2015 (12) TMI 190 - AT - Income Tax

Disallowance on unpaid leave encashment provisions applying provision of section 43B (f) - Held that - Leave encashment is not a scheme where employer and employee contributes but is a provision to be made according to accrual method of accounting where payment due to employees on their retirement or otherwise for their accrued leave for the tenure of the service. Further it is not for the welfare of the employees but it is wages due to the employees for the services rendered by them according to the terms of employment. It is also not a statutory payment but a contractual payment. Further finance Act 2001 has introduced section 43B (f) wherein leave encashment provision were covered, therefore it is apparent that earlier to that it was allowed on accrual basis irrespective of the year of payment. - Decided against revenue

Summary

Issues:
- Disallowance under section 43B (f) of the Income Tax Act on account of unpaid provision of leave encashment for three assessment years.

Analysis:
1. The appeals were filed against the disallowance under section 43B (f) for the years 2008-09, 2009-10, and 2010-11, related to unpaid provision of leave encashment. The disallowances were identical for all three years.

2. The assessing officer disallowed the provision of leave encashment made by the assessee as it was unpaid, citing section 43B (f) of the Act. The CIT (A) upheld the disallowance for all three years based on the same grounds.

3. The AR of the assessee argued that the disallowance was incorrect and relied on judicial precedents to challenge the constitutionality of section 43B (f). However, the DR supported the lower authorities' orders, stating that the provisions were clear.

4. The tribunal noted that section 43B (f) disallows deduction for provision of earned leave if not actually paid in the same year. The Calcutta High Court had declared this provision unconstitutional in a previous case, but the Supreme Court stayed the judgment pending appeal.

5. The tribunal rejected the AR's argument to delete the addition, emphasizing that section 43B (f) should be followed until the appeal decision. The tribunal cited a Kerala High Court case supporting the disallowance of leave encashment provisions under section 43B (f).

6. The tribunal dismissed the AR's claim that leave encashment should fall under section 43B (b) instead of (f), explaining that it is not a contribution scheme but a contractual payment for accrued leave. The Finance Act 2001 explicitly included leave encashment provisions in section 43B (f).

7. Consequently, the tribunal upheld the disallowance of the unpaid leave encashment provisions for all three years, as they were not paid by the due date for filing income tax returns.

This detailed analysis covers the issues raised in the judgment, the arguments presented by both parties, and the tribunal's reasoning for upholding the disallowance under section 43B (f) for the unpaid provision of leave encashment.