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Issues: Determination of deduction for provisions made for leave with wages under the Income-tax Act, 1961.
Analysis: The case involved a private limited company engaged in tobacco business, which made a provision for leave with wages payable to workers in its profit and loss account. The Income-tax Officer disallowed the claim as a liability, stating it was contingent. The Appellate Tribunal allowed the deduction based on a judgment from the Cochin Bench of the Kerala State, which suggested the amount could be determined with some precision. The Tribunal disagreed with the Income-tax Officer and the Appellate Assistant Commissioner, leading to a legal dispute. The central issue revolved around the interpretation of Section 79 of the Factories Act, 1948, which governs annual leave with wages for workers. The Income-tax Officer argued that the liability arises only in the subsequent calendar year when workers can actually go on leave, making it contingent. On the contrary, the assessee contended that the liability accrues in the year the worker fulfills the required days of service, justifying the deduction claimed. The court examined various legal precedents, including decisions from the Kerala High Court, the Supreme Court, and other High Courts, to determine the nature of the liability for leave with wages. The court emphasized that the provision for leave with wages is contingent and not an existing or accrued liability. It highlighted that the liability depends on actual availment of leave by workers and cannot be determined with certainty in advance, leading to the denial of the deduction claimed by the assessee. Ultimately, the court ruled against the assessee, stating that the liability claimed for provision of leave with wages was contingent and not certain or definite for accurate determination. The court aligned with previous decisions from the Calcutta, Madhya Pradesh, and Bombay High Courts, emphasizing that such liabilities are permissible only when they become certain and not merely anticipated. In conclusion, the court held that the provision for leave with wages was a contingent liability dependent on actual availment of leave by workers, and therefore, not eligible for deduction under the Income-tax Act, 1961.
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