Supreme Court affirms constitutionality of Section 43B(f) (of Income Tax Act, 1961).

In this appeal, the Supreme Court considers the constitutional validity of clause (f) of Section 43B (of Income Tax Act, 1961). The clause, inserted in 2002, imposes a tax disincentive for deductions claimed by taxpayers in relation to leave encashment liabilities that have not been paid by the employer. The High Court at Calcutta previously held this clause to be arbitrary and violative of Article 14 of the Constitution. However, the Supreme Court upholds the validity of the clause, finding it aligns with the broader objective of protecting public interest, including employee welfare and preventing revenue fraud. The court concludes that clause (f) fits within the framework of the Income Tax Act and serves a legitimate purpose.

In this case, the Supreme Court examines the constitutional validity of clause (f) of Section 43B (of Income Tax Act, 1961). The High Court at Calcutta had previously declared this clause as arbitrary and violative of Article 14 of the Constitution. However, the Supreme Court reviews the arguments presented and upholds the validity of clause (f). The court concludes that the clause serves the purpose of curbing abuse and protecting employee interests, aligning with the broader objectives of the Income Tax Act. The court also dismisses the contention that the clause encroaches upon the judiciary's powers, emphasizing that it was a legislative response to a specific legal position. Ultimately, the Supreme Court finds no constitutional infirmity with clause (f) of Section 43B (of Income Tax Act, 1961).

In the present case, the Supreme Court examines the constitutional validity of clause (f) of Section 43B (of Income Tax Act, 1961). The court begins by emphasizing the presumption in favor of constitutionality and the exclusive power of the legislature to enact laws. It states that the power to decide the timing, content, and extent of legislation lies primarily with the legislature, and the court's role is to review the exercise of such power.

The court notes that Section 43B (of Income Tax Act, 1961) provides for deductions to be availed by the assessee in lieu of liabilities accrued in the previous year without making actual payment. It clarifies that this provision does not impose any embargo on the autonomy of the assessee in adopting a particular method of accounting or deprive the assessee of any lawful deduction. Instead, it imposes an additional condition for availing deductions under specific heads.

The court observes that Section 43B (of Income Tax Act, 1961) has been amended over time to include different deductions, and it does not solely cover statutory liabilities. The inclusion of deductions in Section 43B (of Income Tax Act, 1961) is a matter of legislative wisdom and serves specific fiscal scenarios determined by the government.

Regarding leave encashment liability, the court explains that the purpose of clause (f) is to prevent the abuse of claiming deductions in advance without actually making the payment to the employee when it is due. It highlights the potential consequences for employees if employers refuse to make the payment upon retirement or other circumstances, leading to litigation and denial of a rightful benefit.

The court rejects the argument that the nature of leave encashment liability makes it impossible to make the actual payment in the same year. It clarifies that clause (f) is primarily aimed at controlling the timing of claiming deductions, not the timing of payment.

Based on these considerations, the court upholds the constitutional validity of clause (f) of Section 43B (of Income Tax Act, 1961), finding no violation of any rights enshrined in Part III of the Constitution.

The Supreme Court emphasizes that the interpretation of a statute should be related to its nature and the mischief it seeks to suppress. In the case of clause (f) of Section 43B (of Income Tax Act, 1961), it was enacted to remedy a specific mischief related to public good, employees' welfare, and prevention of fraud upon revenue. The court cites the Heydon's case principle, which states that statutes designed to prevent fraud upon the revenue should receive a liberal construction in favor of the government.

The court further explains that objects and reasons behind the enactment of a statute signify the legislature's intention. While the objects and reasons are useful in understanding the purpose of a provision, they are not the sole basis for interpreting the statute. The court states that the objects and reasons can be considered as an external aid to appreciate the true intent of the legislature or to understand the object sought to be achieved by the enactment.

However, the court clarifies that the publication of objects and reasons is not essential for the sustenance of a duly enacted provision. When there is no ambiguity about the legislative competence and the import of the enactment, the objects and reasons can only be used for limited purposes in the process of interpretation. The court cites previous judgments to support this position.

The court concludes that the express objects and reasons serve a limited purpose of assisting the court in examining the validity of a provision, especially when there is ambiguity in its interpretation.

The Supreme Court emphasizes that when examining the validity of a provision, the primary concern is the literal text of the provision itself. The court states that the legislature speaks through the text, and as long as the text is unambiguous, the court's interpretation should be based on the literal meaning. This constitutes the first test of interpretation, known as literal interpretation, which allows the court to understand the legislative intent from the text.

However, if the textual element of the provision is ambiguous and susceptible to multiple meanings, the court engages in a proactive examination to determine the true meaning. The court can consider the objects and reasons for limited purposes to understand the circumstances surrounding the enactment. Nevertheless, the court is not bound by these external elements and is not empowered to invalidate a provision solely based on the absence of objects and reasons, as long as the literal features of the provision allow for a clear understanding.

The court criticizes the approach taken by the High Court in this case, which based its judgment on the absence of objects and reasons, without examining the constitutional validity of the provision or dissecting its text. The court clarifies that the examination of validity is limited to finding constitutional infirmities in the provision itself and not questioning the motives or wisdom of the legislature. The court reiterates the principle that courts are concerned with the power to enact statutes, not their wisdom.

The court further explains that the power of the legislature in enacting fiscal statutes is given a larger discretion, and it can create specific liabilities, deductions, or regulatory measures as long as they comply with the principles of Article 14. The court notes that the legislature can make an enactment ineffective by removing the base on which a previous judicial decision was rendered, as long as it does so within its legislative competence.

Regarding the specific grounds on which the High Court ruled against the validity of clause (f), the court finds them ill-founded. It states that there is no direct or indirect limitation on the legislature to include only specific deductions in Section 43B (of Income Tax Act, 1961), and the scheme of the section does not restrict it to a particular category of deduction. The court also rejects the argument that clause (f) lacks nexus with the objects and reasons behind the enactment of Section 43B (of Income Tax Act, 1961). It concludes that the grounds relied upon by the High Court are untenable.

Lastly, the court clarifies that the legislature has the power to alter or amend an enactment to rectify any defects pointed out by the court. It can render a judicial decision ineffective by fundamentally altering the conditions on which the decision was based, as long as it does so within the framework of the Constitution. The legislature's action in altering the law does not invalidate the court's opinion.

The Supreme Court concludes that the judgment under consideration, which dealt with the nature of liability for leave encashment, was rendered based on the general dispensation of autonomy given to taxpayers to follow either cash or mercantile system of accounting. The judgment does not imply that deductions against such liabilities cannot be regulated by a prospective law made by Parliament. The insertion of clause (f) in Section 43B (of Income Tax Act, 1961), only brings about a limited change and applies prospectively. It does not reverse the nature of the liability or take away the deduction as such. The liability of leave encashment continues to be a present liability under the mercantile system, but the deduction is deferred until the actual payment is made to the employee. The insertion of clause (f) simply regulates the deduction by putting it in a special provision.

The court notes that this regulatory measure is in line with other deductions specified in Section 43B (of Income Tax Act, 1961), which also pertain to present and accrued liabilities. Assessees used to defer payment of these liabilities while claiming deductions based on the mercantile system. Thus, irrespective of the category of liability, such deductions were regulated by Section 43B (of Income Tax Act, 1961). The court emphasizes that the legislature has the power to correct fiscal mischiefs and regulate deductions prospectively, including creating new liabilities, exempting existing liabilities, or subjecting existing deductions to new regulatory measures. The court rejects the argument that clause (f) was enacted solely to defeat the judgment of the court, stating that such a plea is misconceived.

Based on the clear legal position discussed, the court allows the appeal, reversing the judgment of the High Court and holding that clause (f) in Section 43B (of Income Tax Act, 1961) is constitutionally valid and operative for all purposes. No costs are awarded, and any pending interlocutory applications are disposed of.

Signed by Justices A.M. Khanwilkar, Hemant Gupta, and Dinesh Maheshwari on April 24, 2020, in New Delhi.

1. In this appeal, the constitutional validity of clause (f) of Section 43B (of Income Tax Act, 1961)1 arises for our consideration as a result of the decision of the High Court at Calcuttavide 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 (of Income Tax Act, 1961) 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 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:

“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 sub­section (1) of

section 36 (of Income Tax Act, 1961), 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 Income Tax Act, 1961) 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 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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961), and where such payment

has been made otherwise than in cash, the sum has been

realised within fifteen days from the due date.

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 Income Tax Act, 1961)

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 Income Tax Act, 1961)

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 Income Tax Act, 1961) 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 Income Tax Act, 1961), 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 Income Tax Act, 1961) 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 (of Income Tax Act, 1961);

(b) “State financial corporation” means a financial

corporation established under section 3 (of Income Tax Act, 1961) or section 3A (of Income Tax Act, 1961)

or an institution notified under section 46 (of Income Tax Act, 1961) 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 long­term finance for

industrial projects and eligible for deduction under

clause (viii) of sub­section (1) of section 36 (of Income Tax Act, 1961).”

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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) has been carved out as an exception

to the afore­stated 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 (of Income Tax Act, 1961) 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, Karnataka 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 (of Income Tax Act, 1961), 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.

5. Having stated that all the clauses under Section 43B (of Income Tax Act, 1961),

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 (of Income Tax Act, 1961), 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:

“... 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. Once the existing legal position

was explained by their Lordships, I think, 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.”

8. The decision of the learned single Judge was appealed and

came to be reversed by the Division Bench of the High Court. The

Division Bench, while holding clause (f) as unconstitutional,

observed thus:

“... While inserting sub­section (f) no special reasons were

disclosed. His Lordship held that such disclosure was not

mandatory. We do not have any reason for disagreement

on such issue provided the subject amendment could be

termed as in furtherance to widen the scope of original

section on the identical objects and reasons as disclosed

at the time of enacting the original provision. As we find,

the original section was incorporated to plug in

deductions claimed by not discharging statutory

liabilities. We also find that provision was subsequently

made to restrict deductions on account of unpaid loan to

the financial institutions. Leave encashment is neither

statutory liability nor a contingent liability. It was a

provision to be made for the entitlement of an employee

achieved in a particular financial year. An employee earns

certain amount by not taking leave which he or she is

otherwise entitled to in that particular year. Hence, the

employer is obliged to make appropriate provision for the

said amount. Once the employee retires he or she has to

be paid such sum on cumulative basis which the

employee earns throughout his or her service career [sic]

unless he or she avails the leave earned [sic] by him or

her. That, in our view, could not have any nexus with the

original enactment. An employer is entitled to deduction

for the expenditure he incurs for running his business

which includes payment of salary and other perquisites to

his employees. Hence, it is a trading liability. As such he

is otherwise entitled to have deduction of such amount by

showing the same as a provisional expenditure in his

accounts. The legislature by way of amendment restricts

such deduction in case of leave encashment unless it is

actually paid in that particular financial year. The

legislature is free to do so after they disclose reasons

for that and such reasons are not inconsistent with

the main object of the enactment. We are deprived of

such reasons for our perusal ...”

(emphasis supplied)

It also held that the subject matter of clause (f) was inconsistent

with the original Section 43B (of Income Tax Act, 1961) and observed as follows:

“... We also do not find such enactment consistent with

the original provision being Section 43B (of Income Tax Act, 1961) which was

originally inserted to plug in evasion of statutory liability.

The Apex Court considered the situation in the case of

Bharat Earth Movers (Supra) when sub­section (f) was not

there. The Apex Court, considering all aspect as disclosed

by us hereinbefore, rejected the contention of the Revenue

and granted appropriate deduction to the concerned

assessee. The legislature to get rid of the decision of the

Apex Court brought out the amendment which would

otherwise nullify the judge made law. The Apex Court

decisions are judge made law and are applicable to all

under the Constitution...”

It is noteworthy that the High Court did not question the

existence of power of the legislature to enact the subject clause,

as can be discerned from the following observations:

“... We, not for a single moment, observe that legislature

was not entitled to bring such amendment. They were

within their power to bring such amendment. However,

they must disclose reason which would be consistent with

the provisions of the Constitution and the laws of the

land and not for the sole object of nullifying the Apex

Court decision.”

9. We shall now examine clause (f) on the touchstone of the

Constitution, to be followed by an analysis of the impugned

judgment.

10. We have heard Ms. Chinmayee Chandra, learned counsel

for the appellants and Dr. Aman Hingorani, learned counsel for

the respondents.

Constitutional validity of clause (f)

11. The approach of the Court in testing the constitutional

validity of a provision is well settled and the fundamental concern

of 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 light of settled constitutional

principles. In State of Madhya Pradesh vs. Rakesh Kohli &

Anr., this Court observed thus:

“17. This Court has repeatedly stated that legislative

enactment can be struck down by Court only on two

grounds, namely (i) that the appropriate legislature

does not have competence to make the law, and (ii)

that it does not take away or abridge any of the

fundamental rights enumerated in Part III of the

Constitution or any other constitutional

provisions....”

(emphasis supplied)

The above exposition has been quoted by this Court with

approval in a catena of other cases including Bhanumati & Ors.

vs. State of Uttar Pradesh & Ors., State of Andhra Pradesh

& Ors. vs. Mcdowell & Co. & Ors.6 and Kuldip Nayar & Ors.

vs. Union of India & Ors., to state a few.

12. In furtherance of the two­fold approach stated above, the

Court, in Rakesh Kohli (supra) also called for a prudent

approach to the following principles while examining the validity

of statutes on taxability:

“32. While dealing with constitutional validity of a

taxation law enacted by Parliament or State Legislature,

the court must have regard to the following principles:

(i) there is always presumption in favour of

constitutionality of a law made by Parliament or a

State Legislature,

(ii) no enactment can be struck down by just

saying that it is arbitrary or unreasonable or

irrational but some constitutional infirmity has

to be found,

(iii) the court is not concerned with the wisdom or

unwisdom, the justice or injustice of the law as

Parliament and State Legislatures are supposed to

be alive to the needs of the people whom they

represent and they are the best judge of the

community by whose suffrage they come into

existence,

(iv) hardship is not relevant in pronouncing on the

constitutional validity of a fiscal statute or

economic law, and

(v) in the field of taxation, the legislature enjoys

greater latitude for classification.....”

(emphasis supplied)

13. In the present case, the legislative power of the Parliament

to enact clause (f) in the light of Article 245 is not doubted at all.

That brings us to the next step of examination i.e. whether the

said clause contravenes any right enshrined in Part III of the

Constitution, either in its form, substance or effect. 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.

14. Generally, the heads of income to be subjected to taxability

under the 1961 Act are enumerated in Section 14 (of Income Tax Act, 1961) 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 and reads thus:

“Method of accounting

145. (1) Income chargeable under the head "Profits and

gains of business or profession" or "Income from other

sources" shall, subject to the provisions of sub­-section

(2), be computed in accordance with either cash or

mercantile system of accounting regularly employed by

the assessee.

(2) The Central Government may notify in the Official

Gazette from time to time accounting standards to be

followed by any class of assessees or in respect of any

class of income.

(3) Where the Assessing Officer is not satisfied about the

correctness or completeness of the accounts of the

assessee, or where the method of accounting provided in

sub­section (1) or accounting standards as notified under

sub­section (2), have not been regularly followed by the

assessee, the Assessing Officer may make an assessment

in the manner provided in section 144 (of Income Tax Act, 1961).”

(emphasis supplied)

15. Sub-­section (1) of Section 145 (of Income Tax Act, 1961) 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. Be it noted that 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. Be that as it may, it is noteworthy that

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.

16. Section 43B (of Income Tax Act, 1961), 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.

17. Section 43B (of Income Tax Act, 1961) bears heading “certain deductions to be only on

actual payment”. It opens with a non­obstante 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 (of Income Tax Act, 1961) 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 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.

18. The existence of Section 43B (of Income Tax Act, 1961) traces back to 1983 when the

legislature conceptualised the idea of such a provision in the

1961 Act. Initially, the provision 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. It is noteworthy that 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. The scope and effect of

the newly inserted provision was explained in paragraph 60 of

the Memorandum explaining the provisions of the Finance Bill,

1983 as under:

“60. ... To curb this practice, it is proposed to provide

that deduction for any sum payable by the assessee by

way of tax or duty under any law for the time being in

force (irrespective of whether such tax or duty is disputed

or not) or 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 shall be allowed only in

computing the income of that previous year in which

such sum is actually paid by him.”

With the passage of time, the legislature inserted more

deductions to Section 43B (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961). It holds no

merit to urge that this section only provides for deductions

concerning statutory liabilities. Section 43B (of Income Tax Act, 1961) 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.

19. 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 pro-

employee. 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

litigation in the evening of his/her life for claiming a hard­earned

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.

20. The argument advanced by the respondents that the nature

of leave encashment liability is such that it is impossible to make

the actual payment in the same year, adds no weight to the claim

of invalidity of the clause. We say so because the thrust of the

provision is not to control the timing of payment, rather, it is

strictly targeted to control the timing of claiming deduction in the

name of such liability. The mischief sought to be remedied by this

clause, as discussed above, clarifies the position.

21. Be it noted that the interpretation of a statute cannot be

unrelated to the nature of the statute. In line with other clauses

under Section 43B (of Income Tax Act, 1961), 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.

In our view, such statutes are to be viewed through the prism of

the mischief they seek to suppress, that is, the Heydon’s case8

principle. In CRAWFORD, Statutory Construction, it has been

gainfully delineated that “an enactment designed to prevent fraud

upon the revenue is more properly a statute against fraud rather

than a taxing statute, and hence should receive a liberal

construction in the government’s favour.”

22. In State of Tamil Nadu vs. MK Kandaswamy10, this

Court expounded on the interpretation of remedial statutes thus:

“26. It may be remembered that Section 7 (of Income Tax Act, 1961)­A is at once a

charging as well as a remedial provision. Its main object

is to plug leakage and prevent evasion of tax. In inter-

preting such a provision, a construction which would

defeat its purpose and, in effect, obliterate it from the

statute book, should be eschewed. If more than one

construction is possible, that which preserves its worka-

bility, and efficacy is to be preferred to the one which

would render it otiose or sterile. The view taken by the

High Court is repugnant to this cardinal canon of inter-

pretation.”

(emphasis supplied)

23. Having ruled upon the constitutional validity of clause (f),

we shall now examine the grounds on which the High Court ruled

against its validity. We may note that the respondents’ challenge

to the constitutional validity of the said clause has primarily been

accepted on three grounds:

(i) Non­disclosure of objects and reasons behind its enactment

and insertion into section 43B (of Income Tax Act, 1961);

(ii) Inconsistency of clause (f) with other clauses of Section

43B and absence of nexus of the clause with the original enactment;

(iii) Enactment has been triggered solely to nullify the dicta

of this Court in Bharat Earth Movers (supra).

Non­disclosure of objects and reasons

24. The objects and reasons behind the enactment of a statute

signify the intention of the legislature behind the enactment of a

statutory provision. Indubitably, the purpose or underlying aim

of a law can be discerned when interpreted in the light of stated

objects and reasons. Inasmuch as, the settled canon of

interpretation is to deduce the true intent of the legislature, as

the will of the people is constitutionally bestowed in the

legislature. 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. This

Court, in State of Tamil Nadu & Ors. vs. K. Shyam Sunder and Ors., laid emphasis upon the usefulness of objects and

reasons in the process of interpretation and observed thus:

“66. The Statement of Objects and Reasons appended to

the Bill is not admissible as an aid to the construction of

the Act to be passed, but it can be used for limited pur-

pose of ascertaining the conditions which prevailed at

that time which necessitated the making of the law, and

the extent and urgency of the evil, which it sought to rem-

edy. The Statement of Objects and Reasons may be rele-

vant to find out what is the objective of any given statute

passed by the legislature. It may provide for the reasons

which induced the legislature to enact the statute. “For

the purpose of deciphering the object and purport of the

Act, ... the court can look to the Statement of Objects and

Reasons thereof.” (emphasis supplied) (Vide Kavalappara

Kottarathil Kochuni v. States of Madras and Kerala [AIR

1960 SC 1080] and Tata Power Co. Ltd. v. Reliance En-

ergy Ltd. [(2009) 16 SCC 659], SCC p. 686, para 79)

67. In A. Manjula Bhashini (2009) 8 SCC 431 this Court

held as under: (SCC p. 459, para 40)

“40. The proposition which can be culled out from

the aforementioned judgments is that although the

Statement of Objects and Reasons contained in the

Bill leading to enactment of the particular Act cannot

be made the sole basis for construing the provisions

contained therein, the same can be referred to for un-

derstanding the background, the antecedent state of

affairs and the mischief sought to be remedied by the

statute. The Statement of Objects and Reasons can

also be looked into as an external aid for appreciating

the true intent of the legislature and/or the object

sought to be achieved by enactment of the particular

Act or for judging reasonableness of the classification

made by such Act.”

(emphasis added)

68. Thus, in view of the above, the Statement of Objects

and Reasons of any enactment spells out the core reason

for which the enactment is brought and it can be looked

into for appreciating the true intent of the legislature or to

find out the object sought to be achieved by enactment of

the particular Act or even for judging the reasonableness

of the classifications made by such Act.”

25. 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 our notice. 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. Regard may be had to State of West Bengal vs.

Union of India, wherein the Court expounded the legal position

thus:

“13. ... It is however well­settled that the Statement of

Objects and Reasons accompanying a bill, when

introduced in Parliament, cannot be used to determine

the true meaning and effect of the substantive provisions

of the statute. They cannot be used except for the limited

purpose of understanding the background and the

antecedent state of affairs leading up to the legislation.

But we cannot use this statement as an aid to the

construction of the enactment or to show that the

legislature did not intend to acquire the proprietary rights

vested in the State or in any way to affect the State

Governments' rights as owners of minerals. A statute, as

passed by Parliament, is the expression of the collective

intention of the legislature as a whole, and any statement

made by an individual, albeit a Minister, of the intention

and objects of the Act cannot be used to cut down the

generality of the words used in the statute.”

The Court was more categorical in restating the position in

Sanjeev Coke Manufacturing Company vs. Bharat Coking

Coal Limited and Anr.13, where it noted:

“25. ......No one may speak for the Parliament and

Parliament is never before the court. After Parliament has

said what it intends to say, only the court may say what

the Parliament meant to say. None else. Once a statute

leaves Parliament House, the Court is the only authentic

voice which may echo (interpret) the Parliament. This the

court will do with reference to the language of the statute

and other permissible aids.....”

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.

26. Indubitably, 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.

27. In other words, 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, as

discussed above. 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.

28. 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. In our view, 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.

29. 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 non­disclosure 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.

30. 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, in

our view, 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. The following instructive passage from United

States vs. Butler et al.14 offers guidance on the above

proposition, wherein Justice Stone observed thus:

“The power of courts to declare a statute unconstitutional

is subject to two guiding principles of decision which

ought never to be absent from judicial consciousness. One

is that courts are concerned only with the power to enact

statutes, not with their wisdom. The other is that while

unconstitutional exercise of the power by the executive is

subject to judicial restraint, the only check upon our own

exercise of power by the executive is subject to judicial

restraint. For the removal of unwise laws from the statute

books appeal lies not to the courts but to the ballot and to

the processes of democratic government...”

In the Indian constitutional jurisprudence, the above principle

has been reckoned by this Court in its early years in 1954 in

K.C. Gajapati Narayan Deo & Ors. vs. The State of Orissa,wherein the Court observed thus:

“... If the Legislature is competent to pass a particular

law, the motives which impelled it to act are really

irrelevant. On the other hand, if the legislature lacks

competency, the question of motive does not arise at all.

Whether a statute is constitutional or not is thus always

a question of power.... If the Constitution of a State

distributes the legislative powers amongst different

bodies, which have to act within their respective spheres

marked out by specific legislature entries, or if there are

limitations on the legislative authority in the shape of

fundamental rights, questions do arise as to whether the

legislature in a particular case has or has not, in respect

to the subject­matter of the statute or in the method of

enacting it, transgressed the limits of its constitutional

powers....”

We have noted that the High Court has characterised clause (f) as

“arbitrary” and “unconscionable” while imputing it with

unconstitutionality. It is pertinent to note that the High Court

reaches this conclusion without undertaking an actual

examination of clause (f). Instead, the declaration is preceded by

an enquiry into the circumstances leading upto the enactment.

As discussed above, 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.

Be it noted that 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.

Inconsistency of clause (f) and absence of nexus with Section

43B

31. The High Court has supported its finding of invalidity by

recording two observations vis­a­vis the previously existing

(unamended) clauses of Section 43B (of Income Tax Act, 1961) – 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 (of Income Tax Act, 1961) and therefore, the objects and

reasons attributed to Section 43B (of Income Tax Act, 1961) cannot be used to deduce the

object and purpose of clause (f).

32. At the outset, we observe that both the grounds are ill-

founded. In the basic scheme of Section 43B (of Income Tax Act, 1961), 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 (of Income Tax Act, 1961). To say

that Section 43B (of Income Tax Act, 1961) is restricted to deductions of a statutory nature

would be nothing short of reading the provision in a purely

imaginative manner. As already discussed above, from 1983

onwards, Section 43B (of Income Tax Act, 1961) had taken within its fold diverse nature of

deductions, ranging from tax, duty to bonus, commission,

railway fee, interest on loans and general provisions for welfare of

employees. An external examination of this journey of Section

43B reveals that 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.

33. Further, it be noted that the broad objective of enacting

Section 43B (of Income Tax Act, 1961) 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, as

already discussed hitherto.

34. Before stepping into the next ground, we are inclined to

observe that 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 pin­pointed 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 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. In

Anant Mills Co. Ltd. vs. State of Gujarat & Ors.16, this Court

noted thus:

“25. ...But, in the application of the principles, the courts,

in view of the inherent complexity of fiscal adjustment of

diverse elements, permit a larger discretion to the

Legislature in the matter of classification so long as it

adheres to the fundamental principles underlying the said

doctrine. The power of the Legislature to classify is of

wide range and flexibility so that it can adjust its system

of taxation in all proper and reasonable ways...”

Viewed thus, the reason weighed with the Division Bench of the

High Court in the impugned judgment is untenable.

Defeating the dictum in Bharat Earth Movers case

35. We shall now examine clause (f) on the ground that it

defeats the judgment of this Court in Bharat Earth Movers

(supra). We have carefully analysed the decision in Bharat

Earth Movers (supra) and note that the Court was sitting in

appeal over the nature of liability under the leave encashment

scheme and held such liability to be a present liability.

Resultantly, it became deductible from the profit and loss

account of the assessee in the same accounting year in which

provision against the same is made. The Court rejected that leave

encashment liability is a contingent one and observed thus:

“7. Applying the abovesaid settled principles to the

facts of the case at hand we are satisfied that provision

made by the appellant Company for meeting the liability

incurred by it under the leave encashment scheme

proportionate with the entitlement earned by employees

of the Company, inclusive of the officers and the staff,

subject to the ceiling on accumulation as applicable on

the relevant date, is entitled to deduction out of the gross

receipts for the accounting year during which the

provision is made for the liability. The liability is not a

contingent liability. The High Court was not right in

taking the view to the contrary.”

36. Before the judgment in Bharat Earth Movers (supra),

various tribunals and High Courts across the country were

treating the liability in lieu of leave encashment as a contingent

liability. This did not go down well with the assessees following

the mercantile accounting system, as they were not able to avail

deductions upon mere creation of a provision against such

liability without making the actual payment. A challenge to this

legal position reached before this Court in Bharat Earth Movers

(supra), wherein the Court reversed the position.

37. 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 law­making 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.

38. In Welfare Association. A.R.P., Maharashtra and Anr.

vs. Ranjit P. Gohil and Ors.17, this Court relied upon Indian

Aluminium Co. and Ors. vs. State of Kerala and Ors.18 and

upon elaborate analysis, laid down certain principles to preserve

the delicate balance of separation of powers and observed thus:

“47. ...(v) in exercising legislative power, the legislature by

mere declaration, without anything more, cannot directly

overrule, revise or override a judicial decision. It can

render judicial decision ineffective by enacting valid law

on the topic within its legislative field fundamentally

altering or changing its character retrospectively. The

changed or altered conditions are such that the previous

decision would not have been rendered by the court, if

those conditions had existed at the time of declaring the

law as invalid.... It is competent for the legislature to

enact the law with retrospective effect;

(vi) the consistent thread that runs through all the

decisions of this Court is that the legislature cannot

directly overrule the decision or make a direction as not

binding on it but has power to make the decision

ineffective by removing the base on which the decision

was rendered, consistent with the law of the Constitution

and the legislature must have competence to do the

same.”

The Court then relied upon State of T.N. vs. Arooran Sugars

Ltd.19 to reaffirm the point and noted thus:

“48. In State of Tamil Nadu v. Arooran Sugars Ltd., the

Constitution Bench made an exhaustive review of all the

available decisions on the point and summed up the law

by holding: ­

“It is open to the legislature to remove the defect

pointed out by the court or to amend the definition or

any other provision of the Act in question

retrospectively. In this process it cannot be said that

there has been an encroachment by the legislature

over the power of the judiciary. A court's directive

must always bind unless the conditions on which it

is based are so fundamentally altered that under

altered circumstances such decisions could not have

been given. This will include removal of the defect in

a statute pointed out in the judgment in question, as

well as alteration or substitution of provisions of the

enactment on which such judgment is based, with

retrospective effect.””

In Indian Aluminium Co. (supra), the Court relied upon a set of

authorities and extended its approval to the above stated position

of law thus:

“41. ... A Constitution Bench of this Court had held that

the distinction between legislative act and judicial act is

well­known. The adjudication of the rights of the parties

is a judicial function. The legislature has to lay down the

law prescribing the norms or conduct which will govern

the parties and transactions to require the court to give

effect to that law. Validating legislation which removes the

norms of invalidity of action or providing remedy is not an

encroachment on judicial power. Statutory rule made

under the proviso to Article 309 was upheld. The

legislature cannot by a bare declaration without

anything more, directly overrule, reverse or override a

judicial decision at any time in exercise of the plenary

power conferred on the legislature by Articles 245 and

246 of the Constitution. It can render a judicial

decision ineffective by enacting a valid law on a topic

within its legislative field, fundamentally altering or

changing with retrospective, curative or nullifying

effect, the conditions on which such a decision is

based. In Hari Singh and Ors. v. The Military Estate

Officer, (1973) 1 SCR 515, prior to 1958 two alternative

modes of eviction under Public Premises Act were

available. When the eviction was sought of an

unauthorised occupant by summary procedure the

constitutionality thereof was challenged and upheld. The

Act was subsequently amended in 1958 with retrospective

operation from September 16, 1958. Thereunder only one

procedure for eviction was available. It was contended to

be a legislative encroachment of judicial power. A Bench

of three Judges held that the legislature possessed

competence over the subject matter and the Validation

Act could remove the defect which the court had found in

the previous case. It was not the legislative encroachment

of judicial power but one of removing the defect which the

court had pointed out with a deeming date.”

(emphasis supplied)

39. Reverting to the true effect of the reported judgment under

consideration, it 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 (of Income Tax Act, 1961) 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. In other words, once the Finance Act,

2001 was duly passed by the Parliament inserting clause (f) in

Section 43B (of Income Tax Act, 1961) with prospective effect, the deduction against the

liability of leave encashment stood regulated in the manner so

prescribed. Be it noted that 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.

40. Notably, this regulatory measure is in sync with other

deductions specified in Section 43B (of Income Tax Act, 1961), 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 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 (of Income Tax Act, 1961), 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.

41. The position of law discussed above leaves no manner of

doubt as regards the legitimacy of enacting clause (f). The

respondents have neither made a case of non­existence of

competence nor demonstrated any constitutional infirmity in

clause (f).

42. 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 is reversed and

clause (f) in Section 43B of the 1961 Act is held to be

constitutionally valid and operative for all purposes. No order as

to costs. Pending interlocutory applications, if any, shall stand

disposed of.

(A.M. Khanwilkar)

(Hemant Gupta)

(Dinesh Maheshwari)

New Delhi;

April 24, 2020.