2014 (1) TMI 449 - HC - Income Tax

Court affirms deduction of leave encashment policy premium under Income-Tax Act

The court upheld the Tribunal's decision that the premium paid for a policy covering leave encashment falls under Section 37 of the Income-Tax Act, ... Payment of LIP to cover leave encashment expenditure - Held that:- The payment of the premium is not an expenditure of the nature described in Sections 30 to 36 - Section 43B contains non-obstante provision and there in Clause (f) payment by the assessee as employer in lieu of any leave to the credit of its employees has been recognized as a revenue expenditure – The expenditure has been certified as an expenditure not for personal expenses of the assessee and that the same is wholly and exclusively for the purpose of the business or profession of the assessee – The expenditure is deductible u/s 37 - Decided against Revenue. Issues:Interpretation of Section 37 of the Income-Tax Act, 1961 regarding the deductibility of a premium paid for obtaining a policy to cover leave encashment due to employees.Analysis:The judgment revolves around the interpretation of Section 37 of the Income-Tax Act, 1961 concerning the deductibility of a premium paid by the assessee to the Life Insurance Corporation of India for a policy covering leave encashment due to its employees. The Assessing Officer disallowed the deduction under Section 43B(f) of the Act, stating that no expenditure was incurred during the relevant assessment year on account of leave encashment to employees. The Tribunal, however, held that the payment falls under Section 37 of the Act, which allows for the deduction of expenditures laid out wholly and exclusively for the business or profession of the assessee.The court analyzed Section 37 of the Act, emphasizing that for an expenditure to qualify under this section, it must not fall under Sections 30 to 36, must not be capital expenditure or personal expenses of the assessee, and must be spent wholly and exclusively for the business or profession. The court noted that the payment in question did not fall under Sections 30 to 36 and argued that Section 43B(f) recognizes payments by the employer in lieu of leave to employees as revenue expenditure. The court rejected the argument that obtaining a cover for such recognized obligations would disqualify the expenditure from falling under Section 37.In conclusion, the court found that the payment made by the assessee for the premium was not in the nature of capital expenditure or personal expenses and was spent wholly and exclusively for the purpose of the business or profession. Therefore, the court dismissed the appeal, upholding the Tribunal's decision that the payment falls under Section 37 of the Income-Tax Act, making it allowable as a deduction in computing the taxable income.