TMI Blog2020 (4) TMI 792X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. 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. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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. This regulatory measure is in sync with other deductions specified in Section 43B, which are also present and accrued liabilities - 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 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 agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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, Karnataka (2000) 6 SCC 645 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lely 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. 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to inspect the existence of enacting power and once such power is found to be present, the next examination is to asce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (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 pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ischarge 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proemployee. 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 and Ors. (2011) 8 SCC 737 , 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. The Court was more categorical in restating the position in Sanjeev Coke Manufacturing Company vs. Bharat Coking Coal Limited and Anr. (1983) 1 SCC 147, where it noted: 25. No one may speak for the Parliament and Parliament is never before the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision 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 the legislature be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 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 deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriences 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. (1975) 2 SCC 175, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (2003) 9 SCC 358, this Court relied upon Indian Aluminium Co. and Ors. vs. State of Kerala and Ors. (1996) 7 SCC 637 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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