Constitutional Validity of Clause (f) of Section 43B of the Income Tax Act, 1961
SUPREME COURT OF INDIA
Union of India v. Exide Industries Limited.
CIVIL APPEAL NO. 3545 OF 2009 | 24th April, 2020
In the present case, the constitutional validity of Section 43B (f) of the Income Tax Act, 1961 (the Act) is under-challenged, which arises out of the decision of Hon’ble Calcutta High Court (the High Court) in case of Exide Industries Ltd vs. Union of India vide order dated A.P.O. 301 OF 2005 IN W.P. NO. 2512 OF 2002 dated 27.06.2007, wherein the Respondent had filed a Writ petition contending that Section 43B (f) of the Act was ultra vires in the law of the land since the assessee being a body corporate was entitled to maintain its accounts by the mercantile system of accounting which is permissible in law.
The ruling of the High Court reached up to Apex Court (the Court) in the present case wherein the Court has analysed the Section 43B since inception along with its objects and also critically observed the intension of the legislature behind the insertion of clause (f) of Section 43B of the Act. Court has also elucidated critically on the powers of the legislature to enact any provisions in the Act in light of various judicial precedents and discussed the Constitutional validity of clause (f) of Section 43B of the Act considering the grounds on which the High Court has held clause (f) of Section 43B of the Act as unconstitutional.
The facts of the present case arise out of the decision of the High Court wherein the amount payable to the employees of Respondent as leave encashment was to be shown in the balance sheet as a liability for each and every year and the employer was entitled to have deduction not only in the year in which it was actually paid but also for the years when the provision was made. The High Court struck down Clause (f) of Section 43 of the Act and held it as arbitrary, unconscionable.
Respondent in the present case being aggrieved with the inclusion of clause (f) of Section 43 of the Act during the time of payment of income tax on the profits and gains of their business, and contended that Section 145 of the Act provides for the independent choice of method of accounting and accordingly, computation of profits and gains of business is determined in accordance with the mercantile system. Respondents further contended that as per the mercantile system, income and expenditure are determined based on accrual or provision and not based on actual receipt/payment.
The respondents further contended that Section 43B of the Act has been carved out as an exception to the afore-stated general rule of accrual basis for determination of liability, as it subjects to deductions in lieu of certain kinds of liabilities to actual payment. According to the respondents, the exception under Section 43B of the Act 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 encashment scheme being a trading liability cannot be subjected to the exception under Section 43B of the 1961 Act.
DISCUSSION AND FINDINGS
Concerning issue in hand, the Court has discussed this issue in light of various cases, and judicial interpretations, wherein Court highlighted the objective behind the insertion of clause (f) in Section 43B of the Act, that the clause (f) to Section 43B of the Act came into effect vide Finance Act, 2001 dated 01.04.2002 to provide for a tax disincentive in cases of deductions claimed by the assessee from income tax in lieu of liability accrued under the leave encashment scheme but not actually discharged by the employer. Relevant part of Section 43B of the Act reads as:
“Section 43B: 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 term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan, or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,