2012 (8) TMI 580 - HC - Income Tax

Disallowance on account of provision made for leave salary Held 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 the 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 is made for the liability In favor of assessee Decision of apex court in Bharat Earth Movers s case 2000 (8) TMI 4 - SUPREME COURT followed.

Summary

Issues:
Whether the disallowance of Rs.15 lakhs by the Assessing Officer in respect of the provision for leave salary was justified or not.

Analysis:
The High Court of Rajasthan heard an appeal under section 260A of the Income-tax Act, 1961, against the order of the Income-tax Appellate Tribunal. The case involved the disallowance of Rs. 15 lakhs claimed for provision made for leave salary by the assessee. The Assessing Officer disallowed the claim, which was later allowed by the Commissioner of Income-tax (Appeals). The Revenue appealed to the Income-tax Appellate Tribunal, which upheld the decision of the Commissioner. The only issue in the appeal was the justification of the disallowance of Rs. 15 lakhs by the Assessing Officer regarding the provision for leave salary.

The appellant argued that the Income-tax Appellate Tribunal wrongly relied on a judgment of the Supreme Court, which, in their opinion, was not applicable to the case. The Tribunal and the appellate authority found the apex court's judgment relevant and set aside the Assessing Officer's order. The Tribunal noted that the provision for leave encashment was not a contingent liability and was deductible. The Tribunal upheld the appellate order based on the Supreme Court's decision in Bharat Earth Movers' case. The Apex Court in the Bharat Earth Movers' case held that the provision for meeting the liability for encashment of earned leave by employees is an admissible deduction. The High Court concluded that the matter was fully covered by the Supreme Court's judgment, and the orders of the appellate authority and the Tribunal were legal and justified.

The High Court dismissed the appeal, stating that no substantial question of law was involved. The judgment highlighted the importance of the Supreme Court's decision in interpreting the provision for leave encashment and its deductibility. The Court found that the Assessing Officer's disallowance was not justified, and the orders of the appellate authority and the Tribunal were in accordance with the law.