CIT vs. Hindustan Latex Ltd (Kerala High Court)

S. 43B(f) which allows deduction for leave encashment only on payment basis is ultra vires. In any event, it does not cover premium paid to insurer

The assessee claimed deduction u/s 37(1) for liability to pay, payment of, premium to LIC under the Group Leave Encashment Scheme policy. The AO allowed the claim though the CIT revised the assessment u/s 263 on the ground that u/s 43B(f), leave encashment was allowable as a deduction only on payment basis. The Tribunal reversed the CIT on the ground that s. 43B(f) had been held to be unconstitutional in Exide Industries 292 ITR 470 (Cal) and that the assessment order was not erroneous. On appeal by the department to the High Court, HELD dismissing the appeal:

(i) S. 43B was inserted by the FA 1983 to prevent assessees from claiming a deduction for a provision for statutory liabilities without actually paying the same. Leave encashment is not a statutory liability as held in Bharat Earth Movers 245 ITR 428 (SC) and a deduction is allowable in respect of the accrued liability. To overcome the said decision, clause (f) was inserted in the year 2001 to allow deduction for leave encashment only on payment basis. In Exide Industries 292 ITR 470 (Cal), clause (f) of s. 43 B was held to be inconsistent with the object with which s. 43B was inserted and thereby was held to be unconstitutional. As the department has accepted the judgement of the Calcutta High Court and not filed an appeal to the Supreme Court, it is not open to the Revenue to challenge its correctness in the case of another assessee as held in Berger Paints 266 ITR 99 (SC).

(ii) Even assuming clause (f) of s. 43B is valid, what is intended by it is to deny deduction for liabilities not actually incurred and to exclude provisions made against future liabilities from being granted a deduction. In the instant case it was not a provision for future liability which was claimed as a deduction. The assessee had insured itself against the liabilities that may arise on account of the claims made by the employees towards leave encashment. The assessee being covered by a valid insurance policy and premium being regularly paid, incurs no liability towards leave encashment. The liability; being covered by a valid insurance policy, is solely that of the insurer. Even if 43B (f) stands, in the case of the assessee, where the liability is borne by the insurer, there can be no situation wherein assessee could make a valid claim for deduction u/s 43B(f) since the actual liability is not incurred in any of the years. The premium paid towards the renewal and continued validity of the insurance policy necessarily becomes business expenditure wholly and exclusively incurred for the business purpose and allowable as a deduction u/s 37.