BHARAT EARTH MOVERS versus COMMISSIONER OF INCOME TAX, KARNATAKA

Citation: [2000] SUPP. 2 S.C.R. 295 · Decided: 09-08-2000 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Appeal(s) allowed

Judgment (excerpt)

BHARAT EARTH MOVERS 
A 
v. 
COMMISSIONER OF INCOME TAX, KARNATAKA 
AUGUST 9, 2000 
[S.P. BHARUCHA, R.C. LAHOTI AND N. SANTOSH HEGDE, JJ.] 
B 
Income Tax Act, 1961 : Section 37(/ ). 
Income Tax-Business liability-Deduction-Detennination of-AY 1978-
79-Comingent liability-Business liability had arisen in an accounting year 
although the liability had to be quantified and discharged at a future date-
Held: Such a liability is not a contingent liability and has to be deducted in the 
same accounting year in which it arose. 
Income Tax-Mercantile System of accounting-Contingent liability-
Business expenditure-Dedw:tion-AY 1978-79-Assessee-employer created a 
fund to meet the liability in respect of encashment of earned leave/vacation 
leave o.f its employees-Held : Such a liability is not a contingent liability and 
is, therefore, deductible. 
Constitution of India, 1950: Article 144. 
c 
D 
' 
Supreme Court directed /TAT to frame a supplementary statement o.f case 
E 
based on books of accounts and other relevant records-Failure on part of 
/TAT, in complience Supreme Court decided the case after culling out the facts 
from the statement o.f case already .filed, which were not disputed-Failure of 
/TAT to comply with its direction deplored by Supreme Court and expected that 
/TAT would be more responsive and sensitive to its directions-Income Tax Act, 
F 
196/, S.258. 
The officers and staff of the appellant·assessee were entitled to en-
cash earned leave/vacation leave subject to a certain limit. The officers and 
staff had the option of_ availing themselves of the accumulated leave or in 
lieu of availing the leave apply for encashment whereupon they would be 
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paid salary for the period of leave earned but not availed. 
The appellant-assessee created a fund by making a provision for 
meeting its liability arising on account of the accumulated earned/vacation 
leave. In the assessment year 1978-79 the appellant-assessee set apart a 
certain sum in a separate account as provisions for encashment of accrued 
H 
295 
A 
B 
c 
D 
296 
SUPREME COURT REPORTS 
[2000] SUPP. 2 S.C.R. 
leave which was claimed as a deduction. However, the High Court held 
that the provision for accrued leave salary was a contingent liability and, 
therefore, was not a permissible deduction. The High Court further held 
that the liability would arise only if an employee applied for encashment or 
on his retirement or termination of service which were uncertain events. 
Hence this appeal. 
Allowing the appeal, this Court 
HELD : 1. If a business liability has definitely arisen in the account-
ing year, the deduction should be allowed although the liability may have 
to be qualified and discharged at a future date. What should be certain is 
the incurring of the liability. It should also be capable of being estimated 
with reasonable certainty though the actual quantification may not be 
possible. If these requirements are satisfied the liability is not a contingent 
one. The liability is in praesenti though it will be discharged at a future 
date. It does not make any difference if the future date on which the 
liability shall have to be discharged is not certain. [299-B] 
Metal Box Company of India Ltd. v. Their Workmen, (1969) 73 ITR 53 
SC and Calcutta Co. Ltd. v. CIT, (1959) 37 ITR 1 SC, relied on. 
2.1. The orders of the authorities below and of the Income Tax 
E 
Appellate Tribunal (ITAT) did not indicate how the appellants operated 
the leave account and leave salary provision was made. To appreciate the 
facts correctly and in that light to settle the law the ITAT was directed to 
frame a supplementary statement of case based on books of accounts and 
other relevant contemporaneous records of the appellant which direction 
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was to be complied with within a period of six months. After a lapse of 
sixteen months the ITAT sought another six months' time to submit the 
supplementary statement of case which request, being unreasonable, was 
declined. Therefore, the necessary facts were cu!led out from the statement 
of case filed earlier by the assessee, the correctness of which were not 
disputed before the ITAT as well as before this Court, in order to decide 
this appeal. [300-F-H; 301-C] 
2.2. Article 144 of the Constitution obliges all authorities, civil and 
judicial, in the territory of India to act in aid of the Supreme Court. 
Failure to comply with the directions of this Court by the ITAT has to be 
deplored. It is expected t

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