Provision For Leave Encashment Not Debited To P&L A/c, Can't Be Added As Employer's Income: Ahmedabad ITAT
The Ahmedabad ITAT held that provision for leave encashment which was inherited by the assessee on account of restructuring exercise of the GEB, by virtue of which, huge number of employees had been onboarded by the assessee-company, cannot be added to assessee's income. The Division Bench of Annapurna Gupta (Accountant Member) and T.R. Senthil Kumar (Judicial Member) observed that...
The Ahmedabad ITAT held that provision for leave encashment which was inherited by the assessee on account of restructuring exercise of the GEB, by virtue of which, huge number of employees had been onboarded by the assessee-company, cannot be added to assessee's income.
The Division Bench of Annapurna Gupta (Accountant Member) and T.R. Senthil Kumar (Judicial Member) observed that no disallowance of leave encashment liability was warranted if the assessee had not debited any amount on account of provision for leave encashment to the profit & loss account.
Facts of the case
During the assessment, the AO noted the assessee company's provision for leave and encashment liability outstanding as at the end of the impugned year was Rs.6746.46 lakhs, whereas the liability for the same as at the beginning of the year was noted to be only Rs.5.38 lakhs. Deriving from this data that the provisions made during the year was the difference of the opening and closing balance being Rs.6741.08 lakhs and noting the same to be unpaid, he proposed the disallowance/ addition of the same to the income of the assessee. On appeal, the CIT(A) deleted the disallowance.
Observation of the Tribunal
The Bench found that the assessee offered explanation contending that the disallowance was not warranted since it had not debited any amount on account of provision for leave encashment to the profit & loss account.
It was explained that the liability had been acquired by the assessee-company on account of restructuring of GEB and pertained to employees onboarded by the assessee company as a consequence and pertained to earlier years, added the Bench.
On the contrary, the Bench noted that the AO had completely disregarded the contentions of the AO and did not even consider it fit to verify the facts, but just went ahead, in total disregard to the explanation of the assessee, to make disallowance/ addition of provision for leave encashment.
Thus, the Bench observed that the CIT(A) has deleted the disallowance/ addition made by the AO of provision for leave encashment amounting to Rs.5874.34 lakhs, after verifying all the facts that this provision was not debited to the profit & loss account of the assessee, and that, it did not pertain to the impugned year also.
Hence, the ITAT dismissed Revenue's appeal.
Counsel for Appellant/ Revenue: Kamlesh Makwana
Counsel for Respondent/ Assessee: Manish J Shah and Jimi Patel
Case Title: DCIT versus Gujarat State Electricity Co. Ltd.
Case Number: ITA No.854/Ahd/2016