Contingent liabilities are not deductible: provisions for holiday wages and retrenchment compensation failed tax scrutiny.

Deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922 was confined to expenditure actually incurred or to a liability that had already accrued. A provision for anticipated holiday wages under section 79 of the Factories Act, 1948 was contingent because the obligation depended on employees actually taking leave or related events, so it was not deductible. Anticipated retrenchment compensation under section 25F of the Industrial Disputes Act, 1947 was also contingent, as liability arose only on retrenchment and fulfilment of statutory conditions. The claimed deductions were therefore disallowed.

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Issues: Whether sums set apart for anticipated holiday wages under section 79 of the Factories Act, 1948, and for anticipated retrenchment compensation under section 25F of the Industrial Disputes Act, 1947, were allowable deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: Deduction under section 10(2)(xv) is confined to expenditure actually incurred or to a liability that has already accrued; a mere provision for a future contingency is not expenditure. Holiday wages under section 79 depend on workers actually taking leave, being discharged, or quitting after refusal of leave, and the employer cannot know in advance whether, when, or to what extent such liability will arise. The obligation therefore remains contingent until the relevant events occur. Retrenchment compensation under section 25F similarly depends on the employer's decision to retrench and on the fulfilment of statutory conditions precedent; there is no present obligation to pay compensation to any identified employee in the accounting year. The liability is thus contingent and not an accrued liability.

Conclusion: The claimed deductions were not allowable, and the answer to the reference was in the affirmative against the assessee.

Ratio Decidendi: A deduction under section 10(2)(xv) is not permissible for amounts reserved against contingent future liabilities; only expenditure or liabilities that have actually accrued can be deducted, even under the mercantile system.

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