Case Law Details
Brief of the Case
ITAT Kolkata held In the case of ICI India Ltd. vs. DCIT that it is clear that liability towards leave encashment is a definite liability which has accrued and arisen during the year. However, payment of the same does not fall during the relevant previous year but under the mercantile system of accounting this expenditure requires recognition in the books of accounts. Also in case of VRS expenses, we find that during the year 735 employees had opted for VRS as per the scheme of the assessee. Accordingly the expense to be made towards VRS to those staff has become definite expense. Although the payment of VRS was due in future date. Hence no disallowance is justifiable.
Facts of the Case
ITA No. 850/Kol/2007 (Assessee’s apepal)
Disallowance of provision of leave encashment
During the year assessee has debited its profit and loss account by an amount of Rs.4.90 crores towards provision for leave salary. On question raised by Assessing Officer on the allowabilty of said provision for leave salary as deduction, the assessee submitted that liability on account of leave salary has been worked out on the basis of leave lying to the credit of each member of the staff as on 31st March, 1996. Assessee further submitted that this amount has not fallen due for payment as on 31st March, 1996 but the liability for the same, has been crystallized. So under mercantile system of accounting, it should be considered as accrued liability and should be allowed as deductable expenditure. However, AO disregarded the claim of assessee and treated the same as contingent liability as it has not accrued during the previous year. It merely represents the provision of liability, therefore the same was disallowed.
Disallowance of liability on account of Voluntary Retirement Scheme (VRS)
During the year assessee has debited a sum of Rs.13.20 crores on account of provisions of VRS. During the year 735 employees opted for VRS. As a result of this the liability accrued to the assessee for an amount of Rs. 13.20 crores during the year. However, the pattern for the payment of retirement benefit was fixed in three installments spreading over a period of three years- April 2000, April 2001, April 2002. So it is clear that the liability has crystallized to the assessee in the assessment year 1996-97 but not falling due for payment in the year under consideration.
AO found that as per the severance agreement the liability for the payment of VRS crystallized in the assessment year 1996-97 but the payment has not fallen due in the relevant year. The AO further found that during the relevant year the actual payment for VRS made of Rs.6,90,77,772/-. Therefore, AO held that payment of VRS which has actually been paid will be allowed as an expense and the balance of Rs.6,29,22,228/- will not be allowed in the year under consideration. Accordingly the AO has disallowed the same and added to the total income of the assessee.
ITA No. 1021/Kol/2007 (Revenue’s appeal)
During the FY 1995-96 which is under consideration the assessee acquired asset of Rs.31,35,33,795/- and sold its undertaking for an amount of Rs.30,28,05,318/- which was deducted from WDV of the relevant block. The WDV coming at the year end i.e 31.03.1996 at Rs.9,62,80,786/- only. The depreciation allowable comes to Rs.1,29,37,156/- on this WDV. However, assessee has claimed depreciation of Rs.15,06,49,470/-, therefore, AO held that the excess depreciation has been claimed by assessee for an amount of Rs.13,77,12,314/-( 15,06,49,470- 1,29,37,156) and he disallowed, added to the total income of the assessee.
Contention of the Assessee
ITA No. 850/Kol/2007 (Assessee’s apepal)
Disallowance of provision of leave encashment
The ld counsel of the assessee submitted that the liability for the leave encashment has been accrued and crystallized. Therefore, it is not a provision at all for leave encashment and submitted that the accrual of expenditure under mercantile system of accounting is an allowable expenditure.
Disallowance of liability on account of Voluntary Retirement Scheme (VRS)
The ld counsel of the assessee submitted that as per the scheme of the company for VRS, the employees of the company have the option either to take the lump sum consideration in one go or in terms of various installment of the various amount. Once the agreement for severance has been signed by the employee the liability for the VRS amount becomes crystallized in the year of signing the agreement. Hence the timing of payment for the VRS amount is not relevant. So the liability for the same has to be recognized for the same and assessee prayed for the allowabilty of the VRS amount.
He relied on the followings judgments – CIT v. Alim Bag Salim Bhai 163 ITR 767 (MP), Kalekhan Mohammed Hanif v. CIT 163 ITR 769 (MP), Kedarnath Jute Mfg. Co. Ltd. v. CIT 82 ITR 363 (SC), Metal Box Co. of India Ltd. v. Their Workmen 73 ITR 53 (SC) and ITAT, Kolkata C Bench Rallis India Ltd. v.DCIT. He also submitted that this Tribunal’s order in assessee’s own case in ITA No. 851/Kol/2008, 1018/Kol/2007 & 1640/Kol/2008., involving the exactly similar facts where the decision was in favour of assessee.
ITA No. 1021/Kol/2007 (Revenue’s appeal)
The ld counsel of the assessee submitted that audited statement showing claim of depreciation u/s. 32 and depreciation claim in audited statement was at Rs.15,06,49,470/- only. Ld. AR further submitted that undertaking which was sold during the previous year as specified by AO in his assessment order was going concern. Therefore the sale proceed of those undertaking will not be adjusted against WDV of the respective block. There was no provision under the income tax Act for charging the undertaking as slum sale the concept of slum sale has been brought under the tax net by the Finance Act, 1999 with effect from 01.04.2000 and instant case, does not fall under the category of slum sale.
Contention of the Revenue
The ld counsel of the revenue claims the provision for leave encashment as contingent liability.
Held by CIT (A)
ITA No. 850/Kol/2007 (Assessee’s apepal)
Disallowance of provision of leave encashment
The CIT (A) upheld the order of AO. It was held that the amount has not fallen due for payment as on 31.3.96. Further, it is not a crystallized liability and is in the nature of a provision to meet the contingent liability.
Disallowance of liability on account of Voluntary Retirement Scheme (VRS)
CIT (A) upheld the the action of AO by observing that amount payable in future are not crystallized expenditure of this year. The appellant is entitled for a deduction of the VRS payments on the basis of payment in the year of actual payment. The disallowance made by the AO is correct since the unpaid amount claimed is in the nature of a provision to meet the future liability.
ITA No. 1021/Kol/2007 (Revenue’s appeal)
CIT (A) deleted the addition made by AO. It was held that as per the decision of the ITAT in the Corromondal Fertilizer 90 ITD 439 (Hyd), the WDV of the unit sold, is to be reduced from block of assets. Depreciation is allowable on the balance value of the block of assets relating to the business units which are not sold and used by the appellant for business. In the appellant’s case, the WDV of the assess belonging to fertilizer and fibre division is to be reduced from block of assets and depreciation is required to be allowed on the assets used by the appellant for the business. The AO is directed to examine the details and to allow depreciation on the WDV of the assets other than those relating to the business sold as going concern.
Held by ITAT
ITA No. 850/Kol/2007 (Assessee’s apepal)
Disallowance of provision of leave encashment
We find that assessee has made the provision for the expenses of leave encashment of those employees having the unutilized leave balance credited in their respective account. The assessee claimed the deduction of the provision created for the leave encashment in the books of accounts. The dispute here is that the assessee claims that the liability of the employees for leave encashment has been crystallized at the year end but has not fallen due for payment. The liability for the payment will arise in future when the employee exercises his option for the encashment of the salary.
A contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future event. But in the give case, we find that the liability is certain for the provision of the leave encashment. It is not a contingent liability because the employees are very much entitled for getting the leave encashed as per the policy of the company. In the case of Bharat Earth Movers 245 ITR 428 (SC), Hon’ble Supreme Court has allowed this kind of expenditure u/s 37(1).
The fact in the instant case is similar to the case of Bharat Earth Movers 245 ITR 428 (SC).It is clear that liability towards leave encashment is a definite liability which has accrued and arisen during the year ending on March of this year. However, payment of the same does not fall during the relevant previous year but under the mercantile system of accounting this expenditure requires recognition in the books of accounts. In view of the above, we allow this ground of assessee’s appeal.
Disallowance of liability on account of Voluntary Retirement Scheme (VRS)
We find that during the year 735 employees had opted for VRS as per the scheme of the assessee. Accordingly the expense to be made towards VRS to those staff has become definite expense. Although the payment of VRS was due in future date. Further we find that this Tribunal has decided in assessee’s own case where the expenses for VRS was allowed and keeping a consistent view we reverse the orders of authorities below.
ITA No. 1021/Kol/2007 (Revenue’s appeal)
The Ld. AR has submitted the decision of ITAT in assessee’s own case wherein the this Tribunal has decided the issue in favour of assessee. From the above discussion, we find that AO has reduced the WDV of the respective block out of the sale proceed from the sale of undertaking as going concern. However, the same was disallowed by CIT (A). Ld. AR of assessee relied in assessee’s own case, wherein relief was granted in favour of assessee in ITA No. 1020/Kol/2007 dated 29.02.2008. In this case , it was held that “After reading the agreement as a whole, we find that the fertilizer business of the assessee has been transferred as a going concern to CCFC. All assets and liabilities relating to fertilizer business has been transferred, only assets excluded are bank balance and the outstanding insurance claim on the date of transfer. Merely because these two assets have been excluded from the assets transferred, it cannot be said that it is not the transfer of the undertaking as a going concern Land, building, plant & machinery, raw material, industrial because, technology, trade mark have been transferred to CCFC. The employees of the assessee working in fertilizer business have also been taken over by the CCFC. All current liabilities relating to fertilizer because as been taken over by CCFC. The sale consideration of the undertaking as a whole has been fixed at a “slump price” of Rs.70,00 crores without specifying any specific value to any asset. Considering the totality of the above facts, we are of the opinion that it is a case of “slump sale” of undertaking as a going concern and not the sale of depreciable assets within the meaning of Section 50. We, therefore, agree with the CIT (A) that the Assessing Officer was not justified in applying the provisions of Section 50.
Taking a consistent view in assessee’s own case and the decision of ITAT Hyderabad Bench in the case of Coromandel Fertilisers 90 ITD 439 (Hyd), we confirm the order of Ld. CIT (A) and this ground of Revenue’s appeal is dismissed.
Accordingly appeal of the assessee allowed and appeal of the revenue dismissed.
