Provision made for liability in terms of proposed recommendation of 6th Pay Commission was to be allowed as deduction

Brief of the case

In case of Gujarat Energy Transmission Corpn. Ltd vs. ACIT, assessee-company the company has provided certain sum towards employees cost for arrears payable upto 31st March, 2008 . It debited said sum in respect of 6 th Pay Commission arrears, since final decision on recommendations of 6 th Pay Commission was awaited. Assessee pleaded that it should be allowed in year of payment to him. Revenue made addition holding it as contingent liability. Tribunal in assesee’s own case in earlier assessment year relied upon CIT vs. Kerala State Financial Enterprises Ltd. wherein it was held that in the normal course, an agreement called settlement as increase in wages takes effect from the date of 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 later approval granted by the Government, but the effective date of commencement of the wage revision under the agreement. In the present case, the CIT(A) has recorded the fact that the Gujarat Government accepted the 6th Pay Commission in December- 2008.Thus, following ratio in aforesaid case , Tribunal allowed assessee’s claim.

Facts of the case

• During the relevant year the assessee-company debited sum of Rs.75,38,35,000/- in respect of 6 th Pay Commission arrears. The assessee in the Note on Account stated that awaiting the final decision on the recommendations of the 6 th Pay Commission, the company has provided Rs.7538 lakhs towards employees cost for arrears payable upto 31 st March, 2008.
• During the course of assessment proceedings, the assessee was asked to state justification for allowability of the expenditure.
• The assessee’s submission was that the pending final decision of 6 th Pay Commission, the company has provided Rs.7538 lakhs towards employees’ cost for arrears payable upto 31 st March, 2008, in terms of accounting practice prescribed by the Institute of Chartered Accountants of India.
• Since the contention about the payment of arrears existed on the balance sheet date, the liability arising from payment of arrears to the employees had to be provided in the accounts in terms of provisions of AS-4 issued by ICAI.
• The AO, after considering the above submissions, observed that the liability of pay arrears had not crystallized during the year under consideration, since the final decision to pay the same was still awaited. Thus,, a sum of Rs.75,38,35,000/- was disallowed and added to the income of the assessee being contingent liability.
• On appeal, the CIT(A) observed that if liability on account of implementation of 6 th Pay Commission recommendation in assessee’s case had indeed crystallized during the financial year 2007-08, the Government order to this effect would have been issued during the year F.Y.2007-08.   In view of this, the disallowance of provision of Rs.75,38,35,000/- was confirmed since the liability did not crystallize in relevant year. As far as the allowance on payment basis in the year of payment is concerned, the claim was first to be made before the AO in this regard, who shall decide the issue on facts and as per law.
• The assessee has filed copy of order of this Bench of the Tribunal in the case of assessee itself for the Asstt.Years 2006-07 and 2007-08 dated 8.5.2015 passed in ITA No.1931/Ahd/2010, 2974/Ahd/2010 and 3004/Ahd/2010.

Contention of Assesse

The plea of the assessee was that it should be allowed in the year of payment to the assessee.

HELD by ITAT

The Tribunal relied on decision of Kerala High Court in the case of CIT vs. Kerala State Financial Enterprises Ltd, wherein it was held that wherein it was held that assessee is entitled to claim deduction of such wage increase attributable upto the end of previous year, no matter exact amount was ascertained.

The department could not point out any distinguishable features order of the Tribunal of the earlier years . Facts being identical, respectfully following the precedent, the court delete the addition of Rs.75,38,35,000/- and allow this ground of appeal of the assessee.