2000 (8) TMI 4 - SC - Income Tax

Supreme Court allows deduction for provision of accrued leave encashment

Bharat Earth Movers Versus Commissioner of Income-Tax

The Supreme Court ruled in favor of the appellant-company regarding the deductibility of the provision for encashment of accrued leave for the assessment ... Provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation - held that provision for meeting the liability for encashment of earned leave by the employee is an admissible deduction Issues:1. Deductibility of provision for encashment of accrued leave for assessment year 1978-79.Analysis:The Supreme Court addressed the issue of whether the provision for meeting the liability for encashment of earned leave by the employee is an admissible deduction for the appellant-company for the assessment year 1978-79. The company had two sets of employees, officers, and staff, with different entitlements for earned and vacation leave. The company created a fund by making a provision for meeting its liability arising from the accumulated earned/vacation leave. The High Court had held that the provision for accrued leave salary was a contingent liability and therefore not a permissible deduction. However, the Supreme Court disagreed with this view. The appellant argued that the liability is certain as it is made to the extent of entitlement of the employees to accumulate earned/vacation leave, subject to the ceiling limit. The Court held that if a business liability has definitely arisen in the accounting year and is capable of being estimated with reasonable certainty, the deduction should be allowed, even if the liability will be discharged at a future date.The Court referred to the Metal Box Company case, where it was established that for an assessee maintaining accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, should be a proper deduction. The liability should be certain and capable of being estimated with reasonable certainty. The Court also cited the Calcutta Co. Ltd. case, emphasizing that the liability being imported would be an accrued liability and not a conditional one merely because it is to be discharged in the future. Applying these principles to the case at hand, the Court concluded that the provision made by the appellant-company for meeting the liability under the leave encashment scheme is entitled to deduction out of the gross receipts for the accounting year during which the provision is made, as the liability is not contingent but certain.The Court allowed the appeal, set aside the judgment under appeal, and answered the question in favor of the assessee and against the Revenue. Additionally, the Court expressed dissatisfaction with the failure of the Tribunal to comply with directions for a supplementary statement of case and emphasized the importance of authorities acting in aid of the Supreme Court. The Court observed that the necessary facts related to the leave encashment scheme were not disputed before the Tribunal or the Court, as stated in the statement of facts filed by the appellant before the Income-tax Appellate Tribunal.