IMPORTANT POINT
The main legal point established in the judgment is the allowability of liabilities for salary and wages arising out of awards and exgratia bonus under Section 37(1) of the Act.

JUDGMENT :

K.R. SHRIRAM, J.

1 On 16th September 2004 the following two substantial questions of law were framed :

1. Whether the Appellate Tribunal is right in law in holding that the liability for salary and wages arising out of the Justice Palekar Award is not allowable as expenditure in the present year but only in the year in which the agreement between the Management and the employees is entered into?

2. Whether the Appellate Tribunal is right in law in holding that exgratia bonus paid to the employees over and above the eligible bonus under the Payment of Bonus Act is not allowable as expenditure under Section 37 (1) of the Act?

2. Assessee/Appellant is engaged in the business of printing and publishing of News Papers and Periodicals. The matter at hand pertains to Assessment Year 1987-1988. During the assessment year in question, the Assessing Officer made the following disallowances :

(a) Provision for additional salary and wages amounting to Rs.17 lakhs arising out of the Justice Palekar Award for the period 1st January 1986 to 30th June 1986 on the basis of the Memorandum of Settlement between the management and the employees signed on 8th May 1987;

(b) Exgratia bonus paid amounting to Rs.16,28,258/- over and above the eligible bonus under the Payment of Bonus Act; and

(c) Bad and irrecoverable debts written off Rs.13,65,300/-.

3. Assessee challenged the order before the Commissioner of Income Tax (Appeals) who deleted the disallowances and allowed the amount as deduction in computing assessee’s income. The Revenue impugned the order of the CIT(A) before the Income Tax Appellate Tribunal (ITAT) who set aside the findings of the CIT(A) and restored that of the Assessing Officer. It is that order passed by the ITAT on 8th April 2002 which is impugned in this appeal. Only two disallowances matter to this appeal, i.e., additional salary and wages amounting to Rs.17 lakhs arising out of the Justice Palekar Award and exgratia bonus amounting to Rs.16,28,258/-over and above the eligible bonus under the Payment of Bonus Act (the Act).

4. The two questions were answered by the ITAT in a very cryptic manner. As regards question no.1, the Assessing Officer found that there was debit of Rs.17 lakhs representing provision for salary and wages arising out of Justice Palekar Award. The Assessing Officer noticed from the agreement between the management and the employees that memorandum of settlement to reclassification with effect from 1st January 1986 was signed on 8th May 1987, i.e., after the close of the accounting year. The Assessing Officer, therefore, held that the liability to pay additional wages arose only after signing of the agreement. According to the Assessing Officer even under mercantile system of accounting, deduction of the said provision cannot be allowed. It is deductible in the year in which the award was signed and liability was incurred. The Assessing Officer, therefore, disallowed the debit of Rs.17 lakhs. On appeal, the CIT(A) held that the events which have taken place after the close of the accounts can be taken into consideration of the accounts are not finalised and, therefore, providing for the liability in the year of account was justified which is also supported by accounting standard 4.

The ITAT decided the issue in one paragraph by simply stating that the arguments of the learned DR that the impugned liability to pay salary and wages is a contractual liability out of the agreement with the employees and hence, the liability would arise only when it is ascertained find support from the decision of Allahabad High Court in Swadeshi Cotton Mills Co. Ltd. V/s. CIT, 125 ITR 33 (All). We have to note that the portion, which is quoted allegedly from the judgment, is not found in the copy of the judgment made available to this Court. Be that as it may, this Court in Commissioner of Income Tax V/s. United Motors (India) Ltd., 1990 (181) ITR 347 has held on identical facts that the payment by assessee in the aggregate