ORDER
B.K. Haldar, Accountant Member
1. All these appeals are filed by the assessee and they pertain to the assessment years 1998-99,1999-2000 and 2000-2001 respectively. ITA 12/Hyd./2002 pertains to the assessment year 1998-99, directed against the order of the CIT(A) III, Hyderabad dated 9-11-2001, ITA No. 705/Hyd./2002 relating to assessment year 1999-2000 is against the separate order of the CIT(A) III, Hyderabad dated 8-5-2002. ITA No. 1035/Hyd./2003 is for assessment year 2000-2001 and is directed against the order of the CIT(A) III dated 15-7-2003.
2. These appeals are disposed of together as most of the issues are common for all the three years. Common issues involved in ITA Nos. 12/ Hyd./2002 and ITA No. 705/Hyd./2002 are :
(i) Allowability of Ad hoc Provision made towards Wages Revision in respect of employees covered under IDA pattern of pay scale :
(ii) Computation of deduction under Section 80HHC.
In ITA No. 1035/Hyd./2003 for assessment year 2000-2001 ground No. 1 is on allowability of ad hoc provision made towards wages revision and second ground is charging of Rs. 3.90 crores to the Profit and Loss Account on account of expenditure incurred on Arki Lime Stone deposits. Third ground in this year is writing-off of miscellaneous losses of Rs. 2,27,46,000.
3. As regards the issue of deduction under Section 80HHC, the same has been decided by us in the case of assessee for earlier years in ITA Nos. 688/ Hyd./2000, 355/Hyd./2000 and 216/Hyd./2000. However, the Id. Counsel for the assessee wanted to put on record the proposition that according to him, job charges do not fall within the scope of Explanation (baa) to Section 80HHC. For this proposition, he has relied on the decision of the Hon’ble Bombay High Court in the case of CIT v. Bangalore Clothing Co. . He has also relied on the decision in the case of Alfa Laval India Ltd. v. Dy. CIT [2003] 266 ITR 418 (Bom.). However, we are of the view that on this issue the reasoning given by the Hon’ble Bombay High Court in the case of CIT v. K.K. Doshi & Co. [2000] 245 ITR 8493 is more acceptable. In view of the above and our order mentioned supra, in assessee’s own case for earlier years, we hold that the Special Bench decision in the case of Lalsons Enterprises v. Dy. CIT[2004] 89 ITD 25 (Delhi) is binding on us and accordingly our decision mentioned above will apply for the assessment years 1998-99 and 1999-2000. We direct accordingly. This ground of the assessee is partly allowed.
4. The second issue involved in assessment year 2000-2001 is disallowance of Rs. 3.90 crores charged to Profit and Loss Account on account of expenditure claimed on Arki Limestone deposits. The Assessing Officer disallowed the above expenditure as the same was incurred towards feasibility studies on exploration and investigation of new mining deposits. As the assessee itself capitalised the expenditure up to the stage of operation of a new mine whenever the feasibility studies results in commercialization, the Assessing Officer held that the expenditure was of capital nature, and, therefore, not allowable as a business expenditure. The Id. CIT(A) noted in para-3.2 of his order that Board’s Resolution for writing off the sum of Rs. 3.90 crores was passed on 20-4-2000 which is relevant to assessment year 2001-2002. He, therefore, held that the above expenditure could not be considered in the assessment year under consideration. Before us, the Id. Counsel for the assessee has not been able to controvert the finding given by the Id. CIT(A). As this is a case of writing-off of expenditure and not charging of regular day-to-day expenditure we hold that this amount cannot be considered in the assessment year under consideration. Even otherwise case laws on the issue as to whether such expenditure is of capital or revenue nature, are against the appellant. This ground of the assessee is, therefore, rejected.
5. As regards the third issue for assessment year 2000-2001, which is on writing-off of miscellaneous loss amounting to Rs. 2,27,46,000, the same consisted of the following amounts.
1. Non-moving stores written off Rs. 182.92 lakhs
2. Obsolete Stores written off Rs. 32.29 lakhs
3. Other Losses Rs. 12.25 lakhs
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Total Rs. 227.46 lakhs
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Before the Assessing Officer, the assessee contended that as per accounting policy of the company, stores and spare items which have not moved for more than 5 years are identified individually and declared as non-moving stores and spares and due to depletion in its value, these are valued at 15 per cent of their original value in the books. The remaining 85 per cent of the value is written of as these are not found to be useful. This practice is being followed since inception and such writing off had been allowed by Department in earlier year also. However, the Assessing Officer did not allow the above claim, as the inventories which were written off had always been outside the P&L Account. As details of items that have been purchased, the amount of such purchase and mode of the valuation were not furnished by the assessee, the Assessing Officer held that the onus that was on the assessee to prove the allowability of the expenditure has not been discharged. Accordingly, he disallowed the same. Ld. CIT(A) in para-6.1 of his order noted that the Assessing Officer held that the purchases relevant to the above expenditure were never claimed in the P&L Account, nor the stocks/inventories formed part of the closing stock. The Assessing Officer also held that inventories which were written off, were not debited to the P&L Account and the appellant had not given the details like items that were purchased, the date of purchase, the value of purchase and the manner in which they were valued and written off etc. Ld. CIT(A) therefore requested the authorized representative to provide him with the date when the report for writing off was submitted and the date of taking final decision to write off the above amount and the names and designations of the authority who took the final decision. He also requested the assessee to furnish contemporaneous documentary evidence that is available with the assessee. However, none of these details were furnished. In view of the above, the Id. CIT(A) upheld the above disallowance made by the Assessing Officer.
6. Before us, the Id. Counsel of the assessee has stated that details of such non-moving items has been furnished by him in pages 78 to 98. However, as regards the approval for writing off the above amount, no documents have been furnished by the assessee. Thus, the ground on which the Id. CIT(A) has upheld the addition has not been controverted. A cursory look at the details filed by the appellant shows that such items are put on sale. Thus, it appears that loss would occur only on such items being actually sold. This is true as these items do not form part of closing stock. It is not a case of valuation of closing stock but a case of loss incurred on sale of stores/spares ie., consumable items. In view of the above, we uphold the order of the Id. CIT(A) on this issue and reject the ground of the assessee.
7. The appellant for the first time has raised the issue that if write off is not allowed, income earned from sale of such items on which write off is not allowed should be excluded from the income of the assessee. As we have held in the previous para, the appellant shall be entitled to book the loss if any on account of sale of stores and spares, which has not been debited to the mfg. and profit and loss account, in the year of sale.
8. The only issue that requires to be disposed of for all the three assessment years is the allowability of ad hoc provision made on account of wage revision in respect of employees covered by IDA Pattern of scales. Such amounts claimed by the assessee during the three assessment years are as under:
1998-99 Rs. 10,13,39,487
1999-2000 Rs. 11,50,64,000
2000-2001 Rs. 12,13,19,000
There are two categories of employees in the Company. The first category of employees are eligible for DA as per Central Government Pattern. The second category of employees are eligible for the DA according to the Industrial Pattern. For the latter category, the agreement between the appellant and its employees expired on 31-12-1996 and, therefore, Pay Revision was due w.e.f. 1-1-1997. The employees/workers submitted a charter of demands as early as 29-12-1997 and continued to demand actual higher payment of wages. After prolonged negotiations between the Management and the Workers’ Unions, a new Memorandum of Settlement was arrived at between the Management and the workers on 17-8-2001 covering the period 1-1-1997 to 31-12-2006. As regards the executives, Government of India, Ministry of Industries, Department of Public Enterprises appointed a Pay Commission under the Chairmanship of Justice Mohan vide its Resolution dated 10-12-1996. The Committee was to examine the present structure of the allowances, perquisites and benefits taking into account the total packages of benefits available to them and suggest changes which may be desirable and feasible. The Committee was given time of six months to submit its report. However, it was categorically stated that the decision of the Government on the recommendations of the Committee would take effect from 1 -1-1997. The Committee submitted its report on 30-10-1998 after obtaining the approval of the Board of Directors of assessee-company, which was sent to the concerned Ministry on 18-3-2000 and the final order giving effect to the recommendations of the Pay Commission was passed by the Ministry on 20-5-2001.
9. The appellant made the following provision on account of enhancement of salaries and wages the second category of employees for the assessment years 1998-99, 1999-2000 and 2000-2001 as under:–
Assessment year 1998-99 Rs. 10,13,39,487
Assessment year 1999-2000 Rs. 11,50,64,000
Assessment year 2000-2001 Rs. 12,13,19,000
Ultimately, during the financial year 2001-2002, total payment of Rs. 7,121.20 lakhs were made to the Officers and workers of the appellant Company. The dispute is with regard to ad hoc provision made with reference to employees covered under IDA pattern of pay scale.
10. In the above factual matrix we have to decide as to whether the provision made by the appellant in the three assessment years is allowable or not.
11. The case of the Department as evidenced by the assessment order, the order of the Id. CIT(A) and the submissions of the Id. Departmental Representative is as under :
The liability arising on account of wage revision is a contractual liability which is dependent on the approval of the concerned Ministry and settlement with the Unions. The liability does not accrue or arise till receipt of the approval from the Government on settlement reached with the Unions. As the approval of Government was received only on 17-8-2001, the accrual could be said to have taken place only on that date. Till that time it was only a contingent and unascertained liability and, therefore, the same was not allowable as per mercantile method of accounting. In support of the above proposition, the Revenue has relied on the following case laws :
1. CIT v. Swadeshi Cotton and Flour Mills (P.) Ltd.
2. Laxmi Devi Sugar Mills v. CIT
3. Johnson & Johnson Ltd. v. First, ITO [1989] 33 TTJ (Bom.) 387
4. Dy. CIT v. Agarwal & Modi Enterprises (Cinema Project) Co. (P.) Ltd. [2003] 86 ITD 214 (Delhi)
5. Bharat Earth Movers v. CIT
6. CIT v. Mahindra Ugine & Steel Co. Ltd.
7. Thermax Babcock and Wilcox Ltd. v. Dy. CIT [2002] 255 ITR 27 (AT) (Pune).
12. It was also argued by the Id. DR that in the books of account, these amounts have been shown as ad hoc provision only, and thus the same could not have been claimed as an expenditure during the relevant previous years. According to him, this would lead to change in method of accounting which is not permissible. In support of the above proposition, he relied on the following case laws :
1. CIT v. British Paints India Ltd.
2. Decision of ITAT, Hyderabad A Bench in the case of Aurobindo Pharma Ltd. v. Dy. CIT[ITA No. 103/Hyd./95 dated 3-12-1997]
3. Decision of the ITAT, Hyderabad B Bench in the case of Vasant Organics Ltd. v. Dy. CIT (Asst.) [IT Appeal No. 1709 (Hyd.) of 1996 dated 21-8-2001]
13. It was also argued by the Id. DR that Notification of Accounting Standard under Section 145(2) of the Act has not changed the principle of accrual of expenditure/liability as explained by various Courts when the same was not available as a part of the Act.
14. The appellant’s case on the other hand is that in the facts and circumstances of the case and taking into account the accounting standards notified by the Central Government, which is reported in (1996) 218 ITR St. 1 and applicable from assessment year 1997-98, it has to be held that the provision made towards enhanced liability on account of salary and wages are allowable as an accrued liability. In support of the above proposition, reliance was placed on the following case laws :
1. Bharat Earth Mover’s case (supra)
2. Metal Box Co. of India Ltd. v. Workmen
3. Calcutta Co. Ltd. v. CIT ;
4. Vazir Sultan Tobacco Co. Ltd. v. CIT
5. Mahindra Ugine & Steel Co. Ltd. ‘s case (supra)
6. I.R.C. v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 (PC)
15. We will now discuss the case laws relied upon by the Revenue and the appellant on the issue of allowability of provision of wages and salaries on account of wage revision,
(i) Swadeshi Cotton & Flour Mills (P.) Ltd. ‘s case (supra).
This is a case under the 1922 Act. The facts in brief are as follows :
The assessee paid as bonus to its employees a particular sum for the calendar year 1947 in terms of an award made on 13-1-1949 under the Industrial Disputes Act. The assessee claimed this expenditure in the year 1948 as the books of account were not closed till the date of award. Bonus was paid to the employees in calendar year 1949 relevant to assessment year 1950-51. The Hon’ble Supreme Court held after considering Section 10(2)(x) and section 10(5) that the claim to profit bonus accrued as per mercantile system of accounting when the same was settled amicably or by industrial adjudication.
(ii) Laxmi Devi Sugar Mills’ case (supra)
This is also a case on the issue of accrual of bonus prior to coming into force of the Bonus Act. Following the Hon’ble Supreme Court’s decision in the case mentioned supra, it was held that the liability accrued only when an agreement was reached.
(iii) Johnson & Johnson Ltd. ‘s case (supra)
This is a case where it was held by the Tribunal that liability arose only on account of agreement made by the assessee-company with its employees and as the books of account of the assessee were not open till the date of agreement, the same was not an allowable liability as per mercantile method of accounting.
(iv) Agarwal & Modi Enterprises (Cinema Project) Co. (P.) Ltd.’s case (supra)
This is a case where liability on account of disputed licence fee was the issue. After the expiry of the original lease a fresh agreement was signed, by which the annual lease amount was increased substantially. Validity of the agreement was disputed by the assessee by filing suit. Under these circumstances, it was held by the Hon’ble Tribunal that the liability accrued only on settlement of the dispute by the court. The same was upheld by the High Court.
(v) Bharat Earth Mover’s case (supra)
This is a case on which reliance has been placed by both the Revenue as well as the assessee. The Apex Court in the above case decided the issue of accrual of liability on account of entitlement of leave salary. Their Lordships held if a business liability had 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. “What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the quantification would not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.” The Hon’ble Court, therefore, held that the provision made by the appellant company for meeting the liability incurred by it under the Leave Encashment Scheme proportionate with the entitlement earned by employees of the company, inclusive of the Officers and staff subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of gross receipts for the accounting year during which the provision is made for the liability. It was held that the liability is not a contingent liability.
(vi) Mahindra Ugine Steel Co. Ltd. ‘s case (supra)
This is also a case on which reliance has been placed by both the parties. The issue under consideration was allowability of liability amounting to Rs. 1.81 crores arising out of wage settlement. The earlier wage settlement came to an end on 31-12-1984 and a fresh charter of demand was submitted. The Hon’ble Tribunal came to the conclusion that after protracted negotiations in respect of the demands portrayed in the fresh charter of demands, conciliations proceedings were held and it was ultimately decided that a lump sum amount would be paid at a particular rate of the workers or the period 1-1-1985 up to 31-12-1986. The Tribunal therefore accepted that the negotiations had reached a stage where it was possible to anticipate the liability to pay the workers higher wages and, therefore, the assessee had rightly debited the P&L Account for the year ending 30-6-1986 with the provision in order to discharge the increased liability. Thus, the Tribunal held on facts that the provision was made on a reasonable basis for anticipated expenditure and, therefore, it was an allowable deduction. The Hon’ble High Court upheld the above finding of the Tribunal.
(vii) Thermax Babcock & Wilcox Ltd. ‘s case (supra)
In this case, the question that arose for decision was as to whether provision for warranty liability made in terms of warranty obligation even when no boilers were delivered or commissioned by the assessee during the relevant accounting year was allowable as per mercantile method of accounting. Both the Ld. Judicial and Accountant Member agreed that the liability was a contingent liability and that it was not allowable under Section 37(1) of the Act. The difference was as to whether the above provision was allowable under Section 28 itself on commercial or accounting principle. It was held by the Hon’ble Third Member that the issue is not as to whether a claim prohibited by sections 30 to 43C of the Act can be allowed under Section 28 or not. It is to be seen whether the claim is allowable as per the scheme of the Act or not irrespective of the other relevant provisions or considerations. As there was no delivery or commissioning of the boilers during the relevant previous year, it was held that no liability towards the same was allowable in the year under consideration.
(viii) Metal Box Co. of India Ltd. ‘s case (supra)
In this case, the Hon’ble Supreme Court explained the meaning of the words ‘provision’ and ‘reserve’. It was held by the Apex Court “provision made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in the P & L Account and the balance sheet…. An amount set aside out of profits and other surpluses not designed to meet liability, contingency, commitment or diminution in value of asset known to exist at the date of the balance sheet is a reserve but amount set aside out of profits and other surpluses to provide for a known liability of which the amount cannot be determined with substantial accuracy is a provision.
(ix) Calcutta Co. Ltd. ‘s case (supra)
In this case, the assessee was dealer in landed property and carried on land developing business. During the course of business it bought land, developed it to make it fit for building purposes and sold it at a profit in plots. On sale of plot, the assessee received 25 per cent of the purchase price in cash and the balance amount was received in 10 annual instalments with certain rate of interest. The debt was secured by creating a charge on the land purchased. It was the responsibility of the assessee to carry out the developments including laying out roads, provision of drainage etc. within a reasonable time. The assessee followed the mercantile system of accounting took into account full sale price of the land sold during the accounting year though only some percentage of the same was received by him. The assessee estimated certain sum as expenditure for the developments to be carried out in respect of the plots which had been sold during the year and debited the same in the books of account on the ground that the liability for the said sum had actually arisen as the assessee was bound to provide the facilities that it had undertaken to do, even though no part of that amount represented any expenditure actually made during the year. It was held by the Apex Court, “the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the appellant in course of carrying on its business and was incidental to the same and having regard to accepted commercial practice and trading principles, was a deduction which if there was no specific provision for it under Section 10(2) of the Act was certainly allowable deduction, in arriving at the profits and gains of the business of the appellant under Section 10(1) of the Act, there being no prohibition against it, express or implied, in the Act. Having accepted the receipts of Rs. 43,692-11-9 in their totality even though a sum of Rs. 29392-11-9 only was actually received by the appellant in cash, thus making the appellant liable for income-tax on a sum of Rs. 14,300 which had not been received by it during the accounting year, it was hardly open to the Revenue to urge that the sum of Rs. 24,809 should not have been allowed as a permissible deduction before arriving at the profits or gains of the appellant which were liable to tax.” It was concluded by the Apex Court “where the assessee was following mercantile system of accounting is entitled to deduct expenditure which is incidental to the business is deductible on accrual basis though it was not actually incurred during the relevant accounting year.
(x) VST Co. Ltd. s case (supra)
In this case, the Apex Court explained the meaning of provision and reserve.
(xi) Mitsubishi Motors New Zealand Ltd. ‘s case (supra)
In this case their Lordships was concerned with the allowability of warranty expenditure. It was held that the assessee was entitled to deduct the provision made for costs of its anticipated liability as there was a legal obligation fastened to the sale made.
16. That there is a distinction between profit bonus and wages has been noted by the Apex Court in Swadeshi Cotton & Flour Mills (P.) Ltd. ‘s case (supra). In that case when the appellant wanted books of account of earlier years to be reopened, the court quoted with approval–
Lord Radcliffe explains the position in England, in Southern Railway of Peru Ltd. v. Owen (1957) AC 334; 32 ITR 737, thus :
The Courts have not found it impossible hitherto to make considerable adjustments in the actual fall of receipts or payments in order to arrive at a truer statement of the profits of a successive years. After all, that is why income and expenditure accounting is preferred to cash accounting for this purpose. As I understand the matter, the principle that justified the attribution of something that was, in Act, received in one year to the profits of an earlier year, as in such cases as Isaac Holden and Sons v. IRC (1924) 12 Tax Cases 768 and Newcastle Breweries Ltd v. IRC (1927) 12 Tax Cases 927 was just this, that the payment had been earned by services given in the earlier years and, therefore, a true statement of profit required that the year which had borne the burden of the cost should have appropriated to it the benefit of the receipt.
The principle mentioned by Lord Radcliffe would not apply to a profit bonus. As stated above, a profit bonus is strictly not wages, at least not or the purpose of computing liability to income-tax; it is not an expense, in the ordinary sense of the term, incurred or the purpose of earning profits.
Thus, it can be said that as regards wages even the books of account of earlier years can be reopened for arriving at the correct amount of profits and gains of business. This case, therefore appears to support the case of the appellant. The case reported in Laxmi Devi Sugar Mills (supra), therefore, does not support the revenue’s case. The ratio laid down by the Apex Court in the case of K.K. Doshi & Co. (supra) also supports the appellant’s case in so far as it was held by the Apex Court that if the liability has been incurred in praesenti, even though the same cannot be quantified accurately and is to be discharged at a different point of time, the same has to be allowed as an expenditure.
17. The Hon’ble Bombay High Court’s decision in the case reported in 250 ITR 84 supra, appears to support the case of the revenue. But in that case the payment was a lump sum payment for a period of two years only. It was akin to liability to profit bonus as discussed in the case of Swadeshi Cotton & Flour Mills (P.) Ltd. (supra). The liability in that case did not arise out of contract of employment. The cases on warranty liability lay down the principle that the contract of warranty comes into effect as soon as the sale has been made. The true profit from such sale can be arrived at after the estimated expenditure on account of warranty liability is reduced from the same. Same is the ratio in the case of Calcutta Co. Ltd. (supra). For determination of true profits, the liability fastened to the receipts accounted for has to be allowed. In this view of the matter, we are unable to agree with the view expressed by the Tribunal in the case reported in Johnson & Johnson Ltd. (supra). It may be pointed out that the fact of notification of accounting standards under the Act has also not been considered in the above case.
18. Considering the facts obtained in the present case, the case laws cited by both the parties, notification of accounting standards under the Act and the concept of real income, we are of the considered view that the appellant is bound to succeed on this ground of appeal. We proceed to give our reasoning in the following paragraph.
19. It is an undisputed legal principle that salary and wages accrue either daily, weekly, fortnightly or monthly as per the contract of appointment. This is so as service is rendered in praesenti. As soon as the service is rendered right to compensation for the service rendered accrues. However, the right to receive the payment arise as per the contract of employment. Also for the employer, liability to compensate the employees for the services rendered accrues in praesenti. Such services have been incurred for earning the income which the employer reflects in his accounts. In the present case, the right to receive compensation for the services rendered by the employees arise out of the contract of employment. The contract of employment in the instant case is not in dispute. What is in dispute is quantification of compensation. In this case the charter of demands by the employees covered under IDA scheme of salary was available as early as 1-1-1997. For these employees the revised wages/ salary was to be given with effect from 1-1-1997. Thus, it can be said that the appellant was reasonably certain of its increased liability on this account. As the Personnel Department of the appellant had knowledge of dealing with such Pay hikes in the past, the assessee could estimate the quantum of such enhanced liability. The liability was certain. What was not certain is the quantum of such liability. Also, the entries taken in the books of account towards provision of enhanced salary/wages cannot be said to be unilateral entry made by the appellant. The appellant accepted its liability to the extent provision was made in the books of account based on the demands from its employees. It may also be noted that the accounting standards were also made part of the Act. Taking into account principle of prudence and the definition of accrual as given therein, as also the principle of real income, we are of the opinion that in the facts of the present case, the provision made towards additional liability on account of enhanced wages and salary are allowable in the year of making such provision. In this view of the matter, this ground of the assessee is allowed.
20. In the result, the appeals of the assessee are partly allowed.