2015 (3) TMI 723 - SC - Income Tax

Supreme Court Allows Retrospective Amendment to Tax Act, Includes Dissolved Firms in Assessment

Assistant Commissioner of Agricultural Income Tax & ors. Versus M/s. Netley 'B' Estate & ors.

The Supreme Court upheld the legislative competence to retrospectively amend Section 26(4) of the Karnataka Agricultural Income Tax Act, including ... Validity of an explanation added retrospectively to Section 26(4) of the Karnataka Agricultural Income Tax Act - Held that:- From a cursory reading of section 26(4) read with section 27, it becomes clear that any sum received after discontinuance of business by a firm is deemed to be the income of the recipient and charged to tax accordingly, 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. 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. With respect to such income, every person who was, at the time of discontinuance or dissolution, a partner of such firm was liable to be jointly or severally assessed on such agricultural income as also to pay the same by way of tax penalty, etc. In the amended Section 26(4), two changes are made. Whereas in the original provision, no express reference was made to companies or associations of persons, and no reference whatsoever was made to a dissolved firm, both have now been added. By the explanation, which is for the removal of doubts, the legislature declares that where before dissolution of a firm, full payment is not received in respect of income that has been earned pre-dissolution, then notwithstanding such dissolution, the said income will be deemed to be the income of the firm in the year in which it is received or receivable and the firm shall be deemed to be in existence for such year for the purposes of assessment. It will be noticed that by this amendment, the basis of the law as it stood when Cardoza's case [1997 (4) TMI 61 - KARNATAKA High Court] was decided has been changed. Cardoza's case noticed that there was no deeming procedure that continued a firm that had been dissolved to be an assessee for the purposes of income that was earned by it pre-dissolution but received post-dissolution. The deeming fiction has now been introduced by the explanation (and with retrospective effect from 1975) thereby making it clear that the basis of the law as it stood when Cardoza's case was decided has now been changed with effect from 1975. The position which therefore, emerges is that instead of such income being taxed at the hands of the 'recipient', it is now taxed in the hands of the dissolved firm. . All that the legislature has done in the present case is to say that with effect from 01.04.1975, dissolved firms will by legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income tax, insofar as they receive income post dissolution but relating to transactions pre-dissolution. In no manner has the legislature in the present case sought to directly nullify the judgment in Cardoza's case. All that has happened is that the legal foundation on which the Cardoza's case was built is retrospectively removed, something which is well within the legislative competence of the legislature. Appeal allowed. Issues Involved:1. Validity of the retrospective amendment to Section 26(4) of the Karnataka Agricultural Income Tax Act.2. Assessment of agricultural income received by a dissolved firm.3. Legislative competence for retrospective amendment.4. Whether the amendment nullifies judicial decisions.Issue-wise Detailed Analysis:1. Validity of the retrospective amendment to Section 26(4) of the Karnataka Agricultural Income Tax Act:The appeals concern the validity of an explanation added retrospectively to Section 26(4) of the Karnataka Agricultural Income Tax Act. The amendment, effective from 01.04.1975, included dissolved firms within its scope and introduced a deeming fiction that income received post-dissolution but earned pre-dissolution is taxable in the hands of the dissolved firm. This change was made to address the legal position established in L.P. Cardoza and others v. Agricultural Income Tax Officer and others, which held that a dissolved firm could not be assessed for income received after dissolution.2. Assessment of agricultural income received by a dissolved firm:Section 26(4), as amended, states that any sum received after the discontinuance or dissolution of a firm shall be deemed to be the income of the recipient and charged to tax accordingly if such sum would have been included in the total income of the person who carried on the business had it been received before such discontinuance or dissolution. The explanation clarifies that income from crops harvested and disposed of before discontinuance or dissolution but for which full payment has not been received shall be deemed to be the income of the firm or association for the year it is received or receivable, and the firm shall be deemed to be in existence for such year for assessment purposes.3. Legislative competence for retrospective amendment:The court recognized the legislature's competence to retrospectively amend laws to alter the basis on which judicial decisions were made. The amendment to Section 26(4) was within the legislative field and fundamentally altered the character of the legislation retrospectively, making it clear that dissolved firms could be assessed for income received post-dissolution. The court distinguished this case from D. Cawasji and Co., Mysore v. State of Mysore, where a retrospective tax increase was struck down as arbitrary and unreasonable.4. Whether the amendment nullifies judicial decisions:The court held that the amendment did not directly nullify the judgment in Cardoza's case but removed the legal basis on which the judgment was rendered. The legislature has the power to enact laws retrospectively to render judicial decisions ineffective by altering the conditions that led to those decisions. This principle was supported by precedents such as Sri Ranga Match Industries and others v. Union of India and others and Indian Aluminium Co. and others v. State of Kerala and others, which upheld the legislature's power to retrospectively validate statutes and remove the basis of judicial decisions.Conclusion:The Supreme Court set aside the impugned judgment of the High Court of Karnataka, which had struck down the retrospective amendment to Section 26(4) of the Karnataka Agricultural Income Tax Act. The court upheld the legislative competence to retrospectively amend the law and include dissolved firms within the scope of assessment for income received post-dissolution. The appeals were allowed, and no orders as to costs were made.