1. This appeal, filed by the assessee, is directed against CIT(A)'s order for the asst. yr. 1989-90. The assessee is a public sector undertaking, and, accordingly, it has duly obtained requisite clearance from the Committee on Disputes (Cabinet Secretariat) for the ground of appeal it seeks to pursue in this appeal.
2. As for the grounds of appeal Nos. 1 and 2, learned counsel fairly stated that since the assessee has not been able to obtain CoD clearance for the same and since the assessee is, therefore, not pressing the same, these two grounds may be treated as withdrawn.
Accordingly, we dismiss the ground Nos. 1 and 2 as withdrawn.
3. Solitary grievance of the assessee, for which CoD clearance is obtained and which the assessee has pressed before us, is against CIT(A)'s confirming the disallowance of Rs. 1,03,07,000 made by the AO on account of provision to give effect of revision of pay scale of officers based on Bureau of Public Enterprises (BPE) guidelines. This grievance is covered by ground of appeal No. 3.
4. Briefly, the material facts giving rise to this dispute before us.
During the course of assessment proceedings, AO noticed that the assessee-company had, claimed a deduction of Rs. 1,03,37,000 on account of provision for salary, wages and allowances. In the accompanying notes on accounts in para. 22(a), it was also stated that "Present pay scales of the officers of the company were approved by the Government of India in terms of DO No. 27/13/82 Fin. 1 (Pt.), dt. 5th March, 1983, for the period of 1st Aug., 1982, to 31st July, 1987. Revision of pay scales w.e.f. 1st Aug., 1987, is presently under consideration by the Government of India. Pending finalization of the same, a provision of Rs. 1,03,07,000 has been made towards estimated liability thereon from 1st Aug., 1987, to 31st March, 1989". The AO (sic-assessee) in response to AO's requisition, ,gave complete details on the basis on which this liability was worked out and claimed that the same ebbing on the basis of Cogent material should be allowed as a deduction in computation of income. The AO noted that since, the aforesaid liability was not final and contingent upon the approval of Government of India, the same cannot be allowed. He observed that whatever be the basis of liability, it is not a final liability and contingent upon Government's approval.
He thus declined the claim for deduction. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Still aggrieved, the assessee is in second appeal before us.
5. Rival contentions are conscientiously heard, orders of the authorities below, and the paper book filed by the assessee, carefully perused, and applicable legal position duly deliberated upon.
6. We find that it is not in dispute that the pay scales and other benefits of the officers were due for revision w.e.f. 1st Aug., 1987, and the exercise of revising the same was already in progress. We have also noted, that the basis of revision was ultimately accepted by the Government and a formal approval to the same was granted. In DO No.2(50/86-BPE(WC), dt. 4th April, 1990, a copy of which was placed before us, Bureau of Public Enterprises had advised that the Government had decided that pay scales of non-unionized supervisors and executives were to be revised w.e.f. 1st April, 1987, as per details given in annexure. I to that letter. It was on this basis that the assessee-company had prepared the proposal and also worked out the liability in respect of the same. In our considered view, it is thus clear that in principle a decision was already in existence to increase the salaries, in accordance with certain guidelines, and the decision was only required to be taken for formal approval by the Government. It could thus be said that the provision was not for an unforeseen liability. Once the Government of India takes a decision to increase salaries of officers with effect from certain date and as per certain norms, and particularly bearing in mind the fact that the assessee-company is fully owned by the Government of India, it cannot be said that a liability with regard to such increase in salaries is not real. Since the profits of the assessee can only be worked out after taking into account due provisions for liabilities, reasonable provision for such liability is to be taken into account for arriving at the commercial profit of the assessee. It is also well settled that on the ground of prudence, provision should be made for all known liabilities and losses even though the amount cannot be ascertained with certainty and represents only a best estimate in the light of the available information. This finds support from the accounting standard adopted by the Government [(1996) 218 ITR (St) 1, at p. 2]. In the light of the above factual position, let us take a look at the following observations of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT (2000) 245 ITR 428 (SC).
The law is settled; if a business liability has 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 actual quantification may 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.
We are of the considered view that when Government of India, absolute owner of the assessee-company, decides to increase the salaries with effect from a certain date and in accordance with certain norms, liability of such increase has definitely arisen. It cannot be said to be a contingent liability on the facts of this case. We have also noted that the provision for liability was worked out on the basis of BPE guidelines and, therefore, it could not be said to be devoid of legally sustainable basis also.
7. In view of the above discussions, we are of the considered view that authorities below erred in declining deduction of Rs. 1,07,00,000 on account of provision for increase in salaries and wages. Accordingly, we direct the AO to allow the same.