TMI Blog1998 (11) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the same in its accounts. 3. As per the scheme, the payment was to be made in two parts. Part I payment amounted to ₹ 43,27,348 which was to be paid before the end of the accounting year, i.e. before 31-8-1986. Part II of the payment, termed as additional compensation, amounted to ₹ 48,05,871 and was to be paid 10 months after the date of retirement. Since the assessee was following mercantile system of accounting, it debited the entire amount of ₹ 91,33,219 in its accounts for the year, which obviously included the Part II amount of ₹ 48,05,871 in the form of provision as liability accrued during the year. 4. The Assessing Officer did not dispute the revenue nature of the expenditure. However, taking into consideration several clauses of the scheme he came to the conclusion that the liability for Part II payment did not accrue during the year. Also referring to clause 2B(ii) of the scheme, the Assessing Officer concluded that assessee s liability under Part II was wholly and clearly contingent upon certain specific conditions being fulfilled and hence according to him it was a contingent liability. Hence he disallowed assessee s claim to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to pay interest for the ten-month period. In other words, it was sought to be emphasised that had not the liability accrued in the year under consideration, it would not have been necessary for the assesee to pay interest. This only showed that liability had already accrued during the year, but its payment was deferred for ten months. Moreover, it was contended that the main event for the accrual of liability was the retirement of the employees. This event had taken place during the year and hence the liability did accrue in this very year. Reliance was placed on the decision in CIT v. Swadeshi Cotton Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC), Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), Raza Buland Sugar Co. Ltd. v. CIT [1980] 122 ITR 817 (All.), CIT v. United Motors (India) Ltd. [1990] 181 ITR 347 (Bom.) and Rallis India Ltd. v. Dy. CIT [1995] 53 ITD 381 (Cal.). 9. We have given our anxious consideration to the rival contentions and the material on record. It is undisputed that the assessee follows mercantile system of accounting. Hence, in this context, we agree with the ld. counsel that payment is a procedural aspect. What is material is the time of accrual of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace 10 months after the date of retirement, that is, only if the employee had not taken up any employment with any other unit manufacturing empty hard gelatine capsules. The point we are trying to stress is that a liability will not accrue until all the events giving rise to the liability have taken place. Till the last event occurs, the liability is a contingent one. 14. Paragraph 3.1 of the Accounting Standard 4 (AS-4) on contingencies and Events Occurring After the Balance Sheet Date defines the term Contingency as follows : A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events. 15. In the present case, whether an employee is entitled to Part II compensation or not can be known only 10 months after the date of his retirement. Hence as per the definition given by ICAI itself, the liability under Part II is a contingent liability. 16. Further, paragraph 5.1 of AS-4 reads as follows : The accounting treatment of a contingent loss is determined by the expected outcome of the contingency. If it is likely that a conting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in six months but time was not of the essence of the contract. In the relevant accounting year the assessee received in cash only ₹ 29,392 towards sale price of lands, but in accordance with the mercantile system of accounting adopted by it, it credited in its accounts the sum of ₹ 43,692 representing the full sale price of lands. At the same time, it also debited an estimated sum of ₹ 24,809 as expenditure for the developments it had undertaken to carry out even though no part of that amount was actually spent. The department disallowed the expenditure. The Supreme Court allowed the deduction by holding that it was an accrued liability. The Court held it to be an accrued liability on the ground that the undertaking to carry out the developments within a reasonable time was unconditional. The Supreme Court as a matter of fact, found that the undertaking imported a liability on the assessee which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. 21. In the case before us, the liability for additional compensation was conditional. The liability was to accrue, as per clause 2B(i) of the agreement, only 10 month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal is also quite distinguishable. In the said case, under the Voluntary Retirement Scheme (VRS) formulated by the assessee company, the concerned employees were to be paid monthly pension. The assessee s liability was actuarially determined at ₹ 3.68 crores. The entire liability was claimed as deduction but was disallowed by the department, inter alia, on the ground that under the Scheme, the assessee could stop or withhold payment if an employee who had taken retirement under VRS had acted in a manner prejudicial to the interest of the company. The Tribunal held that the liability to pay pension in future years was not a contingent liability but was a real, definite and ascertained liability. The Tribunal further observed that the clause empowering the assessee to stop or withhold the payment did not make the liability contingent upon any particular event. Here lies the difference. In the present case, the liability is contingent upon a particular event of not accepting employment in a similar unit within 10 months. In Rallis India Ltd. s case (supra) the Tribunal also observed that it was only the payment which was contingent upon the good behaviour of the employee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come earning activity of a particular year. In that sense, the liability for additional compensation has no correlation with the income earning activity of the present year as well. In any event, the deduction is not allowed solely on the ground that the liability though determined, has not actually accrued in the present year. In view of the foregoing discussion we hold that the CIT(A) was not justified, on facts and in law, to allow the deduction of additional compensation amounting to ₹ 48,05,871. Accordingly, we restore the disallowance thereof made by the Assessing Officer. 27. Second ground relates to the deletion of interest amount of ₹ 14,19,296 charged under section 215 of the Act. While framing the assessment, the Assessing Officer levied interest under section 215. The CIT(A) observed that main difference between estimated income and assessed income arose on account of disallowance of additional compensation of ₹ 48,05,871 which the assessee could not have foreseen and hence cancelled the interest charged under section 215. 28. The assessee estimated its income at ₹ 10 lakhs and paid advance tax of ₹ 1,66,668 thereon. It returned an in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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