'REPORTABLE'
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 8617-8635 OF 2003
ASSISTANT COMMISSIONER OF
AGRICULTURAL INCOME TAX & ORS. ...Appellants
VERSUS
M/S. NETLEY 'B' ESTATE & ORS. ...Respondents
J U D G M E N T
R. F. NARIMAN, J.
The present set of appeals are concerned with the validity of
an explanation added retrospectively to Section 26(4) of the Karnataka
Agricultural Income Tax Act (hereinafter referred to as 'Act').
On facts, the present appeals are concerned with the assessment
of agricultural income received by a firm after it is dissolved insofar as
the income of the firm pertains to actual cash receipts after the firm is
dissolved but relating to income earned prior to dissolution.
Section 26 of the Act reads as follows: -
"26. Assessment in case of discontinued company, firm or association - (1)
where agricultural income is received by a company, firm or association of
persons and the business through which such income is received is
discontinued in any year, an assessment may be made in that year on the
basis of the agricultural income received during the period between the end
of the previous year and the date of the such discontinuance, in addition
to the assessment, if any, made on the basis of the agricultural income
received in the previous year.
(2) Any person discontinuing any such business shall give to the
Agricultural Income-tax officer notice of such discontinuance within thirty
days thereof and where any person fails to give the notice required by this
sub-section, such officer may direct that a sum shall be recovered from him
by way of penalty not exceeding the amount of agricultural income-tax
subsequently assessed on him in respect of any agricultural income of the
company, firm or association of persons up to the date of the
discontinuance of the business.
(3) Where an assessment is to be made under sub-section (1), the
Agricultural Income-tax officer may service on the person whose
agricultural income is to be assessed, or, in the case of a firm on any
person who was a member of such firm at the time of the discontinuance or,
in the case of a company, on the principal officer thereof, a notice
containing all or any of the requirements which may be included in a notice
under sub-section (2) of section 18 and the provisions of this Act shall,
so far as may be, apply accordingly as if the notice were a notice issued
under that sub-section."
Sub-section (4) was added to Section 26 by amendment in 1987
and reads as follows: -
"Where any business through which agricultural income is received is
discontinued in any year, any sum received after the discontinuance shall
be deemed to be the income of the recipient and charged to tax accordingly
in the year of receipt, if such sum would have been included in the total
income of the person who carried on the business had such sum been received
before such discontinuance."
Section 27 with which we are also concerned reads as follows: -
"27. Liability in case of discontinued firm or association - (1) where the
business of a firm or association of persons is discontinued or such firm
or association is dissolved, the Assistant Commissioner of Agricultural
Income-Tax shall make the assessment of the agricultural income of the firm
or association of persons as if no such discontinuance or dissolution has
taken place and all the provisions relating to the levy of penalty or any
other sum chargeable under any provisions of this Act shall apply, so far
as may be, to such assessment.
(2) Every person who was at the time of such discontinuance or
dissolution, a partner of such firm or a member of such association and the
legal representative of any such person who is deceased, shall be jointly
and severally liable to the assessment on such agricultural income and also
to pay the amount of agricultural income-tax, penalty or other sum payable
and all the provisions of this Act, so far as may be shall apply to any
such assessment or imposition of penalty or other sum."
From a cursory reading of section 26(4) read with section 27,
it becomes clear that any sum received after discontinuance of business by
a firm is deemed to be the income of the recipient and charged to tax
accordingly, if such sum would have been included in the total income of
the person who carried on the business had such sum been received before
such discontinuance. Section 27 went one step further and also spoke of
income of a firm which is dissolved as opposed to a firm whose business had
been discontinued. With respect to such income, every person who was, at
the time of discontinuance or dissolution, a partner of such firm was
liable to be jointly or severally assessed on such agricultural income as
also to pay the same by way of tax penalty, etc.
In L.P. Cardoza and others v. Agricultural Income Tax Officer
and others [(1997) 227 ITR 421], the question involved was as to whether a
dissolved firm could be assessed to agricultural income tax after the date
of its dissolution in respect of income received for supply of goods made
by the firm prior to its dissolution. This question arose in the light of
Section 26(4) and Section 27 as they then stood, that is, as they stood in
1987. The question was answered by the Bench after setting out the
aforesaid provisions as follows: -
"We are, therefore, unable to hold that under section 27 the
dissolved firm could be deemed to be in existence for purpose of assessment
in respect of the income derived after the date of dissolution of the firm.
In fact in W.P. No. 2397 and 2398 of 1988 that is the view taken by the
Karnataka Appellate Tribunal and it is on that ground the assessment orders
were set aside.
The next point to be considered is whether section 26(4), as
amended by Act 10 of 1987, could be of any help to the respondent.
Learned counsel for the petitioners contended that section
26(4) applies only to a case of discontinuance of the business and not to a
case of dissolution of the firm, that section 27 makes a distinction
between discontinuance of a business and dissolution of the firm, and that
as such section 26(4) does not apply to a case of dissolution of the firm.
It is no doubt true that discontinuance of business need not necessarily
imply dissolution of the firm. A firm may continue to exist but may
discontinue carrying on a particular business. But where a firm is
dissolved it necessarily involves discontinuance of business. As such it
cannot be said that section 26(4) cannot be applied as it does not refer to
dissolution of the firm, but what we are concerned with is as t whether
this provision creates any legal fiction regarding the continuance of the
firm notwithstanding its dissolution for purposes of assessing an income
received after the dissolution. All that this provision lays down is that,
any sum received after the discontinuance of business shall be deemed to be
the income of the "recipient" and charged to tax in the year of receipt, if
such sum would have been included in the total income of the person who
carried on the business had such sum been received before such
discontinuance. Explaining this provision the Division Bench of this
Court, in E.M.V. Muthappan's case (1990) 184 ITR 161, has pointed out that
since the sale proceeds received is income relating to agricultural
activity carried on during the earlier years, it must be deemed to be the
income of the recipient, as the original assessee is no longer continuing
the business and, therefore, is liable to tax in the year of receipt in the
hands of the recipient. It is, therefore, clear that this provision
applies to a case where the person carrying on the business discontinues it
and the income due to him, he being the original assessee, is received by
another after the discontinuance of the business. In such a case, income
received by the recipient could be charged to tax in the year of receipt.
There is nothing in this provision to indicate that where the firm is
dissolved and some income is received after the dissolution in respect of
agricultural produce supplied by the firm before its dissolution, the firm
itself could be assessed in the year of receipt of income notwithstanding
its dissolution."
On a reading of this judgment, two things become clear.
Section 27 of the Act would not help in answering the question before the
Court as a firm after dissolution has no existence in the eye of law and
cannot for that reason be an assessee. Secondly, Section 26(4) also did
not help for the self same reason and also because it referred to only
discontinuance of business of a firm as opposed to dissolution of a firm.
The court specifically held that there was nothing in Section
26(4) as it then stood or Section 27 to indicate that where the firm is
dissolved and income is received after dissolution in respect of
agricultural produce supplied by the firm before dissolution, the firm
itself could be assessed in the year of receipt of income notwithstanding
its dissolution.
Faced with this decision of the Karnataka High Court, the
legislature amended Section 26(4) retrospectively that is, with effect
from, 01.04.1975. The amended provision now reads as follows: -
"26(4) Where any business through which agricultural income is
received by a company, firm or association of persons is discontinued or
any such firm or association is dissolved in any year, any sum received
after the discontinuance or dissolution shall be deemed to be income of the
recipient and charged to tax accordingly in the year of receipt, if such
sum would have been included in the total income of the person who carried
on the business had such sum been received before such discontinuance or
dissolution. Explanation: - For the removal of doubts, it is
hereby declared that where before the discontinuance of such business or
dissolution of a firm or association hitherto assessed as a firm or
association, or as the case may be, on the company, the crop is harvested
and disposed of, but full payment has not been received for such crop, or
the crop is harvested and not disposed of, the income from such crop shall,
notwithstanding the discontinuance or dissolution be deemed to be the
income of the company, firm or association for the year or years in which
it is received or receivable and the firm or association shall be deemed to
be in existence, for such year or years and such income shall be assessed
as the income of the company, firm or association according to the method
of accounting regularly employed by it immediately before such
discontinuance or dissolution."
It will be noticed that in the amended Section 26(4), two
changes are made. Whereas in the original provision, no express reference
was made to companies or associations of persons, and no reference
whatsoever was made to a dissolved firm, both have now been added. By the
explanation, which is for the removal of doubts, the legislature declares
that where before dissolution of a firm, full payment is not received in
respect of income that has been earned pre-dissolution, then
notwithstanding such dissolution, the said income will be deemed to be the
income of the firm in the year in which it is received or receivable and
the firm shall be deemed to be in existence for such year for the purposes
of assessment. It will be noticed that by this amendment, the basis of the
law as it stood when Cardoza's case was decided has been changed.
Cardoza's case noticed that there was no deeming procedure that
continued a firm that had been dissolved to be an assessee for the purposes
of income that was earned by it pre-dissolution but received post-
dissolution. The deeming fiction has now been introduced by the
explanation (and with retrospective effect from 1975) thereby making it
clear that the basis of the law as it stood when Cardoza's case was decided
has now been changed with effect from 1975. The position which therefore,
emerges is that instead of such income being taxed at the hands of the
"recipient", it is now taxed in the hands of the dissolved firm.
The said amendment was the subject matter of challenge before a
learned Single Judge of the High Court of Karnataka. The Single Judge
repelled the challenge basically on the ground that the explanation only
clarified the main provision and therefore did not go beyond the main
provision. Equally, since the legislature has the right to amend both
prospectively and retrospectively, all that was done in the present case
was an exercise of legislative power retrospectively and therefore, no
question arose of any discrimination on this count. The Single Judge
therefore, dismissed the writ petitions before him.
In appeal before the Division Bench, the Division Bench set out
all the aforesaid provisions and ultimately found, following the judgment
in D. Cawasji and Co., Mysore v. State of Mysore and another [1984 (Supp)
SCC 490], that the amending Act of 1997 suffered from the vice that was
found in Cawasji's case, namely that it interfered directly with the
judgment of a High Court and would therefore, have to be struck down as
unconstitutional on this score alone. This the Division Bench found,
because, according to the Division Bench, in the statement of objects and
reasons for the 1997 amendment, it was held that the object of the
amendment was to undo the judgment of the High Court of Karnataka in
Cardoza's case.
Revenue is in appeal before us. It was argued by the learned
counsel that the factual situation in Cawasji's case was completely
different from the factual situation in the present case and that
therefore, Cawasji's case being distinguishable, cannot be followed.
Learned counsel also referred to various other judgments which we will
advert to a little later. To buttress this submission, he said that all
that was done on the facts in the present case was that the legislature
retrospectively changed the basis of the law of assessment of firms
regarding income received after they were dissolved, which is something
that the legislature is competent to do.
Learned counsel for the assessees, on the other hand, tried to
support the judgment. In addition, it was argued that since there was, in
fact, no lacuna to be cured, the legislative exercise of retrospective
amendment undertaken would be bad as there was no necessity for the same.
It was also argued that an explanation cannot defeat the substantive
provision to which it is attached and the present explanation therefore,
being beyond the main provision, is also bad. He also cited certain
decisions which we will advert to.
First, the decision in Cawasji's case. The question which fell
for decision in Cawasji's case was a retrospective amendment made to the
Mysore Sales Tax Act, 1957, in which sales tax was retrospectively raised
from 6 per cent to 45 per cent. Notwithstanding any judgment to the
contrary, even though collection of sales tax has been struck down on the
ground that excise duty, education cess and health cess could not have been
included in the price of arrack sold, yet such tax will be deemed to be
validly levied and collected in accordance with law. The ratio of the
decision emerges from paragraph 18 of the judgment which his set out
hereinbelow: -
"In the instant case, the State instead of remedying the defect or
removing the lacuna has by the impugned amendment sought to raise the rate
of tax from 6 per cent to 45 per cent with retrospective effect from
April 1, 1966 to avoid the liability of refunding the excess amount
collected and has further purported to nullify the judgment and order
passed by the High Court directing the refund of the excess amount
illegally collected by providing that the levy at the higher rate of 45 per
cent will have retrospective effect from April 1, 1966. The judgment of
the High Court declaring the levy of sales tax on excise duty, education
cess and health cess to be bad become conclusive and is binding on the
parties. It may or may not have been competent for the State Legislature
to validly remove the lacuna and remedy the defect in the earlier levy by
seeking to impose sales tax through any amendment on excise duty, education
cess and health cess; but, in any event, the State Government has not
purported to do so through the Amending Act. As a result of the judgment
of the High Court declaring such levy illegal, the State became obliged to
refund the excess amount wrongfully and illegally collected by virtue of
the specific direction to that effect in the earlier judgment. It appears
that the only object of enacting the amended provision is to nullify the
effect of the judgment which became conclusive and binding on the parties
to enable the State Government to retain the amount wrongfully and
illegally collected as sales tax and this object has been sought to be
achieved by the impugned amendment which does not even purport or seek to
remedy or remove the defect and lacuna but merely raises the rate of duty
from 6 per cent to 45 per cent and further proceeds to nullify the
judgment and order of the High Court. In our opinion, the enhancement of
the rate of duty from 6 per cent to 45 per cent with retrospective effect
is in the facts and circumstances of the case clearly arbitrary and
unreasonable. The defect or lacuna is not even sought to be remedied and
the only justification for the steep rise in the rate of duty by the
amended provision is to nullify the effect of the binding judgment. The
vice of illegal collection in the absence of the removal of the illegality
which led to the invalidation of the earlier assessments on the basis of
illegal levy, continues to taint the earlier levy. In our opinion, this is
not a proper ground for imposing the levy at the higher rate with
retrospective effect. It may be open to the Legislature to impose the levy
at the higher rate with prospective operation but levy of taxation at
higher rate which really amounts to imposition of tax with retrospective
operation has to be justified on proper and cogent grounds. This aspect of
the matter does not appear to have been properly considered by the High
Court and the High Court in our view was not right in holding that "by the
enactment of Section 2 of the impugned Act the very basis of the complaint
made by the petitioner before this Court in the earlier writ petition as
also the basis of the decision of this Court in Cawasji case that the
State is collecting amounts by way of tax in excess of what was authorised
under the Act has been removed." We, accordingly, set aside the judgment
and order of the High Court to the extent it upholds the validity of the
impugned amendment with retrospective effect from April 1, 1966 and to the
extent it seeks to nullify the earlier judgment of the High Court. We
declare that Section 2 of the impugned amendment to the extent that it
imposes the higher levy of 45 per cent with retrospective effect from April
1, 1966 and Section 3 of the impugned Act seeking to nullify the judgment
and order of the High Court are invalid and unconstitutional."
It is clear from this judgment that two reasons were given for
striking down the retrospective levy. The first reason given was that, in
the facts and circumstances of the case, retrospectively enhancing of the
levy of duty from 6 per cent to 45 per cent is in itself arbitrary and
unreasonable. The second reason given is that the defect or lacuna found
by the High Court is not sought to be remedied and the only justification
for the steep rise in the rate of duty is to nullify the effect of an
earlier binding judgment. It was held that the vice of illegal collection
in the absence of the removal of the illegality which led to the
invalidation of the earlier levy continued to taint the earlier levy.
This judgment is wholly distinguishable from the facts in the
present case. All that has been done in the present case is to remove the
basis of the law as it stood in 1987 which was interpreted in Cardoza's
case as leading to a particular result. All that the legislature has done
in the present case is to say that with effect from 01.04.1975, dissolved
firms will by legal fiction, continue to be assessed, for the purposes of
levy and collection of agricultural income tax, insofar as they receive
income post dissolution but relating to transactions pre-dissolution. In
no manner has the legislature in the present case sought to directly
nullify the judgment in Cardoza's case. All that has happened is that the
legal foundation on which the Cardoza's case was built is retrospectively
removed, something which is well within the legislative competence of the
legislature.
In Sri Ranga Match Industries and others v. Union of India and
others [1994 (Suppl.) 2 SCC 726], this court dealt with the same situation
of a retrospective validation of a statute otherwise declared
unconstitutional. Cawasji's case which was relied upon there (as it has
been relied upon in the present case) was distinguished in the following
terms: -
"At this stage, it would be appropriate to deal with the decision of this
Court in D. Cawasji & Co., Mysore v. State of Mysore on which too reliance
was placed by Shri Vaidyanathan, learned counsel for the appellants, Sales
tax on liquor was levied at 6 %. The Government was collecting it on the
entire sale price of arrack. However, in a batch of writ petitions filed
by the licensees, the Karnataka High Court held that the levy of sales tax
on excise duty and cesses component of the sale price was incompetent. In
other words, it was held that sales tax can be levied only on the price
proper but not upon excise duty and cesses which form part of the sale
price. The said judgment of the High Court was questioned in this Court
but later on the Government withdrew the appeal, with the result that the
judgment of the High Court became final. With a view to nullify claims for
refund, the Karnataka Legislature intervened and amended the Mysore Sales
Tax Act with retrospective effect. The amending Act enhanced the rate of
tax from 6 % to 45 % which meant that the Government need not refund any
amount to the licensees pursuant to the aforesaid judgment of the High
Court. The Amendment Act was questioned in the High Court but was upheld.
On Appeal, this Court held the Amendment Act unconstitutional. On a close
reading of the judgment, it is clear that the main ground on which the Act
was held to be incompetent was that raising the rate of tax from 6 % to
45% with retrospective effect was "clearly arbitrary and unreasonable" and,
therefore, violative of Articles 14 and 19. It was observed that instead
of removing the defect/lacuna pointed out by the High Court, the
legislature sought to raise the rate of tax steeply with retrospective
effect and that it was bad. The judgment cannot be read as laying down
that in no event can the legislature seek to render the judgment of the
Court ineffective and inoperative by amending or rectifying the defect or
the lacuna pointed out, on the basis of which the judgment was rendered.
In my opinion, therefore, the said judgment cannot be understood as
supporting the appellant's submission nor can it be read as militating
against the well-accepted power of Parliament which has been reiterated in
innumerable judgments of this Court."
In the Indian Aluminium Co. and others v. State of Kerala and
others [(1996) 7 SCC 637], there is a long discussion coupled with a large
number of judgments on validation acts. Cawasji's case was dealt with in
para 52 in the following terms:
"In D. Cawasji & Co. v. State of Mysore the High Court in a writ
filed by the appellant had held that the State Government was devoid of
power under Section 19 of the Sales Tax Act to collect sales tax and excise
duty which is not a part of the selling price. Mandamus for refund was
issued. Appeal filed in this Court was withdrawn and the Sales Tax
(Amendment) Act was enacted enhancing sales tax from original 6 per cent to
45 per cent with retrospective effect. Section 3 validated the previous
assessments. This Court struck down the amendment so far as it related to
retrospectivity pointing out that the lacuna pointed out by the court was
not cured and the judgment could not be nullified by legislative
amendment."
Finally, a number of principles were laid down in para 56 as
follows: -
"From a resume of the above decisions the following principles
would emerge:
(1) The adjudication of the rights of the parties is the essential
judicial function. Legislature has to lay down the norms of conduct or
rules which will govern the parties and the transactions and require the
court to give effect to them;
(2) The Constitution delineated delicate balance in the exercise of the
sovereign power by the legislature, executive and judiciary;
(3) In a democracy governed by rule of law, the legislature exercises the
power under Articles 245 and 246 and other companion articles read with the
entries in the respective lists in the Seventh Schedule to make the law
which includes power to amend the law.
(4) Courts in their concern and endeavour to preserve judicial power
equally must be guarded to maintain the delicate balance devised by the
Constitution between the three sovereign functionaries. In order that rule
of law permeates to fulfil constitutional objectives of establishing an
egalitarian social order, the respective sovereign functionaries need free
play in their joints so that the march of social progress and order remains
unimpeded. The smooth balance built with delicacy must always be
maintained;
(5) In its anxiety to safeguard judicial power, it is unnecessary to be
overzealous and conjure up incursion into the judicial preserve
invalidating the valid law competently made;
(6) The court, therefore, needs to carefully scan the law to find out;
(a) whether the vice pointed out by the court and invalidity suffered by
previous law is cured complying with the legal and constitutional
requirements; (b) whether the legislature has competence to validate the
law; (c)whether such validation is consistent with the rights guaranteed in
Part III of the Constitution.
(7) The court does not have the power to validate an invalid law or to
legalise impost of tax illegally made and collected or to remove the norm
of invalidation or provide a remedy. These are not judicial functions but
the exclusive province of the legislature. Therefore, they are not
encroachment on judicial power.
(8) 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.
(9) The consistent thread that runs through all the decisions of this
Court is that the legislature cannot directly overrule the decision or make
a direction as not binding on it but has power to make the decision
ineffective by removing the base on which the decision was rendered,
consistent with the law of the Constitution and the legislature must have
competence to do the same."
We are concerned in this case directly with principles 8 and 9.
On facts, the judicial decision in Cardoza's case has been rendered
ineffective by enacting a valid law on a topic within the legislative field
which fundamentally alters or changes the character of legislation
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. The
legislature has not directly over-ruled the decision of any court but has
only rendered, as has been stated above, such decision ineffective by
removing the basis on which the decision was arrived at.
Learned counsel for the respondent cited three decisions before us.
Panchi Devi v. State of Rajasthan and others [(2009) 2 SCC 589], para 9 was
cited before us for the proposition that a delegated legislation being
ordinarily prospective in nature should not be interpreted to give a
retrospective effect to take away a right or liability which was created
for the first time. In the present case, we are concerned with an Act of
the Legislature and not delegated legislation. No right or liability is
created for the first time - the only thing done in the present case is
that a firm is by fiction of law continued as such for certain purposes of
assessment even after its dissolution. Equally, no question of
interpretation qua retrospectivity arises. The legislature in the present
case has expressly made the impugned provision retrospective. On all these
counts, this judgment is distinguishable and would not apply at all here.
It was then contended based on Tata Motors Ltd. v. State of
Maharashtra and others [(2004) 5 SCC 783] from para 12 thereof, that
withdrawal with retrospective effect of relief properly granted by statute
to an assessee which the assessee has lawfully enjoyed as a vested
statutory right cannot be taken away unless there be strong and exceptional
circumstances justifying the said withdrawal. On facts again, this
judgment does not apply. There is no withdrawal of any right which has
become a vested statutory right which deprives an assessee of anything in
the present case. As has been noted above, what was taxable in the hands
of a recipient assessee is now taxable in the hands of a dissolved firm
post-dissolution only for certain purposes. This judgment also therefore,
cannot have any application in the present factual scenario.
Lastly, the judgment in Hardev Motor Transport v. State of M.
P. and others [(2006) 8 SCC 613] was cited before us. Para 31 thereof was
read out in support of the proposition that by inserting an explanation in
a statute, the main provision of the Act cannot be defeated or enlarged.
Applying this test to the present case, it is clear that in 1997 both the
main provision, that is Section 26(4), as well as explanation were added
retrospectively. The main provision has been expanded to include dissolved
firms and the explanation creates a legal fiction in furtherance of the
main provision by deeming a dissolved firm to be in existence as an
assessee for certain purposes. This being the case, this judgment would
also have no application to the present factual scenario.
For these reasons, we set aside the impugned judgment dated
03.07.2002 and allow the appeals. There shall be no orders as to
costs.
........................., J.
[ A.K. SIKRI ]
........................., J.
[ ROHINTON FALI NARIMAN ]
New Delhi;
March 17, 2015.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 8617-8635 OF 2003
ASSISTANT COMMISSIONER OF
AGRICULTURAL INCOME TAX & ORS. ...Appellants
VERSUS
M/S. NETLEY 'B' ESTATE & ORS. ...Respondents
J U D G M E N T
R. F. NARIMAN, J.
The present set of appeals are concerned with the validity of
an explanation added retrospectively to Section 26(4) of the Karnataka
Agricultural Income Tax Act (hereinafter referred to as 'Act').
On facts, the present appeals are concerned with the assessment
of agricultural income received by a firm after it is dissolved insofar as
the income of the firm pertains to actual cash receipts after the firm is
dissolved but relating to income earned prior to dissolution.
Section 26 of the Act reads as follows: -
"26. Assessment in case of discontinued company, firm or association - (1)
where agricultural income is received by a company, firm or association of
persons and the business through which such income is received is
discontinued in any year, an assessment may be made in that year on the
basis of the agricultural income received during the period between the end
of the previous year and the date of the such discontinuance, in addition
to the assessment, if any, made on the basis of the agricultural income
received in the previous year.
(2) Any person discontinuing any such business shall give to the
Agricultural Income-tax officer notice of such discontinuance within thirty
days thereof and where any person fails to give the notice required by this
sub-section, such officer may direct that a sum shall be recovered from him
by way of penalty not exceeding the amount of agricultural income-tax
subsequently assessed on him in respect of any agricultural income of the
company, firm or association of persons up to the date of the
discontinuance of the business.
(3) Where an assessment is to be made under sub-section (1), the
Agricultural Income-tax officer may service on the person whose
agricultural income is to be assessed, or, in the case of a firm on any
person who was a member of such firm at the time of the discontinuance or,
in the case of a company, on the principal officer thereof, a notice
containing all or any of the requirements which may be included in a notice
under sub-section (2) of section 18 and the provisions of this Act shall,
so far as may be, apply accordingly as if the notice were a notice issued
under that sub-section."
Sub-section (4) was added to Section 26 by amendment in 1987
and reads as follows: -
"Where any business through which agricultural income is received is
discontinued in any year, any sum received after the discontinuance shall
be deemed to be the income of the recipient and charged to tax accordingly
in the year of receipt, if such sum would have been included in the total
income of the person who carried on the business had such sum been received
before such discontinuance."
Section 27 with which we are also concerned reads as follows: -
"27. Liability in case of discontinued firm or association - (1) where the
business of a firm or association of persons is discontinued or such firm
or association is dissolved, the Assistant Commissioner of Agricultural
Income-Tax shall make the assessment of the agricultural income of the firm
or association of persons as if no such discontinuance or dissolution has
taken place and all the provisions relating to the levy of penalty or any
other sum chargeable under any provisions of this Act shall apply, so far
as may be, to such assessment.
(2) Every person who was at the time of such discontinuance or
dissolution, a partner of such firm or a member of such association and the
legal representative of any such person who is deceased, shall be jointly
and severally liable to the assessment on such agricultural income and also
to pay the amount of agricultural income-tax, penalty or other sum payable
and all the provisions of this Act, so far as may be shall apply to any
such assessment or imposition of penalty or other sum."
From a cursory reading of section 26(4) read with section 27,
it becomes clear that any sum received after discontinuance of business by
a firm is deemed to be the income of the recipient and charged to tax
accordingly, if such sum would have been included in the total income of
the person who carried on the business had such sum been received before
such discontinuance. Section 27 went one step further and also spoke of
income of a firm which is dissolved as opposed to a firm whose business had
been discontinued. With respect to such income, every person who was, at
the time of discontinuance or dissolution, a partner of such firm was
liable to be jointly or severally assessed on such agricultural income as
also to pay the same by way of tax penalty, etc.
In L.P. Cardoza and others v. Agricultural Income Tax Officer
and others [(1997) 227 ITR 421], the question involved was as to whether a
dissolved firm could be assessed to agricultural income tax after the date
of its dissolution in respect of income received for supply of goods made
by the firm prior to its dissolution. This question arose in the light of
Section 26(4) and Section 27 as they then stood, that is, as they stood in
1987. The question was answered by the Bench after setting out the
aforesaid provisions as follows: -
"We are, therefore, unable to hold that under section 27 the
dissolved firm could be deemed to be in existence for purpose of assessment
in respect of the income derived after the date of dissolution of the firm.
In fact in W.P. No. 2397 and 2398 of 1988 that is the view taken by the
Karnataka Appellate Tribunal and it is on that ground the assessment orders
were set aside.
The next point to be considered is whether section 26(4), as
amended by Act 10 of 1987, could be of any help to the respondent.
Learned counsel for the petitioners contended that section
26(4) applies only to a case of discontinuance of the business and not to a
case of dissolution of the firm, that section 27 makes a distinction
between discontinuance of a business and dissolution of the firm, and that
as such section 26(4) does not apply to a case of dissolution of the firm.
It is no doubt true that discontinuance of business need not necessarily
imply dissolution of the firm. A firm may continue to exist but may
discontinue carrying on a particular business. But where a firm is
dissolved it necessarily involves discontinuance of business. As such it
cannot be said that section 26(4) cannot be applied as it does not refer to
dissolution of the firm, but what we are concerned with is as t whether
this provision creates any legal fiction regarding the continuance of the
firm notwithstanding its dissolution for purposes of assessing an income
received after the dissolution. All that this provision lays down is that,
any sum received after the discontinuance of business shall be deemed to be
the income of the "recipient" and charged to tax in the year of receipt, if
such sum would have been included in the total income of the person who
carried on the business had such sum been received before such
discontinuance. Explaining this provision the Division Bench of this
Court, in E.M.V. Muthappan's case (1990) 184 ITR 161, has pointed out that
since the sale proceeds received is income relating to agricultural
activity carried on during the earlier years, it must be deemed to be the
income of the recipient, as the original assessee is no longer continuing
the business and, therefore, is liable to tax in the year of receipt in the
hands of the recipient. It is, therefore, clear that this provision
applies to a case where the person carrying on the business discontinues it
and the income due to him, he being the original assessee, is received by
another after the discontinuance of the business. In such a case, income
received by the recipient could be charged to tax in the year of receipt.
There is nothing in this provision to indicate that where the firm is
dissolved and some income is received after the dissolution in respect of
agricultural produce supplied by the firm before its dissolution, the firm
itself could be assessed in the year of receipt of income notwithstanding
its dissolution."
On a reading of this judgment, two things become clear.
Section 27 of the Act would not help in answering the question before the
Court as a firm after dissolution has no existence in the eye of law and
cannot for that reason be an assessee. Secondly, Section 26(4) also did
not help for the self same reason and also because it referred to only
discontinuance of business of a firm as opposed to dissolution of a firm.
The court specifically held that there was nothing in Section
26(4) as it then stood or Section 27 to indicate that where the firm is
dissolved and income is received after dissolution in respect of
agricultural produce supplied by the firm before dissolution, the firm
itself could be assessed in the year of receipt of income notwithstanding
its dissolution.
Faced with this decision of the Karnataka High Court, the
legislature amended Section 26(4) retrospectively that is, with effect
from, 01.04.1975. The amended provision now reads as follows: -
"26(4) Where any business through which agricultural income is
received by a company, firm or association of persons is discontinued or
any such firm or association is dissolved in any year, any sum received
after the discontinuance or dissolution shall be deemed to be income of the
recipient and charged to tax accordingly in the year of receipt, if such
sum would have been included in the total income of the person who carried
on the business had such sum been received before such discontinuance or
dissolution. Explanation: - For the removal of doubts, it is
hereby declared that where before the discontinuance of such business or
dissolution of a firm or association hitherto assessed as a firm or
association, or as the case may be, on the company, the crop is harvested
and disposed of, but full payment has not been received for such crop, or
the crop is harvested and not disposed of, the income from such crop shall,
notwithstanding the discontinuance or dissolution be deemed to be the
income of the company, firm or association for the year or years in which
it is received or receivable and the firm or association shall be deemed to
be in existence, for such year or years and such income shall be assessed
as the income of the company, firm or association according to the method
of accounting regularly employed by it immediately before such
discontinuance or dissolution."
It will be noticed that in the amended Section 26(4), two
changes are made. Whereas in the original provision, no express reference
was made to companies or associations of persons, and no reference
whatsoever was made to a dissolved firm, both have now been added. By the
explanation, which is for the removal of doubts, the legislature declares
that where before dissolution of a firm, full payment is not received in
respect of income that has been earned pre-dissolution, then
notwithstanding such dissolution, the said income will be deemed to be the
income of the firm in the year in which it is received or receivable and
the firm shall be deemed to be in existence for such year for the purposes
of assessment. It will be noticed that by this amendment, the basis of the
law as it stood when Cardoza's case was decided has been changed.
Cardoza's case noticed that there was no deeming procedure that
continued a firm that had been dissolved to be an assessee for the purposes
of income that was earned by it pre-dissolution but received post-
dissolution. The deeming fiction has now been introduced by the
explanation (and with retrospective effect from 1975) thereby making it
clear that the basis of the law as it stood when Cardoza's case was decided
has now been changed with effect from 1975. The position which therefore,
emerges is that instead of such income being taxed at the hands of the
"recipient", it is now taxed in the hands of the dissolved firm.
The said amendment was the subject matter of challenge before a
learned Single Judge of the High Court of Karnataka. The Single Judge
repelled the challenge basically on the ground that the explanation only
clarified the main provision and therefore did not go beyond the main
provision. Equally, since the legislature has the right to amend both
prospectively and retrospectively, all that was done in the present case
was an exercise of legislative power retrospectively and therefore, no
question arose of any discrimination on this count. The Single Judge
therefore, dismissed the writ petitions before him.
In appeal before the Division Bench, the Division Bench set out
all the aforesaid provisions and ultimately found, following the judgment
in D. Cawasji and Co., Mysore v. State of Mysore and another [1984 (Supp)
SCC 490], that the amending Act of 1997 suffered from the vice that was
found in Cawasji's case, namely that it interfered directly with the
judgment of a High Court and would therefore, have to be struck down as
unconstitutional on this score alone. This the Division Bench found,
because, according to the Division Bench, in the statement of objects and
reasons for the 1997 amendment, it was held that the object of the
amendment was to undo the judgment of the High Court of Karnataka in
Cardoza's case.
Revenue is in appeal before us. It was argued by the learned
counsel that the factual situation in Cawasji's case was completely
different from the factual situation in the present case and that
therefore, Cawasji's case being distinguishable, cannot be followed.
Learned counsel also referred to various other judgments which we will
advert to a little later. To buttress this submission, he said that all
that was done on the facts in the present case was that the legislature
retrospectively changed the basis of the law of assessment of firms
regarding income received after they were dissolved, which is something
that the legislature is competent to do.
Learned counsel for the assessees, on the other hand, tried to
support the judgment. In addition, it was argued that since there was, in
fact, no lacuna to be cured, the legislative exercise of retrospective
amendment undertaken would be bad as there was no necessity for the same.
It was also argued that an explanation cannot defeat the substantive
provision to which it is attached and the present explanation therefore,
being beyond the main provision, is also bad. He also cited certain
decisions which we will advert to.
First, the decision in Cawasji's case. The question which fell
for decision in Cawasji's case was a retrospective amendment made to the
Mysore Sales Tax Act, 1957, in which sales tax was retrospectively raised
from 6 per cent to 45 per cent. Notwithstanding any judgment to the
contrary, even though collection of sales tax has been struck down on the
ground that excise duty, education cess and health cess could not have been
included in the price of arrack sold, yet such tax will be deemed to be
validly levied and collected in accordance with law. The ratio of the
decision emerges from paragraph 18 of the judgment which his set out
hereinbelow: -
"In the instant case, the State instead of remedying the defect or
removing the lacuna has by the impugned amendment sought to raise the rate
of tax from 6 per cent to 45 per cent with retrospective effect from
April 1, 1966 to avoid the liability of refunding the excess amount
collected and has further purported to nullify the judgment and order
passed by the High Court directing the refund of the excess amount
illegally collected by providing that the levy at the higher rate of 45 per
cent will have retrospective effect from April 1, 1966. The judgment of
the High Court declaring the levy of sales tax on excise duty, education
cess and health cess to be bad become conclusive and is binding on the
parties. It may or may not have been competent for the State Legislature
to validly remove the lacuna and remedy the defect in the earlier levy by
seeking to impose sales tax through any amendment on excise duty, education
cess and health cess; but, in any event, the State Government has not
purported to do so through the Amending Act. As a result of the judgment
of the High Court declaring such levy illegal, the State became obliged to
refund the excess amount wrongfully and illegally collected by virtue of
the specific direction to that effect in the earlier judgment. It appears
that the only object of enacting the amended provision is to nullify the
effect of the judgment which became conclusive and binding on the parties
to enable the State Government to retain the amount wrongfully and
illegally collected as sales tax and this object has been sought to be
achieved by the impugned amendment which does not even purport or seek to
remedy or remove the defect and lacuna but merely raises the rate of duty
from 6 per cent to 45 per cent and further proceeds to nullify the
judgment and order of the High Court. In our opinion, the enhancement of
the rate of duty from 6 per cent to 45 per cent with retrospective effect
is in the facts and circumstances of the case clearly arbitrary and
unreasonable. The defect or lacuna is not even sought to be remedied and
the only justification for the steep rise in the rate of duty by the
amended provision is to nullify the effect of the binding judgment. The
vice of illegal collection in the absence of the removal of the illegality
which led to the invalidation of the earlier assessments on the basis of
illegal levy, continues to taint the earlier levy. In our opinion, this is
not a proper ground for imposing the levy at the higher rate with
retrospective effect. It may be open to the Legislature to impose the levy
at the higher rate with prospective operation but levy of taxation at
higher rate which really amounts to imposition of tax with retrospective
operation has to be justified on proper and cogent grounds. This aspect of
the matter does not appear to have been properly considered by the High
Court and the High Court in our view was not right in holding that "by the
enactment of Section 2 of the impugned Act the very basis of the complaint
made by the petitioner before this Court in the earlier writ petition as
also the basis of the decision of this Court in Cawasji case that the
State is collecting amounts by way of tax in excess of what was authorised
under the Act has been removed." We, accordingly, set aside the judgment
and order of the High Court to the extent it upholds the validity of the
impugned amendment with retrospective effect from April 1, 1966 and to the
extent it seeks to nullify the earlier judgment of the High Court. We
declare that Section 2 of the impugned amendment to the extent that it
imposes the higher levy of 45 per cent with retrospective effect from April
1, 1966 and Section 3 of the impugned Act seeking to nullify the judgment
and order of the High Court are invalid and unconstitutional."
It is clear from this judgment that two reasons were given for
striking down the retrospective levy. The first reason given was that, in
the facts and circumstances of the case, retrospectively enhancing of the
levy of duty from 6 per cent to 45 per cent is in itself arbitrary and
unreasonable. The second reason given is that the defect or lacuna found
by the High Court is not sought to be remedied and the only justification
for the steep rise in the rate of duty is to nullify the effect of an
earlier binding judgment. It was held that the vice of illegal collection
in the absence of the removal of the illegality which led to the
invalidation of the earlier levy continued to taint the earlier levy.
This judgment is wholly distinguishable from the facts in the
present case. All that has been done in the present case is to remove the
basis of the law as it stood in 1987 which was interpreted in Cardoza's
case as leading to a particular result. All that the legislature has done
in the present case is to say that with effect from 01.04.1975, dissolved
firms will by legal fiction, continue to be assessed, for the purposes of
levy and collection of agricultural income tax, insofar as they receive
income post dissolution but relating to transactions pre-dissolution. In
no manner has the legislature in the present case sought to directly
nullify the judgment in Cardoza's case. All that has happened is that the
legal foundation on which the Cardoza's case was built is retrospectively
removed, something which is well within the legislative competence of the
legislature.
In Sri Ranga Match Industries and others v. Union of India and
others [1994 (Suppl.) 2 SCC 726], this court dealt with the same situation
of a retrospective validation of a statute otherwise declared
unconstitutional. Cawasji's case which was relied upon there (as it has
been relied upon in the present case) was distinguished in the following
terms: -
"At this stage, it would be appropriate to deal with the decision of this
Court in D. Cawasji & Co., Mysore v. State of Mysore on which too reliance
was placed by Shri Vaidyanathan, learned counsel for the appellants, Sales
tax on liquor was levied at 6 %. The Government was collecting it on the
entire sale price of arrack. However, in a batch of writ petitions filed
by the licensees, the Karnataka High Court held that the levy of sales tax
on excise duty and cesses component of the sale price was incompetent. In
other words, it was held that sales tax can be levied only on the price
proper but not upon excise duty and cesses which form part of the sale
price. The said judgment of the High Court was questioned in this Court
but later on the Government withdrew the appeal, with the result that the
judgment of the High Court became final. With a view to nullify claims for
refund, the Karnataka Legislature intervened and amended the Mysore Sales
Tax Act with retrospective effect. The amending Act enhanced the rate of
tax from 6 % to 45 % which meant that the Government need not refund any
amount to the licensees pursuant to the aforesaid judgment of the High
Court. The Amendment Act was questioned in the High Court but was upheld.
On Appeal, this Court held the Amendment Act unconstitutional. On a close
reading of the judgment, it is clear that the main ground on which the Act
was held to be incompetent was that raising the rate of tax from 6 % to
45% with retrospective effect was "clearly arbitrary and unreasonable" and,
therefore, violative of Articles 14 and 19. It was observed that instead
of removing the defect/lacuna pointed out by the High Court, the
legislature sought to raise the rate of tax steeply with retrospective
effect and that it was bad. The judgment cannot be read as laying down
that in no event can the legislature seek to render the judgment of the
Court ineffective and inoperative by amending or rectifying the defect or
the lacuna pointed out, on the basis of which the judgment was rendered.
In my opinion, therefore, the said judgment cannot be understood as
supporting the appellant's submission nor can it be read as militating
against the well-accepted power of Parliament which has been reiterated in
innumerable judgments of this Court."
In the Indian Aluminium Co. and others v. State of Kerala and
others [(1996) 7 SCC 637], there is a long discussion coupled with a large
number of judgments on validation acts. Cawasji's case was dealt with in
para 52 in the following terms:
"In D. Cawasji & Co. v. State of Mysore the High Court in a writ
filed by the appellant had held that the State Government was devoid of
power under Section 19 of the Sales Tax Act to collect sales tax and excise
duty which is not a part of the selling price. Mandamus for refund was
issued. Appeal filed in this Court was withdrawn and the Sales Tax
(Amendment) Act was enacted enhancing sales tax from original 6 per cent to
45 per cent with retrospective effect. Section 3 validated the previous
assessments. This Court struck down the amendment so far as it related to
retrospectivity pointing out that the lacuna pointed out by the court was
not cured and the judgment could not be nullified by legislative
amendment."
Finally, a number of principles were laid down in para 56 as
follows: -
"From a resume of the above decisions the following principles
would emerge:
(1) The adjudication of the rights of the parties is the essential
judicial function. Legislature has to lay down the norms of conduct or
rules which will govern the parties and the transactions and require the
court to give effect to them;
(2) The Constitution delineated delicate balance in the exercise of the
sovereign power by the legislature, executive and judiciary;
(3) In a democracy governed by rule of law, the legislature exercises the
power under Articles 245 and 246 and other companion articles read with the
entries in the respective lists in the Seventh Schedule to make the law
which includes power to amend the law.
(4) Courts in their concern and endeavour to preserve judicial power
equally must be guarded to maintain the delicate balance devised by the
Constitution between the three sovereign functionaries. In order that rule
of law permeates to fulfil constitutional objectives of establishing an
egalitarian social order, the respective sovereign functionaries need free
play in their joints so that the march of social progress and order remains
unimpeded. The smooth balance built with delicacy must always be
maintained;
(5) In its anxiety to safeguard judicial power, it is unnecessary to be
overzealous and conjure up incursion into the judicial preserve
invalidating the valid law competently made;
(6) The court, therefore, needs to carefully scan the law to find out;
(a) whether the vice pointed out by the court and invalidity suffered by
previous law is cured complying with the legal and constitutional
requirements; (b) whether the legislature has competence to validate the
law; (c)whether such validation is consistent with the rights guaranteed in
Part III of the Constitution.
(7) The court does not have the power to validate an invalid law or to
legalise impost of tax illegally made and collected or to remove the norm
of invalidation or provide a remedy. These are not judicial functions but
the exclusive province of the legislature. Therefore, they are not
encroachment on judicial power.
(8) 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.
(9) The consistent thread that runs through all the decisions of this
Court is that the legislature cannot directly overrule the decision or make
a direction as not binding on it but has power to make the decision
ineffective by removing the base on which the decision was rendered,
consistent with the law of the Constitution and the legislature must have
competence to do the same."
We are concerned in this case directly with principles 8 and 9.
On facts, the judicial decision in Cardoza's case has been rendered
ineffective by enacting a valid law on a topic within the legislative field
which fundamentally alters or changes the character of legislation
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. The
legislature has not directly over-ruled the decision of any court but has
only rendered, as has been stated above, such decision ineffective by
removing the basis on which the decision was arrived at.
Learned counsel for the respondent cited three decisions before us.
Panchi Devi v. State of Rajasthan and others [(2009) 2 SCC 589], para 9 was
cited before us for the proposition that a delegated legislation being
ordinarily prospective in nature should not be interpreted to give a
retrospective effect to take away a right or liability which was created
for the first time. In the present case, we are concerned with an Act of
the Legislature and not delegated legislation. No right or liability is
created for the first time - the only thing done in the present case is
that a firm is by fiction of law continued as such for certain purposes of
assessment even after its dissolution. Equally, no question of
interpretation qua retrospectivity arises. The legislature in the present
case has expressly made the impugned provision retrospective. On all these
counts, this judgment is distinguishable and would not apply at all here.
It was then contended based on Tata Motors Ltd. v. State of
Maharashtra and others [(2004) 5 SCC 783] from para 12 thereof, that
withdrawal with retrospective effect of relief properly granted by statute
to an assessee which the assessee has lawfully enjoyed as a vested
statutory right cannot be taken away unless there be strong and exceptional
circumstances justifying the said withdrawal. On facts again, this
judgment does not apply. There is no withdrawal of any right which has
become a vested statutory right which deprives an assessee of anything in
the present case. As has been noted above, what was taxable in the hands
of a recipient assessee is now taxable in the hands of a dissolved firm
post-dissolution only for certain purposes. This judgment also therefore,
cannot have any application in the present factual scenario.
Lastly, the judgment in Hardev Motor Transport v. State of M.
P. and others [(2006) 8 SCC 613] was cited before us. Para 31 thereof was
read out in support of the proposition that by inserting an explanation in
a statute, the main provision of the Act cannot be defeated or enlarged.
Applying this test to the present case, it is clear that in 1997 both the
main provision, that is Section 26(4), as well as explanation were added
retrospectively. The main provision has been expanded to include dissolved
firms and the explanation creates a legal fiction in furtherance of the
main provision by deeming a dissolved firm to be in existence as an
assessee for certain purposes. This being the case, this judgment would
also have no application to the present factual scenario.
For these reasons, we set aside the impugned judgment dated
03.07.2002 and allow the appeals. There shall be no orders as to
costs.
........................., J.
[ A.K. SIKRI ]
........................., J.
[ ROHINTON FALI NARIMAN ]
New Delhi;
March 17, 2015.
