2012 (6) TMI 713 - HC - Income Tax

Validity of revisionary order passed u/s 263 - alleged erroneous deduction u/s 37 given in respect of premium to LIC for the policy under Group Leave Encashment Scheme - Revenue contended that leave encashment is an allowable deduction u/s 43B(f) only and the same can be availed of only with respect to payments made on that account in the previous year - Held that - In the instant case it was not a provision for future liability which was claimed as a deduction. The assessee a Government Company had insured itself against the liabilities that may arise on account of the claims made by the employees towards leave encashment. The assessee being covered by a valid insurance policy and premium being regularly paid incurs no liability towards leave encashment. The liability; being covered by a valid insurance policy is solely that of the insurer. Even if Section 43 B(f) stands in the case of the assessee where the liability is borne by the insurer there can be no situation wherein assessee could make a valid claim for deduction u/s 43B(f) since the actual liability is not incurred in any of the years. However premium paid towards the renewal and continued validity of the insurance policy necessarily becomes business expenditure wholly and exclusively incurred for the business purpose and allowable as a deduction u/s 37. Therefore order passed u/s 263 is not valid. Also Revenue having accepted the decision of the High Court in case of Exide Industries Ltd. And another v. Union of India (2007 (6) TMI 175 (HC)) holding Section 43B(f) to be unconstitutional cannot press into service Section 43B(f) - Decided in favor of assessee.

Summary

Issues:
1. Interpretation of Section 263 of the Income Tax Act.
2. Applicability of Section 43B(f) regarding deduction for leave encashment.
3. Validity of the amendment to Section 43B(f) introduced in 2001.
4. Impact of the Calcutta High Court decision on the interpretation of Section 43B(f).
5. Allowability of deduction under Section 37 for premium paid towards insurance policy.

Analysis:
1. The case involved a Government Company appealing against a revision under Section 263 of the Income Tax Act regarding the deduction claimed for premium paid to the Life Insurance Corporation under the Group Leave Encashment Scheme. The company contended that the revision was a mere change of opinion and not based on incorrect facts or law application by the Assessing Officer.

2. The main argument centered around the interpretation of Section 43B(f) which restricts deductions for leave encashment to amounts actually paid in the previous year. The company argued that as they had a valid insurance policy covering the liability, they did not incur any actual liability, and thus, the premium paid should be deductible under Section 37, not Section 43B(f).

3. Section 43B was introduced to prevent claiming deductions for statutory liabilities without actual payment. The amendment in 2001 added Clause (f) to restrict deductions for leave encashment to actual payments made in the previous year. However, the company argued that their situation, covered by insurance, did not fall under the purview of Section 43B(f).

4. The Calcutta High Court had previously declared Section 43B(f) as unconstitutional in a different case, stating that it did not align with the original purpose of Section 43B. This decision was cited to support the company's argument against the applicability of Section 43B(f) in their case.

5. The court ultimately ruled in favor of the company, stating that the premium paid for insurance, ensuring coverage for leave encashment liability, was a legitimate business expenditure under Section 37. The Assessing Officer's decision to allow the deduction was upheld, and the revision under Section 263 was deemed unnecessary and not prejudicial to the Revenue. Additionally, the Revenue's acceptance of the Calcutta High Court decision further supported the company's position.

In conclusion, the court rejected the Income Tax appeal, emphasizing that the company's premium deduction for insurance policy coverage of leave encashment liability was valid under Section 37, and the revision under Section 263 was unwarranted.