Section 40(b) Explanation 2 treated as governed by earlier binding precedent, with later contrary remarks held to be obiter dicta.

Explanation 2 to Section 40(b) of the Income-tax Act, 1961, inserted from 1 April 1985, was treated as governed by the earlier binding decisions that had regarded it as declaratory. Later observations suggesting a different position were treated as obiter dicta because Section 40(b) and the Explanation were not directly in issue in that case. The earlier three-judge view was followed, and the Explanation was not accepted as merely clarificatory on the broader basis suggested by the later decision.

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Issues: Whether Explanation 2 to Section 40(b) of the Income-tax Act, 1961, introduced with effect from 1 April 1985, is prospective in operation or merely declaratory.

Analysis: The prior decisions holding the Explanation to be declaratory were treated as correctly stating the law. The contrary observations in a later decision were held to be obiter dicta because the application of Section 40(b) and the Explanation was not actually in issue there. On that basis, the Explanation was not accepted as merely clarificatory in the manner suggested by the later case, and the earlier three-judge view was followed.

Conclusion: The Explanation is to be applied in accordance with the earlier binding decisions, and the appeal fails.

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