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Assistant Commissioner of Agricultural Income Tax & ors. Versus M/s. Netley 'B' Estate & ors.

2015 (3) TMI 723 - SUPREME COURT

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 been included in the total income of the person who carried on the business had such sum been received before such discontinuance. S .....

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rence 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 a .....

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ction 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 hands of the dissolved firm. . All that the legislature has done in the present case is to say that with effect from 01.04.1975, disso .....

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petence 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. The present set of appeals are concerned with the validity of an explanation added retrospectively to Section 26(4) of the Karnatak .....

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ns 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 the previous year. (2) Any person discontinuing any such business shall give to the Agricultural Income-tax officer notice of such di .....

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e-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 section 18 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub .....

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." 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 firm or association of persons as if no such discontinuance or dissolution has taken place and all the provisions relating to the l .....

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he 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 been included in the total income of the person who carried on the business had such sum been received before such discontinuance. Se .....

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nvolved 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 Bench after setting out the aforesaid provisions as follows: - "We are, therefore, unable to hold that under section 27 the dissol .....

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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 imply dissolution of the firm. A firm may continue to exist but may discontinue carrying on a particular business. But where a firm is .....

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ll 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, has pointed out that since the sale proceeds received is income relating to agricultural activity carried on during the earlier years .....

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ld 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 reading of this judgment, two things become clear. Section 27 of the Act would not help in answering the question before the Court as .....

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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 through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or associa .....

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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 or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in exi .....

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ded. 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 the firm shall be deemed to be in existence for such year for the purposes of assessment. It will be noticed that by this amendment, .....

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e 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 repelled the challenge basically on the ground that the explanation only clarified the main provision and therefore did not go beyon .....

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d 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 the Division Bench, in the statement of objects and reasons for the 1997 amendment, it was held that the object of the amendment was t .....

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ne 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 there was, in fact, no lacuna to be cured, the legislative exercise of retrospective amendment undertaken would be bad as there was no .....

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ent 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 from paragraph 18 of the judgment which his set out hereinbelow: - "In the instant case, the State instead of remedying the defect .....

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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, education cess and health cess; but, in any event, the State Government has not purported to do so through the Amending Act. As a result of .....

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s 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 retrospective effect is in the facts and circumstances of the case clearly arbitrary and unreasonable. The defect or lacuna is not even .....

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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 not right in holding that "by the enactment of Section 2 of the impugned Act the very basis of the complaint made by the petition .....

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e 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 retrospective levy. The first reason given was that, in the facts and circumstances of the case, retrospectively enhancing of the levy o .....

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dgment 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 legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income tax, insofar as they receive i .....

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th 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 of Mysore on which too reliance was placed by Shri Vaidyanathan, learned counsel for the appellants, Sales tax on liquor was levied .....

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he 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 the licensees pursuant to the aforesaid judgment of the High Court. The Amendment Act was questioned in the High Court but was upheld. .....

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ith 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 understood as supporting the appellant's submission nor can it be read as militating against the well-accepted power of Parliament whi .....

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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 amendment so far as it related to retrospectivity pointing out that the lacuna pointed out by the court was not cured and the judgment co .....

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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 concern and endeavour to preserve judicial power equally must be guarded to maintain the delicate balance devised by the Constitution betw .....

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dating 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 with the rights guaranteed in Part III of the Constitution. (7) The court does not have the power to validate an invalid law or to l .....

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egislative 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 effect from a particular date. The legislature can change the character of the tax or duty from impermissible to permissible tax but t .....

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urt 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 Constitution and the legislature must have competence to do the same." We are concerned in this case directly with principles 8 and .....

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s 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 in nature should not be interpreted to give a retrospective effect to take away a right or liability which was created for the first .....

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