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TMI Blog1984 (9) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee proceeded on leave and he was paid for the said period of leave. There is no provision for encashment of leave salary though the ITO's order gives impression as if leave was encashable. The ITO observed that as and when an employee would in future avail of leave, then his leave account will be debited with the days of leave availed of and the assessee-company can claim the expenditure on leave salary so paid in the year in which the employee proceeded on leave. Similar was the position according to the ITO in respect of workers, who were covered under the Factories Act, 1948 (and not by the aforesaid leave rules framed by the assessee-company). The ITO, accordingly, disallowed the provision for leave salary of Rs. 16,928 in the assessment year 1978-79. Similarly, in the assessment year 1979-80, Rs. 4,966 was disallowed on the ground that there was no present liability to pay leave salary and the liability was contingent on the employees proceeding on leave and the said provision was made in respect of those employees who have not exercised option to avail of leave in the year under consideration. The ITO observed that in the subsequent years, actual payment of leave salary wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax purposes, it was held that a distinction must be drawn between an actual, i.e., legal liability, which is future or contingent and for which no deduction can be made. The High Court observed that a worker is paid for the leave period to which he may be entitled only if (i) he takes the leave, or (ii) if he is discharged, or (iii) if being refused leave, he quits his employment before the holidays are allowed to him. It was clear to the High Court that it was 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. Till these circumstances arise, the liability that rests on the employer to pay to a worker wages in accordance with section 79 for leave period remains a contingent liability which the employer may or may not be called upon to discharge. The Madhya Pradesh High Court noted that similar view was taken by the Calcutta High Court in Bengal Enamel Works Ltd. v. CIT [1955] ILR 2 (Cal.) 13, where the Chief Justice of the Calcutta High Court said that statutory liability for holiday wages as the Factories Act creates, is only a cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or gratuity under the Surtax Act and the observations in Metal Box Co. of India Ltd.'s case were confined to computation of net profit under the Payment of Bonus Act and that the observations in the said two cases were not in supersession of the principles laid down by the Supreme Court in Indian Molasses Co. (P.) Ltd.'s case and Calcutta Co. Ltd.'s case and therefore, contingent liability did not amount to an expenditure as held in the last mentioned two cases and that even liability for leave salary is not known and existing and is uncertain in the accounting year under consideration and the liability may or may not arise when a worker quits employment and measure of liability for leave salary can never be known in advance. The Commissioner (Appeals), accordingly, disallowed provision of Rs. 16,928 on account of leave salary in the assessment year 1978-79. He followed this order in the assessment year 1978-79, when he disallowed provision of leave salary of Rs. 4,966. 8. The assessee is in appeal before us and urges that provision for leave salary was allowed by the ITO in the assessment years 1976-77 and 1977-78 and should have been allowed in the years under appeal (assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of V.V. Dixit and, therefore, out of the claim of Rs. 10,678, only Rs. 1,445 was disallowable. In the assessment year 1979-80, the assessee similarly claimed that provision disallowable was of Rs. 2,562 out of total provision of Rs. 4,966. 11. We are unable to accept the assessee's contention for considering accumulation of sick leave of 21 days for working out the excess. Sick leave can be availed of only in the contingency of an employee falling sick, which contingency may or may not happen during the entire service span of an employee and more so during the next few years, following the years under consideration. Further, sick leave can be availed of only on furnishing a medical certificate from a registered medical practitioner. An employee may or may not exercise the option to convert half pay medical leave into half the number of days on full pay. In view of all these contingencies, the provision in respect of sick leave of 21 days in respect of each employee is clearly a contingent provision. If sick leave of 21 days is, thus, ignored and only ceiling of 60 days of privilege leave is considered as liability, then the entire provision for leave salary made in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion even under the mercantile system of accounting. Reliance is placed on Indian Molasses Co. (P.) Ltd.'s case and M.S.P. Senthikumara Nadar Sons v. CIT [1957] 32 ITR 138, 149, where the Madras High Court reviewing case law observed that only an ascertained liability justifies an entry in accounts maintained on mercantile basis and deductions are not permissible for anticipated losses or contingent liabilities, even if they are inevitable. The Madras High Court in M.S.P. Senthikumara Nadar Sons' case relied on Spencer Co. v. Inland Revenue [1950] TR 149 and Peter Merchant Ltd.'s case. We have noted above in para 6 that the Madhya Pradesh High Court in Chhaganlal Textile Mills (P.) Ltd.'s case had also relied on Peter Merchant Ltd.'s case. Similarly, Chaturvedi and Pithisaria in Income-tax Law, Third edition, Vol. II, p. 1288, have expressed the same opinion that where obligation of the assessee is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation. Sampath Iyengar in Law of Income-tax, Seventh edition, p. 1624, observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith that of the Payment of Bonus Act and also referred to the 1961 Act when it observed : "If under the Income-tax Act an estimated liability ascertainable with substantial accuracy can be taken into account for arriving at the true profits and gains, there is no reason why the same cannot be done under the Bonus Act." The Supreme Court was, thus, essentially considering the provisions of the Payment of Bonus Act and allowability of provision for gratuity under the said Act. Thus, the decision is not a direct authority on the question before us, i.e., allowability of contingent liability. We have already noted above two direct decisions of the Supreme Court, namely, in Calcutta Co. Ltd.'s case and Indian Molasses Co. (P.) Ltd.'s case as also three direct decisions of the High Courts regarding non-allowability of provision for wages, namely, Chhaganlal Textile Mills (P.) Ltd.'s case, Bengal Enamel Works Ltd.'s case and Rajkumar Mills Ltd.'s case, as also the Madras High Court's decision in the case of M.S.P. Senthikumara Nadar Sons, regarding the non-allowability of contingent liability. The Madras High Court followed it in Tarachand Ghanshyamdas v. CIT [1966] 59 ITR 378. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the General Manager, Bhumla, as also one month's extra salary of Rs. 2,430 paid to the General Manager, Bhumla. He further upheld the disallowance of Rs. 7,735 as excess bonus (which disallowance, as mentioned above, has been accepted by the assessee). 21. The assessee in its grounds, challenges the disallowance of ex gratia payment to the employees, as customary bonus as also bonus of Rs. 2,430 paid to the General Manager, Bhumla. The assessee has, thus, not challenged the disallowance of ex gratia payment of Rs. 2,430 to the General Manager, Bhumla. 22. The assessee before us relied on the Tribunal, Madras Bench 'A's decision in ITO v. Egmore Benefit Society Ltd. [1981] 11 TTJ 265 (Mad.), where it was held that bonus equal to five months' salary was customary bonus as similar bonus had been paid by the assessee regularly in the earlier years. In view of the said admitted position, the Tribunal had held that the payment of customary bonus was not covered by the Payment of Bonus Act and, hence, was outside the first proviso to section 36(1)(ii). Similar view was taken by the Bangalore Bench in ITO v. Kasturi Ramesh Pai Co. [1982] 1 ITD 803. In the case before us, the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. Decision of the Tribunal Calcutta Bench in Molins of India Ltd. v. ITO [1984] 8 ITD 30 is not relevant for resolving the controversy before us because in that case, the limited controversy was that the bonus paid at the rate of 20 per cent even though within the limit set by the Payment of Bonus Act, was in excess of allocable surplus. The assessee also relied on Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal [1980] 3 Taxman 43 (SC), where it was held that customary bonus was allowable under section 17 of the Payment of Bonus Act and was available for deduction from bonus payable under the Payment of Bonus Act. This was also a case of payment as a result of agreement between the employees and the employer. The facts of the case before us are, therefore, clearly distinguishable. 27. The Supreme Court in Baidyanath Ayurveda Bhawan MazdoorUnionv. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd. [1984] 17 Taxman 19 held that attendance bonus paid to workers was outside the purview of the Payment of Bonus Act. This case is also distinguishable as the facts of the case before us are entirely different. 28. The facts and circumstances of the case before us are e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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