Union Of India vs M/S Exide Industries Ltd. on 24 April, 2020
Supreme Court of India
Union Of India vs M/S Exide Industries Ltd. on 24 April, 2020
Author: A.M. Khanwilkar
Bench: A.M. Khanwilkar, Dinesh Maheshwari
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3545/2009
Union of India & Ors. ... Appellant(s)
VERSUS
Exide Industries Limited & Anr. ... Respondent(s)
JUDGMENT
A.M. Khanwilkar, J.
1. In this appeal, the constitutional validity of clause (f) of
Section 43B of the Income Tax Act, 1961 1 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.
Signature Not Verified
The stated clause (f) was inserted in the already existing
Digitally signed by
DEEPAK SINGH
Section 43B vide Finance Act, 2001 with effect from 1.4.2002, in
Date: 2020.04.24
15:21:50 IST
Reason:
1 For short, “the 1961 Act”
2 For short, “the High Court”
2
order to provide for a tax disincentive in cases of deductions
claimed by the assessee from income tax in lieu of liability
accrued under the leave encashment scheme but not actually
discharged by the employer. This clause made the actual
payment of liability to the employees as a condition precedent for
extending the benefit of deduction under the 1961 Act. With the
application of clause (f), the eligibility for deduction arises in the
previous year in which the abovesaid payment is actually made
and not in which provision was made in that regard, irrespective
of the system of accounting followed by the assessee. Before we
delve into further examination, we deem it apposite to reproduce
the amended Section 43B of the 1961 Act as applicable to the
present case, which reads thus:
“43B. 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 subsection (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
3investment 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:
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 subsection (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
subsection (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.
Explanation 1.—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.
4
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 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);
5
(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 longterm finance for
industrial projects and eligible for deduction under
clause (viii) of subsection (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 aforestated general rule of accrual for determination of
liability, as it subjects deductions in lieu of certain kinds of
liabilities to actual payment. According to the respondents, the
exception under Section 43B comes into operation only in a
6
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
3 (2000) 6 SCC 645
7
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.
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
8
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:
“… 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.”
9
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 subsection (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 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 …”
10(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 subsection (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.
11
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 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
4 (2012) 6 SCC 312
12Constitution 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 twofold 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,
(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 the5 (2010) 12 SCC 1
6 (1996) 3 SCC 709
7 (2006) 7 SCC 1
13community 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
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 subsection
(2), be computed in accordance with either cash or
mercantile system of accounting regularly employed by
the assessee.
(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
subsection (1) or accounting standards as notified under
subsection (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. Subsection (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
15
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 subsection (1) is “subject to the provisions
of subsection (2)”, which unambiguously empowers the Central
Government to prescribe income computation and disclosure
standards for accounting. Concededly, subsection (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.
16
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 nonobstante 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 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
17
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
18the 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 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
19
litigation in the evening of his/her life for claiming a hardearned
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
20
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 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 7A is at once a
charging as well as a remedial provision. Its main object
is to plug leakage and prevent evasion of tax. In inter
preting 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 worka
bility, 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 inter
pretation.”
(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:
8 (1584) 3 Co Rep 7
9 CRAWFORD, Statutory Construction p. 508
10 (1975) 4 SCC 745
21
(i) Nondisclosure 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).
Nondisclosure 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 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
22
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 pur
pose 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 rem
edy. The Statement of Objects and Reasons may be rele
vant 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 En
ergy 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 un
derstanding 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)
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.”
11 (2011) 8 SCC 737
23
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 wellsettled 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.”
12 AIR 1963 SC 1241
24
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 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.
13 (1983) 1 SCC 147
25
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.
26
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.
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 nondisclosure 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
27
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…”In the Indian constitutional jurisprudence, the above principle
has been reckoned by this Court in its early years in 1954 in
14 297 US 1 (1936)
28K.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 subjectmatter 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
15 (1954) SCR 1
29
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 visavis 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).
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
30
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.
31
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 pinpointed 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 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
16 (1975) 2 SCC 175
32Legislature 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
33provision 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 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
34
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 lawmaking 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:
17 (2003) 9 SCC 358
18 (1996) 7 SCC 637
35
“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 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.””19 (1997) 1 SCC 326
36In 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
wellknown. 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 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)
37
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 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
38prescribed. 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 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
39
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 have neither made a case of nonexistence 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
40
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.
…………………………….J.
(A.M. Khanwilkar)
…………………………….J.
(Hemant Gupta)
…………………………….J.
(Dinesh Maheshwari)
New Delhi;
April 24, 2020.