Feb 252011
 

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Neyveli Lignite Corporation Limited. Versus Assistant Commissioner Of Income-tax. – Income Tax – ITAT MADRAS-B – Tri – Business loss/deductions, Method of accounting, Deductions – 2004 (8) TMI 364 – ITAT MADRAS-B – TTJ 093, 685, [2005] 2 SOT 863 (CHENNAI) – IT APPEAL NO. 2315 (MAD.) OF 2003 – - Dated:- 18-8-2004 – Member(s) : S. V. MEHROTRA., N. VIJAYAKUMARAN. JUDGMENT: This appeal is against the order under s. 263 of the IT Act, 1961 passed by the CIT, dt. 25th Nov., 2003. At the time of hearing, the learned counsel for the assessee pointed out that the Committee on Disputes has not accorded its approval for raising the issue regarding jurisdiction of the CIT invoking the provisions under s. 263 of the IT Act. Accordingly, this ground of appeal challenging the assumption of jurisdiction by CIT was not pressed before us. Accordingly, the said ground is dismissed as not pressed. 2. The second effective ground of appeal is that the learned CIT erred in directing the AO to disallow the business deduction of Rs. 180.92 crores, being arrears of salary. Brief facts apropos this ground are that the assessee had made a claim of Rs. 180.92 crores on account of pay revision. The assessee in its reply pointed out that liability had been created in the accounts for the pay revision as per Accounting Standard-4, which deals with the events occurring after the date of balance sheet but before the date of approval of accounts by the board of directors. The assessee also referred to the decision in the case of Bharat Earth Movers Ltd. vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC) and pointed out that it has been decided in that case that all known liabilities though not fully quantified had to be provided for. Since this was an existing liability, the same was provided. 3. The course of events giving rise to the pay revision was like this. The wage structure of workmen of Neyveli Lignite Corporation was determined through a memorandum of understanding dt. 8th July, 1995 between the management and workmen of the Neyveli Lignite Corporation represented by the joint council of unions. Settlement under s. 12(3), of the Industrial Disputes Act, 1947, was subsequently signed on 26th Aug., 1995 which was valid till 31st Dec., 1996. On account of expiry of the existing settlement, a bipartite committee was constituted on 29th Sept., 1999 and modified on 17th April, 2001, subsequent to identification of NLC Workers Progressive Union as the majority union through secret ballot election as per the directions of the Hon ble High Court of Madras. The Neyveli Lignite Corporation Workers Progressive Union vide their strike notice dt. 18th April, 2001 raised an industrial dispute against the management of Neyveli Lignite Corporation (NLC) over the issue of finalizing the new wage revision from 1st Jan., 1997. There was a work to rule agitation from 17th May, 2001, a sit on strike on 21st May 2001 and general strike from 22nd May, 2001 to 26th May, 2001. Negotiations on the revised charter of demands of the recognized union commenced on 23rd April, 2001 and the Committee had meetings on various dates and finally on 26th May, 2001 and after protracted discussions on the union s charter of demands, a memorandum of understanding was reached between the representatives of management and recognized union on 27th May, 2001. Consequent to the arriving at a memorandum of understanding between the management of NLC and NLC workers progressive union, the strike was withdrawn. The dispute was ceased in consultations and conciliation provided on various dates as on 2nd May, 2001, 23rd May, 2001, 24th May, 2001, 25th May, 2001, 26th May, 2001 and finally on 29th June, 2001. 4. After protracted and prolonged discussions finally on 29th June, 2001, both the parties agreed to arrive at a settlement under s. 12(3) of the Industrial Disputes Act. The learned CIT taking note of the fact that the wage agreement was entered into on 29th June, 2001 and treating this as a fresh event which had taken place in the subsequent year, for which there was no whisper in the previous year, held that this liability germinated in the subsequent year and could not be related back to the earlier year. He further observed that the principle of prudence, as referred in Accounting Standard-4, is applicable to known liabilities and not to the liabilities of the subsequent years. The learned counsel for the assessee submitted that pay revision was effective from 1st Jan., 1997, the process for which was started in 1999. However, list of demands was submitted by workers union on 1997 itself. In this regard, he referred to the letter of workers union dt. 26th June., 1997 contained at p. 19 of the paper book, which reads as under: We, the Workers Progressive Union, submitted list of demands for the ensuing wage revision period starting from 1st Jan., 1997 and decided to furnish the memorandum to the management with request all this demands . He also referred to p. 14 of the paper book, wherein letter dt. 22nd Feb., 1999 from the Director of Ministry of Coal, Government of India, addressed to the Chairman, Coal India Ltd., and CMD., Neyveli Lignite Corporation Ltd., is contained wherein it is pointed out as under: I am directed to forward herewith the office memorandum issued in the Department of Public Enterprises vide No. 2(11)96-UPE(LC) dt. the 14th Jan., 1999, which contains the decisions of the Government, regarding the policy for the Sixth Enterprises. It may kindly be ensured that the wage settlements are negotiated strictly in accordance with the parameters laid down in the aforesaid O.M. of the Department of public enterprises . The learned counsel further referred to p. 15 of the paper book containing the office memorandum dt. 14th Jan., 1999 referred to in the letter of the director and pointed out that this office memorandum followed for the sixth round of wage negotiations in public sector undertakings and copy of this was endorsed to the assessee-company also and received in the office of the chariman on 22nd Feb., 1999. The learned counsel submitted that services had been rendered before 31st March, 2001 and this liability did not accrue after 31st March, 2001 but actually accrued prior to March, 2001 and a reasonable estimate in respect of the said liability was possible. In support of his argument regarding reaching at reasonable estimate, the learned counsel referred to p. 35 of the paper book wherein are contained the instructions dt. 25th March, 2001 for revision of pay scales, fitment, DA, fringe benefit, etc., in respect of the executives for implementation with the approval of the Government of India. Thus, the learned counsel submitted that framework for arriving at the revised pay structure had already been framed and, therefore, the assessee had to follow the same parameters for arriving at reasonable estimate of its accrued liability in respect of workers. The learned counsel pointed out that there could not be any conflict between wage revision of employees and executives and since instructions had been received regarding wage revision of executives, on the same lines provision for liability accruing on account of wage revision of employees could reasonably be made as the services had already been rendered by the workers. The learned counsel further referred to p. 15 of the additional paper book wherein a letter dt. 2nd March, 2001 of Personnel Department of National Thermal Power Corporation Ltd., is contained. He pointed out that NTPC had given the revised pay scales on 2nd March, 2001 and uniformity had to be had with other public sector undertakings. He also referred to p. 47 of the paper book wherein the circular of Corporate Personnel Department of Bharat Heavy Electricals Ltd., dt. 15th Nov., 2000 is contained which also deals with revision of pay and allowances of employees. The learned counsel submitted that all these facts were available to the assessee prior to 31st March, 2001 and, accordingly, the assessee had made provision for this liability. The learned counsel submitted that once a liability is known, the provision is an allowable deduction. In this regard he relied on following decisions: Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC). – In this case the Hon ble Supreme Court, inter alia, observed as under: Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and the present value is discounted, is deductible from the gross receipts while preparing the P&L a/c . CIT vs. Coimbatore Cotton Mills Ltd. (1983) 33 CTR (Mad) 301 : (1983) 140 ITR 562 (Mad) – In this case it was held that provision for gratuity made on actuarial valuation was the proper deduction from the profits. Hukumchand Jute & Industries Ltd. vs. CIT (2000) 158 CTR (Cal) 28 : (2000) 241 ITR 517 (Cal) – In this case, the assessee was a public limited company. During the year relevant to the asst. yr. 1981-82, the assessee-company consumed electricity and received a notice of demand for additional fuel surcharge in September, 1983 relevant to the asst. yr. 1984-85. In the original return for the asst. yr. 1981-82, the assessee did not claim deduction in respect of the amount of Rs. 25,48,047 on account of additional fuel surcharge for power consumption. But the assessee claimed it before the IAC in the proceedings under s. 144B of the Act. The claim of the assessee was not allowed by the IAC for the asst. yr. 1981-82 on the ground that the amount of liability was not ascertained and quantified, an ad hoc provision of Rs. 3,71,980 had been made by the asst. yr. 1981-82 for additional fuel surcharge. The Hon ble Calcutta High Court, after taking note of cls. 19, 20 and 25(9) of the agreement entered into between the Board and the assessee, wherein it was agreed that fuel charges would form part of the bill issued monthly and would depend upon the units consumed by the assessee during the month, held that the liability accrued under the agreement when the electricity was consumed by the assessee in the previous year relevant to the asst. yr. 1981-82 though quantification was made later. Accordingly, it was held that the assessee was entitled for deduction of additional fuel charge liability in the asst. yr. 1981-82. Bharat Earth Movers Ltd. vs. CIT. – The Hon ble Supreme Court observed: If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent on. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain . CIT vs. Mahindra Ugine & Steel Co. Ltd. (2001) 169 CTR (Bom) 191 : (2001) 250 ITR 84 (Bom) – In this case it was held that where, after perusing the terms and conditions of the wage settlement entered into by the assessee-company, the Tribunal found that under the conciliation proceedings a lumpsum payment was to be paid to the workers and hence, a debit was made in the P&L a/c to discharge the increased liability, and that the provision was made on a reasonable basis for anticipated expenditure, it was an allowable deduction. CIT vs. United Motors (India) Ltd. (1990) 181 ITR 347 (Bom) – In this case, the assessee was an agent for sale of motor vehicles. It also carried out repairing motor vehicles. The terms and conditions of service of workmen employed by the assessee were governed by wards. In October, 1970 the trade union representing the workmen of the assessee gave notice to the assessee terminating the award with effect from four months thereafter. The assessee s board of directors noted this at a meeting held on 25th Feb., 1970. A provision was made for Rs. 1 lakh in view of the impending liability on account of the change in service conditions of the assessee s workmen in the accounts for the year under consideration. Negotiations between the asssessee and the trade union resulted in settlement dt. 2nd May and 6th Oct., 1972. Pursuant thereto the assessee paid a sum of Rs. 28,600 to the workmen in the month of May and June, 1972 on account of salary, etc. Later another ad hoc payment of Rs. 48,000 was made to the workers pursuant to the said settlement. The assessee claimed deduction of the aggregate sum of Rs. 76,680 in the asst. yr. 1972-73. It was held that though the provision of Rs. 100 lakhs itself was an allowable deduction, but since the same was denied, the assessee was entitled for the quantified liability of Rs. 76,680. The learned Departmental Representative submitted that either the amount should have been apportioned over the years to which it related or it should have been debited in the P&L a/c in the year in which settlement reached. The learned Departmental Representative referred to p. 53 of the paper book wherein the memorandum of settlement under s. 12(3) of the Industrial Disputes Act, 1947, between the company and NLC Workers Progressive Union is contained. She pointed out that the said settlement was entered into on 29th June, 2001. The learned Departmental Representative submitted that nothing happened in asst. yr. 2001-02 and, therefore, it could not be allowed. She referred to the decision of the Tribunal in the case of South Eastern Coalfields Ltd. vs. Jt. CIT (2002) 72 TTJ (Nag) 401 : (2003) 260 ITR 1 (Nag)(AT). In this case, the assessee-company had made a provision for interim relief payable to its employees covered by the National Coal Wage Agreement for the period 1st July, 1991 to 31st March, 1994 to the extent of Rs. 3,266 lakhs and amount payable to the employees covered by executives rules for the period 1st Jan., 1992 to 31st March, 1994 to the extent of Rs. 62.49 lakhs. The Tribunal held that as far as provision of Rs. 3,266 lakhs made by the assessee-company in respect of interim relief payable to the employees governed by the National Coal Wage Agreement was concerned, a letter was issued by the holding company, i.e. Coal India Ltd., on 11th Feb., 1994, which was carrying on the negotiations with the representing trade unions, intimating the assessee that amicable settlement between the parties had been arrived at, according to which Rs. 100 per month of interim relief to the employees covered by the National Coal Wage Agreement was payable w.e.f. 1st July, 1991. The Tribunal allowed this provision. However,………………

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