Leave Encashment Deductible On Payment Basis – SC Upholds Constitutional Validity

Background

Section 43B of the Income-tax Act, 1961 ('IT Act') allows deduction of expenses only on payment basis. Finance Act, 2001 had inserted clause (f) in section 43B of the IT Act to provide that leave encashment shall be allowed on payment basis only. Prior to introduction of clause (f), deductibility of provision of leave encashment was a contentious tax issue. This dispute was laid to rest by the Hon'ble Supreme Court's decision in the case of Bharat Earth Movers¹ wherein it was held that the taxpayer can claim the provision for leave encashment in the year in which the liability has accrued even though it has not been finally discharged. With the insertion of clause (f), this decision of the Supreme Court was nullified. However, the constitutional validity of clause (f) was challenged. Recently, Hon'ble Supreme Court² pronounced its judgement on the constitutional validity of Section 43B(f) of the IT Act and held that leave encashment, though recognised in