2013 (6) TMI 97 - HC - Income Tax

Leave encashment - whether not an ascertained liability and thus liable to be added to the book profit under explanation 1 to Section 115 JB - MAT - Held that - As decided in Bharat Earth Movers Versus Commissioner of Income-Tax 2000 (8) TMI 4 - SUPREME Court if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. Thus provision for meeting the liability for encashment of earned leave by the employee is an admissible deduction.

Summary

Issues:
1. Whether provision made for leave encashment is an ascertained liability liable to be added to the "book profit" under explanation 1 to Section 115 JB of the Income Tax Act, 1961.

The judgment revolves around the issue of whether the provision made by the assessee for leave encashment constitutes an ascertained liability to be added to the "book profit" under Section 115 JB of the Income Tax Act, 1961. The Assessing Officer initially disallowed the provision based on the decision of the Calcutta High Court, considering it an unascertained liability. However, the Appellate Tribunal overturned this decision, deeming the provision to be in respect of an "ascertained and definite liability" towards leave allowance for employees. The Tribunal relied on the Supreme Court's decision in Bharat Earth Movers versus Commissioner of Income Tax, emphasizing that if a business liability has arisen in the accounting year and can be estimated with reasonable certainty, it should be allowed as a deduction. The Tribunal's finding was based on established legal principles and the Apex Court's ruling, making it impermissible for the High Court to overturn it. Therefore, the High Court dismissed the appeals, as the substantial question of law raised by the Department had already been addressed by the Supreme Court in the Bharat Earth Movers case.

In conclusion, the judgment upholds the Tribunal's decision that the provision made by the assessee for leave encashment represents an ascertained liability towards leave allowance for employees, in accordance with legal principles outlined by the Supreme Court. The High Court emphasizes the importance of recognizing liabilities that have definitely arisen in the accounting year and can be reasonably estimated, even if the exact quantification and discharge occur in the future. The judgment highlights the significance of established legal precedents in determining the treatment of such liabilities for tax purposes, ultimately leading to the dismissal of the appeals brought by the Department.