UNION OF INDIA & ORS. versus EXIDE INDUSTRIES LIMITED & ANR.
[2020] 7 S.C.R. 1, Supreme Court of India, 2020
Outcome: Appeal(s) allowed (Granted)
Segment: Ratio
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UNION OF INDIA & ORS.
v.
EXIDE INDUSTRIES LIMITED & ANR.
(Civil Appeal No. 3545 of 2009)
APRIL 24, 2020
[A. M. KHANWILKAR, HEMANT GUPTA AND
DINESH MAHESHWARI, JJ.]
Income Tax Act, 1961:
s. 43B(f) (as inserted by Finance Act, 2001) – Liability under
leave encashment scheme – Subjected to exception u/s. 43B by
inserting Clause (f) to s. 43B – Constitutional validity of – Held:
s.43B is not an embargo upon the autonomy of the assessee in
adopting a particular method of accounting, nor deprives the
assessee of any lawful deduction – It merely operates as an
additional condition for the availment of deduction qua the specified
head – The only effect of insertion of clause (f) is to regulate the
stated deduction by putting it in a special provision – The assessee
has neither made a case of non-existence of competence nor
demonstrated any constitutional infirmity in Clause (f) – s.43B (f)
is held to be constitutionally valid and operative for all purposes.
s.145 – Method of accounting – Is a prerogative falling in
the domain of the assessee – However, the autonomy of assessee in
adopting a system of accounting is controlled by the regulation
notified by the Central Government.
Judicial Review:
Legislative enactment – Constitutionality – Determination of
– Held: In exercise of judicial review, the Court starts with a basic
presumption in favour of constitutionality – While testing the
constitutional validity of a provision, the Court is to
inspect the
existence of enacting power, and once such power is found to be
present, the next examination is to ascertain whether the enacted
provision impinges upon any right enshrined in Part III of the
Constitution – While adjudicating constitutionality of a duly enacted
provision, Court cannot venture into hypothetical spheres –
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Unfounded limitation cannot be read into the process of judicial
review – The process of testing constitutional validity is not to sneak
into the prudence or proprieties of the legislature in enacting the
impugned provision, nor to examine the culpable conduct of the
legislature as an appellate authority over the legislature – The role
of the Court is restricted to the finding of a constitutional infirmity
in the provision, as it is placed before the Court.
Fiscal statutes – Judicial review of – The approach of
Constitutional Courts ought to be different while dealing with fiscal
statutes – The general principles of exclusion and inclusion do not
apply to taxing statutes with the same vigour unless the law reeks of
constitutional infirmities – A larger discretion is given to the
legislature in taxing statutes than in other spheres.
Legislation:
A law when declared to be invalid, by Court, legislature is
free to diagnose such law and alter the invalid elements thereof –
In doing so, the legislature is not declaring the opinion of the Court
to be invalid.
Interpretation of Statutes:
Non-obstante clause – Interpretation of – Held: A non-
obstante clause assumes an over-riding character against any other
provision of general application.
Objects and reasons of the statute – As an aid to interpretation
of statute – Nature of – When the Court examines the validity of a
provision, its primary concern is literal text of the
provision – This
constitutes first test of interpretation – Interpretation of statute
cannot be unrelated to the nature of the statute – Objects and reasons
of the Statute are the external aids to the interpretation and can be
looked into for a limited purpose in the process of interpretation,
especially when the Court is sitting over the interpretation of an
ambiguous provision – The Court is not bound by such external
elements – Therefore, the presence or absence of objects and reasons
have no impact upon the constitutional validity of a provision as
long as the literal features of a provision enable the Court to
comprehend its true meaning with sufficient clarity.
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Allowing the appeal, the Court
HELD: 1.1 While testing the constitutional validity of a
provision, the Court is to inspect the existence of enacting power
and once such power is found to be present, the next examination
is to ascertain whether the enacted provision impinges upon any
right enshrined in Part III of the Constitution. Broadly speaking,
the process of examining validity of a duly enacted provision, as
envisaged under Article 13 of the Constitution, is premised on
these two steps. No doubt, the second test of infringement of
Part III is a deeper test undertaken in the light of settled
constitutional principles. [Para 11][20-H; 21-A-B]
State of Madhya Pradesh v. Rakesh Kohli & Anr.  (2012)
6 SCC 312 : [2012] 6 SCR 661; Bhanumati & Ors. v.
State of Uttar Pradesh & Ors. (2010) 12 SCC 1 : [2010]
7 SCR 585; State of Andhra Pradesh & Ors. v. Mcdowell
& Co. & Ors. (1996) 3 SCC 709 : [1996] 3 SCR 721;
Kuldip Nayar & Ors. v. Union of India & Ors. (2006) 7
SCC 1 : [2006] 5 Suppl. SCR 1 – relied on.
2. 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. This power is clothed with power to
decide when to legislate, what to legislate and how much to
legislate. Thus, to decide the
timing, content and extent of
legislation is a function primarily entrusted to the legislature and
in exercise of judicial review, the Court starts with a basic
presumption in favour of the proper exercise of such power.
[Para 13][22-D-E]
2.1 Generally, the heads of income to be subjected to
taxability under the Income Tax Act, 1961 are enumerated in
Section 14 which starts with a saving clause and expressly
predicates that profits and gains of business or profession shall
be chargeable to income tax. This general declaration of
chargeability is followed by Section 145, which prescribes the
method of accounting. [Para 14][22-F-G]
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2.2 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. As per the mercantile system
of accounting, the assessment of income is made on the basis of
accrual of liability and not on the basis of actual expenditure in
lieu thereof. The expression “either cash or mercantile system of
accounting” offers guidance on the nature of this accounting
system. 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. [Para 15][23-C-F]
2.3. Section 43B, however, 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. It is not a provision to place any embargo
upon the autonomy of the assessee in adopting a particular method
of accounting, nor deprives the assessee of any lawful deduction.
Instead, it merely
operates as an additional condition for the
availment of deduction qua the specified head. [Para 16][23-F-G]
2.4 Section 43B bears heading “certain deductions to be only
on actual payment”. It opens with a non-obstante clause. As per
settled principles of interpretation, a non-obstante clause
assumes an overriding character against any other provision of
general application. It declares that within the sphere allotted to
it by the Parliament, it shall not be controlled or overridden by
any other provision unless specifically provided for. Out of the
allowable deductions, the legislature consciously earmarked
certain deductions from time to time and included them in the
ambit of Section 43B so as to subject such deductions to
conditionality of actual payment. Such conditionality may have
the inevitable effect of being different from the theme of mercantile
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system of accounting on accrual of liability basis qua the specific
head of deduction covered therein and not to other heads. But
that is a matter for the legislature and its wisdom in doing so.
[Para 17][23-H; 24-A-C]
2.5 Initially, the provision (s. 43B) included deductions in
respect of sum payable by assessee by way of tax or duty or any
sum payable by the employer by way of contribution to any
provident fund or superannuation fund. The legislature explained
the inclusion of these deductions by citing certain practices of
evasion of statutory liabilities and other liabilities for the welfare
of employees. With the passage of time, the legislature inserted
more deductions to Section 43B including cess, bonus or
commission payable by employer, interest on loans payable to
financial institutions, scheduled banks etc., payment in lieu of
leave encashment by the employer and repayment of dues to the
railways. Thus understood, there is no oneness or uniformity in
the nature of deductions included in Section 43B. Therefore, it is
not correct to say that this section only provides for deductions
concerning statutory liabilities. Section 43B is a mix 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. [Para 18]
[24-G-H; 25-A]
2.6. The leave encashment scheme envisages the payment
of a certain amount to the employees in lieu of their unused paid
leaves in a year. The nature of this payment is beneficial and pro-
employee. However, it is not in the form of a bounty and forms a
part of the conditions of service of the employee. An employer
seeking deduction from tax liability in advance, in the name of
discharging the liability of leave encashment, without actually
extending such payment to the employee as and when the time
for payment arises may lead to abhorrent consequences. When
time for such payment arises upon retirement (or otherwise) of
the employee, an employer may simply refuse to pay.
Consequently, the innocent employee will be entangled in
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litigation in the evening of his/her life for claiming a hard-earned
right without any fault on his part. Concomitantly, it would entail
in double benefit to the employer – advance deduction from tax
liability without any burden of actual payment and refusal to pay
as and when occasion arises. It is this mischief clause (f) seeks
to subjugate. [Para 19][25-B-D]
2.7 The interpretation of a statute cannot be unrelated to
the nature of the statute. In line with other clauses under Section
43B, clause (f) was enacted to remedy a particular mischief and
the concerns of public good, employees’ welfare and prevention
of fraud upon revenue is writ large in the said clause. Such statutes
are to be viewed through the prism of the mischief they seek to
suppress, that is, the *Heydon’s case principle. [Para 21]
[25-F-G]
State of Tamil Nadu v. MK Kandaswamy (1975) 4 SCC
745 : [1976] 1 SCR 38 – relied on.
*Heydon’s case (1584) 3 Co Rep 7 – referred to.
2.8 The objects and reasons behind the enactment of a
statute signify the intention of the legislature behind the
enactment of a statutory provision. It is true that an express
objects and reasons would be useful in understanding the import
of an enacted provision as and when the Court is called upon to
interpret the same. Whereas, when there is no ambiguity about
the legislative competence and of the import of the enactment,
no rule, authority or convention to support the view that
publication of objects and reasons is quintessence for the
sustenance of a duly enacted provision has been brought to the
notice of the Court. In fact, objects and reasons feature in the list
of external aids to interpretation and can be looked into for the
limited purpose in the process of interpretation. The express
objects and reasons, therefore, serves a limited purpose of
assisting the Court in examining the validity of a provision,
especially when the Court is sitting over the interpretation of an
ambiguous provision. [Paras 24 and 25][26-G; 27-A; 28-B-C;
29-B]
State of West Bengal v. Union of India AIR 1963
SC 1241 : [1964] 1 SCR 371; Sanjeev Coke
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Manufacturing Company v. Bharat Coking Coal Limited
and Anr. (1983) 1 SCC 147 : [1983] 1 SCR 1000 –
relied on.
State of Tamil Nadu & Ors. v. K. Shyam Sunder and
Ors. (2011) 8 SCC 737 : [2011] 11 SCR 1094 – referred
to.
2.9 When the Court examines the validity of a provision,
its primary concern is the literal text of the provision. It is so
because the legislature speaks through the text and as long as it
is not speaking in an equivocal manner, there is limited space for
the Court to venture beyond the text. This constitutes the first
test of interpretation, often termed as the literal interpretation.
If the text of the provision is unambiguous, the legislative intent
gets coalesced and is epitomised therefrom. When the textual
element of the provision reeks of ambiguity and is susceptible to
multiple meanings, the Court enters into a proactive examination
to find out the real meaning of the provision. This proactive
examination by the Court offers multiple avenues and methods
to achieve the ultimate purpose of interpretation. Adverting to
the express objects and reasons may be useful for limited purpose
to understand the surrounding circumstances at the time of
enactment. The Court is not bound by such external elements.
Therefore, the presence or absence of objects and reasons has
no impact upon the constitutional validity of a provision as long
as the literal features of the provision enable the Court to
comprehend its true meaning with sufficient
clarity.
[Paras 26 and 27][29-C-F]
2.10. The Division Bench of the High Court, in the present
case, plainly glossed over the fundamental presumption of
constitutionality in favour of clause (f) and based its judgment
upon the absence of objects and reasons as striking at the root of
its validity. This approach is flawed for at least three reasons.
First, it steers clear from the necessary attempt to discover any
constitutional infirmities in the enacted provision. Second, it
makes no attempt to dissect the text of the provision so as to
display the need to go beyond the text. Third, it goes into the
background of the enactment and ventures into a sphere which
is out of bounds for the Court as long as the need for interpretation
borne out of any ambiguity arises. [Para 28][29-G-H; 30-A]
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2.11 The process of testing validity is not to sneak into the
prudence or proprieties of the legislature in enacting the
impugned provision. Nor, is it to examine the culpable conduct
of the legislature as an appellate authority over the legislature.
The only examination of the Court is restricted to the finding of a
constitutional infirmity in the provision, as is placed before the
Court. Thus, the non-disclosure of objects and reasons per se
would not impinge upon the constitutionality of a provision unless
the provision is ambiguous and the possible interpretation violate
Part III of the Constitution.  In the absence of any finding of any
constitutional infirmity in a provision, the Court is not empowered
to invalidate a provision. [Para 29][30-B-C]
2.12 To hold a provision as violative of the Constitution on
account of failure of the legislature to state the objects and reasons
would amount to an indirect scrutiny of the motives of the
legislature behind the enactment. Such a course of action is
unwarranted. The raison d’etre behind this self-imposed
restriction is because of the fundamental reason that different
organs of the State do not scrutinise each other’s wisdom in the
exercise of their duties. In other words, the time-tested principle
of checks and balances does not empower the Court to question
the motives or wisdom of the legislature, except in circumstances
when the same is demonstrated from the enacted
law. [Para 30]
[30-D-E]
K.C. Gajapati Narayan Deo & Ors. v. The State of
Orissa [1954] SCR 1 – relied on.
United States v. Butler et al 297 US 1 (1936) – referred to
2.13 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.
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 has
been exhibited and adverted to in the impugned judgment.
[Para 30][31-E-F]
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2.14 The High Court has supported its finding of invalidity
by recording two observations vis-a-vis the previously existing
(unamended) clauses of Section 43B – First, that clause (f) is
inconsistent with other clauses and nature of deduction targeted
in clause (f) is distinct from other deductions. Second, that clause
(f) has no nexus with the objects and reasons behind the
enactment of original Section 43B and therefore, the objects and
reasons attributed to Section 43B cannot be used to deduce the
object and purpose of clause (f). Both the grounds are ill-founded.
In the basic scheme of Section 43B, there is no direct or indirect
limitation upon the power of legislature to include only particular
type of deductions in the ambit of Section 43B. The legislature
never restricted it to a particular category of deduction and that
intent cannot be read into the main Section by the Court, while
sitting in judicial review. Concededly, it is a provision to attach
conditionality on deductions otherwise allowable under the Act
in respect of specified heads, in that previous year in which the
sum is actually paid irrespective of method of accounting.
[Paras 31 and 32][31-G; 32-A-D]
2.15 Further, the 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. [Para 33][32-E]
2.16 The approach of constitutional courts ought to be
different while dealing with fiscal statutes. It is trite that the
legislature is the best forum to weigh different problems in the
fiscal domain and form policies to address the same including to
create a new liability, exempt an existing liability, create a
deduction or subject an existing deduction to new regulatory
measures.  In the very nature of taxing statutes, legislature holds
the power to frame laws to plug in specific leakages. Such laws
are always pin-pointed in nature and are only meant to target a
specific avenue of taxability depending upon the experiences of
tax evasion and tax avoidance at the ground level. The general
principles of exclusion and inclusion do not apply to taxing statutes
with the same vigour unless the law reeks of constitutional
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infirmities.  No doubt, fiscal statutes must comply with the tenets
of Article 14. However, a larger discretion is given to the
legislature in taxing statutes than in other spheres. [Para 34]
[32-F-H; 33-A]
Anant Mills Co. Ltd. v. State of Gujarat & Ors. (1975)
2 SCC 175 : [1975] 3 SCR 220 – relied on.
3.1 It is no doubt true that the legislature cannot sit over a
judgment of this Court or so to speak overrule it. There cannot
be any declaration of invalidating a judgment of the Court without
altering the legal basis of the judgment - as a judgment is
delivered with strict regard to the enactment as applicable at the
relevant time. However, once the enactment itself stands
corrected, the basic cause of adjudication stands altered and
necessary effect follows the same. A legislative body is not
supposed to be in possession of a heavenly wisdom so as to
contemplate all possible exigencies of their enactment. As and
when the legislature decides to solve a problem, it has multiple
solutions on the table. At this stage, the Parliament exercises its
legislative wisdom to shortlist the most desirable solution and
enacts a law to that effect. It is in the nature of a ‘trial and error’
exercise and a law-making body, particularly in statutes of fiscal
nature, is duly empowered to undertake such an exercise as long
as the concern of legislative competence does not come into
doubt. Upon the law coming into force, it becomes
operative in
the public domain and opens itself to any review under Part III
as and when it is found to be plagued with infirmities. Upon being
invalidated by the Court, the legislature is free to diagnose such
law and alter the invalid elements thereof. In doing so, the
legislature is not declaring the opinion of the Court to be invalid.
[Para 37][34-B-E]
Welfare Association. A.R.P., Maharashtra and Anr. v.
Ranjit P. Gohil and Ors. (2003) 9 SCC 358 : [2003] 2
SCR 139; Indian Aluminium Co. and Ors. v. State of
Kerala and Ors. (1996) 7 SCC 637 : [1996] 2 SCR 23;
State of T.N. v. Arooran Sugars Ltd. (1997) 1 SCC 326
: [1996] 8 Suppl. SCR 193 – relied on.
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3.2. The judgment in Bharat Earth Movers Case was
rendered in light of general dispensation of autonomy of the
assessee to follow cash or mercantile system of accounting
prevailing at the relevant time, in absence of an express statutory
provision to do so differently. It is an authority on the nature of
the liability of leave encashment in terms of the earlier
dispensation. In absence of any such provision, the sole operative
provision was Section 145(1) of the 1961 Act that allowed complete
autonomy to the assessee to follow the mercantile system. Now
a limited change has been brought about by the insertion of clause
(f) in Section 43B and nothing more. It applies prospectively.
Merely because a liability has been held to be a present liability
qualifying for instant deduction in terms of the applicable
provisions at the relevant time does not ipso facto signify that
deduction against such liability cannot be regulated by a law made
by Parliament prospectively. In matter of statutory deductions, it
is open to the legislature to withdraw the same prospectively.
[Para 39][36-F-H; 37-A]
3.3 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. The amendment does
not reverse the nature of the liability nor has it taken away the
deduction as such. The liability of leave encashment continues
to
be a present liability as per the mercantile system of
accounting. 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. [Para 21][37-B-C]
3.4  This regulatory measure is in sync with other deductions
specified in Section 43B, which are also present and accrued
liabilities. To wit, the liability in lieu of tax, duty, cess, bonus,
commission etc. also arise in the present as per the mercantile
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system, but assessees used to defer payment thereof despite
claiming deductions thereagainst under the guise of mercantile
system of accounting. Resultantly, irrespective of the category
of liability, such deductions were regulated by law under the aegis
of Section 43B, keeping in mind the peculiar exigencies of fiscal
affairs and underlying concerns of public revenue. A priori, merely
because a certain liability has been declared to be a present
liability by the Court as per the prevailing enactment, it does not
follow that legislature is denuded of its power to correct the
mischief with prospective effect, including to create a new liability,
exempt an existing liability, create a deduction or subject an
existing deduction to new regulatory measures. 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.
[Para 40][37-D-G]
4. The respondents have neither made a case of non-
existence of competence nor demonstrated any constitutional
infirmity in clause (f) of s. 43B. Accordingly, the impugned
judgment of the Division Bench of the High Court is reversed
and clause (f) in Section 43B of the Income Tax Act, 1961 is held
to be constitutionally
valid and operative for all purposes.
[Paras 41 and 42][37-H; 38-A-B]
Bharat Earth Movers v. Commissioner of Income Tax,
Karnataka (2000) 6 SCC 645 : [2000] 2 Suppl. SCR
295 – relied on.
Case Law Reference
[2000] 2 Suppl. SCR 295
relied on
Para 4
[2012] 6 SCR 661
relied on
Para 11
[2010] 7 SCR 585
relied on
Para 11
[1996] 3 SCR 721
relied on
Para 11
[2006] 5 Suppl. SCR 1
relied on
Para 11
[1976] 1 SCR 38
relied on
Para 22
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[2011] 11 SCR 1094
referred to
Para 24
[1964] 1 SCR 371
relied on
Para 25
[1983] 1 SCR 1000
relied on
Para 25
[1954] SCR 1
relied on
Para 30
[1975] 3 SCR 220
relied on
Para 34
[2003] 2 SCR 139
relied on
Para 38
[1996] 2 SCR 23
relied on
Para 38
[1996] 8 Suppl. SCR 193
relied on
Para 38
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3545
of 2009.
From the Judgment and Order dated 27.06.2007 of the High Court
of Calcutta in APO No. 301 of 2005.
K. K. Venugopal, AG (NP), Tushar Mehta, ASG (NP),
Ms. Madhavi Divan, ASG, Ms. Chinmayee Chandra, Ms. Nidhi Khanna
and Mrs. Anil Katiyar, Advs. for the Appellants.
Dr. Aman Hingorani, Basu, Himanshu Yadav for M/s. Hingorani
& Associates, Advs. for the Respondents.
The Judgment of the Court was delivered by
A. M. KHANWILKAR, J.
1. In this appeal, the constitutional validity of clause (f) of Section
43B of the Income Tax Act, 19611 arises for our consideration as a
result of the decision of the High Court at Calcutta2 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
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1 For short, “the 1961 Act”
2 For short, “the High Court”
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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:
“43-B. Certain deductions to be only on actual payment.-
Notwithstanding anything contained in any other provision of this
Act, a deduction otherwise allowable under this Act in respect of-
(a) any sum payable by the assessee by way of tax, duty, cess or
fee, by whatever name called, under any law for the time being in
force, or
(b) any sum payable by the assessee as an employer by way of
contribution to any provident fund or superannuation fund or
gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (ii) of sub-section (1) of section
36, or
(d) any sum payable by the assessee as interest on any loan or
borrowing from any public financial institution or a State financial
corporation or a State industrial investment corporation, in
accordance with the terms and conditions of the agreement
governing such loan or borrowing, or
(e) any sum payable by the assessee
as interest on any term loan
from a scheduled bank in accordance with the terms and conditions
of the agreement governing such loan, or
(f) any sum payable by the assessee as an employer in lieu of any
leave at the credit of his employee,
shall be allowed (irrespective of the previous year in which the
liability to pay such sum was incurred by the assessee according
to the method of accounting regularly employed by him) only in
computing the income referred to in section 28 of that previous
year in which such sum is actually paid by him:
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Provided that nothing contained in this section shall apply in relation
to any sum referred to in clause (a) or clause (c) or clause (d) or
clause (e) or clause (f) which is actually paid by the assessee on
or before the due date applicable in his case for furnishing the
return of income under sub-section (1) of section 139 in respect
of the previous year in which the liability to pay such sum was
incurred as aforesaid and the evidence of such payment is furnished
by the assessee along with such return:
Provided further that no deduction shall, in respect of any sum
referred to in clause (b), be allowed unless such sum has actually
been paid in cash or by issue of a cheque or draft or by any other
mode on or before the due date as defined in the Explanation
below clause (va) of sub-section (1) of Section 36, and where
such payment has been made otherwise than in cash, the sum has
been realised within fifteen days from the due date.
Explanation1.—For the removal of doubts, it is hereby declared
that where a deduction in respect of any sum referred to in clause
(a) or clause (b) of this section is allowed in computing the income
referred to in section 28 of the previous year (being a previous
year relevant to the assessment year commencing on the 1st day
of April, 1983, or any earlier assessment year) in which the liability
to pay such sum was incurred by the assessee, the assessee shall
not be entitled to any deduction under this section in respect of
such
sum in computing the income of the previous year in which
the sum is actually paid by him.
Explanation 2.—For the purposes of clause (a), as in force at all
material times, “any sum payable” means a sum for which the
assessee incurred liability in the previous year even though such
sum might not have been payable within that year under the relevant
law.
Explanation 3.—For the removal of doubts it is hereby declared
that where a deduction in respect of any sum referred to in clause
(c) or clause (d) of this section is allowed in computing the income
referred to in section 28 of the previous year (being a previous
year relevant to the assessment year commencing on the 1st day
of April, 1988, or any earlier assessment year) in which the liability
to pay such sum was incurred by the assessee, the assessee shall
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
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not be entitled to any deduction under this section in respect of
such sum in computing the income of the previous year in which
the sum is actually paid by him.
Explanation 3A.—For the removal of doubts, it is hereby declared
that where a deduction in respect of any sum referred to in clause
(e) of this section is allowed in computing the income referred to
in section 28 of the previous year (being a previous year relevant
to the assessment year commencing on the 1st day of April, 1996,
or any earlier assessment year) in which the liability to pay such
sum was incurred by the assessee, the assessee shall not be entitled
to any deduction under this section in respect of such sum in
computing the income of the previous year in which the sum is
actually paid by him.
Explanation 3B.—For the removal of doubts, it is hereby declared
that where a deduction in respect of any sum referred to in clause
(f) of this section is allowed in computing the income, referred to
in section 28, of the previous year (being a previous year relevant
to the assessment year commencing on the 1st day of April, 2001,
or any earlier assessment year) in which the liability to pay such
sum was incurred by the assessee, the assessee shall not be entitled
to any deduction under this section in respect of such sum in
computing the income of the previous year in which the sum is
actually paid by him.
Explanation 4.—For the purposes of this section,—
(a) “public financial institutions” shall have the meaning assigned
to it in section 4A of the Companies Act, 1956 (1 of 1956);
(aa) “scheduled bank” shall have the meaning assigned to it in
the Explanation to clause (iii) of sub-section (5) of section 11;
(b) “State financial corporation” means a financial corporation
established under section 3 or section 3A or an institution
notified under section 46 of the State Financial Corporations
Act, 1951 (63 of 1951);
(c) “State industrial investment corporation” means a
Government company within the meaning of section 617 of
the Companies Act, 1956 (1 of 1956), engaged in the business
of providing long-term finance for industrial projects and eligible
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for deduction under clause (viii) of sub-section (1) of section
36.”
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 afore-stated
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.
4. It is the case of the respondents that the judgment of this Court
in Bharat Earth Movers vs. Commissioner of Income Tax,
Karnataka3 holds the field of law as far as the nature of the liability of
leave encashment is concerned. The said
judgment, while dealing with
the principles of accounting under Section 37, conclusively holds that if a
business liability has arisen definitely, deduction may be claimed against
the same in the previous year in which such liability has accrued, even if
it has not been finally discharged. The Court further held that the liability
in lieu of leave encashment scheme is a present and definite liability and
not a contingent liability. As regards the nature of the leave encashment
liability, the respondents urge that this liability is carved in the nature of a
beneficial provision and leave can only be encashed by the employees in
accordance with the terms and conditions of employment. It is further
contended that since the due date for encashment of leave does not
arise in the same accounting year in which provision is made, there is no
question of subjecting the deductions against such liability upon actual
payment.
3 (2000) 6 SCC 645
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5. Having stated that all the clauses under Section 43B, barring
clause (f), cover liabilities of a statutory nature and those driven by
concerns of employees’ welfare, the respondents would urge that the
liability covered by clause (f) is of a completely distinct nature and without
specifying clear objects and reasons for the inclusion of this liability under
Section 43B, it cannot be slipped into the main section. Further, the nature
of this liability is neither in sync with the objects and reasons of the
original section nor with those of other clauses enacted from time to
time in different assessment years.
6. The respondents also urge that the enactment of clause (f)
was driven by the sole consideration of subjugating the legal position
expounded by this Court in Bharat Earth Movers (supra) without
removing the basis thereof.  Such enactment would fall foul of the scheme
of the Constitution. It would be an inroad into the sphere reserved
exclusively for the judiciary and thereby violate the essential principles
of separation of powers.
7. The validity of clause (f) faced judicial scrutiny first before the
single Judge of the High Court. The clause passed the constitutional
muster of the Court, which had observed thus:
“Thus the position of law existing at the date of insertion of cl. (f)
did not oblige the employer to actually pay the leave encashment
benefit either to his employee or to any fund or to any third
party,
though the liability was an accrued one. If the employer, of his
own accord, maintained a fund, he maintained it for his own
convenience, and not because of any legal obligation. But in view
of the mercantile system of accounting followed he was justified
in showing the accrued liability and claiming deduction. There
was nothing to prevent him from enjoying the benefit of deduction
and at the same time from controlling and using the amount for
his own benefit, till he was compelled to give the benefit of the
leave in question to the employee concerned. It is evident that the
clause was inserted to curb the abuse of existing law and protect
the interests of the employee.”
Addressing the argument that the insertion of the said clause was
solely intended to defeat the judgment of this Court in Bharat Earth
Movers (supra), the learned single Judge stated thus:
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“…It is true that the action neutralized the effect of the apex
court decision in Bharat Earth Movers case, but I do not agree
that it has amounted to encroachment upon the powers of the
judiciary. Once the existing legal position was explained by their
Lordships, I think, it was quite natural for the legislature to examine
the situation and legislate according to the need. The binding
decision of the highest court was not nullified in the process; only
the position of law was changed prospectively.”
8. The decision of the learned single Judge was appealed and
came to be reversed by the Division Bench of the High Court. The
Division Bench, while holding clause (f) as unconstitutional, observed
thus:
“... While inserting sub-section (f) no special reasons were
disclosed. His Lordship held that such disclosure was not
mandatory. We do not have any reason for disagreement on such
issue provided the subject amendment could be termed as in
furtherance to widen the scope of original section on the identical
objects and reasons as disclosed at the time of enacting the original
provision. As we find, the original section was incorporated to
plug in deductions claimed by not discharging statutory liabilities.
We also find that provision was subsequently made to restrict
deductions on account of unpaid loan to the financial institutions.
Leave encashment is neither statutory liability nor a contingent
liability. It was a provision to be made for the entitlement of
an
employee achieved in a particular financial year. An employee
earns certain amount by not taking leave which he or she is
otherwise entitled to in that particular year. Hence, the employer
is obliged to make appropriate provision for the said amount. Once
the employee retires he or she has to be paid such sum on
cumulative basis which the employee earns throughout his or her
service career [sic] unless he or she avails the leave earned [sic]
by him or her. That, in our view, could not have any nexus with
the original enactment. An employer is entitled to deduction for
the expenditure he incurs for running his business which includes
payment of salary and other perquisites to his employees. Hence,
it is a trading liability. As such he is otherwise entitled to have
deduction of such amount by showing the same as a provisional
expenditure in his accounts. The legislature by way of amendment
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restricts such deduction in case of leave encashment unless it is
actually paid in that particular financial year. The legislature is
free to do so after they disclose reasons for that and such
reasons are not inconsistent with the main object of the
enactment. We are deprived of such reasons for our perusal ...”
(emphasis supplied)
It also held that the subject matter of clause (f) was inconsistent
with the original Section 43B and observed as follows:
“…We also do not find such enactment consistent with the original
provision being Section 43B which was originally inserted to plug
in evasion of statutory liability. The Apex Court considered the
situation in the case of Bharat Earth Movers (Supra) when sub-
section (f) was not there. The Apex Court, considering all aspect
as disclosed by us hereinbefore, rejected the contention of the
Revenue and granted appropriate deduction to the concerned
assessee. The legislature to get rid of the decision of the Apex
Court brought out the amendment which would otherwise nullify
the judge made law. The Apex Court decisions are judge made
law and are applicable to all under the Constitution…”
It is noteworthy that the High Court did not question the existence
of power of the legislature to enact the subject clause, as can be discerned
from the following observations:
“…We, not for a single moment, observe that legislature was not
entitled to bring such amendment. They were within
their power
to bring such amendment. However, they must disclose reason
which would be consistent with the provisions of the Constitution
and the laws of the land and not for the sole object of nullifying
the Apex Court decision.”
9. We shall now examine clause (f) on the touchstone of the
Constitution, to be followed by an analysis of the impugned judgment.
10. We have heard Ms. Chinmayee Chandra, learned counsel for
the appellants and Dr. Aman Hingorani, learned counsel for the
respondents.
Constitutional validity of clause (f)
11. The approach of the Court in testing the constitutional validity
of a provision is well settled and the fundamental concern of the Court is
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to inspect the existence of enacting power and once such power is found
to be present, the next examination is to ascertain whether the enacted
provision impinges upon any right enshrined in Part III of the Constitution.
Broadly speaking, the process of examining validity of a duly enacted
provision, as envisaged under Article 13 of the Constitution, is premised
on these two steps. No doubt, the second test of infringement of Part III
is a deeper test undertaken in light of settled constitutional principles. In
State of Madhya Pradesh vs. Rakesh Kohli& Anr.4, this Court observed
thus:
“17. This Court has repeatedly stated that legislative enactment
can be struck down by Court only on two grounds, namely (i)
that the appropriate legislature does not have competence
to make the law, and (ii) 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….”
(emphasis supplied)
The above exposition has been quoted by this Court with approval
in a catena of other cases including Bhanumati& Ors. vs. State of
Uttar Pradesh & Ors.5, State of Andhra Pradesh& Ors. vs.
Mcdowell& Co.& Ors.6 and Kuldip Nayar& Ors. vs. Union of India&
Ors.7, to state a few.
12. In furtherance of the two-fold approach stated above, the
Court, in Rakesh Kohli (supra) also called for a prudent approach to the
following principles while examining the validity of statutes on taxability:
“32. While dealing
with constitutional validity of a taxation law
enacted by Parliament or State Legislature, the court must have
regard to the following principles:
(i) there is always presumption in favour of constitutionality of
a law made by Parliament or a State Legislature,
(ii) no enactment can be struck down by just saying that it is
arbitrary or unreasonable or irrational but some constitutional
infirmity has to be found,
4 (2012) 6 SCC 312
5 (2010) 12 SCC 1
6 (1996) 3 SCC 709
7 (2006) 7 SCC 1
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(iii) the court is not concerned with the wisdom or unwisdom,
the justice or injustice of the law as Parliament and State
Legislatures are supposed to be alive to the needs of the people
whom they represent and they are the best judge of the
community by whose suffrage they come into existence,
(iv) hardship is not relevant in pronouncing on the constitutional
validity of a fiscal statute or economic law, and
(v) in the field of taxation, the legislature enjoys greater latitude
for classification…..”
(emphasis supplied)
13. In the present case, 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. This
power is clothed with power to decide when to legislate, what to legislate
and how much to legislate. Thus, to decide the timing, content and extent
of legislation is a function primarily entrusted to the legislature and in
exercise of judicial review, the
Court starts with a basic presumption in
favour of the proper exercise of such power.
14. Generally, the heads of income to be subjected to taxability
under the 1961 Act are enumerated in Section 14 which starts with a
saving clause and expressly predicates that profits and gains of business
or profession shall be chargeable to income tax. This general declaration
of chargeability is followed by Section 145, which prescribes the method
of accounting and reads thus:
“Method of accounting
145. (1) Income chargeable under the head “Profits and gains of
business or profession” or “Income from other sources” shall,
subject to the provisions of sub-section (2), be computed in
accordance with either cash or mercantile system of accounting
regularly employed by the assessee.
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(2) The Central Government may notify in the Official
Gazette from time to time accounting standards to be
followed by any class of assessees or in respect of any class
of income.
(3) Where the Assessing Officer is not satisfied about the
correctness or completeness of the accounts of the assessee, or
where the method of accounting provided in sub-section (1) or
accounting standards as notified under sub-section (2), have not
been regularly followed by the assessee, the Assessing Officer
may make an assessment in the manner provided in section 144.”
(emphasis supplied)
15. 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 it noted that as per the mercantile system of accounting,
the assessment of income is made on the basis of accrual of liability and
not on the basis of actual expenditure in lieu thereof. The expression
“either cash or mercantile system of accounting” offers guidance on
the nature of this accounting system. 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.
16. Section 43B, however, 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. It is not a provision
to place any embargo upon the autonomy of the assessee in adopting a
particular method of accounting, nor deprives the assessee of any lawful
deduction. Instead, it merely operates as an additional condition for the
availment of deduction qua the specified head.
17. Section 43B bears heading “certain deductions to be only
on actual payment”. It opens with a non-obstante clause. As per settled
principles of interpretation, a non obstante clause assumes an overriding
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character against any other provision of general application. It declares
that within the sphere allotted to it by the Parliament, it shall not be
controlled or overridden by any other provision unless specifically
provided for. Out of the allowable deductions, the legislature consciously
earmarked certain deductions from time to time and included them in
the ambit of Section 43B so as to subject such deductions to conditionality
of actual payment.  Such conditionality may have the inevitable effect of
being different from the theme of mercantile system of accounting on
accrual of liability basis qua the specific head of deduction covered
therein and not to other heads. But that is a matter for the legislature and
its wisdom in doing so.
18. The existence of Section 43B traces back to 1983 when the
legislature conceptualised the idea of such a provision in the 1961 Act.
Initially, the provision included deductions in respect of sum payable by
assessee by way of tax or duty or any sum payable by the employer by
way of contribution to any provident fund or superannuation fund. It is
noteworthy that the legislature explained the inclusion of these deductions
by citing certain practices of evasion of statutory liabilities and other
liabilities for the welfare of employees.The scope and effect of the newly
inserted provision was explained in paragraph 60 of the Memorandum
explaining the provisions of the Finance Bill, 1983
as under:
“60.…To curb this practice, it is proposed to provide that deduction
for any sum payable by the assessee by way of tax or duty under
any law for the time being in force (irrespective of whether such
tax or duty is disputed or not) or any sum payable by the assessee
as an employer by way of contribution to any provident fund, or
superannuation fund or gratuity fund or any other fund for the
welfare of employees shall be allowed only in computing the
income of that previous year in which such sum is actually paid
by him.”
With the passage of time, the legislature inserted more deductions
to Section 43B including cess, bonus or commission payable by employer,
interest on loans payable to financial institutions, scheduled banks etc.,
payment in lieu of leave encashment by the employer and repayment of
dues to the railways. Thus understood, there is no oneness or uniformity
in the nature of deductions included in Section 43B. It holds no merit to
urge that this section only provides for deductions concerning statutory
liabilities. Section 43B is a mix bag and new and dissimilar entries have
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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.
19. The leave encashment scheme envisages the payment of a
certain amount to the employees in lieu of their unused paid leaves in a
year. The nature of this payment is beneficial and pro-employee.
However, it is not in the form of a bounty and forms a part of the conditions
of service of the employee. An employer seeking deduction from tax
liability in advance, in the name of discharging the liability of leave
encashment, without actually extending such payment to the employee
as and when the time for payment arises may lead to abhorrent
consequences. When time for such payment arises upon retirement (or
otherwise) of the employee, an employer may simply refuse to pay.
Consequently, the innocent employee will be entangled in litigation in the
evening of his/her life for claiming a hard-earned right without any fault
on his part. Concomitantly, it would entail in double benefit to the employer
– advance deduction from tax liability without any burden of actual
payment and refusal to pay as and when occasion arises. It is this mischief
clause (f) seeks to subjugate.
20. The argument advanced by the respondents that the nature of
leave encashment liability is such that it is impossible to make the actual
payment in the same year, adds no weight to the claim of invalidity of the
clause. We say so because the thrust of the provision is not to control
the timing of payment, rather, it is strictly targeted to control the timing
of claiming deduction in the name of such liability. The mischief sought
to be remedied by this clause, as discussed above, clarifies the position.
21. Be it noted that the interpretation of a statute cannot be
unrelated to the nature of the statute. In line with other clauses under
Section 43B, clause (f) was enacted to remedy a particular mischief and
the concerns of public good, employees’ welfare and prevention of fraud
upon revenue is writ large in the said clause. In our view, such statutes
are to be viewed through the prism of the mischief they seek to suppress,
that is, the Heydon’s case8 principle. In CRAWFORD, Statutory
Construction9, it has been gainfully delineated that “an enactment
8 (1584) 3 Co Rep 7
9 CRAWFORD, Statutory Construction p. 508
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designed to prevent fraud upon the revenue is more properly a statute
against fraud rather than a taxing statute, and hence should receive
a liberal construction in the government’s favour.”
22. In State of Tamil Nadu vs. MK Kandaswamy10, this Court
expounded on the interpretation of remedial statutes thus:
“26. It may be remembered that Section 7-A is at once a charging
as well as a remedial provision. Its main object is to plug leakage
and prevent evasion of tax. In interpreting such a provision, a
construction which would defeat its purpose and, in effect,
obliterate it from the statute book, should be eschewed. If
more than one construction is possible, that which preserves its
workability, and efficacy is to be preferred to the one which would
render it otiose or sterile. The view taken by the High Court is
repugnant to this cardinal canon of interpretation.”
(emphasis supplied)
23. Having ruled upon the constitutional validity of clause (f), we
shall now examine the grounds on which the High Court ruled against its
validity. We may note that the respondents’ challenge to the constitutional
validity of the said clause has primarily been accepted on three grounds:
(i)
Non-disclosure of objects and reasons behind its enactment
and insertion into section 43B;
(ii)
Inconsistency of clause (f) with other clauses of Section 43B
and absence of nexus of the clause with the original
enactment;
(iii) Enactment has been
triggered solely to nullify the dicta of
this Court in Bharat Earth Movers (supra).
Non-disclosure of objects and reasons
24. The objects and reasons behind the enactment of a statute
signify the intention of the legislature behind the enactment of a statutory
provision. Indubitably, the purpose or underlying aim of a law can be
discerned when interpreted in the light of stated objects and reasons.
Inasmuch as, the settled canon of interpretation is to deduce the true
intent of the legislature, as the will of the people is constitutionally
bestowed in the legislature. It is true that an express objects and reasons
10 (1975) 4 SCC 745
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would be useful in understanding the import of an enacted provision as
and when the Court is called upon to interpret the same.  This Court, in
State of Tamil Nadu & Ors. vs. K. Shyam Sunder and Ors.11, laid
emphasis upon the usefulness of objects and reasons in the process of
interpretation and observed thus:
“66. The Statement of Objects and Reasons appended to the Bill
is not admissible as an aid to the construction of the Act to be
passed, but it can be used for limited purpose of ascertaining the
conditions which prevailed at that time which necessitated the
making of the law, and the extent and urgency of the evil, which it
sought to remedy. The Statement of Objects and Reasons may
be relevant to find out what is the objective of any given statute
passed by the legislature. It may provide for the reasons which
induced the legislature to enact the statute. “For the purpose
of deciphering the object and purport of the Act, … the court
can look to the Statement of Objects and Reasons thereof.”
(emphasis supplied) (Vide Kavalappara Kottarathil
Kochuni v. States of Madras and Kerala [AIR 1960 SC 1080]
and Tata Power Co. Ltd. v. Reliance Energy Ltd. [(2009) 16 SCC
659], SCC p. 686, para 79)
67. In A. Manjula Bhashini (2009) 8 SCC 431 this Court held
as under: (SCC p. 459, para 40)
“40. The proposition which can be culled out from the
aforementioned judgments is that although the Statement of
Objects and Reasons contained in the Bill leading to enactment
of
the particular Act cannot be made the sole basis for
construing the provisions contained therein, the same can be
referred to for understanding the background, the antecedent
state of affairs and the mischief sought to be remedied by the
statute. The Statement of Objects and Reasons can also be
looked into as an external aid for appreciating the true intent
of the legislature and/or the object sought to be achieved by
enactment of the particular Act or for judging reasonableness
of the classification made by such Act.”
(emphasis added)
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
ANR. [A. M. KHANWILKAR, J.]
11 (2011) 8 SCC 737
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68. Thus, in view of the above, the Statement of Objects and
Reasons of any enactment spells out the core reason for which
the enactment is brought and it can be looked into for appreciating
the true intent of the legislature or to find out the object sought to
be achieved by enactment of the particular Act or even for judging
the reasonableness of the classifications made by such Act.”
25. Whereas, when there is no ambiguity about the legislative
competence and of the import of the enactment, no rule, authority or
convention to support the view that publication of objects and reasons is
quintessence for the sustenance of a duly enacted provision has been
brought to our notice. In fact, objects and reasons feature in the list of
external aids to interpretation and can be looked into for the limited purpose
in the process of interpretation. Regard may be had to State of West
Bengal vs. Union of India12, wherein the Court expounded the legal
position thus:
“13. …  It is however well-settled that the Statement of Objects
and Reasons accompanying a bill, when introduced in Parliament,
cannot be used to determine the true meaning and effect of the
substantive provisions of the statute. They cannot be used except
for the limited purpose of understanding the background and the
antecedent state of affairs leading up to the legislation.But we
cannot use this statement as an aid to the construction of the
enactment or to show
that the legislature did not intend to acquire
the proprietary rights vested in the State or in any way to affect
the State Governments’ rights as owners of minerals.A statute,
as passed by Parliament, is the expression of the collective
intention of the legislature as a whole, and any statement made by
an individual, albeit a Minister, of the intention and objects of the
Act cannot be used to cut down the generality of the words used
in the statute.”
The Court was more categorical in restating the position in Sanjeev
Coke Manufacturing Company vs. Bharat Coking Coal Limited and
Anr.13, where it noted:
“25. ……No one may speak for the Parliament and Parliament is
never before the court. After Parliament has said what it intends
12 AIR 1963 SC 1241
13 (1983) 1 SCC 147
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to say, only the court may say what the Parliament meant to say.
None else.Once a statute leaves Parliament House, the Court is
the only authentic voice which may echo (interpret) the
Parliament.This the court will do with reference to the language
of the statute and other permissible aids…..”
The express objects and reasons, therefore, serves a limited
purpose of assisting the Court in examining the validity of a provision,
especially when the Court is sitting over the interpretation of an ambiguous
provision.
26. Indubitably, when the Court examines the validity of a provision,
its primary concern is the literal text of the provision. It is so because the
legislature speaks through the text and as long as it is not speaking in an
equivocal manner, there is limited space for the Court to venture beyond
the text. This constitutes the first test of interpretation, often termed as
the literal interpretation. If the text of the provision is unambiguous, the
legislative intent gets coalesced and is epitomised therefrom.
27. In other words, when the textual element of the provision
reeks of ambiguity and is susceptible to multiple meanings, the Court
enters into a proactive examination to find out the real meaning of the
provision. This proactive examination by the Court offers multiple avenues
and methods to achieve the ultimate purpose of interpretation. Adverting
to the express objects and reasons may be useful for limited purpose to
understand the
surrounding circumstances at the time of enactment.
The Court is not bound by such external elements, as discussed above.
Therefore, the presence or absence of objects and reasons has no impact
upon the constitutional validity of a provision as long as the literal features
of the provision enable the Court to comprehend its true meaning with
sufficient clarity.
28. The Division Bench of the High Court, in the present case,
plainly glossed over the fundamental presumption of constitutionality in
favour of clause (f) and based its judgment upon the absence of objects
and reasons as striking at the root of its validity. In our view, this approach
is flawed for at least three reasons. First, it steers clear from the
necessary attempt to discover any constitutional infirmities in the enacted
provision. Second, it makes no attempt to dissect the text of the provision
so as to display the need to go beyond the text. Third, it goes into the
background of the enactment and ventures into a sphere which is out of
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bounds for the Court as long as the need for interpretation borne out of
any ambiguity arises.
29. The process of testing validity is not to sneak into the prudence
or proprieties of the legislature in enacting the impugned provision. Nor,
is it to examine the culpable conduct of the legislature as an appellate
authority over the legislature. The only examination of the Court is
restricted to the finding of a constitutional infirmity in the provision, as is
placed before the Court. Thus, the non-disclosure of objects and reasons
per se would not impinge upon the constitutionality of a provision unless
the provision is ambiguous and the possible interpretation violate Part III
of the Constitution.  In the absence of any finding of any constitutional
infirmity in a provision, the Court is not empowered to invalidate a
provision.
30. To hold a provision as violative of the Constitution on account
of failure of the legislature to state the objects and reasons would amount
to an indirect scrutiny of the motives of the legislature behind the
enactment. Such a course of action, in our view, is unwarranted. The
raison d’etre behind this self-imposed restriction is because of the
fundamental reason that different organs of the State do not scrutinise
each other’s wisdom in the exercise of their duties. In other words, the
time-tested principle of checks and balances does not empower the Court
to question the motives or wisdom
of the legislature, except in
circumstances when the same is demonstrated from the enacted law.
The following instructive passage from United States vs. Butler et al.14
offers guidance on the above proposition, wherein Justice Stone observed
thus:
“The power of courts to declare a statute unconstitutional is subject
to two guiding principles of decision which ought never to be
absent from judicial consciousness. One is that courts are
concerned only with the power to enact statutes, not with their
wisdom. The other is that while unconstitutional exercise of the
power by the executive is subject to judicial restraint, the only
check upon our own exercise of power by the executive is subject
to judicial restraint. For the removal of unwise laws from the statute
books appeal lies not to the courts but to the ballot and to the
processes of democratic government...”
14 297 US 1 (1936)
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In the Indian constitutional jurisprudence, the above principle has
been reckoned by this Court in its early years in 1954 in K.C. Gajapati
Narayan Deo & Ors. vs. The State of Orissa15,wherein the Court
observed thus:
“…  If the Legislature is competent to pass a particular law, the
motives which impelled it to act are really irrelevant. On the other
hand, if the legislature lacks competency, the question of motive
does not arise at all. Whether a statute is constitutional or not is
thus always a question of power....  If the Constitution of a State
distributes the legislative powers amongst different bodies, which
have to act within their respective spheres marked out by specific
legislature entries, or if there are limitations on the legislative
authority in the shape of fundamental rights, questions do arise as
to whether the legislature in a particular case has or has not, in
respect to the subject-matter of the statute or in the method of
enacting it, transgressed the limits of its constitutional powers….”
We have noted that the High Court has characterised clause (f)
as “arbitrary” and “unconscionable” while imputing it with
unconstitutionality. It is pertinent to note that the High Court reaches this
conclusion without undertaking an actual examination of clause (f).
Instead, the declaration is preceded by an enquiry into the circumstances
leading upto the enactment. As discussed above, 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 has been
exhibited and adverted to in the impugned judgment.
Inconsistency of clause (f) and absence of nexus with Section
43B
31. The High Court has supported its finding of invalidity by
recording two observations vis-a-vis the previously existing (unamended)
clauses of Section 43B – first, that clause (f) is inconsistent with other
clauses and nature of deduction targeted in clause (f) is distinct from
other deductions. Second, that clause (f) has no nexus with the objects
UNION OF INDIA & ORS. v. EXIDE INDUSTRIES LIMITED &
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and reasons behind the enactment of original Section 43B and therefore,
the objects and reasons attributed to Section 43B cannot be used to
deduce the object and purpose of clause (f).
32. At the outset, we observe that both the grounds are ill-founded.
In the basic scheme of Section 43B, there is no direct or indirect limitation
upon the power of legislature to include only particular type of deductions
in the ambit of Section 43B. To say that Section 43B is restricted to
deductions of a statutory nature would be nothing short of reading the
provision in a purely imaginative manner. As already discussed above,
from 1983 onwards, Section 43B had taken within its fold diverse nature
of deductions, ranging from tax, duty to bonus, commission, railway fee,
interest on loans and general provisions for welfare of employees. An
external examination of this journey of Section 43B reveals that the
legislature never restricted it to a particular category of deduction and
that intent cannot be read into the main Section by the Court, while
sitting in judicial review. Concededly, it is a provision to attach
conditionality on deductions otherwise allowable under the Act in respect
of specified heads, in that previous year in which the sum is actually paid
irrespective of method of accounting.
33. Further, it be noted that the 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, as already discussed hitherto.
34. Before stepping into the next ground, we are inclined to observe
that the approach of constitutional courts ought to be different while
dealing with fiscal statutes. It is trite that the legislature is the best forum
to weigh different problems in the fiscal domain and form policies to
address the same including to create a new liability, exempt an existing
liability, create a deduction or subject an existing deduction to new
regulatory measures. In the very nature of taxing statutes, legislature
holds the power to frame laws to plug in specific leakages. Such laws
are always pin-pointed in nature and are only meant to target a specific
avenue of taxability depending upon the experiences of tax evasion and
tax avoidance at the ground level. The general principles of exclusion
and inclusion do not apply to taxing statutes with the same vigour unless
the law reeks of constitutional infirmities. No doubt, fiscal statutes must
comply with the tenets of Article 14. However, a larger discretion is
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given to the legislature in taxing statutes than in other spheres. In Anant
Mills Co. Ltd. vs. State of Gujarat& Ors.16, this Court noted thus:
“25. ...But, in the application of the principles, the courts, in view
of the inherent complexity of fiscal adjustment of diverse elements,
permit a larger discretion to the Legislature in the matter of
classification so long as it adheres to the fundamental principles
underlying the said doctrine. The power of the Legislature to
classify is of wide range and flexibility so that it can adjust its
system of taxation in all proper and reasonable ways...”
Viewed thus, the reason weighed with the Division Bench of the
High Court in the impugned judgment is untenable.
Defeating the dictum in Bharat Earth Movers case
35. We shall now examine clause (f) on the ground that it defeats
the judgment of this Court in Bharat Earth Movers (supra). We have
carefully analysed the decision in Bharat Earth Movers (supra) and
note that the Court was sitting in appeal over the nature of liability under
the leave encashment scheme and held such liability to be a present
liability.  Resultantly, it became deductible from the profit and loss account
of the assessee in the same accounting year in which provision against
the same is made. The Court rejected that leave encashment liability is
a contingent one and observed thus:
“7. Applying the abovesaid settled principles to the facts of the
case at hand we are satisfied that provision
made by the appellant
Company for meeting the liability incurred by it under the leave
encashment scheme proportionate with the entitlement earned by
employees of the Company, inclusive of the officers and the staff,
subject to the ceiling on accumulation as applicable on the relevant
date, is entitled to deduction out of the gross receipts for the
accounting year during which the provision is made for the liability.
The liability is not a contingent liability. The High Court was not
right in taking the view to the contrary.”
36. Before the judgment in Bharat Earth Movers (supra), various
tribunals and High Courts across the country were treating the liability in
lieu of leave encashment as a contingent liability. This did not go down
well with the assessees following the mercantile accounting system, as
16 (1975) 2 SCC 175
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they were not able to avail deductions upon mere creation of a provision
against such liability without making the actual payment. A challenge to
this legal position reached before this Court in Bharat Earth Movers
(supra), wherein the Court reversed the position.
37. It is no doubt true that the legislature cannot sit over a judgment
of this Court or so to speak overrule it. There cannot be any declaration
of invalidating a judgment of the Court without altering the legal basis of
the judgment - as a judgment is delivered with strict regard to the
enactment as applicable at the relevant time. However, once the
enactment itself stands corrected, the basic cause of adjudication stands
altered and necessary effect follows the same. A legislative body is not
supposed to be in possession of a heavenly wisdom so as to contemplate
all possible exigencies of their enactment. As and when the legislature
decides to solve a problem, it has multiple solutions on the table. At this
stage, the Parliament exercises its legislative wisdom to shortlist the
most desirable solution and enacts a law to that effect. It is in the nature
of a ‘trial and error’ exercise and we must note that a law-making body,
particularly in statutes of fiscal nature, is duly empowered to undertake
such an exercise as long as the concern of legislative competence does
not come into doubt. Upon the law coming into force, it becomes operative
in the public
domain and opens itself to any review under Part III as and
when it is found to be plagued with infirmities. Upon being invalidated by
the Court, the legislature is free to diagnose such law and alter the invalid
elements thereof. In doing so, the legislature is not declaring the opinion
of the Court to be invalid.
38. In Welfare Association. A.R.P., Maharashtra and Anr. vs.
Ranjit P. Gohil and Ors.17, this Court relied upon Indian Aluminium
Co. and Ors. vs. State of Kerala and Ors.18 and upon elaborate analysis,
laid down certain principles to preserve the delicate balance of separation
of powers and observed thus:
“47. ...(v) in exercising legislative power, the legislature by mere
declaration, without anything more, cannot directly overrule, revise
or override a judicial decision. It can render judicial decision
ineffective by enacting valid law on the topic within its legislative
field fundamentally altering or changing its character
retrospectively. The changed or altered conditions are such that
17 (2003) 9 SCC 358
18 (1996) 7 SCC 637
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the previous decision would not have been rendered by the court,
if those conditions had existed at the time of declaring the law as
invalid….It is competent for the legislature to enact the law with
retrospective effect;
(vi) the consistent thread that runs through all the decisions of this
Court is that the legislature cannot directly overrule the decision
or make a direction as not binding on it but has power to make the
decision ineffective by removing the base on which the decision
was rendered, consistent with the law of the Constitution and the
legislature must have competence to do the same.”
The Court then relied upon State of T.N. vs. Arooran Sugars
Ltd.19 to reaffirm the point and noted thus:
“48. In State of Tamil Nadu v. Arooran Sugars Ltd., the Constitution
Bench made an exhaustive review of all the available decisions
on the point and summed up the law by holding: -
“It is open to the legislature to remove the defect pointed out
by the court or to amend the definition or any other provision
of the Act in question retrospectively. In this process it cannot
be said that there has been an encroachment by the legislature
over the power of the judiciary. A court’s directive must always
bind unless the conditions on which it is based are so
fundamentally altered that under altered circumstances such
decisions could not have been given. This will include removal
of the defect in a statute pointed out in the judgment in question,
as well as
alteration or substitution of provisions of the
enactment on which such judgment is based, with retrospective
effect.””
In Indian Aluminium Co. (supra), the Court relied upon a set of
authorities and extended its approval to the above stated position of law
thus:
“41. …  A Constitution Bench of this Court had held that the
distinction between legislative act and judicial act is well-known.
The adjudication of the rights of the parties is a judicial function.
The legislature has to lay down the law prescribing the norms or
conduct which will govern the parties and transactions to require
the court to give effect to that law. Validating legislation which
19 (1997) 1 SCC 326
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removes the norms of invalidity of action or providing remedy is
not an encroachment on judicial power. Statutory rule made under
the proviso to Article 309 was upheld. The legislature cannot
by a bare declaration without anything more, directly
overrule, reverse or override a judicial decision at any time
in exercise of the plenary power conferred on the
legislature by Articles 245 and 246 of the Constitution. It
can render a judicial decision ineffective by enacting a valid
law on a topic within its legislative field, fundamentally
altering or changing with retrospective, curative or
nullifying effect, the conditions on which such a decision is
based. In Hari Singh and Ors. v. The Military Estate Officer,
(1973) 1 SCR 515, prior to 1958 two alternative modes of eviction
under Public Premises Act were available. When the eviction
was sought of an unauthorised occupant by summary procedure
the constitutionality thereof was challenged and upheld. The Act
was subsequently amended in 1958 with retrospective operation
from September 16, 1958. Thereunder only one procedure for
eviction was available. It was contended to be a legislative
encroachment of judicial power. A Bench of three Judges held
that the legislature possessed competence over the subject matter
and the Validation Act could remove the defect which the court
had found in the previous case. It was not the legislative
encroachment of judicial power but one of
removing the defect
which the court had pointed out with a deeming date.”
(emphasis supplied)
39. Reverting to the true effect of the reported judgment under
consideration, it was rendered in light of general dispensation of autonomy
of the assessee to follow cash or mercantile system of accounting
prevailing at the relevant time, in absence of an express statutory provision
to do so differently. It is an authority on the nature of the liability of leave
encashment in terms of the earlier dispensation. In absence of any such
provision, the sole operative provision was Section 145(1) of the 1961
Act that allowed complete autonomy to the assessee to follow the
mercantile system. Now a limited change has been brought about by the
insertion of clause (f) in Section 43B and nothing more. It applies
prospectively. Merely because a liability has been held to be a present
liability qualifying for instant deduction in terms of the applicable provisions
at the relevant time does not ipso facto signify that deduction against
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such liability cannot be regulated by a law made by Parliament
prospectively. In matter of statutory deductions, it is open to the legislature
to withdraw the same prospectively. In other words, 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. Be it
noted that the amendment does not reverse the nature of the liability nor
has it taken away the deduction as such. The liability of leave encashment
continues to be a present liability as per the mercantile system of
accounting. 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.
40. Notably, this regulatory measure is in sync with other
deductions specified in Section 43B, which are also present and accrued
liabilities. To wit, the liability in lieu of tax, duty, cess, bonus, commission
etc. also arise in the present as per the mercantile system, but assessees
used to defer payment thereofdespite claiming deductions thereagainst
under the guise of
mercantile system of accounting. Resultantly,
irrespective of the category of liability, such deductions were regulated
by law under the aegis of Section 43B, keeping in mind the peculiar
exigencies of fiscal affairs and underlying concerns of public revenue.
A priori, merely because a certain liability has been declared to be a
present liability by the Court as per the prevailing enactment, it does not
follow that legislature is denuded of its power to correct the mischief
with prospective effect,including to create a new liability, exempt an
existing liability, create a deduction or subject an existing deduction to
new regulatory measures.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.
41. The position of law discussed above leaves no manner of
doubt as regards the legitimacy of enacting clause (f). The respondents
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have neither made a case of non-existence of competence nor
demonstrated any constitutional infirmity in clause (f).
42. In view of the clear legal position explicated above, this appeal
deserves to be allowed. Accordingly, the impugned judgment of the
Division Bench of the High Court is reversed and clause (f) in Section
43B of the 1961 Act is held to be constitutionally valid and operative for
all purposes. No order as to costs. Pending interlocutory applications, if
any, shall stand disposed of.
Kalpana K. Tripathy
Appeal allowed.