Bharat
Earth Movers Vs. Commissioner of Income Tax, Karnataka [2000] INSC 423 (9 August 2000)
R.C.Lahoti,N.S.Hegde
R.C. Lahoti,
J.
L.I.T.J
Relevant to the assessment year 1978-1979 the following question of law was
stated, at the instance of the Revenue, by the Income Tax Appellate Tribunal
for the opinion of the High Court of Karnataka under Section 256 (1) of the
Income-tax Act, 1961:- 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 appellant company has two sets of
employees. One set of employees is covered by Employees State Insurance Scheme
and is generally known as staff. The other set of employees not so covered is
known generally as officers.
The
company has floated beneficial schemes for its employees for encashment of
leave. The officers are entitled to earned leave calculated at the rate of 2.5
days per month, i.e., 30 days per year. The staff (other than officers) is
entitled to vacation leave calculated at the rate of 1.5 days per month, i.e.,
18 days in a year. The earned leave can be accumulated upto 240 days maximum
while the vacation leave can be accumulated upto 126 days maximum. The earned
leave/vacation leave can be encashed subject to the ceiling on accumulation.
The officers may at their option avail the accumulated leave or in lieu of
availing the leave apply for encashment whereupon they would be paid salary for
the period of leave earned but not availed. So does the scheme extend facility
of encashment to the staff in respect of vacation leave. Any leave earned
beyond the said ceiling limit of 240/126 days cannot be accumulated and goes a
waste. It can neither be availed nor encashed. The appellant company has
created a fund by making a provision for meeting its libility arising on
account of the accumulated earned/vacation leave. In the assessment year
1978-1979 an amount of Rs.62,25,483/- was set apart in a separate account as
provision for encashment of accrued leave. It was claimed as a deduction. In
the opinion of the Tribunal the assessee was entitled to such deduction.
The
High Court has formed a different opinion and held that the provision for
accrued leave salary was a contingent liability and therefore was not a
permissible deduction.
The
reasoning applied by the High Court is that the liability will arise only if an
employee may not go on leave and instead apply for encashment. If the employee
avails the leave as per his entitlement, then he would be paid salary for the
period of leave and liability for encashment would not arise. The other event
on the occurrence of which the employee may stake his claim is termination or
retirement which again is an uncertainty. Accordingly the High Court has
answered the question in the negative, that is, in favour of the Revenue and
against the assessee. The assessee has come up in appeal.
Shri
S.E. Dastur, the learned senior advocate for the appellant company has
submitted that the liability is a certainty. Provision is made for meeting the
liability to the extent of entitlement of the officers and staff to accumulate
earned/vacation leave subject to the ceiling limit of 240/126 days as may be
applicable. Having accumulated leave in a particular year, in the succeeding
year the employee may either avail the leave or apply for its encashment. If he
avails the leave then additional provision for encashment is not made in the
reserve account.
However,
if he does not avail the leave and instead chooses to encash his entitlement,
he becomes entitled to an additional number of days as accumulated leave. For
example, having rendered service for 365 days in the year A an officer becomes
entitled to avail leave for 30 days in the succeeding year B, provision in the
leave reserve account is made in the year A for payment of an amount equivalent
to 30 days salary so as to meet the claim for encashment. If he chooses to encash
the leave and renders service for full 365 days in the year B, then the amount
transferred to reserve is paid to him and in view of his having earned again
the next entitlement for 30 days leave, provision is made therefor by
transferring the appropriate amount in the reserve account. If he avails the
leave then he is paid the leave salary. The leave salary is paid from the
reserve. Whether the amount is paid as salary by drawing upon from the current
years P&L Account or from the reserve, it would not make any difference in
practice as there would be no double payment and hence no double claim for
deduction. In either case the liability is certain though the period in which
the liability would be incurred is not certain inasmuch as the leave encashment
can be sought for by the employee either during the years of service or at the
end of the service. Subject to the ceiling every employee would either avail
the leave or seek encashment and therefore the liability is a certainty; it
cannot be called a contingent liability. We find substance in the submission of
the learned senior counsel for the appellant.
The
law is settled: if a business liability has definitely arisen in the accounting
year, the deduction should be allowed although the liability may have to be
quantified and discharged at a future date. What should be certain is the
incurring of the liability. It should also be capable of being estimated with
reasonable certainty though the actual quantification may not be possible. If
these requirements are satisfied the liability is not a contingent one. The
liability is in praesenti though it will be discharged at a future date. It
does not make any difference if the future date on which the liability shall
have to be discharged is not certain.
(1969)
73 ITR 53 the appellant company estimated its liability under two gratuity
schemes framed by the company and the amount of liability was deducted from the
gross receipts in the P&L account. The company had worked out on an
actuarial valuation its estimated liability and made provision for such
liability not all at once but spread over a number of years. The practice
followed by the company was that every year the company worked out the
additional liability incurred by it on the employees putting in every
additional year of service. The gratuity was payable on the termination of an
employees service either due to retirement, death or termination of service -
the exact time of occurrence of the latter two events being not determinable
with exactitude before hand. A few principles were laid down by this court, the
relevant of which for our purpose are extracted and reproduced as under :- (i)
For an assessee maintaining his accounts on mercantile system, a liability
already accrued, though to be discharged at a future date, would be a proper
deduction while working out the profits and gains of his business, regard being
had to the accepted principles of commercial practice and accountancy. It is
not as if such deduction is permissible only in case of amounts actually
expended or paid; (ii) Just as receipts, though not actual receipts but accrued
due are brought in for income-tax assessment, so also liabilities accrued due
would be taken into account while working out the profits and gains of the
business; (iii) A condition subsequent, the fulfillment of which may result in
the reduction or even extinction of the liability, would not have the effect of
converting that liability into a contingent liability; (iv) A trader computing
his taxable profits for a particular year may properly deduct not only the
payments actually made to his employees but also the present value of any
payments in respect of their services in that year to be made in a subsequent
year if it can be satisfactorily estimated.
Commissioner
of Income-Tax, West Bengal (1959) 37 ITR 1 wherein this court has held that the
liability on the assessee having been imported, the liability would be an
accrued liability and would not convert into a conditional one merely because
the liability was to be discharged at a future date. There may be some
difficulty in the estimation thereof but that would not convert the accrued
liability into a conditional one; it was always open to the tax authorities
concerned to arrive at a proper estimate of the liability having regard to all
the circumstances of the case.
Applying
the above-said settled principles to the facts of the case at hand we are
satisfied that 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 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.
Before
parting we would like to observe that when this appeal came up for hearing on
24.3.1999 we felt some difficulty in proceeding to answer the question arising
for decision because the orders of the authorities below and of the Tribunal
did not indicate how the leave account was operated by the appellants and leave
salary provision was made. To appreciate the facts correctly and in that light
to settle the law we had directed the Income Tax Appellate Tribunal to frame a
supplementary statement of case based on books of account and other relevant
contemporaneous records of the appellant which direction was to be complied
with within a period of six months. The hearing was adjourned sine die. After a
lapse of sixteen months the matter was listed before the court on 20.7.2000.
The only communication received by this court from the Tribunal was a letter
dated 20th June, 2000 asking for another six months time
to submit the supplementary statement of case which prayer being unreasonable,
was declined. Under Section 258 of the Income Tax Act, 1961, the High Court or
the Supreme Court have been empowered to call for supplementary statement of
case when they find the one already before it not satisfactory. Article 144 of
the Constitution obliges all authorities, civil and judicial, in the territory of India to act in aid of Supreme Court. Failure to comply with the
directions of this court by the Tribunal has to be deplored. We expect the
Tribunal to be more responsive and more sensitive to the directions of this
Court. We leave this aspect in this case by making only this observation.
We
have culled out the necessary facts stated in the earlier part of this judgment
from the statement of facts filed by the assessee appellant before the
Income-Tax Appellate Tribunal. The correctness of the requisite factual
information relating to the leave encashment scheme, as stated in the said
statement, does not appear to have been disputed before the Tribunal and was
not disputed before this court too.
. . ..
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