TMI Blog1990 (10) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer rejected the claim of the assessee for depreciation on the ground that as deduction had already been allowed in the previous years under section 35 in respect of these items, the assessee was not entitled to claim any depreciation. In appeal, the Appellate Assistant Commissioner set aside the order of the Income-tax Officer and held that deduction allowable under section 35 of the Income-tax Act and depreciation claimed under section 32 of the Income-tax Act are disjunctive and cumulative. Both can be allowed, though not in the same year. The Tribunal has also held that although a deduction has been allowed under section 35 in respect of these items in a previous year, the assessee is entitled to depreciation under section 32. From this finding of the Tribunal, the following question has been referred to us by the Tribunal under section 256(1) of the Income-tax Act, 1961 : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation allowance given under section 32(1) and deduction given under section 35(1)(iv)/ 35(2)(ia) of the Act, are disjunctive, cumulative and not alternative and, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 35, the assessee is denied these claims for depreciation. Hence, the present writ petition in which the assessee has challenged the retrospective operation of this amendment. Mr. S. E. Dastur, learned counsel for the assessee, contends that taking away a benefit granted to the assessee under section 35 retrospectively with effect from April 1, 1962, violates article 19(1)(g) and article 14 of the Constitution, while it is the contention of Mr. Jetley, learned counsel for the Department, that the amendment is merely clarificatory and made in order to carry out the original legislative intent. Hence, retrospective effect given to the amendment is justified and ought not to be considered as violating any fundamental rights under article 19(1)(g) of the Constitution. Legislative history : In order to examine these contentions, it is necessary to look at the legislative history of the benefit given under the Income-tax Act in respect of capital assets used for scientific research related to the business of the assessee. The necessity to give an incentive regarding expenditure on scientific research was first felt in the U. K. after the Second World War. The U. K. Finance Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position, e.g., prevent double allowance or excessive allowance. A provision in the Finance Bill is designed to give retrospective effect for one year to the grant of this allowance. (emphasis supplied by us). It is thus clear that when similar provisions were introduced in the Indian Income-tax Act, 1922, in the year 1946, the draftsman had before him the U. K. Finance Act on the basis of which the provision was introduced. Section 10(2)(xiv)(d) of the Indian Income-tax Act, 1922, provided that, in respect of any expenditure of a capital nature on scientific research related to the business of the assessee, where a deduction was allowed for any previous year under this clause in respect of expenditure represented wholly or partly by any such asset, no deduction shall be allowed under clause (vi) or clause (vii) for the same previous year in respect of that asset. Clauses (vi) and (vii) deal with depreciation. Under section 10(2)(xiv) of the Indian Income-tax Act, 1922, deduction was to be allowed in respect of such capital assets over a period of five years in five equal instalments. Now, on a comparison of the provisions in the U. K. Act with those introduced in the Indian I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal expenditure incurred in any previous year shall be deducted for that previous year ... (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (i), (ii), (iii) and (vi) Of subsection (1) or under sub-section (1A) of section 32 for the same previous year in respect of that asset. Once again section 35(2)(iv) was retained in its original form. As a result of Finance (No. 2) Act, 1980, section 35(2)(iv) now stands amended as from April 1, 1962, to read as follows : 35. (2) For the purposes of clause (iv) of sub-section (1),- . . . (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii), (iia), (iii) and (vi) of sub-section (1) or under sub-section (lA) of section 32 for the same or any other previous year in respect of that asset: The amendment, therefore, makes a material change in the law. Instead of disallowing depreciation in the same year in which a deduction under section 35 is claimed, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds might seriously affect the fiscal policy of the Government. The taxes already collected may have been spent on various requirements of the State. Retrospective validation of a taxing statute in such circumstances has been upheld. Therefore, normally, unless there are compelling reasons for making a retrospective amendment in public interest, such a retrospective amendment is not enacted. And when a retrospective amendment is enacted without any compelling reasons of public interest, it runs the risk of being declared unreasonable or arbitrary and violative of articles 14 and 19(1)(g) of the Constitution. In the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, the Supreme Court was required to consider the constitutional validity of the Finance (No. 2) Act 1980, in so far as it amended section 80J by incorporating the provisions of rule 19A, as sub-section (lA) in section 80J, with retrospective effect from April 1, 1972. The majority judgment of the Supreme Court held that the amendment was merely clarificatory in nature and was, therefore, valid even though it operated retrospectively. The majority held that the original rule 19A was a valid exercise of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te may be relieved of the liability of refunding any tax already collected. But he said (at p. 383): The withdrawal with retrospective effect of any relief granted by valid statutory provision to an assessee, depriving the assessee of the benefit of the relief vested in the assessee, stands on a footing entirely different from the footing which may necessitate the passing of a Validating Act seeking to validate any statutory provision declared unconstitutional. When Parliament passes an amendment validating any provision which might have been declared invalid for some defect or lacuna, Parliament seeks to enforce its intention which was already there by removing the defect or lacuna . . . However, the withdrawal or modification with retrospective effect of the relief properly granted by the statute to an assessee which the assessee has lawfully enjoyed or is entitled to enjoy as his vested statutory right, depriving the assessee of the vested statutory right has the effect of imposing a levy with retrospective effect for the years for which there was no such levy and cannot, unless there be strong and exceptional circumstances justifying such withdrawal or modification, be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and seek a windfall from the Legislature's mistakes. It said, in testing whether a retrospective imposition of a tax operates so harshly as to violate the fundamental right under article 19(1)(g), the factors considered relevant include the context in which retroactivity was contemplated such as whether the law is one of validation of a taxing statute struck down by courts for certain defects, the period of such retroactivity and the defects and extent of any unforeseen or unforeseeable financial burden imposed for the past period, etc. (p. 348). The Supreme Court reaffirmed its decision on this point in Empire Industries Ltd.'s case [1986] 162 ITR 846, upholding the validity of retrospective amendment. There can, therefore, be no doubt that a taxing statute which validates imposition of a tax earlier held invalid by a court of law can be retrospective in operation and be not, on that account, considered unreasonable or violating article 19(1)(g), especially when the tax has already been collected. Curative Acts : Similarly, in a number of cases where the retrospecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislation. The amendment was necessitated because of the Legislature's failure to bring out clearly in the principal Act, its intention to separate processed or split foodgrains, and the retrospective amendment became necessary as otherwise the State would have had to refund large sums of money. It, therefore, held that the retrospective levy was not violative of article 19 (1) (f) or (g). We need not consider in detail all such cases where retrospective amendments to remove lacunae in existing legislation have been upheld. (See in this connection Pioneer Match Works v. Deputy CTO [1974] 34 STC 266 (Mad) and Shiv Dutt Rai Fateh Chand v. Union of India [1984] 148 ITR 664 (SC)). Shiv Dutt Rai's case [1984] 148 ITR 664 (SC) dealt with a penalty under the Central Sales Tax Act. In the case of Khemka and Co. (Agencies) P. Ltd. v. State of Maharashtra, AIR 1975 SC 1549, the Supreme Court held that a penalty not being merely an adjunct to or consequential to an assessment, could not be levied in the absence of an express provision under section 9 of the Central Sales Tax Act. Section 9 was retrospectively amended. This was challenged in Shiv Dutt Rai's case [1984] 148 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment could not be brought within the meaning of the word business as understood in the commercial world and as interpreted by courts of law. The effect of such retrospective operation of the amendment would be to impose an unexpected liability in respect of transactions which, when they took place, were not subject to any charge or liability under the Act. The retrospective amendment, the court said, imposed an unreasonable restriction upon a person's fundamental right guaranteed under article 19(1)(f) and (g) of the Constitution and was, therefore, invalid. A similar view was taken by the Division Bench of the Calcutta High Court in the case of Bengal Paper Mill Co. Ltd. v. CTO [1976] 38 STC 163. Similarly, a retrospective amendment which does not remove the lacuna which it intended to remove, but merely legislates to impose a new burden has also been held to be unconstitutional. In the case of D. Cawasji and Co. v. State of Mysore [1984] 150 ITR 648 (SC), the Mysore State Government, with effect from April 1, 1966, had started collecting sales tax on the sale price of arrack as well as on the excise duty and cesses payable on it. So computed, the sales tax came t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of authorities of the Supreme Court as well as of the other High Courts where the courts have expressly examined the question of constitutional validity of retrospective legislation, inter alia, on the ground of such retrospective legislation violating articles 19(1)(f) and (g) of the Constitution. We, therefore, respectfully differ from the view taken by the Punjab and Haryana High Court that retrospective legislation cannot be examined in the light of articles 19(1)(f) and (g) in order to determine whether it is reasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) of the Constitution (now only article 19(l)(g)). It is submitted by Mr. Jetley, learned counsel for the Department that, in the present case, the amendment should not be considered as taking away retrospectively the benefit which was originally granted. The amendment should be considered as validating in nature or as removing a lacuna in the existing law to bring out the true legislative intent. This contention cannot be accepted looking to the legislative history of the provisions incorporated in sections 35 and 32 of the Income-tax Act, 1961. In order that the amendment may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, proposed to make an amendment of a clarificatory nature in the aforesaid section so as to bring out the intention clearly . It is not at all clear how it can be said that the original legislative intent was not to grant depreciation for any previous year in respect of such assets, nor is it clear how such an amendment can only be considered as clarificatory. A bare reading of section 35(2)(iv), as it stood prior to the amendment, clearly shows that where a deduction is allowed under section 35 for any previous year, no depreciation in respect of the same asset can be granted under section 32 for the same previous year. The phrase the same previous year clearly indicates that there is a prohibition against granting of depreciation only in that previous year in which deduction is allowed under section 35. By necessary implication, the claim for depreciation under section 32 can be granted if it is for any previous year other than the previous year in which deduction is allowed under section 35. It was contended by Mr. Jetley that sections 35 and 32 are mutually exclusive. But there is nothing in the language of section 32 or section 35 which would indicate that the two s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee, when a deduction had been allowed under section 35, had been consistently negatived by the Income-tax Appellate Tribunal in number of decisions. Only in 1978, for the first time, a Bench of the Tribunal at Madras held to the contrary. However, a Special Bench of the Tribunal, constituted for this purpose at Bombay, negatived the view taken by the Tribunal at Madras and upheld the earlier view taken by the Tribunal. The Karnataka High Court, in the case of CIT v. Indian Telephone Industries Ltd. [1980] 126 ITR 548, interpreted section 35(2)(iv) as it stood prior to the 1980 amendment and held that section 32 which provides for allowance of depreciation is not subject to any other allowance provided in the Act, and, in particular, not subject to the allowance to be made under section 35(2)(ia). Neither does the latter provision restrict the grant of depreciation allowance on the ground that relief is granted under that section. It said (at p. 549) : The prohibition is only in regard to grant of depreciation allowance in the same previous year in which an allowance under section 35 is given. It also referred to clause (v) of section 35(2) which provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... una in the existing law, the length of the retrospective operation of a fresh levy does become relevant while considering the extent of hardship which the assessee would suffer if long retrospectivity is given to such a new levy. For example, in the instant case, the assessee has set out in the petition the effect of the retrospective operation of the present amendment on the assessee. Over the last about 14 years, the assessee points out, it has spent over ₹ 2.46 crores on research and development activity related to its business. The assessee has pointed out that it has undertaken scientific research and development programmes on such a large scale on the basis of the tax benefits available under sections 32 and 35. In respect of its income-tax liability, the assessee has proceeded on the basis that it is entitled to depreciation on scientific research assets for the previous years in which a deduction was not claimed in respect of these assets. The annual report of the directors to the shareholders takes into account the tax liability calculated on the basis that the assessee is entitled to depreciation in respect of scientific research assets. Based on such provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istent view of the Tribunal. As a result of the retrospective amendment in section 35(2)(iv), the assessee is suddenly faced with a liability for additional tax which would exceed ₹ 47 lakhs. As a result, the debt equity ratio of the assessee will be affected. It would result in paucity of funds and reduction of credit facilities adversely affecting the projects already under way. The assessee contends that, on the basis of internal accruals calculated on the above basis, the assessee has decided to put up a Methyl Chloride Chlorophilanez Project with an expected investment of ₹ 8 crores and an Antioxidants project with an expected investment of ₹ 2 crores. The retrospective amendment of section 35(2)(iv) would adversely affect the petitioners' right to carry on business. The assessee has also submitted that, in the light of the law as it stood, it has made representations to the public and to financial institutions and other authorities, which representations would be rendered incorrect by the retrospective amendment of section 35(2)(iv). It may result in the assessee violating various provisions of law. The assessee also contends that it may be liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(g) of the Constitution. The assessee whose assessments have been completed prior to the amendment are not affected by such an amendment while only those assessees whose assessments are pending or can be reopened, would be deprived of the benefits which were earlier available. The amendment, therefore, also violates article 14 of the Constitution. Mr. Jetley, learned counsel for the Department, relied upon a decision of this High Court in the case of T. Khemchand Tejoomal v. CIT [1986] 161 ITR 492 as also the decision in the case of Union Carbide India Ltd. v. CIT [1987] 165 ITR 678 (Cal), Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836 (Kar) and the case of Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224 (AP). All these decisions deal with section 35(2)(iv), as amended in 1980. All these decisions are to the effect that, in view of the amendment of section 35(2)(iv), an assessee cannot now claim depreciation in respect of capital assets used for scientific research relating to the business of the assessee in respect of which a deduction has been allowed under section 35. These cases merely interpret the law as amended. They do not deal with the question at issue before us an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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