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SUPREME COURT OF INDIA
Y.V. CHANDRACHUD. CJI., P.N. BHAGWATI, AMARENDRA NATH SEN, D.P. MADON AND M.P. THAKKAR, JJ.*
M/s. Lohia Machines Ltd. and another, Petitioners
Versus
Union of India and others, Respondents.
Writ Petns. Nos. 4509, 4542-43 etc. of 1979: 6434 etc. of 1980 (with C.M.P. No. 34440 of 1983): 4-5 31, 41 etc. of 1981, 1529, 2579 etc. of 1982 and 6-10 and 13491-13495 etc. of 1983, D/- 25-1-1985.
Advocates appeared
Mr. N. A. Palkhiwala, B. K. Mohanti, Ram Panjwani, T. A. Ramachandran, D. Pal, A. K. Sen, M. M. Abdul Khader and G. C. Sharma. Sr. Advocates, Mr. Dinesh Vyas, T. M. Munim, S. P. Mehta, Ramesh Divan, Srinivasmurthi, Harish N. Salve; Homi Raina, J. B. Dadachanji, Ravinder Narain. O. C. Mathur. Mrs. A. K. Verma, T. M. Ansar. Miss Rainu Walia. D. N. Mishra, S. Sukumaran, P. K. Ram, A. M. Ditia, Aditya Narain, Ashok Sagar, M/s. Vijay Panjwani, Raj Panjwani, S. K. Bagga; H. K. Puri, C. S. S. Rao; Lalit Kumar Gupta, Subhash Dutta. Vimal Dave; Mrs. Janaki Ramachandran: P. H. Parekh, Ashok K. Gupta; A. V. Rangam; M. K. Garg; Dalveer Bhandari. B. Parthasarthi; Praveen Kumar, Anil Kumar Sharma, Ashok Mathur, R. P. Garg. S. K. Bansal. P. K. Mukherjee; Dr. V. Gouri Shanker, K. L. Hathi. Manoj Arora, D. K. Chhaya, Mrs. Hemantika Wahi; N. Sudhakaran; K. N. Bhatt, V. K. Verma; M. L. Lahoty, Hrishikesh Roy, Naseem Ahmed, S. K. Jain; M. M. Kshatriya; M. Seal, D. N. Gupta, H. P. Ranian; K. B. Rohatgi; C. S. Aggarwal, B.V. Desai; M. L. Verma; M. R. K. Pillai; B. D. Sharma Kailash Vasdev; O. P. Vaish, Santosh K. Aggarwal, P. K. Bhindaria; A. K. Sanghi, Ravinder Bana, Miss Meera Bhatia; S. K. Dholakia; V. N. Ganpule; S. K. Gambhir; S. C. Patel; Sarwa Mitter; K.H. Kaji, M. N. Shroff; M. C. Dhingra; T. P. Sundrajan; B. B. Tawkley; K. K. Jain, S. K. Gupta, P. Dayal, A. D. Sanger; Anoop Sharma, R. S. Sharma; Lalit Bhasin, Rakesh Sahni, Vineet Kumar, 424 Miss Arshi Singh, A. Subba Rao; B. R. Aggarwala, R. C. Pandey, Miss V. Menon; Santosh Chatterjee. Altaf Ahmad and A. K. Panda with them, for the appearing Petitioners; Mr. K. Parasaran, Attorney General and Miss A. Subhashini. Advocate with him, for Respondents.
Income-tax Act, 1961 – Section 80-J, 84, 84(1) - Finance Act, 1980 - Section 80-J - Indian Income-tax Act, 1922 - Section 15-C, 59(1) - Business Profits Tax Act. 1947 - Section 13 - Taxation Laws Act 1949 - Section 34(2) - Companies Act 1956 - Income-tax Rules, 1962 - Rule 19-A - Indian Income-tax Rules 1949 – Section 19, 19A – Constitution of India, 1950 - Article 14, 19(1)(g), 19 - Levy Tax - Imposition of Higher Taxes - Challenge Validity - These writ petitions raise an interesting question of law relating to interpretation and on basis of certain interpretation, they challenge validity of Income-tax Rules, 1962 and also call in question constitutionality of retrospective amendment made in S. 80-J by Finance Act. 1980 - Questions arising in these writ petitions are of considerable importance since they involve revenue aggregating to crores of rupees and they have been argued at great length on both sides- Whether R. 19-A could be said to be in conformity with mandate of sub-section (1) of S. 80-J in so far as it provided for exclusion of all borrowed monies including long term borrowings from computation of capital employed and enacted that computation of capital employed should be made as on first day of computation period - Whether it has been acquiesced in or not - Whether T.C.E. is owned or borrowed is immaterial for this control figure - Whether concern has earned a satisfactory annual profit having regard to expected return on total funds employed in business - Whether capital employed necessarily includes long term borrowings - Whether short term borrowings can be regarded as forming part of capital employed - Whether Rule 19A of Income-tax Rules in so far as said Rule excludes borrowed capital and fixes first day of year in matter of computation of capital employed for purpose of relief under S. 80-J is valid - Whether amendment introduced in S. 80-J by Finance Act of 1980 incorporating in section provisions of Rule in relation to exclusion of borrowed capital and fixing of first day of year for purpose of computation of capital employed for granting relief under Sec. 80-J with retrospective effect is valid – Held, Years for which levy is sought to be imposed with retrospective effect has already passed and there cannot be any proper justification for imposition of any fresh tax for those years - Such retrospective taxation is likely to disturb and unsettle settled position and because of such imposition of retrospective levy for years for which there was no such levy, assessments for those years which might already have been completed and concluded will get upset - If State is in need of more funds State instead of seeking to levy any tax with retrospective effect can always take appropriate steps to collect any larger amount so required by imposition of higher taxes or by other appropriate methods – Court have already observed that Validating Acts which seek to validate levy of any tax with retrospective effect do not in effect impose any fresh tax with retrospective effect and Validating Acts stand on an entirely different footing – Court therefore hold that impugned amendment in so far as it is sought to be made retrospective with effect is invalid and unconstitutional though amendment in so fax as it operates prospectively is valid – Court set aside judgment of Madhya Pradesh High Court which upholds validity of Rule and court allow appeal of assessee against judgment of Madhya Pradesh High Court – Court hold and declare that Rule 19-A in so far as it seeks to exclude borrowed capital and fixes first day of year for computation of relief under S. 80J is invalid and unconstitutional and same has to be struck down and has been struck down rightly by various High Courts – Court hold and declare that impugned amendment of 1980 incorporating provision of invalid Rule 19-A in section itself, excluding borrowed capital and fixing first day of year for computation of relief under S. 80J is valid in its prospective operation from date of amendment and is unconstitutional and invalid in so far as said amendment is sought to be brought into operation retrospectively with effect - Accordingly, Court allow writ petitions challenging validity of amendment only to extent of its retrospective operation and Court dismiss writ petitions in so far as amendment in its entirety is sought to be challenged - Petitions dismissed.
Judgment
BHAGWATI, J. ( For himself, Y. V. Chandrachud, C. J. and D. P. Modon and M. P. Thakkar, JJ.):- These writ petitions raise an interesting question of law relating to the interpretation of Sec. 80-J of the Income-tax Act, 1961 and on the basis of certain interpretation, they challenge the validity of Rule 19-A of the Income-tax Rules, 1962 and also call in question the constitutionality of the retrospective amendment made in S. 80-J by Finance (No. 2) Act. 1980. The questions arising in these writ petitions are of considerable importance since they involve revenue aggregating to crores of rupees and they have been argued at great length on both sides
2. The principal controversy between the parties turns on the true interpretation of Section 80-J of the Income-tax Act. 1961 and hence we may begin our discussion of the issues arising in the writ petitions by examining the language of that section. But before we do so, we may usefully refer to the genesis of the provision enacted in Sec. 80-J and the transformation it has undergone from time to time over the years. It is in fact necessary to trace the historical evolution of this provision in order to arrive at its true interpretation, for, as observed by Cardozo. J. in Duparqued Huat V. Evans. (1935) 297 US 216, in questions relating to construction, "history is a teacher that is not to be ignored". The first time that a provision of this kind was introduced in the Indian Income-tax Act, 1922 was by the Taxation Laws (Amendment) Ordinance 1949 when Section 15-C was added in that Act with effect from 31st March, 1949. Sub-section (1) of Section 15-C exempted a part of the profits and gains of a new industrial undertaking from tax and this provision as originally enacted was in the following terms :
"15-C (1) Save as otherwise provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue."
The Central Board of Revenue in exercise of the powers conferred under sub-section (1) of Section 59 of the Indian Income-tax Act 1922 issued a Notification dated 15th October 1949 making the Indian Income-tax (Computation of Capital of Indistrial Undertakings) Rules 1949 for computation of capital employed in the industrial undertaking as envisaged in sub- section (1) of Section 15-C. Rule 3 of these Rules in so far as material provided inter alia as follows :
Rule 3 (1) : For the purpose of S. 15-C of the Act, the capital employed. in an undertaking to which the said sect ion applies shall be taken to be -
(a) in the case of assets acquired by purchase and entitled to depreciation -
(i) if they have been acquired before the computation period, the written down value on. the commencing date of the said period;
(ii) if they have been acquired on or after the commencing date of the computation period their average cost during the said period;
(b) In the case of assets acquired by purchase and not entitled to depreciation -
(i) if they have been acquired before the computation period, their actual cost to the assessee ;
(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period;
(c) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts;
(d) in the case of any other assets the value of the assets when they became assets of the business provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed.
(2) Where the price of any assets has been satisfied otherwise than in cash the then value of the consideration actually given for the asset shall be treated as the price at which the asse
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