2014 (7) TMI 122 - AT - Income Tax

Book adjustments u/s 115JB of the Act - MAT - Provision for leave encashment Held that - The decision in Bharat Earth Movers Versus Commissioner of Income-Tax 2000 (8) TMI 4 - SUPREME Court followed - meeting the liability incurred by the company under the leave encashment scheme proportionate with entitlement earned by employees of the company inclusive of officers and the staff subject to ceiling of accumulation as applicable on the relevant date is entitled to deduction out of the gross receipt for the accounting year during which the provision is made for the liability - the liability is not a contingent liability - the provision made for leave encashment cannot be considered to be a contingent liability - there is no question of any addition thus, the addition is liable to be set aside Decided in favour of Assessee.

Summary

Issues: Disallowance of provision for leave encashment.

Analysis:
The appeal pertains to the disallowance of Rs. 2,74,000 towards provision for leave encashment for the assessment year 2005-06. The representative for the assessee argued that the provision for leave encashment should not be considered a contingent liability, citing the judgment in the case of Bharat Earth Movers Ltd vs Commissioner of Income-tax. It was contended that once the income was computed under section 115JB and certified by the auditor, the assessing officer cannot go beyond the certified accounts. On the other hand, the Departmental Representative argued that the provision for leave encashment is a contingent liability and should be added to the profit computed under section 115JB. The contention was that the liability to pay leave encashment arises only when employees exercise their options.

The Tribunal analyzed the submissions and referred to the judgment in the case of Bharat Earth Movers Ltd. The Tribunal observed that the Apex Court had found that the provision for leave encashment is not a contingent liability. The Court held that the liability incurred by the company under the leave encashment scheme, proportionate with entitlement earned by employees, is entitled to deduction from gross receipts for the accounting year in which the provision is made. Therefore, the provision for leave encashment cannot be considered a contingent liability. Consequently, the Tribunal set aside the orders of the lower authorities and deleted the addition made by the assessing officer. The appeal of the assessee was allowed, and the addition of Rs. 2,74,000 was removed.

In conclusion, the Tribunal ruled in favor of the assessee, holding that the provision for leave encashment is not a contingent liability based on the judgment of the Apex Court. The decision emphasized that the provision made for leave encashment should be allowed as claimed, and there was no justification for the addition made by the assessing officer.