Commissioner of Income Tax vs Investigation and Security Service (India)(P.) Ltd.

Y.V. Anjaneyulu, J.—This reference arising under the income tax Act, 1961 (''the Act'') relates to the assessment year 1980-81. It is made at the instance of the Commissioner by the Tribunal. The question referred for consideration of this Court is: Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the provision of Rs. 50,000 made by the assessee towards ESI contribution was an allowable deduction in computing the total income of the assessee for the assessment year 1980-81?

The assessee is a company incorporated under the Companies Act, 1956. For the assessment year 1980-81 the assessee claimed by way of deduction provision of Rs. 50,000 on account of ESI. It was pointed out that the assessee was disputing that it was not liable to pay ESI. The ESI department, however, held the assessee to be liable and served a demand notice on 18-1-1977 demanding a sum of Rs. 1,10,349 for the period 19-4-1975 to 19-7-1977. The assessee also pointed out that an appeal against the aforesaid claim of the ESI department was filed in the Employees'' Insurance Court and by its judgment dated 28-1-1978 the assessee''s claim was accepted by the ESI Court. Even so, the ESI department filed an appeal in the High Court against the judgment and order dated 28-1-1978 of the ESI Court so that the dispute regarding the assessee''s liability continued to exist. 2. As the question regarding liability was not finally decided the assessee claimed that in connection with the previous year relevant for the assessment year 1980-81 the statutory liability on account of ESI on the basis of the demand earlier raised by the department, was Rs. 50,000 and deduction of the same was claimed. The ITO declined to allow it on the short ground that there was no existing liability. The assessee carried the matter in appeal to the Commissioner (Appeals) who upheld the ITO''s view and rejected the assessee''s claim. The assessee thereupon filed a further appeal to the Tribunal. The Tribunal allowed the assessee''s claim. Aggrieved by that the present reference is sought by the Commissioner.

There is no dispute before us that the assessee maintained accounts on mercantile system. It is also not in dispute that if the assessee would be liable under the ESI Act, 1948, the provision of Rs. 50,000 made by the assessee would be adequate. The short question canvassed before us by the learned standing counsel for the revenue is that the ESI Court had already allowed the assessee''s claim that it was not liable to pay the contribution. Although that decision was not accepted by the ESI department and was carried in appeal to the High Court, the fact would remain that the declaration given by the ESI Court regarding non-liability would prevail until a contrary view is taken by the superior appellate authority. In that view the learned standing counsel contends that the assessee cannot successfully claim deduction of the provision made for the assessment year under consideration. We are unable to agree. So long as an appeal is pending (as admittedly it is in this case) it must be said that the matter is at large and no finality has reached. This principle directly flows from the decision in the case of J.K. Synthetics Ltd. Vs. O.S. Bajpai, Income Tax Officer, Central and Another, ) and also from the decision of the Supreme Court in Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., . We are also fortified in this view by the decision of this Court in Commissioner of Wealth-tax, Andhra Pradesh Vs. Amatul Kareem, . So long as it is not denied that the provision of Rs. 50,000 represents a correct provision under the ESI Act concerning the statutory liability relating to the assessment year under consideration, it is not possible to resist the assessee''s claim for deduction in view of the system of accounting employed by them. If eventually the assessee succeeds finally and no liability under the ESI Act is affirmed, then it will be open to the department to invoke provisions of section 40(1) of the income tax Act, 1961 and bring to assessment the amount or amounts allowed as deduction remitted in appeal. Having regard to the above we consider the Tribunal to be wholly justified in the view that it has taken that the provision of Rs. 50,000 made by the assessee towards ESI contribution was an allowable deduction. The question referred is answered in the affirmative that is in favour of the assessee and against the revenue. No costs.

Reference answered in the affirmative.