Section 43B of the Income-tax Act, 1961 - Business disallowance

Held On a perusal of the object and reasons as disclosed by the Finance Act, 1983 for enacting section 43B, it would appear that the Legislature expressed concern about the unreasonable deduction claim on the basis of mercantile accounting method without discharging statutory liabilities. It was observed by the Legislature that there had been a trend to evade statutory liabilities on the one hand, and claim appropriate benefit under the Act, on the other hand. Hence, such enactment was necessary. [Para 12] The said section had undergone several changes from time to time and on each and every occasion, the Legislature came out with the objects and reasons disclosed therefor. In 1990, deduction on account of unpaid loan and public financial institution or a State financial institution was roped in. By a further amendment in 1996, unpaid loan of scheduled bank was also incorporated. On each such occasion, the objects and reasons were disclosed. While inserting clause (f), no special reasons were disclosed. The Single Judge held that such disclosure was not mandatory. There was no reason for disagreement on such issue, provided the subject amendment could be termed as in furtherance to widen the scope of the original section on the identical objects and reasons as disclosed at the time of enacting the original provision. As the original section was incorporated to plug in deductions claimed by not discharging statutory liabilities, the provision was subsequently made to restrict deductions on account of unpaid loan to the financial institutions. Leave encashment is neither a statutory liability nor a contingent liability. It is 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, unless he or she avails of the leave earned by him or her. That 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 the case of leave encashment unless it is actually paid in that particular financial year. The Legislature is free to do so after it discloses reasons for that and such reasons are not inconsistent with the main object of the enactment. There was no such reason for perusal. The revenue could not enlighten on that score. Such enactment is not 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 Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 when clause (f) was not there. The Apex Court, considering all aspects, 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 about 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. The Legislature was entitled to bring such amendment, it was within its power to bring such amendment. However, it must disclose reasons 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. [Para 13] The appeal had to succeed and was to be allowed. Section 43B(f) is to be struck down being arbitrary, unconscionable and de hors the Apex Court decision in Bharat Earth Movers (supra).