Case Law Details
ACIT Vs Chennai Central Cooperative Bank Ltd. (ITAT Chennai)
The appeal filed by the Revenue pertains to Assessment Year 2017–18 and challenges the order of the Commissioner of Income Tax (Appeals), which deleted the disallowance made by the Assessing Officer in respect of provision for wage arrears. During assessment proceedings, the Assessing Officer observed that the assessee had debited an amount of Rs. 8,50,91,477 under the head “Contingencies and Provisions” in its Profit and Loss account, representing provision for wage arrears. Upon enquiry, the assessee explained that the provision was created following implementation of Pay Commission recommendations applicable to State Government employees. Directions had been issued by the State Government through the Registrar of Co-operative Societies requiring co-operative banks to negotiate wage revisions with employee unions, effective from 01.01.2016.
The assessee submitted that, pursuant to these directions, it created a provision for wage arrears based on revised pay scales. Although the revised pay scales were implemented and arrears were actually disbursed in Financial Year 2017–18, the liability had arisen with effect from 01.01.2016. It was further contended that the liability had crystallized in Financial Year 2015–16, though its quantification was pending due to ongoing negotiations with employee unions. The provision was made on a reasonable estimate of the accrued liability.
Before the Commissioner of Income Tax (Appeals), the assessee argued that the provision represented an ascertained liability and not a contingent liability. It was submitted that the liability arose from binding directions issued by the Registrar of Co-operative Societies through circulars mandating wage revision. Since the assessee followed the mercantile system of accounting, accrued liabilities were allowable even if payment was made in a subsequent year. The actual payment of arrears in a later financial year substantiated the existence of a genuine liability. The assessee also relied on various judicial precedents and decisions in its own case for earlier assessment years, where similar provisions had been allowed.
The Assessing Officer, however, rejected the claim on the ground that the provision constituted a contingent liability dependent on future negotiations and finalization with employee unions. It was held that the liability was not ascertained during the relevant previous year and therefore was not allowable under Section 37 of the Income-tax Act. Accordingly, the entire provision was disallowed and added back to the income of the assessee.
The Commissioner of Income Tax (Appeals) considered the submissions and held that the issue was covered in favour of the assessee by earlier decisions in its own case for Assessment Years 2009–10 and 2010–11, where similar claims had been allowed and upheld by the Tribunal. On further appeal, the Tribunal examined the material on record, the order of the lower authorities, and the relevant judicial precedents.
The Tribunal noted that the jurisdictional High Court had held that provision for wage arrears constitutes an ascertained liability where the liability has arisen and can be reasonably estimated, even if it is to be discharged in a future period. It observed that if a liability has arisen and is capable of reasonable estimation, it cannot be treated as contingent merely because its exact quantification or payment occurs later.
In the present case, the Tribunal found that the liability arose due to wage revision effective from 01.01.2016. The provision made by the assessee was based on a reasonable estimate of the liability. The Tribunal further observed that the liability was subsequently discharged through actual payment of arrears, thereby establishing its genuineness.
The Tribunal also referred to its earlier decisions in the assessee’s own case for prior assessment years, wherein it was held that wage arrears represent a real liability for services already rendered by employees. It was noted that such liability arises from past events and constitutes a present obligation, even if its quantification and payment are deferred. The Tribunal observed that the liability was not dependent on uncertain future events, but rather arose from services already rendered by employees and contractual obligations between employer and employees.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This captioned Appeal filed by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi, [CIT(A)] dated 15.10.2025 for Assessment Year 2017-18.
2. Brief facts of the case are that during the course of assessment proceedings, the Assessing Officer (AO) observed that the appellant had debited a sum of Rs.8,50,91,477/- in its Profit & Loss Account under the head “Contingencies and Provisions”, being provision for wage arrears. On being queried, the appellant explained that pursuant to the implementation of Pay Commission recommendations for State Government employees, directions were issued by the State Government through the Registrar of Cooperative Societies to all co-operative banks to enter into negotiations with employees’ unions for wage revision effective from 01.01.2016. Accordingly, the appellant created a provision towards wage arrears arising on account of revision in pay scales. The revised pay scales were eventually implemented in FY 2017-18, and the arrears were disbursed to employees. The appellant contended that the liability to pay wages in the revised scale had arisen with effect from 01.01.2016. Hence, the liability for wage arrears had crystallized in FY 2015-16, though quantification was pending due to ongoing negotiations. The provision was made on a reasonable estimate of accrued liability.
3. Before the appellate proceedings [ld.CIT(A)], the appellant submitted that the provision for wage arrears represented an ascertained liability and not a contingent liability. The liability arose due to binding directions issued by the Registrar of Co-operative Societies through circulars dated 16.11.2009 and 20.03.2010, mandating wage revision. The wage revision was effective from 01.01.2016, thereby giving rise to an accrued liability as on the balance sheet date. The appellant was following the mercantile system of accounting, under which accrued liabilities are allowable even if payment is made in a subsequent year. The actual disbursement of arrears in FY 2017-18 substantiates the existence of a real liability.
The appellant relied on the following judicial precedents:
- Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC)
- Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC)
- CIT vs. Haryana Agro Industries Corporation Ltd. (P&H HC)
- Allahabad Bank vs. Assessee (ITAT Kolkata)
- CIT vs. Metropolitan Transport Corporation (Chennai) Ltd.(Madras HC)
Further, it was submitted that in appellant’s own case for AYs 2009- 10 and 2010-11, similar claims were allowed by the CIT(A) and upheld by the ITAT.
4. On further appeal before us, we heard both the parties and perused the record and also order of the co-ordinate bench in appellant’s own case for AYs 2009-10 and 2010-11 [ITA Nos.79 & 80/Chny/2020 dated 09.12.2020]. We find that the AO rejected the appellant’s claim and held that the provision for wage arrears constituted a contingent liability, as it was dependent on future negotiations and finalization with employees’ unions. The reliance placed on Bharat Earth Movers vs. CIT was misplaced, as that case pertained to provision for leave encashment, whereas the present case involved wage arrears. Since the liability was not ascertained during the relevant previous year, it was not allowable under Section 37 of the Income-tax Act. Accordingly, the AO disallowed the provision of Rs.8,50,91,477/- and added it back to the income of the appellant.
5. We further find that the ld.CIT(A) carefully considered the submissions of the appellant and held that the issue is squarely covered in favour of the appellant by decisions in its own case for AYs 2009-10 and 2010-11, wherein similar provisions were allowed by the CIT(A) and upheld by the ITAT. We have also gone through the judgment of the Hon’ble Jurisdictional High Court in CIT vs. Metropolitan Transport Corporation (Chennai) Ltd. which has held that provision for wage arrears constitutes an ascertained liability, following the principles laid down by the Hon’ble Supreme Court in Bharat Earth Movers vs. CIT and Calcutta Co. Ltd. vs. CIT . The Hon’ble High Court has clearly ruled that if a liability has arisen and can be reasonably estimated, it cannot be treated as contingent merely because it is to be discharged at a future date.
6. In the present case, the liability arose due to wage revision effective from 01.01.2016. The provision was made on a reasonable basis. The liability was subsequently discharged, establishing its genuineness. Therefore, the provision for wage arrears is an ascertained liability allowable under law.
7. The order of the co-ordinate bench in appellant’s own case for AYs 2009-10 and 2010-11 [ITA Nos.79 & 80/Chny/2020 dated 09.12.2020 has been held as under:
“9. We have heard both the parties, perused the material available on record and gone through the orders of authorities below along with case laws cited by both parties. There is no dispute with regard to the fact that there was negotiations between the assessee bank and employees unions for wage revision on the basis of recommendation of 6th Pay Commission of State Government w.e.f. 01.01.2006. It is also not in dispute that the State Government has constituted a committee to examine the demands of employees union and accordingly, a committee has been constituted under the leadership of Registrar of Co-operative Societies, Government of Tamil Nadu. Further, after negotiations and deliberations with employees union, a settlement had been reached, as per which the assessee bank and employees unions have agreed to revise the wages w.e.f 01.01.2006, but monetary benefit arising out of revision shall be w.e.f 01.01.2007. Based on the above inputs, the assessee has anticipated liability in respect of wage arrears to its employees for the impugned assessment years and accordingly on the basis of certain degree of estimation provision was made for wage arrears in the books of account, although the said liability has been finally quantified and paid in subsequent financial years. In the light of the above factual background and on examining the contention of the Assessing Officer that the said liability is contingent liability, we find that the findings of the Assessing Officer appears to be misplaced both facts and in law because liability of wage arrears is a real one for the services which have already been rendered and therefore, was definitely in the nature of arrears for such unpaid salary and had definitely arisen and therefore, in fact, it had a present obligation as a result of past events of the works or services already carried out by the employees entailing an outflow of resources to settle such obligation as per contractual agreement between employees and management. No doubt, the liability may not have been quantified and paid in the impugned assessment years, but certainly liability has been estimated on reasonable degree of estimation based on past events and hence, the same cannot be considered as unascertained liability. Further, liability for wages had accrued on the date of balance sheet for services already rendered has to be paid as per terms of appointment/employment and therefore, liability to compensate the employees for the services already rendered was very much existing liability and was not contingent on the happening of any future event or agreement, but on the result of past events/works already rendered. This view is supported by the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT (supra), where the Hon’ble Court held that 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 and what should be certain is incurring of liability and 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 could not be contingent one which is present though to be discharged at future date and it does not make any difference in future date on which liability shall have to be discharged.
10. In this case, on perusal of facts, we find that there is no dispute with regard to the fact that wage arrears needs to be paid to the employees for the services already rendered for the impugned assessment years. It is also not in dispute that negotiations between the assessee bank and employees union were going on at the time of making provision for liability on the basis of recommendation of 6th Pay Commission of State Government. The assessee bank had also made provision with certain degree of estimation, although the same is not quantified with accuracy. Therefore, we are of the considered view that liability has been provided in books of accounts when it was accrued for the impugned assessment years for the services rendered and hence the same cannot be considered as contingent in nature or unascertained liability, merely for the reason that the said liability was quantified and paid in subsequent financial years. The learned CIT(A) after considering the relevant facts has rightly deleted the addition made by the Assessing Officer towards disallowance of provision for wage arrears. We do not find any error or infirmity in the order of the learned CIT(A) and hence, we incline to uphold the order of the learned CIT(A) and dismiss the appeal filed by the Revenue for both the assessment years.
11. In the result, appeal filed by the Revenue for both the assessment years are dismissed.
Order pronounced in the open court on 9th December, 2020.”
8. Therefore, respectfully following the order of the co-ordinate bench in appellant’s own case for AYs 2009-10 and 2010-11 [ITA Nos.79 & 80/Chny/2020 dated 09.12.2020 and other case laws referred supra, we upheld the order of the ld.CIT(A) deleting the disallowance of Rs.8,50,91,477/-.
9. In the result, appeal filed by the revenue is dismissed.
Order pronounced on the 06th day of April 2026, in Chennai.
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