TaxTMI 
TaxTMI 
2026 (8) TMI 1721
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....owards sick leave. During the assessment, the AO called upon the assessee to explain the nature of this provision to which the assessee replied as under: "As required, we wish to submit that the company has a policy for accruing towards sick leave as an employee benefit. The sick leave balance is not eligible for encashment but the employees are allowed to carry forward and utilize the balance in the subsequent period. Accordingly the company is not liable for making any payment in respect of sick leave. The company records a provision for sick leave as an expense in the books of account based on actuarial valuation report issued by an Actuary. During the subject AY, the company has recorded a sum of Rs. 1,86,84,414/- towards provision for sick leave. In respect of the above we wish to submit that the above sick leave is not covered under the provision of section 43B(f) of the Act, as no sum is payable to employees in lieu of any leave at the credit to the employees. Section 43B(f) of the Act inter alia provides for disallowance of 'any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee' In the ....
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....lant contends that the ratio of this case supports its claim, as the methodology for provisioning was based on actuarial inputs, was applied consistently, and did not result in tax avoidance. (iii). The Appellant has further referred to paragraph 12 of AS-15, which provides that short-term accumulating compensated absences (such as sick leave) that are non-vesting but can be carried forward should be measured as the additional amount the entity expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date. Based on this guidance, the Appellant submits that the provision is based on a recognised accounting standard and reflects an accrued liability, albeit estimated. (iv). While the accounting treatment under AS-15 may warrant recognition of such provisions for the purposes of financial reporting, the allowability of an expenditure under the Income-tax Act must be tested on the touchstone of statutory provisions, particularly Sections 37(1) and 43B. 5. 1. Statutory Framework - Section 43B(f) (i). It is important to note that Section 43B(f), inserted by the Finance Act, 2001 with effect from AY 2002-03, specifi....
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.... by the assessing officer, diminishes its probative value. (iii). The Appellant has also relied on a series of judicial precedents including, inter alia, CIT v. Bilahari Investments Pvt. Ltd., Challapalli Sugars Ltd. v. CIT, CIT v. U.P. State Industrial Development Corporation (UPSIDC), and ACIT v. Mahindra Holidays & Resorts India Ltd. to bolster its contention that a consistently followed accounting methodology, including provisions based on actuarial principles or reasonable estimates, must be respected for tax purposes unless specifically barred. While the judicial principles laid down in these decisions-particularly with respect to the legitimacy of estimated liabilities, accrual-based accounting, and recognition of obligations under mercantile system-are noted and carry persuasive value in appropriate contexts, their application is fact-dependent and must be tested against the substantive nature of the liability claimed. (iv). In the cited cases, the provisions in question generally related to contractually enforceable liabilities, actual financial obligations, or commercially necessary accruals that were ultimately expected to result in outflows of economic....
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....Ld. AR before us submitted that, as per the company's policy, employees are entitled to sick leave, and any unutilized sick leave can be carried forward and used in subsequent years. When an employee avail such accumulated sick leave, the employee continues to receive salary for the leave period, which otherwise would have resulted in loss of pay. Therefore, the company has an obligation towards its employees' accumulated sick leave. 7.1 The Ld. AR submitted that the provision of Rs. 1,86,84,414/- was created in accordance with AS-15 and was determined on a scientific basis through an actuarial valuation. Referring to paragraphs 12 to 14 of AS-15, it was submitted that even non-vesting compensated absences are required to be recognized as an obligation where the unused entitlement can be carried forward and utilized in future years. Thus, merely because employees cannot encash the accumulated sick leave does not mean no liability exists. 7.2 The Ld. AR further submitted that the assessee is required to pay salary to employees when they avail the accumulated sick leave. Therefore, the provision represents an accrued business expenditure and is allowable as a deduction. Rel....
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....in as to how many employees would actually fall sick and utilize such accumulated leave in future. He was therefore of the view that the liability was not ascertainable and that there was no justification for debiting the provision to the profit and loss account. 9.2 The learned CIT(A) confirmed the disallowance. He held that if the sick leave was non-encashable, there was no liability to make payment and consequently nothing accrued or ascertained liability allowable u/s 37(1) of the Act. He further observed that, alternatively, if the leave was encashable, the deduction would be governed by section 43B(f) of the Act and would be allowable only on actual payment. The learned CIT(A) also considered the liability to be dependent upon uncertain future events such as whether an employee would fall sick and whether the accumulated leave would actually be utilized. 9.3 We have carefully considered the reasoning of the lower authorities. In our view, the matter has to be examined by looking at the real nature of the liability and not merely from the fact that the accumulated sick leave is not capable of being encashed. There is no dispute that the employees earn sick leave while re....
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....luation. The very purpose of an actuarial valuation is to estimate the probable financial liability by taking into consideration relevant factors such as the accumulated leave entitlement, utilization pattern, employee attrition and other appropriate assumptions. Therefore, the AO's observation that there can be no scientific method to determine how many employees would fall sick cannot, by itself, be a sufficient ground to reject an actuarially determined provision. 9.8 The learned CIT(A) has observed that the actuarial valuation report was not produced before the AO and was furnished during the appellate proceedings. In our view, if there was any doubt regarding the basis, assumptions or correctness of the actuarial valuation, the proper course was to examine the report or obtain the comments of the AO. Merely because the actuarial report was produced at the appellate stage would not, by itself, establish that the underlying liability was contingent or inadmissible. 9.9 We also find that section 43B(f) of the Act has no application to the facts as submitted by the assessee. The provision applies to any sum payable by an employer in lieu of any leave at the credit of an ....
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.... 12.8. We note that such employee benefit obligations are required to be recognised in accordance with Accounting Standard-15 (Employee Benefits) issued by the Institute of Chartered Accountants of India, which mandates that liabilities towards accumulated leave and similar benefits be determined on actuarial basis. Where such liability is computed on scientific principles and reflects a present obligation arising from past service, the same assumes the character of an ascertained liability. 12.9. The contention of the Ld. DR that no expenditure would be incurred if the employees do not avail the leave is, in our view, misplaced. The obligation of the employer arises the moment the employees earn such leave in accordance with the service conditions, and the liability thus accrues with the rendering of services. Insofar as Leave Travel Concession/Home Travel Concession is concerned, the provision represents the estimated liability towards actual reimbursement of travel costs such as rail or air fare to which the employees become entitled upon availing such leave. The same is not in the nature of leave encashment so as to fall within the ambit of section 43B(f) of the Act. ....
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....ote No. 9 to the revised return of income on page 7 of the Paper Book - I. The AO disallowed these provisions on the basis that the same cannot be allowed under section 37(1) of the Act and the provisions of section 43B of the Act are applicable. 31. Out of the above, the CIT(A) allowed items mentioned at Sr. Nos. 4, 5 & 7 aggregating Rs. 3.90 crore and upheld the disallowance of items mentioned at Sr. Nos. 2, 3 & 6 aggregating Rs. 41.50 crore. With respect to item mentioned at Sr. No. 1, a separate ground of appeal viz. ground of appeal No. 3 has been raised in the captioned appeal, whereas ground of appeal No. 2.2 has been raised with respect to items mentioned at Sr. Nos. 2, 3 & 6 aggregating Rs. 41.50 crore. 32. Provision for Leave Travel and Home Travel Concession represents provision towards actual payments to be made by the assessee to its employees for the travel costs incurred by them such as rail fare, air fare, etc. on availment of the leave the employees are entitled to. It is not towards any encashment of leave at the credit of the employee so as to fall within the scope of section 43B(f) of the Act. Further, provisionfor casual leave and sick leave r....