Himachal Pradesh High Court
H.P. State Civil Supplies Corporation … vs Asstt. Commissioner Of Income Tax … on 31 December, 2024
Author: Tarlok Singh Chauhan
Bench: Tarlok Singh Chauhan
( 2024:HHC:16935-DB )
IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA
ITA Nos. 37of 2007, 56 of 2008, 57 of
2008, 54 of 2009 and 20 of 2011
Reserved on: 21.12.2024
Date of decision : 31.12.2024.
H.P. State Civil Supplies Corporation Ltd. ...Appellant.
Versus
Asstt. Commissioner of Income Tax &another ...Respondents
Coram:
The Hon'ble Mr. Justice Tarlok Singh Chauhan, Judge.
The Hon'ble Mr. Justice Satyen Vaidya, Judge.
Whether approved for reporting?1Yes.
For the appellants : Mr. Vishal Mohan, Sr. Advocate
with Mr. Prashant Sharma and Mr.
Praveen Sharma, Advocates.
For the respondents : Mr. Neeraj Sharma & Mr. Ishan
Kashyap, Advocates.
Satyen Vaidya, Judge:
Since common questions of law have arisen in
these appeals inter-se the same parties out of assessment
proceedings for different assessment years, all the appeals
have been heard and are being decided together by a
common judgment.
1
Whether reporters of Local Papers may be allowed to see the
judgment?
-2-
2. The relevant assessment years are 2002-03,
2003-04, 2004-05, 2005-06 and 2007-08.
3. For brevity the facts of the case involving
assessment year 2002-03 are being considered herein.
4. By way of instant appeal under Section 260-A of
Income Tax Act, 1961, (for short, ‘the Act’), the assessee
has assailed order dated 25.5.2007, passed by the Income
Tax Appellate Tribunal (ITAT), Chandigarh in ITA No.
1044/Chandi/2005. The appeal was admitted for hearing
vide order dated 11.10.2007 on the following substantial
questions of law:-
“1) Whether on the facts and in the circumstances of the case,
the provision for meeting the liability for encashment of
saved leave by the employee is an admissible deduction?
ii) Whether leave encashment, which is a kind of earned
leave, is a present liability or a future liability so as to be
allowed the expenses u/s 37 of the Income Tax Act, 1961
d deductible from gross profit?
iii) Whether leave encashment is a current or present liability
or a contingent liability in view of the principles laid down
by the Hon’ble Supreme Court in the case of Bharat Earth
Movers 245 ITR 428 (SC) and thus accordingly allowable
as an expense deductible from gross profit?
iv) Whether the provision for leave encashment is a defined
benefit entitled to be allowed as an expense during the
-3-year in which such provision is made in books of accounts
in view of Accounting Standard 15 issued by ICAI?
(v) Whether the expense of leave encashment deduction has
been rightly claimed by the appellant in view of the
judgment of the Apex Court in the case of Bharat Earth
Movers 245 ITR 428 (SC)?
vi) Whether the liability towards leave encashment has been
ascertained during the period of assessment under
consideration for the payment of the same at a future date
in view of the leave Rule 26 & 29 of the Central Civil
Services Leave Rule as applicable to the employees of the
appellant and has been rightly claimed as an expense
deductible during the year under assessment?
vii) Whether the procedure adopted for ascertaining of liability
as leave encashment by adhering to Accounting
Standard-15 issued by ICAI was proper & correct and the
expense so claimed is an allowable deduction under the
Income Tax Act. 1961?
(viii) Whether the expenses towards contribution to have
encashment trust for the discharge of the Statutory
liability is an allowable expense under the provisions of
Section 37(1) of the Income Tax Act, 1961?
ix) Whether the Learned Tribunal was justified going beyond
the pleadings in issuing the directions for enhancing the
income by adding to the income the amount to the extent
of which the said deduction has been set off against the
liability when such a ground was neither agitated by
either party?
x) Whether the learned Tribunal was justified in holding that
amount of Rs.242,35,622.00 payable to the State
-4-Government on account of its share in Handling charges
of Cement as income of the Appellate Corporation?
xi) Whether the learned Tribunal was justified in holding in
para 9 that there is no change in the accounting system
whereas in reply to question No. 18 it was specifically
mentioned that there is a change in the accounting system
and A.O. vide his letter dated 14.3.2005 categorically
asked for the reasons of the change of system?”
5. At the outset it appears that question number (x)
as framed above has been carved out from the material
which is not the subject matter of instant appeal nor has
any argument been raised on such issue by either of the
parties at the hearing of the matter.
6. The assessee filed its Income Tax Return (ITR)
for the assessment year 2002-03, declaring income of Rs.
1,20,64,680/-. The ITR was filed on 31.10.2002. Assessee
claimed an expenses of Rs. 88,01,203/- in the profit and
loss account, which included a sum of Rs. 45,00,000/-
paid by the assessee to Life Insurance Corporation of India
(LIC) on account of contribution to Credit Leave
Encashment Trust (CLET). The assessee, thus, claimed
deduction of Rs. 45,00,000/-.
-5-
7. The Assessing Officer (AO) passed an
assessment order dated 29.3.2005. The claim of the
assessee for deduction of an amount of Rs. 45,00,000/-
was disallowed and resultantly an amount of Rs.
45,00,000/- was added to the income of the assessee.
8. The assessee preferred an appeal to the
Appellate Authority i.e. Commissioner Income Tax
(Appeals). The objection of assessee against the order of
AO, disallowing the deduction of Rs. 45,00,000/- was
rejected by the CIT(A) vide order dated 14.5.2005.
9. The assessee further approached the Income Tax
Appellate Tribunal (ITAT), Chandigarh, who vide impugned
order again remained unsuccessful in its challenge against
disallowance of the deduction of Rs. 45,00,000/-., hence
this appeal.
10. The AO vide assessment order dated 29.3.2005
had held the deduction of Rs. 45,00,000/- claimed by the
assessee as inadmissible on following grounds: –
a) The financial year 2001-02 relevant to the
assessment year 2002-03 had already been over
-6-on 31.3.2002 and the accounts of the assessee
for the said financial year also stood closed on
the said date. Therefore, the Credit Leave
Encashment Scheme (for short, ‘the scheme’) set
up by the assessee for providing leave
encashment benefits to its employees on
29.10.2002 by remitting an amount of Rs.
45,00,000/- to LIC on the same day i.e.
29.10.2002, could not be said to be the payment
made in the relevant accounting year 2001-02.
b) The liability to pay leave encashment as per the
details provided by the assessee was due only in
the year 2004 and onwards, as such, neither
any liability had accrued nor discharged during
the financial year 2001-02.
c) There was no mention of the profit on the
interest accruable on the amount paid to LIC
being subjected to the income tax or being
adjusted against the liability of the assessing
amount.
-7-
d) The process for establishment and registration of
CLET was initiated and completed during the
assessment year 2002-03 and was registered in
the said year only.
e) No liability was ascertained in the financial year
2001-02.
11. While rejecting the appeal of the assessee
against the assessment year, disallowing the deduction of
Rs. 45,00,000/-, the CIT(A)recorded the following reasons:-
a) As; there was no specific provision under Section
36 of the Act relating to contribution to leave
encashment fund, the amount of Rs.
45,00,000/- paid into the said fund by the
assessee had no statutory recognition.
b) There was no ascertained liability and rather the
same was only contingent. In this behalf,
reliance was placed on the judgment of CIT vs.
Sileman Khan passed by the Hon’ble High Court
of Andhra Pradesh, reported in 174 ITR 200 and
judgment passed by the Hon’ble Karnatka High
-8-
Court in CIT vs. Hindustan Aeronautics Ltd.,
reported in 174 ITR 340.
c) Since the liability did not pertain to the relevant
financial year, the deduction was not admissible.
d) The sum of Rs. 45,00,000/- did not meet annual
contribution payable by the assessee on the
basis of actuarial valuation to reach a part of
initial contribution payable on account of
liability for the past service.
e) Since the initial contribution was not admissible
as deduction under Section 36 of the Act, the
provision of Section 43-B of the Act was not
applicable.
f) The applicability of Accounting Standard-15was
also doubted on the ground that where the
liability for determining the benefit was found
through a scheme administered by an insurer,
the actuarial certificate or a confirmation from
the insurer obtained for the contribution payable
-9-
to the insurer is the appropriate accrual of the
liability for the year.
12. The ITAT also held as under:-
a) Neither any liability had accrued to the assessee
on account of leave encashment of employees in
the year under appeal nor any payment was
made to the employees during the said year.
b) Section 43-B of the Act regulates the deductions, which are otherwise allowable
under the Act and since no other provision of
act allowed the deduction of amount paid
towards the fund created for discharge of leave
encashment liability of employees by the
employer, hence the applicability of section 43-
B of the act was ruled out.
c). Even otherwise sub-clause (f) to section 43-B of
the Act inserted by the Finance Act, 2001 w.e.f.
1.4.2002 provided for deduction for the year of
payment of the liability in respect of any sums
-10-
payable by the assessee as an employer in lieu
of any leave at the credit of his employees.
d) In the earlier year, the assessee was following
the cash system of accounting in respect of the
liability on account of encashment of leave
salary. Therefore, the deduction was being
claimed on the basis of actual payment for
encashment salary. There has been no change
in the system of accounting in the year under
appeal as the steps for formulation of the
scheme had not taken after the end of financial
year 2001-02.
e) Since the scheme has no recognition under
Section 36 (1) (iv) and (v), the assessee was not
entitled to the deduction.
13. We have heard learned counsel for the parties
and have also gone through the record carefully.
14. Mr. Vishal Mohan, learned Senior Counsel for
the assessee/appellant has contended that the liability
incurred by the assessee in the shape of payment of Rs.
-11-
45,00,000/- to LIC under the scheme was the part of the
entire past liability of Rs. 1.80 crores assessed by the
insurer. The liability was ascertained and calculated on
actuarial basis. It was not a contingent liability. As the
fund was created on 29.10.2002 and the payment of Rs.
45,00,000/- was made to LIC on the same day, the process
was completed within the admissible time limit for
submission of income tax return and hence, the same was
liable to be construed as an exercise having been
undertaken during the relevant financial year in terms of
proviso to section 42B(f) of the Act which includes cases
where the payment is actually made by the assessee before
the due date for furnishing of return under Section 139 (1)
of the Act.
15. Per contra, Mr. Neeraj Sharma, Advocate,
representing the revenue has supported the impugned
order passed by the ITAT by contending that the proviso of
Section 43-B (f) of the Act makes allowance for only those
deductions, which were ascertained liability during the
relevant financial year and had been paid up during the
-12-
said year itself. He further asserted that the liability
undertaken by the assessee, even if, assumed to be
deductible, was not during the relevant financial year i.e.
2001-02. Learned counsel for the revenue further
submitted that Section 43-B was applicable only to those
deductions, which otherwise were allowable under the Act
and since the sum payable by the assessee as an employer
in lieu of any leave at the credit of his employees was not
deductible under the proviso of the Act, the claim of the
assessee was rightly rejected.
16. Since the assessment year relevant in the
instant case is 2002-03, the proviso of Section 43-B(f) of
the Act having become applicable w.e.f. 1.4.2002, shall be
seen in its application to the facts of instant case.
17. The findings of facts recorded concurrently by
the AO, CIT(A) and ITAT can be summoned up as under:-
a) The fund was established on 29.10.2002 and the
contribution of Rs. 45,00,000/- towards the
fund was also made by the assessee to LIC on
the same date.
-13-
b) No provision for contribution towards the fund
was made by the assessee after closure of
accounting year 2001-02, on 31.3.2002.
c) The assessee has not resorted to the option of
mercantile accounting during the accounting
year 2001-02.
d) The liability of payment of amount towards leave
encashment was neither accrued nor paid
during the relevant accounting year 2001-02.
18. Further, both the appellate authorities have also
held that contribution towards fund for payment of leave
encashment due to the employees was not deductible
under any provision of the Act. In alternative, it has been
held that Section 43-B (f) of the Act attracts the
deductibility of the amount only if it was incurred and paid
in the relevant accounting year.
19. The first question that arises for determination
is whether the contribution made by a corporate employer
towards fund for payment of leave encashment to its
-14-
employees is entitled for deduction from profit and loss
account under the Act?
20. The above question has arisen because the ITAT
and CIT(A) have held such contribution to be not
deductible under any of the provisions of the Act. The
appellate authorities have rendered the view that such a
fund had no statutory recognition as only those funds were
recognized as were declared under Section 36(1)(iv)&(v) of
the Act.
21. We have our reservations in endorsing the view
so taken by the appellate authorities. The inclusion of
Clause (f) in Section 43-B of the Act will be rendered otiose
by such a pedantic interpretation. The three Judges
Bench of the Hon’ble Supreme Court while adjudging the
constitutional validity of sub-Section (f) of Section 43-B of
the Act in the matter titled as Union of India vs. Excide Industries
Ltd, reported in (2020) 425 ITA-1 (SC) has observed as under
“…..it holds no merit to urge that the section
only provides for deduction concerning statutory
liabilities. Section 43-B is a mix bag and new
and dissimilar interpretation have been inserted
-15-therein from time to time to cater to different
fiscal scenarios which are to be determined by
the Government of the day………”
22. Further underlining the object and purpose of
the leave encashment scheme, it has been observed in
Excide Industries (supra) as under: –
“19. The leave encashment scheme envisages the
payment of a certain amount to the employees in lieu of
their unused paid leaves in a year. The nature of this
payment is beneficial and pro employee. However, it is
not in the form of a bounty and forms a part of the
conditions of service of the employee. An employer
seeking deduction from tax liability in advance, in the
name of discharging the liability of leave encashment,
without actually extending such payment to the employee
as and when the time for payment arises may lead to
abhorrent consequences. When time for such payment
arises upon retirement (or otherwise) of the employee, an
employer may simply refuse to pay. Consequently, the
innocent employee will be entangled in litigation in the
evening of his/her life for claiming a hardearned right
without any fault on his part. Concomitantly, it would
entail in double benefit to the employer – advance
deduction from tax liability without any burden of actual
payment and refusal to pay as and when occasion arises.
It is this mischief clause (f) seeks to subjugate.”
-16-
23. In the same context their Lordships in Excide
Industries, then further observed as under:
“In line with other clauses under Section 43B,
clause (f) was enacted to remedy a particular
mischief and the concerns of public good,
employee’s welfare and prevention of fraud upon
revenue is writ large in the said clause. In our
view, such statutes are to be viewed through the
prism of the mischief they seek to suppress, that
is, the Haydon’s case [1584] 3 Co rep 7 principle.
IN CRAWFORD, Statutory Construction
(CRAWFORD Statutory Construction p.508), it
has been gainfully delineated that “an enactment
designed to prevent the fraud upon the revenue
is more properly a statute against fraud rather
than a taxing statute, and hence should receive
a liberal construction in the government’s
favour.”
24. In an adjudication by Hon’ble High Court of
Kerala in its judgment dated 27.6.2012 passed in ITA No.
64 of 2012, titled as CIT vs. M/s Hindustan Latex Ltd. It
has been observed as under: –
“However, it cannot be doubted for a moment for the
premium paid towards the renewal and continued validity
-17-of the insurance policy necessarily becomes business
expenditure wholly and exclusively incurred for the
business purpose and allowable as a deduction under
Section 37 of the Act.”
25. In view of what has been held above, we have no
hesitation to hold that the amount of contribution made by
the assessee towards the fund for payment of leave
encashment to its employees qualifies to be deductible as
expenses, subject, however, to the conditions imposed
under Section 43-B of the Act.
26. Taking the benefit of proviso to section 43B of
the Act it has been contended on behalf of the assessee
that the last date for filing of income tax return by the
assessee for accounting year 2001-02 was 31.10.2002 and
since sum of Rs. 45,00,000/- had been paid to the LIC on
29.10.2002, the assessee was covered under the aforesaid
proviso.
26.1 The proviso to Section 43-B of the Act deals with
any sum which is actually paid by the assessee on or
before the due date applicable in his case for furnishing
the return of income under sub-Section (1) of Section 139
-18-
of the Act, in respect of the previous year in which, the
liability to pay such sum was incurred and instance of
such payment is furnished by the assessee along with such
return.
27. The argument raised on behalf of the assessee
deserves to be rejected for the reason that the proviso to
Section 43-B relates only to that liability as was incurred
by actual payment of the sum in the previous accounting
year, which in the instant case is 2001-02. Thus, in our
considered view, the exception carved out by the aforesaid
proviso only derives the limitation from end of accounting
year to the date of submission of return as per Section 139
(1) of the Act. It nowhere takes away the mandatory
requirement for assessee to comply with the provisions of
main section, which reads as under: –
“Section43-B : notwithstanding anything contained in any
other provision of this act, a deduction otherwise
allowable under this Act;
(f) in respect of any sum payable by the
assessee as an employer in lieu of any leave at the credit
of his employees shall be allowed (irrespective of the
previous year for which the liability to pay such sum was
incurred by the assessee according to method of
-19-accounting regularly employed by him) only in computing
the income referred to in Section 28 of that previous year
in such sum is actually paid by him:
28. Thus, as per the aforesaid proviso only that sum
payable by the assessee as an employer in lieu of any leave
at the credit of his employees shall be allowed as deduction
where firstly the liability to pay such sum was incurred by
the assessee according to method of accounting regularly
employed by him and secondly the sum was actually paid
by the employer in the previous accounting year.
29. The question next arises whether the assessee in
the instant case had incurred the liability to pay a sum of
Rs. 45,00,000/- to its employees for the previous year in
which such sum is actually paid.
30. Admittedly, the sum of Rs. 45,00,000/- was paid
by the assessee to LIC in the year 2001-02 by application
of the proviso to Section 43-B. We are, however, not
inclined to hold that the liability had already been incurred
as a past liability. Though, the assessee has tried to
impress upon us by referring to a communication inter-se
the assessee and the insurer that the amount of past
-20-
liability was assessed at Rs. 1.80 crores, but the same has
not been substantiated before AO or the appellate
authorities by the assessee. Both the appellate authorities
have concurrently held that it was not on account of any
past liability, rather, the payments of leave encashment
were actually made during the years 2004 to 2016. We are
not convinced with the contention of assessee that the
finding of fact to that effect is perverse.
31. Learned Senior Counsel for the appellant has
contended that the liability in similar circumstance has
been held to be ascertained and permissible for deduction
by the Hon’ble Supreme Court in the judgment Bharat
Earth Movers vs. CIT (2000) 245 ITR 428. He has also
placed reliance on the judgment passed by the Hon’ble
Supreme Court in the matter of CIT vs. Textools Co. Ltd.
rendered on 9.9.2009 in Civil Appeal No. 447 of 2003,
whereby the view favouring the assessee/appellant herein
taken by Hon’ble Madras High Court was affirmed.
32. In Excide Industry Ltd. (supra), the Hon’ble
Supreme Court had the occasion to adjudicate the
-21-
constitutional validity of Section 43-B (f) of the Act and one
of the grounds of such challenge was that the proviso had
been incorporated to undo the effect of judgment passed by
the Hon’ble Supreme Court in Bhart Earth Movers. While
rejecting the challenge on said ground it has been held that
the judgment in Bharat Earth Movers was rendered
keeping in view the then applicable statutory regime.
Adhering to the constitutional validity of Section 43-B(f),
the Hon’ble Supreme Court held that the said provision will
apply prospectively meaning thereby that the period prior
to period of enactment of Section 43-B(f), would be
governed by the law laid down in Bharat Earth Movers. In
view of such exposition, the assessee cannot derive any
benefit from the verdict in Bhart Earth Movers, as he has
to independently tackle the obstacles raised by
incorporation of Section 43-B(f) w.e.f. 1.4.2002.
33. As regards the judgment in Textools (supra), the
same will also not help the cause of the assessee as the
issues with respect to implication of the proviso of Section
43-B(f) were not involved in the facts of said case rather it
-22-
was a case relating to gratuity fund covered under Section
36 (1) (iv) of the Act.
34. It will also be gainful to reproduce paragraphs
39 and 40 of the Excide Industries Ltd to support our view
that the liability incurred by the assessee did not qualify
the requirement of Section 43-B(f) of the Act and hence
were rightly disallowed by the revenue.
“39. Reverting to the true effect of the reported judgment
under consideration, it was rendered in light of general
dispensation of autonomy of the assessee to follow cash
or mercantile system of accounting prevailing at the
relevant time, in absence of an express statutory provision
to do so differently. It is an authority on the nature of the
liability of leave encashment in terms of the earlier
dispensation. In absence of any such provision, the sole
operative provision was Section 145(1) of the 1961 Act
that allowed complete autonomy to the assessee to follow
the mercantile system. Now a limited change has been
brought about by the insertion of clause (f) in Section 43B
and nothing more. It applies prospectively. Merely
because a liability has been held to be a present liability
qualifying for instant deduction in terms of the applicable
provisions at the relevant time does not ipso facto signify
that deduction against such liability cannot be regulated
by a law made by Parliament prospectively. In matter of
statutory deductions, it is open to the legislature to
withdraw the same prospectively. In other words, once
-23-the Finance Act, 2001 was duly passed by the Parliament
inserting clause (f) in Section 43B with prospective effect,
the deduction against the liability of leave encashment
stood regulated in the manner so prescribed. Be it noted
that the amendment does not reverse the nature of the
liability nor has it taken away the deduction as such. The
liability of leave encashment continues to be a present
liability as per the mercantile system of accounting.
Further, the insertion of clause (f) has not extinguished the
autonomy of the assessee to follow the mercantile system.
It merely defers the benefit of deduction to be availed by
the assessee for the purpose of computing his taxable
income and links it to the date of actual payment thereof
to the employee concerned. Thus, the only effect of the
insertion of clause (f) is to regulate the stated deduction
by putting it in a special provision.
40. Notably, this regulatory measure is in sync with
other deductions specified in Section 43B, which are also
present and accrued liabilities. To wit, the liability in lieu
of tax, duty, cess, bonus, commission etc. also arise in the
present as per the mercantile system, but assessees used
to defer payment thereof despite claiming deductions
thereagainst under the guise of mercantile system of
accounting. Resultantly, irrespective of the category of
liability, such deductions were regulated by law under the
aegis of Section 43B, keeping in mind the peculiar
exigencies of fiscal affairs and underlying concerns of
public revenue. A priori, merely because a certain liability
has been declared to be a present liability by the Court as
per the prevailing enactment, it does not follow that
legislature is denuded of its power to correct the mischief
-24-with prospective effect, including to create a new liability,
exempt an existing liability, create a deduction or subject
an existing deduction to new regulatory measures. Strictly
speaking, the Court cannot venture into hypothetical
spheres while adjudging constitutionality of a duly
enacted provision and unfounded limitations cannot be
read into the process of judicial review. A priori, the plea
that clause (f) has been enacted with the sole purpose to
defeat the judgment of this Court is misconceived”.
35. In light of above discussions, the substantial
questions of law (i) to (ix) and (xi)are answered accordingly.
36. Accordingly, we find no merit in the appeals and
the same are accordingly dismissed. Pending applications,
if any, also stand disposed of.
(Tarlok Singh Chauhan)
Judge
(Satyen Vaidya)
31st December, 2024 Judge
(kck)