Section 43B of Income Tax Act, 1961—Business Disallowance- Only effect of the insertion of clause (f) is to regulate the stated deduction by putting it in a special provisio, thus, clause (f) in Section 43B is held to be constitutionally valid and operative for all purposes.
Facts: In this appeal, the constitutional validity of clause (f) of Section 43B arises for consideration as a result of the decision of the High Court at Calcutta vide wherein it is held that the said clause is arbitrary and violative of Article 14 of the Constitution of India. 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 offers them the choice of method of accounting and accordingly, they computed their profits and gains of business in accordance with the mercantile system and 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.
Held, that 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 prescribed. 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. 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 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.The respondents have neither made a case of nonexistence of competence nor demonstrated any constitutional infirmity in clause (f). 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 clause (f) in Section 43B of the 1961 Act is held to be constitutionally valid and operative for all purposes. - UOI V/s EXIDE INDUSTRIES LIMITED -  315 CTR 062 (SC)