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CASE NO.:

Appeal (civil) 6170 of 2001

PETITIONER:

National Agricultural Co-operative Marketing Federation of India Ltd. & Anr.

RESPONDENT:

Union of India & Ors.

DATE OF JUDGMENT: 25/03/2003

BENCH:

RUMA PAL & B.N. SRIKRISHNA.

JUDGMENT:

J U D G M E N T

RUMA PAL, J

The appellant No. 1 is a co-operative society

registered under the Multi State Co-operative Societies Act,

1984 with its registered office in Delhi. It is the apex society of

a chain of Co-operative Societies which operate at different

territorial levels. The chain starts with the farmers who become

members of village co-operative societies, the village societies

become members of primary marketing co-operative societies

(District Societies) and District Societies become members of

the State Co-operative Societies (Apex Societies).

The issue raised by the appellants relates to the construction

and Constitutional validity of section 80 P (2) (a) (iii) of the Income

Tax Act, 1961 and grant of deduction of the profits made by

societies by the marketing of agricultural produce.

Under the Income Tax Act, 1922 ( hereinafter referred to as

the 1922 Act) exemption was granted in respect of profits and

gains of business of co-operative societies including societies

engaged in the marketing of the agricultural produce of its

members. The Income Tax Act, 1961 continued this exemption

under Section 81 (1) (c) which read:

81. Income of co-operative societies.

Income-tax shall not be payable by a

cooperative society-

(i) in respect of the profits and gains of

business carried on by it, if it is

(a) xxx xxx xxx xxx

(b) xxx xxx xxx xxx

(c) a society engaged in the

marketing of the agricultural produce

of its members".

By the Finance Act ( No. II ) 1967, Section 81 was omitted

and its provisions re-enacted as Section 80P of the 1961 Act.

The relevant extract of Section 80P is :

80-P (1) Where, in the case of an assessee

being a co-operative society, the gross total

income includes any income referred to in sub-

section (2), there shall be deducted, in

accordance with and subject to the provisions

of this section, the sums specified in sub-

section (2), in computing the total income of

the assessee.

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(2) The sums referred to in sub-section (i)

shall be the following namely:-

(a) in the case of a co-operative society

engaged in

(i) xxx xxx xxx

(ii) xxx xxx xxx

(iii) the marketing of the agricultural

produce of its members, or

(iv) xxx xxx xxx

(v) xxx xxx xxx

(vi) xxx xxx xxx

(vii) .. the whole of the amount

of profits and gains of business

attributable to any one or more of

such activities".

(emphasis supplied)

According to the appellant, prior to 1994 several High

Courts as well as this Court had construed Section 81(1)(c)

and Section 80 P (2)(a)(iii) and held that the benefit of

exemption was available to all the co-operative societies from

the village to the Apex Level. This was also the view taken by

the Kerala High Court as expressed in CIT V. Kerala State

Cooperative Marketing Federation . The view was reversed

by a Bench of this Court in Assam Cooperative Apex

Marketing Society v. CIT (Additional) when it held that the

object of Section 81 was to encourage basic level societies

and that therefore, the phrase "produce of its members" must

refer to agricultural produce actually "produced by its

members". It was held that unless this interpretation were

given, co-operative societies of traders would also become

entitled to exemption which could not have been the intention

of Parliament.

According to the appellant, as a result of the decision in

the Assam Co-operatives case, the appellant No. 1, who

had enjoyed the deduction under Section 80 P till then, was

reassessed to tax on its profits and the assessments in

respect of the assessment year from 1986-87 to 1994-95 were

re-opened.

Following the decision of this Court in Assam Co-

operatives case (supra), the Kerala High Court reversed its

earlier view while deciding the issue raised by the Kerala Co-

operative Marketing Federation in respect of a subsequent

year and denied the Kerala Federation the deduction under

S.80 P. The Kerala Federation impugned the decision of the

High Court under Article 136. In these circumstances the

view expressed in Assam Cooperatives came to be re-

considered by a larger Bench in 1998. This Court by its

decision in Kerala Cooperative Marketing Federation Ltd. &

Ors. V. Commissioner of Income Tax overruled Assam

Cooperatives and held that the word 'of' in Section 80P (2)

(a) (iii) had been too restrictively construed in Assam

Cooperatives. On an interpretation of the provisions of

Section 80P and having regard to the object with which the

provisions had been introduced, it was held that the

legislature did not intend to limit the scope of exemption only

to primary societies and that the phrase 'produce of its

members' must be construed as including any society

engaged in marketing agricultural produce 'belonging to' its

members. It said:

The language adopted in Section

80-P(2)(a)(iii) with which we are concerned

will admit the interpretation that the society

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engaged in marketing of agricultural produce

of its members as agricultural produce

"belonging to" its members which is not

necessarily raised by such member. Thus,

when the provisions of Section 80-P of the Act

admit of a wider exemption there is no reason

to cut down the scope of the provision as

indicated in Assam Coop. Apex Marketing

Society Case".

This decision was given in December 1998. Immediately

thereafter, Section 80P(2)(a)(iii) was sought to be amended by

the Income Tax Act (2nd Amendment) Bill No. 169 of 1998.

Clause 8 of the Bill which is relevant for our purposes, reads:

"Amendment of section 80P. In

section 80P of the Income-tax Act, in

sub-section (2), in clause (a), for sub-

clause (iii), the following sub-clause

shall be substituted, and shall be

deemed to have been substituted with

effect from the 1st day of April, 1968,

namely: -

(iii) the marketing of agricultural

produce grown by its members."

The reason for this amendment has been stated in

Clause 6 of the Statement of Objects and Reasons as:

" 6 Clause 8 seeks to amend section

80P of the Income-tax Act. Under the

existing provision, profits derived by a

cooperative society engaged in the

marketing of agricultural produce of its

members are fully deductible in computing

the taxable income under Section

80P(2)(a)(iii) of the Income-tax Act. The

deduction was intended for primary

cooperative societies marketing the

agricultural produce of their farmer

members. In the case of Kerala State

Cooperative Marketing Federation vs.

Commissioner of Income-tax, the Hon'ble

Supreme Court held that the use of words

"of its members" in the relevant clause

would mean the agricultural produce

belonging to the members and not

necessarily grown by them. The

interpretation given to the use of the words

in the provision is not in accordance with

the legislative intent of the existing

provision. In respect of income arising

from transactions with non-members, the

cooperatives are not different from other

assessees, and such cooperatives are

required to be taxed in the same manner

as companies or other assessees

engaged in marketing of agricultural

produce. If an amendment in section

80P(2)(a)(iii) is not made, it is likely to

have serious impact on revenues. The

proposed amendment, therefore, replaces

the words "of its members" by the words

"grown by its members". The amendment

seeks to restrict the deduction to the

profits derived by a cooperative society

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engaged in the marketing of agricultural

produce grown by its members".

The Bill was passed after obtaining the assent of the

President and became the Income Tax (2nd Amendment) Act,

1999 ( Act No. 11 of 1999).

The appellants impugned this amendment before the

Delhi High Court under Article 226. They prayed for a

declaration that the 1999 Amendment Act in so far as it seeks

to retrospectively amend Section 80P (2)(a)(iii) of the Income

Tax Act, 1961 was unconstitutional, and for an order to restrain

the respondents from seeking to assess or re-assess the

appellant society in respect of any previous year prior to the

date of the enactment of the Amendment Act.

The Delhi High Court dismissed the writ petition holding

that the amendment was valid and that the legislature was

competent to retrospectively take away a benefit granted

earlier by an amendment of the law. However, the Court

recorded the statement of the Solicitor General appearing on

behalf of the respondent authorities that the amendment would

apply only to assessments which were yet to be finalised.

That the Legislature can enact laws retroactively is not

in dispute. Nor is it disputed that the amendment is intended

to be retrospective and that the amendment would at least

prospectively exclude all cooperative societies except the

primary society from the benefit of Section 80 P(2)(a)(iii) of the

Income Tax Act. According to the appellants, the amendment

cannot be considered to have retrospective operation in the

absence of a validating provision nor could Parliament reverse

the judgment of this Court by such statutory overruling. If the

amendment is construed as having retrospective operation,

then, it is submitted, the amendment is unconstitutional

because it seeks to impose a tax on apex societies for the last

31 years. It was contended that by denying the deduction to

the apex societies, the farmers and the primary societies

would be vitally affected as it would be reflected in the returns

obtained by them. This would be contrary to the legislative

intent which was to benefit all societies which market

agricultural produce.

It is unnecessary to record the submissions of the

respondents separately as they form part of our reasons for

dismissing the appeal.

The Legislative power either to introduce enactments for

the first time or to amend the enacted law with retrospective

effect, is not only subject to the question of competence but is

also subject to several judicially recognized limitations with

some of which we are at present concerned. The first is the

requirement that the words used must expressly provide or

clearly imply retrospective operation . The second is that the

retrospectivity must be reasonable and not excessive or harsh,

otherwise it runs the risk of being struck down as

unconstitutional . The third is apposite where the legislation is

introduced to overcome a judicial decision. Here the power

cannot be used to subvert the decision without removing the

statutory basis of the decision .

There is no fixed formula for the expression of legislative

intent to give retrospectivity to an enactment. "Sometimes this

is done by providing for jurisdiction where jurisdiction had not

been properly invested before. Sometimes this is done by re-

enacting retrospectively a valid and legal taxing provision and

then by fiction making the tax already collected to stand under

the re-enacted law. Sometimes the Legislature gives its own

meaning and interpretation of the law under which tax was

collected and by legislative fiat makes the new meaning

binding upon courts. The Legislature may follow any one

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method or all of them".

A validating clause coupled with a substantive statutory

change is therefore only one of the methods to leave actions

unsustainable under the unamended statute, undisturbed.

Consequently, the absence of a validating clause would not by

itself affect the retrospective operation of the statutory

provision, if such retrospectivity is otherwise apparent.

By the impugned amendment, the legislature has

substituted the word 'of'' which occurred in Section 80P

(2)(a)(iii) and which had been construed by this Court in 1998

as "belonging to" , with the phrase "grown by". The clear effect

of the substitution, in keeping with general principles relating

to amendments, would be that Section 80P(2)(a)(iii) must be

read as if the substituted phrase were included from the date

that the section was introduced in the statute viz. 1st April,

1968.

In making this change, the Legislature does not "statutorily

overrule" this Courts decision in Kerala Cooperative

Marketing Federation Ltd. as has been contended by the

appellant. Overruing assumes that a contrary decision is given

on the same facts or law. Where the law, as in this case, has

been changed and is no longer the same, there is no question

of the Legislature overruling this Court.

As has been held in Ujagar Prints V. Union of India

"A competent legislature can always

validate a law which has been declared

by courts to be invalid, provided the

infirmities and vitiating infactors noticed

in the declaratory judgment are removed

or cured. Such a validating law can also

be made retrospective. If in the light of

such validating and curative exercise

made by the legislature granting

legislative competence the earlier

judgment becomes irrelevant and

unenforceable, that cannot be called an

impermissible legislative overruling of

the judicial decision. All that the

legislature does is to usher in a valid law

with retrospective effect in the light of

which the earlier judgment becomes

irrelevant".

A somewhat similar situation arose in connection with

Section 73 of the Bombay Municipality Boroughs Act, 1925

which allowed the municipality to levy "a rate on building or

lands or both situated within the municipal Borough". Rule

350A made under that Act provided for the rate on land at a

percentage evaluation based upon capital. The Rule was held

to be ultra-vires in Patel Gordhandas Hargovindas v.

Municipal Commissioner, Ahmedabad on the ground that

the word 'rate' as was understood in the legislative practice of

India and used in Section 73 did not allow for an impost as

provided under Rule 350A. A Validation Act was passed

subsequent to the decision in Patel Gordhandas

Hargovindas redefining the word 'rate' in Section 73 itself.

The constitutionality of the Validation Act was challenged. In

dismissing the challenge, this Court in, Shri Prithvi Cotton

Mills Ltd. V. Broach Borough Municipality held that the

legislature could exercise its undoubted powers of redefining

the word 'rate' in Section 73 to validate the assessments

earlier made under Rule 350A. The Court held that when a

Legislature sets out to validate a tax declared by a Court to be

illegally collected under an ineffective or an invalid law, the

cause for ineffectiveness or invalidity must be removed before

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validation can be said to take place effectively.

"It is not sufficient to declare merely that

the decision of the Court shall not bind

for that is tantamount to reversing the

decision in exercise of judicial power

which the Legislature does not possess

or exercise. 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".

Once the circumstances are altered by Legislation, it

may neutralise the effect of the earlier decision of the Court

which becomes ineffective after the change of the law.

Similarly in M/s. Krishnamurthi & Co. v. State of

Madras & Anr., the Madras General Sales Tax 1959 Act (as it

stood) provided under Entry 47 for tax on "lubricating oils, all

kinds of mineral oils (not otherwise provided for in this Act)

quenching oil and greases w.e.f. 1.4.1964". The question was

whether this entry covered furnace oil. The Madras High Court

construed the phrase and came to the conclusion that it did not.

The Legislature then enacted an Amendment Act in 1967.

Entry 47 was amended so as to expressly provide that

furnace oil would be subjected to tax. The Act was made

effective from 1964. The Act was challenged as being

unreasonable since it retrospectively made the dealers liable for

sales tax which they had not passed on to others. The

challenge was negatived and it was said that

"The object of such an enactment is to

remove and rectify the defect in phraseology

or lacuna of other nature and also to validate

the proceedings, including realisation of tax,

which have taken place in pursuance of the

earlier enactment which has been found by

the court to be vitiated by an infirmity. Such

an amending and validating Act in the very

nature of things has a retrospective

operation. Its aim is to effectuate and carry

out the object for which the earlier principal

Act had been enacted. Such an amending

and validating Act to make "small repairs" is a

permissible mode of legislation and is

frequently resorted to in fiscal enactments".

Again when the question arose whether factory and other

buildings were 'houses' for the purpose of levy of house tax,

the High Court held that the word 'house' could not be

construed to include factories and other buildings. Pending

the appeal from the High Court's decision before this Court, the

word 'house' was legislatively redefined to include factories

and other buildings with retrospective effect. This Court in

Govt. of Andhra Pradesh vs. Hindusthan Machine Tools

rejected the challenge to the amendment holding that this was

a permissible legislative exercise. It was held that the

Legislature had not overruled or set aside the judgment of the

High Court but had removed the basis of the decision rendered

by the High Court so that the decision could not have been

given in the altered circumstances. This enunciation of the law

has been noted with approval by the Constitution Bench in

State of Tamil Nadu v. Arroran Sugar Mills .

The appellant has relied on this Court's decision in

Madan Mohan Pathak V. Union of India to contend that

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what the legislature had done in the present case was to

statutorily overrule the decision of this Court in Kerala

Marketing. In Madan Mohan Pathak a settlement had been

arrived between the Life Insurance Corporation and its

employees, inter-alia with regard to bonus payable to its class

III and IV employees. Subsequent to the settlement, the

Payment of Bonus Act, 1976 came into force which

considerably curtailed rights of employees to bonus in

industrial establishments. Although the Payment of Bonus Act

was not applicable to the Life Insurance Corporation, the

Central Government issued a directive to the LIC that it should

not make payment of bonus to its employees without getting

the same cleared by the Central Government. The LIC issued

a circular stopping the payment of bonus. The employees'

association challenged this by way of a petition under Article

226 and prayed for a writ directing the LIC to act in terms of the

settlement. The writ petition was allowed. While the appeal

was pending before the Division Bench, Parliament enacted

the Life Insurance Corporation Modification of Settlement,

1976. By the Act, the settlement deprived the class III and

class IV employees of the annual cash bonus to which they

were otherwise entitled under the settlement in respect of

certain years. However, despite this statutory interpretation,

the Division Bench did not interfere with the order of the Single

Judge and dismissed the appeal. After this, somewhat

unnecessarily, the employees of LIC assailed the constitutional

validity of the 1976 Act under Article 32 before this Court. One

of the grounds taken was that the impugned Act deprived the

class III and IV employees of their vested rights under the

settlement and was in violation of Article 19(1)(f) of the

Constitution. This Court allowed the writ application holding

that since the LIC had not pressed its appeal before the

Division Bench despite the 1976 Act, it could not be absolved

from its obligation from carrying out the writ of mandamus

issued by the Single Judge of the High Court. It also held that

the judgment of the High Court was not based upon any defect

in any statutory provision, which could have been removed by

the legislature as was the case in Prithvi Cotton Mills (supra).

In other words as long as the judgment stood it could not be

disregarded or ignored by LIC.

The decision is an authority for the principle that a

judicial decision which has become final inter partes, cannot

be set at naught by legislative action, a principle that is well

entrenched. Therefore, if, as has been contended by the

appellant, the High Court in 1981 had in proceedings between

the appellant and the Revenue held that the appellant was

entitled to the benefit of the deduction under Section

80P(2)(a)(iii) of the Act, and the Revenue has not impugned

the High Court's decision, that decision binds the parties for

the assessment years in question and cannot be reopened

because of the 1998 amendment. This principle, however,

does not in any way detract from the principle that the

Legislature may "cure" the statute so that it more correctly

represents its intention. Such curative legislation does not in

fact touch the validity of a judicial decision which may have

attained finality albeit under the pre-amended law.

The main thrust of the appellant's argument has been to

the constitutionality of the amendment. The substitution in

1998 of the phrase "grown by" in Section 80P(2)(a)(iii) of the

Act to operate from 1968, it is argued, amounts to a new levy

and an unforeseen financial burden imposed on Apex

Societies like the appellant with effect from the past 30 years.

If this were so doubtless the Court may have considered the

amendment to be excessively and unreasonably retrospective

violating the appellants fundamental rights under Articles

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19(1)(g) and 14 of the Constitution . But in fact the grievance

is unfounded.

The test of the length of time covered by the retrospective

operation cannot by itself, necessarily be a decisive test.

Account must be taken of the surrounding facts and

circumstances relating to the taxation and the legislative

background of the provision. To recapitulate the legislative

background of the particular statutory provision in question

before us - the first authoritative interpretation of Section 80P

(2)(a)(iii) was made in 1994 in Assam Cooperatives when it

held that the word "of" must be construed as "produced by".

Therefore, the law as it stood from 1968 was, by this decision,

required to be read in precisely this manner and presumably

assessments of Apex Societies were commenced and

concluded on this basis. The situation continued till 1998 till

this Court reversed Assam Cooperatives in Kerala

Cooperative Marketing Federation Ltd. . Before the

assessment year was over, by the 1998 Amendment the word

"of" was substituted with " grown by". In real terms therefore

there was hardly any retrospectivity, but a continuation of the

status quo ante. The degree and extent of the unforeseen and

unforeseeable financial burden was, in the circumstances,

minimal and cannot be said to be unreasonable or

unconstitutional.

It is hardly likely on the given facts, that assessments

had been concluded on the basis of the decision in Kerala

Marketing and the period for reopening such assessments

had become time barred. In any event the 1998 amendment

cannot be construed as authorizing the Revenue authorities to

reopen assessments when the reopening is already barred by

limitation. The amendment does not seek to touch on the

periods of limitation provided in the Act, and in the absence of

any such express provision or clear implication, the legislature

clearly could not be taken to intend that the amending

provision authorises the Income-tax Officer to commence

proceedings which before the new Act came into force,had, by

the expiry of the period provided become barred. Different

considerations would arise if, by the amendment even final

assessments were unambiguously sought to be opened .

That is not the case here. The concession of the Solicitor

General on behalf of the Revenue that the amendment would

apply only to assessments which were yet to be finalised

could not of course be a relevant consideration in upholding

the amendment if it were found to be constitutionally infirm .

But it was an unnecessary concession, since having regard to

the limited operation of the amendment, it could only apply to

pending assessments in the sense that it could not revive a

power lost by efflux of time.

The final submission of the appellant as to the possible

adverse economic impact of the amendment on farmers and

primary societies is not a consideration which is relevant to a

decision on its validity particularly when neither the factual

basis for such assertion is laid nor the persons on behalf of

whom the appellant seeks to take up cudgels, are before us.

We therefore dismiss the appeal without any order as to

costs.

193 ITR 624

201 ITR 338 SC: 1994 (Supp.) 2 SCC 96

231 ITR 814: 1998 (5) SCC 48

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S.S. Gadgil v. M/s Lal & Co.: AIR 1965 SC 171, 177 ; J.C. Jani, Income Tax Officer,Circle-

IV,

Ward-G Ahmedabad v.Induprasad Devshanker Bhatt, AIR 1969 SC 778, 781

Rai Ramkrishna & Ors. v. The State of Bihar (1964) 1 SCR 897, 915; Jawaharmal v. State of

Rajasthan & Ors. [1966] 1 SCR 890, 905; Supreme Court Employees Welfare Association vs.

Union of India & Anr. 1989 (3) SCC 488, 517

Shri Prithvi Cotton Mills Ltd. vs. Broach Borough Municipality & Ors. 1969 (2) SCC 283;

Lalitaben v. Gordhanbhai & Anr. 1987 (Supp) SCC 750 para 15; Janapada Sabha Chhindwara v.

The Central Provinces Syndicate Ltd. 1970 (1) SCC 509; Indian Aluminium Co. & Ors. v. State

of

Kerala & Ors. 1996 7 SCC 637

Shri Prithvi Cotton Mills v. Broach Borough Municipality 1969 (2) SCC 283

Supra

1989(3) SCC 488 at 517

1964 (2) SCR 608

Supra

(1973) 2 SCR 54

(1975) 2 SCC 274

(1997) 1 SCC 326 para 16

1978 (2) SCC 50

S.R. Bhagwat v. State of Mysore; 1995 (6) SCC 16 paras 12, 15, 18; Re: Cauvery Water

Disputes Tribunal 1993 Supp. (1) SCC 96 (II) Para 76.

M/s Ujagar Prints & Ors. v. Union of India & Ors. 1989 (3) SCC 488, 517

Rai Ramkrishna & Others V. The State of Bihar 1964 (1) SCR 897 at 915

Jawaharmal v. State of Rajasthan: 1966 (1) SCR 890, 905

Supra

Supra

S.S. Gadvil v. Lal & Co. AIR 1965 SC 171, p.177 : See also J.P. Jani v. Induprasad

Devshankar Bhatt: AIR 1969 SC 778, 781; K.M. Sharma v. Income Tax Officer, Ward 13(7),

New Delhi (2002) 4 SCC 339

Commercial Tax Officer v. Biswanath Jhunjhunwalla & Anr.(1996) 5 SCC 626

The collector of Customs, Madras v. Nathella Sampathu Chetty and Anr: 1962 (3)SCR 786,

825; Sanjeev Coke Manufacturing Co. v. M/s. Bharat Coking Coal Ltd. & Anr.; 1983 (1) SCC 147

,

paragraph 25