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  179 ITR 317;  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,  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.  53 ITR 231 (SC); J.P. Jani, ITO v. Induprasad Devshanker Bhatt  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,  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.