COMMISSIONER OF INCOME TAX Vs. HINDUSTAN LATEX LTD

JUDGEMENT

(1.) The Revenue is in appeal and the respondent is a Government Company. The assessment of the company for the year 2005-06 was completed by Annexure A order. Inter alia, the assessee's claim with respect to the payment ofpremium to Life Insurance Corporation for the policy under Group Leave Encashment Scheme was claimed as a deduction under Section 37 of the Income Tax Act, 1961(hereinafter referred to as 'the Act'). The claim was allowed treating the same as an expenditure exclusively incurred for the purpose of business. Subsequently, the Commissioner of Income Tax issued notice under Section 263 of the Act and after hearing the objections held that leave encashment is an allowable deduction under Section 43B(f) only and the same can be availed of only with respect to payments made on that account in the previous year. The assessee was before the Tribunal challenging the revision under Section 263 mainly on two grounds (i) being the scope of powers under Section 263 and (ii) Section 43 B(f) being no longer available for the Revenue in view of the judgment of the Calcutta High Court striking down the same. Primarily the assessee contended that the exercise of jurisdiction under Section 263 in the above case could not be sustained for the reason that the finding of the Commissioner with respect to the claim falling under Section 43B(f) would only constitute a mere change of opinion. While conceding the position that the provision conferring powers on the Commissioner to revise orders prejudicial to the interest of the Revenue could be invoked in the event of incorrect appreciation of the facts or incorrect application of law; it has to be noticed that the same cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. The provision made in the accounts for disbursement of leave encashment facility; which is to be disbursed at a future point of time, may not be permissible as a deduction under Section 43B(f). However in the case of the assessee who has taken insurance policy to cover such liability there is absolutely no question of future disbursal of the liability since such payments/disbursal will be made only by the insurer and the assessee cannot claim any deduction towards such payments made by the insurer. The payments made on account of premium, the assessee contended, was allowable as a deduction under Section 37 and the revisional order of the Commissioner could only amount to a change of opinion. The allowance of the claim by the Assessing Officer cannot be said to be on an incorrect appreciation of facts or on an incorrect application of law. It was also contended that in any event Section 43B(f) has been held to be unconstitutional by the Calcutta High Court as per the decision reported in Exide Industries Ltd. And another v. Union of India and others, 2007 292 ITR 470. The Tribunal accepted both the contentions of the assessee and set aside the impugned order passed by the Commissioner under Section 263 of the Act.

(2.) Revenue has raised the following questions of law:-

(3.) Section 43B was introduced by the Finance Act 1983 with effect from 1.4.1984 and clause (f) was inserted by the Finance Act 2001 with effect from 1.4.2002. The introduction of Clause (f) was purportedly to restrict deduction allowable in computing income referred to in Section 28 for the previous year, to that amounts actually paid in lieu of leave encashment in the previous year itself. Section 43B itself was introduced to dissuade tax payers from claiming deduction on he basis of provisions made for discharging statutory liabilities without having actually discharged the same. The object of Section 43B was to prevent assessees from making provisions for statutory liabilities without actually discharging the same and maintaining it as a provision in the Books of Accounts while avoiding actual payment by invoking legal remedies or otherwise. It is to be noticed that leave encashment is not a statutory liability and even in the case of provisions being made the deduction was allowed as abusiness expenditure; when the liability was not actually incurred in the previous year. In fact the above position was so declared by the decision of the Hon'ble Supreme Court in Bharat Earth Movers V. Commissioner of Income Tax, 2000 245 ITR 428. Purportedly to overcome the said decision, the Parliament had brought in an amendment in the year 2001 to deny such deduction in the event of the same being not incurred in the previous year by introduction of Clause (f) to Section 43B.