The High Court at Calcutta in Exicle Industries Ltd. v. Union of India [2007] 164 Taxman 9/292, held that the section 43B(f) is arbitrary and violative of article 14 of the Constitution of India on various counts. Before SC, the constitutional validity of Section 43B(f) was to be considered.
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 employees as a condition precedent for extending the benefit of deduction under the Act.
Constitutional validity of clause (f)
The SC observed that 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.
In furtherance of the above two-fold approach, the SC referred to the decision in the case of Rakesh Kohli (2012) 6 SCC 312 wherein SC 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:
- there is always presumption in favour of constitutionality of a law made by Parliament or a State Legislature,
- 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,
- 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,
- hardship is not relevant in pronouncing on the constitutional validity of a fiscal statute or economic law, and
- in the field of taxation, the legislature enjoys greater latitude for classification “
The SC observed that in the present case, the legislative power of the Parliament to enact clause (f) in section 43B is not doubted at all in the light of article 245. Therefore, it needs to be examined i.e. whether the said clause contravenes any right enshrined in Part III of the Constitution, either in its form, substance or effect.
The SC further held that 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 SC starts with a basic presumption in favour of the proper exercise of such power.
The SC observed that 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. The SC held that it is this mischief clause (f) seeks to subjugate. The SC therefore held that clause (f) to section 43B is constitutional validity.
Comments on HC decision
The SC also examined the grounds on which the High Court ruled against its validity. The HC accepted the challenge to the constitutional validity of the said clause on primarily following three grounds:
- Non-disclosure of objects and reasons behind its enactment and insertion into section 43B;
- Inconsistency of clause (f) with other clauses of Section 43B and absence of nexus of the clause with the original enactment;
- Enactment has been triggered solely to nullify the dicta of this Court in Bharat Earth Movers (supra).
The SC held that 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. The SC observed that 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. The SC held that 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. 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.
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). At the outset, the SC observed 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. The SC held that 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.
With respect to HC observed that clause (f) was inserted to defeat the judgment of SC in Bharat Earth Movers (2000) 6 SCC 645, the SC observed that it is no doubt true that the legislature cannot sit over a judgment of SC 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.
The SC observed that 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.