2024 (1) TMI 53 - AT - Income Tax

Disallowance of the provisions made for leave encashment - such provision was made on the basis of actuarial valuation carried out by the assessee and that leave encasement was not a statutory liability for the assessee - HELD THAT - The assessee is entitled to deduction of any such on this account subject to payment. Section 43B of the Act as noted is an overriding provision which allows deduction for the purpose of computing income u/s 28 of the Act only if actual payment has been made. The Parliament has inserted clause (f) after the judgment of the Hon ble Supreme Court in Bharat Earth Movers. 2000 (8) TMI 4 - SUPREME COURT to eschew the mischief of claim of deduction (leave salary) without making actual payment. Mischief Rule/Heydon s Rule is really a sub-rule of Purposive Construction Rule . It is well accepted cannon of statutory construction that it is the duty of the court to further Parliament s aim of providing a remedy for the mischief against which the enactment is directed and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it. (Refer RBI Vs. Peerless General Finance 1996 (1) TMI 332 - SUPREME COURT ). Even if we apply the purposive construction and look at the purpose of introducing clause (f) in section 43B of the Act with effect from 01.04.2002 (by Finance Act, 2001) after the Hon ble Supreme Court decision in Bharat Earth Movers Ltd supra the Legislative intent is clear that in computing the income of an assessee in a previous year u/s 28 of the Act, the assessee be allowed deduction of any sum which is actually paid; and clause (f) read with Explanation 3B makes it clear that Post 01.04.2001, deduction of any sum on account of payment towards employees leave encashment would be allowed only in the previous year when assessee makes actual payment. A literal interpretation of relevant section 43B of the Act also supports the view of CIT(A), therefore, the action of Ld. CIT(A) is legally sustainable and so it is upheld. Appeal of assessee stands dismissed.

Summary

Issues Involved:
1. Disallowance of delayed deposit of Employees Contribution to Provident Fund (PF).
2. Disallowance of provisions made for leave encashment.

Summary:

Issue 1: Disallowance of Delayed Deposit of Employees Contribution to Provident Fund (PF)
The appellant did not press ground no. 2 regarding the disallowance of Rs. 29,96,545/- under section 36(1)(va) of the Income Tax Act, 1961 for delayed deposit of Employees Contribution to Provident Fund (PF). This issue was dismissed as it was covered against the assessee by the Supreme Court decision in Checkmate Services P. Ltd v/s. Commissioner of Income Tax (448 ITR 518 (SC)).

Issue 2: Disallowance of Provisions Made for Leave Encashment
The appellant contested the disallowance of Rs. 14,70,00,661/- for provisions made for leave encashment, arguing that it was based on actuarial valuation and not a statutory liability. The CIT(A) upheld the disallowance under section 43B(f) of the Act, which mandates that such sums are deductible only on actual payment. The CIT(A) directed the AO to allow the amount of leave encashment paid up to the date of filing the return of income.

The Tribunal reviewed the facts and cited various case laws, including Bharat Earth Movers Ltd. Vs. CIT, which supported the appellant's claim that provisions for leave encashment based on actuarial valuation are deductible. However, the Tribunal noted that section 43B(f), introduced by the Finance Act, 2001, overrides this by allowing such deductions only on actual payment. The Tribunal upheld the CIT(A)'s decision, emphasizing that section 43B is an overriding provision that mandates deductions based on actual payments to prevent misuse. The appeal was dismissed, affirming the legal sustainability of the CIT(A)'s action.

Conclusion:
The appeal was dismissed, upholding the CIT(A)'s decisions on both issues. The Tribunal emphasized the overriding nature of section 43B(f), which allows deductions for leave encashment only on actual payment, aligning with legislative intent to prevent misuse.