Accrued liability test for leave with wages: contingent future entitlement was not deductible as an income-tax deduction.

Provision for leave with wages was not deductible as an accrued liability because entitlement under section 79 of the Factories Act depended on future contingencies such as actual leave, refusal, discharge, resignation, superannuation or death. Mere statutory eligibility did not create a definite liability in the accounting year, and without an established annual payment obligation the amount was not capable of reasonable ascertainment. The gratuity principle was held inapplicable because leave with wages remained uncertain and contingent. The deduction was therefore disallowed, and the reference was answered against the assessee.

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Issues: Whether the provision made for leave with wages was an allowable deduction as an accrued liability under the Income-tax Act.

Analysis: Entitlement to leave with wages under section 79 of the Factories Act, 1948 depends on several contingencies, including actual availment of leave, refusal of leave, discharge, dismissal, resignation, superannuation or death. Mere statutory entitlement on completion of the qualifying period does not by itself create a definite or ascertainable liability in the accounting year. In the absence of any established practice or obligation of annual payment, the provision cannot be treated as a liability capable of precise computation. The principle applicable to gratuity, where the amount is capable of substantial accuracy and actuarial valuation, does not extend to leave with wages. The provision therefore remained uncertain and contingent.

Conclusion: The provision for leave with wages was not an existing or accrued liability and was not allowable as a deduction.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: A provision is deductible only if it represents an existing or accrued liability that is definite and capable of reasonable ascertainment; where the obligation depends on future contingencies, it is a contingent liability and not allowable as a deduction.

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