Accrued liability for leave encashment must be proved before deduction under income-tax law

Deduction for holiday wages and leave encashment under the Beedi and Cigar Workers (Conditions of Employment) Act, 1966 depended on proof of an accrued statutory liability under the Income-tax Act, 1961. The Court held that a mere statutory entitlement was not enough: the assessee had to show that a worker had actually claimed encashment and that the liability had crystallised during the relevant year. As no such evidentiary foundation was established, the amount could not be treated as an ascertained liability for deduction under section 37. The deduction was therefore rejected.

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Issues: Whether the assessee was entitled to deduction of the provision made towards holiday wages and leave encashment under the Beedi and Cigar Workers (Conditions of Employment) Act, 1966 as an accrued or ascertained liability for income-tax purposes.

Analysis: The claimed deduction was examined in the context of the statutory liability said to arise under sections 21, 26 and 27 of the Beedi and Cigar Workers (Conditions of Employment) Act, 1966 and the settled principle that only an accrued statutory liability can be allowed as a deduction under section 37 of the Income-tax Act, 1961. The Court found that the assessee had not established, by evidence, that any worker had actually claimed encashment or that the liability had in fact accrued during the relevant year. The factual foundation for treating the amount as an existing liability was therefore absent, and the mere existence of a statutory entitlement did not by itself prove accrual of liability.

Conclusion: The assessee was not entitled to the deduction, as the liability was not proved to have accrued.

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