# UNION OF INDIA & ORS v. EXIDE INDUSTRIES LIMITED & ANR

- **Citation:** [2020] 7 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 2020-04-24
- **Case number:** Civil Appeal No. 3545 of 2009
- **Bench:** A. M. Khanwilkar, Hemant Gupta, Dinesh Maheshwari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-ors-v-exide-industries-limited-anr-34651
- **Pages:** 38

## Headnote

Income Tax Act, 1961:
s. 43B(f) (as inserted by Finance Act, 2001) - Liability under
leave encashment scheme - Subjected to exception u/s. 43B by
inserting Clause (f) to s. 43B - Constitutional validity of - Held:
s.43B is not an embargo upon the autonomy of the assessee in
adopting a particular method of accounting, nor deprives the
assessee of any lawful deduction - It merely operates as an
additional condition for the availment of deduction qua the specified
head - The only effect of insertion of clause (f) is to regulate the
stated deduction by putting it in a special provision - The assessee
has neither made a case of non-existence of competence nor
demonstrated any constitutional infirmity in Clause (f) - s.43B (f)
is held to be constitutionally valid and operative for all purposes.
s.145 - Method of accounting - Is a prerogative falling in
the domain of the assessee - However, the autonomy of assessee in
adopting a system of accounting is controlled by the regulation
notified by the Central Government.
Judicial Review:
Legislative enactment - Constitutionality - Determination of
- Held: In exercise of judicial review, the Court starts with a basic
presumption in favour of constitutionality - While testing the
constitutional validity of a provision, the Court is to inspect the
existence of enacting power, and once such power is found to be
present, the next examination is to ascertain whether the enacted
provision impinges upon any right enshrined in Part III of the
Constitution - While adjudicating constitutionality of a duly enacted
provision, Court cannot venture into hypothetical spheres -
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Unfounded limitation cannot be read into the process of judicial
review - The process of testing constitutional validity is not to sneak
into the prudence or proprieties of the legislature in enacting the
impugned provision, nor to examine the culpable conduct of the
legislature as an appellate authority over the legislature - The role
of the Court is restricted to the finding of a constitutional infirmity
in the provision, as it is placed before the Court.
Fiscal statutes - Judicial review of - The approach of
Constitutional Courts ought to be different while dealing with fiscal
statutes - The general principles of exclusion and inclusion do not
apply to taxing statutes with the same vigour unless the law reeks of
constitutional infirmities - A larger discretion is given to the
legislature in taxing statutes than in other spheres.
Legislation:
A law when declared to be invalid, by Court, 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.
Interpretation of Statutes:
Non-obstante clause - Interpretation of - Held: A nonobstante clause assumes an over-riding character against any other
provision of general application.
Objects and reasons of the statute - As an aid to interpretation
of statute - Nature of - When the Court examines the validity of a
provision, its primary concern is literal text of the provision - This
constitutes first test of interpretation - Interpretation of statute
cannot be unrelated to the nature of the statute - Objects and reasons
of the Statute are the external aids to the interpretation and can be
looked into for a limited purpose in the process of interpretation,
especially when the Court is sitting over the interpretation of an
ambiguous provision - The Court is not bound by such external
elements - Therefore, the presence or absence of objects and reasons
have no impact upon the constitutional validity of a provision as
long as the literal features of a provision enable the Court to
comprehend its true meaning with sufficient clarity.
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Allowing the appeal, the Court
HELD: 1.1 While testing the constitutional validity of a
provision, the Court is to inspect the existence of enacting power
and once such power is found

## Text

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[2020] 7 S.C.R. 1
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UNION OF INDIA & ORS.
v.
EXIDE INDUSTRIES LIMITED & ANR.
(Civil Appeal No. 3545 of 2009)
APRIL 24, 2020
[A. M. KHANWILKAR, HEMANT GUPTA AND
DINESH MAHESHWARI, JJ.]
Income Tax Act, 1961:
s. 43B(f) (as inserted by Finance Act, 2001) - Liability under
leave encashment scheme - Subjected to exception u/s. 43B by
inserting Clause (f) to s. 43B - Constitutional validity of - Held:
s.43B is not an embargo upon the autonomy of the assessee in
adopting a particular method of accounting, nor deprives the
assessee of any lawful deduction - It merely operates as an
additional condition for the availment of deduction qua the specified
head - The only effect of insertion of clause (f) is to regulate the
stated deduction by putting it in a special provision - The assessee
has neither made a case of non-existence of competence nor
demonstrated any constitutional infirmity in Clause (f) - s.43B (f)
is held to be constitutionally valid and operative for all purposes.
s.145 - Method of accounting - Is a prerogative falling in
the domain of the assessee - However, the autonomy of assessee in
adopting a system of accounting is controlled by the regulation
notified by the Central Government.
Judicial Review:
Legislative enactment - Constitutionality - Determination of
- Held: In exercise of judicial review, the Court starts with a basic
presumption in favour of constitutionality - While testing the
constitutional validity of a provision, the Court is to inspect the
existence of enacting power, and once such power is found to be
present, the next examination is to ascertain whether the enacted
provision impinges upon any right enshrined in Part III of the
Constitution - While adjudicating constitutionality of a duly enacted
provision, Court cannot venture into hypothetical spheres -
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Unfounded limitation cannot be read into the process of judicial
review - The process of testing constitutional validity is not to sneak
into the prudence or proprieties of the legislature in enacting the
impugned provision, nor to examine the culpable conduct of the
legislature as an appellate authority over the legislature - The role
of the Court is restricted to the finding of a constitutional infirmity
in the provision, as it is placed before the Court.
Fiscal statutes - Judicial review of - The approach of
Constitutional Courts ought to be different while dealing with fiscal
statutes - The general principles of exclusion and inclusion do not
apply to taxing statutes with the same vigour unless the law reeks of
constitutional infirmities - A larger discretion is given to the
legislature in taxing statutes than in other spheres.
Legislation:
A law when declared to be invalid, by Court, 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.
Interpretation of Statutes:
Non-obstante clause - Interpretation of - Held: A nonobstante clause assumes an over-riding character against any other
provision of general application.
Objects and reasons of the statute - As an aid to interpretation
of statute - Nature of - When the Court examines the validity of a
provision, its primary concern is literal text of the provision - This
constitutes first test of interpretation - Interpretation of statute
cannot be unrelated to the nature of the statute - Objects and reasons
of the Statute are the external aids to the interpretation and can be
looked into for a limited purpose in the process of interpretation,
especially when the Court is sitting over the interpretation of an
ambiguous provision - The Court is not bound by such external
elements - Therefore, the presence or absence of objects and reasons
have no impact upon the constitutional validity of a provision as
long as the literal features of a provision enable the Court to
comprehend its true meaning with sufficient clarity.
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Allowing the appeal, the Court
HELD: 1.1 While testing the constitutional validity of a
provision, the Court is to inspect the existence of enacting power
and once such power is found to be present, the next examination
is to ascertain whether the enacted provision impinges upon any
right enshrined in Part III of the Constitution. Broadly speaking,
the process of examining validity of a duly enacted provision, as
envisaged under Article 13 of the Constitution, is premised on
these two steps. No doubt, the second test of infringement of
Part III is a deeper test undertaken in the light of settled
constitutional principles. [Para 11][20-H; 21-A-B]
State of Madhya Pradesh v. Rakesh Kohli & Anr. (2012)
6 SCC 312 : [2012] 6 SCR 661; Bhanumati & Ors. v.
State of Uttar Pradesh & Ors. (2010) 12 SCC 1 : [2010]
7 SCR 585; State of Andhra Pradesh & Ors. v. Mcdowell
& Co. & Ors. (1996) 3 SCC 709 : [1996] 3 SCR 721;
Kuldip Nayar & Ors. v. Union of India & Ors. (2006) 7
SCC 1 : [2006] 5 Suppl. SCR 1 - relied on.
2. It is no more res integra that the examination of the Court
begins with a presumption in favour of constitutionality. This
presumption is not just borne out of judicial discipline and
prudence, but also out of the basic scheme of the Constitution
wherein the power to legislate is the exclusive domain of the
Legislature/Parliament. This power is clothed with power to
decide when to legislate, what to legislate and how much to
legislate. Thus, to decide the timing, content and extent of
legislation is a function primarily entrusted to the legislature and
in exercise of judicial review, the Court starts with a basic
presumption in favour of the proper exercise of such power.
[Para 13][22-D-E]
2.1 Generally, the heads of income to be subjected to
taxability under the Income Tax Act, 1961 are enumerated in
Section 14 which starts with a saving clause and expressly
predicates that profits and gains of business or profession shall
be chargeable to income tax. This general declaration of
chargeability is followed by Section 145, which prescribes the
method of accounting. [Para 14][22-F-G]
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
ANR.
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2.2 Sub-section (1) of Section 145 explicitly provides that
the method of accounting is a prerogative falling in the domain of
the assessee and an assessee is well within its rights to follow
the mercantile system of accounting. As per the mercantile system
of accounting, the assessment of income is made on the basis of
accrual of liability and not on the basis of actual expenditure in
lieu thereof. The expression "either cash or mercantile system of
accounting" offers guidance on the nature of this accounting
system. The right flowing from sub-section (1) is "subject to the
provisions of sub-section (2)", which unambiguously empowers the
Central Government to prescribe income computation and
disclosure standards for accounting. Concededly, sub-section
(2) is an enabling provision. It signifies that the general principle
of autonomy of the assessee in adopting a system of accounting,
is controlled by the regulation notified by the Central Government
and must be adhered to by the class of assessee governed
thereunder. [Para 15][23-C-F]
2.3. Section 43B, however, is enacted to provide for
deductions to be availed by the assessee in lieu of liabilities
accruing in previous year without making actual payment to
discharge the same. It is not a provision to place any embargo
upon the autonomy of the assessee in adopting a particular method
of accounting, nor deprives the assessee of any lawful deduction.
Instead, it merely operates as an additional condition for the
availment of deduction qua the specified head. [Para 16][23-F-G]
2.4 Section 43B bears heading "certain deductions to be only
on actual payment". It opens with a non-obstante clause. As per
settled principles of interpretation, a non-obstante clause
assumes an overriding character against any other provision of
general application. It declares that within the sphere allotted to
it by the Parliament, it shall not be controlled or overridden by
any other provision unless specifically provided for. Out of the
allowable deductions, the legislature consciously earmarked
certain deductions from time to time and included them in the
ambit of Section 43B so as to subject such deductions to
conditionality of actual payment. Such conditionality may have
the inevitable effect of being different from the theme of mercantile
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system of accounting on accrual of liability basis qua the specific
head of deduction covered therein and not to other heads. But
that is a matter for the legislature and its wisdom in doing so.
[Para 17][23-H; 24-A-C]
2.5 Initially, the provision (s. 43B) included deductions in
respect of sum payable by assessee by way of tax or duty or any
sum payable by the employer by way of contribution to any
provident fund or superannuation fund. The legislature explained
the inclusion of these deductions by citing certain practices of
evasion of statutory liabilities and other liabilities for the welfare
of employees. With the passage of time, the legislature inserted
more deductions to Section 43B including cess, bonus or
commission payable by employer, interest on loans payable to
financial institutions, scheduled banks etc., payment in lieu of
leave encashment by the employer and repayment of dues to the
railways. Thus understood, there is no oneness or uniformity in
the nature of deductions included in Section 43B. Therefore, it is
not correct to say that this section only provides for deductions
concerning statutory liabilities. Section 43B is a mix bag and new
and dissimilar entries have been inserted therein from time to
time to cater to different fiscal scenarios, which are best
determined by the Government of the day. It is not unusual or
abnormal for the legislature to create a new liability, exempt an
existing liability, create a deduction or subject an existing
deduction to override regulations or conditions. [Para 18]
[24-G-H; 25-A]
2.6. The leave encashment scheme envisages the payment
of a certain amount to the employees in lieu of their unused paid
leaves in a year. The nature of this payment is beneficial and proemployee. However, it is not in the form of a bounty and forms a
part of the conditions of service of the employee. An employer
seeking deduction from tax liability in advance, in the name of
discharging the liability of leave encashment, without actually
extending such payment to the employee as and when the time
for payment arises may lead to abhorrent consequences. When
time for such payment arises upon retirement (or otherwise) of
the employee, an employer may simply refuse to pay.
Consequently, the innocent employee will be entangled in
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litigation in the evening of his/her life for claiming a hard-earned
right without any fault on his part. Concomitantly, it would entail
in double benefit to the employer - advance deduction from tax
liability without any burden of actual payment and refusal to pay
as and when occasion arises. It is this mischief clause (f) seeks
to subjugate. [Para 19][25-B-D]
2.7 The interpretation of a statute cannot be unrelated to
the nature of the statute. In line with other clauses under Section
43B, clause (f) was enacted to remedy a particular mischief and
the concerns of public good, employees' welfare and prevention
of fraud upon revenue is writ large in the said clause. Such statutes
are to be viewed through the prism of the mischief they seek to
suppress, that is, the *Heydon's case principle. [Para 21]
[25-F-G]
State of Tamil Nadu v. MK Kandaswamy (1975) 4 SCC
745 : [1976] 1 SCR 38 - relied on.
*Heydon's case (1584) 3 Co Rep 7 - referred to.
2.8 The objects and reasons behind the enactment of a
statute signify the intention of the legislature behind the
enactment of a statutory provision. It is true that an express
objects and reasons would be useful in understanding the import
of an enacted provision as and when the Court is called upon to
interpret the same. Whereas, when there is no ambiguity about
the legislative competence and of the import of the enactment,
no rule, authority or convention to support the view that
publication of objects and reasons is quintessence for the
sustenance of a duly enacted provision has been brought to the
notice of the Court. In fact, objects and reasons feature in the list
of external aids to interpretation and can be looked into for the
limited purpose in the process of interpretation. The express
objects and reasons, therefore, serves a limited purpose of
assisting the Court in examining the validity of a provision,
especially when the Court is sitting over the interpretation of an
ambiguous provision. [Paras 24 and 25][26-G; 27-A; 28-B-C;
29-B]
State of West Bengal v. Union of India AIR 1963
SC 1241 : [1964] 1 SCR 371; Sanjeev Coke
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Manufacturing Company v. Bharat Coking Coal Limited
and Anr. (1983) 1 SCC 147 : [1983] 1 SCR 1000 -
relied on.
State of Tamil Nadu & Ors. v. K. Shyam Sunder and
Ors. (2011) 8 SCC 737 : [2011] 11 SCR 1094 - referred
to.
2.9 When the Court examines the validity of a provision,
its primary concern is the literal text of the provision. It is so
because the legislature speaks through the text and as long as it
is not speaking in an equivocal manner, there is limited space for
the Court to venture beyond the text. This constitutes the first
test of interpretation, often termed as the literal interpretation.
If the text of the provision is unambiguous, the legislative intent
gets coalesced and is epitomised therefrom. When the textual
element of the provision reeks of ambiguity and is susceptible to
multiple meanings, the Court enters into a proactive examination
to find out the real meaning of the provision. This proactive
examination by the Court offers multiple avenues and methods
to achieve the ultimate purpose of interpretation. Adverting to
the express objects and reasons may be useful for limited purpose
to understand the surrounding circumstances at the time of
enactment. The Court is not bound by such external elements.
Therefore, the presence or absence of objects and reasons has
no impact upon the constitutional validity of a provision as long
as the literal features of the provision enable the Court to
comprehend its true meaning with sufficient clarity.
[Paras 26 and 27][29-C-F]
2.10. The Division Bench of the High Court, in the present
case, plainly glossed over the fundamental presumption of
constitutionality in favour of clause (f) and based its judgment
upon the absence of objects and reasons as striking at the root of
its validity. This approach is flawed for at least three reasons.
First, it steers clear from the necessary attempt to discover any
constitutional infirmities in the enacted provision. Second, it
makes no attempt to dissect the text of the provision so as to
display the need to go beyond the text. Third, it goes into the
background of the enactment and ventures into a sphere which
is out of bounds for the Court as long as the need for interpretation
borne out of any ambiguity arises. [Para 28][29-G-H; 30-A]
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2.11 The process of testing validity is not to sneak into the
prudence or proprieties of the legislature in enacting the
impugned provision. Nor, is it to examine the culpable conduct
of the legislature as an appellate authority over the legislature.
The only examination of the Court is restricted to the finding of a
constitutional infirmity in the provision, as is placed before the
Court. Thus, the non-disclosure of objects and reasons per se
would not impinge upon the constitutionality of a provision unless
the provision is ambiguous and the possible interpretation violate
Part III of the Constitution. In the absence of any finding of any
constitutional infirmity in a provision, the Court is not empowered
to invalidate a provision. [Para 29][30-B-C]
2.12 To hold a provision as violative of the Constitution on
account of failure of the legislature to state the objects and reasons
would amount to an indirect scrutiny of the motives of the
legislature behind the enactment. Such a course of action is
unwarranted. The raison d'etre behind this self-imposed
restriction is because of the fundamental reason that different
organs of the State do not scrutinise each other's wisdom in the
exercise of their duties. In other words, the time-tested principle
of checks and balances does not empower the Court to question
the motives or wisdom of the legislature, except in circumstances
when the same is demonstrated from the enacted law. [Para 30]
[30-D-E]
K.C. Gajapati Narayan Deo & Ors. v. The State of
Orissa [1954] SCR 1 - relied on.
United States v. Butler et al 297 US 1 (1936) - referred to
2.13 The constitutional power of judicial review
contemplates a review of the provision, as it stands, and not a
review of the circumstances in which the enactment was made.
Merely holding an enacted provision as unconscionable or
arbitrary is not sufficient to hold it as unconstitutional unless such
infirmities are sufficiently shown to exist in the form, substance
or functioning of the impugned provision. No such infirmity has
been exhibited and adverted to in the impugned judgment.
[Para 30][31-E-F]
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2.14 The High Court has supported its finding of invalidity
by recording two observations vis-a-vis the previously existing
(unamended) clauses of Section 43B - First, that clause (f) is
inconsistent with other clauses and nature of deduction targeted
in clause (f) is distinct from other deductions. Second, that clause
(f) has no nexus with the objects and reasons behind the
enactment of original Section 43B and therefore, the objects and
reasons attributed to Section 43B cannot be used to deduce the
object and purpose of clause (f). Both the grounds are ill-founded.
In the basic scheme of Section 43B, there is no direct or indirect
limitation upon the power of legislature to include only particular
type of deductions in the ambit of Section 43B. The legislature
never restricted it to a particular category of deduction and that
intent cannot be read into the main Section by the Court, while
sitting in judicial review. Concededly, it is a provision to attach
conditionality on deductions otherwise allowable under the Act
in respect of specified heads, in that previous year in which the
sum is actually paid irrespective of method of accounting.
[Paras 31 and 32][31-G; 32-A-D]
2.15 Further, 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. [Para 33][32-E]
2.16 The approach of constitutional courts ought to be
different while dealing with fiscal statutes. It is trite that the
legislature is the best forum to weigh different problems in the
fiscal domain and form policies to address the same including to
create a new liability, exempt an existing liability, create a
deduction or subject an existing deduction to new regulatory
measures. In the very nature of taxing statutes, legislature holds
the power to frame laws to plug in specific leakages. Such laws
are always pin-pointed in nature and are only meant to target a
specific avenue of taxability depending upon the experiences of
tax evasion and tax avoidance at the ground level. The general
principles of exclusion and inclusion do not apply to taxing statutes
with the same vigour unless the law reeks of constitutional
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ANR.
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infirmities. No doubt, fiscal statutes must comply with the tenets
of Article 14. However, a larger discretion is given to the
legislature in taxing statutes than in other spheres. [Para 34]
[32-F-H; 33-A]
Anant Mills Co. Ltd. v. State of Gujarat & Ors. (1975)
2 SCC 175 : [1975] 3 SCR 220 - relied on.
3.1 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 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.
[Para 37][34-B-E]
Welfare Association. A.R.P., Maharashtra and Anr. v.
Ranjit P. Gohil and Ors. (2003) 9 SCC 358 : [2003] 2
SCR 139; Indian Aluminium Co. and Ors. v. State of
Kerala and Ors. (1996) 7 SCC 637 : [1996] 2 SCR 23;
State of T.N. v. Arooran Sugars Ltd. (1997) 1 SCC 326
: [1996] 8 Suppl. SCR 193 - relied on.
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3.2. The judgment in Bharat Earth Movers Case was
rendered in light of general dispensation of autonomy of the
assessee to follow cash or mercantile system of accounting
prevailing at the relevant time, in absence of an express statutory
provision to do so differently. It is an authority on the nature of
the liability of leave encashment in terms of the earlier
dispensation. In absence of any such provision, the sole operative
provision was Section 145(1) of the 1961 Act that allowed complete
autonomy to the assessee to follow the mercantile system. Now
a limited change has been brought about by the insertion of clause
(f) in Section 43B and nothing more. It applies prospectively.
Merely because a liability has been held to be a present liability
qualifying for instant deduction in terms of the applicable
provisions at the relevant time does not ipso facto signify that
deduction against such liability cannot be regulated by a law made
by Parliament prospectively. In matter of statutory deductions, it
is open to the legislature to withdraw the same prospectively.
[Para 39][36-F-H; 37-A]
3.3 Once the Finance Act, 2001 was duly passed by the
Parliament inserting clause (f) in Section 43B with prospective
effect, the deduction against the liability of leave encashment stood
regulated in the manner so prescribed. The amendment does
not reverse the nature of the liability nor has it taken away the
deduction as such. The liability of leave encashment continues
to be a present liability as per the mercantile system of
accounting. Further, the insertion of clause (f) has not
extinguished the autonomy of the assessee to follow the
mercantile system. It merely defers the benefit of deduction to
be availed by the assessee for the purpose of computing his
taxable income and links it to the date of actual payment thereof
to the employee concerned. Thus, the only effect of the insertion
of clause (f) is to regulate the stated deduction by putting it in a
special provision. [Para 21][37-B-C]
3.4 This regulatory measure is in sync with other deductions
specified in Section 43B, which are also present and accrued
liabilities. To wit, the liability in lieu of tax, duty, cess, bonus,
commission etc. also arise in the present as per the mercantile
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system, but assessees used to defer payment thereof despite
claiming deductions thereagainst under the guise of mercantile
system of accounting. Resultantly, irrespective of the category
of liability, such deductions were regulated by law under the aegis
of Section 43B, keeping in mind the peculiar exigencies of fiscal
affairs and underlying concerns of public revenue. A priori, merely
because a certain liability has been declared to be a present
liability by the Court as per the prevailing enactment, it does not
follow that legislature is denuded of its power to correct the
mischief with prospective effect, including to create a new liability,
exempt an existing liability, create a deduction or subject an
existing deduction to new regulatory measures. 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 priori, the plea that clause (f) has been enacted with the
sole purpose to defeat the judgment of this Court is misconceived.
[Para 40][37-D-G]
4. The respondents have neither made a case of nonexistence of competence nor demonstrated any constitutional
infirmity in clause (f) of s. 43B. Accordingly, the impugned
judgment of the Division Bench of the High Court is reversed
and clause (f) in Section 43B of the Income Tax Act, 1961 is held
to be constitutionally valid and operative for all purposes.
[Paras 41 and 42][37-H; 38-A-B]
Bharat Earth Movers v. Commissioner of Income Tax,
Karnataka (2000) 6 SCC 645 : [2000] 2 Suppl. SCR
295 - relied on.
Case Law Reference
[2000] 2 Suppl. SCR 295
relied on
Para 4
[2012] 6 SCR 661
relied on
Para 11
[2010] 7 SCR 585
relied on
Para 11
[1996] 3 SCR 721
relied on
Para 11
[2006] 5 Suppl. SCR 1
relied on
Para 11
[1976] 1 SCR 38
relied on
Para 22
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[2011] 11 SCR 1094
referred to
Para 24
[1964] 1 SCR 371
relied on
Para 25
[1983] 1 SCR 1000
relied on
Para 25
[1954] SCR 1
relied on
Para 30
[1975] 3 SCR 220
relied on
Para 34
[2003] 2 SCR 139
relied on
Para 38
[1996] 2 SCR 23
relied on
Para 38
[1996] 8 Suppl. SCR 193
relied on
Para 38
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3545
of 2009.
From the Judgment and Order dated 27.06.2007 of the High Court
of Calcutta in APO No. 301 of 2005.
K. K. Venugopal, AG (NP), Tushar Mehta, ASG (NP),
Ms. Madhavi Divan, ASG, Ms. Chinmayee Chandra, Ms. Nidhi Khanna
and Mrs. Anil Katiyar, Advs. for the Appellants.
Dr. Aman Hingorani, Basu, Himanshu Yadav for M/s. Hingorani
& Associates, Advs. for the Respondents.
The Judgment of the Court was delivered by
A. M. KHANWILKAR, J.
1. In this appeal, the constitutional validity of clause (f) of Section
43B of the Income Tax Act, 19611 arises for our consideration as a
result of the decision of the High Court at Calcutta2 vide order dated
27.06.2007 in APO No. 301 of 2005, wherein it is held that the said
clause is arbitrary and violative of Article 14 of the Constitution of India
on various counts, as discussed hereinafter.
2. The stated clause (f) was inserted in the already existing Section
43B vide Finance Act, 2001 with effect from 1.4.2002, in order 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. This clause made the actual payment of liability to the
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
ANR.
1 For short, "the 1961 Act"
2 For short, "the High Court"
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employees as a condition precedent for extending the benefit of
deduction under the 1961 Act. With the application of clause (f),
the eligibility for deduction arises in the previous year in which the
abovesaid payment is actually made and not in which provision
was made in that regard, irrespective of the system of accounting
followed by the assessee. Before we delve into further
examination, we deem it apposite to reproduce the amended
Section 43B of the 1961 Act as applicable to the present case,
which reads thus:
"43-B. 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,
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:
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Provided that nothing contained in this section shall apply in relation
to any sum referred to in clause (a) or clause (c) or clause (d) or
clause (e) or clause (f) 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:
Provided further that no deduction shall, in respect of any sum
referred to in clause (b), be allowed unless such sum has actually
been paid in cash or by issue of a cheque or draft or by any other
mode on or before the due date as defined in the Explanation
below clause (va) of sub-section (1) of Section 36, and where
such payment has been made otherwise than in cash, the sum has
been realised within fifteen days from the due date.
Explanation1.-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
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
ANR. [A. M. KHANWILKAR, J.]
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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 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
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for deduction under clause (viii) of sub-section (1) of section
36."
3. The respondents, being liable to pay income tax upon the profits
and gains of their business, found 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 afore-stated
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 encashment scheme being a trading
liability cannot be subjected to the exception under Section 43B of the
1961 Act.
4. It is the case of the respondents that the judgment of this Court
in Bharat Earth Movers vs. Commissioner of Income Tax,
Karnataka3 holds the field of law as far as the nature of the liability of
leave encashment 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. The Court further held that the liability
in lieu of leave encashment scheme is a present and definite liability and
not a contingent liability. As regards the nature of the leave encashment
liability, the respondents urge that this liability is carved in the nature of a
beneficial provision and leave can only be encashed by the employees in
accordance with the terms and conditions of employment. It is further
contended that since the due date for encashment of leave does not
arise in the same accounting year in which provision is made, there is no
question of subjecting the deductions against such liability upon actual
payment.
3 (2000) 6 SCC 645
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
ANR. [A. M. KHANWILKAR, J.]
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5. Having stated that all the clauses under Section 43B, barring
clause (f), cover liabilities of a statutory nature and those driven by
concerns of employees' welfare, the respondents would urge that the
liability covered by clause (f) is of a completely distinct nature and without
specifying clear objects and reasons for the inclusion of this liability under
Section 43B, it cannot be slipped into the main section. Further, the nature
of this liability is neither in sync with the objects and reasons of the
original section nor with those of other clauses enacted from time to
time in different assessment years.
6. The respondents also urge that 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.
7. The validity of clause (f) faced judicial scrutiny first before the
single Judge of the High Court. The clause passed the constitutional
muster of the Court, which had observed thus:
"Thus the position of law existing at the date of insertion of cl. (f)
did not oblige the employer to actually pay the leave encashment
benefit either to his employee or to any fund or to any third party,
though the liability was an accrued one. If the employer, of his
own accord, maintained a fund, he maintained it for his own
convenience, and not because of any legal obligation. But in view
of the mercantile system of accounting followed he was justified
in showing the accrued liability and claiming deduction. There
was nothing to prevent him from enjoying the benefit of deduction
and at the same time from controlling and using the amount for
his own benefit, till he was compelled to give the benefit of the
leave in question to the employee concerned. It is evident that the
clause was inserted to curb the abuse of existing law and protect
the interests of the employee."
Addressing the argument that the insertion of the said clause was
solely intended to defeat the judgment of this Court in Bharat Earth
Movers (supra), the learned single Judge stated thus:
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"...It is true that the action neutralized the effect of the apex
court decision in Bharat Earth Movers case, but I do not agree
that it has amounted to encroachment upon the powers of the
judiciary.