2014 (7) TMI 122 - AT - Income Tax

Tribunal rules provision for leave encashment not a contingent liability, assessee's appeal allowed.

The Tribunal ruled in favor of the assessee, holding that the provision for leave encashment is not a contingent liability based on the judgment of the ... Treatment of provision for leave encashment for book profit computed under section 115JB - contingent liability - allowability of provision for leave encashment as deduction when made - precedential effect of Apex Court decision in Bharat Earth Movers Ltd.Provision for leave encashment - contingent liability - computation of book profit under section 115JB - Bharat Earth Movers Ltd. precedent - Addition of Rs. 2,74,000 made by the assessing officer by treating provision for leave encashment as a contingent liability was not sustainable. - HELD THAT: - The Tribunal examined whether the provision for leave encashment constitutes a contingent liability requiring add-back while computing book profit under section 115JB. Relying on the Apex Court's decision in Bharat Earth Movers Ltd., which held that liability under a leave encashment scheme - proportionate to entitlement earned and subject to applicable ceilings - is not a contingent liability and that provision made therefor is allowable as a deduction in the accounting year in which the provision is made, the Tribunal held that the provision cannot be treated as contingent. The Tribunal noted and followed the binding precedent of the Apex Court, and therefore concluded that the assessing officer's addition on the ground of contingency was not tenable. Consequently, the addition of Rs. 2,74,000 was deleted following the said precedent. [Paras 5, 6]Tribunal allowed the appeal and deleted the addition of Rs. 2,74,000 made towards provision for leave encashment.Final Conclusion: Appeal allowed; the addition made by the assessing officer treating the provision for leave encashment as a contingent liability is deleted in accordance with the Apex Court's decision in Bharat Earth Movers Ltd. Issues: Disallowance of provision for leave encashment.Analysis:The appeal pertains to the disallowance of Rs. 2,74,000 towards provision for leave encashment for the assessment year 2005-06. The representative for the assessee argued that the provision for leave encashment should not be considered a contingent liability, citing the judgment in the case of Bharat Earth Movers Ltd vs Commissioner of Income-tax. It was contended that once the income was computed under section 115JB and certified by the auditor, the assessing officer cannot go beyond the certified accounts. On the other hand, the Departmental Representative argued that the provision for leave encashment is a contingent liability and should be added to the profit computed under section 115JB. The contention was that the liability to pay leave encashment arises only when employees exercise their options.The Tribunal analyzed the submissions and referred to the judgment in the case of Bharat Earth Movers Ltd. The Tribunal observed that the Apex Court had found that the provision for leave encashment is not a contingent liability. The Court held that the liability incurred by the company under the leave encashment scheme, proportionate with entitlement earned by employees, is entitled to deduction from gross receipts for the accounting year in which the provision is made. Therefore, the provision for leave encashment cannot be considered a contingent liability. Consequently, the Tribunal set aside the orders of the lower authorities and deleted the addition made by the assessing officer. The appeal of the assessee was allowed, and the addition of Rs. 2,74,000 was removed.In conclusion, the Tribunal ruled in favor of the assessee, holding that the provision for leave encashment is not a contingent liability based on the judgment of the Apex Court. The decision emphasized that the provision made for leave encashment should be allowed as claimed, and there was no justification for the addition made by the assessing officer.