Assistant Commissioner of Agricultural Income-tax v. Netley "B" Estate
[Citation -2015-LL-0317]

Citation 2015-LL-0317
Appellant Name Assistant Commissioner of Agricultural Income-tax
Respondent Name Netley "B" Estate
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 17/03/2015
Judgment View Judgment
Keyword Tags discontinuance of business • retrospective amendment • imposition of penalty • agricultural produce • legal representative • method of accounting • agricultural income • specific direction • state government
Bot Summary: On facts, the present appeals are concerned with the assessment of agricultural income received by a firm after it is dissolved in so far as the income of the firm pertains to actual cash receipts after the firm is dissolved but relating to income earned prior to dissolution. 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. 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. 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. 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. 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. 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.


JUDGMENT judgment of court was delivered by R. F. Nariman J.-The present set of appeals are concerned with validity of Explanation added retrospectively to section 26(4) of Karnataka Agricultural Income-tax Act (hereinafter referred to as "the Act"). On facts, present appeals are concerned with assessment of agricultural income received by firm after it is dissolved in so far as income of firm pertains to actual cash receipts after firm is dissolved but relating to income earned prior to dissolution. Section 26 of Act reads as follows: "26. Assessment in case of discontinued company, firm or association.-(1) Where agricultural income is received by company, firm or association of persons and business through which such income is received is discontinued in any year, assessment may be made in that year on basis of agricultural income received during period between end of previous year and date of such discontinuance, in addition to assessment, if any, made on basis of agricultural income received in previous year. (2) Any person discontinuing any such business shall give to Agricultural Income-tax Officer notice of such discontinuance within thirty days thereof and where any person fails to give notice required by this sub- section, such officer may direct that sum shall be recovered from him by way of penalty not exceeding amount of agricultural income-tax subsequently assessed on him in respect of any agricultural income of company, firm or association of persons up to date of discontinuance of business. (3) Where assessment is to be made under sub-section (1), Agricultural Income-tax Officer may serve on person whose agricultural income is to be assessed, or, in case of firm on any person who was member of such firm at time of discontinuance or, in case of company, on principal officer thereof, notice containing all or any of requirements which may be included in notice under sub-section (2) of section 18 and provisions of this Act shall, so far as may be, apply accordingly as if notice were 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 discontinuance shall be deemed to be income of recipient and charged to tax accordingly in year of receipt, if such sum would have been included in total income of person who carried on 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 association.-(1) Where business of firm or association of persons is discontinued or such firm or association is dissolved, Assistant Commissioner of Agricultural Income-tax shall make assessment of agricultural income of firm or association of persons as if no such discontinuance or dissolution has taken place and all provisions relating to 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 time of such discontinuance or dissolution, partner of such firm or member of such association and legal representative of any such person who is deceased, shall be jointly and severally liable to assessment on such agricultural income and also to pay amount of agricultural income-tax, penalty or other sum payable and all provisions of this Act, so far as may be shall apply to any such assessment or imposition of penalty or other sum." From cursory reading of section 26(4) read with section 27, it becomes clear that any sum received after discontinuance of business by firm is deemed to be income of recipient and charged to tax accordingly, if such sum would have been included in total income of person who carried on business had such sum been received before such discontinuance. Section 27 went one step further and also spoke of income of firm which is dissolved as opposed to firm whose business had been discontinued. With respect to such income, every person who was, at time of discontinuance or dissolution, partner of such firm was liable to be jointly or severally assessed on such agricultural income as also to pay same by way of tax penalty, etc. In L. P. Cardoza v. Agricultural ITO [1997] 227 ITR 421 (Karn), question involved was as to whether dissolved firm could be assessed to agricultural income-tax after date of its dissolution in respect of income received for supply of goods made by firm prior to its dissolution. This question arose in light of section 26(4) and section 27 as they then stood, that is, as they stood in 1987. question was answered by Bench after setting out aforesaid provisions as follows: "We are, therefore, unable to hold that under section 27 dissolved firm could be deemed to be in existence for purpose of assessment in respect of income derived after date of dissolution of firm. In fact in W. P. Nos. 2397 and 2398 of 1988 that is view taken by Karnataka Appellate Tribunal and it is on that ground assessment orders were set aside. next point to be considered is whether section 26(4), as amended by Act 10 of 1987, could be of any help to respondent. Learned counsel for petitioners contended that section 26(4) applies only to case of discontinuance of business and not to case of dissolution of firm, that section 27 makes distinction between discontinuance of business and dissolution of firm, and that as such section 26(4) does not apply to case of dissolution of firm. It is no doubt true that discontinuance of business need not necessarily imply dissolution of firm. firm may continue to exist but may discontinue carrying on particular business. But where 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 firm, but what we are concerned with is as t whether this provision creates any legal fiction regarding continuance of firm notwithstanding its dissolution for purposes of Page 427 of 227 ITR. assessing income received after dissolution. All that this provision lays down is that, any sum received after discontinuance of business shall be deemed to be income of the'recipient' and charged to tax in year of receipt, if such sum would have been included in total income of person who carried on business had such sum been received before such discontinuance. Explaining this provision Division Bench of this court, in E. M. V. Muthappan's case [1990] 184 ITR 161, has pointed out that since sale proceeds received is income relating to agricultural activity carried on during earlier years, it must be deemed to be income of recipient, as original assessee is no longer continuing business and, therefore, is liable to tax in year of receipt in hands of recipient. It is, therefore, clear that this provision applies to case where person carrying on business discontinues it and income due to him, he being original assessee, is received by another after discontinuance of business. In such case, income received by recipient could be charged to tax in year of receipt. There is nothing in this provision to indicate that where firm is dissolved and some income is received after dissolution in respect of agricultural produce supplied by firm before its dissolution, firm itself could be assessed in year of receipt of income notwithstanding its dissolution." On reading of this judgment, two things become clear. Section 27 of Act would not help in answering question before court as firm after dissolution has no existence in eye of law and cannot for that reason be assessee. Secondly, section 26(4) also did not help for selfsame reason and also because it referred to only discontinuance of business of firm as opposed to dissolution of firm. court specifically held that there was nothing in section 26(4), as it then stood or section 27, to indicate that where firm is dissolved and income is received after dissolution in respect of agricultural produce supplied by firm before dissolution, firm itself could be assessed in year of receipt of income notwithstanding its dissolution. Faced with this decision of Karnataka High Court, Legislature amended section 26(4) retrospectively, that is, with effect from, April 1, 1975. amended provision now reads as follows: "26. (4) Where any business through which agricultural income is received by company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after discontinuance or dissolution shall be deemed to be income of recipient and charged to tax accordingly in year of receipt, if such sum would have been included in total income of person who carried on business had such sum been received before such discontinuance or dissolution. Explanation.-For removal of doubts, it is hereby declared that where before discontinuance of such business or dissolution of firm or association hitherto assessed as firm or association, or as case may be, on company, crop is harvested and disposed of, but full payment has not been received for such crop, or crop is harvested and not disposed of, income from such crop shall, notwithstanding discontinuance or dissolution be deemed to be income of company, firm or association for year or years in which it is received or receivable and firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as income of company, firm or association according to method of accounting regularly employed by it immediately before such discontinuance or dissolution." It will be noticed that in amended section 26(4), two changes are made. Whereas in original provision, no express reference was made to companies or association of persons, and no reference whatsoever was made to dissolved firm, both have now been added. By Explanation, which is for removal of doubts, Legislature declares that where before dissolution of firm, full payment is not received in respect of income that has been earned pre- dissolution, then notwithstanding such dissolution, said income will be deemed to be income of firm in year in which it is received or receivable and firm shall be deemed to be in existence for such year for purposes of assessment. It will be noticed that by this amendment, basis of 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 firm that had been dissolved to be assessee for purposes of income that was earned by it pre-dissolution but received post-dissolution. deeming fiction has now been introduced by Explanation (and with retrospective effect from 1975) thereby making it clear that basis of law as it stood when Cardoza's case was decided has now been changed with effect from 1975. position which, therefore, emerges is that instead of such income being taxed at hands of "recipient", it is now taxed in hands of dissolved firm. said amendment was subject matter of challenge before learned single judge of High Court of Karnataka. single judge repelled challenge basically on ground that Explanation only clarified main provision and, therefore, did not go beyond main provision. Equally, since Legislature has right to amend both prospectively and retrospectively, all that was done in present case was exercise of legislative power retrospectively and, therefore, no question arose of any discrimination on this count. single judge, therefore, dismissed writ petitions before him. In appeal before Division Bench, Division Bench set out all aforesaid provisions and ultimately found, following judgment in D. Cawasji and Co. v. State of Mysore [1984] (Suppl.) SCC 490, that Amending Act of 1997 suffered from vice that was found in Cawasji's case, namely, that it interfered directly with judgment of High Court and would, therefore, have to be struck down as unconstitutional on this score alone. This Division Bench found because, according to Division Bench, in Statement of Objects and Reasons for 1997 amendment, it was held that object of amendment was to undo judgment of High Court of Karnataka in Cardoza's case. Revenue is in appeal before us. It was argued by learned counsel that factual situation in Cawasji's case was completely different from factual situation in 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 little later. To buttress this submission, he said that all that was done on facts in present case was that Legislature retrospectively changed basis of law of assessment of firms regarding income received after they were dissolved, which is something that Legislature is competent to do. Learned counsel for assessees, on other hand, tried to support judgment. In addition, it was argued that since there was, in fact, no lacuna to be cured, legislative exercise of retrospective amendment undertaken would be bad as there was no necessity for same. It was also argued that Explanation cannot defeat substantive provision to which it is attached and present Explanation, therefore, being beyond main provision, is also bad. He also cited certain decisions which we will advert to. First, decision in Cawasji's case. question which fell for decision in Cawasji's case was retrospective amendment made to Mysore Sales Tax Act, 1957, in which sales tax was retrospectively raised from 6 per cent. to 45 per cent. Notwithstanding any judgment to contrary, even though collection of sales tax has been struck down on ground [1984] 150 ITR 648 (SC). that excise duty, education cess and health cess could not have been included in price of arrack sold, yet such tax will be deemed to be validly levied and collected in accordance with law. ratio of decision emerges from paragraph 18 of judgment which is set out hereinbelow: "In instant case, State instead of remedying defect or removing lacuna has by impugned amendment sought to raise rate of tax from 6 per cent. to 45 per cent. with retrospective effect from April 1, 1966, to avoid liability of refunding excess amount collected and has further purported to nullify judgment and order passed by High Court directing refund of excess amount illegally collected by providing that levy at higher rate of 45 per cent. will have retrospective effect from April 1, 1966. judgment of High Court declaring levy of sales tax on excise duty, education cess and health cess to be bad become conclusive and is binding on parties. It may or may not have been competent for State Legislature to validly remove lacuna and remedy defect in earlier levy by seeking to impose sales tax through any amendment on excise duty, education cess and health cess; but, in any event, State Government has not purported to do so through Amending Act. As result of judgment of High Court declaring such levy illegal, State became obliged to refund excess amount wrongfully and illegally collected by virtue of specific direction to that effect in earlier judgment. It appears that only object of enacting amended provision is to nullify effect of judgment which became conclusive and binding on parties to enable State Government to retain amount wrongfully and illegally collected as sales tax and this object has been sought to be achieved by impugned amendment which does not even purport or seek to remedy or remove defect and lacuna but merely raises rate of duty from 6 per cent. to 45 per cent. and further proceeds to nullify judgment and order of High Court. In our opinion, enhancement of rate of duty from 6 per cent. to 45 per cent. with retrospective effect is, in facts and circumstances of case, clearly arbitrary and unreasonable. defect or lacuna is not even sought to be remedied and only justification for steep rise in rate of duty by amended provision is to nullify effect of binding judgment. vice of illegal collection in absence of removal of illegality which led Page 661 of 150 ITR. to invalidation of earlier assessments on basis of illegal levy, continues to taint earlier levy. In our opinion, this is not proper ground for imposing levy at higher rate with retrospective effect. It may be open to Legislature to impose levy at 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 matter does not appear to have been properly considered by High Court and High Court, in our view, was not right in holding that'by enactment of section 2 of impugned Act, very basis of complaint made by petitioner before this court in earlier writ petition as also basis of decision of this court in Cawasji's case that State is collecting amounts by way of tax in excess of what was authorised under Act has been removed'. We, accordingly, set aside judgment and order of High Court to extent it upholds validity of impugned amendment with retrospective effect from April 1, 1966, and to extent it seeks to nullify earlier judgment of High Court. We declare that section 2 of impugned amendment to extent that it imposes higher levy of 45 per cent. with retrospective effect from April 1, 1966, and section 3 of impugned Act seeking to nullify judgment and order of High Court are invalid and unconstitutional." It is clear from this judgment that two reasons were given for striking down retrospective levy. first reason given was that, in facts and circumstances of case, retrospectively enhancing of levy of duty from 6 per cent. to 45 per cent. is in itself arbitrary and unreasonable. second reason given is that defect or lacuna found by High Court is not sought to be remedied and only justification for steep rise in rate of duty is to nullify effect of earlier binding judgment. It was held that vice of illegal collection in absence of removal of illegality which led to invalidation of earlier levy continued to taint earlier levy. This judgment is wholly distinguishable from facts in present case. All that has been done in present case is to remove basis of law as it stood in 1987 which was interpreted in Cardoza's case as leading to particular result. All that Legislature has done in present case is to say that with effect from April 1, 1975, dissolved firms will by legal fiction, continue to be assessed, for purposes of levy and collection of [1973] 31 STC 445 (Mys). agricultural income-tax, in so far as they receive income post-dissolution but relating to transactions pre-dissolution. In no manner has Legislature in present case sought to directly nullify judgment in Cardoza's case. All that has happened is that legal foundation on which Cardoza's case was built is retrospectively removed, something which is well within legislative competence of Legislature. In Sri Ranga Match Industries v. Union of India [1994] (Suppl.) 2 SCC 726, this court dealt with same situation of retrospective validation of statute otherwise declared unconstitutional. Cawasji's case which was relied upon there (as it has been relied upon in present case) was distinguished in following terms: "At this stage, it would be appropriate to deal with decision of this court in D. Cawasji and Co. v. State of Mysore on which too reliance was placed by Shri Vaidyanathan, learned counsel for appellants, sales tax on liquor was levied at 6 per cent. Government was collecting it on entire sale price of arrack. However, in batch of writ petitions filed by licensees, Karnataka High Court held that levy of sales tax on excise duty and cesses component of sale price was incompetent. In other words, it was held that sales tax can be levied only on price proper but not upon excise duty and cesses which form part of sale price. said judgment of High Court was questioned in this court but later on Government withdrew appeal, with result that judgment of High Court became final. With view to nullify claims for refund, Karnataka Legislature intervened and amended Mysore Sales Tax Act with retrospective effect. amending Act enhanced rate of tax from 6 per cent. to 45 per cent. which meant that Government need not refund any amount to licensees pursuant to aforesaid judgment of High Court. Amendment Act was questioned in High Court but was upheld. On appeal, this court held Amendment Act unconstitutional. On close reading of judgment, it is clear that main ground on which Act was held to be incompetent was that raising rate of tax from 6 per cent. to 45 per cent. with retrospective effect was'clearly arbitrary and unreasonable' and, therefore, violative of articles 14 and 19. It was observed that instead of removing defect/lacuna pointed out by High Court, Legislature sought to raise rate of tax steeply with retrospective effect and that it was bad. judgment cannot be read as laying down that in no event can Legislature seek to render judgment of court ineffective and inoperative by amending o r rectifying defect or lacuna pointed out, on basis of which judgment was rendered. In my opinion, therefore, said judgment cannot be understood as supporting appellant's submission nor can it be read as militating against well-accepted power of Parliament which has been reiterated in innumerable judgments of this court." In Indian Aluminium Co. v. State of Kerala [1996] 7 SCC 637, there is In Indian Aluminium Co. v. State of Kerala [1996] 7 SCC 637, there is long discussion coupled with large number of judgments on validation acts. Cawasji's case was dealt with in paragraph 52 in following terms: "In D. Cawasji and Co. v. State of Mysore High Court in writ filed by appellant had held that State Government was devoid of power under section 19 of Sales Tax Act to collect sales tax and excise duty which is not part of selling price. Mandamus for refund was issued. Appeal filed in this court was withdrawn and Sales Tax (Amendment) Act was enacted enhancing sales tax from original 6 per cent. to 45 per cent. with retrospective effect. Section 3 validated previous assessments. This court struck down amendment so far as it related to retrospectivity pointing out that lacuna pointed out by court was not cured and judgment could not be nullified by legislative amendment." Finally, number of principles were laid down in paragraph 56 as follows: "From resume of above decisions, following principles would emerge: (1) adjudication of rights of parties is essential judicial function. Legislature has to lay down norms of conduct or rules which will govern parties and transactions and require court to give effect to them; (2) Constitution delineated delicate balance in exercise of sovereign power by Legislature, executive and judiciary; (3) In democracy governed by rule of law, legislature exercises power under articles 245 and 246 and other companion articles read with entries in respective lists in Seventh Schedule to make law which includes power to amend law. (4) Courts in their concern and endeavour to preserve judicial power equally must be guarded to maintain delicate balance devised by Constitution between three sovereign functionaries. In order that rule of law permeates to fulfil constitutional objectives of establishing egalitarian social order, respective sovereign functionaries need free play in their joints so that march of social progress and order remains unimpeded. 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 judicial preserve invalidating valid law competently made; (6) court, therefore, needs to carefully scan law to find out; (a) whether vice pointed out by court and invalidity suffered by previous law is cured complying with legal and constitutional requirements; (b) whether Legislature has competence to validate law; (c) whether such validation is consistent with rights guaranteed in Part III of Constitution. (7) court does not have power to validate invalid law or to legalise impost of tax illegally made and collected or to remove norm of invalidation or provide remedy. These are not judicial functions but exclusive province of Legislature. Therefore, they are not encroachment on judicial power. (8) In exercising legislative power, Legislature by mere declaration, without anything more, cannot directly overrule, revise or override judicial decision. It can render judicial decision ineffective by enacting valid law on topic within its legislative field fundamentally altering or changing its character retrospectively. changed or altered conditions are such that previous decision would not have been rendered by court, if those conditions had existed at time of declaring law as invalid. It is also empowered to give effect to retrospective legislation with deeming date or with effect from particular date. Legislature can change character of tax or duty from impermissible to permissible tax but tax or levy should answer such character and Legislature is competent to recover invalid tax validating such tax on removing invalid base for recovery from subject or render recovery from State ineffectual. It is competent for legislature to enact law with retrospective effect and authorise its agencies to levy and collect tax on that basis, make imposition of levy collected and recovery of tax made valid, notwithstanding declaration by court or direction given for recovery thereof. (9) consistent thread that runs through all decisions of this court is that Legislature cannot directly overrule decision or make direction as not binding on it but has power to make decision ineffective by removing base on which decision was rendered, consistent with law of Constitution and Legislature must have competence to do same." We are concerned in this case directly with principles 8 and 9. On facts, judicial decision in Cardoza's case has been rendered ineffective by enacting valid law on topic within legislative field which fundamentally alters or changes character of legislation retrospectively. changed or altered conditions are such that previous decision would not have been rendered by court if those conditions had existed at time of declaring law as invalid. Legislature has not directly overruled decision of any court but has only rendered, as has been stated above, such decision ineffective by removing basis on which decision was arrived at. Learned counsel for respondent cited three decisions before us. Panchi Devi v. State of Rajasthan [2009] 2 SCC 589, paragraph 9 was cited before us for proposition that delegated legislation being ordinarily prospective in nature should not be interpreted to give retrospective effect to take away right or liability which was created for first time. In present case, we are concerned with Act of Legislature and not delegated legislation. No right or liability is created for first time-the only thing done in present case is that 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. Legislature in present case has expressly made 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 [2004] 5 SCC 783 from paragraph 12 thereof, that withdrawal with retrospective effect of relief properly granted by statute to assessee which assessee has lawfully enjoyed as vested statutory right cannot be taken away unless there be strong and exceptional circumstances justifying said withdrawal. On facts again, this judgment does not apply. There is no withdrawal of any right which has become vested statutory right which deprives assessee of anything in present case. As has been noted above, what was taxable in hands of recipient assessee is now taxable in hands of dissolved firm post-dissolution only for certain purposes. This judgment also, therefore, cannot have any application in present factual scenario. Lastly, judgment in Hardev Motor Transport v. State of M. P. [2006] 8 SCC 613 was cited before us. Paragraph 31 thereof was read out in support of proposition that by inserting Explanation in statute, main provision of Act cannot be defeated or enlarged. Applying this test to present case, it is clear that in 1997 both main provision, that is, section 26(4), as well as Explanation were added retrospectively. main provision has been expanded to include dissolved firms and Explanation creates legal fiction in furtherance of main provision by deeming dissolved firm to be in existence as assessee for certain purposes. This being case, this judgment would also have no application to present factual scenario. For these reasons, we set aside impugned judgment dated July 3, 2002, and allow appeals. There shall be no orders as to costs. *** Assistant Commissioner of Agricultural Income-tax v. Netley "B" Estate
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