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'REPORTABLE'

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 8617-8635 OF 2003

ASSISTANT COMMISSIONER OF

AGRICULTURAL INCOME TAX & ORS. ...Appellants

VERSUS

M/S. NETLEY 'B' ESTATE & ORS. ...Respondents

J U D G M E N T

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 Karnataka Agricultural Income Tax Act

(hereinafter referred to as 'Act').

On facts, the present appeals are concerned with the

assessment of agricultural income received by a firm after it

is dissolved insofar as the income of the firm pertains to

actual cash receipts after the firm is dissolved but relating

to income earned prior to dissolution.

Section 26 of the Act reads as follows: -

“26. Assessment in case of discontinued company, firm

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

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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 discontinuance within thirty days thereof and

where any person fails to give the notice required by

this sub-section, such officer may direct that a sum

shall be recovered from him by way of penalty not

exceeding the amount of agricultural income-tax

subsequently assessed on him in respect of any

agricultural income of the company, firm or

association of persons up to 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 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-section.”

Sub-section (4) was added to Section 26 by amendment in

1987 and reads as follows: -

“Where any business through which agricultural

income is received is discontinued in any year, any

sum received after the discontinuance shall be

deemed to be the income of the recipient and

charged to tax accordingly 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.”

Section 27 with which we are also concerned reads as

follows: -

“27. Liability in case of discontinued firm or

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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 levy of penalty

or any other sum chargeable under any provisions of

this Act shall apply, so far as may be, to such

assessment.

(2) Every person who was at the time of such

discontinuance or dissolution, a partner of such

firm or a member of such association and the legal

representative of any such person who is deceased,

shall be jointly and severally liable to the

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 been included in the total income of the

person who carried on the business had such sum been received

before such discontinuance. Section 27 went one step further

and also spoke of income of a firm which is dissolved as

opposed to a firm whose business had been discontinued. With

respect to such income, every person who was, at the time of

discontinuance or dissolution, a partner of such firm was

liable to be jointly or severally assessed on such

agricultural income as also to pay the same by way of tax

penalty, etc.

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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

Bench after setting out the aforesaid provisions as follows: -

“We are, therefore, unable to hold that under

section 27 the dissolved firm could be deemed to be in

existence for purpose of assessment in respect of the

income derived after the date of dissolution of the

firm. In fact in W.P. No. 2397 and 2398 of 1988 that

is the view taken by the Karnataka Appellate Tribunal

and it is on that ground the assessment orders were set

aside.

The next point to be considered is whether

section 26(4), 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 imply dissolution of the firm. A

firm may continue to exist but may discontinue carrying

on a particular business. But where a firm is

dissolved it necessarily involves discontinuance of

business. As such it cannot be said that section 26(4)

cannot be applied as it does not refer to dissolution

of the firm, but what we are concerned with is as t

whether this provision creates any legal fiction

regarding the continuance of the firm notwithstanding

its dissolution for purposes of assessing an income

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

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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, it must

be deemed to be the income of the recipient, as the

original assessee is no longer continuing the business

and, therefore, is liable to tax in the year of receipt

in the hands of the recipient. It is, therefore, clear

that this provision applies to a case where the person

carrying on the business discontinues it and the income

due to him, he being the original 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 reading of this judgment, two things become clear.

Section 27 of the Act would not help in answering the question

before the Court as a firm after dissolution has no existence

in the eye of law and cannot for that reason be an assessee.

Secondly, Section 26(4) also did not help for the self same

reason and also because it referred to only discontinuance of

business of a firm as opposed to dissolution of a firm.

The court specifically held that there was nothing in

Section 26(4) as it then stood or 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.

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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 association is dissolved in any year, any sum

received after the discontinuance or dissolution shall

be deemed to be income of the recipient and charged to

tax accordingly 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 or dissolution.

Explanation: - 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 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 existence, for such year or

years and such income shall be assessed as the income

of the company, firm or association according to the

method of accounting regularly employed by it

immediately before such discontinuance or

dissolution.”

It will be noticed that 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

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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, the basis of the law

as it stood when Cardoza's case was decided has been changed.

Cardoza's case noticed that there was no deeming

procedure that continued a firm that had been dissolved 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 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 beyond the main provision. Equally,

since the legislature has the right to amend both

prospectively and retrospectively, all that was done in the

present case was an exercise of legislative power

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retrospectively and therefore, no question arose of any

discrimination on this count. The Single Judge therefore,

dismissed the writ petitions before him.

In appeal before the Division 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 the Division Bench, in the

statement of objects and reasons for the 1997 amendment, it

was held that the object of the amendment was to undo the

judgment of the High Court of Karnataka in Cardoza's case.

Revenue is in appeal before us. It was argued by the

learned counsel that the factual situation in Cawasji's case

was completely different from the factual situation in the

present case and that therefore, Cawasji's case being

distinguishable, cannot be followed. Learned counsel also

referred 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

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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 necessity for the same. It was

also argued that an explanation cannot defeat the substantive

provision to which it is attached and the present explanation

therefore, being beyond the main provision, is also bad. He

also cited certain decisions which we will advert to.

First, the decision in Cawasji's case. The question

which fell for decision in Cawasji's case was a retrospective

amendment made to the Mysore Sales Tax Act, 1957, in which

sales tax was retrospectively raised from 6½ 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 from

paragraph 18 of the judgment which his set out hereinbelow: -

“In the instant case, the State instead of remedying

the defect or removing the lacuna has by the impugned

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amendment sought to raise the rate of tax from 6 ½ per

cent to 45 per cent with retrospective effect from

April 1, 1966 to avoid the liability of refunding the

excess amount collected and has further purported to

nullify the judgment and order passed by the High

Court directing the refund of the excess amount

illegally collected 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, 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 the judgment of the High

Court declaring such levy illegal, the State became

obliged to refund the excess amount wrongfully and

illegally collected by virtue of the specific

direction to that effect in the earlier judgment. It

appears that the only object of enacting the amended

provision is to nullify the effect of the judgment

which became conclusive and binding on 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 ½ 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 ½ 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 sought

to be remedied and the only justification for the

steep rise in the rate of duty by the amended

provision is to nullify the effect of the binding

judgment. The vice of illegal collection in the

absence of the removal of the illegality which led to

the invalidation of the earlier assessments on the

basis of illegal levy, continues to taint the earlier

levy. In 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

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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 petitioner before this Court in the

earlier writ petition as also the basis of the

decision of this Court in C awasji case that the State

is collecting amounts by way of tax in excess of what

was authorised under the Act has been removed.” We,

accordingly, set aside the judgment and order of the

High Court to the extent it upholds the validity of

the impugned amendment 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 retrospective levy. The first

reason given was that, in the facts and circumstances of the

case, retrospectively enhancing of the levy of duty from 6 ½

per cent to 45 per cent is in itself arbitrary and

unreasonable. The second reason given is that the defect or

lacuna found by the High Court is not sought to be remedied

and the only justification for the steep rise in the rate of

duty is to nullify the effect of an earlier binding judgment.

It was held that the vice of illegal collection in the absence

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

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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 income post

dissolution but relating to transactions pre-dissolution. In

no manner has the legislature in the present case sought to

directly nullify the judgment in Cardoza's case. All that has

happened is that the legal foundation on which the Cardoza's

case was built is retrospectively removed, something which is

well within the legislative competence of the 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 of Mysore on which too reliance was placed by

Shri Vaidyanathan, learned counsel for the appellants,

Sales tax on liquor was levied at 6½ %. The Government

was collecting it on the entire sale price of arrack.

However, in a batch of writ petitions filed by the

licensees, the Karnataka High Court held that the levy

of sales tax on excise duty and cesses component of the

sale price was incompetent. In other words, it was

held that sales tax can be levied only on the price

proper but not upon excise duty and cesses which form

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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 6½ % 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. On Appeal, this Court held

the Amendment Act unconstitutional. On a close reading

of the judgment, it is clear that the main ground on

which the Act was held to be incompetent was that

raising the rate of tax from 6½ % to 45% with

retrospective effect was “clearly arbitrary and

unreasonable” and, therefore, violative of Articles 14

and 19. It was observed 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

understood as supporting the appellant's submission nor

can it be read as militating against the well-accepted

power of Parliament which has been reiterated in

innumerable judgments of this Court.”

In the Indian Aluminium Co. and others v. State of

Kerala and others [(1996) 7 SCC 637], there is a long

discussion coupled with a large number of judgments on

validation acts. Cawasji's case was dealt with in para 52 in

the following terms:

“In D. Cawasji & Co. v. State of Mysore the 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

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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 could

not be nullified by legislative amendment.”

Finally, a number of principles were laid down in para

56 as follows: -

“From a resume of the above decisions the

following principles would emerge:

(1) The adjudication of the rights of the parties is

the essential judicial function. Legislature has to

lay down the norms of conduct or rules which will

govern 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 concern and endeavour to

preserve judicial power equally must be guarded to

maintain the delicate balance devised by the

Constitution between the three sovereign functionaries.

In order that rule of law permeates to fulfil

constitutional objectives of establishing an

egalitarian social order, the respective sovereign

functionaries need free play in their joints so that

the march of social progress and order remains

unimpeded. The smooth balance built with delicacy must

always be maintained;

(5) In its 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 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 legalise impost of tax illegally made

and collected or to remove the norm of invalidation or

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provide a remedy. These are not judicial functions but

the exclusive province of the legislature. Therefore,

they are not encroachment on judicial power.

(8) In exercising legislative power, the legislature

by mere declaration, without anything more, cannot

directly overrule, 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

effect from a particular date. The legislature can

change the character of the tax or duty from

impermissible to permissible tax but the tax or levy

should answer such character and the legislature is

competent to recover the invalid tax validating such a

tax on removing the invalid base for recovery from the

subject or render the recovery from the State

ineffectual. It is competent for the legislature to

enact the law with retrospective effect and authorise

its agencies to levy and collect the tax 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

Constitution and the legislature must have competence

to do the same.”

We are concerned in this case directly with principles

8 and 9. On facts, the judicial decision in Cardoza's case

has been rendered ineffective by enacting a valid law on a

topic within the legislative field which fundamentally alters

or changes the character of legislation 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

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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 in nature should not be interpreted to give a

retrospective effect to take away a right or liability which

was created for the first time. In the present case, we are

concerned with an Act of the Legislature and not delegated

legislation. No right or liability is created for the first

time – the only thing done in the present case is that a firm

is by fiction of law continued as such for certain purposes of

assessment even after its dissolution. Equally, no question

of interpretation qua retrospectivity arises. The legislature

in the present case has expressly made the impugned provision

retrospective. On all these counts, this judgment is

distinguishable and would not apply at all here.

It was then contended based on Tata Motors Ltd. v.

State of Maharashtra and others [(2004) 5 SCC 783] from para

12 thereof, that withdrawal with retrospective effect of

relief properly granted by statute to an assessee which the

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assessee has lawfully enjoyed as a vested statutory right

cannot be taken away unless there be strong and exceptional

circumstances justifying the said withdrawal. On facts again,

this judgment does not apply. There is no withdrawal of any

right which has become a vested statutory right which deprives

an assessee of anything in the present case. As has been

noted above, what was taxable in the hands of a recipient

assessee is now taxable in the hands of a dissolved firm post-

dissolution only for certain purposes. This judgment also

therefore, cannot have any application in the present factual

scenario.

Lastly, the judgment in Hardev Motor Transport v. State

of M. P. and others [(2006) 8 SCC 613] was cited before us.

Para 31 thereof was read out in support of the proposition

that by inserting an explanation in a statute, the main

provision of the Act cannot be defeated or enlarged. Applying

this test to the present case, it is clear that in 1997 both

the main provision, that is Section 26(4), as well as

explanation were added retrospectively. The main provision

has been expanded to include dissolved firms and the

explanation creates a legal fiction in furtherance of the main

provision by deeming a dissolved firm to be in existence as an

assessee for certain purposes. This being the case, this

judgment would also have no application to the present factual

scenario.

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For these reasons, we set aside the impugned judgment

dated 03.07.2002 and allow the appeals. There shall be no

orders as to costs.

........................., J.

[ A.K. SIKRI ]

........................., J.

[ ROHINTON FALI NARIMAN ]

New Delhi;

March 17, 2015.