2020 (11) TMI 575 - HC - Income Tax

Claim the provision for leave encashment u/s.43B - Tribunal order holding that the Assessee was not eligible to claim the provision for leave encashment which has been determined scientifically and accurately based on actuarial valuation, and the incurring of expenditure is certain and has arisen in the previous year ended in 31st March 2004 - HELD THAT - The above substantial questions of law have to be answered against the appellant/assessee in the light of the decision of the Hon'ble Supreme Court in the case of Union of India and others vs. Exide Industries Limited 2020 (4) TMI 792 - SUPREME COURT . The High Court of Kerala in the case of South Indian Bank Ltd 2014 (2) TMI 1080 - KERALA HIGH COURT also held that deduction for leave encashment is allowable only on actual payment. Substantial Questions of Law framed for consideration has to be necessarily answered against the appellant/assessee

Summary

Issues:
1. Eligibility to claim provision for a loss under Section 28(i) read with Section 29.
2. Applicability of explanation to Sec.37(1) of the IT Act.
3. Eligibility to claim provision for leave encashment based on actuarial valuation.
4. Application of the decision in Exide Industries Ltd and another Vs. Union of India & Others 292 ITR 470.

Analysis:

1. The appellant challenged the order of the Income Tax Appellate Tribunal regarding the eligibility to claim a provision for a loss incurred during business under Section 28(i) read with Section 29. The Hon'ble Supreme Court's decision in Union of India and others Vs. Exide Industries Ltd and another highlighted the importance of actual payment in such cases to prevent employers from avoiding payment obligations. The court dismissed the appeal based on this precedent, emphasizing that deductions for leave encashment are allowed only upon actual payment.

2. The Tribunal's decision on the applicability of the explanation to Sec.37(1) of the IT Act was also challenged. However, the court referred to the Supreme Court's ruling in Dhanalakshmi Bank Ltd. Vs. Commissioner of Income-tax, affirming that disallowance of provision for leave encashment under Section 43B(f) is permissible only upon actual payment. The High Court of Kerala also supported this stance, emphasizing that deductions for leave encashment should only be claimed upon actual payment.

3. Another issue raised was the eligibility to claim a provision for leave encashment determined through actuarial valuation. The appellant contended that the provision was accurately calculated and certain, arising in the previous year. However, the court's reliance on previous judgments and the requirement for actual payment led to the dismissal of the appeal, emphasizing that deductions for leave encashment must align with actual payments.

4. Lastly, the appellant questioned the Tribunal's decision regarding the application of the judgment in Exide Industries Ltd and another Vs. Union of India & Others 292 ITR 470. However, the court's consistent stance on the necessity of actual payment for claiming deductions for leave encashment led to the dismissal of the appeal, with the Substantial Questions of Law answered against the assessee based on established legal precedents.