TMI Blog2005 (7) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - HON'BLE D. MANMOHAN, JUDICIAL MEMBER AND B.K. HALDAR, ACCOUNTANT MEMBER For the Appellant : N.R. Sivaswamy, Adv. For the Respondent : Y.R. Rao and B.G. Reddy, Advs. ORDER B.K. Haldar, Accountant Member. 1. All these appeals are fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of the assessee is partly allowed. 4. The second issue involved in assessment year 2000-2001 is disallowance of Rs. 3.90 crores charged to Profit and Loss Account on account of expenditure claimed on Arki Limestone deposits. The Assessing Officer disallowed the above expenditure as the same was incurred towards feasibility studies on exploration and investigation of new mining deposits. As the assessee itself capitalised the expenditure up to the stage of operation of a new mine whenever the feasibility studies results in commercialization, the Assessing Officer held that the expenditure was of capital nature, and, therefore, not allowable as a business expenditure. The ld. CIT(A) noted in para-3.2 of his order that Board's Resolution for writing off the sum of Rs. 3.90 crores was passed on 20-4-2000 which is relevant to assessment year 2001-2002. He, therefore, held that the above expenditure could not be considered in the assessment year under consideration. Before us, the ld. Counsel for the assessee has not been able to controvert the finding given by the ld. CIT(A). As this is a case of writing-off of expenditure and not charging of regular day-to-day expenditure we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision. He also requested the assessee to furnish contemporaneous documentary evidence that is available with the assessee. However, none of these details were furnished. In view of the above, the ld. CIT(A) upheld the above disallowance made by the Assessing Officer. 6. Before us, the ld. Counsel of the assessee has stated that details of such non-moving items has been furnished by him in pages 78 to 98. However, as regards the approval for writing off the above amount, no documents have been furnished by the assessee. Thus, the ground on which the ld. CIT(A) has upheld the addition has not been controverted. A cursory look at the details filed by the appellant shows that such items are put on sale. Thus, it appears that loss would occur only on such items being actually sold. This is true as these items do not form part of closing stock. It is not a case of valuation of closing stock but a case of loss incurred on sale of stores/spares i.e., consumable items. In view of the above, we uphold the order of the ld. CIT(A) on this issue and reject the ground of the assessee. 7. The appellant for the first time has raised the issue that if write off is not allowed, income earned fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant made the following provision on account of enhancement of salaries and wages the second category of employees for the assessment years 1998-99, 1999-2000 and 2000-2001 as under:- Assessment year 1998-99 Rs. 10,13,39,487 Assessment year 1999-2000 Rs. 11,50,64,000 Assessment year 2000-2001 Rs. 12,13,19,000 Ultimately, during the financial year 2001-2002, total payment of Rs. 7,121.20 lakhs were made to the Officers and workers of the appellant Company. The dispute is with regard to ad hoc provision made with reference to employees covered under IDA pattern of pay scale. 10. In the above factual matrix we have to decide as to whether the provision made by the appellant in the three assessment years is allowable or not. 11. The case of the Department as evidenced by the assessment order, the order of the ld. CIT(A) and the submissions of the ld. Departmental Representative is as under: The liability arising on account of wage revision is a contractual liability which is dependent on the approval of the concerned Ministry and settlement with the Unions. The liability does not accrue or arise till receipt of the approval from the Government on settlement reached with the Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Workmen [1969] 73 ITR 53 (SC) 3. Calcutta Co. Ltd. v. CI [1959] 37 ITR 1 (SC); 4. Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC) 5. Mahindra Ugine Steel Co. Ltd.'s case 6. I.R.C. v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 (PC) 15. We will now discuss the case laws relied upon by the Revenue and the appellant on the issue of allowability of provision of wages and salaries on account of wage revision. (i) Swadeshi Cotton Flour Mills (P.) Ltd.'s case. This is a case under the 1922 Act. The facts in brief are as follows: The assessee paid as bonus to its employees a particular sum for the calendar year 1947 in terms of an award made on 13-1-1949 under the Industrial Disputes Act. The assessee claimed this expenditure in the year 1948 as the books of account were not closed till the date of award. Bonus was paid to the employees in calendar year 1949 relevant to assessment year 1950-51. The Hon'ble Supreme Court held after considering section 10(2)(x) and section 10(5) that the claim to profit bonus accrued as per mercantile system of accounting when the same was settled amicably or by industrial adjudication. (ii) Laxmi Devi Sugar Milk&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to deduction out of gross receipts for the accounting year during which the provision is made for the liability. It was held that the liability is not a contingent liability. (vi) Mahindra Ugine Steel Co. Ltd.'s case This is also a case on which reliance has been placed by both the parties. The issue under consideration was allowability of liability amounting to Rs. 1.81 crores arising out of wage settlement. The earlier wage settlement came to an end on 31-12-1984 and a fresh charter of demand was submitted. The Hon'ble Tribunal came to the conclusion that after protracted negotiations in respect of the demands portrayed in the fresh charter of demands, conciliations proceedings were held and it was ultimately decided that a lump sum amount would be paid at a particular rate of the workers or the period 1-1-1985 up to 31-12-1986. The Tribunal therefore accepted that the negotiations had reached a stage where it was possible to anticipate the liability to pay the workers higher wages and, therefore, the assessee had rightly debited the P L Account for the year ending 30-6-1986 with the provision in order to discharge the increased liability. Thus, the Tribunal held o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e received 25 per cent of the purchase price in cash and the balance amount was received in 10 annual instalments with certain rate of interest. The debt was secured by creating a charge on the land purchased. It was the responsibility of the assessee to carry out the developments including laying out roads, provision of drainage etc. within a reasonable time. The assessee followed the mercantile system of accounting took into account full sale price of the land sold during the accounting year though only some percentage of the same was received by him. The assessee estimated certain sum as expenditure for the developments to be carried out in respect of the plots which had been sold during the year and debited the same in the books of account on the ground that the liability for the said sum had actually arisen as the assessee was bound to provide the facilities that it had undertaken to do, even though no part of that amount represented any expenditure actually made during the year. It was held by the Apex Court, the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the appellant in course of carrying on its business and was incidental to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the profits of an earlier year, as in such cases as Isaac Holden and Sons v. IRC (1924) 12 Tax Cases 768 and Newcastle Breweries Ltd v. IRC (1927) 12 Tax Cases 927 was just this, that the payment had been earned by services given in the earlier years and, therefore, a true statement of profit required that the year which had borne the burden of the cost should have appropriated to it the benefit of the receipt. The principle mentioned by Lord Radcliffe would not apply to a profit bonus. As stated above, a profit bonus is strictly not wages, at least not or the purpose of computing liability to income-tax; it is not an expense, in the ordinary sense of the term, incurred or the purpose of earning profits. Thus, it can be said that as regards wages even the books of account of earlier years can be reopened for arriving at the correct amount of profits and gains of business. This case, therefore appears to support the case of the appellant. The case reported in Laxmi Devi Sugar Mills, therefore, does not support the revenue's case. The ratio laid down by the Apex Court in the case of K.K. Doshi Co. also supports the appellant's case in so far as it was held by the Apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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