IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘E’, NEW DELHI

ITA No. 4240-5234-5312/Del/2012 : A.Y. : 2008-09 2009-10 2010-11
Nainital Almora Kshetriya Gramin Bank (Appellant) vs. ACIT (Respondent)

ORDER

Per Prashant Maharishi, AM:
01. All these three appeals are preferred by assessee against the common disallowance u/s 43B (f) of the Act on account of unpaid provision of leave encashment payable to employees for 3 years for AY: 2008-09, 2009-10 & 2010-11. As the claim, reason for disallowance for all the years are identical, these three appeals are disposed off by this common order.

02. The disallowances for the respective years of provision of leave encashment made by assessee which is unpaid is as under:
Sl No.               AY                    Amount (Rs.)
01                    2008-09           26,66,363/-
02                    2009-10           77,68,640/-
03                    2010-11           62,37,756/-

03. The brief facts as gathered from the assessment year 2008-09 is that the assessee has made a provision leave encashment for its employees on the basis of actuarial valuation payable to the employees on their retirement, death or termination of employment. The assessing officer has disallowed this expenditure applying provisions of section 43B (f) of the Act holding that such amount of provisioning is allowable only if paid. AO was of the view that according to clause (f) of Section 43B of the Income Tax Act, any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed in the previous year in which such sum is actually paid irrespective of the previous year in which liability to pay such sum was incurred by the assessee. As in this year assessee has made provision in the books of accounts based on actuarial valuation but has not paid this amount same is disallowed. Assessee carried the matter before the CIT (A) who dismissed the appeal of the assessee concurring with the views of the AO. Facts for the subsequent assessment year i.e. A.Y. 2009-10 and 2010-11 are identical. Therefore, assessee is in appeal before us for all the three years raising identical grounds of appeal.

04. Ld. AR of the assessee Mr. K. Sampat, CA submitted that disallowance made by the AO is incorrect and provisions of section 43B (f) are held to be constitutionally in valid and therefore the disallowance made for all three years be deleted. For this proposition he relied on various judicial precedents as under:-
i. Exide Industries Ltd. vs. Union of India, 292 ITR 470
ii. DCIT vs. A.P. State Seeds Development Corporation ltd. ITA no. 1459/HYD/2013
iii. Eimco Elecon (India) Ltd. vs. ACIT 22 ITR (Trib.) 380
iv. Universal Cables vs. DCIT, 954/Kol/2010

05. Ld. DR relied on the orders of lower authorities and submitted that the provisions of section 43B (f) are clear and therefore disallowance of actuarial leave encashment which is admittedly unpaid may be upheld.

06. We have carefully considered the rival submission and are of the view that with effect from 01.04.2002, clause (f) has been added in section 43B of The Income Tax Act which provides that deduction of provision of earned leave of employees made by the assessee shall not be allowed as deduction in computing the business income of the assessee provided such sum is actually paid. If same is not paid in the year of provisioning same shall be allowed subsequently in the year of payment. Hon’ble Calcutta High Court in Exide Industries Ltd. vs. Union of India, 292 ITR 470 has struck down the constitutional validity of section 43B(f) being arbitrary, unconscionable and de horse the facts Apex Court decision in the case of Bharat Earth Movers 245 ITR 428. Subsequently other Tribunal decisions cited by the Ld. AR are based on the decision of Hon’ble Calcutta High Court and deleted the addition. However, it has come to the notice of the bench that revenue has preferred an appeal against the order of Hon’ble Calcutta High Court and honourable supreme court has stayed it vide its order dated 08/05/2009 as under :-

“Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns.”

07. We are afraid we cannot agree with the views of ld. AR that addition may be deleted. As rightly submitted by the learned AR, the provisions of section 43B (f) was struck down by the Calcutta High Court as arbitrary and de hors of the apex court judgment in Bharat Earth Movers (supra). It is also an admitted fact that the apex court has stayed the judgment of the Calcutta High Court in Exide Industries Ltd. (supra). Therefore, the correct position of law is that we should read the statute as if those provisions are there on the statute book. This Tribunal being a quasi-judicial authority as to decide the appeal only based on the provisions of section 43B (f) of the Act. In other words, the provisions of section 43B(f) cannot be ignored since the judgment of the Calcutta High Court in the case of Exide Industries Ltd. was stayed by the apex court. Therefore, the claim of the assessee could be allowed only if it is actually paid on the due date for filing the return of income. It is not the case of the assessee that the amount claimed as leave encashment was paid before the due date for filing the return of income. Our view is further strengthened by decision of Honourable Kerala high court where in it is held while considering identical facts and circumstances in case of South Indian bank limited V CIT 45 taxmann.com 428 ( Kerala ) that :-

“6. Then coming to the second issue, it pertains to the provision made for leave encashment and the disallowance claimed was under Section 43B (f). As already stated above, the opinion of the CIT (Appeals) was set aside by the Tribunal in the light of the stay order of the judgment of the High Court of Calcutta in Excide Industries case (supra) and the SLP stated above is still pending. Therefore, the opinion of the Tribunal so far as disallowance claimed in respect of leave encashment under Section 43B(f) of the Act, as on today, the provision seems to be in force in the light of the stay order granted by the Apex Court in the SLP. Therefore, as long as Section 43B (f) is on Statute, the said disallowance is justified”

08. Since the provisions made by assessee of leave encashment remains to be paid, we are of the considered opinion that the Commissioner of Income Tax (Appeals) has rightly confirmed the disallowance made by the Assessing Officer on unpaid leave encashment provisions applying provision of section 43B (f) of the Income tax Act.

09. During the course of hearing before us Ld. AR raised o another issue that the provision of leave encashment is not covered in section 43B (f) of the act but u/s 43B (b) of the act which provides about any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.

10. We have considered the above argument but reject it at threshold because of the reason that leave encashment is not a scheme where employer and employee contributes but is a provision to be made according to accrual method of accounting where payment due to employees on their retirement or otherwise for their accrued leave for the tenure of the service. Further it is not for the welfare of the employees but it is wages due to the employees for the services rendered by them according to the terms of employment. It is also not a statutory payment but a contractual payment. Further finance Act 2001 has introduced section 43B (f) wherein leave encashment provision were covered, therefore it is apparent that earlier to that it was allowed on accrual basis irrespective of the year of payment.

11. Therefore in view of above appeal of assessee for all the three years are dismissed.

(Order Pronounced in the Court on 09/11/2015)

Sd/-                                                     Sd/-
(C.M.Garg)                              (Prashant Maharishi)
JUDICIAL MEMBER                ACCOUNTANT MEMBER