Income-Tax Officer vs Mohan Meakin Ltd.
1989 Latest Caselaw 262 Del

ORDER

Per Agarwal, J. M. - 1 and 2 [These paras are not reproduced here as they involve minor issues.]

3. The first ground raised in the Revenues appeal is as under :

"The CIT [Appeals] was not correct in law and in facts in directing the ITO to allow the alleged liability of Rs. 18,64,000 in respect of provision for leave encashment."

By application dated 9-12-1988, the Revenue has raised the following additional grounds pertaining to the aforesaid ground No. 1 :-

"1. On the facts and in the circumstances of the case, the CIT [Appeals] erred in not recording the reason as required mandatorily under ruler 46A [2] of the IT Rules.

2. On the facts and in the circumstance of the case, the CIT [Appeals] erred in taking cognizance of the actuarial report before getting it examined by the expert.

3. On the facts and in the circumstances of the case, the CIT [Appeals] erred in replying on the actuarial report which is based on surmises, conjectures and suppositions not supported by any material on record.

4. On the facts and in the circumstances of the case, the CIT [Appeals] erred in admitting and relying on actuarial report while there can be no actuarial valuation regarding the liability for payment of leave salary."

The learned D. R. pleaded that the additional ground be admitted for hearing as they relate to a matter which has already been raised in the appeal in ground No. 1 and the additional grounds are merely in the nature of clarification of the already existing ground. The learned counsel for the assessed, on the other hand, contended that the application was belated. After hearing the parties on this question, we in open Court announced our decision to admit the additional grounds for hearing as, in our opinion, the additional grounds were merely of a clarificatory nature. We now proceed to dispose of the aforesaid grounds.

4. The learned D. R. contended that the learned CIT [Appeals] did not recorded any reasons for admitting the additional evidence. No material was produced before us to substantiate this contention. The revenue should have produced the CIT [Appeals]s record to show whether while admitting the additional evidence on the assesseds application, the reason were recorded or not. In the absence of such material, the Revenues contention cannot be accepted.

5. The other three grounds deal with the veracity of the actuarial report and, therefore, we would deal with it along with the merits of the pre-existing ground No. 1.

6. The facts are that the assessed has a scheme of allowing leave encashment to its employees in the event of premature retirement, voluntary resignation, superannuation, death and physical or mental incapacity. The encashment is of leave due to an employee at the time of any of the aforesaid relevant events and is restricted to the maximum number of days for which leave can be accumulated. Up to the assessment year 1981-82, the assessed was claiming expenditure on account of payment of leave encashment on the basis of actual payments made during the relevant accounting year. In the year under consideration, however, the assessed made a provision in a sum of Rs. 22,58,000 on account of alleged liability for the payment of encashment of leave in future. The ITO disallowed the alleged liability on the ground that the liability had not been determined by any actuary, no contribution towards the scheme had been made by the assessed during the year and, there was no statutory liability cast on the assessed to provide for this liability. The assessed appealed to the CIT [Appeals] before whom an actuarial report was presented. The actuary determined the liability as on 31-3-1982 at Rs. 18,64,000 and the CIT [Appeals] allowed liability for payment of leave encashment at the said amount. For this, reliance was placed on a judgment of this Tribunal in Bharat Commerce & Industries v. ITO [1981] 7 Taxman 194 [Delhi -Trib]. and a judgment of Honorable the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53. The learned D. R. contend that none of the aforesaid judgments applied to the facts of the case and relied on CIT v. Bharat General & Textile Industries Ltd [1986] 157 ITR 158 [Cal]. CIT v. Sileman Khan Mahabub Khan [1988] 174 ITR 200 [AP] and CIT v. Hindustan Aeronautics Ltd. [1988] 174 ITR 340 [Kar.]. The learned counsel for the assessed on the other hand relied upon the aforesaid two judgments referred to above land in additional sought support from the another order of the Tribunal in Delton Sales [P]. Ltd v. IAC [1988] 26 ITD 168 [Delhi].

7. Bharat General & Textiles Industries Ltd.s case [supra] was a case in which like the case before us a provision was made in respect of liability for payment of encashment of leave. The Honorable Calcutta High Court held that it could not be ascertained with any certainly whether in a particular year, the employees would go on leave or leave would be granted to them. The Honorable High Court observed that accumulated leave to the extend of 120 days could not be encashed at the time of retirement or the termination of the service and this was, therefore, a contingent liability and provision for leave wages was not deductible. In that case also, reliance was placed by the assessed on the ratio in the case of Metal Box Co. if India Ltd. [supra] and the Hobble High Court held that the ratio laid down by the supreme court had no application in the case. Regarding the determination of the extend of liability by an actuary, the Honorable High Court observed that there can be no actuarial valuation regarding the liability for payment of leave, wages and it cannot be equated with gratuity liability under the Gratuity Act. Similar views were taken by Honorable Andhra Pradesh and Karnataka High Courts in the case referred to above. The ratio in the case of Metal Box Co. of India Ltd. [supra] was discussed by the Hobble Andhra Pradesh High Court as well and it was observed that the principles laid down in the matter to gratuity cannot be extended to a provision for leave wages.

8. In Metal Box Co. of India Ltd.s Case [supra] the issue before the Honorable supreme Court was about the computation of bonus admissible to the workman and it was held that where the liability under a scheme of gratuity in respect of the accounting years stated in the profit and loss account, in the absence of any challenged by the workmen to the correctness of the method go valuation land in the absence of a challenge that such liability cannot be estimated on any fair standard, the amount claimed, according to the profits and loss account should be presumed to be genuine and allowed. In the case before us, the dispute is about the allowance of a supposed liability on account of payment of leave encashment in future and the revenue has stoutly challenged the existence of that liability. The judgment of this Tribunal in Bharat Commerce & Industries case [supra] is of the year 1981 and is based on the ratio of Honorable the Supreme Court in Metal Box Co. of India Ltd.s case [supra] which two High Courts have specifically held cannot be applied in income-tax proceedings in respect of claim of an alleged liability for encashment of leave. In the face of the three judgments of different High Courts, the decision in the case of Bharat Commerce & Industries [supra] cannot be followed. This Tribunals decision in Delton Sales [P.] Ltd.s case [supra], is also based on the ruling of this Tribunal in the case of of Metal Box Co. of India Ltd. [supra] and the judgment of this Tribunal in the case of Bharat Commerce & Industries [supra]. None of the three authorities of the Calcutta, Andhra Pradesh and Karnataka High Courts were cited before the Bench and, therefore, this order of the Tribunal too cannot help the assessed.

9. As already stated the assessed filed a report which is said to be a report by an actuary determining the present liability as on 31-3-1982 at Rs. 18,64,000. A copy of the actuarys report has been placed at pages 127 and 128 of the paper book and a perusal thereof would show that it is based on certain vague and subjective assumption made by the so-called actuary. Nothing of an actuarial science pertaining to the subject of evaluation of the parson liability on account of leave encashment is visible anywhere in the report. The three High Court referred to above have held that determination of present liability on account of leave encashment is not possible even by an actuary. Sh. Bhatia the learned actuary employed by the assessed has nowhere specified in his report as to whether in the actuarial science there are any principles for the determination or estimation of the present liability on account of a thing like leave encashment. The learned counsel for the assessed also did not place before us any literature on the subject nor did he point out that the actuarial institute has laid down any specific method for an exercise of the type before us. We are, therefore, in agreement with the learned Departmental Representative that the so-called actuarial report was not a scientific document and it mentioned only vague calculations based on subjective personal assumptions. It is to be reimburse that in the relevant accounting period not a single penny is shown to have been actually spent under this head. We are, therefore, in agreement with the learned ITO that there was no existing liability which could be provided for in the accounts and about which a deduction could be claimed in determining the assesseds income. The order passed by the learned CIT [Appeals] on this point, is therefore, set aside and the order passed by the ITO is restored.

10 to 35. [These paras are not reproduced here as they involve minor issued.]