Practice & Validity of Retrospective amendments in Tax Laws

Recently SC held that in exercising legislative power, the legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively.

Advocate Akhilesh Kumar Sah


Recently, the Supreme Court of India, in Assistant Commissioner of Agricultural Income Tax vs. Netley ‘B’ Estate [CIVIL APPEAL NOS. 8617-8635 OF 2003, Date Of Judgment: 17 March, 2015], has held that in exercising legislative power, the legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court, if those conditions had existed at the time of declaring the law as invalid. It is also empowered to give effect to retrospective legislation with a deeming date or with effect from a particular date. The legislature can change the character of the tax or duty from impermissible to permissible tax but the tax or levy should answer such character and the legislature is competent to recover the invalid tax validating such a tax on removing the invalid base for recovery from the subject or render the recovery from the State ineffectual. It is competent for the legislature to enact the law with retrospective effect and authorise its agencies to levy and collect the tax on that basis, make the imposition of levy collected and recovery of the tax made valid, notwithstanding the declaration by the court or the direction given for recovery thereof.

Often changes are made in taxation laws with retrospective effect. For example, in Income Tax Act, 1961 an Explanation to section 37 has been inserted by the Finance (No.2) Act, 1998, with effect from 1-4-1962 declaring that any expenditure incurred by an assesses for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Retrospective amendments are generally not welcome:

Changes which are made with some back-date sometimes are not welcome by persons concerned due to unreasonableness of the provision or when some benefit given is taken back by the change being made with retrospective effect. Therefore, dispute generally arise on this count. The reasonableness of  a retrospective change depends upon the circumstances of each case. The Supreme Court in Krishnamurthi & Co. v. State of Madras (1973) 31 STC 190 (SC) has observed that where the court comes to the conclusion that the levy of tax is not valid as the legal provision enacted for this purpose does not warrant the levy of tax imposed because of some defect in phraseology or other infirmity, the Legislature quite often passes an amending and validating Act. The object of such an enactment is to remove and rectify the defect in phraseology or lacuna of other nature and also to validate the proceedings including realisation of tax, which have taken place in pursuance of the earlier enactment which has been found by the court to be vitiated by  an infirmity. Such an amending and validating Act in the very nature of things has a retrospective operation. Its aim is to effectuate and carry out the object for which the earlier principle Act had been enacted. Such an amending and validating Act to make “small repairs” is a permissible mode of legislation and is frequently resorted to the fiscal enactments. The Supreme Court in Jawaharlal V. State of Rajasthan (1966) 1 SCR 890 (SC)has observed that the power to make laws involved the power to make them effective prospectively as well as retrospectively and tax laws are no exception to this rule. So, it would be idle to contended that merely because a taxing statute purports to operate retrospectively, the retrospective operation per se involves contravention of the fundamental right of the citizen taxed under article 19(1)(f) or (g) of the Constitution of India. It is true that cases may conceivably occur where the court may have to consider the question as to whether excessive retrospective operation prescribed by ‘taking statue amounts to the contravention of the citizens’ fundamental right; and in dealing with such a question, the court may have to take into account all the relevant and surrounding facts and circumstances in relation to the taxation.

Power to make enactments with retrospective operation, some cases:

The Supreme Court has also observed in ITO v. M. C. Ponnoose (1970) 75 ITR 174 (SC)that where any rule or regulation is made by any person or authority to whom such powers have been delegated by the legislature it may or may not be possible to make the same so as to give retrospective operation. It will depend on the language employed in the statutory provision which may in express terms or by necessary implication empower the authority concerned to make a rule or regulation with retrospective effect. But where no such language is to be found it has been held by the courts that the person or authority exercising subordinate legislative functions  cannot make a rule, regulation or bye-law which can operate with retrospective effect. The Supreme Court was more emphatic in Rai Ramkrishna v. State of Bihar (1961) 1 SCR 897; (1963) 50 ITR 171 (SC), about the power of the legislature in India to enact retrospective taxation laws. It held that if in its essential features a taxing statute is within the competence of the legislature, it would not cease to be so if retrospective effect is given to it. A power to make a law, therefore, includes within its scope to make all relevant provisions which are ancillary or incidental to it. The provision for levying of interest and to levy penalties retrospectively and to validate earlier proceedings under laws which have been declared unconstitutional after removing the element of unconstitutionality is included within the scope of legislative power. The scope of the power of a legislature to make a law validating the levy of a tax or a duty retrospectively was considered by the Supreme Court in Chhotabhi Jethabhai Patel & Co. v. Union of India (1962) Suppl. 2 SCR 1; AIR 1962 SC 1006. The court held that Parliament acting within its legislative field had the power and could by law both prospectively and retrospectively levy excise duty under the Central Excise and Salt Act, 1944, even where it was established that by reason of the retrospective effect being given to the law, the assessees were incapable of passing on the excise duty to the buyers. In the case of J. K. Jute Mills Co. Ltd. v. State of Uttar Pradesh (1961) 12 STC 429 (SC), the Supreme Court has held that the power to make retrospective legislation in cases relating to tax on sale of goods is the same as in  the income tax. The use of the expression “retrospective operation” is at times vague and misleading. In a broad general sense it may be right to say that a statute has retrospective operation when it purports to such facts or events which took place before the enactment came into force. It is sometimes used in a different sense when vested rights are sought to be affected. It is sometimes loosely used in the context of certain fictions of law which the lawmaker deems it necessary to introduce in existing laws for the purpose of setting certain matters right or avoiding certain mischief which might be possible but for the change in the law; and this is done by laying down that certain facts or things which did not in fact exist shall be deemed to have existed. This last need necessarily be called retrospective legislation. It may be more appropriate to describe it as ex post facto legislation of a curative nature.

Retrospective versus prospective legislation, a comparison:

A statue which deals with matter of substantive law and taxation is matter of substantive law-would not be construed to have retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary implication [New Shorrock Spinning & Manufacturing Co. Ltd. Vs. N. V. Raval ITO (1959) 37 ITR 41 (Bom). It was observed by the Andhra Pradesh High Court, in Kanumarlapudi Lakshminarayana Chetty v. First Addl. ITO (1956) 29 ITR 419 (AP), that a statute affecting vested rights is prima facie prospective unless the statute expressly or by necessary implication indicated to the contrary. Given where it is retrospective in operation, courts should confine its operation only to the extent retrospective when we reach their line at which the words of the section cease to be plain, the same rule leaning against retrospectively should be applied. It is well settled rule of interpretation allowed by time and sanctified by judicial decisions that, unless the terms of a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the laws of England (3rd edition) and reiterated in several decision of the Supreme Court as well as English Courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only [Govinddas v. ITO (1976) 103 ITR 123 (SC)]. A court of appeal, in an appeal properly appeal, been amended retrospectively with the object of conferring upon the authority or Tribunal of first instance, from the order whereof the appeal is filed, jurisdiction which is originally lacked; and a provision for review in the amending statute does not affect the power of the appellate court to deal with the appeal in the light of the amended law [State Of UP v. Raja Syed Mohammed Saadat Ali Khan (1961) 41 ITR 737 (SC)]. Also, it has been observed by the Kerala High Court in Kil Kotagiri Tea and Coffee Estates Co. Ltd. v. ITAT (1988) 174 ITR 579 (ker), that a binding decision rendered by a court is always retrospective and the decision which is overruled was never the law. The overruling decision should be deemed to have been in force even on the day when the order sought to be rectified was passed. A subsequent binding decision of the Supreme Court or of the High Court has retrospective operation as in the case of subsequent legislation and overruling is always retrospective. In CIT v. Mrs. Ayodhyakumari (1985) 154 ITR 604 (Raj),the Rajasthan High Court held that all laws are considered to be prospective except when made retrospective by express words or by necessary intendment (Gem Granites vs. CIT (2005) 185 Taxation 5 (SC).

Reasonability or unreasonability of amendment, an analysis:

Under section 295 the CBDT is only authorised to make rules to carryout the purposes of the Act. The rules so framed could only be for carrying out the provisions of the Act and could not take away what was conferred by the Act or whittle down its effect. Section 296 of the Act, no doubt, enjoins that the rules framed by the Central Government should be placed before Parliament and the same might be modified by Parliament. However, by this process, the rules framed by the delegate do not become legislation of Parliament (Century Enka Ltd. v. ITO (1977) 107 ITR 909 (Cal). Parliament always has the power to amend is own law, i. e., the Act, if it finds that the provisions relating to penalties in any state law cross the limits of public interest. [Shiv Dutt Raj Fateh Chand v. Union of India (1984) 148 ITR 664 (SC)]. The power and competence of the Parliament to amend any statutory provision with retrospective effect cannot be doubted. Any retrospective amendment to be valid must, however, be reasonable and not arbitrary and must not be violative of any of the fundamental right guaranteed under the Constitution. The mere fact that any statutory provision has been amended with retrospective effect does not by itself make the amendment unreasonable. Unreasonableness or arbitrariness of any such amendment with retrospective effect has necessarily to be judged on the merits of the amendment in the light of the facts and circumstances under which such amendment is made. In considering the question as to whether the legislative power to amend a provision with retrospective operation has been reasonably exercise or not, it becomes relevant to enquire as to how the retrospective effect of the amendment operates [Lohia Machines Ltd. V. Union of India(1985)152 ITR 308 (SC) 328]. Also, it has been held by Supreme Court in D. Cawasji & Co. v. State of Mysore & Ors. (1984) 150 ITR 648 (SC), that is may be open the legislature to impose levy of tax at a higher rate with prospective operation, but levy of taxation at a higher rate, which really amounts to imposition of tax, with retrospective operation, has to be justified on proper and cogent grounds. The withdrawal with retrospective effect by amendment of any financial benefit or relief granted by a fiscal statute must ordinarily be held to be unreasonable and arbitrary. Such withdrawal makes a mockery of a beneficial statutory provision and leads to chaos and confusion. Such withdrawal in effect results in the imposition of a levy at a future date for past years for which there was no such levy in the relevant years. The imposition of any fresh tax with retrospective effect for years for which there was no such levy is bound to operate unduly harshly on every assesses who is entitled to arrange and normally arrange his financial affairs on the basis of the law as it exists. Such retrospective taxation imposes and unjust and unwarranted accumulated burden on the assessee for no fault on his part and the assesse has to face unnecessarily without any just reason very serious financial and other problems. Imposition of any tax with retrospective effect for years for which no such tax was there, cannot also be considered to be just and reasonable from the point of view of revenue. The years for which levy is sought to be imposed with retrospective effect has already passed and there cannot be any proper justification for imposition of any fresh tax for those years. Such retrospective levy for the years for which there was no such levy, assessments for those years which might already have been completed and concluded will get upset. If the State is in need of more funds, the State instead of seeking to levy any tax with retrospective effect can always take appropriate steps to collect any larger amounts so required by imposition of higher taxes or by other appropriate methods [Lohia Machines Ltd. v. Union of India (1985) 152 ITR 308 (SC).

Validity of retrospective amendment, some views:

In the case of Rai Ramkrishna v. State of Bihar (supra) the Supreme Court observed that no mechanical test can be applied in determining the validity of the retrospective operation of the Act and it is conceivable that a case may arise in which the retrospective operation of the taxing or other statute may introduce such an element of unreasonableness that the restrictions imposed by it may be open to serious challenge as unconstitutional. In the case of Asstt. CIT of Urban Land Tax v. Buckingham & Carnatic Co. Ltd. (1970) 75 ITR 603 (SC), the Supreme Court observed that it is not right to say as general proposition that the imposition of tax with retrospective effect per se renders that law unconstitutional, but in applying the test of reasonableness to a taxing statute, it is of course a relevant consideration that the tax is being enforced with retrospective effect but that is not conclusive in itself. With regard to the validity of a retrospective amendment, one has to take into account the facts and circumstances under which the impugned amendment was made and to enquire as to how the retrospective effect of the impugned amendment  operated [Sati Oil Udyog Ltd. v. CIT (1998) 6 DTC 259 (Gau-HC) : (1998) 232 ITR 502 (Gau)].

It is the settled legal position that there is a legal presumption that retrospective effect cannot be given to a statue unless specifically provided by the statute itself. However, this presumption is not applicable to declaratory or clarificatory statues as held by the SC in the case of CIT vs. Poddar Cement Pvt. Ltd. (1997) 226 ITR 625. So, where the Explanation is not declaratory or clarificatory but expands the scope of the main section, respective effect cannot be given to such explanation unless specifically provided (Addl. CIT vs. Hughes Services (Far East) Pvt. Ltd. 2003(2) MTC 1397 (ITAT-Del.).

Legislature may “Cure” the statute so that it more correctly represents its intention. Such curative legislation does not in fact tough the validity of a judicial decision which may have attained finality albeit under the pre amended law (National Agriculture Co-operative Marketing Federation of India Ltd. and Anr. vs. Union of India & ors. 2003(1) MTC 609 (SC).

Parliament has the power to enact the law which may be prospective or retrospective. It is only the unreasonableness which could be explained when a retrospective amendment of law is challenged. If such retrospective amendments is violative of any other provision of the constitution that would also be considered (M. Srinivasalu vs. Union of India (2000) 13 SITC 42 (Karn.).

A judicial decision acts retrospectively(ACIT) vs. Saurashtra Kutch Stock Exchange Ltd. (2009) 208 Taxation 90 (SC).

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