Law: Income Tax Act, 1961

Section: 37

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…

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