Deduction claimed for a pay/wage revision is an ascertained liability not contingent

The deduction claimed for a  pay/wage revision is an ascertained liability and cannot be termed as contingent because the wage and probable revision or rates of revision would be within the fair estimation of the employer.

Case Law Details:

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘B’ NEW DELHI

I.T.A .No.-1733/Del/2014 (ASSESSMENT YEAR-2010-11)

DCIT vs. Central Cottage Industries Corporation of India Ltd. 

Date of Judgment/Order: 17/03/2016

Ground of Appeal:

“On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition made on account of disallowance of provision for pay revision by failing to appreciate that the proposal for pay revision is pending for approval from Government and as such does not qualify as ascertained liability. “

Brief Facts:

The assessee was a public sector undertaking (PSU), engaged in promotion and trading of handicrafts and allied items. For the assessment year 2010-11 the Assessee had claimed an expense of Rs. 198.58 lakhs on account of provision for pay revision, pending approval of the same from the Government. The revision of pay scale was due as per DPE guidelines. Following accrual system of accounting, the assessee estimated the liability and provided the same in the books of account. However, he Assessing Officer completed the assessment u/s 143(3) by making a disallowance of ‘provision made towards liability’ on account of pay revision of employees holding that the assessee’s liability was contingent in nature and accordingly do not qualify for deduction.

The Assessee contested the matter before the CIT(A) who held that in the past such provision was allowed towards liability on account of pay revision of employees and the same is not being a contingent liability.

Held: ITAT allowed the deduction and dismissed the appeal.

Excerpt from ITAT Judgment:

We have perused all the records and heard both the counsels. In case of CIT Vs. Bharat Heavy Electrical Ltd. (2012) 26 Taxmann. Com 252 (Delhi HC) it was held that 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. The deduction claimed for that period cannot be termed as contingent because the wage and probable revision or rates of revision would be within the fair estimation of the employer. The issue is fully covered in assessee’s favour and the CIT (A) has rightly deleted the said addition in respect of provision for pay revision.