2005 (7) TMI 303 - AT - Income Tax

Business Expenditure - Wages and salaries - Allowability of Ad hoc Provision made towards Wages Revision in respect of employees covered under IDA pattern of pay scale - HELD THAT - In the present case, the right to receive compensation for the services rendered by the employees arise out of the contract of employment. The contract of employment in the instant case is not in dispute. What is in dispute is quantification of compensation. In this case the charter of demands by the employees covered under IDA scheme of salary was available as early as 1-1-1997. For these employees the revised wages/salary was to be given with effect from 1-1-1997. Thus, it can be said that the appellant was reasonably certain of its increased liability on this account. As the Personnel Department of the appellant had knowledge of dealing with such Pay hikes in the past, the assessee could estimate the quantum of such enhanced liability. The liability was certain. What was not certain is the quantum of such liability. Also, the entries taken in the books of account towards provision of enhanced salary/wages cannot be said to be unilateral entry made by the appellant. The appellant accepted its liability to the extent provision was made in the books of account based on the demands from its employees. It may also be noted that the accounting standards were also made part of the Act. Taking into account principle of prudence and the definition of accrual as given therein, as also the principle of real income, we are of the opinion that in the facts of the present case, the provision made towards additional liability on account of enhanced wages and salary are allowable in the year of making such provision. In this view of the matter, this ground of the assessee is allowed. In the result, the appeals of the assessee are partly allowed.

Issues Involved:
1. Allowability of Ad hoc Provision made towards Wages Revision in respect of employees covered under IDA pattern of pay scale.
2. Computation of deduction under section 80HHC.
3. Charging of Rs. 3.90 crores to the Profit and Loss Account on account of expenditure incurred on Arki Lime Stone deposits.
4. Writing-off of miscellaneous losses of Rs. 2,27,46,000.

Detailed Analysis:

1. Allowability of Ad hoc Provision made towards Wages Revision in respect of employees covered under IDA pattern of pay scale:

The appellant made provisions for wage revisions for employees under the IDA pattern for the assessment years 1998-99, 1999-2000, and 2000-2001. The amounts claimed were Rs. 10,13,39,487, Rs. 11,50,64,000, and Rs. 12,13,19,000 respectively. The wage revision was due from 1-1-1997, with a new settlement reached on 17-8-2001. The Revenue argued that the liability was contingent and not allowable until government approval was received. The appellant contended that the provision was based on a reasonable estimate of the liability, which was certain but not quantifiable at the time. The Tribunal concluded that the provision was allowable, citing principles of prudence, real income, and accounting standards, thereby allowing this ground of appeal.

2. Computation of deduction under section 80HHC:

The issue of deduction under section 80HHC was previously decided in favor of the appellant for earlier years. The appellant argued that job charges do not fall within the scope of Explanation (baa) to section 80HHC, relying on decisions from the Hon'ble Bombay High Court. However, the Tribunal upheld its previous decision, stating that the Special Bench decision in the case of Lalsons Enterprises v. Dy. CIT was binding. Consequently, this ground of the assessee was partly allowed.

3. Charging of Rs. 3.90 crores to the Profit and Loss Account on account of expenditure incurred on Arki Lime Stone deposits:

The appellant claimed Rs. 3.90 crores as expenditure for feasibility studies on Arki Limestone deposits, which the Assessing Officer disallowed, considering it capital expenditure. The CIT(A) noted that the Board's Resolution for writing off the sum was relevant to the assessment year 2001-2002, not the year under consideration. The Tribunal upheld the CIT(A)'s finding, stating that the expenditure was not allowable in the assessment year 2000-2001, and rejected this ground of the assessee.

4. Writing-off of miscellaneous losses of Rs. 2,27,46,000:

The appellant wrote off non-moving stores, obsolete stores, and other losses totaling Rs. 2,27,46,000. The Assessing Officer disallowed the claim, stating that the inventories written off were not part of the Profit & Loss Account or closing stock, and the appellant failed to provide necessary details. The CIT(A) upheld this disallowance, noting the lack of contemporaneous documentary evidence. The Tribunal agreed, emphasizing that the loss would occur only on the actual sale of such items, and upheld the CIT(A)'s order, rejecting this ground of the assessee.

Conclusion:

The Tribunal partly allowed the appeals of the assessee, permitting the provision for wage revisions but rejecting claims related to the deduction under section 80HHC, expenditure on Arki Limestone deposits, and writing-off of miscellaneous losses.

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