RETROSPECTIVE AMENDMENT: A TRIUMPH OF BUREAUCRATIC OBSTINACY OVER GOOD SENSE?

[Siddarth Malhotra]

EXORDIUM

India is one of the fastest growing economies of the world and even in such unprecedented times many experts contemplate India to make a V-shape recovery after economy suffered on account of lockdown and corona virus pandemic. The taxation policies are expected to play a vital role in entire redevelopment process of the economy.

Imposition of taxes has always been a subject matter of controversy and litigation. The critics has always visualised it as a legalised loot, where as the ones advocating it has always presented it as an apparatus to achieve elusory dream of egalitarianism through continuous public welfare. The factual position, however, lies somewhere in between the two. Jean-Baptiste Colbert once said

“The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing”.

Indian era of indirect taxation has taken a major leap i.e. the economy has transformed from old multiple indirect tax laws to a unilateral code GOODS AND SERVICE TAX in 2017. The intention behind such a leap is to raise indirect tax collections and transform the entire indirect tax structure into single market “ONE NATION ONE TAX” to avoid tax evasion as well as to remove the cascading effect.

The phase of evolving a perfect GST regime, however, is still in its probationary period and is struggling for perfection on both State and well as Central level after giving due consideration to the Legislature, the Judiciary and other stake holders.

Over the period of three years under GST regime, Government has introduced/amended various provisions by way of retrospective amendments. Some of these amendments seems to be justified when read in the light of constitutional provisions but most of these amendments have been introduced without proper in-depth analysis.

A retrospective amendment to an enactment is bound to have some implications not only to existing/ongoing contracts but also on completed transactions and may even impact the accrued rights and remedies so much so that reopening of completed assessments and settled cases.

Such intimidating impact makes it worthy enough to discuss the validity of retrospective amendments to tax statute. This is more so when such amendments are made to overturn the judicial decisions which are rendered against revenue.

LEGISLATIVE COMPETENCE

The legislature, over the period of three years, has made gross abuse of its power to bring about retrospective amendments under GST statute more particularly to render the judgement of Courts, so pronounced against the revenue, to nullity.

Most recent being amendment to section 140 of CGST Act, 2017 to nullify the judgement of Hon’ble Delhi High Court wherein the words "within such time and", which were not initially present in section 140, were added retrospectively w.e.f. 01.07.2017 by the Finance Act, 2020 and the said amendment has been made effective vide Notification No. 43/2020-Central Tax dated 16.05.2020 effectuating Section 128 of the Finance Act, 2020 from 18/05/2020 retrospectively amending Section 140 of the Act.

This practice of bringing changes in taxation statute by virtue of retrospective amendments was also prevalent in erstwhile regime and can also be discerned in Income Tax Act. The Vodafone Case is one of the best example wherein the Hon’ble Apex Court pronounced its verdict in favour of the telecom company, wherein the Hon’ble court held that the tax department did not have the jurisdiction to tax the transaction. Following this judgement, the government used its master weapon and brought an amendment to the Income Tax Act.

By committing such an act, the government not only succeeded in its agenda of unjust enrichment by imposing tax liability on similar transactions, but also faced a mass revolt by triggering widespread criticism. The legislative competence of Government to amend the law retrospectively came under scanner.

Over the years, though the Apex Court accepted a well settled principle that tax laws are subject to discipline of Part III of the Constitution i.e. Fundamental Rights and submissive to the ground that they are violative of Art. 14 i.e. Equality before Law but outrightly rejected the contention that the tax laws would be rendered arbitrary or violative merely due to their retrospectivity. The Supreme Court had well accepted the power and competence of legislature to make the laws retroactively.

 In the case of CHHOTABHAI JETHABHAI PATEL AND CO. VERSUS UNION OF INDIA 1961 (12) TMI 1 - SUPREME COURT, the Court followed and cited with approval, the decision of the privy Council in Colonial's sugar refining Co Ltd versus Irving which had stated the proposition with clarity-

“if there was a power to impose taxation conferred by a constitution, the legislature could equally make the law retroactive and impose the duties from a date earlier than that from which it was imposed.”

The aforesaid principle as laid down in 1962 was consistently followed and adopted in plethora of cases wherein retrospective amendments, as contested in these cases, so made were either correcting some drafting flaw which clearly defeated legislative intent, or correcting some feature on account of which the Court found the law unconstitutional.

In the case of ASSISTANT COMMISSIONER OF LAND TAX, MADRAS, AND OTHERS VERSUS BUCKINGHAM AND CARNATIC CO. LIMITED (AND OTHER CASES) [1969 (4) TMI 28 - SUPREME COURT] the Supreme Court cited article that had appeared in the Harvard Law Review which suggested that-

"it is necessary that the legislature should be able to cure inadvertent defects in statutes or their administration by making what has been aptly called small repairs"

Clearly, the courts recognised the power of legislature to amend the law retrospectively. However, the same was limited to the extent to cure the inadvertent defects or errors only and not where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations.

The Courts were of the mind-set that a retrospective amendment shall hold for the betterment of citizens, and must add an ease of understanding to the statute but shall not create an undue obligation on the citizens.

POWER TO OVERTURN JUDICIAL PRECEDENTS

Having recognised the power of legislature to amend the law retrospectively, another questions that arises is - can such an amendment overturn a judicial pronouncement?

The legislature can make a retrospective amendment of the law in cases where such legislation does not contravene other provisions of the Indian Constitution or to cure a defect noticed by judicial decision. However, there is a tenet that legislature cannot directly overrule judicial decision but it can retrospectively cure the defect noticed by the Judicial decision thereby rendering the judgment ineffective, by way of a validating legislation.

A validating clause is a provision which validates a recovery or a demand of tax notwithstanding the judgment of the Court to the contrary.

Having regard to the history of retrospective amendments made, it can be understood that it is not a regular or a routine exercise that legislature undertakes from time to time. It is rather a tool in the hands of legislature to deal with or cut short the judicial verdict pronounced against revenue.

In VIRENDER SINGH HOODA AND ORS. VERSUS STATE OF HARYANA AND ANR. 2004 (10) TMI 585 - SUPREME COURT, the court held that

“the Legislature though has the power to enact laws with the retrospective effect but has no power to change a judgment of the court of law either retrospectively or prospectively.”

However, time and again, retrospective amendments are being introduced to overturn judicial pronouncement through a validating clause.

In case of SHRI PRITHVI COTTON MILLS LIMITED VERSUS BROACH BOROUGH MUNICIPALITY AND OTHERS 1969 (4) TMI 30 - SUPREME COURT, the court recognised the power of legislature to amend the law notwithstanding anything contained in any judgment or decree. But there has to be a change in the legislature itself of the very basis on which decision was pronounced. The court explained:

"a Court's decision must always bind unless the conditions on which it is based are so fundamentally altered that the decision could not have been given in the altered circumstances".

Similar pronouncement was given in case of IN SAKSENA VERSUS. THE STATE OF MADHYA PRADESH 1976 (1) TMI 173 - SUPREME COURTwhere the court held that

“the Legislature cannot by a bare declaration, without anything more, directly overrule, reverse or override a judicial decision. It may, at any time in the exercise of plenary power conferred on it by constitution render legislative field, fundamentally alter or change with a retrospective, curative, or neutralizing affect the conditions on which such decision is based.”

Therefore, where the amendment, seeking to validate a recovery from earlier date or a past collection, fails to cure the error/defect, would rather be unconstitutional and can be challenged accordingly.

However, where the amendment is able to alter the very basis on which judgment was pronounced, the legislature can very much go on to make such retrospective amendment and validate all its actions to make recovery on the basis of such amendment.

SCOPE OF RETROSPECTIVE AMENDMENT

The coherence of retrospective amendments depends upon the intention of the legislature and the purpose for which such amendment is being introduced.

In case of NATIONAL AGRICULTURAL CO-OPERATIVE MARKETING FEDERATION OF INDIA LTD. AND ORS. VERSUS UNION OF INDIA (UOI) AND ORS. 2003 (3) TMI 758 - SUPREME COURT, Hon’ble Apex Court observed that

“the power to amend the law with retrospective effect is subject to several judicial recognized limitations, one of which is that the retrospectivity just be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional.”

The amendment should such where on account of some poor drafting or some other error which rendered the provision rather inoperative so much that state stood to suffer loss of revenue, resulting in corresponding windfall to the taxpayer and not which impacts or restricts any existing rights of the tax payer.

If the amendment made is such which deprives tax payers of his rightful claim, then same cannot be said to have been made in public interest and will be held as arbitrary and in violation of Article 14 and 19(1)(g) of the Constitution of India.

Any amendment, so made, retrospectively should be based on the principle of ‘fairness’ as was observed in the case of L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Company Limited [1994] 1 AC 486.

In Government of India & Ors. v. Indian Tobacco Association 2005 (8) TMI 113 - SUPREME COURT the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation.

The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of VIJAY VERSUS STATE OF MAHARASHTRA & ORS. 2006 (7) TMI 648 - SUPREME COURT It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, this is complete contradiction to the provisions imposing some burden or liability upon the tax payer.

Legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective, unless the legislative intent is clear to give the enactment a retrospective effect. [MCDONALD’S INDIA PVT. LTD. VERSUS COMMISSIONER OF SERVICE TAX, DELHI 2016 (12) TMI 1469 - CESTAT NEW DELHI]

A legislation cannot be treated as retrospective unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation i.e. under circumstances where a particular amendment can be treated as clarificatory or declaratory in nature.

The circumstances under which a provision can be termed as “declaratory statutes” is explained by Justice G.P. Singh Principles of Statutory Interpretation, 13^th Edition 2012 published by LexisNexis Butterworths Wadhwa, Nagpur in the following manner:

“The presumption against retrospective operation is not applicable to declaratory statutes. As stated in CRAIES and approved by the Supreme Court: For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Act is usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes.

In determining the nature of the Act, regard must be given to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.

In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous.

An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law which the Constitution came into force, the amending Act also will be part of the existing law.”

A Constitution Bench of Apex Court in KESHAVLAL JETHALAL SHAH VERSUS MOHANLAL BHAGWANDAS & ANR [1968 (4) TMI 72 - SUPREME COURT], while considering the nature of amendment to Section 29(2) of the Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows:

“The amending clause does not seek to explain any pre-existing legislation which was ambiguous or defective. The power of the High Court to entertain a petition for exercising revisional juris-diction was before the amendment derived from s. 115, Code of Civil Procedure, and the legislature has by the amending Act attempted to explain the meaning of that provision. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.”

Further, following observations made by Hon’ble Apex Court in the case of GOVINDDAS AND ORS. VERSUS THE INCOME TAX OFFICER AND ANR. 1975 (12) TMI 144 - SUPREME COURT, while holding Section 171 (6) of the Income- Tax Act to be prospective and inapplicable for any assessment year prior to 1st April, 1962 i.e. the date on which the Income Tax Act came into force:

“Now it is a well settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in Vol. 36 of the Laws of England (3rd Edn.) and reiterated in several decisions of this Court as well as English courts is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospectively and retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.”

Constitution Bench of Hon’ble Apex court once again summarised the aforesaid position in respect of retrospective amendment in its judgment dated 15^th September, 2014 in case of COMMISSIONER OF INCOME TAX (CENTRAL) -I, NEW DELHI VERSUS VATIKA TOWNSHIP PRIVATE LIMITED 2014 (9) TMI 576 - SUPREME COURT where the five-judge bench consisting Chief Justice, Jagdish Singh Khehar, J. Chelameswar, A.K. Sikri and Rohinton Fali Nariman while overruling a previous two-judge bench decision held that the provision for such surcharge, contained in the proviso to Section 113 of the Income Tax Act was “clarificatory in nature", making it retrospective said that any law that imposes an additional burden on the taxpayer should ideally be prospective in nature. Retrospective meaning to a provision should only be made to correct some law to the benefit of the taxpayer.

The broad principle as observed by constitution bench was that a vested right cannot be taken away by a retrospective amendment and whenever there are two interpretations to a provision of law, the one which renders it prospective and extends benefit to the taxpayer shall be opted. The Bench further observed that

“If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect."

Aforesaid judgment, being the judgment of Constitution Bench of Supreme Court, can be said to be a landmark ruling as it deals with multiple aspects of retrospective amendments and broadly set forth the pivotal facet in determining the applicability of a retrospective amendment.

Recently a 2-judge bench of Hon’ble Apex Court consisting of AM Khanwilkar and Dinesh Maheshwari upheld the aforesaid principal in case of M/S. L.R. BROTHERS INDO FLORA LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE 2020 (9) TMI 49 - SUPREME COURT, where it held that:

“for application of a subsequent legislation retrospectively it is necessary to show that the previous legislation had any omission or ambiguity or it was intended to explain an earlier act. In absence of the above ingredients, a legislation cannot be regarded as having retrospective effect.”

The Court said that to call the amendment notification clarificatory or curative in nature, it would require that there had been an error/mistake/omission in the previous notification which is merely sought to be explained.

Further, The Hon’ble Supreme Court in STAR INDIA PVT. LTD. VERSUS CCE, MUMBAI & GOA 2005 (3) TMI 10 - SUPREME COURT while analysing the issue of imposing interest liability arising due to retrospective amendment observed as under:

“While it is permissible for the legislature to retrospectively legislate, such retrospectivity is normally not permissible to create an offence retrospectively. No act or acts on part of any person shall be punishable as an offence which would not have been so punishable if the section had not come into force.”

Thus, a liability or a burden can though be created retrospectively but any non-payment or non-compliance arising out of such retrospective change cannot be considered as an offence from earlier date but has to be considered prospective only and accordingly cannot be subject to payment of interest or penalty.

EXPERT VIEWS ON RETROSPECTIVE AMENDMENTS

Mr. Parthasarthy Shome, heading an expert committee appointed by government to give advice in matter of retrospective amendment after the famous Vodafone case, stated as under:

“The Committee concluded that retrospective application of tax law should occur in exceptional or rarest of rare cases, and with particular objectives: first, to correct apparent mistakes/anomalies in the statute; second, to apply to matters that are genuinely clarificatory in nature, i.e. to remove technical defects, particularly in procedure, which have vitiated the substantive law; or, third, to “protect” the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without economic substance, but not to “expand” the tax base…….”

Another expert committee headed by Mr. Damodaran while addressing the question of retrospective amendment said as under:

“It has often been said that death and taxes are equally undesirable aspects of human life. Yet, it can be said in favour of death that it is never retrospective. Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India. While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity. This is a major area where improvements should be attempted sooner rather than later….”

CONCLUSION

It is undoubtedly clear that the legislature can bring about a change in the legislation with retrospective affect so much so that even a judicial pronouncement is reduced to nullity. However, it is a well settled position, with a near unanimity among jurists and plethora of cases, having power to bring about retrospective change is limited to the extent of curing any inadvertent defect or to bring about any clarificatory or declaratory change. The key feature of such legislation is correction but the government is misusing it to demolish the very basis on which the decision had been pronounced.

Any amendment to statute that affects the vested rights or imposes a new burden or impairs the existing obligation is deemed to be prospective only, unless there are words in the statute that are sufficient to explain the intention of the legislature to affect existing rights.

Despite all, this issue woefully remains where it originally started without any real solution to it. The above prospect has by no means made the Government to back out from the use of its plenary power to bring about retrospective changes in a tax statute with solitary purpose of changing the legal position after a judicial ruling rendered against revenue.

Government in recent times had made deliberate aberrant to bring about retrospective changes to taxation statutes, which has created huge unwarranted and hasty demands on the tax payers, to get over the judgment of various courts.

It is due to such tenacity on part of government, renowned tax jurist late Mr. Nani Palkhivala, addressing one of his exemplary budget speeches, while criticising retrospective amendment called it,

“a triumph of bureaucratic obstinacy over good sense.”

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