Leave encashment provision on actuarial basis not to be added back while computing book profit for MAT
Relevant Text is as follows:
(A) Addition of provision for leave encashment for computing ‘book profit’ under Sec.115JB: Rs.15,30,070/-:
Facts:
(i) On a perusal of the assessment order, we find, that the A.O for the purpose of computing the ‘book profit’ under Sec. 115JB (MAT) had added the provision for leave encashment of Rs.15,30,070/- to the ‘net profit’ of the assessee. Refuting the aforesaid action of the A.O, it was the claim of the assessee that as the said provision was not for an unascertained liability, therefore, the same was not liable to be added for the purpose of computing the ‘book profit’ under Sec.115JB of the Act. However, the A.O was not inclined to accept the aforesaid claim of the assessee and rejected the same. It was observed by the A.O that as the liabilities pertaining to leave encashment were not ascertained by the end of the financial year, therefore, the assessee had made a provision for the same. On appeal, the CIT(A) finding no infirmity in the view taken by the A.O upheld the same.
(ii) The ld. Authorized Representative (for short ‘A.R’) for the assessee assailed the addition of the provision for leave encashment for the purpose of computing the ‘book profit’ under Sec. 115JB of the Act. It was claimed by the ld. A.R, that as the aforesaid provision for leave encashment was made in the books on actuarial basis, therefore, the same could not be held to be in the nature of a provision for an unascertained liability. In support of his contention the ld. A.R had relied on the judgment of the Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. National Hydro Electric Power corporation Ltd. (2010) 45 DTR 117 (P&H).
(iii). Per contra, the ld. Departmental Representative (for short ‘D.R’) relied on the orders of the lower authorities. It was the claim of the ld. D.R, that as the provision for leave encashment was in the nature of an unascertained liability, therefore, the lower authorities had rightly concluded that the same was liable to be added for the purpose of computing the ‘book profit’ under Sec. 115JB of the Act.
Decision :
(i). We have heard the authorized representatives for both the parties in context of the aforesaid issue, and also the perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. In our considered view, if a business liability had 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. Our aforesaid view is fortified by the judgment of the Hon’ble Supreme Court in the case of Bharat Earth Movers Vs. CIT (2000) 245 ITR 428 (SC). In the said case, it was observed by the Hon’ble Apex Court that what should be certain is the incurring of the liability and the fact that the same is capable of being estimated with reasonable certainty, although the actual quantification may not be possible. As therein observed, if the aforesaid requirements were satisfied, then the liability could not be held as a contingent liability. Also, it was observed by the Hon’ble Apex Court, that although the liability is in praesenti though it is to be discharged at a future date, it would not make any difference if the future date on which the liability is to be discharged is not certain. In the backdrop of its aforesaid observations, the Hon’ble Supreme Court had concluded that the provision made by an assessee 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 of accumulation as applicable on the relevant date would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the said liability. Accordingly, the Hon’ble Apex Court reversing the view taken by the High Court, had observed, that the provision for meeting the liability for encashment of earned leave by the employees is not a contingent liability and is admissible as a deduction. On the basis of our aforesaid observations, we are of the considered view, that as the provision for leave encashment had been made by the assessee on actuarial basis, therefore, the same being in the nature of an ascertained liability could not have been added by the A.O for the purpose of determining the ‘book profit’ under Sec. 115JB of the Act. As such, the Ground of appeal No. 5 raised by the assessee is allowed.
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Tags : Judgement, High Court, Income Tax
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