Asst. Commissioner of Agricultural Income-tax & Ors. vs. Netley “B” Estate and Ors. [2015] 372 ITR 590 (SC)
Before the Supreme Court the issue in a batch of appeals was whether the assessment of agricultural income received by a firm after it was dissolved in so far as the income of the firm pertained to actual cash receipts after the firm was dissolved but relating to income earned prior to dissolution.
The Supreme Court noted that in L.P. Cardoza vs. Agricultural ITO [1997] 227 ITR 421 (Karn.), the question involved was as to whether a dissolved firm could be assessed to agricultural income-tax after the date of its dissolution in respect of income received for supply of goods made by the firm prior to its dissolution. This question arose in the light of section 26(4) and section 27 as they then stood, that is, as they stood in 1987.
The Karnataka High Court had held that there was nothing in section 26(4), as it then stood or section 27, to indicate that where the firm is dissolved and income is received after dissolution in respect of agricultural produce supplied by the firm before dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution.
Faced with this decision of the Karnataka High Court, the Legislature amended section 26(4) retrospectively, that is, with effect from, 1st April, 1975. The amended provision as follows:
“26. (4) Where any business through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after the discontinuance or dissolution shall be deemed to be income of the recipient and charged to tax accordingly in the year of receipt, if such would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance or dissolution.
Explanation – For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regulatory employed by it immediately before such discontinuance or dissolution.”
The said amendment was the subject matter of challenge before a learned single judge of the Karnataka High Court. The single judge repelled the challenge basically on the ground that the Explanation only clarified the main provision and, therefore, did not go beyond the main provision. Equally, since the Legislature has the right to amend both prospectively and retrospectively, all that was done in the present case was an exercise of the legislative power retrospectively and, therefore, no question arose of any discrimination on this count. The single judge, therefore, dismissed the writ petitions before him.
In appeal before the Division Bench, the Division Bench set out all the aforesaid provisions and ultimately found, following the judgment in D. Cawasji & Co. vs. State of Mysore [1984] (Suppl.) SCC 490/ 150 ITR 648, that the Amending Act of 1997 suffered from the vice that was found in Cawasji’s case, namely, that it interfered directly with the judgment of the High Court and would, therefore, have to be struck down as unconstitutional on this score alone. This the Division Bench found because, according to the Division Bench, in the Statement of Objects and Reasons for the 1997 amendment, it was held that the object of the amendment was to undo the judgment of the High Court of Karnataka in Cardoza’s case.
The Supreme Court was thus concerned with the validity of Explanation added retrospectively to section 26(4) of the Karnataka Agricultural Income-tax Act (hereinafter referred to as “the Act”).
The Supreme Court noticed that in the amended section 26(4), two changes were made. Whereas in the original provision, no express reference was made to companies or association of persons, and no reference whatsoever was made to a dissolved firm, both were added. By the Explanation, which is for the removal of doubts, he Legislature declared that where before dissolution of a firm, full payment was not received in respect of income that has been earned pre-dissolution, then notwithstanding such dissolution, the said income would be deemed to be the income of the firm in the year in which it was received or receivable and the firm would be deemed to be in existence for such year for the purposes of assessment. By this amendment, the basis of the law as it stood when Cardoza’s case was decided had been changed.
The Supreme Court held that all that had been done in the present case was to remove the basis of the law as it stood in 1987 which was interpreted in Cardoza’s case as leading to a particular result. All that the Legislature has done in the present case is to say that with effect from 1st April, 1975, dissolved firms will by legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income-tax, in so far 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 had happened was that the legal foundation on which the Cardoza’s case was built was retrospectively removed, something which was well within the legislative competence of the Legislature.
The Supreme Court further held that the judicial decision in Cardoza’s case had been rendered ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid. The Legislature had not directly overruled the decision of any court but has only rendered, as has been stated above, such decision ineffective by removing the basis on which the decision was arrived at.
The Supreme Court set aside the impugned judgment of the Division Bench of the High Court, and allowed the appeals.
