Kumar Sharma Vs. Vikas Adhikari & Anr  Insc 179 (25 March 2003)
Pal & B.N. Srikrishna. Ruma Pal, J
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).
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
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:
Income of co-operative societies.
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
Finance Act (No. II) 1967, Section 81 was omitted and its provisions re-enacted
as Section 80P of the 1961 Act.
relevant extract of Section 80P is :
(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.
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
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.
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.
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.
language adopted in Section 80-P(2)(a)(iii) with which we are concerned will
admit the interpretation that the society 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
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
8 of the Bill which is relevant for our purposes, reads:
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:
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 engaged in the
marketing of agricultural produce grown by its members".
Bill was passed after obtaining the assent of the President and became the
Income Tax (2nd Amendment) Act, 1999 (Act No. 11 of 1999).
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.
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.
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.
unnecessary to record the submissions of the respondents separately as they
form part of our reasons for dismissing the appeal.
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 .
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 method or all of
validating clause coupled with a substantive statutory change is therefore only
one of the methods to leave actions unsustainable under the unamended statute,
the absence of a validating clause would not by itself affect the retrospective
operation of the statutory provision, if such retrospectivity is otherwise
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.
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.
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".
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.
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 validation can be said to take place effectively.
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
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
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.
Legislature then enacted an Amendment Act in 1967.
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".
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 .
appellant has relied on this Court's decision in Madan Mohan Pathak V. Union of
India to contend that 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).
other words as long as the judgment stood it could not be disregarded or
ignored by LIC.
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.
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.
this were so doubtless the Court may have considered the amendment to be
excessively and unreasonably retrospective violating the appellants fundamental
rights under Articles 19(1)(g) and 14 of the Constitution . But in fact the
grievance is unfounded.
test of the length of time covered by the retrospective operation cannot by
itself, necessarily be a decisive test.
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".
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.
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
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 .
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.
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.
therefore dismiss the appeal without any order as to costs.
ITR 624 201 ITR 338 SC: 1994 (Supp.) 2 SCC 96 231 ITR 814: 1998 (5) SCC 48 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.  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