INCOME TAX ACT, 1961

Article 226 Article 14 Section 43B(f)

Business disallowance under section 43B - Constitutional validity of clause (f) of section 43B - -

The assessee 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 offers them the choice of method of accounting and accordingly, they computed their profits and gains of business in accordance with the mercantile system. According to the 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. It was further contended that since the due date for encashment of leave does not arise in the same accounting year in which provision was made, there was no question of subjecting the deductions against such liability upon actual payment. The High Court held that clause (f) of section 43B is arbitrary and violative of article 14 of constitution. Held: High Court had characterised clause (f) as 'arbitrary' and 'unconscionable' while imputing it with unconstitutionality. The constitutional power of judicial review contemplates a review of the provision, as it stands, and not a review of the circumstances in which the enactment was made. Be it noted that merely holding an enacted provision as unconscionable or arbitrary is not sufficient to hold it as unconstitutional unless such infirmities are sufficiently shown to exist in the form, substance or functioning of the impugned provision. No such infirmity had been exhibited and adverted to in the impugned judgment. Broad objective of enacting section 43B concerning specified deductions referred to therein was to protect larger public interest primarily of revenue including welfare of the employees. Clause (f) fits into that scheme and shares sufficient nexus with the broad objective. Once the Finance Act, 2001 was duly passed by the Parliament inserting clause (f) in section 43B with prospective effect, the deduction against the liability of leave encashment stood regulated in the manner so prescribed. Further, the 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. Strictly speaking, the Court cannot venture into hypothetical spheres while adjudging constitutionality of a duly enacted provision and unfounded limitations cannot be read into the process of judicial review. A priori, the plea that clause (f) has been enacted with the sole purpose to defeat the judgment of this Court is misconceived. Assessee have neither made a case of non-existence of competence nor demonstrated any constitutional infirmity in clause (f). The impugned judgment of the Division Bench of the High Court was reversed and clause (f) in section 43B of the 1961 Act is held to be constitutionally valid and operative for all purposes.

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