1. At the instance of the Revenue, the following question of law has been referred to this Court under Sec. 256(1) of the I.T Act, 1961.

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the provisions of accrued leave salary is an admissible deduction to arrive at the assessable profits of the assessee-company?”

2. The question arises in the following circumstances: The assessee is a public sector undertaking. In its profits and loss account for the assessment years 1967-1968, 1968-1969 and 1969-1970 the assessee had debited on account of accrued leave salary of its employees, sums of Rs. 27,46,717/-, Rs. 29,68,630/- and Rs. 34,90,254/- respectively.

3. The Assessing Officer while allowing the actual payments disallowed certain amounts as they were only provisions and not an accrued liability. In the present case we are concerned with the assessment year 1967-1968.

4. On appeal against the assessment-order the Appellate Assistant Commissioner noted that the point had been decided by the Tribunal in the earlier years in favour of the assessee and allowed assessee's claim. Questioning the correctness of this order, the Revenue went up in appeal to the Tribunal. The Tribunal also proceeded on the basis that the point had been decided earlier in the case of this very assessee in its favour and followed the same and the departmental case was rejected. Thereafter, the Revenue sought for reference on the question set-forth above.

5. The Tribunal for the earlier years proceeded on the basis of a remand report of the Appellate Assistant Commissioner of Income-Tax who distinguished a decision of the Madhya Pradesh High Court in Chaganlal Textile Mills Pvt. Ltd. v. C.I.T (62 I.T.R 274) and held that the debit for accrued leave salary was a definite liability and not a mere provision and therefore allowed the claim of the assessee in this regard.

6. The assessee put forth its case as under:—In the assessee's undertaking the personnel rules regarding leave are set-forth in several bulletins which provided for different types of leave to its employees. By general Bulletin Nos. 180 and 181 of October 17, 1946, the assessee made rules in regard to the vacation leave. Rule 2 provides that the daily rated personnel…………………… will be entitled to Vacation at the rate of one and one half day's per calendar month i.e, three weeks (consisting of 18 working days and 3 or 4 Sundays) for a full year of service. Rule 4 provides that vacation leave becomes earned at the end of each calender year and may be accumulated to the extent that is earned in three consequtive calendar years of service and in respect of each employee the assessee maintains a leave account. On termination of service the employee is entitled to the vacation leave in monetary benefits, which has not been availed off by him to the extent of a maximum of 54 days. The contention of the assessee is that vacation leave becomes earned at the end of each calendar year. On the year being over the employee has a right to ensure that the employer has credited 10 his account in monetary value the leave he has earned on the very first day of the next calendar year, which would be necessarily a day following the accounting year itself and also that the employee may choose to retire, in which event the appellant as an employer would be bound to pay the monetary value of the vacation earned.

7. For the Department, placing reliance on the decision reported in Chaganlal Textile Mills (P.) Ltd., (62 I.T.R 274.) it was contended that the nature of deduction claimed by the assessee cannot be regarded as the permissible deduction and is only a contingent liability which is neither definite nor ascertainable and hence is not entitled to the deduction as sought for. The basis for the Tribunal's decision being remand report of the Appellate Assistant Commissioner it is necessary to examine the same closely.

8. The Appellate Assistant Commissioner distinguished the leave benefit as provided in Section 79 of the Factories Act from Rules applicable in the instant case and pointed out that vacation leave is earned at the end of each calendar year at the rate of one and one half day per calendar month, and the leave account is credited on accrual basis and even leave which is earned for a part of the year, the calendar year not being over, credit is being given and payment is being made to the employee on the employee being terminated. He also held in the present case that there is nothing that is uncertain about the employer's liability of the type of uncertainty pointed out in Chaganlal Textile Mills Pvt. Ltd's case, (62 I.T.R 274) in as much as, at any point of time and certainly at the close of the calendar year that is 3 months before the close of the accounting year the assessee knows what its liability is in respect of vacation leave of its entire staff. Considering the fact that the assessee had credited the monetary value of leave in each employee's account and also the fact that the assessee has to pay on termination of the employment, the monetary value of the same, he held, that there was a definite liability and that it was not a provision which the assessee had made and debited in its account.

9. The question is whether sums set apart against the contingency of the workmen claiming encashment of leave standing to their credit on the date of termination of their service could be deducted? Earliest of the cases which decided this issue is found in the decision of the Calcutta High Court in Bengal Enamel Works Ltd. v. Commissioner of Income-Tax, West Bengal, (1955) I.L.R 2 Cal. 13. In that case the assessee asked for a deduction of Rs. 6,800/- which it had debited to the expenses account and claimed as a deduction from its profit and loss because it had incurred a liability for a corresponding amount to the employees on account of holiday wages which would have to be paid to them sometime in the following year in accordance with Section 49B of the Factories Act, 1934. The Calcutta High Court agreeing with the Tribunal held that the assessee was not entitled to the deduction claimed both for the reason that no expenses had been actually incurred and also for the reason that the amount could not be claimed even as on account representing certain liability. After examining the provisions of Section 49B of the Factories Act, 1934, the learned Chief Justice of the Calcutta High Court observed:

“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 congingent 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 in 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.”

10. The basis of that decision is the liability under Section 49B of the Factories Act, 1934, to pay holiday wages depends on the circumstances specified therein and since they may or may not arise, the liability is only contingent and uncertain which may or may not have to be discharged. As there was no material difference between this Section and Section 79 of the Factories Act, 1948, the view of the Calcutta High Court was followed in Chaganlal Textile Mills Pvt. Ltd.'s case (1). Once again, this view was reiterated by Bombay High Court in Commissioner of Income-Tax, Bombay Central v. Rajkumar Mills Ltd., Indore (80 I.T.R 244). Therefore, what requires to be considered in this case is whether there is any material difference between the Rule and Section 79 of the Factories Act as is sought to be made out in the remand report of the Appellate Assistant Commissioner. Rule 18 is to the effect that the employees whose services are terminated for reasons other than misconduct will be entitled to encash the entire vacation leave not exceeding 54 days to their credit on the date of termination, and in the case of employees whose services are terminated for misconduct, vacation leave in excess of 30 days will be forfeited to the company, and encashment of leave will be restricted to 30 days vacation leave. The other rule entitles an employee for leave at the rate of 1½ day every month. The net effect is that the question of payment on encashment of leave to a worker could arise only when his employment is terminated. Till then the liability that rests on the employer to pay a worker wages in accordance with the said rules for unutilised leave period remains a contingent liability which the employer may or may not be called upon to discharge. Consequently if any amount is set apart by an employer in any year for meeting this contingency, it cannot be regarded as a permissible deduction. In substance, there is no difference between Section 79 of the Factories Act, 1948, on the one hand and the leave rules of the assessee on the other. In the circumstances, the contingencies arising in both the cases being identical the distinction sought to be drawn by the Appellate Assistant Commissioner is one without difference. Hence we are in respectful agreement with the views expressed by the Madhya Pradesh, Calcutta and Bombay High Courts. Following the said decisions, we answer the question referred to this Court in the negative and in favour of the Revenue.