Case Law Details
M/s. Rashtriya Ispat Nigam Ltd. Vs. JCIT (OSD) (ITAT Visakhapatnam)
The assessee company has created a provision under the head ’Future Leave Encashment’. During the course of assessment proceedings, the assessee company was asked to explain how the amount debited towards the provision for future leave encashment can be allowed as deduction. In response to which, the assessee company filed its explanation contending inter alia, that the assessee company is following mercantile system of accounting and the amount on account of leave encashment was provided in the accounts are based on the actuarial valuation certificate issued by Consulting Actuary. Therefore, the fact is, it is the liability towards ascertained employee cost for the present services, determined based on actuarial valuation i.e., on a realistic and scientific basis.
However, Assessing Officer was not convinced with the explanation furnished by the assessee company. The Assessing Officer held that the provision is in the nature of contingent liability but not an ascertained liability. The liability is neither accrued nor incurred unless the employees of the company encashed the leave accrued to them. Further, the employees have an option either to avail the leave or to en cash the same and therefore, there is high element of uncertainty whether the said leave would be encashed or availed by the employees whose exact number under either head is not ascertainable. The provision therefore is clearly in the nature of contingent liability and the same is not an allowable expenditure. In this context, Assessing Officer relied on the decision of Karnataka High Court in the case of Mysore Lamp Works Ltd., vs. CIT 185 ITR 96 and added the amount to the income of the assessee.
On appeal, the Ld. CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, assessee filed appeal filed before the Tribunal.
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