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2015 (3) TMI 723 - SUPREME COURT

2015 (3) TMI 723 - SUPREME COURT - [2015] 372 ITR 590 (SC), 2015 AIR 1912, 2015 (3) SCR 630, 2015 (11) SCC 462, 2015 (4) SCALE 94 - Validity of an explanation added retrospectively to Section 26(4) of the Karnataka Agricultural Income Tax Act - Held that:- 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 .....

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ay of tax penalty, etc. - 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 notwithstandi .....

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ved 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 ha .....

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egal foundation on which the Cardoza's case was built is retrospectively removed, something which is well within the legislative competence of the legislature. Appeal allowed. - CIVIL APPEAL NOS. 8617-8635 OF 2003 - Dated:- 17-3-2015 - A.k. Sikri And Rohinton Fali Nariman JJ For the Appellant : Mr. V. N. Raghupathy, Adv. Mr. Parikshit P. Angadi, Adv. Mr. Sanjay R. Hegde, Adv. For the Respondent : Mr. G. Sarangan, Sr. Adv. Mr. Sanjay Kumar, Adv. Mr. R. N. Keshwani, Adv. Judgment R. F. NARIMAN, J. .....

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ct reads as follows: - Reason: 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 t .....

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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 secti .....

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ve 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 .....

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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 b .....

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y 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 Ben .....

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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 imp .....

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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, h .....

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inal 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 re .....

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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 th .....

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n: - 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 .....

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ce 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 .....

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ation (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 .....

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ivision 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 th .....

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eferred 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 the .....

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se 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 fro .....

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lected 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, educatio .....

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n 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 ret .....

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n 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 11 not appear to have been properly considered by the High Court and the High Court in our view was no .....

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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 retr .....

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ence 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 l .....

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he 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 .....

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e 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 th .....

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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 unders .....

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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 amend .....

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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 concer .....

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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 .....

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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 ef .....

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x 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 Const .....

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ad 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 i .....

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