It has been a tendency in recent Finance Acts to change the position of law in relation to the Income Tax Act through retrospective amendments; in order to overturn judicial decisions against the Revenue. In this context, a question arises as to what extent the legislature can nullify previous judicial decisions through allegedly ‘clarificatory’ amendments; which actually change the position of law.
Undoubtedly, it has been held in Ujagar Prints v. Union of India [1989] 179 ITR 317; [1989] 3 SCC 488, 517 (page 347): “A competent Legislature can always validate a law which has been declared by courts to be invalid, provided the infirmities and vitiating factors 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.” The position is that where the legislation is introduced to overcome a judicial decision, the legislative power cannot be used to subvert the decision without removing the statutory basis of the decision. This proposition is extremely well-settled – it can perhaps be traced back to the prohibition on bills of attainder and has been affirmed by at least one Constitution Bench.
Thus, while there does exist a power to enact retrospective legislation, it is also clearly established that 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…” See: National Agricultural Co-operative Marketing Federation of India v. Union of India, [2003] 260 ITR 548 (SC). First and foremost, there is a strong presumption of prospective application. A law will be retrospective only if the words used must expressly provide or necessarily imply retrospective operation. See: S.S. Gadgil v. Lal and Co. [1964] 53 ITR 231 (SC); J.P. Jani, ITO v. Induprasad Devshanker Bhatt [1969] 72 ITR 595 (SC). Furthermore, while it is undoubtedly true that there is a presumption of constitutionality as to statutes, it is now beyond doubt that “… the presumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain individuals or corporations to hostile or discriminating legislation…” See: RK Dalmia v. Justice Tendolkar, AIR 1958 SC 1938. It is arguable that this principle should apply in the case of retrospective application of taxing statutes. At the same time, one must also take into account the fact that economic/taxing legislations enjoy a stronger-than-usual presumption of constitutionality. Whether the retrospective operation would affect the strength of this presumption is a matter on which the law is unclear. Perhaps more importantly, it can be argued that if an allegedly clarificatory Explanation seeking to get over previous judicial decisions is seen to be in substance amounting to a “new” and “unforeseen” levy – or is in substance a change as opposed to a clarification – the retrospective amendment will be rendered unconstitutional. In a similar situation of a retrospective amendment, the Supreme Court was faced with the argument that “… 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. …” On the facts of that case, the Court (Ruma Pal and Srikrishna JJ) held that the substitution was not in substance a “new” or “unforeseen” burden; and hence rejected the argument. Nonetheless, the Court went ahead to clearly state as a matter of law, “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 19(1)(g) and 14 of the Constitution…” See: National Agricultural Co-operative Marketing Federation of India v. Union of India, [2003] 260 ITR 548 (SC).
The legislature has several times (mis)used its power to enact retrospective changes in taxing statutes. The Finance (No. 2) Act, 2009, itself carries several instances of retrospective changes in the Income Tax Act. The sole purpose behind some of these is to change the legal position after an ‘inconvenient’ interpretation. In doing so, while purporting to ‘clarify’ the provision, the same has been substantially changed, leading to an unforeseen burden on taxpayers. The amendment to the Explanation to Section 80(IA)(13) is just one example. Perhaps the time has come for the judiciary to clarify that total abuse of the legislative power simply to get over unfavourable judicial decisions may not withstand a constitutional challenge.
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With the blessings of Article 20
(1) of Constitution of India- State cannot make any Law/Rule which imposes any- fresh Tax liability or Penalty or Fine or imprisonment on Citizenry, a liability/fine/ penalty/ imprisonment which was not in existent at the time of Citizenry entering into a transaction; or which was not in existent at the time when Citizen has done a particular act.
Like penal laws, fiscal laws too are strictly construed. Like penal laws, One must be told before hand all his liabilities before he intend to venture to his acts. Moreover, There must be certainty to the law.
You make a law wherein certain set of Citizenry are called upon to pay certain Tax/ duty for a certain period. All Citizenry thus in return plan their investments and expenditure.
Thank you,
Sandeep Jalan
Mumbai.
Hello,
There are a few decisions which have held that Article 20 would not apply to ex post facto tax laws; even if they impose penalty. That is true especially considering the recent attitude of the judiciary in refusing to treat penalty proceedings as criminal - they are in the nature of civil provisions as per Dharmendra Textiles. In any case, the bar on ex post facto applies only to criminal laws; and does not bar retrospective taxation as such.
As far as the point that retrospective taxation affects the legitimate expectations of citizens, that is a very valid concern. Normatively, there are doubts at least to me about retrospective taxation. Unfortunately, there can be no estoppel against the legislature - as held right from Motilal Padampat onwards. Practicalyl every case which applies estoppel against the government is at pains to point out that there can be no estoppel against the legislative power. Hence, any checks must come from elsewhere.
I was wondering whether the power which vests with Parliament to retrospectively amend tax laws could be pressed to contend, more forcefully than otherwise, that ambiguous tax provisions ought to be construed in favour of the taxpayer. Of course, it is a well established rule that when two interpretations are possible the one in favour of the taxpayer ought to be preferred, the underlying rationale being that Parliament being the one enacting the law, it could always have worded it unambiguously in favour of the Revenue. But it is one thing to contend that Parliament at the first instance could have worded the law differently, it is something more to contend that it could at anytime amend the wordings with retrospective effect. Thus, shouldn't the interpretative process tend more towards the tax payer than it presently does? Has such an argument been raised, and judicially considered, earlier?
Regards,
Renganath
Advocate, Madras High Court
Notwithstanding the legal position arrived in Dharmendra Textiles case, the Article 20 flows from constitution of India. The constitution of India is not an act of legislature. No one will dispute, constitution of India is a supreme and fundamental governing volume. This epic governing volume makes a categorical announcement in the introductory passage that people of India are the architect of this governing volume. The people of India have drafted this mammoth governing volume. This fundamental governing volume cannot be interpreted like any other statutes of legislatures. This fundamental governing volume is to be construed keeping in mind what the right minded people have decided for themselves. Can it be presumed that people of India has in article 20(1) allowed the Legislature to impose taxes on them retrospectively.
Hello,
The debates behind Article 20 reveal that it was intended to apply only against criminal laws operating ex post facto. The wording of Article 20 also seems to support this conclusion. It is on this basis that it has been held that Article 20 does not apply to ex post facto taxation. Of course, if it is a prosecution (say for evasion u/s 276C) then that cannot be applied retrospectively. However, insofar as the charge of tax is concerned or insofar as the retrospective removal of benefits is concerned, despite this possibly being inherently unfari, Article 20 offers no remedy. It might be possible however to build the line of argument suggested by you into Article 14, especially since Article 14 has been interpreted to be a guarantee against all forms of arbitrariness (Royappa's case).
Article 20(1) states: "No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence"
Here, in both linbs, 'offence' is essential. In the case of a retrospective tax measure, there is no 'offence' as such - there is no retrospective 'offence' created, nor is there any penaly inflicted greater than at the time of te 'offence'
You have stated:
"It has been a tendency in recent Finance Acts to change the position of law in relation to the Income Tax Act through retrospective amendments; in order to overturn judicial decisions against the Revenue. In this context, a question arises as to what extent the legislature can nullify previous judicial decisions through allegedly ‘clarificatory’ amendments; which actually change the position of law."
(I am not an expert in constitutional law or tax law so the below comments might not even make sense.)
You speak about retrospective clarificatory tax amendments (RCTA). In this regard, it should be noted that RCTA may either be
a) following a decision wherein the Supreme Court/ High Court declares a provision/ statute as invalid and the RCTA nullifies the Supreme Court/ High Court decision
b) following a decision wherein a tribunal/ authority (not being a High Court/ Supreme Court) rejecting the view of the Revenue and upholding the view of an assessee with regard to interpretation of a provision of law.
This distinction is crucial while examining the validity of an RCTA because I don't think there is any prohibition on the Legislature to enact an RCTA in case of (b).
You have stated:
"The Finance (No. 2) Act, 2009, itself carries several instances of retrospective changes in the Income Tax Act. The sole purpose behind some of these is to change the legal position after an ‘inconvenient’ interpretation."
It must be noted that the Finance (No. 2) Act, 2009 contains RCTA that belong to class (b).
Would love to have your comments on this dichotomy and also on restrictions on the legislature to enact an RCTA belonging to class (b).
Hello,
Thanks for your comments. The point you raise about there being a distinction between a decision of the superior judiciary (SC/HC) and other authorities (say, ITAT) is very interesting; though I must disagree with you at this juncture. I welcome your further thoughts on the issue.
As you pointed out, the amendment in Finance (No. 2) Act, 2009 [particularly on Sec. 80IA which has been challenged before the Bombay HC] was to negate the effect of a Tribunal decision based on an interpretation of Section 80IA. I believe the relevant tribunal decision is of the Mumbai Bench in the case of Patel Engineering; and there is also a Jaipur Bench decision (though I am not sure of this).
Even where the decision is of the High Court or the Supreme Court, the legislature can enact a validating amendment to negate the impact of the decision - the test in that case is, does the amendment change the legal basis of the decision or does it merely negate the decision? In other words, is the amendment one which changes the law retrospectively; or is it one which in substance does nothing but say "The decision in so-and-so is not to be enforced". The former is valid, even if the effect is to negate a decision of the superior judiciary. The latter is invalid; as it amounts to the legislature usurping a judicial function.
The rationale thus seems to stem from the principle of separation of powers. This rationale would apply, in my opinion, to all decisions of judicial authorities which have a judicial function to perform. The Tribunal in interpreting a statute does have a judicial function to perform and being a (quasi?)judicial authority is entitled to perform that function; so if the legislature passes an amendment of category (b) which negates a Tribunal judgment without removing the legal basis of the judgment (in the form of changing the underlying law), then I believe that the amendment would be ultra vires.
The rationale is not that the legislature is taking away the power of judicial review exercisable by the higher judiciary, but that the legislature is exercising a primarily judicial function as opposed to a legislative function; and this is violative of separation of powers.
It is open to the legislature to negate the effect of a Tribunal judgment by changing the basis of that judgment - but, the legislature can do the same in respect of a judgment of the higher judiciary as well. Of course, if the judgment of the higher judiciary is based on a constitutional point, then a validating act may suffer from the same constitutional infirmity. In those cases, a constitutional amendment may be needed. If the judgment of the higher judiciary is based on a point of statutory construction/interpretation/a particular assessment being ultra vires the parent Act; then the legislature will be entitled to enact a validating law; provided that the law takes away the basis of the decision; and not the decision directly. I believe that the same test applies to both the cases.
So far I have understood the categories (a) and (b) as being divided on the basis of the authority/court which has decided the point earlier. But if the division is based on the fact that (a) is based on the statute being invalid and (b) is based on an interpretation of the statute; it is open for the legislature in category (a) to enact a retrospective validating law which takes care of the infirmity which has been pointed out in the earlier decision. For instance if a statute is struck down as being ultra vires Article 14; a retrospective validating act can be enacted if the reason why the earlier statute was held to be ultra vires is not present in the validating act.
(This is of course independent from the point that the amendment is arguable harsh, oppressive and destructive of vested rights- consequently being arbitrary and invalid under Article 14)
"Thus, shouldn't the interpretative process tend more towards the tax payer than it presently does? Has such an argument been raised, and judicially considered, earlier?"
I have not been able to find a case where this has been considered. The difficulty perhaps might be that the rule (construction favouring the taxpayer) is applied only when two views are reasonable possible. In such a case, the view in favour of the assessee is preferred. In the case of a retrospective amendment where two views are possible, the view in favour of the taxpayer will be preferred. But this is the same even in prospective statutes - I am not sure how the fact of the amendment being retrospective will allow ne to prefer the tax payer any more than otherwise. For to do that, one will have to say that even when the literal meaning is clear, courts must strive to read the language in favour of the taxpayer. I am not sure that the Court will be willing to do this. Or whether, considering that ultimately they must interpret the law as it stands, they will be entitled to do so. What they can, perhaps, do is give retrospective statutes much less deference in terms of the prsumption of constitutionality - besides this, in practical terms - will Courts be able to do anything more which is different from what they would anyway do as a matter of interpreting tax statutes? If they can, I agree that they should - but not to the extent of applying the principle when the plain meaning admits of no ambiguity at all. Perhaps they can be more open to considering something as an 'ambiguity'? I am not sure about this and would love to hear your thoughts.
1. Any retrospective amendment which is violative of the constitution is, for obvious reasons, not valid. Such constitutional invalidity of the retrospective amendment may be:
a. due to contravention of some provision of the constitution, or
b. because the retrospective amendment changes the nature of the tax imposed and imposition of such a tax is not within the competence of the legislature.
2. A tax may be illegally collected by the Revenue because:
a. of constitutional invalidity of the concerned provision levying tax due to reasons stated in 2, or
b. the judiciary (authority/ tribunal/ court) might be of the view that the reading afforded to a legislative enactment by the Revenue that is wider than what the legislative enactment actually provides for. I was wrong, and you were right, in not contemplating that even a court (High Court or Supreme Court) could declare illegal collection of a tax by reading the statute more broadly than what the statute actually provides for.
A competent court may declare illegal such collection of tax.
3. Where the judiciary purports to provide an interpretation to a provision enacted by the Legislature, the Legislature is free to abrogate such interpretation of the judiciary by enacting a clarificatory amendment retrospectively. There is nothing wrong in such clarificatory amendment having a retrospective operation because the judiciary has misinterpreted a law enacted by the Legislature and the Legislature can very well correct such misinterpretation. Such a retrospective clarificatory amendment clarifying the proper interpretation shall hereinafter be called as (RCAI) The legislature in a RCAI may simply provide an explanation and state that the term or phrase should be interpreted in the way provided in the explanation and not otherwise. Such a RCAI is perfectly valid (unless it comes within 2 above).
Let’s consider this hypothetical example: there is this Act called as Cow Tax Act “the owner of a cow shall pay a tax of Rs. 5 annually”. The owner of a buffalo, Mr. Cowboy, does not pay the said tax. Revenue asks him to pay the tax because, according to it, “cow” would also include “buffalo”. Mr. Cowboy approaches the judiciary and the judiciary holds that a literal reading of the provision does not support Revenue’s contention that cow would also include buffalo. Now the legislature amends the provision retrospectively and states that from the date of enactment of the Cow Tax Act (which is, say, three years before the amendment) cow would also include buffalo. The legislature is clearly entitled to do so.
(Contd.)
(contd. from prev. comment)
4. Supposing, in the said hypothetical cow-buffalo example, the Legislature, while enacting the RCAI, states in the Statement of Objects and Reasons, that:
a. the judicial decision in so-and-so is wrong as the decision seeks to restrictively read a statute and to declare invalid the correct interpretation of the statute as provided by the Revenue, that the term cow shall also include buffalo, and that an explanation providing that cow shall also include buffalo shall apply with effect from the date of coming into force of the Cow Tax Act, or
b. instead of (a), it is stated that the judicial decision in so-and-so shall not be enforced and that judiciary has simply misconstrued the statute and the Revenue was right, or
c. instead of (a) or (b), it is stated that the judicial decision in so-and-so shall not be enforced.
The effect of 4(a) or (b) is the same, notwithstanding the impolite approach by the Legislature to abrogate the decision in (b). Here, the judiciary has not performed the function of judicial review of a legislative action on the touchstone of the constitution. While judicially reviewing a taxing statute on the touchstone of the constitution, the judiciary is the master because the task of enforcing the constitution vis-à-vis the legislature is given to the judiciary. But when judiciary is reviewing an act of the executive in assessing the liability of an assesee to pay tax on the touchstone of the constitution, the judiciary may have the constitutional authority to make sure that the executive acts within the statutory limits, but the legislature is the master here, because the words were the legislature’s and the legislature is free to call a buffalo as a cow.
You are perhaps right in stating that while enacting a RCAI, the legislature shall not state amend the taxing statute by saying that the decision shall not be enforced. But then what is the difference between saying, on the one hand, that the interpretation of the judiciary shall not be enforced, and, on the other hand, that the interpretation of the judiciary is wrong and supplying the right interpretation by way of an explanation or otherwise. In effect, the Legislature ought to choose the former, not because of “separation of powers” doctrine but because of the simple reason that legislature should be polite in saying that the judiciary was wrong- the legislature should not say that the judiciary’s decision should not be enforced or that the judiciary’s decision should not be enforced because it is wrong. Rather, the legislature should couch its language by saying that the interpretation provided by, say the tribunal, was not in accordance with the legislative intent and saying that “cow” shall also include “buffalo”.
(contd.)
(contd. from previous comment)
In the context of the Finance (No.2) Act, 2009, S. 37(a) defines the term “undertaking” through an explanation effective from the 1st day of April, 2000. The purpose of this explanation, according to the Memorandum to the Bill seems to be:
“The term "undertaking" in sub-section (9) has not been defined. Therefore, in the context of mineral oil, the meaning of the term "undertaking" has been the subject matter of considerable dispute. The tax payers have been holding the view that every well in a block licensed constitutes a single "undertaking" and accordingly the tax holiday is available separetely for each such well. However, this view is against the legislative intent. Accordingly, it is proposed to amend sub-section (9) by inserting an Explanation so as to clarify that for the purposes of claiming deduction under sub-section (9), all blocks licensed under a single contract, which has been awarded under the New Exploration Licencing Policy announced by the Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL, dated 10th February, 1999 or has been awarded in pursuance of any law for the time being in force or has been awarded by Central or a State Government in any other manner, shall be treated as a single "undertaking". This amendment is proposed to take retrospective effect from the 1st April, 2000 and will, accordingly, apply in relation to assessment year 2000-2001 and subsequent years.” (emphasis not in the original)
The above quote seems to indicate that the tax payers have held some erroneous view which is sought to be corrected by the Legislature. It may be noted that the tax payers view was affirmed by the CIT (Appeals) and the ITAT, Ahmedabad. This amendment seeks to clarify that that the interpretation of the term “undertaking” given by the said authorities/ tribunals and the tax payers was wrong and the Revenue’s interpretation was right. This is an example of a RCAI that is couched in a politically correct language that does not even call the judiciary wrong in interpreting the term “undertaking”, when in reality the Legislature seeks to abrogate the interpretative decision of the ITAT!
My point is that it, in terms of consequence, it does not matter if the RCAI is enacted stating that the decision of the judiciary shall not be enforced or by “removing the basis” of the judicial decision. But in the case where a taxing statute (or a retrospective amendment to a taxing statute) is declared as unconstitutional, it would MATTER if the legislature simply states that the judicial decision declaring the taxing statute to be ultra vires the constitution shall not be enforced, because, in such a case, the constitution (and thereby the judiciary) is the master.
Thanks for the comment - I will post my thoughts later after going through the comment in detail. I must clarify that I was referring to the retrospective amendments through the explanation inserted at the end of Section 80(IA) (after clause 13) which applies in the context of clause 4, as opposed to clause 9.
Thanks a lot for highlighting several important points related to but not discussed in the original post.
Yes, you are correct. While your post speaks about explanation inserted at the end of Section 80(IA) my comment (with all its typos!!)speaks of RCIA to Section 80-IB(9), in particular and RCIA, in general.
I must confess that I ought to have made myself clearer. My comment was not on the interpretation of the retrospective Amendment Acts. Rather, it related to the general principles of interpretation of taxation statues unsullied by retrospective amendments - in the case of such statutes where there is an ambiguity, the interpretation in favour of the taxpayer is preferred. The reason advanced is that the Act being one which emanates from the legislature, it could always have adopted a more explicit wording (a reason similar to contra proferentem); my point was this - is the above the only reason to prop up the said rule of construction, or has the reason, that the legislature always has the power to amend the law retrospectively to make its stand unequivocal (a unilateral power that a contracting party does not have), also been pressed in service to justify the said rule? In other words, should not this rule of construction be stronger than the contra proferentem rule, or at any rate rest on stronger foundations?
Whatever it be, at some level, the issue is arguably one of degree. Again, my comment was/is perhaps hyper-academic. Or, is it ? As you ingeniously put it, should the courts be more ready to infer ambiguity? In my opinion, yes - the fact that the power of the legislature to make itself clear existed not only in the past, but exists in the future as well, should probably make the courts more ready to accept a situation as ambiguous. Or, to state it in a manner less unpalatable to the legislature (and the judiciary), taxation statutes ought to be interpreted (to borrow and tweak the language of burden of proof)in favour of the Revenue only if the position is so beyond ALL doubt - there ought to be no weighing of reasons in favour of the tax-payer against those in favour of the exchequer. One hopes the courts in a dialectic exercise adopt the above attitude to interpretation as an anti-thesis to the increasing tendency of our Parliament to be wise, if at all, after the initial legislative event.
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