2016 (5) TMI 397 - HC - Income Tax

Additions made on account of provision for arrears of salary being as prior period expenses and contingent liabilities - Held that - Tribunal after examining the matter that as per notification dated 7.1.2009 issued by the State Government, the arrears of pay revision were to be paid by the assessee in two instalments i.e. 40% during the financial year 2008-09 and 60% in the next financial year. The liability was thus not in the nature of any contingent liability. Since the method adopted by the assessee was mercantile system of accounting and the provision on account of arrears for salary payment was made in the accounts on accrual basis, the disallowance made by the Assessing Officer was not held to be justified. The findings recorded by the Tribunal are pure findings of fact which have not been shown to be illegal or perverse by the learned counsel for the appellant-revenue. - Decided against revenue

Summary

Issues:
Appeal by revenue under section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal regarding the addition made on account of provision for arrears of salary.

Analysis:
The respondent-assessee, a government undertaking, filed its income tax return declaring income, which was revised later. During scrutiny, it was noted that provisions were made for arrears of salary based on a State Government notification. The Assessing Officer disallowed the provision, stating it should be allowed only in the year of payment. The CIT(A) partly allowed the appeal, deleting the addition. The Tribunal affirmed the CIT(A)'s decision, stating the liability was not contingent but an ascertained liability. The provision was made on accrual basis as per the mercantile system of accounting. The Tribunal found no infirmity in the CIT(A)'s order, dismissing the appeal.

The Tribunal's findings were based on facts and not shown to be illegal or perverse. The liability for arrears of salary was not contingent but ascertained, arising during the assessment year and discharged in the future. The provision was made on accrual basis as per the mercantile system of accounting. Therefore, no substantial question of law arose, leading to the dismissal of the appeal by the revenue.