COMPANIES providing for leave encashment payments in their books can now claim tax deduction even if the actual cash payouts have not taken place. Providing for leave encashments is mandatory under ICAI accounting norms for companies. However, companies were unable to claim a deduction for the encashments if there was no actual cash outflow due to a provision in the Income-Tax Act.
The government had carried out an amendment in the section 43B(F) of the Income-Tax Act in 2001. As per the amendment, companies could only claim deduction for actual cash flow and not for the provisions made.
According to a recent ruling given by the Calcutta High Court, companies will be able to claim deduction based on provision for leave encashment. The decision came in response to an petition filed by Exide Industries. The court has termed the amendment carried out by government as arbitrary and struck it out.
“What the high court has held is, for other items covered under the section 43B like statutory duties, payments to excise department, contribution to provident funds, interest payments to banks, giving deduction only on account of actual cash outflow was appropriate as public money was involved in these payments and the government wanted to stop any misuse of public money. But, leave encashment is not a statutory liability and does not involve public money in any way. The decision will help companies as they would be able to claim deduction for these payouts and would reflect on their balance-sheet,” PricewaterhouseCoopers executive director Rahul Mitra said.
The amendment was brought in by the government to nullify a Supreme Court verdict given in the case of Bharat Earth Movers. The high court pointed that the original 43B did have the sub-section F covering leave encashments. Section 43B was brought in only to prevent evasion of statutory liability and sub-section F was inserted in 2001 only to nullify the apex court’s decision.