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Issues involved: The deduction of accrued leave salary as an admissible deduction to arrive at the assessable profits of the assessee-company.
Summary: The High Court of Karnataka addressed the issue of whether accrued leave salary could be considered as a permissible deduction for the assessee-company's assessable profits. The assessee, a public sector undertaking, had debited sums for accrued leave salary in its profit and loss account for the assessment year 1967-68. The Assessing Officer disallowed certain amounts, considering them as provisions rather than accrued liabilities. The Appellate Assistant Commissioner and the Tribunal had previously ruled in favor of the assessee, leading to the Revenue's appeal to the High Court. The assessee argued that vacation leave became earned leave at the end of each calendar year, with employees entitled to encash their unutilized leave upon termination. The Department, relying on precedent, contended that the deduction claimed was a contingent liability and not definite or ascertainable. The Appellate Assistant Commissioner distinguished the leave benefits provided by the Factories Act from the rules applicable to the assessee, emphasizing that the liability was definite and known at the close of the calendar year. The High Court examined previous decisions, including the Calcutta High Court's ruling in Bengal Enamel Works Ltd. v. CIT, which emphasized that liabilities dependent on uncertain circumstances were contingent and not deductible. The Court noted that the liability to pay encashment of leave only arose upon termination of employment, making it a contingent liability. The Court concluded that there was no material difference between the Factories Act and the assessee's leave rules, leading to the denial of the deduction for accrued leave salary. In alignment with decisions from various High Courts, the High Court of Karnataka ruled against the assessee, holding that the deduction for accrued leave salary was not permissible. The judgment favored the Revenue, emphasizing the contingent nature of the liability and the lack of certainty in the encashment of leave.
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