9911796707
TMI Blog2000 (8) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment of the court was delivered by R. C. LAHOTI J.--- Relevant to the assessment year 1978-79, the following question of law was stated, at the instance of the Revenue, by the Income-tax Appellate Tribunal for the opinion of the High Court of Karnataka (see [1995] 211 ITR 515), under section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the provision for meeting the liability for encashment of earned leave by the employee is an admissible deduction ?" The appellant-company has two sets of employees. One set of employees is covered by the Employees State Insurance Scheme and is generally known as "staff". The other set of employees not so covered is known generally as "officers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tingent liability and therefore was not a permissible deduction. The reasoning applied by the High Court is that the liability will arise only if an employee may not go on leave and instead apply for encashment. If the employee avails of the leave as per his entitlement, then he would be paid salary for the period of leave and liability for encashment would not arise. The other event on the occurrence of which the employee may stake his claim is termination or retirement which again is an uncertainty. Accordingly, the High Court has answered the question in the negative, that is, in favour of the Revenue and against the assessee. The assessee has come up in appeal. Shri S. E. Dastur, the learned senior advocate for the appellant-company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reserve, it would not make any difference in practice as there would be no double payment and hence no double claim for deduction. In either case, the liability is certain though the period in which the liability would be incurred is not certain inasmuch as the leave encashment can be sought for by the employee either during the years of service or at the end of the service. Subject to the ceiling every employee would either avail of the leave or seek encashment and, therefore, the liability is a certainty ; it cannot be called a contingent liability. We find substance in the submission of the learned senior counsel for the appellant. The law is settled : if a business liability has definitely arisen in the accounting year, the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtracted and reproduced as under : (i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid ; (ii) just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business ; (iii) A condition subsequent, the fulfilment of which may result in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Before parting we would like to observe that when this appeal came up for hearing on March 24, 1999, we felt some difficulty in proceeding to answer the question arising for decision because the orders of the authorities below and of the Tribunal did not indicate how the leave account was operated by the appellants and leave salary provision was made. To appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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