid to be eligible for deduction?

Analysis:

The appeal before the Appellate Tribunal ITAT Pune involved a dispute regarding the deduction of additional liability for wages payable to workers as per the Industrial Tribunal's award for the assessment year 1974-75. The respondent, a manufacturing company, contested the award but calculated the probable liability and claimed a deduction of Rs. 5,50,000. The Income Tax Officer (ITO) refused the deduction, stating the liability was not accepted and quantified. However, the Assessee's Appellate Commissioner (AAC) allowed the deduction of Rs. 1,99,268 as the liability had accrued in the previous year, following the mercantile method of accounting.

The departmental representative argued that the liability did not accrue as it was disputed and exact quantification was necessary for deduction. In response, the assessee's counsel relied on Supreme Court decisions supporting the deduction of accrued liabilities under the mercantile system of accounting, irrespective of disputes or quantification issues. The Tribunal noted the assessee's consistent use of the mercantile system.

Referring to Supreme Court judgments, the Tribunal emphasized that under the mercantile system, accrued liabilities are deductible regardless of payment status. The Tribunal rejected the Revenue's argument that the absence of a provision in the books of account precludes deduction, citing a Supreme Court case where the failure to record a liability did not bar its deduction. Additionally, the Tribunal clarified that payment is not a prerequisite for deducting accrued liabilities.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the AAC's decision to allow the deduction of the accrued liability of Rs. 1,99,268. The judgment reaffirmed the principle that under the mercantile system of accounting, accrued liabilities are deductible, even if disputed or not quantified, as long as they have accrued.