The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the disallowance of a leave encashment provision,emphasizing the requirement under Section 43B(f) of the Income Tax Act,1961 for actual payment to claim deductions.
JMC Projects,appellant-assessee,company involved in civil construction and infrastructure development, challenged the disallowance of its leave encashment provision by the Assessing Officer ( AO ). The company argued that the provision, based on actuarial valuation, represented an accrued liability for employee benefits and should be allowed as an expense. However, it could not provide details of payments made against this provision.
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The AO referred to Section 43B(f) of the Act, which requires actual payment for deductions related to leave encashment. It was noted that the provision could not be allowed as a deduction unless paid within the financial year. The AO also emphasized that the non-obstante clause in Section 43B overrides other provisions allowing accrual-based deductions. Consequently, the AO disallowed the claim and added the amount back to the assessee’s income, stating this aligned with the law’s requirement for payment-based deductions.
The assessee, dissatisfied with the AO’s order, appealed to the Commissioner of Income Tax (Appeals)[CIT(A)] regarding the disallowance of leave encashment provisions under Section 43B. The assessee referred to the Calcutta High Court’s ruling in Exide Industries Ltd. vs. Union of India (292 ITR 470), which held Section 43B(f) unconstitutional, and argued that this allowed deductions on an accrual basis.
The CIT(A) observed that the Supreme Court had stayed the Calcutta High Court’s decision, meaning Section 43B(f) was still in effect and required actual payment for deductions. However, the CIT(A) allowed a partial deduction for payments made before the due date for filing the return for A.Y. 2008-09, as permitted under Section 43B of the Act.
The two member bench comprising Suchitra Kamble ( Judicial Member ) and Makarand V.Mahadeokar ( Accountant Member ) reviewed the assessee’s submissions, the AO’s findings, and the CIT(A)’s order. It also considered the Supreme Court’s decision in Exide Industries Ltd. [425 ITR 1 (SC)], which addressed the application of Section 43B(f) for leave encashment provisions.
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The Supreme Court confirmed that Section 43B(f) was constitutional and required actual payment for leave encashment deductions, regardless of the accounting method used or when the liability accrued.
Considering this and the assessee’s acknowledgment of the legal position, the tribunal upheld the disallowance of the unpaid leave encashment provision and dismissed the appeal, as the assessee had not made the required actual payment.
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