1994 (11) TMI 114 - HC - Income Tax

Summary

Issues involved:
The issue involves whether the provision for making the liability for encashment of earned leave by the employee is an admissible deduction under the Income-tax Act, 1961.

Judgment Details:

Contending Views:
The assessee maintained an accrued leave reserve for employees to encash leave at their credit, claiming deduction for the provision made. The Revenue argued that leave salary provision is a contingent liability, dependent on uncertain events of leave utilization. The assessee asserted that the liability is certain as leave encashment is earned by the employee and can be ascertained annually based on accumulated leave.

Assessee's Argument:
The assessee contended that the liability for accrued leave is certain as it represents an ascertained liability to be discharged in the future, depending on actual employee utilization. They argued that leave salary can be determined at year-end based on accumulated leave, making it a liability in praesenti, not contingent.

Revenue's Position:
The Revenue maintained that leave salary provision is contingent, arising only when an employee goes on leave and opts for encashment. They argued that the uncertainty of leave utilization makes the liability contingent, not certain. The Revenue emphasized that the provision must provide for a known liability with determinable amount for deduction.

Legal Precedents:
The Revenue cited legal precedents to support their position, emphasizing the need for a known liability with substantial accuracy for deduction. They referred to cases like CWT v. Prema Laxman and CIT v. C. Tharian and Sons. The Revenue also highlighted the judgment in CIT v. Hindustan Aeronautics Ltd., where it was held that provision for accrued leave salary, being contingent, is not a permissible deduction.

Court's Decision:
The Court ruled in favor of the Revenue, stating that leave salary and encashment benefits are contingent liabilities, not present liabilities. They disagreed with the assessee's argument that leave salary could be ascertained at year-end, emphasizing that the liability only arises when an employee goes on leave. The Court held that leave salary provision is not a certain liability, hence not eligible for deduction.

Conclusion:
The Court's decision aligned with the Revenue's view that provision for leave salary is contingent and uncertain, dependent on employee actions, and not a known liability eligible for deduction under the Income-tax Act, 1961.