Income Tax Provision granting Tax Incentive to Employers under Leave Encashment Scheme is Constitutionally Valid: SC [Read Judgment]

A three-judge bench of the Supreme Court while upholding the constitutional validity of Section 43­B(f) of the Income Tax Act, 1961 pertaining to certain deductions to be only on actual payment in respect of any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, has held that the provision is not violative of Article 14 of the Constitution of India. Leave encashment is the sum of money paid by an employer for the leaves unutilized.

The respondents, Exide Industries Limited is 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 of payment.

The respondents contended that Section 43B has been carved out as an exception to the 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.

The Apex court addressed the issue while keeping in view that legislative enactment can be struck down by Court only on two grounds, either the appropriate legislature does not have the competence to make the law, or 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.

The three-judge bench comprising Justice A.M. Khanwilkar, Justice Hemant Gupta and Justice Dinesh Maheshwari upheld the constitutional validity of clause (f) in Section 43B.

“Section 43B is a mixed 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,” the bench observed.