Legislature has not defeated the dictum in Bharat Earth Movers case by inserting clause (f) to Section 43B of the IT Act

Supreme Court: The 3-judge bench of AM Khanwilkar, Hemant Gupta and Dinesh Maheshwari, JJ has the constitutional validity of clause (f) of Section 43B of the Income Tax Act, 1961 and said,

“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.”

On validity of Clause (f) of Section 43B of the IT Act

Clause (f) of Section 43B of the IT Act provides 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.

The Court explained that Section 43B was enacted in 1983 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.

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. It holds no merit to urge 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.”

On legislature’s power to defeat the dictum of Supreme Court

Though the Court noticed that 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.

The Court further explained that the 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 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.

Defeating the dictum in Bharat Earth Movers case

It was argued before the Court that by inserting clause (f) to Section 43B of IT Act, the legislature defeated the ruling of Supreme Court in Bharat Earth Movers v. Commissioner of Income Tax, Karnataka, (2000) 6 SCC 645. 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.

The Court, in the present case, noticed that the decision in Bharat Earth Movers 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.

The Court further said that a limited change was brought about by the insertion of clause (f) in Section 43B and nothing more which 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.”

The Court, hence, held that 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.

[Union of India v. Exide Industries Limited, 2020 SCC OnLine SC 399 , decided on 24.04.2020]

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