2009 (7) TMI 1156 - HC - VAT and Sales Tax

Amendment to the definition of manufacture in section 2(17) of the Bombay Sales Tax Act, 1959 made by the Maharashtra Act No. 9 of 1997, be struck down to the extent of its retrospectivity with effect from July 1, 1981 seeked Held that - In order to protect the Revenue and the tax collected which had already been spent on welfare activities of the State, the Legislature amended the definition of manufacture by amending section 2(17) of the Sales Tax Act. The Legislature did not overrule or reverse the decision of the court by amending section 2(17) of the Sales Tax Act. The Legislature only removed the flaw in the definition of manufacture , on account of which lacquering of polyester films was held to be not manufacture by this court. It is settled principle of law that the Legislature cannot reverse or overrule a decision given by a court, but can amend the law so as to remove a flaw or lacuna in an Act which leads to a particular interpretation at the hands of the court. It is possible for the Legislature to alter the premise or the basis on which a decision is based and this is not impermissible under the Constitution. It is also a settled principle of law that such amendment can be made with retrospective effect unless it is specifically prohibited by a provision of the Constitution (like article 20 of the Constitution which prohibits a criminal law to be retrospective) or where the Legislature lacks the legislative competence. Appeal dismissed.

Summary

Issues:
Challenge to the retrospective amendment of the definition of "manufacture" in the Bombay Sales Tax Act, 1959.
Contentions regarding overruling a court decision and retrospective effect of the amendment.

Analysis:
The petitioner, engaged in lacquering polyester films, challenged the retrospective amendment to the definition of "manufacture" in the Sales Tax Act, which now includes lacquering. The challenge arose after a court decision held that lacquering did not amount to manufacture. The petitioner argued that the Legislature cannot overrule a court decision and that retrospective taxation is impermissible. However, the court held that the amendment was necessary to rectify the flaw in the definition of "manufacture" and safeguard revenue collected on lacquered films. The court emphasized that the Legislature can amend laws to remove flaws leading to specific court interpretations, even with retrospective effect, unless prohibited by the Constitution or lacking legislative competence.

In the case of Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality, the Supreme Court outlined principles for validating taxes declared illegal by courts. The court's decision binds unless circumstances fundamentally change. Validation requires removing grounds of illegality and making the tax legal. The Legislature can provide jurisdiction, re-enact valid provisions retrospectively, or interpret laws differently to neutralize court decisions. The validity of a validating law depends on legislative competence and adequacy in rectifying defects found by courts. This principle was reiterated in the ITW Signode India Ltd. v. Collector of Central Excise case.

Ultimately, the court dismissed the petition, stating that the amendment was necessary to correct the flaw in the definition of "manufacture" and protect revenue collected on lacquered films. The court found no merit in the petitioner's contentions against overruling a court decision and retrospective taxation, emphasizing the Legislature's authority to amend laws to rectify flaws and interpretations, even with retrospective effect.