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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 ..... ejected for the reason that the proviso to Section 43-B relates only to that liability as was incurred by actual payment of the sum in the previous accounting year, which in the instant case is 2001-02. Thus, exception carved out by the aforesaid proviso only derives the limitation from end of accounting year to the date of submission of return as per Section 139 (1). As per Section 43-B 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. Whether the assessee in the instant case had incurred the liability to pay a sum to its employees for the previous year in which such sum is actually paid ? - In Excide Industry Ltd [ 2020 (4) TMI 792 - SUPREME COURT] had the occasion to adjudicate the constitutional validity of Section 43-B (f) of the Act and one of the grounds of such challenge was that the proviso had been incorporated to undo the effect of judgment passed by the Hon ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in view of the judgment of the Apex Court in the case of Bharat Earth Movers 245 ITR 428 (SC)? vi) Whether the liability towards leave encashment has been ascertained during the period of assessment under consideration for the payment of the same at a future date in view of the leave Rule 26 29 of the Central Civil Services Leave Rule as applicable to the employees of the appellant and has been rightly claimed as an expense deductible during the year under assessment? vii) Whether the procedure adopted for ascertaining of liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000/- 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 on the said date. Therefore, the Credit Leave Encashment Scheme (for short, the scheme ) set up by the assessee for providing leave encashment benefits to its employees on 29.10.2002 by remitting an amount of Rs. 45,00,000/- to LIC on the same day i.e. 29.10.2002, could not be said to be the payment made in the relevant accounting year 2001-02. b) The liability to pay leave encashment as per the details provided by the assessee was due only in the year 2004 and onwards, as such, neither any liability had accrued nor discharged during the financial year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 deduction was being claimed on the basis of actual payment for encashment salary. There has been no change in the system of accounting in the year under appeal as the steps for formulation of the scheme had not taken after the end of financial year 2001-02. e) Since the scheme has no recognition under Section 36 (1) (iv) and (v), the assessee was not entitled to the deduction. 13. We have heard learned counsel for the parties and have also gone through the record carefully. 14. Mr. Vishal Mohan, learned Senior Counsel for the assessee/appellant has contended that the liability incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 fund for payment of leave encashment to its employees is entitled for deduction from profit and loss account under the Act? 20. The above question has arisen because the ITAT and CIT(A) have held such contribution to be not deductible under any of the provisions of the Act. The appellate authorities have rendered the view that such a fund had no statutory recognition as only those funds were recognized as were declared under Section 36(1)(iv) (v) of the Act. 21. We have our reservations in endorsing the view so taken by the appellate authorities. The inclusion of Clause (f) in Section 43-B of the Act will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 insurance policy necessarily becomes business expenditure wholly and exclusively incurred for the business purpose and allowable as a deduction under Section 37 of the Act. 25. In view of what has been held above, we have no hesitation to hold that the amount of contribution made by the assessee towards the fund for payment of leave encashment to its employees qualifies to be deductible as expenses, subject, however, to the conditions imposed under Section 43-B of the Act. 26. Taking the benefit of proviso to section 43B of the Act it has been contended on behalf of the assessee that the last date for filing of income tax return by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of any past liability, rather, the payments of leave encashment were actually made during the years 2004 to 2016. We are not convinced with the contention of assessee that the finding of fact to that effect is perverse. 31. Learned Senior Counsel for the appellant has contended that the liability in similar circumstance has been held to be ascertained and permissible for deduction by the Hon ble Supreme Court in the judgment Bharat Earth Movers vs. CIT (2000) 245 ITR 428 . He has also placed reliance on the judgment passed by the Hon ble Supreme Court in the matter of CIT vs. Textools Co. Ltd. rendered on 9.9.2009 in Civil Appeal No. 447 of 2003 , wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spectively. 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 effect, the deduction against the liability of leave encashment stood regulated in the manner so prescribed. Be it noted that the amendment does not reverse the nature of the liability nor has it taken away the deduction as such. The liability of leave encashment continues to be a present liability as per the mercantile system of accounting. Further, the insertion of clause (f) has not extinguished the autonomy of the assessee to follow the mercantile system. It merely defers the benefit of deduction to be availed by the assessee for the purpose of computing his taxable income and links it to the date of actual payment thereof to the employee concerned. Thus, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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