Full Judgment Text
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CASE NO.:
Appeal (civil) 9271 of 1995
PETITIONER:
BHARAT EARTH MOVERS
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, KARNATAKA
DATE OF JUDGMENT: 09/08/2000
BENCH:
R.C.Lahoti,N.S.Hegde
JUDGMENT:
R.C. Lahoti, J.
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Relevant to the assessment year 1978-1979 the
following question of law was stated, at the instance of the
Revenue, by the Income Tax Appellate Tribunal for the
opinion of the High Court of Karnataka under Section 256 (1)
of the Income-tax Act, 1961:-
Whether on the facts and in the circumstances of the
case the provision for meeting the liability for encashment
of earned leave by the employee is an admissible deduction?
The appellant company has two sets of employees. One
set of employees is covered by Employees State Insurance
Scheme and is generally known as staff. The other set of
employees not so covered is known generally as officers.
The company has floated beneficial schemes for its employees
for encashment of leave. The officers are entitled to
earned leave calculated at the rate of 2.5 days per month,
i.e., 30 days per year. The staff (other than officers) is
entitled to vacation leave calculated at the rate of 1.5
days per month, i.e., 18 days in a year. The earned leave
can be accumulated upto 240 days maximum while the vacation
leave can be accumulated upto 126 days maximum. The earned
leave/vacation leave can be encashed subject to the ceiling
on accumulation. The officers may at their option avail the
accumulated leave or in lieu of availing the leave apply for
encashment whereupon they would be paid salary for the
period of leave earned but not availed. So does the scheme
extend facility of encashment to the staff in respect of
vacation leave. Any leave earned beyond the said ceiling
limit of 240/126 days cannot be accumulated and goes a
waste. It can neither be availed nor encashed. The
appellant company has created a fund by making a provision
for meeting its libility arising on account of the
accumulated earned/vacation leave. In the assessment year
1978-1979 an amount of Rs.62,25,483/- was set apart in a
separate account as provision for encashment of accrued
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leave. It was claimed as a deduction. In the opinion of
the Tribunal the assessee was entitled to such deduction.
The High Court has formed a different opinion and held that
the provision for accrued leave salary was a contingent
liability and therefore was not a permissible deduction.
The reasoning applied by the High Court is that the
liability will arise only if an employee may not go on leave
and instead apply for encashment. If the employee avails
the leave as per his entitlement, then he would be paid
salary for the period of leave and liability for encashment
would not arise. The other event on the occurrence of which
the employee may stake his claim is termination or
retirement which again is an uncertainty. Accordingly the
High Court has answered the question in the negative, that
is, in favour of the Revenue and against the assessee. The
assessee has come up in appeal.
Shri S.E. Dastur, the learned senior advocate for the
appellant company has submitted that the liability is a
certainty. Provision is made for meeting the liability to
the extent of entitlement of the officers and staff to
accumulate earned/vacation leave subject to the ceiling
limit of 240/126 days as may be applicable. Having
accumulated leave in a particular year, in the succeeding
year the employee may either avail the leave or apply for
its encashment. If he avails the leave then additional
provision for encashment is not made in the reserve account.
However, if he does not avail the leave and instead chooses
to encash his entitlement, he becomes entitled to an
additional number of days as accumulated leave. For
example, having rendered service for 365 days in the year
A an officer becomes entitled to avail leave for 30 days
in the succeeding year B, provision in the leave reserve
account is made in the year A for payment of an amount
equivalent to 30 days salary so as to meet the claim for
encashment. If he chooses to encash the leave and renders
service for full 365 days in the year B, then the amount
transferred to reserve is paid to him and in view of his
having earned again the next entitlement for 30 days leave,
provision is made therefor by transferring the appropriate
amount in the reserve account. If he avails the leave then
he is paid the leave salary. The leave salary is paid from
the reserve. Whether the amount is paid as salary by
drawing upon from the current years P&L Account or from the
reserve, it would not make any difference in practice as
there would be no double payment and hence no double claim
for deduction. In either case the liability is certain
though the period in which the liability would be incurred
is not certain inasmuch as the leave encashment can be
sought for by the employee either during the years of
service or at the end of the service. Subject to the
ceiling every employee would either avail the leave or seek
encashment and therefore the liability is a certainty; it
cannot be called a contingent liability. We find substance
in the submission of the learned senior counsel for the
appellant.
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
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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.
In Metal Box Company of India Ltd. Vs. Their Workmen
(1969) 73 ITR 53 the appellant company estimated its
liability under two gratuity schemes framed by the company
and the amount of liability was deducted from the gross
receipts in the P&L account. The company had worked out on
an actuarial valuation its estimated liability and made
provision for such liability not all at once but spread over
a number of years. The practice followed by the company was
that every year the company worked out the additional
liability incurred by it on the employees putting in every
additional year of service. The gratuity was payable on the
termination of an employees service either due to
retirement, death or termination of service - the exact time
of occurrence of the latter two events being not
determinable with exactitude before hand. A few principles
were laid down by this court, the relevant of which for our
purpose are extracted and reproduced as under :- (i) For 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; (ii)
Just as receipts, though not actual receipts but accrued due
are 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; (iii) A
condition subsequent, the fulfillment of which may result in
the reduction or even extinction of the liability, would not
have the effect of converting that liability into a
contingent liability; (iv) A trader computing his taxable
profits for a particular year may properly deduct not only
the payments actually made to his employees but also the
present value of any payments in respect of their services
in that year to be made in a subsequent year if it can be
satisfactorily estimated.
So is the view taken in Calcutta Co. Ltd. Vs.
Commissioner of Income-Tax, West Bengal (1959) 37 ITR 1
wherein this court has held that the liability on the
assessee having been imported, the liability would be an
accrued liability and would not convert into a conditional
one merely because the liability was to be discharged at a
future date. There may be some difficulty in the estimation
thereof but that would not convert the accrued liability
into a conditional one; it was always open to the tax
authorities concerned to arrive at a proper estimate of the
liability having regard to all the circumstances of the
case.
Applying the above-said settled principles to the
facts of the case at hand we are satisfied that provision
made by the appellant company for meeting the liability
incurred by it under the leave encashment scheme
proportionate with the entitlement earned by employees of
the company, inclusive of the officers and the staff,
subject to the ceiling on accumulation as applicable on the
relevant date, is entitled to deduction out of the gross
receipts for the accounting year during which the provision
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is made for the liability. The liability is not a
contingent liability. The High Court was not right in
taking the view to the contrary.
The appeal is allowed. The judgment under appeal is
set aside. The question referred by the Tribunal to the
High Court is answered in the affirmative, i.e. in favour
of the assessee and against the Revenue.
Before parting we would like to observe that when this
appeal came up for hearing on 24.3.1999 we felt some
difficulty in proceeding to answer the question arising for
decision because the orders of the authorities below and of
the Tribunal did not indicate how the leave account was
operated by the appellants and leave salary provision was
made. To appreciate the facts correctly and in that light
to settle the law we had directed the Income Tax Appellate
Tribunal to frame a supplementary statement of case based on
books of account and other relevant contemporaneous records
of the appellant which direction was to be complied with
within a period of six months. The hearing was adjourned
sine die. After a lapse of sixteen months the matter was
listed before the court on 20.7.2000. The only
communication received by this court from the Tribunal was a
letter dated 20th June, 2000 asking for another six months
time to submit the supplementary statement of case which
prayer being unreasonable, was declined. Under Section 258
of the Income Tax Act, 1961, the High Court or the Supreme
Court have been empowered to call for supplementary
statement of case when they find the one already before it
not satisfactory. Article 144 of the Constitution obliges
all authorities, civil and judicial, in the territory of
India to act in aid of Supreme Court. Failure to comply
with the directions of this court by the Tribunal has to be
deplored. We expect the Tribunal to be more responsive and
more sensitive to the directions of this Court. We leave
this aspect in this case by making only this observation.
We have culled out the necessary facts stated in the
earlier part of this judgment from the statement of facts
filed by the assessee appellant before the Income-Tax
Appellate Tribunal. The correctness of the requisite
factual information relating to the leave encashment scheme,
as stated in the said statement, does not appear to have
been disputed before the Tribunal and was not disputed
before this court too.
. . .. . . . . . . . . . . . . . .J.
(S.P.Bharucha )