1981 (4) TMI 11 - HC - Income Tax

Summary

Issues:
Interpretation of rule 29(2) of the M.P. Beedi and Cigar Workers (Conditions of Employment) Rules, 1968 for deduction of wages for rejected bidis under the Income-tax Act, 1961.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the deduction of wages for rejected bidis by an assessee who was a bidi manufacturer. The question was whether an unconditional or ascertained liability arose for the payment of wages to workers under rule 29(2) of the M.P. Beedi and Cigar Workers (Conditions of Employment) Rules, 1968, and if the assessee was entitled to deduct it in the assessment year 1970-71. The assessee claimed a deduction of Rs. 3,48,406 for wages of workers based on the rejection of bidis exceeding 5% under rule 29(2) of the Rules.

The Income-tax Officer contended that the liability was contingent and not permissible for deduction, as it was subject to determination by an authority under the Act or through industrial dispute settlement. However, the Tribunal held that the liability to pay wages for rejected bidis arose immediately under rule 29(2) and was ascertainable, not contingent. The Tribunal emphasized that the workers' right to payment accrues only after a determination regarding wilful negligence and that the liability was definite and certain.

The Tribunal compared the liability under rule 29 to a liability under the Sales Tax Act, where once a sale occurs, the dealer becomes liable to pay tax regardless of actual payment. The Tribunal also referred to the Metal Box Company case, stating that accrued liabilities are deductible even if not paid immediately, following commercial practices and accountancy principles.

The Tribunal found that the assessee had shown the liability in the profit and loss account, and the fact that workers had not been paid was inconsequential. The Tribunal concluded that the liability was not contingent, and the assessee was entitled to deduct the amount payable to workers under rule 29(2) in the assessment year 1970-71.

In summary, the judgment clarified that the liability to pay wages for rejected bidis under rule 29(2) was not contingent but definite and ascertainable, entitling the assessee to claim deduction for the amount payable to workers in the assessment year 1970-71.