2002 (7) TMI 92 - HC - Income Tax

Karnataka Agricultural Income-tax Act 1957 Dissolution - In all these appeals the constitutional validity of the Explanation to section 26(4) of the Karnataka Agricultural Income-tax Act 1957 introduced retrospectively with effect from April 1 1975 by the Karnataka Taxation Laws (Second Amendment) Act 1997 (Act No. 18 of 1997) falls for determination. - we are however unable to accept that the retrospective nature of the Amending Act is valid. The Act if any for the reasons stated above can be held to be valid prospectively and not retrospectively as was held by the Supreme Court in Cawasji s case in similar circumstances.

Issues Involved:
1. Constitutional validity of the Explanation to section 26(4) of the Karnataka Agricultural Income-tax Act, 1957.
2. Retrospective effect of the Karnataka Taxation Laws (Second Amendment) Act, 1997.
3. Interpretation of section 26(4) and section 27 of the Karnataka Agricultural Income-tax Act, 1957.
4. Validity of amendments nullifying judicial decisions.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Explanation to Section 26(4):
The appeals questioned the constitutional validity of the Explanation to section 26(4) of the Karnataka Agricultural Income-tax Act, 1957, introduced retrospectively from April 1, 1975, by the Karnataka Taxation Laws (Second Amendment) Act, 1997. The Explanation clarified that income from crops harvested before the discontinuance or dissolution of a firm or association but received later would be deemed the income of the firm or association in the year it was received or receivable. This was introduced to address the gap where income received post-dissolution escaped tax.

2. Retrospective Effect of the Amendment:
The retrospective amendment aimed to nullify the judgment in L.P. Cardoza v. Agrl. ITO [1997] 227 ITR 421 (Karn), where the court held that pre-dissolution income received subsequently should be taxed in the hands of the recipient and not the dissolved firm. The Supreme Court's judgment in D. Cawasji and Co. v. State of Mysore [1984] 150 ITR 648 (SC) was cited, which held that retrospective amendments to nullify judicial decisions without curing any defect or lacuna in the original law are invalid. The court found that the retrospective effect of the amendment was intended solely to override the Cardoza judgment and was not a valid exercise of legislative power.

3. Interpretation of Section 26(4) and Section 27:
Originally, section 26(4) allowed for the taxation of sums received post-discontinuance as the income of the recipient. Section 27 provided for the assessment of a firm as if it continued to exist until its actual dissolution. The court noted that section 27 did not extend this fiction to post-dissolution income, which was to be dealt with under section 26(4). The amendment introduced by Act No. 18 of 1997 sought to extend this fiction to post-dissolution income, deeming the firm or association to be in existence for the year or years in which the income was received or receivable.

4. Validity of Amendments Nullifying Judicial Decisions:
The court held that while the state has the power to amend laws retrospectively to bridge a lacuna or defect, such amendments should not merely nullify judicial decisions without addressing any defect in the original law. The judgment in Cawasji's case [1984] 150 ITR 648 (SC) was applied, which invalidated retrospective amendments aimed solely at nullifying judicial decisions. The court concluded that the retrospective effect of the amendment to section 26(4) was invalid as it did not cure any defect but merely sought to nullify the Cardoza judgment.

Conclusion:
The court upheld the validity of the Amending Act prospectively but invalidated its retrospective effect. The demand notices for the assessment year 1996-97 were quashed, and the writ appeals were disposed of accordingly. The retrospective amendment was found contrary to the Supreme Court's pronouncement in Cawasji's case, and the state was directed to refund amounts collected under the invalidated proceedings.

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