2012 (11) TMI 1108 - AT - Income Tax

Disallowance of provision for Leave encashment u/s 43B(f) - provisional liability or not - Held that - An employer is entitled for deduction for the expenditure he incurs for running his business in the form of perquisites as it is trading liability - the provisions made on account of leave encashment should be allowed although the liability may have to be quantified and discharged at a future date - Decided in favor of assessee.

Summary

Issues:
1. Disallowance of provision for EL encashment u/s. 43B(f) of the Income-tax Act, 1961.
2. Admissibility of leave encashment provisions as a deduction.

Analysis:
1. The Revenue appealed against the CIT(A)'s order disallowing provision for EL encashment under section 43B(f) of the Income-tax Act, 1961 for assessment year 2008-09. The Revenue contended that the provision was not actually paid before the due date for filing the return of income. The CIT(A) was urged to consider the pending Supreme Court case against the Kolkata High Court decision and uphold the disallowance. However, the Tribunal noted that a previous judgment in the assessee's case for assessment year 2005-06 had already addressed the issue. The Tribunal emphasized that leave encashment is not a statutory or contingent liability but a provision for an employee's entitlement earned during a specific financial year. The Tribunal held that the employer is entitled to a deduction for such expenditure only when it is actually paid in that financial year. Referring to the Calcutta High Court's decision and the Supreme Court's ruling in Bharat Earth Movers Ltd. case, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal.

2. The Tribunal's analysis focused on the interpretation of section 43B(f) concerning the deduction of leave encashment provisions under the Income-tax Act, 1961. The Tribunal highlighted that the legislative intent behind the provision was to prevent unreasonable deductions based on the mercantile system of accounting without discharging statutory liabilities. It was emphasized that leave encashment is a trading liability and an employer can claim a deduction for such expenditure only when it is actually paid in the relevant financial year. The Tribunal referred to the Supreme Court's judgment in Bharat Earth Movers Ltd. case to support the allowance of provisions made for leave encashment, even if the liability is to be quantified and discharged in the future. By aligning with the previous Tribunal order and legal precedents, the Tribunal affirmed the CIT(A)'s decision to allow the deduction for leave encashment provisions and dismissed the Revenue's appeal.

In conclusion, the Tribunal's detailed analysis and adherence to legal principles and precedents resulted in the dismissal of the Revenue's appeal regarding the disallowance of provision for EL encashment under section 43B(f) of the Income-tax Act, 1961. The judgment underscored the significance of actual payment in the relevant financial year for claiming deductions related to leave encashment provisions, in line with the legislative intent and judicial interpretations.