BHARAT EARTH MOVERS VS COMMISSIONER OF INCOME-TAX
2001 P T D 1427
[245 I T R 428]
[Supreme Court of India]
Present: S. P. Bharucha, R. C. Lahoti and N. Santosh Hedge, JJ
BHARAT EARTH MOVERS
versus
COMMISSIONER OF INCOME‑TAX
C. A. No. 9271 of 1995, decided on 09/08/2000.
(Appeal from the judgment and orgy, dated November 7, 1994, of the Karnataka High Court in I.T.R.C. No.57 of 1985).
Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑General principles‑‑‑Difference between accrued and contingent liabilities‑‑‑Amount set apart to meet liability on account of leave encashment of employees‑‑‑Not a contingent liability‑‑‑Amount is deductible‑‑‑Indian Income Tax Act, 1961, S.37‑‑‑[CIT v. Bharat Earth Movers Ltd. (1995) 211 ITR 515 reversed].
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.
The assessee‑company had two sets of employees. One set of employees was covered by the Employees State Insurance Scheme and was generally known as "staff". The other set of employees not so covered was known generally as "officers". The company had floated beneficial schemes for its employees for encashment of leave. The officers were 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) were entitled to vacation leave calculated at the rate of 1.5 days per month, i.e., 18 days in a year. The earned leave could be accumulated up to a maximum of 240 days while the vacation leave could be accumulated. up to a maximum of 126 days.' The earned leave/vacation leave could be encashed subject to the ceiling on accumulation. The officers could at their option avail of .the accumulated leave or in lieu of availing of the leave apply for encashment whereupon they would be paid salary for the period of leave earned but not availed of. So, did the scheme extend the facility of encashment to the staff in respect of vacation leave. The assessee‑company had created .a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. In the assessment year 1978‑79, 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 had formed a different opinion and held that the provision for accrued leave salary was a contingent liability and, therefore, was not a permissible deduction. On appeal to the Supreme Court:
Held, reversing the decision of the High Court, 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 contingent liability.
Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC); 39 Comp. Cas. 410; 35 FJR 181 (SC) and Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC) applied.
CIT v. Bharat Earth Movers Ltd. (19951 21 i ITR 515 reversed.
Senior Advocate (P.J. Pardiwalla, K.P. Kumar and K.T.Anantharaman, Advocates for M/s. Lawyers Inn, Advocates with him) for Appellant.
Senior Advocate (Ms. Sushma Suri, Advocate with
JUDGMENT
R.C. LAHOTI; J.‑‑‑Relevant to the assessment year 1978‑79, 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 (see (1995) 211 ITR 515), under section 256(1) of the Income Tax Act, 1961, (page 516):
"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 the 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 up to 240 days maximum while the vacation leave can be accumulated up to 126 days maximum. The earned leave/vacation leave can be encashed subject to the ceiling on accumulation. The officers may at their option avail of the accumulated leave or in lieu of availing of the leave apply for encashment whereupon they would be paid salary for the period of leave earned but not availed of. 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 waste. It can neither be availed of nor encashed. The appellant‑company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. In the assessment year 1978‑79, 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 liability will arise only if an employee may not go on leave and instead apply for encashment. If the employee avails of 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. A 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 of the leave or apply for its encashment. If he avails of the leave then additional provision for encashment is not made in the reserve account. However, if he does not avail of 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", the 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, the provision is made therefor by transferring the appropriate amount in the reserve account. If he avails of 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 year's profit and loss 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 of 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 discharge 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. v. Their Workmen (1969) 73 ITR 53 (SC), 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 profit and loss, account. The company had worked out an actuarial valuation its estimated liability and made provision for such liability not all at once but speared 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 employee's 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 reproduced as under:
(i) For an assessee maintaining his accounts on the 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 permissible only in the case of amounts actually expended or paid;
(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 fulfilment 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. v. (CIT (1959) 37 ITR 1 (SC) 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 abovesaid settled principles to the facts of the case at hand we are satisfied that the 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 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 March 24, 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 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, was declined. Under section 2:58 of the Income‑tax Act, 1961, the High Court or the Supreme Court have been empowered to call for a supplementary statement of case when they find the one already before it no; satisfactory. Article 144 of the Constitution obliges all authorities, civil. and judicial, in the territory of India to act in aid of the 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.
M.B.A./483/FC?????????????????????????????????????????????????????????????????????????????????? Order accordingly