Income-tax---

----Business expenditure---Accounting---Year in which expenditure is admissible ---Assessee Manufacturing Beedies following mercantile system of accounting ---Beedi and Cigar Workers (Conditions of Employment) Act, 1966, held valid by Supreme Court in 1974---Notification issued by State Government in consequence in December, 1976, stating that workers should be paid leave wages for 1974, 1975 and 1976 in four instalments in 1977-- Claim by assessee for deduction for assessment year 1975-76---Liability was statutory and was deductible---Indian Income Tax Act, 1961, S. 37.

The assessee was a registered firm engaged in the business of manufacturing beedies. The validity of the provisions of the Beedi and Cigar Workers (Conditions of Employment) Act 1966, was upheld by the Supreme Court in 1974. Thereafter, the State Government issued notification, dated December 10, 1976, under section 26(6) of the Act laying down that the workers will be entitled to leave wages under subsection (6) of section 26 of the Act. In order to effectuate this provision, the State Government issued notification, dated December 10, 1976, and it laid down that financial advantage will be payable from 1974. It was further laid down that in lieu of leave earned in 1974, 1975 and 1976, this additional financial advantage shall be paid to the worker in four instalments in 1977 and when demanded on festival occasions. It was also laid down that the additional financial advantage shall be equal to the wages of 5 percent. of the total number of beedis made by the workers. The assessee was maintaining its accounts on the mercantile system. It filed a revised return for the assessment year 1975-76 claiming expenses of Rs.3,84,652 on account of leave wages. The claim was disallowed by the Income-tax Officer and the Tribunal. On a reference:

Held, that the financial liability had accrued under the 1966 Act read with the notification against the assessee right from 1974 to make payment to these workers as and when demanded. It was a statutory liability admissible under the law The assessee was entitled to the deduction.

Kalekhan Mohammed Hanif v. CIT (1987) 163 ITR 769 (MP) (Appez) and CIT v. Alimbeg Salimbhai (1997) 224 ITR 166 (MP) ref.

B. L. Nema for the Assessee.

Abhay Sapre for the Commissioner.

JUDGMENT

A. K. MATHUR, C. J.---At the instance of the assessee under section 256(2) of the Income-tax Act, the Tribunal was directed to send the statement of case and, accordingly, the following question of law has been referred by the Tribunal for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to claim any deduction for Rs.3,84,652 on account of leave with wages under the Beedi and Cigar Workers (Conditions of Employment) Act, 1966?"

The year of assessment is 1975-76 and the accounting year ended on March 31, 1975. The assessee is a registered firm engaged in the business of manufacturing beedis. The assessee filed a return showing income at Rs.4,57,675. It was subsequently revised on March 10, 1977, showing income at Rs.73,023. In the revised return, it claimed expenses of Rs.3,84,652, on account of leave with wages as per notification, dated December 10, 1976, of the State Government. The relevant conditions of the said notification are as under:

(1) That in lieu of the period of leave earned under the provisions of section 26(1), the home workers will be paid additional financial advantage in fortnightly instalments.

(2) That the financial advantage shall be payable from 1974. In lieu of leave earned in 1974, 1975 and 1976, this additional advantage shall be paid to the worker in four instalments in 1977 as and when demanded on festival occasions.

(3) That the amount of this additional financial advantage shall be equal to the wages of 5 percent. of the total number of bidies made by the workers.

(4) That this exemption shall not be applicable in respect of any women employees for which separate orders will be issued.

The Inspecting Assistant Commissioner (Assessment) disallowed the claim of deduction of Rs.3,84,652, on two grounds, viz., no provision for' the liability was made in the account books, and the liability if any,, by virtue of the said notification, dated December 10, 1976, crystallise 3 in the assessment year 1977-78.

Aggrieved against the order of the Inspecting Assistant Commissioner (Assessment), the assessee approached the Commissioner of Income-tax (Appeals) in appeal and the Commissioner of Income-tax (Appeals) held that the benefits of leave with wages was due to be paid for the calendar year 1974 onwards and was payable in 1977 and the amount so payable was determined by the notification to be equal to wages for. 5 percent. of the total number of beedis manufactured during the year. The Commissioner of Income-tax (Appeals), also held that the liability was an ascertained one and it was not contingent. Therefore, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee.

Aggrieved against the order of the Commissioner of Income-tax (Appeals), the Department approached the Tribunal in appeal and the Tribunal reversed the finding of the Commissioner of Income-tax (Appeals) holding that by virtue of subsection (6) of section 26 of the Beedi and Cigar Workers (Conditions of Employment) Act, 1966, the assessee was not entitled to claim any deduction for leave with wages. 1t was also held that only in 1977 the amount was ascertained as to what was the quantum of legal liability which the assessee claimed. Though the method of calculation of such liability in 1977 would entail calculations from 1974 onwards, but so far as the financial year 1974-75 was concerned, there was no enforceable liability to pay any additional financial advantage to the workers in the year under consideration. The Tribunal further held that no parallel could be drawn with the statutory liability under the Sales Tax Act and, hence, it was disallowed.

The assessee, aggrieved by the order of the Tribunal approached this Court under section 256(2) of the income-tax Act for calling the statement of facts and that application was allowed by this Court. and, accordingly, the aforesaid question of law has been referred by the Tribunal for answer of this Court.

We have heard learned counsel for the parties and perused the records. It has been pointed out that the validity of the provisions of the Beedi and Cigar Workers (Conditions of Employment) Act, 1966, (hereinafter referred to as the "Act"), came up for challenge and ultimately, the matter reached the Supreme Court and the Supreme Court in 1974 upheld it. Thereafter, the Sate Government issued notification, dated December 10, 1976, under section -26(6) of the Act laying down that the workers will be entitled to leave wages under section 26(6) of the Act. In order to effectuate this provisions, the State Government issued notification, dated December 10, 1976, and it laid down that financial advantage will be payable from 1974. This appears to have been done because the matter remained in litigation before the Supreme Court and in order to give effect to the provisions of the .Act, the said notification was issued legitimising the claim of the workers from 1974. It was further laid down that in lieu of leave earned in 1974, 1975 and 1976, this additional financial advantage shall be paid to the worker in four instalments in 1977 and when demanded on festival occasions. It was also laid down that the additional financial advantage shall be equal to the wages of 5 percent. of total number of beedis made by the workers. It is an admitted position that the assessee maintains the mercantile system of accountancy. That being so, the financial liability had accrued as per the Act read with the notification against the assessee right from 1974 to make payment to these workers as and when demanded. It is a statutory liability admissible under the law. Since it is a statutory liability created under the Act, therefore, the assessee is entitled to claim deduction from 1974 and in that part, in lieu of leave earned in 1974 onwards. The revised return was filed by the assessee for the assessment year 1975-76 after notification, dated December 10, 1976, had come into force. Therefore, the view taken by the Tribunal in declining to permit the deduction, does not appear to be justified. It may be relevant to mention here that so far as the statutory liability deduction is concerned, this Court in the case of Kalekhan Muhammad Hanif v. CIT (1987) 163 ITR 769 (Appex.) has taken a view that such liability is eligible for deduction.

A similar question came up before this Court in the case of CIT v. Alimbeg Salimbhai (1997) 224 ITR 166, decided on March 15, 1996, in M.C.C. No. 28 of 1990, and relying on the decision of Kalekhan Muhammad Hanif v. CIT (1987) 163 ITR 769 (Appex.) this Court answered that reference in favour of the assessee and against the Revenue. However, while parting with the case, it was observed by this Court in M. C. C. No.28 of 1990 (see (1997) 224 ITR 166, 168):

"It would be open for the assessing authorities to probe into the matter and if it is found that this amount kept reserved under the statutory liability under the M. P. Beedi and Cigar Workers (Conditions of Employment) Act, 1966, has not been disbursed to the workers towards their wages and the same is found to have been invested in the business, then it would be open to the authorities to proceed under the relevant provisions of law for assessment of the liabilities. "

Therefore, in case, it is found that the statutory liability has not been disbursed to the workers then the Assessing Officer will be free to take appropriate steps against the assessee in accordance with law. However, for the reasons mentioned above, we answer the aforesaid question in favour of the assessee against the Revenue.

M.B.A./3368/FCReference answered.