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of <h1>Court denies deductions for contingent liabilities under Indian Income-tax Act, 1922.</h1> The court upheld the disallowance of deductions for earned leave wages and retrenchment compensation as they were deemed contingent liabilities and not ... - Issues Involved:1. Disallowance of the claim for Rs. 75,000 for earned leave wages.2. Disallowance of the claim for Rs. 1,75,000 for retrenchment compensation.Issue-Wise Detailed Analysis:1. Disallowance of the Claim for Rs. 75,000 for Earned Leave Wages:The assessee, a private limited company engaged in textile manufacturing, claimed a deduction of Rs. 75,000 set apart as a reserve fund for holiday wages under section 79 of the Factories Act, 1948. The Income-tax Officer disallowed this claim, viewing the liability as contingent and not an actual liability in praesenti. This decision was upheld by the Appellate Assistant Commissioner and the Tribunal.The court affirmed that under section 10(2)(xv) of the Indian Income-tax Act, 1922, a deduction is not permissible for a contingent liability, as it does not constitute 'expenditure.' The Supreme Court in Indian Molasses Co. v. Commissioner of Income-tax and Senthikumara Nadar and Sons v. Commissioner of Income-tax has clarified that 'expenditure' refers to something paid out irretrievably, and a contingent liability does not meet this criterion.Section 79 of the Factories Act, 1948, stipulates that workers are entitled to leave wages only if they take leave, are discharged, or quit after being refused leave. The employer cannot know in advance how many employees will take leave or at what wage rates. Thus, the liability remains contingent until these conditions are met. The court cited Bengal Enamel Works Ltd. v. Commissioner of Income-tax, where it was held that a statutory liability for holiday wages under similar provisions was contingent and not deductible.2. Disallowance of the Claim for Rs. 1,75,000 for Retrenchment Compensation:The assessee also claimed a deduction of Rs. 1,75,000 for retrenchment compensation under section 25F of the Industrial Disputes Act, 1947. The court noted that section 25F requires compensation to be paid only when retrenchment occurs. The employer cannot predict the number of employees to be retrenched or the amount of compensation required in advance, making the liability contingent.The court distinguished the case from Southern Railway of Peru v. Owen, where a statutory obligation to pay retirement compensation was recognized as a deductible liability. Here, the liability to pay retrenchment compensation is contingent upon future events, making it non-deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The court referenced Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation, which held that retrenchment compensation under section 25F is a contingent liability and not an accrued liability, even under the mercantile system of accounting.Conclusion:The court concluded that both claims for deductions were rightly disallowed as they represented contingent liabilities, not actual liabilities in praesenti. The question referred to the court was answered in the affirmative, and the assessee was ordered to pay the costs of the reference, with counsel's fee fixed at Rs. 200.
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