SC Upholds The Constitutional Validity of Clause(f) of Section 43B of Income Tax Act, 1961 [Read Judgment]

Reversing the judgment of the Calcutta High Court, the Supreme Court on Friday upheld the constitutional validity of clause (f) of Section 43B of the Income Tax Act, 1961. The Calcutta High Court vide order dated 27.06.2007 in APO No. 301 of 2005, had held that the said clause is arbitrary and violative of Article 14 of the Constitution of India. Clause (f) was inserted in the already existing Section 43B vide Finance Act, 2001 with effect from 1.4.2002. The purpose of introducing this clause was 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. Actual payment of liability to the employees was made a condition precedent, by this clause, for extending the benefit of deduction under the 1961 Act. This means that with the application of clause (f), the eligibility for deduction arises in the previous year in which the above said payment is actually made and not in which provision was made in that regard. The respondents, aggrieved by the inclusion of the clause (f) 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; 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; 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; andTherefore, the liability under the leave encashment scheme being a trading liability cannot be subjected to the exception under Section 43B of the 1961 Act. The approach adopted by the Apex Court in testing the constitutional validity of a provision was well settled and the fundamental concern of the Court was to inspect the existence of enacting power and once such power was found to be present, the next examination was to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Constitution or not. The Bench noted that 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." observed the Bench. The Justices explained that this power to legislate is clothed with power to decide 'when to legislate, what to legislate and how much to legislate.' The Bench further explained that the function of deciding the timing, content and extent of legislation has been primarily entrusted to the Legislature, and the Court, while exercising judicial review, starts with a basic presumption in favour of the proper exercise of such power. "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. 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." noted the Bench. The Justices stated that Section 43B 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 and it is not a provision to place any embargo upon the autonomy of the assessee in adopting a particular method of accounting, nor does it deprive the assessee of any lawful deduction. Elaborating, the Bench said that the clause merely operates as an additional condition for the availment of deduction qua the speicfied head. Section...

SC Upholds The Constitutional Validity of Clause(f) of Section 43B of Income Tax Act, 1961 [Read Judgment]

Mehal Jain

Tags