K.K. Dube, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, referring to us for our opinion the following question of law :
'Whether, on the facts and in the circumstances of the case, an unconditional or ascertained liability arose to the assessee for the payment of wages to its workers under the provisions of Rule 29(2) of the M.P. Beedi and Cigar Workers (Conditions of Employment) Rules, 1968, and the assessee was entitled to the deduction thereof in the assessment year 1970-71 ?'
2. The assessee, a bidi manufacturer, for the assessment year 1970-71 claimed deduction of Rs. 3,48,406 as wages of the workers. Under the Madhya Pradesh Beedi and Cigar Workers (Conditions of Employment) Rules, 1968 (hereinafter referred to as 'the Rules'), framed under the Beedi and Cigar Workers (Conditions of Employment) Act, 1966 (hereinafter referred to as 'the Act'), any manufacturer of bidis is also required to pay wages to the workers for substandard or chhat bidis as provided under Rule 29(2). Rule 29 of the Rules reads as under :
'29. Limit with regard to the rejection of beedi or cigar.--(1) No employer or contractor shall ordinarily reject as sub-standard or chhat orotherwise more than five per cent. of the bidis or cigars, or both, received from a worker including a home worker.
(2) Where any bidi or cigar is rejected as sub-standard or chhat or otherwise on any ground other than the ground of wilful negligence of the worker, the worker shall be paid wages for the bidis or cigars so rejected at one-half of the rate at which wages are payable to him for the bidis or cigars, or both, which have not been so rejected.'
3. Since the rejection of bidis manufactured by the workers was in excess of 5% under Rule 29(2), the assessee worked out his liability which according to him was to be Rs. 3,48,406. From the statement of the case, it appears that the amount represents the full wages payable to the workers for the rejected bidis. Under the aforesaid Rule 29(2), the workers became entitled to half the wages. Therefore, it was conceded before the Tribunal that the liability to pay under Rule 29(2) would be only to the extent of half the wages payable to the workers which comes to Rs. 1,74,203. The assessee maintains the mercantile system of accountancy and has duly shown the amount as payable to the workers. The amount has, however, not been actually paid as the assessee has moved the Supreme Court challenging the vires of the provisions of the Act. As regards the liability to pay under the Act and the Rules relating to the relevant year, the Income-tax Officer was of the view that the liability was contingent and was not a permissible deduction. No such expenditure for the earlier year was claimed nor has any such expenditure for the subsequent year been shown by the assessee. The Income-tax Officer also observed that none of the workers of the assessee has made any claim to such amount till the date of assessment.
4. The assessee appealed to the Appellate Assistant Commissioner of Income-tax but without any success. The assessee then filed a second appeal before the Income-tax Appellate Tribunal. The Tribunal was of the opinion that the said Rule 29 does not itself create a liability to pay wages in respect of rejected bidis as sub-standard and the liability arises after determination by an authority appointed for that purpose under the Act or is settled in an industrial dispute. The right to payment under Rule 29, the Tribunal states, accrues to the workers only after the determination of the question as to whether there was any wilful negligence on their part or not. The wages are payable to the workers weekly and the workers had not claimed anything up to the close of the relevant accounting year. Since no demand has been made by the workers for the wages for excess bidis rejected, the liability remained a contingent liability payable on determination. The Tribunal observed as under :
Rule 29(2) is not an equivocal provision. A right to recover wages for excess of bidis rejected cannot accrue to a worker unilaterally under the provisions of Rule 29(2) and a worker cannot charge his employer with an unconditional liability unilaterally in respect of the same. Such a claim is capable of determination only on bilateral basis.'
5. In the mercantile system of accounting, when the liability accrues, the same is shown in the account books and is debited to the profit and loss account even though it may not have been actually paid. The assessee follows the mercantile system of accounting and he has shown the wages payable in his profit and loss account. Provisions contained in Rule 29 lay down that no employer or contractor shall reject as sub-standard or chhat or otherwise more than five per cent. of the bidis or cigars or both received from the workers including a home worker and that where any bidi or cigar is rejected as sub-standard or chhat or otherwise on any ground other than the ground of wilful negligence of the worker, the worker shall be paid wages for the bidis or cigars or both rejected at one-half of the rate at which the wages are payable to him for the bidis or cigars or both which have not been so rejected. Reading the two sub-rules of Rule 29, it would appear that an obligation arises to pay wages on the rejection of the bidis by the employer. While Sub-rule (1) enjoins that the employer ought not to reject bidis above certain limit as sub-standard, under Sub-rule (2), it is laid down that he would be required to pay wages at the rate of one-half of what he would have paid if the bidis had not been rejected. The use of the words 'shall pay' in Sub-rule (2) would indicate that the liability arose forthwith though such a liability may be subject to any decision in a dispute as to the rejection of bidis as chhat. A dispute may relate to rejection by the employer of the bidis made by an employee or payment of wages for bidis rejected by the employer: The employer may also raise a dispute that the workers had been wilfully negligent. The dispute may have a bearing on the quantum of liability but the liability to pay wages cannot be said to be contingent as it is not dependent on the determination of a lis. The rejection of bidis as chhat when it is more than 5 per cent. per se gave rise to an obligation for payment of wages. The liability that arises under Rule 29 is quite ascertainable because the wages are fixed under a contract or under the Minimum Wages Act and the rules made thereunder. When a dispute is raised either by the workman or by the employer, it is in the nature of a claim which may or may not succeed. A decision or adjudication as permissible under Section 39(2) of the Act or Rule 29 merely seeks to alter the quantum of liability. The quantum payable may be reduced, but under Rule 29, the obligation is definite and certain.
6. The Tribunal found that the assessee had shown the liability in the profit and loss account as expenditure being wages payable to the workers. The fact that the workers have not been paid the wages or that no claim has been made by them was inconsequential. The liability arising under Rule 29 would be analogous to the one arising under the Sales Tax Act, where once a sale takes place, ataxable event under the Sales Tax Act occurs and the dealer becomes liable to pay tax and the dealer is entitled to debit such a liability whether or not the tax is deposited.
7. In Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC , the Supreme Court considered the various income-tax and wealth-tax decisions and laid down that it would be legitimate to deduct estimated liability in the profit and loss account while working out its net profit. It was observed as under (p. 62) :
'In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due or brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business.'
8. Their Lordships relied on Calcutta Co. Ltd. v. CIT : 37ITR1(SC) for the proposition that a deduction of an accrued liability though not actually paid was permissible under the Income-tax Act. There is no prohibition in the Income-tax Act for deduction of estimated liability even though it did not come under any specific provisions of Section 10(2) of the Income-tax Act. Then, citing with approval the case of CWT v. Standard Vacuum Oil Co. Ltd. : 59ITR569(SC) , it was pointed out that a debt is owed when an order is passed under Section 18A and a notice of demand is sent. The amount mentioned in the notice begins to be owed till a new figure is substituted under Section 18A(2) of the Income-tax Act. But till that is done, the amount is ascertainable and there is a statutory liability to pay the amounts mentioned in the order under Section 18A(1) and are debts on the valuation dates and, therefore, deductible for the purpose of arriving at the company's net wealth. A condition subsequent, fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting the liability into a contingent liability.
9. The Tribunal has observed that the amount payable to the workers as wages for the excess rejection of bidis has not been paid even though two years have passed after the relevant accounting year. This is justified by the assessee on the ground that his case is pending before the Supreme Court and payment of the amount to the workers would render the petition infructuous. The amount has been set apart for payment to the workers. Therefore, if it is eventually not paid, it would be open to the authorities, to treat it as revenue. But from this fact alone it was not possible to declare that the liability to pay wages was contingent. We would, therefore, answer the Department by saying that theassessee was entitled to deductiory of the amount payable to workers under Rule 29(2) of the M.P. Beedi and Cigar (Conditions of Employment) Rules, 1968, in the assessment year 1970-71. Such a liability was not contingent There shall be no order as to costs.