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PETITIONER: BHARAT EARTH MOVERS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, KARNATAKA

DATE OF JUDGMENT:       09/08/2000

BENCH: N.S.Hegde, R.C.Lahoti, S.P.Bharucha

JUDGMENT:

R.C.  Lahoti, 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

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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.

     In Metal Box Company of India Ltd.  Vs.  Their Workmen

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(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 r eproduced 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  paid; permissible  only  in case of amounts actually  expended  or (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.

     So  is  the  view  taken in Calcutta  Co.   Ltd.   Vs. 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

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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.