694/CBDT. - Income Tax - 694/CBDT

INSTRUCTION NO. 694/CBDT Dated : May 29, 1974 Section(s) Referred: 37(1) Statute: Income - Tax Act, 1961 Under Section 79 of the Factories Act, 1948, every worker who has worked for a period of 240 days or more in a factory during the calendar year, is allowed during the subsequent calendar year "Leave with Wages" for a number of days calculated at a rate specified in sub-section (1) of Section 79 of the Factories Act, 1948. If a worker fails to avail himself of the whole of the Holidays allowed to him, during any period of twelve months, the leave not taken by him is added to the leave to be allowed to him in the succeeding calendar year subject, however, to the limit that the total number of days of leave that can be carried-forward to a succeeding year, does not exceed thirty in the case of an adult and forty in the case of a child. The worker is paid for leave period to which he may be entitled only if (i) he takes the leave; or (ii) he is discharged; or (iii) after being refused leave he quits his employment, before the holidays are allowed to him. 2. It is clear from the above that it is impossible for an employer to know in advance in any one year as to how many of his employees will go on leave next year and at what rate wages would have to be paid to them for the period of leave. The question of payment of wages for leave to worker would arise only if the worker goes on leave or if he is discharged or on being refused his leave, he quits employment. Till these circumstances arise, the liability that rests on the employer to pay to their worker wages in accordance with section 79 of the Factories Act, 1948, for leave period remains a contingent liability which the employer may or may not be called upon to discharge. That being so, any sum set apart by an employer in any year for meeting the contingency of some of his workers going on leave next year, cannot be regarded as admissible expenditure u/s.37 of the Income-tax Act, as it would not be an ascertained liability. 3. In this connection, the decision of the Madhya Pradesh High Court in the case of Chaganlal Textile Mills Pvt.Ltd. Vs.CIT.(1966) 62 ITR 274 and Bombay High Court in the case of CIT. (Central) Vs Rajkumar Mills Ltd., (1971) 79 ITR, short notes on p.12 may also be referred to wherein it has been held that the provision for leave with wages is only a contingent liability hence not allowable as deduction in computing the total income of the employer assessee. 4. Necessary instructions may please be issued to the Income-tax Officers working in your charge for information and necessary action.