2005 (6) TMI 36 - HC - Income Tax

1. Whether, Tribunal was right in law in holding that the amount of leave salary paid to the retiring employees did not constitute salary as defined in Explanation 2 to section 40A(5) for the purpose of limiting the expenditure under that section? 2. Whether Tribunal was right in law in holding that the amount of statutory liability of sales tax, ESI contribution, P.F. contribution, etc., paid after the close of the previous year but before the due date for filing of return of income under section 139(1) was an allowable deduction in the AY 1984-85 when the proviso to section 43B was inserted w.e.f. 1st April, 1988? - Question No. 1 is answered in the negative, i.e., in favour of the Revenue and against the assessee. Question No. 2 is accordingly answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Whether the amount of leave salary paid to retiring employees constitutes "salary" as defined in Explanation 2 to section 40A(5) for the purpose of limiting the expenditure under that section.
2. Whether statutory liabilities paid after the close of the previous year but before the due date for filing of return of income under section 139(1) are allowable deductions in the assessment year 1984-85.

Detailed Analysis:

Issue 1: Leave Salary as "Salary" under Section 40A(5)
The Tribunal had held that the amount of leave salary paid to retiring employees did not constitute "salary" as defined in Explanation 2 to section 40A(5) for the purpose of limiting the expenditure under that section. The Assessing Officer had disallowed Rs. 50,857 paid as leave salary to three employees at the time of their retirement, arguing that such payments should be included in "salary" as per section 17(1)(va) and section 17(3) of the Act. The Commissioner of Income-tax (Appeals) and the Tribunal had relied on the Special Bench decision in Kodak Ltd. v. IAC, which equated leave salary with gratuity, both being payments made at the time of retirement.

The court, however, held that the definition of "salary" under section 17(1)(va) explicitly includes payments for leave not availed of by the employee. Therefore, such payments should be considered "salary" for the purposes of section 40A(5), which limits deductible expenditure. The court emphasized that section 10(10AA), which exempts such payments from the total income of the recipient employee, does not apply to the computation of the employer's income under "Profits and gains of business or profession". Thus, the Tribunal's decision was erroneous, and the question was answered in the negative, in favor of the Revenue.

Issue 2: Allowability of Statutory Liabilities Paid After Year-End
The Tribunal had held that statutory liabilities such as sales tax, ESI contribution, and P.F. contribution, paid after the close of the previous year but before the due date for filing the return of income under section 139(1), were allowable deductions. This issue was covered by the Supreme Court decision in Allied Motors (P.) Ltd. v. CIT, which held that such liabilities are deductible if paid before the filing of the return. The court affirmed this view, stating that the Tribunal was correct in allowing these deductions. Therefore, question No. 2 was answered in the affirmative, in favor of the assessee and against the Revenue.

Conclusion:
The court concluded that the payment of leave salary to retiring employees constitutes "salary" under Explanation 2 to section 40A(5) for the purpose of limiting the expenditure under that section. Therefore, the Tribunal's decision on this issue was incorrect. However, the court upheld the Tribunal's decision that statutory liabilities paid after the close of the previous year but before the due date for filing the return are allowable deductions. The reference was disposed of with no order as to costs.