Section 43b and leave encashment provision vis-a-vis payment

Tax queries 3220 views 2 replies

Parthasarathy T K

Senior Manager - Taxation & Legal

31 Points Joined September 2009

In a company, there is disallowed Leave encashment provision of earlier years (created after 2005-06). Also, there is a provision created in the previous year 2011-12. Leave encashment payments were made to resigned employees, both during 2011-12 and also till September 2012. For claiming deduction under Proviso to section 43B, i.e. for leave encashment payments made after 1st April 2012 till 30th September 2012, is it necessary that they are out of the provisions made in the previous year 2011-12 only or can it be from the provisions made in the earlier years too? It is very difficult to segregate each payment like this, since the number of such payments is very high.

In case, the answer is that it can be out of the earlier years' provisions too, then how does Form 3CD support this?

In case, if the answer is that it has to be only out of provisions made in 2011-12, then can these payments be claimed only in the next year?

Replies (2)

Giridhar S Karandikar

Team Lead

7558 Points Joined November 2011

Leave encashment paid of any of teh previous years shall be allowed as deduction from the taxable income in the year of payment.

However if it is not possible to ascertain to which year the paymetn relates, then it shall be mentioend in teh audit report accorindgly.

However the payment made on account shall be matched with the Ledger Account for Provision of Leave encashemnt account. therefore the payment can be made to teh extent there is balance in the ledger account.

Saket Sinha

Student

129 Points Joined October 2011

As per sec43B deduction of leave encasment is allowed only on payment basis in the Income Tax Act,1961. Accrual concept is followed while makin privision for leave encashmnent and charged to profit and loss account every year. so making of the provision is according to accrual concept of accounting . While calculating income under the head Profita and gains from business or profession provision for leave encashment has to be added back since it has already been debited and the decuction is to be made only on payment basis. since deduction to be allowed only on oayment basis the same has been diasllowed in the previous years therfore no deduction has been made previously ,therefore it is not essential that for payment in the year 2012-13 provision shoul be made in march2012 it can be of previous years also because the balance in provsion for leave encasment is the cuumulative balance which comprises previous years.