Full Judgment Text
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CASE NO.:
Appeal (civil) 6170 of 2001
PETITIONER:
National Agricultural Co-operative Marketing Federation of India Ltd. & Anr.
RESPONDENT:
Union of India & Ors.
DATE OF JUDGMENT: 25/03/2003
BENCH:
RUMA PAL & B.N. SRIKRISHNA.
JUDGMENT:
J U D G M E N T
RUMA PAL, J
The appellant No. 1 is a co-operative society
registered under the Multi State Co-operative Societies Act,
1984 with its registered office in Delhi. It is the apex society of
a chain of Co-operative Societies which operate at different
territorial levels. The chain starts with the farmers who become
members of village co-operative societies, the village societies
become members of primary marketing co-operative societies
(District Societies) and District Societies become members of
the State Co-operative Societies (Apex Societies).
The issue raised by the appellants relates to the construction
and Constitutional validity of section 80 P (2) (a) (iii) of the Income
Tax Act, 1961 and grant of deduction of the profits made by
societies by the marketing of agricultural produce.
Under the Income Tax Act, 1922 ( hereinafter referred to as
the 1922 Act) exemption was granted in respect of profits and
gains of business of co-operative societies including societies
engaged in the marketing of the agricultural produce of its
members. The Income Tax Act, 1961 continued this exemption
under Section 81 (1) (c) which read:
81. Income of co-operative societies.
Income-tax shall not be payable by a
cooperative society-
(i) in respect of the profits and gains of
business carried on by it, if it is
(a) xxx xxx xxx xxx
(b) xxx xxx xxx xxx
(c) a society engaged in the
marketing of the agricultural produce
of its members".
By the Finance Act ( No. II ) 1967, Section 81 was omitted
and its provisions re-enacted as Section 80P of the 1961 Act.
The relevant extract of Section 80P is :
80-P (1) Where, in the case of an assessee
being a co-operative society, the gross total
income includes any income referred to in sub-
section (2), there shall be deducted, in
accordance with and subject to the provisions
of this section, the sums specified in sub-
section (2), in computing the total income of
the assessee.
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(2) The sums referred to in sub-section (i)
shall be the following namely:-
(a) in the case of a co-operative society
engaged in
(i) xxx xxx xxx
(ii) xxx xxx xxx
(iii) the marketing of the agricultural
produce of its members, or
(iv) xxx xxx xxx
(v) xxx xxx xxx
(vi) xxx xxx xxx
(vii) .. the whole of the amount
of profits and gains of business
attributable to any one or more of
such activities".
(emphasis supplied)
According to the appellant, prior to 1994 several High
Courts as well as this Court had construed Section 81(1)(c)
and Section 80 P (2)(a)(iii) and held that the benefit of
exemption was available to all the co-operative societies from
the village to the Apex Level. This was also the view taken by
the Kerala High Court as expressed in CIT V. Kerala State
Cooperative Marketing Federation . The view was reversed
by a Bench of this Court in Assam Cooperative Apex
Marketing Society v. CIT (Additional) when it held that the
object of Section 81 was to encourage basic level societies
and that therefore, the phrase "produce of its members" must
refer to agricultural produce actually "produced by its
members". It was held that unless this interpretation were
given, co-operative societies of traders would also become
entitled to exemption which could not have been the intention
of Parliament.
According to the appellant, as a result of the decision in
the Assam Co-operatives case, the appellant No. 1, who
had enjoyed the deduction under Section 80 P till then, was
reassessed to tax on its profits and the assessments in
respect of the assessment year from 1986-87 to 1994-95 were
re-opened.
Following the decision of this Court in Assam Co-
operatives case (supra), the Kerala High Court reversed its
earlier view while deciding the issue raised by the Kerala Co-
operative Marketing Federation in respect of a subsequent
year and denied the Kerala Federation the deduction under
S.80 P. The Kerala Federation impugned the decision of the
High Court under Article 136. In these circumstances the
view expressed in Assam Cooperatives came to be re-
considered by a larger Bench in 1998. This Court by its
decision in Kerala Cooperative Marketing Federation Ltd. &
Ors. V. Commissioner of Income Tax overruled Assam
Cooperatives and held that the word ’of’ in Section 80P (2)
(a) (iii) had been too restrictively construed in Assam
Cooperatives. On an interpretation of the provisions of
Section 80P and having regard to the object with which the
provisions had been introduced, it was held that the
legislature did not intend to limit the scope of exemption only
to primary societies and that the phrase ’produce of its
members’ must be construed as including any society
engaged in marketing agricultural produce ’belonging to’ its
members. It said:
The language adopted in Section
80-P(2)(a)(iii) with which we are concerned
will admit the interpretation that the society
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engaged in marketing of agricultural produce
of its members as agricultural produce
"belonging to" its members which is not
necessarily raised by such member. Thus,
when the provisions of Section 80-P of the Act
admit of a wider exemption there is no reason
to cut down the scope of the provision as
indicated in Assam Coop. Apex Marketing
Society Case".
This decision was given in December 1998. Immediately
thereafter, Section 80P(2)(a)(iii) was sought to be amended by
the Income Tax Act (2nd Amendment) Bill No. 169 of 1998.
Clause 8 of the Bill which is relevant for our purposes, reads:
"Amendment of section 80P. In
section 80P of the Income-tax Act, in
sub-section (2), in clause (a), for sub-
clause (iii), the following sub-clause
shall be substituted, and shall be
deemed to have been substituted with
effect from the 1st day of April, 1968,
namely: -
(iii) the marketing of agricultural
produce grown by its members."
The reason for this amendment has been stated in
Clause 6 of the Statement of Objects and Reasons as:
" 6 Clause 8 seeks to amend section
80P of the Income-tax Act. Under the
existing provision, profits derived by a
cooperative society engaged in the
marketing of agricultural produce of its
members are fully deductible in computing
the taxable income under Section
80P(2)(a)(iii) of the Income-tax Act. The
deduction was intended for primary
cooperative societies marketing the
agricultural produce of their farmer
members. In the case of Kerala State
Cooperative Marketing Federation vs.
Commissioner of Income-tax, the Hon’ble
Supreme Court held that the use of words
"of its members" in the relevant clause
would mean the agricultural produce
belonging to the members and not
necessarily grown by them. The
interpretation given to the use of the words
in the provision is not in accordance with
the legislative intent of the existing
provision. In respect of income arising
from transactions with non-members, the
cooperatives are not different from other
assessees, and such cooperatives are
required to be taxed in the same manner
as companies or other assessees
engaged in marketing of agricultural
produce. If an amendment in section
80P(2)(a)(iii) is not made, it is likely to
have serious impact on revenues. The
proposed amendment, therefore, replaces
the words "of its members" by the words
"grown by its members". The amendment
seeks to restrict the deduction to the
profits derived by a cooperative society
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engaged in the marketing of agricultural
produce grown by its members".
The Bill was passed after obtaining the assent of the
President and became the Income Tax (2nd Amendment) Act,
1999 ( Act No. 11 of 1999).
The appellants impugned this amendment before the
Delhi High Court under Article 226. They prayed for a
declaration that the 1999 Amendment Act in so far as it seeks
to retrospectively amend Section 80P (2)(a)(iii) of the Income
Tax Act, 1961 was unconstitutional, and for an order to restrain
the respondents from seeking to assess or re-assess the
appellant society in respect of any previous year prior to the
date of the enactment of the Amendment Act.
The Delhi High Court dismissed the writ petition holding
that the amendment was valid and that the legislature was
competent to retrospectively take away a benefit granted
earlier by an amendment of the law. However, the Court
recorded the statement of the Solicitor General appearing on
behalf of the respondent authorities that the amendment would
apply only to assessments which were yet to be finalised.
That the Legislature can enact laws retroactively is not
in dispute. Nor is it disputed that the amendment is intended
to be retrospective and that the amendment would at least
prospectively exclude all cooperative societies except the
primary society from the benefit of Section 80 P(2)(a)(iii) of the
Income Tax Act. According to the appellants, the amendment
cannot be considered to have retrospective operation in the
absence of a validating provision nor could Parliament reverse
the judgment of this Court by such statutory overruling. If the
amendment is construed as having retrospective operation,
then, it is submitted, the amendment is unconstitutional
because it seeks to impose a tax on apex societies for the last
31 years. It was contended that by denying the deduction to
the apex societies, the farmers and the primary societies
would be vitally affected as it would be reflected in the returns
obtained by them. This would be contrary to the legislative
intent which was to benefit all societies which market
agricultural produce.
It is unnecessary to record the submissions of the
respondents separately as they form part of our reasons for
dismissing the appeal.
The Legislative power either to introduce enactments for
the first time or to amend the enacted law with retrospective
effect, is not only subject to the question of competence but is
also subject to several judicially recognized limitations with
some of which we are at present concerned. The first is the
requirement that the words used must expressly provide or
clearly imply retrospective operation . The second is that the
retrospectivity must be reasonable and not excessive or harsh,
otherwise it runs the risk of being struck down as
unconstitutional . The third is apposite where the legislation is
introduced to overcome a judicial decision. Here the power
cannot be used to subvert the decision without removing the
statutory basis of the decision .
There is no fixed formula for the expression of legislative
intent to give retrospectivity to an enactment. "Sometimes this
is done by providing for jurisdiction where jurisdiction had not
been properly invested before. Sometimes this is done by re-
enacting retrospectively a valid and legal taxing provision and
then by fiction making the tax already collected to stand under
the re-enacted law. Sometimes the Legislature gives its own
meaning and interpretation of the law under which tax was
collected and by legislative fiat makes the new meaning
binding upon courts. The Legislature may follow any one
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method or all of them".
A validating clause coupled with a substantive statutory
change is therefore only one of the methods to leave actions
unsustainable under the unamended statute, undisturbed.
Consequently, the absence of a validating clause would not by
itself affect the retrospective operation of the statutory
provision, if such retrospectivity is otherwise apparent.
By the impugned amendment, the legislature has
substituted the word ’of’’ which occurred in Section 80P
(2)(a)(iii) and which had been construed by this Court in 1998
as "belonging to" , with the phrase "grown by". The clear effect
of the substitution, in keeping with general principles relating
to amendments, would be that Section 80P(2)(a)(iii) must be
read as if the substituted phrase were included from the date
that the section was introduced in the statute viz. 1st April,
1968.
In making this change, the Legislature does not "statutorily
overrule" this Courts decision in Kerala Cooperative
Marketing Federation Ltd. as has been contended by the
appellant. Overruing assumes that a contrary decision is given
on the same facts or law. Where the law, as in this case, has
been changed and is no longer the same, there is no question
of the Legislature overruling this Court.
As has been held in Ujagar Prints V. Union of India
"A competent legislature can always
validate a law which has been declared
by courts to be invalid, provided the
infirmities and vitiating infactors noticed
in the declaratory judgment are removed
or cured. Such a validating law can also
be made retrospective. If in the light of
such validating and curative exercise
made by the legislature granting
legislative competence the earlier
judgment becomes irrelevant and
unenforceable, that cannot be called an
impermissible legislative overruling of
the judicial decision. All that the
legislature does is to usher in a valid law
with retrospective effect in the light of
which the earlier judgment becomes
irrelevant".
A somewhat similar situation arose in connection with
Section 73 of the Bombay Municipality Boroughs Act, 1925
which allowed the municipality to levy "a rate on building or
lands or both situated within the municipal Borough". Rule
350A made under that Act provided for the rate on land at a
percentage evaluation based upon capital. The Rule was held
to be ultra-vires in Patel Gordhandas Hargovindas v.
Municipal Commissioner, Ahmedabad on the ground that
the word ’rate’ as was understood in the legislative practice of
India and used in Section 73 did not allow for an impost as
provided under Rule 350A. A Validation Act was passed
subsequent to the decision in Patel Gordhandas
Hargovindas redefining the word ’rate’ in Section 73 itself.
The constitutionality of the Validation Act was challenged. In
dismissing the challenge, this Court in, Shri Prithvi Cotton
Mills Ltd. V. Broach Borough Municipality held that the
legislature could exercise its undoubted powers of redefining
the word ’rate’ in Section 73 to validate the assessments
earlier made under Rule 350A. The Court held that when a
Legislature sets out to validate a tax declared by a Court to be
illegally collected under an ineffective or an invalid law, the
cause for ineffectiveness or invalidity must be removed before
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validation can be said to take place effectively.
"It is not sufficient to declare merely that
the decision of the Court shall not bind
for that is tantamount to reversing the
decision in exercise of judicial power
which the Legislature does not possess
or exercise. A court’s decision must
always bind unless the conditions on
which it is based are so fundamentally
altered that the decision could not have
been given in the altered
circumstances".
Once the circumstances are altered by Legislation, it
may neutralise the effect of the earlier decision of the Court
which becomes ineffective after the change of the law.
Similarly in M/s. Krishnamurthi & Co. v. State of
Madras & Anr., the Madras General Sales Tax 1959 Act (as it
stood) provided under Entry 47 for tax on "lubricating oils, all
kinds of mineral oils (not otherwise provided for in this Act)
quenching oil and greases w.e.f. 1.4.1964". The question was
whether this entry covered furnace oil. The Madras High Court
construed the phrase and came to the conclusion that it did not.
The Legislature then enacted an Amendment Act in 1967.
Entry 47 was amended so as to expressly provide that
furnace oil would be subjected to tax. The Act was made
effective from 1964. The Act was challenged as being
unreasonable since it retrospectively made the dealers liable for
sales tax which they had not passed on to others. The
challenge was negatived and it was said that
"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 principal
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 in fiscal enactments".
Again when the question arose whether factory and other
buildings were ’houses’ for the purpose of levy of house tax,
the High Court held that the word ’house’ could not be
construed to include factories and other buildings. Pending
the appeal from the High Court’s decision before this Court, the
word ’house’ was legislatively redefined to include factories
and other buildings with retrospective effect. This Court in
Govt. of Andhra Pradesh vs. Hindusthan Machine Tools
rejected the challenge to the amendment holding that this was
a permissible legislative exercise. It was held that the
Legislature had not overruled or set aside the judgment of the
High Court but had removed the basis of the decision rendered
by the High Court so that the decision could not have been
given in the altered circumstances. This enunciation of the law
has been noted with approval by the Constitution Bench in
State of Tamil Nadu v. Arroran Sugar Mills .
The appellant has relied on this Court’s decision in
Madan Mohan Pathak V. Union of India to contend that
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what the legislature had done in the present case was to
statutorily overrule the decision of this Court in Kerala
Marketing. In Madan Mohan Pathak a settlement had been
arrived between the Life Insurance Corporation and its
employees, inter-alia with regard to bonus payable to its class
III and IV employees. Subsequent to the settlement, the
Payment of Bonus Act, 1976 came into force which
considerably curtailed rights of employees to bonus in
industrial establishments. Although the Payment of Bonus Act
was not applicable to the Life Insurance Corporation, the
Central Government issued a directive to the LIC that it should
not make payment of bonus to its employees without getting
the same cleared by the Central Government. The LIC issued
a circular stopping the payment of bonus. The employees’
association challenged this by way of a petition under Article
226 and prayed for a writ directing the LIC to act in terms of the
settlement. The writ petition was allowed. While the appeal
was pending before the Division Bench, Parliament enacted
the Life Insurance Corporation Modification of Settlement,
1976. By the Act, the settlement deprived the class III and
class IV employees of the annual cash bonus to which they
were otherwise entitled under the settlement in respect of
certain years. However, despite this statutory interpretation,
the Division Bench did not interfere with the order of the Single
Judge and dismissed the appeal. After this, somewhat
unnecessarily, the employees of LIC assailed the constitutional
validity of the 1976 Act under Article 32 before this Court. One
of the grounds taken was that the impugned Act deprived the
class III and IV employees of their vested rights under the
settlement and was in violation of Article 19(1)(f) of the
Constitution. This Court allowed the writ application holding
that since the LIC had not pressed its appeal before the
Division Bench despite the 1976 Act, it could not be absolved
from its obligation from carrying out the writ of mandamus
issued by the Single Judge of the High Court. It also held that
the judgment of the High Court was not based upon any defect
in any statutory provision, which could have been removed by
the legislature as was the case in Prithvi Cotton Mills (supra).
In other words as long as the judgment stood it could not be
disregarded or ignored by LIC.
The decision is an authority for the principle that a
judicial decision which has become final inter partes, cannot
be set at naught by legislative action, a principle that is well
entrenched. Therefore, if, as has been contended by the
appellant, the High Court in 1981 had in proceedings between
the appellant and the Revenue held that the appellant was
entitled to the benefit of the deduction under Section
80P(2)(a)(iii) of the Act, and the Revenue has not impugned
the High Court’s decision, that decision binds the parties for
the assessment years in question and cannot be reopened
because of the 1998 amendment. This principle, however,
does not in any way detract from the principle that the
Legislature may "cure" the statute so that it more correctly
represents its intention. Such curative legislation does not in
fact touch the validity of a judicial decision which may have
attained finality albeit under the pre-amended law.
The main thrust of the appellant’s argument has been to
the constitutionality of the amendment. The substitution in
1998 of the phrase "grown by" in Section 80P(2)(a)(iii) of the
Act to operate from 1968, it is argued, amounts to a new levy
and an unforeseen financial burden imposed on Apex
Societies like the appellant with effect from the past 30 years.
If this were so doubtless the Court may have considered the
amendment to be excessively and unreasonably retrospective
violating the appellants fundamental rights under Articles
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19(1)(g) and 14 of the Constitution . But in fact the grievance
is unfounded.
The test of the length of time covered by the retrospective
operation cannot by itself, necessarily be a decisive test.
Account must be taken of the surrounding facts and
circumstances relating to the taxation and the legislative
background of the provision. To recapitulate the legislative
background of the particular statutory provision in question
before us - the first authoritative interpretation of Section 80P
(2)(a)(iii) was made in 1994 in Assam Cooperatives when it
held that the word "of" must be construed as "produced by".
Therefore, the law as it stood from 1968 was, by this decision,
required to be read in precisely this manner and presumably
assessments of Apex Societies were commenced and
concluded on this basis. The situation continued till 1998 till
this Court reversed Assam Cooperatives in Kerala
Cooperative Marketing Federation Ltd. . Before the
assessment year was over, by the 1998 Amendment the word
"of" was substituted with " grown by". In real terms therefore
there was hardly any retrospectivity, but a continuation of the
status quo ante. The degree and extent of the unforeseen and
unforeseeable financial burden was, in the circumstances,
minimal and cannot be said to be unreasonable or
unconstitutional.
It is hardly likely on the given facts, that assessments
had been concluded on the basis of the decision in Kerala
Marketing and the period for reopening such assessments
had become time barred. In any event the 1998 amendment
cannot be construed as authorizing the Revenue authorities to
reopen assessments when the reopening is already barred by
limitation. The amendment does not seek to touch on the
periods of limitation provided in the Act, and in the absence of
any such express provision or clear implication, the legislature
clearly could not be taken to intend that the amending
provision authorises the Income-tax Officer to commence
proceedings which before the new Act came into force,had, by
the expiry of the period provided become barred. Different
considerations would arise if, by the amendment even final
assessments were unambiguously sought to be opened .
That is not the case here. The concession of the Solicitor
General on behalf of the Revenue that the amendment would
apply only to assessments which were yet to be finalised
could not of course be a relevant consideration in upholding
the amendment if it were found to be constitutionally infirm .
But it was an unnecessary concession, since having regard to
the limited operation of the amendment, it could only apply to
pending assessments in the sense that it could not revive a
power lost by efflux of time.
The final submission of the appellant as to the possible
adverse economic impact of the amendment on farmers and
primary societies is not a consideration which is relevant to a
decision on its validity particularly when neither the factual
basis for such assertion is laid nor the persons on behalf of
whom the appellant seeks to take up cudgels, are before us.
We therefore dismiss the appeal without any order as to
costs.
193 ITR 624
201 ITR 338 SC: 1994 (Supp.) 2 SCC 96
231 ITR 814: 1998 (5) SCC 48
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S.S. Gadgil v. M/s Lal & Co.: AIR 1965 SC 171, 177 ; J.C. Jani, Income Tax Officer,Circle-
IV,
Ward-G Ahmedabad v.Induprasad Devshanker Bhatt, AIR 1969 SC 778, 781
Rai Ramkrishna & Ors. v. The State of Bihar (1964) 1 SCR 897, 915; Jawaharmal v. State of
Rajasthan & Ors. [1966] 1 SCR 890, 905; Supreme Court Employees Welfare Association vs.
Union of India & Anr. 1989 (3) SCC 488, 517
Shri Prithvi Cotton Mills Ltd. vs. Broach Borough Municipality & Ors. 1969 (2) SCC 283;
Lalitaben v. Gordhanbhai & Anr. 1987 (Supp) SCC 750 para 15; Janapada Sabha Chhindwara v.
The Central Provinces Syndicate Ltd. 1970 (1) SCC 509; Indian Aluminium Co. & Ors. v. State
of
Kerala & Ors. 1996 7 SCC 637
Shri Prithvi Cotton Mills v. Broach Borough Municipality 1969 (2) SCC 283
Supra
1989(3) SCC 488 at 517
1964 (2) SCR 608
Supra
(1973) 2 SCR 54
(1975) 2 SCC 274
(1997) 1 SCC 326 para 16
1978 (2) SCC 50
S.R. Bhagwat v. State of Mysore; 1995 (6) SCC 16 paras 12, 15, 18; Re: Cauvery Water
Disputes Tribunal 1993 Supp. (1) SCC 96 (II) Para 76.
M/s Ujagar Prints & Ors. v. Union of India & Ors. 1989 (3) SCC 488, 517
Rai Ramkrishna & Others V. The State of Bihar 1964 (1) SCR 897 at 915
Jawaharmal v. State of Rajasthan: 1966 (1) SCR 890, 905
Supra
Supra
S.S. Gadvil v. Lal & Co. AIR 1965 SC 171, p.177 : See also J.P. Jani v. Induprasad
Devshankar Bhatt: AIR 1969 SC 778, 781; K.M. Sharma v. Income Tax Officer, Ward 13(7),
New Delhi (2002) 4 SCC 339
Commercial Tax Officer v. Biswanath Jhunjhunwalla & Anr.(1996) 5 SCC 626
The collector of Customs, Madras v. Nathella Sampathu Chetty and Anr: 1962 (3)SCR 786,
825; Sanjeev Coke Manufacturing Co. v. M/s. Bharat Coking Coal Ltd. & Anr.; 1983 (1) SCC 147
,
paragraph 25