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Unravel the complexities of retrospective and retroactive operation of law in business, exploring legal implications and judicial perspectives in India and beyond.

In today’s dynamic business world, the only constant thing is change. In this context, the law cannot remain standstill, and it has to adapt to changes. When changes are effected from the past, the situation becomes complex.

Such changes effected from the past are referred to as Retrospective amendments. However, making the law effective from the past has some side effects. These side effects include inconvenience, uncertainty, bias, and instability in a business environment. This raises a question as to whether such amendments are constitutionally legitimate or not.

The Indian Constitution permits retrospective operation of law in some fields such as civil law and in particular taxation, whereas it prohibits certain other fields such as criminal law.  The clarity on retrospective operation has been advanced through a series of Judicial decisions while there are still some grey areas.

This article outlines the distinction between Retrospective and Retroactive law through the various judicial positions on the construction and operation of such amendments. It argues through a series of case laws that there is a clear demarcation between Retrospective and Retroactive law, though subtle, is very clear.

Background :

The general principle of law is that it is prospective in operation, as held by Justice Sri. Rohinton Fali Nariman in the case of CIT vs Vatika Township Pvt Ltd,[1]

Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward.”

As was observed in Phillips vs. Eyre,[2] retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law.

Further, in the case supra, it was observed that “…….one established rule is that, unless a contrary intention appears a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it[3].

 Situations where retrospective operation of statutes arise:

Previously, there have been instances where retrospective amendments were have been brought in for a specific object or purpose. A summary of the purpose includes

1. Curative

i. Curing of defects in law[4]

ii. Removal of hardships to taxpayer

2. Declaratory

i. Create a new obligation or burden or disability

ii. Changes in procedures

3. Explanatory

i. Clarification of a previous law

ii. Removal of doubts

4. Validating Act

i. Validation of doubts

ii. Validating an unlawful transaction or vice versa

Retrospective amendments

Retrospective amendments are those amendments that apply to pre-existing facts or right or liability or disability or duty from a date in the past. It would be in effect from before and not in the future like the prospective amendments. The term retrospective signifies looking backwards. In general the Courts regards as retrospective any statute which operates on events or facts that have come into existence before its commencement.

There is a presumption of retrospective effect when a statute explains or supplies an omission in an earlier enactment.

Such retrospective operation may

i. Create new results or different consequences when applied to pre-existing events or facts

ii. Also apply to future events or facts after the commencement of the amendment.

iii. Also create an additional burden in the form of new obligations, duty, disability or liability.

iv. Cure the validity of an earlier judgment.[5] or cures the validity of an earlier transaction that was considered unlawful or vice versa.

1. Where the legislation unequivocally provides for retrospective operation

If an enactment declares or mentions that it is in effect from a past date, then that enactment acquires a retrospective operation. The amendment affects pre-existing rights and obligations under some statutes by effecting or extinguishing or enforcing or amending their effect to the extent provided. For legislation to have a retrospective operation there must be a clear mention of the same in the unequivocal language in the enactment itself.

The principle can be derived that a statute cannot be provided with a retrospective effect unless the language of the statute intends or expressly mentions the same.

2. Where the legislation is ambivalent or silent on retrospective operation

Every law that takes away or impairs vested right is retrospective, and is generally unjust and may be oppressive. A retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matter of procedure unless that effect cannot be avoided without doing violence to the language of the enactment. The presumption against retrospective operation is strong in cases in which the statute, if operated retrospectively, would prejudicially affect vested rights or the legality of the past transactions, or impair contracts, or impose new duty or attach new disability in respect of past transactions or consideration already passed. The general rule of construction used by the Courts is that a statute should not be construed as to create new disabilities or obligations or impose new duties in respect of transactions which were complete at the time the amending Act came into force.[6]

when a literal reading of the provision giving retrospective effect does not produce absurdity or anomaly, the same would not be construed to be only prospective. The negation is not a rigid rule and varies with the intention and purport of the legislature, but to apply it in such a case is a doctrine of fairness. When a law is enacted for the benefit of the community as a whole, even in the absence of a provision, the statute may be held to be retrospective in nature[7].

Where a statute is passed for the purpose of supplying an obvious omission in a former statute, the subsequent statute relates back to the time when the prior Act was passed. The statute need not be given retrospective effect by express words but the intent and object of the legislature in relation thereto can be culled out from the background facts.[8]

A right which is acquired as a result of operation of a statutory provision cannot be taken away retrospectively unless the statutory provision so provides or by necessary implication it has the same effect[9]

3. Where the legislation validates already concluded or continuing transactions:

If the legislature has the power over the subject matter and competence to make a valid  law,  it can at, any time  make  such a  valid  law  and  make  it retrospectively operative so as to bind even past transactions.

Validating legislations operate under two situations

i. Where there is a doubt regarding the construction or application of a provision in a statute and a retrospective amendment removes such doubts through a provision that validates or invalidates that construction.

ii. Where the past transactions have been carried out without an authoritative interpretation as to its lawfulness and the validating Act validates the previous transaction and deems it to have been lawfully done.

Subject to the condition that such validation must be

i. Within the legislative competence of the legislature

 ii. Is Intra vires the Constitution

iii. Does not validate an incorrect or ultra vires provision of law by deeming it to be correct or Intra vires.[10]

4. Where Retrospective amendment should be reasonable

Any withdrawal or modification with retrospective effect of the relief properly granted by the statute to an assessee which the assessee has lawfully enjoyed or is entitled to enjoy as his vested statutory right, depriving the assessee of the vested statutory right has the effect of imposing a levy with retrospective effect for the years for which there was no such levy and cannot, unless there be strong and exceptional circumstances justifying such withdrawal or modification cannot be held to be reasonable or rational. If the retrospective feature of a law is arbitrary and burdensome the statute cannot be sustained[11]

Demystifying Retrospective and Retroactive Operation of Law

 

5. Where the retrospective legislation affects both rights and procedures

Where rights and procedure are dealt with together, the intention of the legislature may well be that the old rights are to be determined by the old procedure and that only the new rights under the substituted section are to be dealt with by the new procedure.[12]

If the legislation affects only the procedures then there is a presumption of retrospective operation, if the amendment is ambiguous, ambivalent or silent on the date of operation.[13]

6. Where the General Clauses Act applies

Any retrospective amendment must be subject to the Rules of Interpretations as specified in Sec.6 and Sec.6A of the General Clauses Act,1897 applied to Central Act or Regulations. The retrospective amendment might be in the nature of new enactment i.e insertion, or in the nature of omission or substitution.  In case of retrospective repeal of enactment, unless such intention is clearly manifested by express words or necessary implication[14], the repeal doesn’t affect[15]

i. matters that are subjudice (investigation or legal proceeding)

ii. vested rights

iii. penalty or forfeiture or punishment already incurred

iv. any action already taken or anything suffered such as assessment order passed before the retrospective amendment comes into operation.

v. revive anything not in force

vi. remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment

However where a repeal makes a substitution, it can have the dual effect of repeal and enactment. Where the substitution fails, the amendment can have the effect of failing both the original enactment and substituted enactment. This theory was tested in case[16] of Central Provinces Manganese Ore Ltd, where it was held that there could be no repeal if substitution failed and that the two steps (repeal and enactment) were part and parcel of a single indivisible process and not bits of a disjointed operation. Also, it is to be noted that the bare provision of Sec.6 of the General Clauses Act applies to Central Act or Regulations which raises a question about its applicability to State Acts.

7. Where there is no presumption of retrospective operation:

When there is any change in the law relating to Appeals, such provision cannot be applied to proceedings already instituted as the right of Appeal has been vested with the parties already.[17]

Where there is a removal of restriction to Appeal, then such provision shall apply retrospectively.

Any amendment or statute that retrospectively takes away or curtails any vested right or privilege, shall not be presumed to be of retrospective operation.

If the new liability to tax is introduced through retrospective amendment, the same construction cannot be extended towards payment of interest on the tax amount. The liability to pay interest and penalty on the defaulted tax liability will arise only from the date of coming into force of the retrospective amendment and not from the date from which the tax liability retrospectively arises.[18]

For e.g, if a retrospective amendment brings about a tax liability of Rs 10,000 for FY 2017 is passed in Finance Act, 2023, the interest for late payment, or any penalty on failure to discharge this liability can be computed only from FY 2023 and not from FY 2017.

Retroactive Amendment or Law:

Retroactive operation of a statute creates a new obligation on transactions or considerations or destroys or impairs vested rights.[19]

Quoting from Advanced Law Lexicon by P. Ramanath Aiyar,  “Retroactive- Acting backward; affecting what is past. (Of a statute, ruling, etc.) extending in scope or effect to matters that have occurred in the past. It is also termed retrospective

The term Retroactive Law has the following distinct concepts:

i. The first, which may be called ‘true retroactivity’, consists of the application of a new rule of law to an act or transaction which was completed before the rule was promulgated[20].

ii. The second concept, which will be referred to as ‘quasi-retroactivity’, occurs when a new rule of law is applied to an act or transaction in the process of completion

iii. While true retroactivity applies to completed transactions, quasi-retroactivity applies to continuing transactions.

Retrospective and Retroactive law differ in two aspects:

i. Retrospective amendments change the legal consequence of pre-existing law for completed or continuing transactions, Whereas Retroactive Law changes the law from a past date, which can apply to future or continuing transactions.

ii. Retrospective amendments do not change or deem to change existing facts, Whereas Retroactive Law may create, alter or nullify existing facts or law through deeming provisions.

Retrospectivity can be considered a weak form of retroactivity. So, it can be argued that retroactive law is wider in import than retrospective law, as it can cast a shadow on both the past law and facts, while retrospective law limits itself to changing the legal consequence of a past law or fact. And the subject matter of retrospective and retroactive law is in relation to the addition of any legal burden and rarely concerns the removal of burden from a past date.

Illustrations of  Retroactive application of law in GST:

♥ Retroactive amendment proposed in the Finance Bill 2021.

Sec.7(1) (aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.[21]

Since the above provision has created a class of persons and consequent tax liability, it can be argued that it is a retroactive law as there was no previous law in this matter, and tax payers had assumed the legal consequences.

♥ Retroactive amendment proposed in the Finance Bill 2023.

Clause  142. (1) In Schedule III to the Central Goods and Services Tax Act, paragraphs 7 and 8 and the Explanation 2 thereof (as inserted vide section 32 of Act 31 of 2018) shall be deemed to have been inserted therein with effect from the 1st day of July, 2017.

(2) No refund shall be made of all the tax which has been collected, but which would not have been so collected, had subsection (1) been in force at all material times.

Explanation of the amendment:

Following activities included in Schedule III (non-supply) with effect from 1 July 2017 (from 1.2.2019):

1. Supply of goods from a place outside India to a place outside India (i.e. merchant trade transactions);

2. Supply of warehoused goods before clearance for home consumption (i.e. in bond sale); and

3. Supply of goods by a consignee to another person by way of transfer of documents to title in goods before such goods are cleared for home consumption (i.e. High sea sales).

4. No refund for past periods (July 2017 to January 2019) even if tax is paid for the above

In my opinion, the word “shall be deemed to have been inserted” means that, the inserted provisions are retroactive in nature because it removes the burden of tax liability from a past date, and refund on past transactions is curtailed. The above amendment applies to facts on which the previous law was ambiguous or unstated, and the legal consequences were assumed by taxpayers. So, it can be argued that there was no previous law on the subject matter, and the amendment is a new law, while it can also be argued that the legal consequence of a pre-existing fact has been introduced. But, the text of the Finance Act Clause 142 reads that Schedule III must read differently to include the amended text from a past date, which is a deeming provision. So, it is a retroactive law, as it changes the law as-is from a past date. However, the refund provision is retrospective in nature, as it applies a different legal consequence on a previous tax payment transaction, in that it bars or removes the right to claim a refund between selected dates. So, the refund provision can be said to be a retrospective provision.

CONCLUSION:

The words retrospective and retroactive seem synonymous and interchangeably used. But, the distinction between the two, while subtle, is clear. Retroactive amendments apply to future transactions or events and do not impact past transactions or events (i.e they are prospective in operation from the past date). On the other hand, retrospective amendments apply to completed transactions or events from the past and may have an impact on those transactions or events. Retroactive laws are generally valid if they are intended to clarify or interpret existing law, remedy a defect in prior legislation, or address an injustice or unfairness. In contrast, retrospective laws are generally invalid because they violate the principle of the rule of law and upset settled expectations. But, within the realm of taxation, the Courts have been more permissive in regard to retrospective amendments, though it is not uncommon to challenge them in the Courts.

G Sujatha, B.Sc., CMA, FCA, LLB, Bengaluru.

[1] [2014] 49 taxmann.com 249 , para 31

[2] (1870) LR 6 QB 1, English Law

[3] Supra Note 1

[4] M/S. Sanathan Textile Pvt. Ltd. … vs Union Of India

[5] ITW Signode India Ltd Vs. Commissioner of Central Excise (2004 ) 3 SCC 48, pp 66-71

[6] Nani Gopal Mitra V State of Bihar AIR 1970 SC 1636

[7] Vijay vs State Of Maharashtra & Ors, Appeal (civil) 3164 of 2006 , SLP (C) No. 25219 of 2004

[8] Government Of India & Ors vs Indian Tobacco Association, (2005) 7 SCC 396 (para 25), p 402, 403

[9] Dipak Vegetable Oil Industries Ltd Vs Union of India 1991 (52) ELT 222 (Guj).

[10] Delhi Cloth and General Mills Co Ltd v State of Rajasthan, AIR 1996 SC 2930, p 2935

[11] TATA Motors vs State Of Maharashtra & Ors

[12] Hajee K. Assainar Vs Commissioner of Income Tax (1971) 81 ITR 423 (Ker)

[13] Shyam Sunder Vs Raj Kumar (2001) 8 SCC 24

[14] Hoosein Kasam Dada (India) Ltd. v. State of Madhya Pradesh & Ors AIR 1953 SC 221

[15] Sec.6, General Clauses Act,1897

[16] State of Maharashtra Vs Central Provinces Manganese Ore Co Ltd AIR 1977 SC 879

[17] Colonial Sugar Refining Co v Irving, (1905) AC 369

[18] Star India Pvt Ltd v Commissioner of Central Excise, (2005) 7 SCC 203 (para 8)

[19] Jay Mahakali Rolling Mills vs. Union of India

[20] Bareki No and Another v Gencor 2006(1) SA 432 (T) De Villiers J

[21] Inserted w.e.f. 01st July, 2017 by s. 108 of The Finance Act, 2021 (No. 13 of 2021) – Brought into force on 01st January, 2022 vide Notification No. 39/2021-C.T., dated 21st December, 2021.

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