2024 (8) TMI 956 - SC - Indian Laws

States can levy tax demands under Entries 49-50 List II but not for pre-April 2005 transactions

The SC applied the doctrine of prospective overruling in a tax matter involving state legislation under Entries 49 and 50 of List II, Seventh Schedule. ... Doctrine of prospective overruling - Legislative competence to levy taxes on minerals under Entries 49 and 50 of List II - Article 142 power to mould relief - Presumption of constitutionality of legislation - Prospective application and retrospective effect in tax adjudication - Waiver of interest and penalty on past tax demands - Staggered payment of revived tax demandsDoctrine of prospective overruling - Presumption of constitutionality of legislation - Legislative competence to levy taxes on minerals under Entries 49 and 50 of List II - Whether the judgment in Mineral Area Development Authority v. Steel Authority of India (MADA) should be given prospective effect - HELD THAT: - The Court reviewed the doctrine of prospective overruling and its application in Indian jurisprudence, including its purpose to avert injustice or hardship where a new rule overrules long-settled precedent. It weighed competing equities: the reliance of States and third parties on the earlier law, the presumption of constitutionality of statutes, the consequences of invalidating taxes (including refunds and disruption to state finances), and the reliance of assessees on the earlier rulings. Given the conflicting precedents (India Cement and Kesoram) which had left the law unsettled, and the substantial fiscal and commercial consequences of retrospective application in the taxation context, the Court concluded that overruling should not be given purely prospective operation. On balance, the Court rejected an overall prospective overruling of MADA but fashioned remedial, transitional measures to reconcile the interests of the States and the assessees. [Paras 17, 24]Rejected; MADA is not to be given wholly prospective effectStaggered payment of revived tax demands - Waiver of interest and penalty on past tax demands - Prospective application and retrospective effect in tax adjudication - Modulation of consequences arising from the MADA decision and directions for handling past tax demands under Entries 49 and 50 of List II - HELD THAT: - Recognising the heavy fiscal and commercial consequences of applying MADA to past transactions, the Court directed a pragmatic scheme to balance competing interests. The State governments are permitted to levy or renew demands in accordance with MADA, subject to limits: such demands shall not operate on transactions made prior to 1 April 2005; the time for payment of any revived demands shall be staggered in instalments over twelve years commencing 1 April 2026; and levy of interest and penalty on demands for the period before 25 July 2024 is waived for all assessees. The Court recorded that these conditions are intended to mitigate hardship, protect settled commercial expectations to an extent, and preserve State revenues without imposing retroactive punitive burdens on assessees. [Paras 25]States may levy or renew demands in terms of MADA subject to: (a) no operation on transactions prior to 1 April 2005; (b) payment staggered over 12 years from 1 April 2026; and (c) waiver of interest and penalty for demands before 25 July 2024Final Conclusion: The prayer to give MADA wholly prospective effect is declined. The Court permits States to enforce tax demands in accordance with MADA but with transitional safeguards: no liability for transactions prior to 1 April 2005, staggered payment over twelve years from 1 April 2026, and waiver of interest and penalty for amounts attributable to the period before 25 July 2024. Issues Involved:1. Prospective Overruling2. Legislative Competence of States under Entries 49 and 50 of List II3. Financial Burden on Assesses and State Governments4. Validity of Taxing LegislationIssue-wise Detailed Analysis:1. Prospective Overruling:The doctrine of prospective overruling is applied when a constitutional court overrules a well-established precedent by declaring a new rule but limits its application to future situations to avert injustice or hardships. This Court has adopted the doctrine of prospective overruling, inspired partly by jurisprudence developed in the US. The doctrine was first applied in Golak Nath v. State of Punjab, where it was held that constitutional amendments are subject to limitations prescribed under Article 13 (2) of the Constitution. The Court declared that its decision would not affect the validity of the Constitution (Seventeenth Amendment) Act, 1964, or other amendments made to the Constitution taking away or abridging the fundamental rights.2. Legislative Competence of States under Entries 49 and 50 of List II:MADA (supra) has upheld the legislative competence of States under Entries 49 and 50 of List II. If MADA (supra) is given prospective application, the validity of all relevant legislation enacted before the date of the decision, that is, 25 July 2024, will have to be tested on the touchstone of the previous law. This Court generally does not declare prospective overruling when upholding the legislative competence of legislatures. In Municipal Council, Kota v. Delhi Cloth & General Mills Co. Ltd., this Court upheld the competence of the Municipal Council to levy the tax and set aside the order of the High Court granting refunds to the assesses.3. Financial Burden on Assesses and State Governments:The learned Solicitor General pointed out that the total amount due by the assesses (which includes public sector undertakings) to the governments is substantial and will impose a heavy financial burden on the assesses. During the pendency of the present reference, this Court passed interim orders in the tagged matters, including rejection of the stay of proceedings while allowing restitution in the event the appeal is allowed, grant of interim stay subject to the assesses submitting bank guarantees for the whole amount sought to be recovered, and direction to the States to take no coercive steps against the assesses for recovery of any demands of tax pending the appeal. The delay in court proceedings should not be to the detriment of the assesses. Equities will be balanced if the State governments waive the outstanding interest accrued on the principal due from the assesses.4. Validity of Taxing Legislation:The doctrine of prospective overruling has been applied by this Court in situations where the new declaration results in the invalidation of legislation, which would otherwise have been valid under the old declaration. In the case of taxing statutes, such a declaration would make the State liable to refund all amounts collected under the invalid legislation. Therefore, this Court declares the new rule to apply prospectively not only to secure the revenues of the State but also to protect the rights and obligations crystallized by persons and entities under the old regime.Conclusion:The submission that MADA (supra) should be given prospective effect is rejected. Bearing in mind the consequences that would emanate from the past period, the following conditionalities are directed to prevail:a. While the States may levy or renew demands of tax, if any, pertaining to Entries 49 and 50 of List II of the Seventh Schedule in terms of the law laid down in the decision in MADA (supra), the demand of tax shall not operate on transactions made prior to 1 April 2005;b. The time for payment of the demand of tax shall be staggered in instalments over a period of twelve years commencing from 1 April 2026; andc. The levy of interest and penalty on demands made for the period before 25 July 2024 shall stand waived for all the assesses.