1984 (9) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of leave salary for assessment years 1978-79 and 1979-80.
2. Disallowance of ex gratia payments as customary bonus for assessment year 1979-80.

Issue-wise Detailed Analysis:

1. Allowability of Leave Salary:

Background:
The assessee, a company manufacturing ingots, follows an accounting year ending on 31st May. The first issue concerns the allowability of leave salary of Rs. 16,928 for the assessment year 1978-79 and Rs. 4,966 for the assessment year 1979-80. The Income Tax Officer (ITO) treated these as contingent liabilities and disallowed them, a decision which was upheld by the Commissioner (Appeals).

Assessment Officer's View:
The ITO observed that leave salary was payable only when an employee proceeded on leave, and there was no provision for encashment of leave salary. Therefore, the liability was considered contingent and disallowed. The Commissioner (Appeals) upheld this view, citing that the liability was not present but contingent on future events.

Commissioner (Appeals)'s Observations:
The Commissioner (Appeals) noted that under the company's leave rules, leave salary became due only under specific conditions, such as an employee taking leave, being discharged, or quitting employment before holidays were allowed. The liability was thus contingent, as it depended on uncertain future events. The Commissioner (Appeals) referenced several High Court rulings and the Supreme Court's decision in Indian Molasses Co. (P.) Ltd. v. CIT, which distinguished between actual liabilities and contingent liabilities.

Assessee's Argument:
The assessee argued that the leave salary should be allowed based on the accrual system of accounting, referencing the Supreme Court's decision in Metal Box Co. of India Ltd. v. Their Workmen, which allowed for the deduction of contingent liabilities if they were sufficiently certain and capable of valuation.

Tribunal's Decision:
The Tribunal agreed with the lower authorities, stating that the leave salary liability was contingent and not ascertainable with substantial accuracy. The Tribunal noted that the leave rules did not provide for encashment of leave salary, and the provision for sick leave was also contingent on future events. Therefore, the provision for leave salary was not a present liability and was disallowed.

2. Disallowance of Ex Gratia Payments as Customary Bonus:

Background:
The second issue concerns the disallowance of ex gratia payments of Rs. 38,759 and Rs. 2,430 to the General Manager as customary bonus for the assessment year 1979-80. The ITO disallowed these payments, considering them over and above the production incentive and bonus already allowed.

Commissioner (Appeals)'s Observations:
The Commissioner (Appeals) rejected the assessee's contention that the ex gratia payments were customary bonus, noting that there was no evidence of such payments being a regular feature or custom in the assessee's business. The Commissioner (Appeals) upheld the ITO's disallowance.

Assessee's Argument:
The assessee relied on various Tribunal decisions, arguing that similar payments had been allowed as customary bonus in other cases. However, the Tribunal found that the facts of those cases were distinguishable from the present case.

Tribunal's Decision:
The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the ex gratia payment was not proved to be customary bonus and was not made as a result of any agreement or settlement between the employer and employees. Therefore, the disallowance of the ex gratia payment of Rs. 38,759 to the employees and Rs. 2,430 to the General Manager was justified.

Conclusion:
Both the assessee's appeals for the assessment years 1978-79 and 1979-80 were dismissed. The Tribunal upheld the disallowance of the provision for leave salary as a contingent liability and the disallowance of ex gratia payments as not being customary bonus.