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TMI Blog2025 (1) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income Tax Appellate Tribunal (ITAT), Chandigarh in ITA No. 1044/Chandi/2005. The appeal was admitted for hearing vide order dated 11.10.2007 on the following substantial questions of law:- "i) Whether on the facts and in the circumstances of the case, the provision for meeting the liability for encashment of saved leave by the employee is an admissible deduction? ii) Whether leave encashment, which is a kind of earned leave, is a present liability or a future liability so as to be allowed the expenses u/s 37 of the Income Tax Act, 1961 d deductible from gross profit? iii) Whether leave encashment is a current or present liability or a contingent liability in view of the principles laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers 245 ITR 428 (SC) and thus accordingly allowable as an expense deductible from gross profit? iv) Whether the provision for leave encashment is a defined benefit entitled to be allowed as an expense during the year in which such provision is made in books of accounts in view of Accounting Standard 15 issued by ICAI? (v) Whether the expense of leave encashment deduction has been rightly claimed by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of contribution to Credit Leave Encashment Trust (CLET). The assessee, thus, claimed deduction of Rs. 45,00,000/-. 7. The Assessing Officer (AO) passed an assessment order dated 29.3.2005. The claim of the assessee for deduction of an amount of Rs. 45,00,000/- was disallowed and resultantly an amount of Rs. 45,00,000/- was added to the income of the assessee. 8. The assessee preferred an appeal to the Appellate Authority i.e. Commissioner Income Tax (Appeals). The objection of assessee against the order of AO, disallowing the deduction of Rs. 45,00,000/- was rejected by the CIT(A) vide order dated 14.5.2005. 9. The assessee further approached the Income Tax Appellate Tribunal (ITAT), Chandigarh, who vide impugned order again remained unsuccessful in its challenge against disallowance of the deduction of Rs. 45,00,000/-., hence this appeal. 10. The AO vide assessment order dated 29.3.2005 had held the deduction of Rs. 45,00,000/- claimed by the assessee as inadmissible on following grounds: - a) The financial year 2001-02 relevant to the assessment year 2002-03 had already been over on 31.3.2002 and the accounts of the assessee for the said financial year also stood closed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the actuarial certificate or a confirmation from the insurer obtained for the contribution payable to the insurer is the appropriate accrual of the liability for the year. 12. The ITAT also held as under:- a) Neither any liability had accrued to the assessee on account of leave encashment of employees in the year under appeal nor any payment was made to the employees during the said year. b) Section 43-B of the Act regulates the deductions, which are otherwise allowable under the Act and since no other provision of act allowed the deduction of amount paid towards the fund created for discharge of leave encashment liability of employees by the employer, hence the applicability of section 43-B of the act was ruled out. c). Even otherwise sub-clause (f) to section 43-B of the Act inserted by the Finance Act, 2001 w.e.f. 1.4.2002 provided for deduction for the year of payment of the liability in respect of any sums payable by the assessee as an employer in lieu of any leave at the credit of his employees. d) In the earlier year, the assessee was following the cash system of accounting in respect of the liability on account of encashment of leave salary. Therefore, the deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, shall be seen in its application to the facts of instant case. 17. The findings of facts recorded concurrently by the AO, CIT(A) and ITAT can be summoned up as under:- a) The fund was established on 29.10.2002 and the contribution of Rs. 45,00,000/- towards the fund was also made by the assessee to LIC on the same date. b) No provision for contribution towards the fund was made by the assessee after closure of accounting year 2001-02, on 31.3.2002. c) The assessee has not resorted to the option of mercantile accounting during the accounting year 2001-02. d) The liability of payment of amount towards leave encashment was neither accrued nor paid during the relevant accounting year 2001-02. 18. Further, both the appellate authorities have also held that contribution towards fund for payment of leave encashment due to the employees was not deductible under any provision of the Act. In alternative, it has been held that Section 43-B (f) of the Act attracts the deductibility of the amount only if it was incurred and paid in the relevant accounting year. 19. The first question that arises for determination is whether the contribution made by a corporate employer towards fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as and when occasion arises. It is this mischief clause (f) seeks to subjugate." 23. In the same context their Lordships in Excide Industries, then further observed as under: "In line with other clauses under Section 43B, clause (f) was enacted to remedy a particular mischief and the concerns of public good, employee's welfare and prevention of fraud upon revenue is writ large in the said clause. In our view, such statutes are to be viewed through the prism of the mischief they seek to suppress, that is, the Haydon's case [1584] 3 Co rep 7 principle. IN CRAWFORD, Statutory Construction (CRAWFORD Statutory Construction p.508), it has been gainfully delineated that "an enactment designed to prevent the fraud upon the revenue is more properly a statute against fraud rather than a taxing statute, and hence should receive a liberal construction in the government's favour." 24. In an adjudication by Hon'ble High Court of Kerala in its judgment dated 27.6.2012 passed in ITA No. 64 of 2012, titled as CIT vs. M/s Hindustan Latex Ltd. It has been observed as under: - "However, it cannot be doubted for a moment for the premium paid towards the renewal and continued validity of the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the aforesaid proviso only that sum payable by the assessee as an employer in lieu of any leave at the credit of his employees shall be allowed as deduction where firstly the liability to pay such sum was incurred by the assessee according to method of accounting regularly employed by him and secondly the sum was actually paid by the employer in the previous accounting year. 29. The question next arises whether the assessee in the instant case had incurred the liability to pay a sum of Rs. 45,00,000/- to its employees for the previous year in which such sum is actually paid. 30. Admittedly, the sum of Rs. 45,00,000/- was paid by the assessee to LIC in the year 2001-02 by application of the proviso to Section 43-B. We are, however, not inclined to hold that the liability had already been incurred as a past liability. Though, the assessee has tried to impress upon us by referring to a communication inter-se the assessee and the insurer that the amount of past liability was assessed at Rs. 1.80 crores, but the same has not been substantiated before AO or the appellate authorities by the assessee. Both the appellate authorities have concurrently held that it was not on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment under consideration, it was rendered in light of general dispensation of autonomy of the assessee to follow cash or mercantile system of accounting prevailing at the relevant time, in absence of an express statutory provision to do so differently. It is an authority on the nature of the liability of leave encashment in terms of the earlier dispensation. In absence of any such provision, the sole operative provision was Section 145 (1) of the 1961 Act that allowed complete autonomy to the assessee to follow the mercantile system. Now a limited change has been brought about by the insertion of clause (f) in Section 43B and nothing more. It applies prospectively. Merely because a liability has been held to be a present liability qualifying for instant deduction in terms of the applicable provisions at the relevant time does not ipso facto signify that deduction against such liability cannot be regulated by a law made by Parliament prospectively. In matter of statutory deductions, it is open to the legislature to withdraw the same prospectively. In other words, once the Finance Act, 2001 was duly passed by the Parliament inserting clause (f) in Section 43B with prospective effec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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