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TMI Blog2014 (9) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the assessment year 1998-99 without estimating with reasonable certainty the said leave encashment after following the mercantile system of accounting? 3. We have heard both the learned standing counsel appearing for the Revenue and the learned counsel appearing for the assessee on the above additional substantial question of law. 4. The brief facts are as follows: The respondent/assessee is engaged in the business of manufacture and production of automobile wheels and ancillaries. For the assessment year 1998-99, the assessee filed return of income admitting a total income of Rs. 5,49,09,000/-. The said return was processed under Section 143(1)(a) of the Income Tax Act and an assessment order was passed on 12.3.2004 determining the total income at Rs. 9,21,75,520/-. Aggrieved by the order of the Assessing Officer, the assessee went on appeal before the Commissioner of Income Tax (Appeals) in I.T.A.No.8/2001-02. Since certain issues were not considered by the Assessing Officer, the Commissioner of Income Tax (Appeals) remanded the matter to the Assessing Officer for considering of the same on merits. On remand, the Assessing Officer, after considering the issues, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amounts claimed in assessment year 98-99. As the amounts paid in these years comprise also the payments for that year and provision of assessment year 98-99, the assessee could not provide details as to how much was the amount paid for the year of payment and how much from provisions for assessment year 98-99. 6. The assessee is a company and as per the provision of the Companies Act it should follow mercantile method of accounting. As per section 145 of IT Act, 1961 it should follow the mercantile system on a consistent basis. As in this assessee's case the assessee follows different methods for different purposes an even on leave salary consistent method is not followed, assessee's contention of claim is not taxable due discussions mentioned above. 7. The assessee's reliance of the ratio of Bharat Earth Movers Ltd case is also rebutted as in the assessee's case the amount is not ascertained towards the liability. Even the liability is also not accrued on definitely arisen as the assessee is not bound by any agreement for the difinite payment of the sum and assessee also has not provided any such, if it is bound to pay, in its books, thus clearly indicating th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of earlier accounting year wherein the gratuity figure had been ascertained. It is, thus, clear that no amount of whatsoever nature had been provided relating to leave encashment either in the books or in the return of income in the memo of income adjustment filed along with the return of income. The impugned sum of Rs. 64,66,000/- had been claimed for the first time vide appellant's letter in No.Ref.FA/DC/IT/1 dated 24.7.2001 (addressed to JCIT, Special Range II, Chennai, relevant portion of which reads as under: "with reference to your notice dated 17.7.01, we furnish below the following details. 1. Leave encashment benefit amounting to Rs. 64,66,000/- claimed in the return of income is a statutory liability governed by the Factories Act and a contractual liability under which the assessee company is liable to pay the amount. Reliance is placed for the above view on the decision of the Supreme Court in the case of Bharat Earth Movers Ltd. It is a statutory accrued liability and it should be allowed in computing the total income based on our claim in the return of income as per the Supreme Court decision in the case of Kedarnath Jute Manufacturing Co. Ltd. 8. The above le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant has not been able to ascertain any liability in this regard not only during this year but also in the previous year. Non ascertainment of the liability possibly has forced the appellant to adopt cash method of accounting for this purpose even though it is statutorily required to follow mercantile system of accounting. The observation is reinforced from the fact that as far as the gratuity is concerned the appellant has been able to estimate a provision in this regard though not made again on account of cash system of accounting for this purpose as well. This provision has been estimated not only for the current year but also for the previous accounting year. To sum up, I hold that there is no substance in the claim of the appellant to seek deduction of Rs. 64,66,000/- towards provision of leave encashment benefits to its employees". 7. Accordingly, the Commissioner of Income Tax (Appeals) dismissed the appeal. Against which, the assessee filed an appeal before the Income Tax Appellate Tribunal. The Tribunal by a cryptic order, allowed the appeal just by referring to the decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax. The or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e system of accounting. Hence, they are entitled to avail the benefit of leave encashment deduction. However, the decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax squarely applies to the facts of the present case and hence the Tribunal has rightly followed it. In support of his contention he relied on the decision reported in (2010) 323 ITR 344 (Mad) (Commissioner of Income Tax Vs. Panasonic Home Appliances), wherein, this Court, while considering the issue on the provision for encashment of leave, followed the decision of the Supreme Court reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax and held in favour of the assessee. 11. Heard learned Standing Counsel appearing for the Revenue and the learned counsel appearing for the assessee and perused the materials placed before this Court. 12. Before we go further in this case, we are emboldened to state the way in which the appeal has been disposed of by the Income Tax Appellate Tribunal. We need to bring 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. Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified 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." 14. In the above-said decision, the Supreme Court relied upon the earlier decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen reported in [1969] 073 ITR 53. However, we find that the decision reported in [2000] 245 ITR 428 Bharat Earth Movers v. Commissioner of Income-tax does not apply to the facts of the present case. 15. We find that the assessee filed the return of income attaching the Statutory Audit report dated 29.7.1998, wherein, in paragraph 2(b), it was mentioned that the note No.17 of Schedule XIV regarding accounting of (i) gratuity amounting to Rs. 340.76 lakhs and (ii) leave encashment benefits to the staff (amount not ascertained) clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 esti mated." 17. From a reading of the above-said decision, it is clear that since the assessee in this case is following 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. We find that the Commissioner of Income Tax (Appeals) in this case has discussed the rules governing encashment in paragraph 13 of the order to hold 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 ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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