Ita 216/2001 v. Ita 216/2001

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR MONDAY, THE 4TH FEBRUARY 2008 / 15TH MAGHA 1929 ITA.No. 216 of 2001() --------------------- ITA.527/COCH/1996 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT : ----------------- THE COMMISSIONER OF INCOME TAX, THRISSUR.. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENTS: ------------- M/S. KERALA STATE FINANCIAL ENTERPRISES LTD., THRISSUR. BY ADV. SRI.P.BALACHANDRAN SMT.PREETHA S.NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 4/2/2008, THE COURT ON 04/02/2008 DELIVERED THE FOLLOWING: C.N. Ramachandran Nair &T.R. Ramachandran Nair, JJ. - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - Dated this the 4[th] day of February, 2008. JUDGMENT C.N. Ramachandran Nair, J. This is an appeal filed by the Revenue under Section 260A of theIncome Tax Act against the order of the Income Tax Appellate Tribunalallowing deduction of around Rs.1.86 crores towards wage increase payableby the assessee to the employees during the previous year under anagreement signed in the subsequent year. The respondent assessee is aKerala Government undertaking engaged in kury business and financing.The wage settlement with the employees expired on 31.7.1992, i.e. towardsthe middle of the previous year relevant for the assessment year 1993-94.Negotiations for settlement were going on in the previous year and theactual agreement approving wage increase with effect from 1.8.1992 wassigned on 9.6.1993. This was approved by the Government by order dated20.10.1993. The assessee claimed increased wages payable to theemployees during the previous year as a deduction in the return filed for theassessment year 1993-94. The assessing officer disallowed the claim on the ITA 216/2001 ground that liability arose under the agreement approved by the Governmentin the succeeding year. On appeal, the Commissioner of Income Tax(Appeals) confirmed the disallowance, against which the assessee filedsecond appeal to the Tribunal. The Tribunal found that liability, thoughascertained and paid through the agreement approved by the Government inthe succeeding year, is liability of the previous year and hence allowable. Itis against this order of the Tribunal, the Revenue has filed appeal. 2. We have heard learned Standing Counsel appearing for theRevenue and Shri P. Balachandran, learned Senior counsel appearing for therespondent assessee. Learned Standing Counsel referred to the decision ofthe Calcutta High Court in Commissioner of Income Tax v. TeestaValley Co. Ltd. (187 I.T.R. 657) and the decision of the Bombay HighCourt in Tyresoles Goa Pvt. Ltd. v. Commissioner of Income Tax (193ITR 649) and contended that the liability in this case is contingent in natureand therefore not an admissible deduction. The assessee on the other hand,relied on the decision of the Supreme Court in Bharath Earth Movers v.Commissioner of Income Tax (245 ITR 428), the decision of the RajasthanHigh Court in C.I.T. v. Premier Vegetable Products ( 227 ITR 931) andthe decision of the Bombay High Court in United Motors India Ltd. v.Commissioner of Income Tax (181 ITR 347) and contended that liabilityfor increased wages, though ascertained and discharged in the subsequentyear being liability of the previous year is an allowable deduction. It is the ITA 216/2001 ITA 216/2001 admitted fact that wage settlement that was prevailing between themanagement and the employees expired on 31.7.1992, i.e. during theprevious year. Therefore, the employees were entitled to wage revisionfrom 1.8.1992 onwards. It is quite normal and particularly in the case ofGovernment companies, wage settlement involves protracted negotiationstaking time and even though agreement is entered later, it always takeseffect from the date of expiry of the previous settlement. In fact, it is onlyon this understanding and expectation the employees continue to workwithout any demand for immediate increase of wages after the expiry of theexisting settlement. 3. Even though learned Standing Counsel for the Revenue contendedthat contractual liability arises only on the date of signing the agreement, weare unable to accept this argument in this case. In the normal course, anagreement called settlement as increase in wages takes effect from the dateof expiry of the previous settlement and this case is no exception to it.What is important is not the date of signing the agreement nor the laterapproval granted by the Government, but the effective date ofcommencement of the wage revision under the agreement. There is nodispute that the wage increase was granted as a continuous measure fromthe date of expiry of the previous settlement, i.e. with effect from 1.8.1992.Therefore, the liability for wage increase really accrued for the respondent-assessee with effect from 1.8.1992. The assessee is entitled to claim ITA 216/2001 deduction of such wage increase attributable upto the end of the previousyear, no matter exact amount was ascertained and payment made later. Inthe decision of the Supreme Court referred to above, it is made very clearthat what is to be considered is whether the liability is attributable to theprevious year or not and it is immaterial if the actual liability wasascertained and settled only in the next year. Even though the other twodecisions cited by the assessee are not directly on the point, the principleslaid down therein are applicable to the facts of this case. It is clear from theorders that by the time the accounts were finalised and returns were filed,the assessee had ascertained the actual liability attributable to the previousyear and therefore the actual amount payable only was claimed based onmercantile system of accounting followed by the assessee. We are therefore of the view that the Tribunal was perfectly justifiedin allowing the claim. The appeal therefore fails and the same isaccordingly dismissed. (C.N. Ramachandran Nair, Judge.) (T.R. Ramachandran Nair, Judge.) ITA 216/2001 kav/ -5- C.N. Ramachandran Nair &T.R. Ramachandran Nair, JJ. - - - - - - - - - - - - - - - - - - - - - -I.T.A. No.216 of 2001- - - - - - - - - - - - - - - - - - - - - - JUDGMENT 4[th] February, 2008.