Rajasthan H.C : Provision made for leave salary is allowable under section 37(1)

High Court Of Rajasthan

CIT vs. Raj. State Bridge and Contruction Corporation Ltd.

Assessment Year : 2000-01

Section : 37(1)

Arun Mishra And Narendra Kumar Jain, JJ.

IT Appeal No. 267 Of 2011

February 6, 2012

JUDGMENT

Narendra Kumar Jain, J. – Heard learned counsel for the appellant.

2. The Revenue has preferred this appeal under section 260A of the Income-tax Act, 1961, against the order dated September 19, 2008, passed by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, whereby the appeal preferred on behalf of the Revenue has been dismissed.

3. Briefly stated the facts of the case are that the assessee filed return of income for the assessment year 2000-01 on March 26, 2001, showing nil income. The order under section 143(3) of the Income-tax Act was passed on February 17, 2003. Later on, the Assessing Officer issued a notice under section 154 of the Act on November 24, 2003, as to why Rs. 15 lakhs claimed on account of provision made for leave salary should not be disallowed. The explanation was furnished. However, it was not accepted. Consequently, the Assessing Officer, vide its order dated March 6, 2007, disallowed the claim of Rs. 15 lakhs and added it back to the income of the assessee. Being aggrieved with the order of the Assessing Officer dated March 6, 2007, an appeal was preferred which was allowed by the Commissioner of Income-tax (Appeals)-II, Jaipur, vide order dated May 2, 2008. The Revenue further preferred an appeal before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, which was dismissed, vide order dated September 19, 2008. The said order is under challenge in this appeal.

4. The submission of learned counsel for the appellant is that the learned Income-tax Appellate Tribunal has wrongly relied upon the judgment of the hon’ble Supreme Court in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61. He has submitted that the said judgment was referred and considered by the Assessing Officer also but the same was not found to be applicable in the facts and circumstances of the case. Therefore, the orders of the appellate authority as well as the Income-tax Appellate Tribunal be set aside and the order of the Assessing Officer be restored.

5. We have considered the submissions of the learned counsel for the appellant and examined the impugned orders.

6. The only issue involved in the appeal is whether the disallowance of Rs.15 lakhs by the Assessing Officer in respect of the provision for leave salary was justified or not. We have examined the facts of the present case and also the ratio of the apex court in Bharat Earth Movers’ case (supra). The appellate authority as well as the Appellate Tribunal considered the facts of the present case and came to a conclusion that the judgment of the apex court is fully applicable and, consequently, set aside the order of the Assessing Officer. The relevant portion of the judgment of the Appellate Tribunal is as under :

“We have gone through the orders of the lower authorities as well as the decisions relied upon. We find that the assessment under section 143(3) was completed. Thereafter, the Assessing Officer found that the assessee had claimed Rs. 15 lakhs on account of provision for leave encashment, which could not be allowed while passing assessment order under section 143(3) of the Act. He, therefore, issued notice under section 154 but he was not satisfied with the explanation of the assessee that the provision of Rs. 15 lakhs was in respect of any ascertained liability. The Assessing Officer noted further that no details of calculation of the said amount was given. He accordingly made the disallowance of Rs. 15 lakhs. The learned Commissioner of Income-tax (Appeals), however, following the decision of the hon’ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) held that the amount set apart to meet the liability on account of leave encashment of employees was not a contingent liability and the amount is deductible. He observed that on the issue the amendment under section 43B has been made effective from April 1, 2002, as per which deduction is linked with payment. The learned Commissioner of Income-tax (Appeals) held further that since the issue under consideration was highly debatable and there were more than two views on the issue, the Assessing Officer was not justified in invoking the provisions of section 154 of the Act for making disallowance of Rs. 15 lakhs. After having gone through the above decision of the hon’ble Supreme Court on the issue in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC), we find that the hon’ble court in that case has been pleased to hold that the provision made by the assessee-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts of the accounting year during which the provision is made for the liability. The liability was not a contingent liability. Since the issue is fully covered by the decision of the hon’ble Supreme Court, the learned Commissioner of Income-tax (Appeals) has rightly deleted the disallowance of Rs. 15 lakhs made by the Assessing Officer treating the provisions for leave encashment was not an ascertained liability. The first appellate order is thus upheld. The ground is thus rejected.”

7. The hon’ble apex court in Bharat Earth Movers’ case (supra) considered the question “Whether, on the facts and in the circumstances of the case, the provision for meeting the liability for encashment of earned leave by the employee is an admissible deduction ?” The hon’ble apex court, after considering the facts and circumstances of the case and the relevant law, held as under (page 432) :

“Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary.

The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.”

8. After considering all the facts and circumstances of the case, we are of the view that the matter is fully covered by the judgment of the hon’ble apex court, referred to above. The orders passed by the appellate authority as well as the Income-tax Appellate Tribunal are legal and justified and the same do not call for any interference.

9. No substantial question of law is involved in this appeal and the same is, accordingly, dismissed.

[Citation : 346 ITR 53]

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