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TMI Blog1987 (12) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... in his directions u/s. 144B and consequently erred in enhancing the amount of the income assessed to that extent. Certain facts need to be stated. There was a dispute between the assessee-company and its workers and a settlement was arrived at and reduced to writing in a memorandum of settlement dated 13-2-1971. The terms of the agreement provided that the agreement shall come into force from 1-1-1971 and shall bind the parties, i.e., the employer and the workmen for a period of three years, i.e., till 31-12-1973. The wage scales of different grades of workers were fixed and the agreement also provided for terms of payment of dearness allowance, accommodation, etc. It would appear that Dr. Datta Samant, the then President of Brihan Mumbai General Kamgar Union, issued a strike notice to the Mg. Director of the company on 4-6-1973 and the workers went on strike from 15-6-1973. The management of the company issued a general notice on 19-6-1973 advising its workers to stop the strike and report for work. On 18-6-1973, the Union, by a letter of the same date, enclosed a charter of demands and the company.addressed a letter on 4-8-1973 to the Commissioner of Labour Director of Employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries Labour Department of the Govt. of Maharashtra referring the matter for adjudication on the subject mentioned in the Schedule therein to the effect that all the workmen whose names were given in the Annexure should be reinstated with full back wages and continuity of service. This order required the management to refer to the Tribunal the demand to reinstate 340 workers with full back wages. It was passed on 10-9-1974. 2.1 On 22-12-1980, the appellant received letter from their solicitors, Bhaishankar Kanga Girdharilal, in which it was stated by them that Mr. Talegawkar had come across two reported cases, namely, Santoshkumari Gupta v. State Bank of Patiala 1980 (2) LLJ 72 and Gujarat Steel Tubes Ltd. 1980 (1) LLJ 137. On perusal of these cases, the solicitors were of the view that the cases filed by them against the workers in IT Ref. Nos. 125 274 of 1974 were likely to go against them and that therefore they would have to provide for a provision with regard to back wages and other fringe benefits in respect of the workmen for the entire period from 1973 to 1980 and continue to make such provision in future till both references were disposed of. 3. It would app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile filing the Income-tax Return for the relevant period the liability in the amount of Rs. 2,20,00,000 which is arrived at as per calculations of Actuaries Report, be claimed only from the Income-tax Return and no mention of like amount be made anywhere in the annual accounts or in the Directors' Report or in the Auditor's Report. (2) A General Reserve No. II in the amount of Rs. 2,20,00,000 be created into the accounts of the year ended 31-12-1980." To give effect to these decisions, three resolutions were passed, first of which, which is relevant for our purpose, reads as under : "Resolved that the balance left, after the provision of dividend from the Net Profit, to the tune of Rs. 2,20,00,000 and Rs. 13,004.21 be transferred to the General Reserve No. II and General Reserve No. I respectively. " The profit loss account for the year ended 31-12-1980 shows a profit of Rs. 2,39,33,004.21 after provision of taxation of Rs. 32,60,000. The amount of Rs. 2,20,00,000 which was said to be the liability payable by way of back wages to the striking workers was not debited to the profit loss account but was shown as general reserve account No. 2 in the profit loss appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferred and utilised as such when there was a split in the manufacturing divisions of the company. 4. On the above facts, Shri Harish, the learned counsel for the assessee, argued that General Reserve No. 2 shown in the accounts for the year ended 31-12-1980 was actually a provision for labour liability which accrued during the year in view of the Supreme Court decision in Gujarat Steel Tubes Ltd.'s case. The company had never made any such provision in the earlier years from 1974 to 1979 in view of an earlier decision of the Supreme Court in Oriental Textile Finishing Mills v. Labour Court AIR 1972 SC 277. Shri Harish drew our pointed attention to para 12 of this decision. The Supreme Court in effect held that in that case there was a persistent and obdurate refusal by the workmen to join duty notwithstanding the fact that the management had done everything possible to persuade them to come back to work but they had without any sufficient cause refused and which in the view of the Court would constitute misconduct and justify the termination of their service. The Supreme Court, therefore, held that the management had proved misconduct and the stand taken by it was reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision. He finally relied on a few authorities. He first cited the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 which, according to him, supported his argument that there is no distinction between reserve and provision. Thereafter, he relied on the decision of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand [1976] 105 ITR 618. In this case, the High Court held that an assessee who follows the mercantile system of accounting is entitled to claim a deduction even though the expenditure is not claimed. It is enough if the liability for such expenditure accrues. For similar proposition, he relied on another decision of the Allahabad High Court in the case of Motilal Padampat Sugar Mills v. CIT [1977] 106 ITR 988. He particularly relied on the finding of the Court that the fact that the assessee did not make appropriate entries in its books of account to get the amount in reserve account though its accounts were maintained on mercantile basis would not make any difference and that the entries in the books of account are not determinative of an item of income or expenditure. Thereafter, he drew our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Industrial Disputes Act during the year 1980. All the sections of the Industrial Disputes Act to which references were made by Shri Harish were on the statute book during the year of account and in the earlier years and the judgment of the Court which was given on the facts and circumstances of that particular case did not in terms create a commercial liability in the case of a third party particularly when there is no dispute regarding the provisions of law and what is decided is a mixed question of facts and law. Shri Tiwari relied on a catena of judgments in support of this proposition. However, in particular, he drew our attention to the decision of the Supreme Court in the case of India General Navigation Railway Co. Ltd. v. Their Workmen AIR 1960 SC 219 in support of his argument that there was no change in the law relating to industrial disputes ever since the Supreme Court decided the case in India General Navigation Railway Co. Ltd. By and large, in that case, the Supreme Court decided that whereas it may be open to the management to dismiss a workman who has taken part in an illegal strike, in determining the question of punishment, a clear distinction has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercantile, the year in which the liability in respect of back wages really accrued has to be ascertained. It was Shri Tiwari's submission that this liability did not arise in this year but was claimed in the accounting year ended 31-12-1980 as a shame of tax planning because this was a year of exceptionally high profits. Shri Tiwari has given figures of net profit as per the audited accounts for calendar year 1980 and seven earlier calendar years to prove that the profits never exceeded Rs. 80 lacs any time and Rs. 79.65 lacs in 1977-78. They had gone down to Rs. 31 lacs in calendar year 1978 and amounted to Rs. 74.92 lacs in calendar year 1979. It was only in this previous year (calendar year 1980) that the book profits after provision for taxation were as high as Rs. 2,39,33,004. Shri Tiwari argued that each year was an independent year and constitutes a unit of assessment. The year in which the expenditure was incurred or the liability accrued was important as decided in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC). Calendar year 1980 was the year of non-event. No important event whatsoever had taken place which could have relevance for the issue in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own to have accrued. Shri Tiwari relied on a decision of the Supreme Court in CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 524 to elaborate what should be considered as tests of accrual of personal liability. He pointed out that the assessee's stand was not consistent and the assessee cannot be allowed to take two separate stands before two different authorities - CIT v. O. P. N. Arunachala Nadar [1983] 141 ITR 620 (Mad.) -and pointed out that the so-called actuarial valuation relied upon by the assessee was not in fact an actuarial valuation since no basis was given for calculating the liability; it was only a report of an actuary; it was defective and unreliable as the manner in which the calculations were made was not known. Shri Tiwari also pointed out that there was a clear distinction in facts of the case decided by the Supreme Court in the assessee's case and there was nothing in the opinion given by the solicitors to indicate that the liability to any compensation and back wages arose as a result of a High Court judgment. The solicitor's opinion only indicated that as a result of the judgment cited by them, they were likely to lose the dispute which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been taken into account by the actuary. The actuary had also not indicated what percentage of back wages would be awarded. Finally, Shri Tiwari argued that this was a well-designed scheme for tax avoidance and the ratio of the decision of the Supreme Court in McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 was clearly applicable to the facts of the present case. Alternatively and without prejudice, Shri Tiwari argued that all the years' liabilities cannot be allowed in one year and relied on the following four decisions of the Supreme Court - CWT v. K. S. N. Bhatt [1984] 145 ITR 1 (SC), Sundaram Motors (P.) Ltd. v. Ameerjan [1985] 152 ITR 64 (SC), K. C. Joshi v. Union of India [1987] 163 ITR 597 (SC) and Sant Raj v. O. P. Singla [1987] 163 ITR 588 (SC). 6. In reply, Shri Harish pointed out that even in mercantile system cash payments are debited. This was not a device to reduce taxation and no scheme for tax planning or tax planning or tax avoidance was contemplated by the assessee which had paid substantial tax in the past. It was the letter of the solicitors which was based on an opinion of the labour counsel and the report of the actuary which weighed considerably with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e so utilised. On the other hand, the assessee was always claiming deduction for wages when they were actually paid and even in respect of the present liability the subsidiary of the assessee claimed deduction as and when settlement with workers were arrived at and payments made. We are also satisfied that nothing had happened during the year of account for the assessee to claim such liability and if the decision of the Supreme Court was the event that gave rise to such liability, such event took place in 1979, i.e. in the earlier accounting year. Further, similar liability was continued to be provided for in subsequent years even when the decision of the Supreme Court had already been delivered. The strike had not begun during the year. The settlement of the disputes with the workers had been taking place over a period of years. The decision of the Industrial Tribunal was not given during the year. Therefore, no significant event having any bearing on the dispute between the management and the workers had taken place during the year for us to conclude that the liability had arisen or accrued during the calendars year 1980. 8. We would now deal with the various arguments and auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that cases of about 69 persons were settled since the dispute started during the period of 8 years. The relevant portion of the terms of the settlement reads as under : "1. It is agreed by the Union that since 69 employees have already settled their dispute of reinstatement as contained in the Reference (IT) No. 272 of 1974 by accepting their legal dues during the period of 8 years, the Union odes not desire to pursue their case further in the Court and has further agreed not to take any objection if the Court is willing to strike off the names of such workmen who have settled their dispute from the proceedings in Reference (IT) No. 272 of 1974. ........" This establishes that the assessee had started a process of buying off the discharged workers by settling their cases and cases of 69 employees had already been settled before arriving at the memorandum of settlement. This memorandum of settlement is dated 10-1-1983 and covers the settlement of nearly 260 workers (page 346 of Vol. II). Thus, the assessee had already started settling cases with the workers and during the year under appeal, i.e. in calendar year 1980, the cases of workers other than those who were disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art in the strike and that if the employer, before dismissing a workman, gave him sufficient opportunity of explaining his conduct and no question adjudication the propriety of such dismissal to look into the sufficiency or otherwise of the evidence led ........" It would be clear that the Supreme Court in that case endorsed the view taken by it in India General Navigation Railway Co. Ltd.'s case. A detail reference to this case has already been made hereinabove while recording the arguments of the Departmental Representative since he relied on it. It cannot, therefore be said that the Supreme Court in Gujarat Steel Tubes Ltd's case laid down law concerning the settlement of industrial disputes different from what was laid down by the Supreme Court in earlier decisions. Therefore, we fail to understand how the decision of the Supreme Court by itself creates a liability of this magnitude and how further such liability can arise for this year. 10. It is also seen that the solicitors' letter only expresses an opinion about the appellant's chances of success before the Industrial Tribunal but does not say a word about the extent of the assessee's liability for payment or the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... workers and the management which is dealt with by various sections of the Industrial Disputes Act. The very facts that the assessee could settle most of the cases with the workers even before the award of the Tribunal was reached would indicate that this was essentially a contractual liability. The modus operand followed by the assessee even from the year the strike started, i.e. from 1974, was to carry on negotiations with the workers and, as stated by the assessee's counsel buy them off by settlement of their claims so that they would face the Tribunal with a 'fait accompli' stating that the dispute was already settled our of court and that therefore they did not wish to purse it. This conduct of the assessee hardly supports the argument of Shri Harish that this was a statutory liability springing from the decision of the Supreme Court. It is further seen from the report of the actuary that it is nowhere mentioned that this is an actuarial valuations. The method of valuation is not indicated, the working of back wages not shown and therefore the figure worked out by the actuary cannot be said to be scientific determination of the liability of the assessee apart from the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors of the company went about methodically attempting to create evidence in the form of solicitor's letter, actuary's report and the various Board resolutions to support their claim of deduction of this large amount as liability for back wages. There is not an iota of evidence that this appropriation was any time intended to be used or was in fact used for payment of wages. In fact, whatever that has come before us is to the.contrary. We would, therefore, accept all the arguments advanced on behalf of the department, reject those advanced by Shri Harish and confirm the view of the CIT (Appeals) on this issue. 13. The second grounds for the asst. year 1981-82 in the assessee's appeals is that the CIT (Appeals) erred in confirming the disallowance of Rs. 2,62,097 under sec. 40(c) of the Act. The Working of the perquisites and benefits which are considered for disallowance u/s 40(c), has been given by the appellant at page 789, Vol. V of the compilation. On perusal of these details, it would appear that the perquisites amounting to Rs. 6,94,097 include commissions payment of Rs. 2,10,000, addition on account of medical reimbursement (Rs. 18,009), motor - car expenses driver's sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure was in the nature of charity or donation incurred on the occasion of the death anniversary of the founder Chairman. It has not been proved that the company had incurred any other type of expenditure to meet its social obligations in accordance with its alleged objectives mentioned in the Memorandum Articles of Association of the company. We therefore, are not satisfied that this is an admissible expenditure. This disallowance is upheld. 18. The next grounds (ground No. 8) challenges the disallowance of expenditure of Rs. 13,500 being the amount paid as filing fees of the Registrar of Companies for increasing the authorised capital by capitalising the reserves. This clearly is not an admissible revenue expenditure in view of the decision of the Bombay High Court in Bombay Burmah Trading Corpn. Ltd. v. CIT [1984] 145 ITR 793. 19. The next grounds is directed against disallowance of club membership fee of Rs. 3,339. An additional claim of Rs. 2,799 was also made. Considering the volume and nature of work, we are satisfied that this expenditure is a necessary expenditure for maintaining business contacts by the directors and senior executives and we would direct that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed against CIT (A) conferring the disallowance of expenditure incurred on the maintains of accommodation at Rajkot. Shri Harish brought to our notice a decision of the Madras High Court in the case of CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619. The Madras High Court held that where an accommodation is maintained, either is located, for the directors and other employees of the assessee, any expenditure incurred for the maintenance of such accommodation cannot be brought within the scope of sec. 37(3) of the IT Act. In that case, on the facts, the court held that he assessee not having shown that the guest house was exclusively used by the employees, the officer was justified in rejecting the claim for deduction of expenditure under sec. 37(3). Shri Harish also brought to our notice a decision of the Punjab Haryana High Court in Saraswati Industrial Syndicate Ltd. v. CIT [1982] 136 ITR 361 which had followed the Madras High Court in Aruna Sugars Ltd.'s case. We find that sub-sec. (5) was inserted in sec. 37 by the Finance Act, 1983 with retrospective effect from 1-4-1979. The language of the section is applicable for the year under appeal before, us, i.e., assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court decision which came in 1980. Now, basis of the Supreme Court decision which came in 1980. Now, first of all, that decision is not in the assessee's case. Therefore, it is not as if the Supreme Court has given a direction in the assessee's cases so as to give rise to the liability. If the decision is applicable in the assessee's case, the Industrial Tribunal would have to apply it and then the liability would arise. Even assuming for the sake of argument that the Supreme Court decision was applicable in the assessee's case and so the decision of the Industrial Tribunal would be a foregone conclusion, that is not as good as the actual decision and order of the Industrial Tribunal. Therefore the liability cannot be said to arise as a result of the Supreme Court decision. 3. On behalf of the assessee it was submitted that the assessee as a prudent businessman had made a provision but the existence of the liability should be the basis of the provision and making of the provision cannot be the basis of the liability. 4. On behalf of the assessee it was also submitted that the amount claimed was a statutory liability on the basis of section 11A of the Industrial Disputes Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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