UNION OF INDIA Vs. EXIDE INDUSTRIES LIMITED

JUDGEMENT

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

(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 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 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.