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2014 (9) TMI 9 - HC - Income TaxAscertainment of liability towards leave encashment contingent liability - Mercantile system of accounting - application of Bharat Earth Movers Versus Commissioner of Income-Tax 2000 (8) TMI 4 - SUPREME Court Held that - The assessee filed the return of income attaching the Statutory Audit report dated 29.7.1998, the note No.17 of Schedule XIV regarding accounting of gratuity and leave encashment benefits to the staff (amount not ascertained) clearly mentioned that it was on cash basis instead of accrual basis - the assessee was able to quantify the gratuity amount as at 31.3.1998 and 302.80 lakhs as on 31.3.1997 - leave encashment benefits was stated to be not ascertained - for the previous assessment year they have followed the cash system of accounting and since they have switched over to mercantile system of accounting from the accounting year 1998-99, they should have estimated the encashment benefits with reasonable certainty based on the relevant data available, which they failed to do at the first instance. Since the assessee is following mercantile system of accounting from the accounting year 1998-99, they should have determined the leave encashment amount on the basis of accepted principles of commercial practice and accountancy - Even though they may not be in a position to give the accurate details, but that does not allow the assessee to claim a figure in an arbitrary manner without there being any supportive material - in view of the vagueness in the nature of the leave encashment benefits as claimed by the assessee, the assessee is not entitled to claim deduction on the leave encashment, which was rightly rejected by the AO as well as the CIT(A) - there could be an estimation with reasonable certainty though no actual quantification is required - there is no attempt on the part of the assessee to satisfy the requirements except placing reliance on the decision - for the relevant AY, the assessee has been inconsistent that for the benefit of leave encashment deduction, they are following cash system of accounting and for the rest, they are following mercantile system of accounting thus, the Tribunal was not justified in passing a cryptic order by just following the decision which is not applicable to the facts of the present case Decided in favour of Revenue.
Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in applying the Supreme Court's judgment in Bharat Earth Movers Ltd. without addressing the findings of the lower authorities regarding the unascertained liability towards leave encashment. 2. Whether the assessee is entitled to the benefit of leave encashment as a deduction for the assessment year 1998-99 without estimating the liability with reasonable certainty under the mercantile system of accounting. Detailed Analysis: Issue 1: Application of Supreme Court's Judgment in Bharat Earth Movers Ltd. The Tribunal allowed the assessee's appeal by merely referencing the Supreme Court's decision in Bharat Earth Movers Ltd., which held that a provision for leave encashment liability proportionate to the employees' entitlement is deductible. The Tribunal did not address the specific facts of the case or the findings of the lower authorities, which had determined that the liability for leave encashment was not ascertained or provided for in the books of accounts. Issue 2: Entitlement to Leave Encashment Deduction The assessee, engaged in manufacturing automobile wheels, claimed a deduction of Rs. 64,66,000 towards leave encashment for the assessment year 1998-99, transitioning from a cash to a mercantile system of accounting. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) both rejected this claim. Key findings included: - The assessee's balance sheet did not reflect an ascertained liability for leave encashment. - The company failed to provide documentary evidence or agreements substantiating the liability. - The assessee could not detail the method of accounting for leave encashment in subsequent years or the exact amounts paid. Lower Authorities' Findings: - The AO noted inconsistencies in the accounting methods and the lack of a consistent approach to leave encashment. - The CIT(A) highlighted that the assessee did not quantify the liability in its books or returns and relied on a post-assessment letter to claim the amount, which lacked a basis for calculation. - The CIT(A) distinguished the Bharat Earth Movers case, stating that the assessee's rules for leave encashment led to uncertainty and were contingent on events like retirement or resignation. High Court's Judgment: The High Court criticized the Tribunal for its non-speaking order and failure to address the specific facts and findings of the lower authorities. It emphasized that: - The liability must be capable of estimation with reasonable certainty, even if not quantified exactly. - The assessee did not provide a basis for the claimed amount and was inconsistent in its accounting methods. - The decision in Bharat Earth Movers Ltd. did not apply due to the lack of reasonable certainty in the assessee's case. Conclusion: The High Court set aside the Tribunal's order, affirming the AO and CIT(A)'s rejection of the leave encashment deduction. The appeal was allowed in favor of the Revenue, emphasizing the need for a clear and consistent approach to accounting for liabilities.
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