Retrospective tax amendment invalid where it only overrides precedent and does not cure a statutory defect; consequential demands fail.

A retrospective taxing amendment cannot be sustained merely to overturn a binding interpretation unless it cures a real statutory defect or lacuna. The Karnataka High Court held that the Explanation inserted into section 26(4) of the Karnataka Agricultural Income-tax Act could operate prospectively, but its retrospective effect from 1 April 1975 was invalid because no curing defect was shown and the amendment was aimed at displacing the earlier judicial view. Demand notices for assessment year 1996-97 based on that retrospective operation therefore could not survive and were quashed.

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Issues: (i) Whether the Explanation to section 26(4) of the Karnataka Agricultural Income-tax Act, 1957, inserted by the Karnataka Taxation Laws (Second Amendment) Act, 1997 with retrospective effect from 1 April 1975, was constitutionally valid; (ii) whether the impugned demand notices for the assessment year 1996-97 could be sustained.

Issue (i): Whether the Explanation to section 26(4) of the Karnataka Agricultural Income-tax Act, 1957, inserted by the Karnataka Taxation Laws (Second Amendment) Act, 1997 with retrospective effect from 1 April 1975, was constitutionally valid.

Analysis: The amendment was introduced after the Division Bench had interpreted section 26(4) as not authorising assessment of post-dissolution receipts in the hands of the dissolved firm. The retrospective Explanation was enacted to overcome that settled interpretation. A retrospective amendment is permissible where it removes a defect or lacuna and validly cures the basis of the earlier invalidity, but it is not justified merely to nullify a binding judgment without curing any statutory defect. On the record, no lacuna in section 26(4) was shown to have been removed; the amendment was aimed at overriding the earlier decision. The court therefore upheld the amendment only prospectively and disapproved its retrospective operation.

Conclusion: The Explanation is valid only prospectively and its retrospective operation is invalid, in favour of the assessee.

Issue (ii): Whether the impugned demand notices for the assessment year 1996-97 could be sustained.

Analysis: Since the retrospective operation of the amending provision could not stand, the demand notices founded on that retrospective basis for the relevant assessment year could not survive. The notices were consequential to the impugned retrospective amendment and therefore lacked legal support to the extent challenged.

Conclusion: The demand notices were quashed, in favour of the assessee.

Final Conclusion: The amendment was upheld only to the extent of its prospective operation, but the retrospective application was struck down and the consequential demand notices were set aside.

Ratio Decidendi: A retrospective taxing amendment cannot be sustained merely to override a binding judgment unless it cures the statutory defect or lacuna that led to the earlier invalidation; a deeming fiction will not be extended beyond its clear terms by implication.

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