2014 (3) TMI 1004 - AT - Income Tax

Tribunal affirms CIT(A)'s decision on earned leave encashment claim, emphasizing legislative intent.

The Tribunal upheld the CIT(A)'s decision to allow the assessee's claim regarding earned leave encashment, citing consistency with previous judgments and ... Disallowance of EL encashment u/s 43B(f) - amount actually paid before the due date for filing the return of income - Held that:- The issue in dispute is squarely covered by the decision of the coordinate bench of ITAT, Hyderabad in assessee’s own case for AY 2008-09 wherein the Tribunal dismissed the appeal of the revenue following the decision of the another coordinate bench decision assessee’s own case for AY 2005-06 to held that an employer is entitled for deduction for the expenditure he incurs for running his business which includes payment of salary and other perquisites to his employees. Hence, it is trading liability. As such he is otherwise entitled to deduction of such amount by showing it as a provisional expenditure in his account. The Legislature by way of amendment restrict such deduction in the case of leave encashment unless it is actually paid in that particular financial year. The legislature is free to do so after it discloses reasons there for and such reasons are not inconsistent with the main object of the enactment. Without such reason the enactment is inconsistent with the original Provision. The legislature must disclose reasons which would be consistent for the provision of the constitution and the laws of the land and not for the sole object of nullifying the judgment in the case of Bharat Earth Movers vs. CIT (2000 (8) TMI 4 - SUPREME Court) wherein held the provisions made on account of leave encashment should be allowed although the liability may have to be quantified and discharged at a future date - Decided against revenue. Issues involved:1. Disallowance of earned leave encashment under section 43B(f) of the IT Act, 1961.2. Interpretation of previous judgments and their impact on the current case.3. Admissibility of the appeal and finality of the matter.Issue 1: Disallowance of earned leave encashment under section 43B(f) of the IT Act, 1961:The case involved an appeal by the Revenue against the order of the CIT(A)-II, Hyderabad regarding the disallowance of earned leave encashment amounting to Rs. 1,02,98,507 under section 43B(f) of the IT Act, 1961. The Assessing Officer disallowed this amount despite the assessee explaining it as an ascertained liability not yet paid. The CIT(A) allowed the appeal based on previous decisions favoring the assessee for other assessment years. The Tribunal upheld the CIT(A)'s decision, citing that the issue was similar to a previous case where the Tribunal dismissed the revenue's appeal. The Tribunal emphasized that leave encashment is not a statutory or contingent liability, but a provision for an employee's entitlement earned during a specific financial year. The Tribunal concluded that the legislative amendment restricting deduction for leave encashment unless actually paid was inconsistent without disclosed reasons, and the decision was in line with previous judgments.Issue 2: Interpretation of previous judgments and their impact on the current case:The Tribunal referred to the decision of a coordinate bench in the assessee's case for the AY 2008-09 and another coordinate bench decision for AY 2005-06. The Tribunal highlighted that the original intention of section 43B of the IT Act was to prevent unreasonable deductions without discharging statutory liabilities. It was noted that leave encashment is not a statutory or contingent liability but a provision for an employee's entitlement earned during a specific financial year. The Tribunal emphasized that the legislative amendment restricting deduction for leave encashment unless actually paid lacked disclosed reasons, making it inconsistent with the original provision. The Tribunal upheld the CIT(A)'s decision based on the precedent set by previous judgments and the interpretation of the legislative intent behind section 43B(f).Issue 3: Admissibility of the appeal and finality of the matter:The Revenue's appeal was dismissed by the Tribunal based on the findings that the issue was identical to a previous case where the Tribunal upheld the assessee's claim. The Tribunal concluded that there was no infirmity in the CIT(A)'s decision to allow the assessee's claim regarding earned leave encashment. The Tribunal's decision highlighted the importance of consistency in applying legal principles and following precedents in similar cases. The appeal was thus dismissed, affirming the decision of the lower authorities and establishing finality in the matter.This comprehensive analysis of the judgment provides a detailed understanding of the issues involved, the legal interpretations made, and the final decision rendered by the Tribunal.