The Supreme Court of India (Supreme Court) in its judgment in the case of Union of India & Ors v Exide Industries & Anr (Civil Appeal No 3545/2009) dated 24 April 2020 upheld the constitutional validity of Section 43B(f) of the Income-tax Act, 1961 (the Act). Clause (f) in Section 43B of the Act was inserted vide Finance Act, 2001 in order to provide for disallowance of provision of leave encashment without actual payment by the employer.

Contention of the Assessees

Despite Section 43B(f) providing of disallowance of such provision, the assessees continued to claim provision of leave encashment (without actual payment) on the following grounds:

  • Where the assessees opt to follow mercantile system of accounting, the income and expenditure are determined on accrual and provision basis and not actual payment according to Section 145 of the Act.
  • Section 43B is applicable only to statutory liabilities and cannot cover employee welfare which is of a completely different nature. Leave encashment scheme being a trading liability cannot be included in the scope of Section 43B. Further, there were no reasons explained as to why the clause (f) was introduced in the statute.
  • The assessees relied upon the decision of Hon’ble Apex Court in Bharat Earth Movers  v CIT [(2000) 245 ITR 428 (SC)] which held, inter alia, that liability in lieu of leave encashment is a present and definite liability and not a contingent liability.

In relation to the constitutional validity of clause (f), the Supreme Court, while addressing the contentions of the assessee, held:

  1. While testing the constitutional validity, one has to first inspect the existence of enacting power and whether such an enacted provision is in violation of any right enshrined in Part III of the Constitution.
  2. Since the legislative power of the Parliament to enact clause (f) has not been challenged, the Apex Court continued to examine whether the clause (f) contravenes any right enshrined in Part III of the Constitution with a presumption in favour of constitutionality.
  3. Section 43B begins with a non obstante clause and as per the settled principles of interpretation, a non obstante clause assumes an overriding character against any other provision of a general nature. The legislature, from time to time, has included various deductions within the ambit of Section 43B which shall be allowed on actual payment only. The condition of allowability of a particular head of deduction on actual payment basis may have an inevitable effect on the mercantile system of accounting on accrual basis for that particular head of deduction and not to other heads.
  4. Section 43B does not provide for deductions pertaining to statutory liabilities only. It also provides for various other expenses to be allowed only on actual payment and such amendments have been made from time to time. The SC also held that the legislature can at times provide for addition of any new liability or remove an existing liability and accordingly allow a deduction or provide for non-allowance of an existing deduction by amending the statute.
  5. Section 43B strictly targets to ensure that the deduction is claimed on a particular expense as specified when actually paid. The mischief that the employer claiming the tax deduction of such a payment at a point of time and may end up not paying the amount to the employee at all is sought to be remedied by insertion of clause (f).
  6. The constitutional validity of a provision cannot be decided in view of any presence or absence of objects or reasons behind its enactment unless the provision is ambiguous, or its possible interpretation violates Part III of the Constitution.
  7. If the failure of the legislature to state its objects or reasons behind its enactment can be reason to hold it to be unconstitutional, then it will lead to an indirect scrutiny of the motives of the legislature behind the enactment.
  8. It is within the power of the Courts to decide whether a provision is constitutionally valid. Such review or decision need not take into consideration the circumstances under which the amendment was made.
  9. There is no bar on the power of the legislature to include only a particular category of deduction within the ambit of Section 43B. The section has incorporated within its scope diverse kinds of deductions since its inception.
  10. The section merely has attached a condition that deduction shall be allowed on actual payment basis in respect of specified heads irrespective of the method of accounting.
  11. 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. The Court also held that clause (f) is meeting with these objectives and is in conformity with the objectives of section 43B.
  12. 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 will not take away the power of the legislature to amend the same prospectively. The insertion of clause (f) has not extinguished the choice 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, in view of the above, clause (f) is providing for allowability of the deduction by making a specific mention of the same in the Section


At the time of the admission of this Special Leave Petition as an appeal before the Supreme Court and its continued pendency, the said issue of allowability of leave encashment had, in many cases, been sent back to the Assessing Officers by the tax tribunals for fresh adjudication of the matter till this appeal was finally decided. . This judgement of the Supreme Court paves way to the question where this issue was set aside, as to whether the assessee can avail the benefit of The Direct Tax Vivad Se Vishwas Act, 2020 (the VSV Act).

According to the clarification issued by the CBDT in Circular No 09 of 2020 dated 22 April 2020, if an appellate authority has set aside an order to file with the AO to carry out fresh examination of the issue with a specific direction, the assessee shall be eligible to avail the VSV Act. The assessees are also required to settle other issues, if any, which have not been set aside and in respect of which an appeal has been filed. In such a case, the amount of disputed tax shall be the tax which would have been payable as if the Assessing Officer would repeat the addition in respect of such issue, which was earlier set aside by the tax tribunal.

Hence, assessees whose appeal is pending against the order of the appellate authority, and where the matter has been sent back to the Assessing Officer for adjudication awaiting the final decision of the Supreme Court, may opt for the provisions of the VSV Act and preclude from paying interest on such amount which was set aside.