Ita/64/2012 Of The Commissioner Of Income Tax, Thiruvananthapuram v. M/S.hindustan Latex Ltd., Thiruvananthapuram

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE THOTTATHIL B.RADHAKRISHNAN &THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN THURSDAY, THE 7TH DAY OF JUNE 2012/17TH JYAISHTA 1934 ITA.No. 64 of 2012 () --------------------- IN ITA.147/COCH/2009 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT(S): ------------ THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S):-------------- M/S.HINDUSTAN LATEX LTD., THIRUVANANTHAPURAM THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 07-06-2012, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.No. 64 of 2012 () ANNEXURE PETITIONER'S ANNEXURE: ANNX A:COPY OF THE ASSESSMENT ORDER DATED 21.12.2007. ANNX B:COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX DATED 11.02.2009.11.02.2009. ANNX C:COPY OF THE ORDER OF THE TRIBUNAL DATED 25.11.2011. RESPONDENT'S ANNEXURE: NIL //TRUE COPY// P.A. TO JUDGE LSN Thottathil B Radhakrishnan & K. Vinod Chandran, JJ ---------------------------------------------------- I.T A No. 64 of 2012----------------------------------------------------Dated this the 7[th] day of June, 2012 J U D G M E N T K. Vinod Chandran, J The Revenue is in appeal and the respondent is aGovernment Company. The assessment of the company forthe year 2005-06 was completed by Annexure A order. Interalia, the assessee's claim with respect to the payment ofpremium to Life Insurance Corporation for the policy underGroup Leave Encashment Scheme was claimed as a deductionunder Section 37 of the Income Tax Act, 1961(hereinafterreferred to as 'the Act'). The claim was allowed treating thesame as an expenditure exclusively incurred for the purpose ofbusiness. Subsequently, the Commissioner of Income Taxissued notice under Section 263 of the Act and after hearingthe objections held that leave encashment is an allowablededuction under Section 43B(f) only and the same can beavailed of only with respect to payments made on that accountin the previous year. I.T.A. No.64/2012 2. The assessee was before the Tribunal challenging therevision under Section 263 mainly on two grounds (i) beingthe scope of powers under Section 263 and (ii) Section 43 B(f)being no longer available for the Revenue in view of thejudgment of the Calcutta High Court striking down the same.Primarily the assessee contended that the exercise ofjurisdiction under Section 263 in the above case could not besustained for the reason that the finding of the Commissionerwith respect to the claim falling under Section 43B(f) wouldonly constitute a mere change of opinion. While concedingthe position that the provision conferring powers on theCommissioner to revise orders prejudicial to the interest ofthe Revenue could be invoked in the event of incorrectappreciation of the facts or incorrect application of law; it hasto be noticed that the same cannot be invoked to correct eachand every type of mistake or error committed by the AssessingOfficer. The provision made in the accounts for disbursementof leave encashment facility; which is to be disbursed at afuture point of time, may not be permissible as a deductionunder Section 43B(f). However in the case of the assessee who I.T.A. No.64/2012 : 3 : I.T.A. No.64/2012 : 3 : has taken insurance policy to cover such liability there isabsolutely no question of future disbursal of the liability sincesuch payments/disbursal will be made only by the insurer andthe assessee cannot claim any deduction towards suchpayments made by the insurer. The payments made onaccount of premium, the assessee contended, was allowable asa deduction under Section 37 and the revisional order of theCommissioner could only amount to a change of opinion. Theallowance of the claim by the Assessing Officer cannot be saidto be on an incorrect appreciation of facts or on an incorrectapplication of law. It was also contended that in any eventSection 43B(f) has been held to be unconstitutional by theCalcutta High Court as per the decision reported in 2007(292) ITR 470 Exide Industries Ltd. And another. TheTribunal accepted both the contentions of the assessee and setaside the impugned order passed by the Commissioner underSection 263 of the Act. 3. Revenue has raised the following questions of law:- A. The decision of the Tribunal is not correct and against the facts of the case. B. The Tribunal without considering the caseon merit held that there are two possibleon merit held that there are two possible views in this case. C. The Tribunal ought to have gone into themerits of the case and observed that thedecision made by the CIT is on the basisof the provisions contained in therelevant section of Income Tax Act andthat the view expressed by the assesseeis not correct.merits of the case and observed that thedecision made by the CIT is on the basisof the provisions contained in therelevant section of Income Tax Act andthat the view expressed by the assesseeis not correct. D. The Tribunal has failed to appreciate thatthe CIT had discussed the relevant factsin detail in the order and had alsoconsidered the objections that had beenraised by the assessee.the CIT had discussed the relevant factsin detail in the order and had alsoconsidered the objections that had beenraised by the assessee. E. The Tribunal should have found that theonly possible view is the one taken by theCommissioner.only possible view is the one taken by theCommissioner. 4. Section 43 B was introduced by the Finance Act 1983with effect from 1.4.1984 and clause (f) was inserted by theFinance Act 2001 with effect from 1.4.2002. The introductionof Clause (f) was purportedly to restrict deduction allowable incomputing income referred to in Section 28 for the previousyear, to that amounts actually paid in lieu of leaveencashment in the previous year itself. Section 43B itself wasintroduced to dissuade tax payers from claiming deduction onthe basis of provisions made for discharging statutoryliabilities without having actually discharged the same. The I.T.A. No.64/2012 : 5 : object of Section 43 B was to prevent assessees from makingprovisions for statutory liabilities without actually dischargingthe same and maintaining it as a provision in the Books ofAccounts while avoiding actual payment by invoking legalremedies or otherwise. It is to be noticed that leaveencashment is not a statutory liability and even in the case ofprovisions being made the deduction was allowed as abusiness expenditure; when the liability was not actuallyincurred in the previous year. In fact the above position wasso declared by the decision of the Hon'ble Supreme Court inBharat Earth Movers V. Commissioner of Income Tax(2000(245) ITR 428). Purportedly to overcome the saiddecision, the Parliament had brought in an amendment in theyear 2001 to deny such deduction in the event of the samebeing not incurred in the previous year by introduction ofClause (f) to Section 43 B. 5. The above provision, specifically Clause (f) of Section43 B came up for consideration before the Calcutta HighCourt wherein the amendment brought in introducing the saidclause was challenged as ultra vires and inconsistent with the 5. The above provision, specifically Clause (f) of Section43 B came up for consideration before the Calcutta HighCourt wherein the amendment brought in introducing the saidclause was challenged as ultra vires and inconsistent with the I.T.A. No.64/2012 object disclosed while inserting the original Section 43 B. TheCalcutta High Court in the decision reported in ExideIndustries Ltd. And another v. Union of India and others2007 292 ITR 470 held Clause (f) of Section 43 B to beunconstitutional. The provision was found to be arbitrary,unsustainable and de hors the Supreme Court decision in thecase of Bharat Earth Movers. In effect the amendment washeld to be incompetent and the law declared by the SupremeCourt in Bharat Earth Movers remained as such. Obviously,there is no challenge made to the Supreme Court from theaforesaid decision, by the department; as there is nothingmentioned about any such challenge in the appealmemorandum. We are also in respectful agreement of thereasoning in Exide Industries case(Supra). 6. In any event what was intended by introduction ofclause (f) was to deny the deduction of liabilities not actuallyincurred or in other words to exclude the provisions beingmade as against future liabilities, from being granted adeduction. In the instant case it was not a provision for futureliability which was claimed as a deduction. The assessee, a I.T.A. No.64/2012 Government Company had insured itself against the liabilitiesthat may arise on account of the claims made by theemployees towards leave encashment. The assessee beingcovered by a valid insurance policy and premium beingregularly paid, incurs no liability towards leave encashment.The liability; being covered by a valid insurance policy, issolely that of the insurer. Even if Section43 B(f) stands, in thecase of the assessee, where the liability is borne by theinsurer, there can be no situation wherein assessee couldmake a valid claim for deduction under Section 43B(f) sincethe actual liability is not incurred in any of the years.However, it cannot be doubted for a moment that the premiumpaid towards the renewal and continued validity of theinsurance policy necessarily becomes business expenditurewholly and exclusively incurred for the business purpose andallowable as a deduction under Section 37. 7. In the said circumstance, the order of the Assessingofficer allowing the claim of deduction cannot at all beassailed. The same cannot be said to be an incorrectassumption of fact or incorrect application of law. The view taken by the Assessing Officer cannot be said to beunsustainable in law. The only reason quoted by theCommissioner to initiate and conclude proceedings underSection 263 was that the amounts paid in lieu of leave as'leave encashment' to employees, could only be claimed as adeduction on the actual liability being suffered in the previousyear as per Section 43 B (f). The said view cannot besustained. The finding of the Tribunal is that the proceedingstaken under Section 263 of the Act to revise the order of theAssessing Officer on grounds of the same being prejudicial tothe Revenue cannot be sustained on the principles laid downby the Supreme Court inMalabar Industries v.Commissioner of Income Tax(2000 243 ITR 83) andreiterated in Commissioner of Income Tax v. Max IndiaLimited (2007 295 ITR 283). Section 263 cannot evidentlybe invoked when an Assessing Officer adopts one of the twocourses permissible in law which may result in loss of revenueor where two views are possible and the Assessing Officertakes a view with which the Commissioner does not agree. Insuch circumstances, it has been clearly laid down in the above I.T.A. No.64/2012 : 9 : I.T.A. No.64/2012 : 9 : cited decisions that an order so passed cannot be treated aserroneous order prejudicial to the interest of the Revenue.Further it was not a provision which was disallowed, but anactual liability towards premium paid on insurance policy andthe liability was allowable as a deduction under Section37being an expenditure incurred for the purpose of the business.The Commissioner proceeded on a totally wrong premise infinding the claim to be only under Section 43B(f) and thendisallowing it. 8. One other circumstance is the Calcutta High Courtdecision in Exide Industries case (supra). The Calcutta HighCourt held that leave encashment is neither a statutoryliability nor a contingent liability and it is a provision to bemade for the entitlement of an employee achieved in aparticular financial year. Testing clause (f) with the objectssought to be achieved by the introduction of Section 43 B, itwas held that the same could not have any nexus with theobject sought to be achieved by the original enactment.Section 43 B, it was held, was originally inserted to plugevasion of statutory liabilities and the introduction of clause (f) I.T.A. No.64/2012 : 10 : was found to be inconsistent with the said object. The learnedJudges held that the amendment brought in could not havenullified the dictum laid down in Bharat Earth Movers case(Supra). As noticed earlier there is nothing in the appealmemorandum to indicate that the Revenue has challenged thesaid decision before the Supreme Court. In the circumstancesof the Revenue having not challenged the correctness of thelaw laid down by the Calcutta High Court, it is not open to theRevenue to challenge its correctness in the case of anotherassessee. The Supreme Court in AIR 2004 1743 SC Berger Paints India Ltd. v. Commissioner of Income Taxreiterated that “if the Revenue has not challenged thecorrectness of the law laid down by the High Court and hasaccepted it in the case of one assessee, then it is not open tothe Revenue to challenge its correctness in the case of otherassessee, without just cause” is squarely applicable herein. 9. The order of the Assessing Officer allowing deductionto the assessee in the case of premium paid towards the validinsurance policy, ensuring the satisfaction of liability for leaveencashment by the insurer cannot be held to be erroneous and is not liable to be revised under Section 263 for the reason ofbeing prejudicial to the Revenue. The Revenue havingaccepted the decision of the Calcutta High Court also cannotpress into service Section 43 B(f). Hence, the questions of law are answered against theRevenue and in favour of the assessee. Income Tax appeal isrejected in limine. Sd/-(Judge) Thottathil B Radhakrishnan Sd/- K. Vinod Chandran(Judge) jma - true copy -