Union of India & Ors. vs Exide Industries Limited & Anr.

Legislative enactment – Constitutionality – Determination of – Held: In exercise of judicial review, the Court starts with a basic presumption in favour of constitutionality – While testing the constitutional validity of a provision, 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 – While adjudicating constitutionality of a duly enacted provision, Court cannot venture into hypothetical spheres – Unfounded limitation cannot be read into the process of judicial review – The process of testing constitutional validity is not to sneak into the prudence or proprieties of the legislature in enacting the impugned provision, nor to examine the culpable conduct of the legislature as an appellate authority over the legislature – The role of the Court is restricted to the finding of a constitutional infirmity in the provision, as it is placed before the Court. Fiscal statutes – Judicial review of – The approach of Constitutional Courts ought to be different while dealing with fiscal statutes – The general principles of exclusion and inclusion do not apply to taxing statutes with the same vigour unless the law reeks of constitutional infirmities – A larger discretion is given to the legislature in taxing statutes than in other spheres. Legislation:

A law when declared to be invalid, by Court, 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.

Interpretation of Statutes:

Non-obstante clause – Interpretation of – Held: A nonobstante clause assumes an over-riding character against any other provision of general application.

Objects and reasons of the statute – As an aid to interpretation of statute – Nature of – When the Court examines the validity of a provision, its primary concern is literal text of the provision – This constitutes first test of interpretation – Interpretation of statute cannot be unrelated to the nature of the statute – Objects and reasons of the Statute are the external aids to the interpretation and can be looked into for a limited purpose in the process of interpretation, especially when the Court is sitting over the interpretation of an ambiguous provision – The Court is not bound by such external elements – Therefore, the presence or absence of objects and reasons have no impact upon the constitutional validity of a provision as long as the literal features of a provision enable the Court to comprehend its true meaning with sufficient clarity. ANR.

Allowing the appeal, the Court

HELD: 1.1 While testing the constitutional validity of a provision, 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. Broadly speaking, the process of examining validity of a duly enacted provision, as envisaged under Article 13 of the Constitution, is premised on these two steps. No doubt, the second test of infringement of Part III is a deeper test undertaken in the light of settled constitutional principles. [Para 11][20-H; 21-A-B] State of Madhya Pradesh v. Rakesh Kohli & Anr. (2012)

6 SCC 312 : [2012] 6 SCR 661; Bhanumati & Ors. v. State of Uttar Pradesh & Ors. (2010) 12 SCC 1 : [2010]

7 SCR 585; State of Andhra Pradesh & Ors. v. Mcdowell & Co. & Ors. (1996) 3 SCC 709 : [1996] 3 SCR 721; Kuldip Nayar & Ors. v. Union of India & Ors. (2006) 7 SCC 1 : [2006] 5 Suppl. SCR 1 – relied on.

2. 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. [Para 13][22-D-E]

2.1 Generally, the heads of income to be subjected to taxability under the Income Tax Act, 1961 are enumerated in Section 14 which starts with a saving clause and expressly predicates that profits and gains of business or profession shall be chargeable to income tax. This general declaration of chargeability is followed by Section 145, which prescribes the method of accounting. [Para 14][22-F-G]

2.2 Sub-section (1) of Section 145 explicitly provides that the method of accounting is a prerogative falling in the domain of the assessee and an assessee is well within its rights to follow the mercantile system of accounting. As per the mercantile system of accounting, the assessment of income is made on the basis of accrual of liability and not on the basis of actual expenditure in lieu thereof. The expression “either cash or mercantile system of accounting” offers guidance on the nature of this accounting system. The right flowing from sub-section (1) is “subject to the provisions of sub-section (2)”, which unambiguously empowers the Central Government to prescribe income computation and disclosure standards for accounting. Concededly, sub-section

(2) is an enabling provision. It signifies that the general principle of autonomy of the assessee in adopting a system of accounting, is controlled by the regulation notified by the Central Government and must be adhered to by the class of assessee governed thereunder. [Para 15][23-C-F]

2.3. Section 43B, however, is enacted to provide for deductions to be availed by the assessee in lieu of liabilities accruing in previous year without making actual payment to discharge 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. [Para 16][23-F-G]

2.4 Section 43B bears heading “certain deductions to be only on actual payment”. It opens with a non-obstante 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 ANR.

system of accounting on accrual of liability basis qua the specific head of deduction covered therein and not to other heads. But that is a matter for the legislature and its wisdom in doing so. [Para 17][23-H; 24-A-C]

2.5 Initially, the provision (s. 43B) included deductions in respect of sum payable by assessee by way of tax or duty or any sum payable by the employer by way of contribution to any provident fund or superannuation fund. The legislature explained the inclusion of these deductions by citing certain practices of evasion of statutory liabilities and other liabilities for the welfare of employees. With the passage of time, the legislature inserted more deductions to Section 43B including cess, bonus or commission payable by employer, interest on loans payable to financial institutions, scheduled banks etc., payment in lieu of leave encashment by the employer and repayment of dues to the railways. Thus understood, there is no oneness or uniformity in the nature of deductions included in Section 43B. Therefore, it is not correct to say that this section only provides for deductions concerning statutory liabilities. Section 43B is a mix bag and new and dissimilar entries have been inserted therein from time to time to cater to different fiscal scenarios, which are best determined by the Government of the day. It is not unusual or abnormal for the legislature to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to override regulations or conditions. [Para 18] [24-G-H; 25-A]

2.6. 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 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 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. It is this mischief clause (f) seeks to subjugate. [Para 19][25-B-D]

2.7 The interpretation of a statute cannot be unrelated to the nature of the statute. In line with other clauses under Section 43B, clause (f) was enacted to remedy a particular mischief and the concerns of public good, employees’ welfare and prevention of fraud upon revenue is writ large in the said clause. Such statutes are to be viewed through the prism of the mischief they seek to suppress, that is, the *Heydon’s case principle. [Para 21] [25-F-G]

State of Tamil Nadu v. MK Kandaswamy (1975) 4 SCC

745 : [1976] 1 SCR 38 – relied on.

*Heydon’s case (1584) 3 Co Rep 7 – referred to.

2.8 The objects and reasons behind the enactment of a statute signify the intention of the legislature behind the enactment of a statutory provision. 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. Whereas, when there is no ambiguity about the legislative competence and of the import of the enactment, no rule, authority or convention to support the view that publication of objects and reasons is quintessence for the sustenance of a duly enacted provision has been brought to the notice of the Court. In fact, objects and reasons feature in the list of external aids to interpretation and can be looked into for the limited purpose in the process of interpretation. The express objects and reasons, therefore, serves a limited purpose of assisting the Court in examining the validity of a provision, especially when the Court is sitting over the interpretation of an ambiguous provision. [Paras 24 and 25][26-G; 27-A; 28-B-C; 29-B]

State of West Bengal v. Union of India AIR 1963 SC 1241 : [1964] 1 SCR 371; Sanjeev Coke

ANR.

Manufacturing Company v. Bharat Coking Coal Limited and Anr. (1983) 1 SCC 147 : [1983] 1 SCR 1000 – relied on.

State of Tamil Nadu & Ors. v. K. Shyam Sunder and Ors. (2011) 8 SCC 737 : [2011] 11 SCR 1094 – referred to.

2.9 When the Court examines the validity of a provision, its primary concern is the literal text of the provision. It is so because the legislature speaks through the text and as long as it is not speaking in an equivocal manner, there is limited space for the Court to venture beyond the text. This constitutes the first test of interpretation, often termed as the literal interpretation. If the text of the provision is unambiguous, the legislative intent gets coalesced and is epitomised therefrom. When the textual element of the provision reeks of ambiguity and is susceptible to multiple meanings, the Court enters into a proactive examination to find out the real meaning of the provision. This proactive examination by the Court offers multiple avenues and methods to achieve the ultimate purpose of interpretation. Adverting to the express objects and reasons may be useful for limited purpose to understand the surrounding circumstances at the time of enactment. The Court is not bound by such external elements. Therefore, 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. [Paras 26 and 27][29-C-F]

2.10. 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. 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. [Para 28][29-G-H; 30-A]

2.11 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 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. [Para 29][30-B-C]

2.12 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 behind the enactment. Such a course of action is unwarranted. The raison d’etre behind this self-imposed restriction is because of the fundamental reason that different organs of the State do not scrutinise each other’s wisdom in the exercise of their duties. In other words, the time-tested principle of checks and balances does not empower the Court to question the motives or wisdom of the legislature, except in circumstances when the same is demonstrated from the enacted law. [Para 30] [30-D-E]

K.C. Gajapati Narayan Deo & Ors. v. The State of Orissa [1954] SCR 1 – relied on.

United States v. Butler et al 297 US 1 (1936) – referred to

2.13 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. 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. [Para 30][31-E-F]

ANR.

2.14 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). 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 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. [Paras 31 and 32][31-G; 32-A-D]

2.15 Further, the 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. [Para 33][32-E]

2.16 The approach of constitutional courts ought to be different while dealing with fiscal statutes. It is trite that the legislature is the best forum to weigh different problems in the fiscal domain and form policies to address the same including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures. In the very nature of taxing statutes, legislature holds the power to frame laws to plug in specific leakages. Such laws are always pin-pointed 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 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. [Para 34] [32-F-H; 33-A]

Anant Mills Co. Ltd. v. State of Gujarat & Ors. (1975)

2 SCC 175 : [1975] 3 SCR 220 – relied on.

3.1 It is no doubt true that the legislature cannot sit over a judgment of this Court 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. 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 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. [Para 37][34-B-E]

Welfare Association. A.R.P., Maharashtra and Anr. v. Ranjit P. Gohil and Ors. (2003) 9 SCC 358 : [2003] 2 SCR 139; Indian Aluminium Co. and Ors. v. State of Kerala and Ors. (1996) 7 SCC 637 : [1996] 2 SCR 23; State of T.N. v. Arooran Sugars Ltd. (1997) 1 SCC 326 : [1996] 8 Suppl. SCR 193 – relied on.

ANR.

3.2. The judgment in Bharat Earth Movers Case was rendered in light of general dispensation of autonomy of the assessee to follow cash or mercantile system of accounting prevailing at the relevant time, in absence of an express statutory provision to do so differently. It is an authority on the nature of the liability of leave encashment in terms of the earlier dispensation. In absence of any such provision, the sole operative provision was Section 145(1) of the 1961 Act that allowed complete autonomy to the assessee to follow the mercantile system. Now a limited change has been brought about by the insertion of clause

(f) in Section 43B and nothing more. It applies prospectively. Merely because a liability has been held to be a present liability qualifying for instant deduction in terms of the applicable provisions at the relevant time does not ipso facto signify that deduction against such liability cannot be regulated by a law made by Parliament prospectively. In matter of statutory deductions, it is open to the legislature to withdraw the same prospectively. [Para 39][36-F-H; 37-A]

3.3 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. 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. [Para 21][37-B-C]

3.4 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. [Para 40][37-D-G]

4. The respondents have neither made a case of nonexistence of competence nor demonstrated any constitutional infirmity in clause (f) of s. 43B. Accordingly, the impugned judgment of the Division Bench of the High Court is reversed and clause (f) in Section 43B of the Income Tax Act, 1961 is held to be constitutionally valid and operative for all purposes. [Paras 41 and 42][37-H; 38-A-B]

Bharat Earth Movers v. Commissioner of Income Tax, Karnataka (2000) 6 SCC 645 : [2000] 2 Suppl. SCR

295 – relied on.