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2013 (4) TMI 222 - AT - Income TaxLeave encashment benefit - A.O.treated the impugned liability as contingent liability and accordingly disallowed the claim of the assessee - Held that - It is not in dispute that the assessee has made provision for leave encashment on the basis of the report of the actuarial valuation. Applying the settled principles of case of M/s. Bharat Earth Movers Ltd. 2000 (8) TMI 4 - SUPREME COURT & Metal Box Company Of India Limited Versus Their Workmen 1968 (8) TMI 53 - SUPREME COURT to the facts of the present case it is satisfied that the 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 is made for the liability. The liability is not a contingent liability - in favour of assessee.
Issues:
- Disallowance of provision for leave encashment as a contingent liability - Application of principles from the case of Metal Box Company of India Ltd. - Justifiability of the order passed by the ld. CIT(A) Analysis: Issue 1: Disallowance of provision for leave encashment as a contingent liability The Revenue contended that the provision for leave encashment of Rs. 17,98,331 should be disallowed as it was considered a contingent liability and not an allowable expense under the Income Tax Act. The Assessing Officer had disallowed the claim, which was confirmed by the ld. CIT(A). However, the Tribunal in a previous order had set aside the decision of the ld. CIT(A) and directed a reevaluation. The ld. CIT(A) later allowed the claim based on actuarial valuation, stating that such provisions were considered allowable as revenue expenditure by various courts and tribunals. The Revenue challenged this decision, arguing that the liability was contingent and should not be allowed. Issue 2: Application of principles from the case of Metal Box Company of India Ltd. The Tribunal referred to the principles laid down by the Hon'ble Apex Court in the case of Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC) regarding the treatment of accrued liabilities for an assessee maintaining accounts on the mercantile system. The principles emphasized that liabilities accrued due should be considered while computing profits and gains, even if not yet paid. The Tribunal applied these principles to the case at hand, concluding that the provision made for leave encashment based on actuarial valuation was entitled to deduction as it was not a contingent liability. Issue 3: Justifiability of the order passed by the ld. CIT(A) The Revenue argued that the ld. CIT(A) erred in allowing the claim without determining if the assessee satisfied the tests laid down by the Hon'ble Apex Court in the case of Bharat Earth Movers Ltd. The ld. CIT(A) justified the decision based on the actuarial valuation report and previous court rulings. The Tribunal upheld the ld. CIT(A)'s decision, stating that since the claim was made based on actuarial valuation and not disputed, it was justified to allow the claim. The Tribunal rejected the Revenue's grounds of appeal and dismissed the appeals, affirming the order passed by the ld. CIT(A) in favor of the assessee. In conclusion, the Tribunal upheld the decision to allow the provision for leave encashment based on actuarial valuation, following the principles from the Metal Box Company case. The order passed by the ld. CIT(A) was deemed justifiable, and the Revenue's appeals were dismissed.
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