Bhaskar Rao, J.:— In this reference made under section 256(2) of the Income-tax Act, 1961, in pursuance of a direction of this court, the question that falls for our determination is:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing that the provisions made for leave with wages will be allowed as deduction allowed on the basis of actual payments would be appropriately adjusted?”

2. The facts in brief are: The assessee is a private limited company carrying on business in tobacco engaging seasonal labour. The assessee in the return filed pursuant to the closure of its books to profit and loss account on December 31, 1975, showed as its liability an amount of Rs. 72,540, representing the provision for leave with wages payable to the workers. The Income-tax Officer disallowed this claim of the assessee as a liability, on the ground that it is only contingent in nature.

3. The Appellate Assistant Commissioner also agreed with this view and refused deduction. The Appellate Tribunal, however, relying upon a judgment of the Cochin Bench of the Kerala State came to the conclusion that the amount could be determined with some degree of precision in the light of section 79 of the Factories Act, 1948, and, accordingly, allowed the deduction disagreeing with the view of the Income-tax Officer and the Appellate Assistant Commissioner. It is, therefore, necessary for us to have a look at section 79 of the Factories Act, in order to assess the possibility of deciding this liability on actuarial valuation basis. Section 79 to the extent relevant, is as under:

“79. Annual leave with wages.— (1) Every worker who has worked for a period of 240 days or more in a factory during a calendar year shall be allowed during the subsequent calendar year, leave with wages for a number of days calculated at the rate of—… (3) if a worker is discharged or dismissed from service or quits his employment or is superannuated or dies while in service, during the course of the calendar year, he or his heir or nominee, as the case may be, shall be entitled to wages in lieu of the quantum of leave to which he was entitled immediately before his discharge, dismissal, quitting of employment, superannuation or death calculated at the rates…

(5) If a worker does not in any one calendar year take the whole of the leave allowed to him under sub-section (1) or sub-section (2), as the case may be, any leave not taken by him shall be added to the leave to be allowed to him in the succeeding calendar year:

Provided that the total number of days of leave that may be carried forward to a succeeding year shall not exceed thirty in the case of an adult or forty in the case of a child:

Provided further that a worker, who has applied for leave with wages but has not been given such leave in accordance with any scheme laid down in sub-sections (8) and (9) or in contravention of sub-section (10), shall be entitled to carry forward the leave refused without any limit.”

4. One more fact that needs to be noticed at this juncture is that the Income-tax Officer in the return filed for the assessment year 1977-78 (the succeeding year) in relation to the closure of books of account on December 31, 1976, allowed the deduction of Rs. 72,540 refused in the earlier assessment year 1976-77, which was upheld by the Appellate Assistant Commissioner also.

5. Learned counsel for the-Revenue contended that section 79 confers on the workers who had put in service for the required number of days with the entitlement to avail of the leave in the subsequent calendar year only and, therefore, the deduction claimed as liability cannot be permitted. He submitted that the liability, if any, arises only in the subsequent calendar year when actually the workers can go on leave. This again is subject to actual availment of leave because the workers as per sub-section (5) may opt to have the accrued leave, subject, of course, to 30 days in the case of an adult or 40 days in case of a child, carried forward to the succeeding year. The leave applied for may also be refused by the employer. It is, thus, a contingent liability subject to availment of leave, discharge, dismissal or quitting from service, superannuation or death. When the liability is so much indefinite, learned standing counsel submits the deduction claimed as leave with wages, not in fact paid, but made as a mere provision, cannot be permitted.

6. On the other hand, Mr. A. Satyanarayana, learned counsel for the assessee, contended that though the entitlement to avail of the leave is in the succeeding calendar year, the liability accrues in the very year in which the worker had worked for the required number of days and, therefore, the deduction claimed is rightly allowed by the Tribunal.

7. As noted, section 79 confers the benefit of leave with wages on the workers, the condition being putting in service for 240 days during a calendar year, for being availed of in the succeeding calendar year. Subsection. (5) permits the worker who has not so availed of the leave accrued, to an extent of 30 and 40 days in the case of an adult and a child, respectively, to have that carried forward to the succeeding year. The leave applied for may also be refused as per the second proviso to sub-section (5). Further, sub-section (3) mandates entitlement to wages in lieu of the quantum of leave to which the worker was entitled immediately before his superannuation, death, discharge, dismissal or quitting of employment. In cases where the leave applied for is refused, the worker is entitled to carry forward such leave without the limit of 30 or 40 days noted above. Availment of leave as seen from section 79 is thus subjected to so many contingencies. Therefore, mere entitlement to leave does not automatically lead to the incurrence or accrual of liability on the part of the assesaee so as to make a claim for deduction on that count as though it is definite and independent. In the case before the Cochin Bench, as stated by learned counsel, there was a practice and custom of payment towards leave with wages every year at the time of “Onam” festival, irrespective of the fact whether the workers go on leave or not. This practice and custom is also evident from the decision of the Kerala High Court in CWT v. Prema Laxman, [1984] 150 ITR 170, wherein there was a clear finding of the Tribunal that such payment was accepted as obligatory. It is in view of this finding that it was held therein that the provision for liability to pay leave with wages was an existing liability, having been incurred already, and not a future or contingent liability. There is absolutely no finding either of the Tribunal or of the other authorities that there has grown up any such practice or custom of making payment towards leave with wages on any occasion like “Onam” in the present case, nor is it so pleaded for the assessee. Since that practice was in vogue and obligatory, the Kerala High Court found that the liability would be worked out as on the valuation day. In the instant case, since there was no such practice of payment nor was such payment obligatory, this decision is of no help to the assessee. Equally so, is a later decision of the Kerala High Court in CIT v. Tharian (C.) and Sons, [1987] 166 ITR 607, which merely followed its earlier decision in Prema Laxman's case, [1984] 150 ITR 170. The other decision of the Kerala High Court in CIT v. High Land Produce Co. Ltd., [1976] 102 ITR 803, is one dealing with the payment of gratuity, which is definite and independent of a number of contingencies contemplated in the matter of payment towards leave with wages. Therefore, this decision has no relevance to the present question. The decision of the Supreme Court in Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53, upon which learned counsel, Mr. Satyanarayana, placed much reliance, deals with the liability for payment of gratuity. Gratuity, as stated by the Supreme Court itself in that very decision, is a known liability of which the amount can be determined with substantial accuracy. The practice of making such a provision, the Supreme Court found, was recognised in trade circles and there was nothing in the Bonus Act prohibiting such a practice. Further, gratuity is capable of being decided on actuarial valuation basis—by discounting its present value—unlike the provision for leave with wages. It is also not the case of the assessee that there is any recognition of making a provision of the present kind in trade circles nor is the provision certain and capable of being determined with substantial accuracy. Therefore, we cannot extend this principle laid down by the Supreme Court in the matter of gratuity to-the present case governing the question of provision for leave with wages.

8. An identical question arose before the Madhya Pradesh High Court in Chhaganlal Textile Mills Private Ltd. v. CIT, [1966] 62 ITR 274. There, the assessee-company set apart a reserve fund in a sum of Rs. 75,000 for payments it may have to make to its workers in the next year under section 79 of the Factories Act, towards leave with wages. It was held therein that the liability was only a contingent one and, therefore, could not be allowed as a deduction even though the accounts were kept on the mercantile basis. In so holding, the Madhya Pradesh High Court placed reliance upon a decision of the Calcutta High Court in Bengal Enamel Works Ltd. v. CIT, [1955] ILR 2 Cal 13. The assessee before the Calcutta High Court sought for a deduction of Rs. 6,800, claiming that to be a liability incurred on account of holiday wages which would have to be paid in the following year as per section 49B of the Factories Act, 1934. The claim was refused both for the reason that no expenditure had been actually incurred and also because the amount does not represent a certain liability. In that context, the learned Chief Justice of the Calcutta High Court said (at p. 278 of 62 ITR):

“It should be clear from what I have stated above that such statutory liability for holiday wages as the Factories Act creates is only a contingent liability which may or may not have to be discharged; and, secondly, the measure of that liability can never be known in advance. It cannot be, so known, because it cannot be known in advance how many employees will avail themselves of how many holidays and when and, necessarily, at what rate holiday wages would be payable. In those circumstances, it is perfectly clear that not only is the amount claimed not allowable as an item of expenditure, because, in fact, no expenditure had been incurred and not a pice had gone out of the funds of the company, but also that the amount does not even represent a certain liability which will have to be discharged in any event. It may be that although a particular amount is not actually expended during the currency of a particular accounting year, the assessee will still be entitled to a deduction if a certain liability for its payment has arisen so that it may be said that the expenditure is as good as made. The amount claimed in the present case is certainly not even of that character and, as I have already pointed out, it is not an amount which was actually spent.”

9. The Bombay High Court in a similar case in Commissioner Of Income-Tax, Bombay Central v. Rajkumar Mills Ltd., Indore.*, [1971] 80 ITR 244, having referred to this decision in Chhaganlal's case, [1966] 62 ITR 274, held (head note):

“The question of payment of wages for leave to a worker would arise only if the worker goes on leave, or if he is discharged, or on being refused leave, he quits his employment. Till these circumstances arise, the liability that rests on the employer to pay to a worker wages in accordance with section 79 of the Factories Act, for leave period remains a contingent liability which the employer may or may not be called upon to discharge. Consequently, a sum set apart by an employer in any year for meeting the contingency of some of his workers going on leave in the next year cannot be regarded as permissible expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.”

10. We are in absolute agreement with the views of the Calcutta High Court and the decisions of the Madhya Pradesh and Bombay High Courts referred to above. We accordingly hold that the liability claimed towards provision for leave with wages in the instant case is neither an existing nor accrued one, nor is it capable of being certain and definite for purposes of determining the amount with accuracy. On the other hand, it is purely a contingent one depending upon the actual availment of leave by the workers.

11. In the result, we answer the question in the negative and against the assessee. No costs.