Housing And Urban Development Corporation ltd Vs Add. CIT (Delhi High Court)
The pay revision of employees of the appellant, a PSU is due every ten years with the expiry of one wage settlement or agreement. Invariably, there is a time lag between expiry of a wage revision and negotiation of a fresh wage revision. The appellant had made provision of Rs. 1.60 crores on scientific foundation and on the basis of its past experience in its accounts for Financial Year 2006-07. The provision was made for the period 1st January, 2007 to 31st March, 2007 and deduction was claimed on the standpoint that appellant is under an obligation to pay revised pay to its employees with effect from 1st January, 2007, determination whereof, was a matter of time. The appellant, thus had a reasonable basis to make provision for this expenditure.
The position in the current case is that the liability had already arisen with certainty. The committee was constituted for the purpose of wage revision. That the wages would be revised was a foregone conclusion. Merely because the making of the report and implementation thereof took time, it could not be said that there was no basis for making the provision. In view of the above, we hold that the ITAT and CIT (A) have fell in error by disallowing the expenditure of Rs.1.60 crores on account of anticipated pay revision in Assessment Year 2007-08. The first and second questions of law are thus answered in favour of the appellant. Accordingly, it is directed that the revenue shall now pass consequential orders accepting the deduction of Rs. 1.60 crores.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. This appeal under Section 260A of the Income Tax Act, 1961 (herein after referred to as the “Act”) filed by the Housing and Urban Development Corporation Ltd – HUDCO (hereinafter referred to as “the appellant”) assails the order dated 21st December, 2018 passed by Income Tax Appellate Tribunal, Delhi Bench „C‟: New Delhi (hereinafter referred to as “ITAT”) in ITA No:- 5705/Del/2014 for the Assessment Year (AY)2007-08(herein after “the impugned order”).
2. On 6th November, 2019, after hearing the learned counsels for the parties, the following questions of law were framed:
“I. Whether the Hon’ble ITAT erred in confirming the disallowance of the claim of provision for salary of Rs. 1,60,00,000/- on the ground that it did not accrue and the same was merely a contingent liability without appreciating the legal precedents as well the facts of the case.
II. Whether the Hon’ble ITAT erred in confirming the disallowance of the claim of provision for salary of Rs. 1,60,00,000/– without appreciating that pay revision of the employees of the Appellant being a Public Sector Enterprise is due every 10 years and with the expiry of one wage settlement or agreement, invariably, there is a time lag when another fresh wage revision agreement is negotiated and entered and this Hon’ble Court in the case of in the case of CIT v. Bharat Heavy Electricals Ltd. 352 ITR 88 (Del) while dealing with a similar provision made on account of wage revision, held, that the deduction claimed for that period cannot ‘be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer.
III. Whether the Hon’ble ITAT erred in confirming the addition of Rs. 1,28,00,000/- on account of change in accounting policy of revenue recognition for application fee, front end fees, administrative fee and processing fee of loans from the date of signing of loan agreement to the date of realization on the ground that the same was not in accordance with the provisions of the Act without appreciating the legal precedents as well the facts of the case.”
3. The factual background of the case giving rise to the present appeal is that the appellant, a Public Sector Undertaking (PSU), filed its return of income for the AY 2007-08 on 30th October, 2007 declaring an income of Rs. 351,93,26,019/-. The same was revised on 24th October, 2008 wherein the income of Rs. 331,58,74,360/- was declared. Appellant‟s case was selected for scrutiny and an assessment order under Section 143(3) of the Act was passed on 30th December, 2009, assessing the total income of the appellant as Rs. 355,28,96,515/-. The Commissioner of Income Tax [herein after referred to as “CIT (A)”] examined the records and vide order dated 24th February, 2012 exercised his jurisdiction under Section 263 of the Act, directing the Respondent to reframe the assessment inter alia on the ground that Assessing Officer (AO) had not disallowed the provision for salary of Rs. 1.60 crores and has erred in not making an addition of Rs. 1.28 crores on account of the financial impact due to change in the accounting policy with respect to revenue recognition for application fee, front end fees, administrative fee and processing fee of loans from the date of signing of the loan agreement to the date of realization.
4. Pursuant to the aforesaid directions, the AO framed the assessment order dated 28th March, 2013 under Section 263/143(3) of the Act, and made certain additions/disallowances which inter alia includes the disallowance of the claim for provision of salary of Rs.1.60 crores and addition of Rs. 1.28 crores on account of financial impact due to change in accounting policy. In the appeal, CIT (A) vide order dated 28.08.2014 upheld the order of the AO and sustained the disallowance and the addition.
5. The appellant challenged the order of the CIT (A) before the Income Tax Appellate Tribunal (“ITAT”). Revenue also filed an appeal regarding the disallowance made by AO under Section 14A of the Act read with Rule 8D of Income Tax Rules. The two cross appeals were heard and decided by way of the impugned judgment and order dated 21st December, 2018.
6. The appellant has preferred the present appeal questioning the correctness of the impugned order, inter alia on the ground that the ITAT has erred in confirming disallowance of the claim for provision of salary of Rs. 1.60 crores, and the addition of Rs. 1.28 crores on account of change in accounting policy with respect to revenue recognition for application fee, front end fees, administrative fee and processing fee of loans.
QUESTION I & II:
7. The appellant claimed deduction of Rs. 1.60 crores on account of the provision for revision of pay in the books of account. The deduction was made in light of the Pay Revision Committee (hereinafter referred to as “PRC”) appointed by the Government of India. The AO disallowed the claim, holding that the expenditure was purely a provision against unascertained liability and could not be claimed as expenditure for Assessment Year 2007-08. The relevant findings of the AO on this issue are as under:
“’Neither, the said liability accrued nor crystallized during the year under consideration. As per the recommendations of the central Sixth Pay Commission/Ministry of Finance etc. It was decided that 60% of arrears worked out on the implementation of Sixth Central Pay Commission was ordered by the Central govt. to be paid in Financial Year 2008-09 relevant to A. Y. 2009-10 and balance 40% was ordered to be paid in F. Y. 2009-10 relevant to A. Y. 2010-11. Accordingly, the assessee could have claimed the expenditure on account of revision of pay in the A.Y. 2009-10 and the balance amount of expenditure w.e.f. 1-4-2008 to the implementation of Sixth Pay commission should have been claimed in A. Y. 2010-1.1. Even the Ld CIT-IV after careful consideration of the issue in question, has observed that the liability on account of revision of pay in consequence of report of Sixth Central Pay Commission has not accrued and crystallized during the F. Y. 2..6-07 relevant to A. Y. 2007-08 because the implementation of the said report in respect of public sector undertaking and State Govt. Employees has been carried out only after September, 2008 beyond the close of the instant financial year relevant to A. Y. 2007-08 and accordingly, the provision of such revision of pay amounting to Rs. 1,60,00,000;- is unascertained liability which is not eligible for deduction for the year under consideration.
Even from the documents filed during fresh proceedings along with its reply dated 30.11.2012 in the form of a note marked as annexure-III and further marked as ”Finance Wing;” with the subject: Provision against pay revision of Executives, clearly states that ”during discussions regarding Annual Account for the year 2006-07 on 10.10.2007 in CMD’s Chamber when DF was also present, it was decided that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in the Annual accounts for the year 2006-07. Accordingly, an ad hoc provision of Rs. 1.60 crores is proposed to be made in the accounts for the period of three months for executives only from 01.01.2007 to 31.3.2007. On the back side of the said note it is mentioned as under:-
