R. C. Lahoti, J. - (1.) Relevant to the assessment year 1978-1979 the following question of law was stated, at the instance of the Revenue, by the Income-tax Appellate Tribunal for the opinion of the High Court of Karnataka under Section 256(1) of the Income-tax Act, 1961:-"Where on the facts and in the circumstances of the case the provision for meeting the liability for encashment of earned leave by the employee is an admissible deduction -
(2.) The appellant-company has two sets of employees. One set of employees is covered by Employees State Insurance Scheme and is generally known as "staff". The other set of employees not so covered is known generally as 'officers'. The company has floated beneficial schemes for its employees for encashment of leave. The officers are entitled to earned leave calculated at the rate of 2.5 days per month, i.e. 30 days per year. The staff (other than officers) is entitled to vacation leave calculated at the rate of 1.5 days per month, i.e., 18 days in a year. The earned leave can be accumulated up to 240 days maximum while the vacation leave can be accumulated up to 126 days maximum. The earned leave/vacation leave can be encashed subject to the ceiling on accumulation. The officers may at their option avail the accumulated leave or in lieu of availing the leave apply for encashment whereupon they would be paid salary for the period of leave earned but not availed. So does the scheme extend facility of encashment to the staff in respect of vacation leave. Any leave earned beyond the said ceiling limit of 240/126 days cannot be accumulated and goes a waste. It can neither be availed nor encashed. The appellant-company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. In the assessment year 1978-1979 an amount of Rs. 62,25,483/- was set apart in a separate account as provision for encashment of accrued leave. It was claimed as a deduction. In the opinion of the Tribunal the assessee was entitled to such deduction. The High Court has formed a different opinion and held that the provision for accrued leave salary was a contingent liability and therefore was not a permissible deduction. The reasoning applied by the High Court is that the liability will arise only if an employee may not go on leave and instead apply for encashment. If the employee avails the leave as per his entitlement, then he would be paid salary for the period of leave and liability for encashment would not arise. The other event on the occurrence of which the employee may stake his claim is termination or retirement which again is an uncertainty. Accordingly the High Court has answered the question in the negative, that is, in favour of the Revenue and against the assessee. The assessee has come up in appeal.
(3.) Shri S. E. Dastur, the learned senior advocate for the appellant-company has submitted that the liability is a certainty. Provision is made for meeting the liability to the extent of entitlement of the officers and staff to accumulate earned/vacation leave subject to the ceiling limit of 240/126 days as may be applicable. Having accumulated leave in a particular year, in the succeeding year the employee may either avail the leave or apply for its encashment. If he avails the leave then additional provision for encashment is not made in the reserve account. However, if he does not avail the leave and instead chooses to encash his entitlement, he becomes entitled to an additional number of days as accumulated leave. For example, having rendered service for 365 days in the year 'A' an officer becomes entitled to avail leave for 30 days in the succeeding year 'B', provision in the leave reserve account is made in the year 'A' for payment of an amount equivalent to 30 days salary so as to meet the claim for encashment. If he chooses to encash the leave and renders service for full 365 days in the year 'B', then the amount transferred to reserve is paid to him and in view of his having earned again the next entitlement for 30 days leave, provision is made therefor by transferring the appropriate amount in the reserve account. If he avails the leave then he is paid the leave salary. The leave salary is paid from the reserve. Whether the amount is paid as salary by drawing upon from the current year's P and L Account or from the reserve, it would not make any difference in practice as there would be no double payment and hence no double claim for deduction. In either case the liability is certain though the period in which the liability would be incurred is not certain inasmuch as the leave encashment can be sought for by the employee either during the years of service or at the end of the service. Subject to the ceiling every employee would either avail the leave or seek encashment and therefore the liability is a certainty; it cannot be called a contingent liability. We find substance in the submission of the learned senior counsel for the appellant.;