ITAT upholds disallowance of leave encashment provision & interest assessment upfront

The ITAT upheld the disallowance of the provision for leave encashment and the assessment of interest received upfront on bills purchased/discounted, ruling against the assessee on both grounds. The disallowance of the provision for leave encashment was supported under section 43B(f) based on a judgment of the Kerala HC. Regarding the assessment of interest received upfront, the ITAT ruled that income accrues at the point of bill discounting, dismissing the appeal.

---

---

Issues:
1. Disallowance of provision for leave encashment
2. Assessment of interest received upfront on bills purchased/discounted

Issue 1: Disallowance of provision for leave encashment
The appeal concerns the disallowance of a provision for leave encashment amounting to Rs. 24.37 crores by the Assessing Officer. The Assessing Officer deemed this provision as vague and not a liability capable of accurate determination. The CIT(A) upheld this disallowance, leading to the appeal. The ITAT referred to a judgment of the Kerala High Court in a similar case involving leave encashment provisions, supporting the disallowance under section 43B(f). Consequently, the ITAT decided against the assessee, upholding the disallowance.

Issue 2: Assessment of interest received upfront on bills purchased/discounted
The second ground of appeal pertains to the assessment of interest received upfront amounting to Rs. 27.64 crores. The assessee, engaged in banking business, argued that the income from bills and LCs with fixed maturity periods should be recognized based on a consistent accounting method. The assessee contended that income should be apportioned over time, with the current year's portion recognized as income and the remainder deferred. The CIT(A) disagreed, stating that income accrues at the point of bill discounting. The ITAT analyzed the method of accounting employed by the assessee and the nature of the transactions. Ultimately, the ITAT supported the lower authorities, ruling that the income from bill discounting is accrued at the point of transaction completion, dismissing the appeal.

In conclusion, the ITAT upheld the disallowance of the provision for leave encashment and the assessment of interest received upfront on bills purchased/discounted, ruling against the assessee on both grounds.

---