Retrospective amendments to Section 80HHC(3) violating Article 14 struck down for arbitrariness and lack of nexus

The HC held that the retrospective insertion of conditions in the provisos to Section 80HHC(3) discriminating between assessees with finalized assessments and those with pending assessments violates Article 14 due to lack of rational nexus and arbitrariness. The Revenue failed to justify this classification. While the doctrine of promissory estoppel does not bind the Legislature, individual assessees may invoke it if adversely affected. The Court ruled that substantive amendments with retrospective effect are impermissible when the relevant scheme has expired. Consequently, the amendment was quashed to the extent it applied retrospectively to prior assessment years for assessees with export turnover exceeding Rs. 10 Crore, allowing the amendment's operation only prospectively to prevent detriment to any assessee.

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Issues Involved:
1. Constitutional validity of the third and fourth provisos to Section 80 HHC (3) of the Income Tax Act, 1961.
2. Whether the amendment is arbitrary and unreasonable.
3. Violation of Article 14 of the Constitution of India.
4. Application of the doctrine of promissory estoppel and legitimate expectation.
5. Retrospective application of the amendment.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Third and Fourth Provisos to Section 80 HHC (3):
The writ applications challenge the constitutional validity of the third and fourth provisos to Section 80 HHC (3) of the Income Tax Act, 1961, inserted by the Taxation Laws (Second Amendment) Act, 2005, with retrospective effect. The petitioners argue that the amendment discriminates between assessees of the same class, violating Article 14 of the Constitution of India, and imposes new pre-conditions retrospectively for eligibility for deduction under Section 80 HHC.

2. Whether the Amendment is Arbitrary and Unreasonable:
The petitioners contend that the amendment is arbitrary and unreasonable as it imposes an absurd condition that no sensible person would exercise. The amendment purports to retrospectively take away the benefit on the basis that exporters with a turnover of more than Rs.10 Crore will get the benefit if they can prove they had an option to choose either duty drawback or DEPB and chose DEPB even when they were entitled to a higher benefit under the duty drawback scheme. The court held that classification based on export turnover is a recognized way of classification throughout the world and found no substance in the petitioners' contention regarding the legality of the amendment based on turnover.

3. Violation of Article 14 of the Constitution of India:
The petitioners argue that the amendment places two assessees of the same class on different footing, violating Article 14 of the Constitution of India. The court agreed that discrimination based on the pendency of assessment proceedings violates Article 14, as the assessees have little role in the completion of assessment. The court found that such classification fails the test of Article 14, being a case of 'palpable arbitrariness.'

4. Application of the Doctrine of Promissory Estoppel and Legitimate Expectation:
The petitioners argue that the amendment violates the principles of promissory estoppel and legitimate expectation, as the benefit of Section 80 HHC was given to encourage exports, and they are now deprived of the incentive. The court held that there is no estoppel against legislation, and the legislature is not bound by the doctrine of promissory estoppel. However, an individual assessee can take the plea of promissory estoppel if the amended provision adversely affects them.

5. Retrospective Application of the Amendment:
The petitioners argue that the substantive amendment cannot have retrospective effect. The court held that although the legislature has the right to confer benefits prospectively or retrospectively, such curtailment with retrospective effect cannot be made to overcome a judicial decision without taking recourse to the provision of appeal prescribed by law. The court found that the amendment, which takes away the benefit already granted through a concluded scheme, is arbitrary and opposed to law. The court quashed the impugned amendment to the extent that its operation could be given effect from the date of amendment and not in respect of earlier assessment years of assessees with export turnover above Rs. 10 Crore.

Conclusion:
The court quashed the impugned amendment to the extent that it should not have retrospective effect detrimental to any of the assessees. The writ applications were disposed of accordingly, with no order as to costs.

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