2012 (9) TMI 750 - AT - Income Tax

Disallowance of provision made for leave encashment - Assessee in the relevant period had made a provision for encashment of privilege leave on the basis of actuarial valuation - AO holding that it is contingent liability which had not crystallized and therefore not allowable as a deduction - Held that - Following the decision in case of BEML(2000 (8) TMI 4 - SUPREME COURT) and Exide Industries Ltd.(2007 (6) TMI 175 - CALCUTTA High Court ) struck down the provisions of section 43B(F), that the assessee s claim for deduction of the provision for privilege leave encashment is not a contingent liability and is to be allowed. Issue decided in favour of assessee Amortization of premium paid on Government securities Following the decision in case of Sir M. Vishveswaraya Co-operative Bank Ltd. (2012 (9) TMI 774 - ITAT, BANGALORE) hold that the assessee is entitled to deduction on account of amortization of premium on Govt. securities over its life. Decision in favour of assessee

Issues Involved:
1. Disallowance of provision for privilege leave encashment.
2. Amortization of premium paid on the purchase of Government Securities.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Privilege Leave Encashment:

The assessee, a co-operative bank, had made a provision for privilege leave encashment amounting to Rs. 52,35,008, which was disallowed by the Assessing Officer (AO) on the grounds that it was a contingent liability. The CIT(A) upheld this disallowance, leading to the assessee's appeal.

The assessee argued that the provision for leave encashment, based on actuarial valuation, is a recognized liability under the mercantile system of accounting and should not be considered contingent. The assessee cited the Supreme Court's decision in Bharat Earth Movers vs. CIT (245 ITR 428) and the Calcutta High Court's decision in Exide Industries Ltd. & Another vs. UOI & Others (292 ITR 470), which struck down Section 43B(f) of the Income Tax Act as arbitrary and unconscionable, holding that leave encashment is not a contingent liability.

The Tribunal considered these arguments and judicial precedents. It noted that the Supreme Court in Bharat Earth Movers held that if a business liability has definitely arisen in the accounting year, it should be allowed as a deduction, even if it is to be discharged in the future. The Tribunal also referred to the Calcutta High Court's decision in Exide Industries, which struck down Section 43B(f) and held that leave encashment is a trading liability and should be allowed as a deduction.

Based on these precedents, the Tribunal concluded that the provision for privilege leave encashment is not a contingent liability and should be allowed as a deduction. The assessee's appeal on this issue was allowed.

2. Amortization of Premium Paid on the Purchase of Government Securities:

The Revenue appealed against the CIT(A)'s decision to allow the amortization of premium paid on Government securities amounting to Rs. 4,84,11,629. The Revenue contended that this was against the CBDT Instruction No. 17 of 2008 and the Supreme Court decision in Vijaya Bank vs. Addl. CIT (187 ITR 541).

The assessee argued that the amortization of premium on Government securities is in line with the RBI's prudential norms and cited the Tribunal's decision in Sir M. Vishveshwaraya Co-operative Bank Ltd. vs. JCIT (ITA No. 1122/Bang/2010), which allowed such amortization.

The Tribunal reviewed the relevant facts and judicial decisions, including the Tribunal's decision in Sir M. Vishveshwaraya Co-operative Bank Ltd., which held that the amortization of premium on investments is allowable. The Tribunal noted that various benches had consistently allowed such deductions.

Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal, confirming that the assessee is entitled to the deduction for the amortization of premium on Government securities.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the provision for privilege leave encashment and dismissed the Revenue's appeal concerning the amortization of premium on Government securities. The decisions were based on judicial precedents and consistent interpretations of the relevant provisions of the Income Tax Act.

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