Leave Encashment Provision and CSR-linked 80G Deduction: ITAT Mumbai Clarifies Tax Treatment

The Mumbai Bench of the Income Tax Appellate Tribunal, in the case of Aditya Birla Sun Life AMC Limited Vs DCIT (ITAT Mumbai), dealt with a wide range of contentious income-tax issues for multiple assessment years. The core ruling that stands out is the Tribunal’s view that a provision for leave encashment based on actuarial valuation represents an ascertained liability and is therefore allowable as a deduction, despite the Revenue’s attempt to disallow it treating it as unascertained or hit by section 43B(f).

Alongside this, the Tribunal also examined:

  • Deduction of CSR-related payments under section 80G
  • Disallowance of employees’ contribution to provident fund under section 36(1)(va) in light of Checkmate Services (P) Ltd. v. CIT [2022] 448 ITR 518
  • Disallowance under section 40(a)(ia) and section 43B
  • Short-term capital gains classification
  • Credit of Dividend Distribution Tax (DDT) and consequential interest under section 115P
  • Computational errors, TDS credits, and interest under sections 234B, 234C, 234D, 244A

The appeals related to A.Ys. 2017–18, 2018–19, 2022–23 and 2023–24, all arising from assessments framed under section 143(3) or section 143(3) r.w.s. 144B of the Income Tax Act 1961.

Background of the Assessee and Assessments

The assessee is a resident corporate entity involved in asset management, portfolio management and advisory services. Returns were filed electronically for the relevant years, processed initially under section 143(1) and later picked up for scrutiny under CASS. During scrutiny, the Assessing Officer examined, inter alia:

  • Section 80G deduction claims on CSR-linked contributions
  • Timeliness of employees’ PF payments under section 36(1)(va)
  • Disallowances under section 40(a)(ia) and section 43B
  • Capital gains computation
  • TDS and DDT credit
  • Interest under sections 234B, 234C, 234D, 115P

Additions and disallowances were made by the Assessing Officer year-wise; the CIT(A), NFAC, largely sustained the additions while granting partial relief in limited areas such as TDS credit. The assessee, being dissatisfied, approached the ITAT.

For context, the returned and assessed incomes were broadly similar across years, with modest additions over large returned figures. For instance, in A.Y. 2017–18 the returned income was around Rs. 3,33,33,48,440/- whereas the assessed income was Rs. 3,34,76,51,568/-.

A.Y. 2017–18: Core Issues and Tribunal’s Findings

Employees’ contribution to PF – Section 36(1)(va)

The assessee’s first ground concerned a disallowance of employees’ PF contribution of Rs. 82,10,149/-. In view of the Supreme Court ruling in Checkmate Services (P) Ltd. v. CIT [2022] 448 ITR 518, the learned Authorised Representative conceded that the issue was covered against the assessee. The Tribunal, following this binding precedent, upheld the disallowance and dismissed the ground.

Interest on delayed TDS payment

A claim of deduction for interest on delayed payment of TDS amounting to Rs. 3,29,345/- was initially contested on the basis that such interest is not in the nature of tax on the income of the assessee but relates to tax collected for third parties. However, considering the relatively insignificant amount involved, the assessee chose not to press this ground. The Tribunal accordingly dismissed it as not pressed.

Allowability of provision for leave encashment – actuarial basis

One of the central questions was whether a provision of Rs. 57,63,634/- towards leave encashment, computed through actuarial valuation in line with AS–15 and mercantile accounting, could be allowed as deduction.

  • The Assessing Officer treated this provision as an unascertained liability, observing that it was reversed in the subsequent year and therefore could not be regarded as crystallised in the relevant year. He disallowed the amount.
  • The CIT(A) did not dispute the actuarial methodology but held that, in view of section 43B(f) and the judgment of the Supreme Court in Union of India v. Exide Industries Ltd. (116 com 378), deduction was available only on payment basis.

The assessee argued: