Leave Encashment provisions u/s 43B(f) is constitutionally valid and operative for all purposes
Apex Court Bench of Justices A.M. Khanwilkar, Dinesh Maheshwari has finally put to rest the long standing issue of Constitutional validity of Section 43B of Income Tax Act, 1961.
The Bench has disposed of the Appeal preferred by Union of India against the Division Bench Judgment by High Court at Calcutta dated 27.06.2007.
It may be recalled that the decision of the learned single Judge of upholding the Constitutionality of Section 43B of Income Tax Act, 1961 was appealed and came to be reversed by the Division Bench of the High Court.
Let us know about it. Let us first read section 43B of the Income Tax Act which reads as under:
Section 43B of Income Tax Act, 1961
Certain deductions to be only on actual payment: Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or
(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank 55[or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank] in accordance with the terms and conditions of the agreement governing such loan or advances, or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or
(g) any sum payable by the assessee to the Indian Railways for the use of railway assets,
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :
Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.
Explanation 1.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 2.—For the purposes of clause (a), as in force at all material times, “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
Explanation 3.—For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.
Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid.
Explanation 4.—For the purposes of this section,—
(a) “public financial institutions” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
(aa) “scheduled bank” shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;
(b) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(c) “State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of section 36;
56[(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.]
The issue involved, submissions by either side and the observation by the Hon’ble court is compiled in a point wise manner as under:
- M/s Oxide Ltd. being liable to pay income tax upon the profits and gains of their business considered themselves aggrieved with the inclusion of clause (f) in Section 43B and contended that Section 145 of the 1961 Act offers them the choice of method of accounting and accordingly, they computed their profits and gains of business in accordance with the mercantile system.
- As per the mercantile system, income and expenditure are determined on the basis of accrual or provision and not on the basis of actual receipt/payment.
- The respondents further contended that Section 43B has been carved out as an exception to the afforested general rule of accrual for determination of liability, as it subjects deductions in lieu of certain kinds of liabilities to actual payment.
- According to the respondents, the exception under Section 43B comes into operation only in a limited set of cases covering statutory liabilities like tax, duty, cess etc. and other liabilities created for the welfare of employees and therefore, the liability under the leave encasement scheme being a trading liability cannot be subjected to the exception under Section 43B of the 1961 Act.
- The respondents contended that the judgment of this Court in Bharat Earth Movers vs. Commissioner of Income Tax, holds the field of law as far as the nature of the liability of leave encasement is concerned. The said judgment, while dealing with the principles of accounting under Section 37, conclusively holds that if a business liability has arisen definitely, deduction may be claimed against the same in the previous year in which such liability has accrued, even if it has not been finally discharged.
- As per them the enactment of clause (f) was driven by the sole consideration of subjugating the legal position expounded by this Court in Bharat Earth Movers (supra) without removing the basis thereof. Such enactment would fall foul of the scheme of the Constitution. It would be an inroad into the sphere reserved exclusively for the judiciary and thereby violate the essential principles of separation of powers.
- The submission the other side was that the broad objective of enacting Section 43B concerning specified deductions referred to therein was to protect larger public interest primarily of revenue including welfare of the employees. Clause (f) fits into that scheme and shares sufficient nexus with the broad objective. It was argued that it was quite natural for the legislature to examine the situation and legislate according to the need. The binding decision of the highest court was not nullified in the process; only the position of law was changed prospectively.
- The Hon’ble Supreme court observed as under:It is no doubt true that the legislature cannot sit over a judgment of this Court or so to speak overrule it. There cannot be any declaration of invalidating a judgment of the Court without altering the legal basis of the judgment as a judgment is delivered with strict regard to the enactment as applicable at the relevant time. However, once the enactment itself stands corrected, the basic cause of adjudication stands altered and necessary effect follows the same. A legislative body is not supposed to be in possession of a heavenly wisdom so as to contemplate all possible exigencies of their enactment. As and when the legislature decides to solve a problem, it has multiple solutions on the table. At this stage, the Parliament exercises its legislative wisdom to shortlist the most desirable solution and enacts a law to that effect. It is in the nature of a ‘trial and error’ exercise and we must note that a law making body, particularly in statutes of fiscal nature, is duly empowered to undertake such an exercise as long as the concern of legislative competence does not come into doubt. Upon the law coming into force, it becomes operative in the public domain and opens itself to any review under Part III as and when it is found to be plagued with infirmities. Upon being invalidated by the Court, the legislature is free to diagnose such law and alter the invalid elements thereof. In doing so, the legislature is not declaring the opinion of the Court to be invalid……
Strictly speaking, the Court cannot venture into hypothetical spheres while adjudging constitutionality of a duly enacted provision and unfounded limitations cannot be read into the process of judicial review. A prior, the plea that clause (f) has been enacted with the sole purpose to defeat the judgment of this Court is misconceived…..
In view of the clear legal position explicated above, this appeal deserves to be allowed.
Accordingly, the impugned judgment of the Division Bench of the High Court was reversed and clause (f) in Section 43B of the Income Tax Act, 1961 Act was held to be constitutionally valid and operative for all purposes