Vildirect: IncomeTax-caselaws-1987-VIL-52-ITAT-

1987-VIL-52-ITAT-

Equivalent Citation: ITD 026, 259,

Income Tax Appellate Tribunal BOMBAY

Date: 01.12.1987

ECHJAY INDUSTRIES (P.) LTD.

SECOND INCOME-TAX OFFICER

BENCH

Member(s) : K. R. DIXIT., M. A. AJINKYA.

JUDGMENT

Per Shri M. A. Ajinkya, Accountant Member - The above three appeals relate to assessment years 1978-79, 1979-80 and 1981-82. The main arguments were addressed by the assessee's counsel, Shri D. M. Harish, in respect of ITA No. 7106 (Bom.) /84 for the assessment year 1981-82. We will therefore deal with this appeal first.

2. The assessee is a limited company which is running an industry at Kanjur Marg, Bhandup. It had at the relevant time business of forgings and in automobile spare parts. For the assessment year 1981-82, the accounting period ended on 31-12-1980. The first and the most important ground raised in this appeal is that the CIT (Appeals) erred in holding that there was no accrued labour liability in the year under appeal and that the claim by the appellant for an amount of Rs. 2,20,87,000 was legally inadmissible. It is also the assessee's further ground that the CIT (Appeals) erred that the IAC had wrongly allowed a deduction of Rs. 38,56,828 in his directions u/s. 144B and consequently erred in enhancing the amount of the income assessed to that extent. Certain facts need to be stated. There was a dispute between the assessee-company and its workers and a settlement was arrived at and reduced to writing in a memorandum of settlement dated 13-2-1971. The terms of the agreement provided that the agreement shall come into force from 1-1-1971 and shall bind the parties, i.e., the employer and the workmen for a period of three years, i.e., till 31-12-1973. The wage scales of different grades of workers were fixed and the agreement also provided for terms of payment of dearness allowance, accommodation, etc. It would appear that Dr. Datta Samant, the then President of Brihan Mumbai General Kamgar Union, issued a strike notice to the Mg. Director of the company on 4-6-1973 and the workers went on strike from 15-6-1973. The management of the company issued a general notice on 19-6-1973 advising its workers to stop the strike and report for work. On 18-6-1973, the Union, by a letter of the same date, enclosed a charter of demands and the company.addressed a letter on 4-8-1973 to the Commissioner of Labour & Director of Employment in which they stated that the strike was not total and some 200 hands were already at work. The fact that a settlement had already been reached on 13-2-1971 effective up to 13-12-1973 till he date of the letter were listed, individual notices to the workers that the strike was illegal were given on 5-9-1973 and this was followed by a public notice dated 10-9-1973 which was published in 'Maratha' and 'Maharashtra Times' in Marathi and the English translation of which has been filed before us. In this public notice, the striking workers were advised to report for work in their own interest and not later than 4 days of the publication of the notice. In case they did not do so, it would be presumed that they were no longer interested in their employment and the vacancies would be filled in by fresh recruits. It appears that the Industries and Labour Department of the Govt. of Maharashtra issued on order under the Industrial Disputes Act on 25-4-1974 in which it referred the dispute between the management and the workers for adjudication to the Tribunal under sec. 10(1) (d) of the Industrial Disputes Act, 1947 (XIV of 1947). By the same order of the same date, i.e. 25-4-1974, Govt. prohibited the continuance of the strike under section 10(3) of the Industrial Disputes Act. It would appear that 340 workers had been removed from employment. It would also appear that on 30-4-1974 Dr. Datta Samant wrote another letter to the management on behalf of the Union in which reference was made to the two orders passed by the Govt. of Maharashtra dated 25-4-1974 referring the workers' demands for adjudication to the Industrial Tribunal and prohibiting the continuance of the strike in connection with the disputes referred to the Industrial Tribunal. It was stated that the workers were not allowed to report when they wanted to do so. Dr. Samant called upon the management to allow the workers to resume work at once. The President of the Union followed it up by another letter dated 21-7-1974 asking the management for immediate compliance of the following demands :

"All the workmen whose names have been given in the list enclosed herewith this demand letter, should be reinstated with continuity of service and full back wages from the date of their termination of service till the date of their reinstatement."

A reference was made to the order dated 10-9-1974 passed by the Industries & Labour Department of the Govt. of Maharashtra referring the matter for adjudication on the subject mentioned in the Schedule therein to the effect that all the workmen whose names were given in the Annexure should be reinstated with full back wages and continuity of service. This order required the management to refer to the Tribunal the demand to reinstate 340 workers with full back wages. It was passed on 10-9-1974.

2.1 On 22-12-1980, the appellant received letter from their solicitors, Bhaishankar Kanga & Girdharilal, in which it was stated by them that Mr. Talegawkar had come across two reported cases, namely, Santoshkumari Gupta v. State Bank of Patiala 1980 (2) LLJ 72 and Gujarat Steel Tubes Ltd. 1980 (1) LLJ 137. On perusal of these cases, the solicitors were of the view that the cases filed by them against the workers in IT Ref. Nos. 125 & 274 of 1974 were likely to go against them and that therefore they would have to provide for a provision with regard to back wages and other fringe benefits in respect of the workmen for the entire period from 1973 to 1980 and continue to make such provision in future till both references were disposed of.

3. It would appear that although Govt. orders referring the dispute between the management and the workers were passed on 21-5-1974 and 10-9-1974 respectively, no provision for back wages of the workers had been made in the books of account by the assessee in its accounts for the year ended 31-12-1974, although specific demands had been made for re-instatement with back wages in terms of the Govt's order by the President of the Union. According to Shri Harish, who represented the appellant-company, the company had acted correctly in removing the workers after giving them independent notices and public notices. The company did not think it necessary to make any provision for back wages of the workers in any of the calendar years 1973 to 1980. The realisation of the assessee's liability in this behalf dawned on the company, according to Shri Harish, when they received the letter dated 22-12-1980 from their solicitors intimating the effect of the decision in the case of Gujarat Steel Tubes Ltd. v. Gujarat Steel Tubes Mazdoor Sabha AIR 1980 SC 1896. The Board of Directors passed a resolution on 27-12-1980 to the following effect :

"Resolved that the Company do file a revised estimate in terms of Sec. 212(3A) of the I. T. Act on or before 30-1-1981 in the amount of Rs. 140 lacs after taking into account the additional liability which.is bound to entail on the Company and pay whatever the tax after taking into account credit for the tax in the amount of Rs. 47,08,500 already paid as per the estimate filed by the Company on 12-6-1980."

A reference was made to the Actuary who sent his report on 22-6-1981 in which he stated that he had worked out the liability that might arise under various benefits in respect of 255 employees whose cases were before the Industrial Tribunal. He took note of the liability for wages, dearness allowance, privilege leave, encashment of leave, bonus, uniform, sick leave, compensation, gratuity, etc., and worked out such liability for the period from 15-6-1973 to 31-12-1980 at Rs. 2,20,87,000. It is necessary to repeat that this letter is dated 22-6-1981 and was received by the assessee-company some time thereafter. The Actuary worked out the amount payable to each of the 255 workers in an Annexure to a report dated 15-7-1981. On 3-7-1981, a meeting of the Board of Directors was held and the following decisions were taken unanimously :

"(1) That while filing the Income-tax Return for the relevant period the liability in the amount of Rs. 2,20,00,000 which is arrived at as per calculations of Actuaries Report, be claimed only from the Income-tax Return and no mention of like amount be made anywhere in the annual accounts or in the Directors' Report or in the Auditor's Report.

(2) A General Reserve No. II in the amount of Rs. 2,20,00,000 be created into the accounts of the year ended 31-12-1980."

To give effect to these decisions, three resolutions were passed, first of which, which is relevant for our purpose, reads as under :

"Resolved that the balance left, after the provision of dividend from the Net Profit, to the tune of Rs. 2,20,00,000 and Rs. 13,004.21 be transferred to the General Reserve No. II and General Reserve No. I respectively. "

The profit & loss account for the year ended 31-12-1980 shows a profit of Rs. 2,39,33,004.21 after provision of taxation of Rs. 32,60,000. The amount of Rs. 2,20,00,000 which was said to be the liability payable by way of back wages to the striking workers was not debited to the profit & loss account but was shown as general reserve account No. 2 in the profit & loss appropriation account. Consequently, the reserve and surplus of the assessee which stood at Rs. 2,25,50,750.93 at the beginning of the year rose up to Rs. 4,62,33,275.14. The reason for showing this alleged liability as general reserve account No. 2 was explained by Shri Harish with reference to the aforesaid resolution of the Board in which it was stated that there was a definite apprehension of the militant elements of the labour taking law into their own hands without waiting for the decision of the Industrial Tribunal if they came in possession of the information that the Actuary had calculated the liability of the company for labour payment at Rs. 2,20,87,000. It was, therefore, in the interest of the company that while bringing about the fair and correct financial picture of the company's assets and liabilities as on 31-12-1980 to the knowledge of the members of the company, it was also necessary to keep the entire matter of this labour liability in strict confidence. One of the directors, therefore, suggested that a special reserve styled as "General Reserve No. 2" should be created in the books of account in the amount of Rs. 2,20,00,000 without assigning any reason and no mention of this labour liability be made in the directors report or in the auditor's report. It may be stated may emphasized that no portion of this amount shown as General Reserve No. 2 was utilized for payment of wages. In fact, it transpired in the course of the hearing that the reserves of Rs. 4,62,33,275 were utilized partly for issue of bonus shares to the extent of Rs. 96 lakhs. It also transpired that Kanjur Division of Echjay Industries Pvt. Ltd., the appellant herein, was taken over with effect from 1-1-1983 as per scheme of arrangement approved by the Bombay High Court by their order dated 3-9-1986 by a company called Echjay Forgings Pvt. Ltd. In the manufacturing, trading and profit & loss account for the year ended 31-12-1983 a deduction of Rs. 20,70,000 was claimed as settlement of wages. It is not necessary for us to well on the course that the amount of Rs. 2,20,00,000 traversed in the subsequent years. It is enough to say that this amount, which was, for the reasons stated by the Directors as above, described as general reserve in the accounts and claimed as liability of the assessee for the year under appeal was, in fact, treated as a reserve for the subsequent years and transferred and utilised as such when there was a split in the manufacturing divisions of the company.

4. On the above facts, Shri Harish, the learned counsel for the assessee, argued that General Reserve No. 2 shown in the accounts for the year ended 31-12-1980 was actually a provision for labour liability which accrued during the year in view of the Supreme Court decision in Gujarat Steel Tubes Ltd.'s case. The company had never made any such provision in the earlier years from 1974 to 1979 in view of an earlier decision of the Supreme Court in Oriental Textile Finishing Mills v. Labour Court AIR 1972 SC 277. Shri Harish drew our pointed attention to para 12 of this decision. The Supreme Court in effect held that in that case there was a persistent and obdurate refusal by the workmen to join duty notwithstanding the fact that the management had done everything possible to persuade them to come back to work but they had without any sufficient cause refused and which in the view of the Court would constitute misconduct and justify the termination of their service. The Supreme Court, therefore, held that the management had proved misconduct and the stand taken by it was reasonable and that the order of terminating their services was not improper. This judgment of the Supreme Court which was given on 11-8-1971 influenced the conduct of the assessee according to Shri Harish in not providing for the wages of the workers whose services were terminated. Shri Harish thereafter referred to the decision in the case of Gujarat Steel Tubes Ltd. and drew our pointed attention to paras 65-66 of the order at page 1913. The finding of the Supreme Court in para 68, on which Shri Harish relied, reads as under :

"One we hold the discharge is punitive the necessary consequence is that enquiry before punishment was admittedly obligatory and confusedly not undertaken."

Shri Harish made extensive references to the portion of the judgment which according to him supported his case that the Supreme Court held that the removal of the workers was a punitive measure and every such punitive measure presupposes that an opportunity to the workers should have been given and if such opportunity was not given, they were entitled to payment of back wages. This, according to Shri Harish, was the sum and substance of the decision of the Supreme Court which weighed with the management when they passed the aforementioned resolutions dated 3-7-1981 for creation of General Reserve No. 2 of Rs. 2,20,00,000 which was in effect a provision for liability for back wages and which arose during the relevant year of account since it was ascertained by an expert for the period from 1973 to 1979 and also because the awareness of such liability came to the assessee as a result of the solicitors letter. In short, according to Shri Harish, the passing of the Supreme Court's order in the aforementioned case had given rise to the liability of Rs. 2,20,00,000. This liability, though claimed as general reserve in the balance sheet of the company, was claimed as a deduction in the statement of total income filed along with the return of income. Shri Harish also argued that it was a statutory liability arising out of sec. 11A of the Industrial Disputes Act, 1947. Shri Harish argued that the facts in appellant's case were in pari materia with the facts in the case before the Supreme Court on which he was relying. The CIT (Appeals) had misconstrued the decision of the Supreme Court (vide para 52 of his order). Shri Harish further argued that there was no distinction between reserve and provision. He finally relied on a few authorities. He first cited the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 which, according to him, supported his argument that there is no distinction between reserve and provision. Thereafter, he relied on the decision of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand [1976] 105 ITR 618. In this case, the High Court held that an assessee who follows the mercantile system of accounting is entitled to claim a deduction even though the expenditure is not claimed. It is enough if the liability for such expenditure accrues. For similar proposition, he relied on another decision of the Allahabad High Court in the case of Motilal Padampat Sugar Mills v. CIT [1977] 106 ITR 988. He particularly relied on the finding of the Court that the fact that the assessee did not make appropriate entries in its books of account to get the amount in reserve account though its accounts were maintained on mercantile basis would not make any difference and that the entries in the books of account are not determinative of an item of income or expenditure. Thereafter, he drew our attention to the decision of the Gujarat High Court in Nagri Mills Co. Ltd. v. CIT [1981] 131 ITR 257 where the High Court held that even where provision for the liability had been made by way of a foot note in the balance sheet and this was in accordance with the accountancy practice, the existence or absence of entries in books of account was not decisive or conclusive while deciding whether the deduction was permissible. He finally relied on the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. Shri Harish concluded his arguments by saying that there was no device as alleged by the CIT (Appeals) in paras 16-17 of his order.

5. Shri Tiwari the learned Senior D. R. while putting the case very ably for the department firstly argued that there was no finding by any authority that this was an illegal strike. The strike was prohibited by the Govt. of Maharashtra by an order passed by them in consequence of a reference made to them for referring the dispute to the Industrial Tribunal. Shri Tiwari pointed out that the services of 356 workers were terminated way back in 1973. The moment the workers started making demands, the company started retrenching them. The assessee had in effect made a total claim for retrenchment compensation and back wages of an amount of Rs. 3,25,00,000 as per the following details :

Asst. year Amount

1981-82 Rs. 2,20,00,000

1982-83 Rs. 36,60,240

1984-85 Rs. 68,07,487

In respect of calendar year 1983, argued Shri Tiwari, a subsidiary company called Echjay Forging Co. was formed and the balance sheet of the appellant-company as on 31-12-1983 (page 692 of Vol. III of paper book) showed an excess of assets over liabilities transferred to Echjay Forgings (P.) Ltd. of Rs. 1,03,50,437. The subsidiary company had (as stated earlier) claimed deduction of an amount of Rs. 20,70,000 under settlement wages account for the year ended 31-12-1983 in respect of the same liability. Shri Tiwari argued that so far as the appellant-company was concerned, there was in fact a cessation of liability for payment of back wages if not offered anything by way of income for such cessation or remission or liability. Shri Tiwari's next contention was that there was no change in the legal position relating to the Industrial Disputes Act during the year 1980. All the sections of the Industrial Disputes Act to which references were made by Shri Harish were on the statute book during the year of account and in the earlier years and the judgment of the Court which was given on the facts and circumstances of that particular case did not in terms create a commercial liability in the case of a third party particularly when there is no dispute regarding the provisions of law and what is decided is a mixed question of facts and law. Shri Tiwari relied on a catena of judgments in support of this proposition. However, in particular, he drew our attention to the decision of the Supreme Court in the case of India General Navigation & Railway Co. Ltd. v. Their Workmen AIR 1960 SC 219 in support of his argument that there was no change in the law relating to industrial disputes ever since the Supreme Court decided the case in India General Navigation & Railway Co. Ltd. By and large, in that case, the Supreme Court decided that whereas it may be open to the management to dismiss a workman who has taken part in an illegal strike, in determining the question of punishment, a clear distinction has to be made between those workmen who not only joined in such strike but also took part in obstructing the loyal workers from carrying on their work and took part in violent demonstrations or acted in defiance of law and order on the one hand and those workers who were more or less silent participants in the strike on the other. An Industrial Tribunal has to consider the question of punishment keeping in mind the overriding consideration of the full and efficient working of the industry as a whole. In support of the proposition that a Court judgment does not in terms create a commercial liability, Shri Tiwari relied on a decision of the Bombay High Court In CIT v. Babulal 105 ITR 721, Madras High Court in Sashays Paper & Boards Ltd. v. IAC [1986] Narottamdas [1976] 157 ITR 342 and the Supreme Court in CIT v. Travancore Sugars & Chemicals Ltd. [1973] 88 ITR 1. Elaborating his argument further, Shri Tiwari argued that a judgment of a Court, and particularly that of the Supreme Court, has to be considered as a declaration of the law as it always stood and not as a retrospective amendment of the law.

5.1 The method of accounting regularly employed by the assessee had not been a mercantile system of accounting particularly when it came to payment of wages. The appellant always claimed deduction for wages when they were actually paid. Even before the decision of the Supreme Court in Gujarat Steel Tubes Ltd.'s case, the appellant had settled 69 cases of workmen out of 101 cases out-of-court between the period June 1973 and December 1979. The modus operand adopted by the assessee was to reach individual settlement with the workers who were retrenched, pay them some compensation and.they would agree not to press their claim before the Tribunal and payments made subsequent to such settlement were claimed as deduction in the year of payment. Shri Tiwari illustrated this point by drawing our attention to Note 2 of Schedule 19 of the balance sheet of the appellant-company for the year ended December 1983. There is a reference in this Note to the fact ended December 1983. There is a reference in this Note to the fact that lease rent on plant & machinery leased out to Enchjay Forgings (P.) Ltd. will be accounted for on receipt basis. Alternatively and without prejudice, Shri Tiwari argued that even if it is assumed that the system of accounting followed by the assessee was mercantile, the year in which the liability in respect of back wages really accrued has to be ascertained. It was Shri Tiwari's submission that this liability did not arise in this year but was claimed in the accounting year ended 31-12-1980 as a shame of tax planning because this was a year of exceptionally high profits. Shri Tiwari has given figures of net profit as per the audited accounts for calendar year 1980 and seven earlier calendar years to prove that the profits never exceeded Rs. 80 lacs any time and Rs. 79.65 lacs in 1977-78. They had gone down to Rs. 31 lacs in calendar year 1978 and amounted to Rs. 74.92 lacs in calendar year 1979. It was only in this previous year (calendar year 1980) that the book profits after provision for taxation were as high as Rs. 2,39,33,004. Shri Tiwari argued that each year was an independent year and constitutes a unit of assessment. The year in which the expenditure was incurred or the liability accrued was important as decided in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC). Calendar year 1980 was the year of non-event. No important event whatsoever had taken place which could have relevance for the issue in this case. This was not the year in which the dispute between the workers and the management started. This was not the year in which the settlement of dispute between the workers and the management had taken place. This was not the year in which the settlement of dispute between the workers and the management had taken place. This was not the year in which the award of the Tribunal became known. In fact, it came as late as in 1983. Therefore, nothing had happened during the year of account to create a liability of as much as Rs. 2,20,000 towards payment of compensation and back wages to the striking workers. According to Shri Tiwari, the learned counsel for the appellant had completely misread the judgment of the Supreme Court when he stated that judgment laid down the law of the land which was that dismissal without enquiry per he was illegal and therefore full back wages would have to be paid. That judgment was given after discussing all the relevant case law on the subject and after taking into account the peculiar fats and circumstances concerning the dispute in that case. Shri Tiwari further argued that the authorities relied upon by the learned counsel were not applicable in the present case because all those authorities did not deal with cases relating to earlier years' provision or liability or based on adjudication or orders by statutory authority or notification. They were all cases where the liabilities were undisputed. A liability which is basically contractual like the one with which we are concerned in the present case, even if governed by certain provisions of the statute, cannot be said to be a determined liability during the subsistence of the dispute and it was certainly not a statutory liability as it did not spring directly from the statute. A statutory liability is a liability which arises by virtue of a statute like a levy or tax imposed by State or a Central or a cess imposed by a municipal body. In support of this proposition, Shri Tiwari relied on Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33 (All.), CIT v. Ratlam Strawboard (P.) Ltd. [1985] 152 ITR 425 (MP) and CIT v. R. V. Brigs & Co. (P.) Ltd. [1985] 155 ITR 495 (Cal.). In order to claim a deduction for liability there should be a definite obligation to pay a debt owed to someone. Further, a personal liability must be shown to have accrued. Further, a personal liability must be shown to have accrued. Shri Tiwari relied on a decision of the Supreme Court in CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 to elaborate what should be considered as tests of accrual of personal liability. He pointed out that the assessee's stand was not consistent and the assessee cannot be allowed to take two separate stands before two different authorities - CIT v. O. P. N. Arunachala Nadar [1983] 141 ITR 620 (Mad.) -and pointed out that the so-called actuarial valuation relied upon by the assessee was not in fact an actuarial valuation since no basis was given for calculating the liability; it was only a report of an actuary; it was defective and unreliable as the manner in which the calculations were made was not known. Shri Tiwari also pointed out that there was a clear distinction in facts of the case decided by the Supreme Court in the assessee's case and there was nothing in the opinion given by the solicitors to indicate that the liability to any compensation and back wages arose as a result of a High Court judgment. The solicitor's opinion only indicated that as a result of the judgment cited by them, they were likely to lose the dispute which was referred to the Industrial Tribunal. The solicitors did not state that the High Court judgment ipso facto gave rise to a liability for payment of back wages in the calendar year 1980 in which year actually the matter was sub juice inasmuch as the Tribunal had not given its finding. Shri Tiwari further argued.that this is a liability which is related to the dispute and can be determined when the dispute is settled either by settlement reached out of court or when the award of the Tribunal was received. In any case such a liability related to earlier years. It cannot, in any case, be calculated as a single year's liability of such magnitude in an intervening period (namely, during the year of account) when nothing of significance relating to the dispute had happened. This was also not a statutory liability inasmuch as it was not enforceable by independent machinery for enforcement provided by the statute. The argument taken before the Industrial Tribunal was contrary to the arguments.

5.2 In order to expose the defects in the argument that the liability arose as a result of the Supreme Court judgment, Shri Tiwari pointed that the judgment was delivered on 27-11-1979 and strictly the liability arose in calendar year 1979 if the proposition canvassed by the counsel for the appellant was to be accepted. The claim for the liability should have been made for the assessment year 1980-81, the return of income for which was filed on 2-7-1980. The accounts for calendar year 1979 if the proposition canvassed by the counsel for the appellant was to be accepted. The claim for the liability should have been made for the assessment year 1980-81, the return of income for which was filed on 2-7-1980. The accounts for calendar year 1979 were audited on 20-5-1980 and the assessment order was made in 1982. The assessee could well have made the claim for liability for the assessment year 1980-81 itself. There cannot be a suspension of operation of the Supreme Court judgment. This only proved that there was no substance in the argument of the counsel for the appellant. As regards the report of the actuary, Shri Tiwari pointed out that it is not mentioned anywhere that this is an actuarial valuation. No method of valuation is given, no working, no parameters, no rate of discounting is spelt out anywhere. The possibility of a settlement between the management and workers has not been taken into account by the actuary. The actuary had also not indicated what percentage of back wages would be awarded. Finally, Shri Tiwari argued that this was a well-designed scheme for tax avoidance and the ratio of the decision of the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 was clearly applicable to the facts of the present case. Alternatively and without prejudice, Shri Tiwari argued that all the years' liabilities cannot be allowed in one year and relied on the following four decisions of the Supreme Court - CWT v. K. S. N. Bhatt [1984] 145 ITR 1 (SC), Sundaram Motors (P.) Ltd. v. Ameerjan [1985] 152 ITR 64 (SC), K. C. Joshi v. Union of India [1987] 163 ITR 597 (SC) and Sant Raj v. O. P. Singla [1987] 163 ITR 588 (SC).

6. In reply, Shri Harish pointed out that even in mercantile system cash payments are debited. This was not a device to reduce taxation and no scheme for tax planning or tax planning or tax avoidance was contemplated by the assessee which had paid substantial tax in the past. It was the letter of the solicitors which was based on an opinion of the labour counsel and the report of the actuary which weighed considerably with the appellant in making the requisite entries in the books and making the claim for deduction of the amount.

7. We have head both the parties at some considerable length and we must state at the outset that the appellant has a very weak case. It is difficult for us accept that the liability of as much as Rs. 2,20,00,000 relating to back wages and compensation sprang up suddenly in the accounting year merely by the act of intimation by the solicitors of the fact that a particular decision had been delivered and in view of that decision the appellant was likely to lose before the Industrial Tribunal. This was only an advice for the appellant to take requisite steps too settle its dispute. The advice did not indicate that the liability, the magnitude of which was spelt out in the actuary's report, necessarily arose in the accounting year 1980. We will in the course of our finding show that the Supreme Court in Gujarat Steel Tubes Ltd.'s case did to lay down any different proposition of law from that laid down in the earlier decisions of the Supreme Court on the same issue. We would also point out that the facts in the Gujarat distinguishable from the facts in the assessee's case. Before doing that, however, it is important to state here that the assessee's conduct in this regard clearly shows that it had no intention whatsoever of accepting the liability of such magnitude. It had in fact not accepted such a liability. It had taken all possible steps to settle the disputes with its workers from time to time starting from 1973 so that the workers and the management faced the Industrial Tribunal with a pre-arranged settlement. Apart from the fact that the liability related to earlier years, it is not established either on facts or in law that this liability arose in this year and that this was a statutory liability which accrued during the year or that what was debited in the books as a provision for liability represented the liability for this books as a provision for liability for this year. The facts that have come before us amply show that this.was intended to be treated as reserve and was in fact so treated in subsequent year by the company as reserve was utilised for transferring the excess of assets over liabilities to the subsidiary company. The conduct of the assessee established that this amount was never utilised for payment of wages or never intended to be so utilised. On the other hand, the assessee was always claiming deduction for wages when they were actually paid and even in respect of the present liability the subsidiary of the assessee claimed deduction as and when settlement with workers were arrived at and payments made. We are also satisfied that nothing had happened during the year of account for the assessee to claim such liability and if the decision of the Supreme Court was the event that gave rise to such liability, such event took place in 1979, i.e. in the earlier accounting year. Further, similar liability was continued to be provided for in subsequent years even when the decision of the Supreme Court had already been delivered. The strike had not begun during the year. The settlement of the disputes with the workers had been taking place over a period of years. The decision of the Industrial Tribunal was not given during the year. Therefore, no significant event having any bearing on the dispute between the management and the workers had taken place during the year for us to conclude that the liability had arisen or accrued during the calendars year 1980.

8. We would now deal with the various arguments and authorities cited by both the parties in support of their respective stands. The main foundation of Shri Harish's argument is that the liability to pay back wages sprang the moment they came to know about the decision in the case of Gujarat Steel Tubes Ltd. That decision clarified the law as it always stood. It was brought to the notice of the appellant by the letter of the solicitors in December 1980. The liability was quantified on the basis of the report of the actuary. It arose as a result of disputes which were referred to the Industrial Tribunal under the Industrial Disputes Act. This liability was a statutory liability and therefore it was admissible in the year in which it was claimed.

9. On a careful reading of the decision of the Supreme Court (pages 85 to 132 of Vol. I of assessee's compilation), it would appear that the facts there were quite different from the facts in the present case. In that case, the strike was illegal. The production was paralysed. The strikers allegedly indulged in objectionable activities and therefore the management retaliated by ordering their discharge. On these facts, the Supreme Court held that once the discharge was held to be punitive, the necessary consequence was that enquiry before punishment was obligatory. If such enquiry was not done, the order of discharge was bad in law. There, there was a wholesale termination of employees followed by fresh recruitment of workmen. The arbitrator held that the action of the management was warranted. The High Court reversed the award and substantially directed reinstatement. In the present case, 356 workers were discharged as far back as in 1973. In fact, the starting point of the demands was the retrenchment of workers which is borne out by the strike notice dated 4-6-1973 (Page 310 of Vol. IL of assessee's compilation). This notice was followed by a charter of demands dated 18-6-1973 and the matter was ultimately referred to the Industrial Tribunal on 25-4-1974. The award of the Industrial Tribunal had to come during the relevant accounting period and even before the Tribunal could decide this matter, the assessee had started settling cases with the workers who were discharged and to whom payments were made. In fact, in the memorandum of settlement that was drawn between the management and the workermen, the very first clause of the terms of the settlement makes reference to the fact that cases of about 69 persons were settled since the dispute started during the period of 8 years. The relevant portion of the terms of the settlement reads as under :

"1. It is agreed by the Union that since 69 employees have already settled their dispute of reinstatement as contained in the Reference (IT) No. 272 of 1974 by accepting their legal dues during the period of 8 years, the Union odes not desire to pursue their case further in the Court and has further agreed not to take any objection if the Court is willing to strike off the names of such workmen who have settled their dispute from the proceedings in Reference (IT) No. 272 of 1974. ........"

This establishes that the assessee had started a process of buying off the discharged workers by settling their cases and cases of 69 employees had already been settled before arriving at the memorandum of settlement. This memorandum of settlement is dated 10-1-1983 and covers the settlement of nearly 260 workers (page 346 of Vol. II). Thus, the assessee had already started settling cases with the workers and during the year under appeal, i.e. in calendar year 1980, the cases of workers other than those who were discharged were still pending before the Industrial Tribunal, It is.seen that the awards of the Industrial Tribunal were received of various dates in February, March, April, July & August 1983. In the award dated 21-2-1983, it is clearly stated that 81 workmen appeared before the Tribunal and stated that they had settled their demands out of court with the company and that therefore they were not interested in proceeding with the reference. Again in February 1983, another lot of 82 workmen appeared before the Tribunal with a similar request. Thus, nearly 143 workers had already settled their disputes in addition to 65 workers mentioned above. Thus, the appellant had managed to settle the cases of more than 200 workers before the first award of the Tribunal was out. In another award dated 8-3-1983, 74 workers appeared before the industrial Tribunal and made similar request for withdrawing their cases. The nature of awards passed in the months of July & August is the same. This fact would indicate that the appellant had not taken any punitive action against its workers and was successful in settling its dispute with the workers from 1974 onwards and nothing happened in 1980 to suddenly burden the appellant with a liability of Rs. 2,20,00,000. Secondly, the Supreme Court has dealt with almost the whole gamut of cases on the subject and endorsed all the earlier decisions. Shri Harish had argued that the decision given by the Supreme Court earlier in Oriental Textile Finishing Mills' case held a different view. it was Shri Harish's case that before the decision in Gujarat Steel Tubes Ltd.'s case was delivered, the law as propounded by the Supreme Court in Oriental Textile Finishing Mills' case held the field. When this was cited before the Supreme Court in Gujarat Steel Tubes Ltd's case, the Supreme Court observed at page 1929 of the report as under:

"We fail to see how it runs counter to the established principle. The Court, in fact, held that even where the strike is illegal, before any action was taken with a view to punishing the strikers a domestic enquiry must be held ............ the court agreed with the view of the Court in India General Navigation & Railway Co. Ltd. case (AIR 1960 SC 219) and re-affirmed the principle that mere taking part in an illegal strike without anything further would not necessarily justify the dismissal of all the workers taking part in the strike and that if the employer, before dismissing a workman, gave him sufficient opportunity of explaining his conduct and no question adjudication the propriety of such dismissal to look into the sufficiency or otherwise of the evidence led ........"

It would be clear that the Supreme Court in that case endorsed the view taken by it in India General Navigation & Railway Co. Ltd.'s case. A detail reference to this case has already been made hereinabove while recording the arguments of the Departmental Representative since he relied on it. It cannot, therefore be said that the Supreme Court in Gujarat Steel Tubes Ltd's case laid down law concerning the settlement of industrial disputes different from what was laid down by the Supreme Court in earlier decisions. Therefore, we fail to understand how the decision of the Supreme Court by itself creates a liability of this magnitude and how further such liability can arise for this year.

10. It is also seen that the solicitors' letter only expresses an opinion about the appellant's chances of success before the Industrial Tribunal but does not say a word about the extent of the assessee's liability for payment or the year in which the liability would arise or could be claimed as deduction and in which year. It would not be out of palace to refer to a few decisions in support of the proposition that Court judgment does not by itself created a liability for deduction of an expenditure. The Bombay High Court held in the case of Babulal Narottamdas' case as under :

"The normal function of a court while adjudicating a dispute between two parties is to declare a right where there is pre-existing right or to determine a liability where there is a pre-existing liability. The right or liability as the case may be exists by itself but it is not created by judgment or decree of a court". (p. 728) Similar proposition was laid down by the Madras High Court in the case of Seshasayee Paper & Board Ltd. at page 345 as under :

"It was vehemently urged before us that section 80J(1A) of the Act has now been held to be valid by the Supreme Court. While this fact cannot be disputed, it is equally true that the decision of the Supreme Court does not automatically have the effect of vacating the order of the Tribunal which has been statutorily made final under section 254(4) of the Act and which has already been given effect to.".

In the case of Travancore Sugars & Chemicals Ltd. the Supreme Court observed at page 10 of the report as under :

"In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial rendered on different facts and which always present distinguishing features for a compression with the facts and circumstances of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination."

Then again this is not a statutory liability inasmuch as it does not spring from a statute. Ordinarily, a statutory liability like sales tax, excise duty or income-tax is liability imposed by a statute which provides specifically for a charging section, for machinery of assessment of the levy, its collection, recovery and enforcement. The wages required to be paid by a management to the workers are not governed by Industrial Disputes Act. It is a dispute between the workers and the management which is dealt with by various sections of the Industrial Disputes Act. The very facts that the assessee could settle most of the cases with the workers even before the award of the Tribunal was reached would indicate that this was essentially a contractual liability. The modus operand followed by the assessee even from the year the strike started, i.e. from 1974, was to carry on negotiations with the workers and, as stated by the assessee's counsel buy them off by settlement of their claims so that they would face the Tribunal with a 'fait accompli' stating that the dispute was already settled our of court and that therefore they did not wish to purse it. This conduct of the assessee hardly supports the argument of Shri Harish that this was a statutory liability springing from the decision of the Supreme Court. It is further seen from the report of the actuary that it is nowhere mentioned that this is an actuarial valuations. The method of valuation is not indicated, the working of back wages not shown and therefore the figure worked out by the actuary cannot be said to be scientific determination of the liability of the assessee apart from the fact that this was not the liability of the year.

11. We will next deal with the question whether this was a reserve or a provision for liability. All the cases cited by Shri Harish for this purpose have no relevance at all for deciding the issue before us. Most of those cases were decided in the context of disputes under the Surtax Act. In fact, in one of the cases, the observations of the Supreme Court in Vazir Sultan Tobacco Co. Ltd.'s case hardly help the appellant. The Supreme Court observed in that case that the broad distinction between a provisions and a reserve is that whereas provision is a charge against the profits to be taken into account against gross receipts in the profits & loss account, reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. On this limited issue, we find that the amount of Rs. 2,20,000 was in fact appropriated after the net amount of Rs. 2,20,000 was in fact appropriated as general reserve No. 2 and was continue to the carried forward to the reserve account even after the subsidiary of the assessee-company was formed. Therefore, this amount was never intended to be a charge against the profits and the ostensible reason given by the directors of the company for treating them as reserve in their resolution while passing the accounts is hardly convincing when we find that no part of such reserve was utilised by the company or its successors for settling the liability towards the back wages or compensation to the workers. In fact, that could not have been the intention of the directors when we further find that right from 1974 it was the policy of the management to settle the cases of discharged workers out of court by getting them to agree to a certain amount of compensation. We also find that such compensation when paid has been claimed as a deduction in the subsequent years on actual of Rs. 2,20,00,000 was in fact appropriation out of profits. It was never intended as a provisions for liability and never utilised as such in the subsequent years. In any case, this was not a liability arising this year and could not be a charge on this year's profits.

12. The figures of profits cited before us do indicate that this year was a year of exceptionally high profits. Having appropriated a large chunk of these profits as reserves, the directors of the company went about methodically attempting to create evidence in the form of solicitor's letter, actuary's report and the various Board resolutions to support their claim of deduction of this large amount as liability for back wages. There is not an iota of evidence that this appropriation was any time intended to be used or was in fact used for payment of wages. In fact, whatever that has come before us is to the.contrary. We would, therefore, accept all the arguments advanced on behalf of the department, reject those advanced by Shri Harish and confirm the view of the CIT (Appeals) on this issue.

13. The second grounds for the asst. year 1981-82 in the assessee's appeals is that the CIT (Appeals) erred in confirming the disallowance of Rs. 2,62,097 under sec. 40(c) of the Act. The Working of the perquisites and benefits which are considered for disallowance u/s 40(c), has been given by the appellant at page 789, Vol. V of the compilation. On perusal of these details, it would appear that the perquisites amounting to Rs. 6,94,097 include commissions payment of Rs. 2,10,000, addition on account of medical reimbursement (Rs. 18,009), motor - car expenses & driver's salary (Rs. 40, 216), expenses on telephone at the residence of they director, personal accident premium, depreciation on furniture at director's residence, maintenance expenses on furniture. flat maintenance expenses and club subscription. Our attention was drawn to the decision of the Spl. Bench of the Madras Tribunal in the case of Mettur Chemical & Industrial Corpn. Ltd. v. ITO [1983] 3 ITD 612. In that case also the Mg. Director of a company received salary, commission, house rent allowance and other benefits such as personal accident premium, medical reimbursement expenses. It was argued before the Tribunal on behalf of the appellant that the Legislature did not intend to consider part of the remuneration for the purpose of disallowance u/s 40(c) was altogether different. Section 40(b) could be invoked only in the assessment of a firm, whereas sec. 40(c) had relevance in the assessment of a company. Therefore, the word 'remuneration' used in clause (c) need not take its colour from the said expression in clause (b), In view of this decisions, Shri Harish's argument that the commission of Rs. 2,10,000 should be excluded is rejected and the disallowance made is confirmed. The second grounds in the assessee's appeal is accordingly dismissed.

14. The third ground was not pressed and is dismissed as such.

15. The fourth ground concerns the disallowance of entertainment expenses under sec. 37(2A) of amounts of Rs. 37,742, Rs. 15,856, Rs. 14,353 and Rs. 28,248. It was argued that this expenditure was made out of consideration of commercial expendiency and that a portion of the expenses which was incurred on the staff should be proportionately excluded. Since no basis for either of these arguments has been given, we reject this argument and confirm the order of CIT(A) on the issue also.

16. Ground No. 5th and ground No. 6th where not pressed and are therefore dismissed as such.

17. Grounds No. 7 challenges the CIT (A)'s order confirming the disallowance of Rs. 19,295 incurred on the death anniversary of the Chairman. It would appear that he amount of Rs. 19,295 included an amount of Rs. 8,920 being food served to Child Aid Society. Shri Harish argued that the expenditure was incurred as a part of social obligation of the company. We are not satisfied that such expenditure had anything to do with the carrying on of the business. A substantial part of the expenditure was in the nature of charity or donation incurred on the occasion of the death anniversary of the founder Chairman. It has not been proved that the company had incurred any other type of expenditure to meet its social obligations in accordance with its alleged objectives mentioned in the Memorandum & Articles of Association of the company. We therefore, are not satisfied that this is an admissible expenditure. This disallowance is upheld.

18. The next grounds (ground No. 8) challenges the disallowance of expenditure of Rs. 13,500 being the amount paid as filing fees of the Registrar of Companies for increasing the authorised capital by capitalising the reserves. This clearly is not an admissible revenue expenditure in view of the decision of the Bombay High Court in Bombay Burmah Trading Corpn. Ltd. v. CIT [1984] 145 ITR 793.

19. The next grounds is directed against disallowance of club membership fee of Rs. 3,339. An additional claim of Rs. 2,799 was also made. Considering the volume and nature of work, we are satisfied that this expenditure is a necessary expenditure for maintaining business contacts by the directors and senior executives and we would direct that such expenditure should be allowed as normal business expenditure.

20. The 10th grounds is directed against upholding the disallowance of Rs. 55,144 spent on Mr. T. A. Pai and Rs. 53.000 on market survey as capital expenditure. It would appear that the IAC allowed on.estimate 25 per cent of the total expenditure of Rs. 73,492 incurred by Shri T. A. Pail by holding that Shri T. A. Pai had looked after certain other affairs of the appellant company apart from the Furfurol Project. We have gone through the IAC's order. He has dealt with the details in this regard and the arguments advanced at quite some length. We agree with the CIT(A) [para 81 of CIT (A)'s order] that the IAC had been very reasonable and fair to the appellant in allowing deduction of 25 per cent of the expense incurred by Shri Pal. We also agreed that the remaining expenditure of Rs. 53,000 was rightly disallowed as this expenditure was not only not of revenue nature but did not relate to the business of the assessee carried on during the year. The expenditure was incurred on market research survey for a new project. This was a preliminary type of expenditure had any relation to the business of the assessee of the year nor are the details of such expenses produced before us to come to the conclusion that it was revenue expenditure. The CIT (A)'s decision in the behalf is confirmed and this ground is also rejected.

21. Ground No. 11 relating to disallowance of travelling expenses was not pressed.

22. Ground No. 12 is directed against CIT (A)'s not granting weighted deduction in respect of travelling expenses of T. A. Pai and also on Rs. 2,000 spent towards legal fees concerning Furfurol Project. This expenditure is claimed under sec. 35B(I)(b)(vii). The CIT (A) had dealt with this issue in paras 84-85 of his order. This ground is connected with the preceding ground. We have already held that the expenditure on T. A. Pai has been rightly treated by IAC vide his directions under sec. 144B (4). We have also held that the expenditure on Furfurol Project has been proved to be of a revenue nature relating to the business of the company. In view of these finding, we would confirm the consequential finding of the CIT (A) (Vide para 85 of his order) that no relief under section 35B is available.

23. Grounds Nos. 13 and 14 were not pressed and are therefore dismissed as such.

24. Ground No. 15 is directed against CIT (A) conferring the disallowance of expenditure incurred on the maintains of accommodation at Rajkot. Shri Harish brought to our notice a decision of the Madras High Court in the case of CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619. The Madras High Court held that where an accommodation is maintained, either is located, for the directors and other employees of the assessee, any expenditure incurred for the maintenance of such accommodation cannot be brought within the scope of sec. 37(3) of the IT Act. In that case, on the facts, the court held that he assessee not having shown that the guest house was exclusively used by the employees, the officer was justified in rejecting the claim for deduction of expenditure under sec. 37(3). Shri Harish also brought to our notice a decision of the Punjab & Haryana High Court in Saraswati Industrial Syndicate Ltd. v. CIT [1982] 136 ITR 361 which had followed the Madras High Court in Aruna Sugars Ltd.'s case. We find that sub-sec. (5) was inserted in sec. 37 by the Finance Act, 1983 with retrospective effect from 1-4-1979. The language of the section is applicable for the year under appeal before, us, i.e., assessment year 1981-82. In view of sub-section (5) which states in unambiguous terms that any accommodation by whatever name called maintained, hired, reserved or otherwise arraged by the assessee for the purpose of providing lodging or boarding and lodging to any person including any employee on tour or visit to the place at which such accommodation is situated, is accommodation within the nature of a guest house for the purpose of sub-sec. (4) of sec. 37. In view of this sub-section, Shri Harish has no case. The CIT (A)'s order is confirmed and this ground is dismissed.

25. Ground No. 16 is directed against disallowance of Rs. 16,645 incurred for pooja in the factory. It was argued that this was expenditure incurred by way of a staff welfare expenditure since the pooja was performed by the members of the staff. In view of this argument, we would hold that this item of expenditure should be allowed as a normal business expenditure.

26. Ground No. 17 is directed against CIT (A) not entertaining the grounds of the appellant against the levy of interest u/s 139(8) and sections 215 & 217 of the IT Act. We would confirm this finding of the CIT (A). The Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 have held that levy of interest is not appealable. We would only observe that the quantum of interest may undergo change if as a consequence of this order, there is any modification in the quantum of the total income determined.

27. In the result, the appeal for the assessment year 1981-82 is allowed in part.

28. The appeals for the assessment years 1978-79 and 1979-80 were not pressed. Shri Harish made a statement to that effect at the commencement of the proceedings. He argued only the appeal for the assessment year 1981-82, which has been dealt with at length in the preceding paragraphs. The other two appeals are therefore dismissed for non-prosecution.

29. In the result, appeal for assessment year 1981-82 is allowed in part and those for assessment years 1978-79 and 1979-80 are dismissed.

Per K. R. Dixit, Judicial Member - I agree with the view of the learned brother (Accountant Member). However, regarding the assessee's claim for deduction of an amount of Rs. 2,20,00,000 in respect of back wages I would like to add a few lines.

2. The crucial issue is whether the deduction can be allowed on the basis of the Supreme Court decision which came in 1980. Now, basis of the Supreme Court decision which came in 1980. Now, first of all, that decision is not in the assessee's case. Therefore, it is not as if the Supreme Court has given a direction in the assessee's cases so as to give rise to the liability. If the decision is applicable in the assessee's case, the Industrial Tribunal would have to apply it and then the liability would arise. Even assuming for the sake of argument that the Supreme Court decision was applicable in the assessee's case and so the decision of the Industrial Tribunal would be a foregone conclusion, that is not as good as the actual decision and order of the Industrial Tribunal. Therefore the liability cannot be said to arise as a result of the Supreme Court decision.

3. On behalf of the assessee it was submitted that the assessee as a prudent businessman had made a provision but the existence of the liability should be the basis of the provision and making of the provision cannot be the basis of the liability.

4. On behalf of the assessee it was also submitted that the amount claimed was a statutory liability on the basis of section 11A of the Industrial Disputes Act. Now that section only enables the Labour Court to direct the reinstatement of the workmen on such terms and conditions or give such relief to him, as it may think fit. It is not as if this section straightway imposes the liability on the employer to pay the back wages. Therefore, it cannot be said that this section imposes statutory liability on the employer.

5. Further the assessee has called the said amount as a reserve and its explanation for doing so is that it had to be kept confidential from the workmen. Thus, the assessee is taking contradictory stands, one for the workmen and another for the income-tax authority. Again the assessee has utilised a part of this amount for the issue of bonus shares. All these show that the claim of the assessee is baseless.

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