Contingent leave encashment liability is not deductible when the obligation is uncertain and not yet ascertained.

Provision for leave encashment was held to be an inadmissible deduction because the employer's liability arose only on termination of employment and remained dependent on a future contingency. The amount set apart was not an ascertained expenditure, as the obligation was neither definite nor accrued at the time of computation of taxable profits. The leave rules were treated as substantively similar to statutory leave provisions where the liability is contingent rather than accrued, so the deduction was disallowed and the issue was answered against the assessee.

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Issues: Whether the provision made for accrued leave salary or leave encashment was an admissible deduction in computing the assessee's taxable profits, or whether it represented only a contingent liability.

Analysis: The liability to pay encashment of unutilised leave arose only on termination of employment. Until that contingency occurred, the employer's obligation remained uncertain and dependent on future events. The leave rules of the assessee were held to be in substance no different from the statutory leave provisions considered under the Factories Act, where the liability had been treated as contingent and not as an accrued liability capable of deduction. The amount set apart merely to meet that possible future liability was therefore not an ascertained expenditure.

Conclusion: The deduction was not allowable and the question was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: A provision made for a liability that arises only upon a future contingency and is neither definite nor ascertained is not an allowable deduction in computing taxable profits.

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