I – Section 115JB – Provision for leave encashment is not to be added back to the book profit for computation u/s 115JB as it is an ascertained liability determined on actuarial basis II – Provision for wealth tax was not to be reduced from book profit to be computed u/s 115JB

6. [2020] 114 taxmann.com 538 (Mum.)(Trib.)

Caprihans India Ltd. vs. DCIT

ITA No. 4252/Mum/2011

A.Y.: 2005-06

Date of order: 23^rd December, 2019

I – Section 115JB – Provision for leave encashment is not to
be added back to the book profit for computation u/s 115JB as it is an
ascertained liability determined on actuarial basis

II – Provision for wealth tax was not to be reduced from
book profit to be computed u/s 115JB

FACTS I

While assessing the total income of the assessee u/s 153C
r.w.s. 143(3) of the Act, the A.O. for the purpose of computing book profits
added the amount of provision for leave encashment of Rs. 15,30,070 on the
ground that it was an unascertained liability. He held that the liabilities
pertaining to leave encashment were not ascertained by the end of the financial
year, therefore the assessee had made a provision for the same.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
upheld the action of the A.O.

The assessee then preferred an appeal to the Tribunal where,
relying on the ratio of the decision of the Punjab & Haryana High
Court in the case of CIT vs. National Hydro Electric Power Corporation
Ltd. [2010] 45 DTR 117 (P&H) it was contended that the provision
for leave encashment was made in the books on actuarial basis, therefore the
same could not be held to be in the nature of a provision for an unascertained
liability.

HELD I

The Tribunal held that if a business liability had 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.

It observed that this view is fortified by the judgment of
the Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT
[2000] 245 ITR 428 (SC). In the said case, it was observed by the
Hon’ble Apex Court that what should be certain is the incurring of the
liability and the fact that the same is capable of being estimated with
reasonable certainty, although the actual quantification may not be possible.
The Apex Court had observed that the provision for meeting the liability for
encashment of earned leave by the employees is not a contingent liability and
is admissible as a deduction.

In view of the above, the Tribunal held that as the provision
for leave encashment had been made by the assessee on actuarial basis,
therefore the same being in the nature of an ascertained liability could not
have been added by the A.O. for the purpose of determining the ‘book profit’
u/s 115JB. This ground of appeal of the assessee was allowed.

FACTS II

The assessee, while computing the ‘book profit’ u/s 115JB had
added back the amount of the wealth tax provision. On appeal, the assessee by
way of a specific ground had assailed the addition of the provision for wealth
tax while computing the ‘book profit’ u/s 115JB. However, the CIT(A) declined
to accept the aforesaid claim. Observing that the said provision was covered
u/s 115JB, the CIT(A) had upheld the view taken by the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that as the provision for wealth tax does not fall
within any of the items of the ‘Explanation’ to section 115JB, the same could
not be added back while computing the ‘book profit’ under the said statutory
provision. In support of the aforesaid contention, reliance was placed on the
order of the ITAT, Kolkata, Special Bench in the case of JCIT vs. Usha
Martin Industries Ltd. [2007] 104 ITD 249 (SB).

HELD II