2018 (9) TMI 1411 - HC - Income Tax

Deduction claimed on account of the provision for wages u/s 43B- Allowable as a deduction since it was quantified based on a consultant s advise - whether the claim for deduction made by the assessee was allowable as deduction or whether it was only an estimation and could be claimed only in the year when the expenditure is occurred. The above question was answered by the High Court of Delhi, while interpreting the very same? - Held that - Useful reference can be made to the decision in the case of Bharat Heavy Electrical Limited 2012 (9) TMI 515 - DELHI HIGH COURT , wherein, the assessee claimed a provision for wage revision, which was disallowed by the Assessing Officer. When the same was put to challenge, it was held that the provision for wage revision was based on past experience, previous Pay Commission s Reports and other relevant factors and the deduction claimed for the period between the expiry of one Wage Board settlement or agreement cannot be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer. Thus, deduction claimed on account of wage revision was held to be permissible. What is important is not the date of signing the agreement nor the later approval granted by the Government, but the effective date of commencement of the wage revision under the agreement and it was held that the liability for wage increase really accrued for the assessee would be the effective date. In the instant case, on the advise given by the Consultant, the assessee estimated the liability, which became payable with retrospective effect, i.e., from April 1998. - Decided in favour of assessee Levy of interest under section 234D of the Act, the assessee does not dispute the fact that the decision in the case of Infrastructure Development Finance Company Ltd. 2011 (9) TMI 591 - MADRAS HIGH COURT has answered the question in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Deduction on account of provision for wages when the liability is not actually accrued.
2. Allowability of provision for wages based on a consultant's advice.
3. Charging of interest under section 234D for refunds granted prior to the insertion of the section.

Detailed Analysis of the Judgment:

1. Deduction on Account of Provision for Wages When the Liability is Not Actually Accrued:
The primary issue was whether the Tribunal was right in allowing the deduction for provision for wages amounting to ?12 Crores, which was based on the Wage Board recommendations but not yet accrued. The assessee had estimated this liability based on the recommendations of a consultant appointed by the Indian Newspapers Society. The Wage Board's tentative proposal was notified on 30.12.1999, and the final notification was issued on 05.12.2000. The Assessing Officer and the CIT(A) rejected the provision, stating the liability had not arisen before the government's final notification. However, the Tribunal allowed the deduction, and this decision was upheld by referencing the Delhi High Court's decision in Hindustan Times, which held that liabilities arising from the Wage Board award were justifiably deductible as expenditure and not covered by Section 43B of the Income Tax Act, 1961.

2. Allowability of Provision for Wages Based on a Consultant's Advice:
The second issue was whether the provision for wages, quantified based on a consultant's advice, was allowable as a deduction. The Tribunal's decision in favor of the assessee was supported by the Delhi High Court's ruling in Hindustan Times, which stated that such liabilities, being arrears of wages due to wage revision, were deductible as they arose during the assessment year. The provision was based on a best estimate in light of the Wage Board's recommendations, aligning with the Accounting Standard I on the disclosure of accounting policies. The court also referenced decisions in Bharat Heavy Electrical Ltd. and Kerala State Financial Enterprises Ltd., which supported the deduction of wage revision provisions based on past experience and relevant factors.

3. Charging of Interest Under Section 234D:
The third issue concerned whether interest under section 234D could be charged for refunds granted before the section's insertion, given that the regular assessment was completed after its insertion. The court referenced the decision in Commissioner of Income Tax Vs. Infrastructure Development Finance Company Ltd., which held that interest under section 234D is applicable if the regular assessment is completed after the section's insertion date, regardless of the assessment year. Thus, the court ruled in favor of the Revenue, allowing the charging of interest under section 234D.

Conclusion:
- The substantial questions of law No. 1 and 2 were answered in favor of the assessee, allowing the deduction for the provision for wages.
- The substantial question of law No. 3 was answered in favor of the Revenue, permitting the charging of interest under section 234D.
- The matter was remanded to the Assessing Officer for further proceedings, with no order as to costs.