TMI Blog2014 (9) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... mercantile system of accounting from the accounting year 1998-99, they should have determined the leave encashment amount on the basis of accepted principles of commercial practice and accountancy - Even though they may not be in a position to give the accurate details, but that does not allow the assessee to claim a figure in an arbitrary manner without there being any supportive material - in view of the vagueness in the nature of the leave encashment benefits as claimed by the assessee, the assessee is not entitled to claim deduction on the leave encashment, which was rightly rejected by the AO as well as the CIT(A) - there could be an estimation with reasonable certainty though no actual quantification is required - there is no attempt on the part of the assessee to satisfy the requirements except placing reliance on the decision - for the relevant AY, the assessee has been inconsistent that for the benefit of leave encashment deduction, they are following cash system of accounting and for the rest, they are following mercantile system of accounting – thus, the Tribunal was not justified in passing a cryptic order by just following the decision which is not applicable to the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year, the assessee claimed a sum of ₹ 64,66,000/- as deduction towards leave encashment benefits to the staff. According to the assessee, upto the year 1997-98, they were following the cash system of accounting and hence, they are entitled to the benefit of leave encashment deduction. By order dated 23.2.2002, the Assessing Officer rejected the claim of the assessee holding as follows: 4. The whole issue was examined and the following facts are brought to light. The assessee company claims that it followed cash system of accounting towards leave salary payments on paid basis till a.Y97-98 and from there on it follows accrual method of accounting on a consistent basis. This is not borne out from the facts brought in the assessee's return and balance sheet. The assessee company in its schedule XIV in its notes on accounts in para 17 mentions that liability towards leave encashment benefits is based on acturial valuation not provided for and will be on cash basis. It also mentions that the actual amount towards this is not ascertained. Even in the Income Tax adjustment memo, the assessee does not mentioned the exact liability towards such payment and it is sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the order of the Assessing Officer, the assessee, again filed an appeal before the Commissioner of Income Tax (Appeals), who did not find favour with the plea of the assessee and denied the benefit. The Commissioner of Income Tax (Appeals) guided by certain facts, as though presented by the assessee before the Original Authority, which clearly showed that the assessee had taken a very specific stand that the leave encashment benefit was not ascertained and therefore it was not quantified even on a reasonable estimate. The relevant portion of the facts submitted by the assessee and recorded by the first Appellate Authority, is as follows: 6. It is seen from the notes forming part of memo of adjustment filed along with the return of income as has been extracted above in para 2, that the appellant had made a claim of liability towards leave encashment only by way of that note. It had, however, not estimated any amount for the said liability. Besides, no amount either by way of provision or other wise had been either debited to the Profit and Loss Account or claimed in the memo of income filed along with the return of income. Even the Statutory Audit report dated 29.7.1998 atta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of income as per the Supreme Court decision in the case of Kedarnath Jute Manufacturing Co. Ltd. 8. The above letter had been sent only after original assessment order was passed on 12.3.2001. The appellant claimed in the letter that the amount of ₹ 64,66,000/- towards leave encashment benefit had been made in the return of income which is actually not correct in view of my discussions earlier. However, the issue to be decided is whether any liability had arisen during the year under consideration towards leave encashment and if so whether it was capable of being estimated with reasonable certainty. 6. Before the Commissioner of Income Tax (Appeals), the assessee placed reliance on the decision of the Supreme Court reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax and contended that subsequent to the assessment order they had given details of the liability that arise out of leave encashment benefits and since they were following mercantile system of accounting, they were entitled to the said allowance. The first Appellate Authority, however, distinguished the decision of the Supreme Court reported in [2000] 245 ITR 428 Bharat Earth Mov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the appeal just by referring to the decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax. The order of the Tribunal is extracted as such for better clarity: This appeal by the assessee is against the order of CIT(A)-IV, Chennai dated 25.03.2003. 2. The only ground in this appeal is that the ld CIT(A) erred in confirming the disallowance of leave encashment benefit to the tune of ₹ 64.66 lakhs. 3. After hearing both the parties and perusal of material placed on record, we find that this issue is covered in favour of the assessee by the judgement of Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT 245 ITR 428 wherein it was held as follows: 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 conting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the attention of the Tribunal the following observation of the Supreme Court in the decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax: Before parting we would like to observe that when this appeal came up for hearing on March 24, 1999, we felt some difficulty in proceeding to answer the question arising for decision because the orders of the autho- rities 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 com- plied 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 July 20, 2000. The only communication received by this court from the Tribunal was a letter dated June 20, 2000, asking for another six months time to submit the supplementary statement of case which prayer being unreasonable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e No.17 of Schedule XIV regarding accounting of (i) gratuity amounting to ₹ 340.76 lakhs and (ii) leave encashment benefits to the staff (amount not ascertained) clearly mentioned that the same was on cash basis instead of accrual basis. Hence, it is clearly established that the assessee was able to quantify the gratuity amount payable at 340.76 lakhs as at 31.3.1998 and 302.80 lakhs as on 31.3.1997. However, leave encashment benefits was stated to be not ascertained. It is also to be noted that for the previous assessment year they have followed the cash system of accounting and since they have switched over to mercantile system of accounting from the accounting year 1998-99, they should have estimated the encashment benefits with reasonable certainty based on the relevant data available, which they failed to do at the first instance. Further, the assessee, in order to overcome this difficulty, pursuant to the decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax, which was rendered on 9.8.2000, vide letter dated 24.7.2001, which has already been referred to supra, determined the leave encashment benefit at ₹ 64,66,000/- stating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the rules does not lead to uncertainty on the quantum of leave encashment. 18. In view of the vagueness in the nature of the leave encashment benefits as claimed by the assessee, we hold that the assessee is not entitled to claim deduction on the leave encashment, which was rightly rejected by the Assessing Officer as well as the Commissioner of Income Tax (Appeals). The decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax and the law settled therein will not enure to the benefit of the assessee herein, as we find that there could be an estimation with reasonable certainty though no actual quantification is required. In this case, there is no attempt on the part of the assessee to satisfy the requirements except placing reliance on the said decision. It is to be noted that for the relevant assessment year, the assessee has been inconsistent in his plea that for the benefit of leave encashment deduction, they are following cash system of accounting and for the rest, they are following mercantile system of accounting. We therefore accept the stand taken by the Revenue. We also deprecate the Tribunal for passing a non-speaking order witho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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