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CHEQUE BOUNS CASE

Section 10(26AAB) of the Income Tax Act, 1961 (the Act) exempts income of Agricultural Market Committees (AMCs) from the levy of income tax under the Act. It was inserted by the Finance Act, 2008 with effect from 01.4.2009. It is settled legal position that CBDT circulars are binding on all Income Tax authorities (Union of India v Muralidhara Menon[34] and CIT v Hotel Blue Moon[35]), and do not fetter the Court from interpreting the law. But they do certainly have significance in understanding the provision under consideration. If the CBDT’s clarificatory circular issued on the heels of the Finance Act does not deviate from the Finance Bill and the Act, there is no bar to rely on the CBDT Circular. A combined reading of Paragraphs 7.1 and 7.2 with 8.1 and 8.2 of the CBDT Circular No.1 of 2009, dated 27.3.2009 negatives the submission of the AMCs that Section 10(26AAB) of the Act was intended to be retrospective. we hold that Section 10(26AAB) of the Act inserted by the Finance Act, 2008 w.e.f. 01.4.2009 cannot be applied retrospectively w.e.f. 01.4.2003 and that the new clause (26AAB) in Section 10 of the Act is applicable w.e.f. 01.4.2009 and shall accordingly apply for the assessment year 2009-10 and for the subsequent assessment years.

* THE HON’BLESRI JUSTICE V.V.S.RAO

Income Tax Cocktail

Income Tax Cocktail (Photo credit: Kenn Wilson)

AND

THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

 

I.T.T.A.Nos.421, 523, 524, 525, 526, 527, 528, 529 of 2010;

2, 3, 4, 6, 7, 11, 20, 22, 32, 36, 37, 38, 39, 40, 41, 42 and 43 of 2011

 

%    30.03.2011

 

Commissioner of Income Tax, Rajahmundry

And others

                        … Appellant

VERSUS

 

Agricultural Market Committee, Tanuku

And others

… Respondent

< GIST:

 

 

> HEAD NOTE:

 

 

 

! Counsel for Petitioners: Sri S.R.Ashok

 

^Counsel for Respondents: The learned Advocate General, for AMCs

Ms. K.Lalitha, Standing Counsel for

Agricultural Market Committees

? Cases referred

1.             (2008) 305 ITR 1 (SC) : (2008) 9 SCC 434

2.             (1997) 226 ITR 625 (SC) : (1997) 5 SCC 482 : AIR 1997 SC 2523

3.             (2001) 250 ITR 369 (Delhi)

4.             (2004) 8 SCC 1

5.             (2005) 7 SCC 396

6.             (2008) 304 ITR 308 (SC) : (2008) 9 SCC 622

7.             (1983) 143 ITR 1020 (AP)

8.             (1983) 143 ITR 1021 (AP)

9.             (1995) 2 SCC 630 : AIR 1996 SC 238

10.         (2009) 12 SCC 209

11.         AIR 1960 SC 12

12.         (1997)223 ITR 824 (SC) : (1997) 1 SCC 352 : AIR 1997 SC 1651

13.         (1997) 4 SCC 89

14.         (1977) 106 ITR 292 (SC) : (1977)  1 SCC 431

15.         (2000) 2 SCC 253

16.         (1997) 224 ITR 677 (SC) : (1997) 3 SCC 472

17.         (2008) 297 ITR 322 (SC) : (2008) 4 SCC 362 : AIR 2008 SC 572

18.         (2010) 1 SCC 489

19.         (1981) 2 SCC 308 : AIR 1981 SC 951

20.         (1996) 219 ITR 515 (SC) : (1996) 8 SCC 758

21.         (2007) 291 ITR 419 (Bom)

22.         (2007) 294 ITR 563 (P&H)

23.         (2009) 308 ITR 380 (MP)

24.         (2009) 308 ITR 401 (MP)

25.         (2007) 295 ITR 561 : (2007) 14 SCC 704

26.         ITTA Nos.251 of 2008 and batch, dated 01.3.2011.

27.         1992 Supp (3) SCC 217 : AIR 1993 SC 477

28.         (1994) 3 SCC 1 : AIR 1994 SC 1918

29.         (2002) 7 SCC 368 : AIR 2002 SC 3176

30.         (1981) 131 ITR 597 (SC) : (1981) 4 SCC 173 : AIR 1981 SC 1922

31.         (1985) 156 ITR 525 (SC) : (1985) 4 SCC 608 : AIR 1986 SC 959

32.         (2008) 310 ITR (St.) 42

33.         (2008) 300 ITR (St.) 17

34.         (2009) 9 SCC 304

35.         (2010) 321 ITR 362 (SC) : (2010) 3 SCC 259


THE HON’BLE SRI JUSTICE V.V.S.RAO

AND

THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

I.T.T.A.Nos.421, 523, 524, 525, 526, 527, 528, 529 of 2010;

2, 3, 4, 6, 7, 11, 20, 22, 32, 36, 37, 38, 39, 40, 41, 42 and 43 of 2011

 

   March 30, 2011

Between:

 

Commissioner of Income Tax, Rajahmundry

… Appellant

          AND

 

Agricultural Market Committee, Tanuku

… Respondent


THE HON’BLE SRI JUSTICE V.V.S.RAO

AND

THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

I.T.T.A.Nos.421, 523, 524, 525, 526, 527, 528, 529 of 2010;

2, 3, 4, 6, 7, 11, 20, 22, 32, 36, 37, 38, 39, 40, 41, 42 and 43 of 2011

 

COMMON JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao)

  Section 10(26AAB) of the Income Tax Act, 1961 (the Act) exempts income of Agricultural Market Committees (AMCs) from the levy of income tax under the Act.  It was inserted by the Finance Act, 2008 with effect from 01.4.2009.  This batch of appeals, under Section 260A of the Act, filed by the Revenue against the orders of the Income Tax Appellate Tribunal, Visakhapatnam (the Visakhapatnam Bench), and the appeals filed by the AMCs against the orders of the Income Tax Appellate Tribunal, Hyderabad (the Hyderabad Bench) throw up the question whether the said provision is retrospective in operation?  Be it noted, all the appeals of the year 2010 except ITTA No.421 of 2010, are filed by the AMCs, and all the appeals of 2011 and ITTA No.421 of 2010 are filed by the Revenue.  Be it also noted, the Visakhapatnam Bench took the view that the said provision is intended to declare the intention of the legislature of not taxing AMCs, and hence it has to be treated as retrospective in operation. The Hyderabad Bench, relying on Agricultural Produce Market Committee, Narela, Delhi v CIT[1] (Narela AMC), took a contra view, and held that AMCs are not eligible for exemption under Section 10(26AAB) of the Act for the assessment years 2003-2004 and 2004-2005.

The learned Advocate General Mr.A.Sudershan Reddy, appearing for AMCs made the following submissions.  AMCs availed tax exemption under Section 10(20) of the Act till 01.4.2002.  By reason of insertion of the Explanation thereto, with effect from 01.4.2003, they were denied the exemption and, therefore, Section 10(26AAB) of the Act was enacted providing exemption with effect from 01.4.2009.  Narela AMC is a case which conclusively decided that AMCs are not local authorities in view of explanation/definition clause to Section 10(20) of the Act.  It is not an authority to hold that Section 10(26AAB) of the Act operates prospectively. In reply to the Finance Bill, the Union Finance Minister made it clear not to tax AMCs to prevent hardship caused to them unintentionally from the assessment year 2003-2004.  The presumption against a statute not being retrospective has no application as Section 10(26AAB) of the Act is clarificatory and declaratory in nature.  It only removed any doubt regarding eligibility of AMCs for exemption during the assessment years 2003-2004 to 2008-2009 and, therefore, it has to be construed as retrospective.  Reliance is placed on CIT v Podar Cement (P) Ltd[2]CIT v Agr. Mktg. Produce Committee[3] (AMPC), Zile Singh v State of Haryana[4]Govt. of India v Indian Tobacco Association[5] and CIT v Gold Coin Health Food (P) Ltd[6].

The Senior Standing Counsel for Income Tax Mr. S.R.Ashok would contend that, as held by the High Courts of Allahabad, Andhra Pradesh, Bombay, Madhya Pradesh and Punjab & Haryana, AMCs are eligible for tax exemption under Section 11 of the Act as institutions engaged in charitable purposes.  This would make it clear that they are not local authorities. Before the Finance Act, 2002, by interpretative process, AMCs were treated as local authorities for the purpose of exemption under Section 10(20) of the Act.  After insertion of the Explanation to Section 10(20) of the Act giving a restrictive meaning to the term ‘local authorities’, AMCs are disqualified from seeking exemption.  The Legislature is presumed to be aware of this legal position and, once unambiguously Section 10(26AAB) of the Act is made applicable only with effect from 01.4.2009, it cannot be said to be declaratory nor it can be given retrospective operation.  He relies on Narela AMCCIT v Agrl. Market Committee, Kadapa[7]Budha Veerinaidu v State of Andhra Pradesh[8]R.Rajagopal Reddy v Padmini Chandrasekharan[9] and Union of India v Martin Lottery Agencies Limited[10].

 

 

The point for consideration

The relevant provisions of the Act – for ready reference – are extracted hereunder.

Chapter III

Incomes which do not form part of total income

Incomes not included in total income

10.  In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included –

(20) the income of a local authority which is chargeable under the head “Income from house property”, “Capital gains” or “Income from other sources” or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service not being water or electricity within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.

Explanation.- For the purposes of this clause, the expression “local authority” means –

(i) Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or

(iii)Municipal Committee and District Board, lecally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in Section 3 of the Cantonments Act, 1924 (2 of 1924);

(26-AAB) Any income of an agricultural market committee or board constituted under any law for the time being in force for the purpose of regulating the marketing of agricultural produce;

 

A plain reading of the above provisions would show that, from the date of coming into force of the newly inserted clause, the income of an AMC shall not be included in the computation of income of a previous year for the purpose of the Act.  So to say, the entire income by an AMC stands exempted from charge to income tax.  Indisputably the Act, as it stands amended as on the 1st day of the financial year, applies to the assessment of that year unless and otherwise it is made applicable retrospectively.  There is also no dispute that, ex facie, Section 10 (26AAB) was inserted with effect from 01.4.2009.  It is agreed that till 31.3.2002 all the AMCs were deemed to be local authorities qualified for exemption as local authorities. From the assessment year 2003-2004, by reason of explanation/definition of “local authority” inserted by the Finance Act, 2002, AMCs were not considered to be local authorities nor Parliament intended them to be treated as such for the purpose of the Act.  Therefore the situation that emerges is as follows.  By reason of Section 10(20) of the Act all AMCs were considered local authorities eligible for exemption under Section 10(20) of the Act.  For the period from 01.4.2003 till 31.3.2009 they ceased to be local authorities and, therefore, not eligible for exemption unless they obtained registration under Section 12A/ 12AA of the Act as institutions for charitable purposes as defined under Section 2(15) of the Act.  With effect from 01.04.2009, however, all AMCs were brought under the ambit of Section 10 of the Act not as local authorities, but as the institutions constituted “under any law for the time being in force”, for the purpose of regulating marketing of agricultural products.  Thus, during the period between the assessment years 2003-2004 to 2008-2009, the AMCs were specifically denied exemption as local authorities although they could claim such exemption under Section 11 of the Act if they were registered as institutions employed in charitable purposes.

The AMCs contend that, even during the interregnum from 2003 to 2009, they ought to be treated as local authorities and made eligible automatically for exemption under Section 10(26AAB) of the Act.  According to them Section 10(26AAB) of the Act is only declaratory, and must operate retrospectively.  What is a declaratory Act?

 

Declaratory Acts

Acts of legislature or Parliament, according to Francis A.R. Bennion, are Public General Acts and Private Acts.  Public General Acts can be classified in various ways: (i) Law Reform Acts;
(ii) Technical Financial Acts; (iii) Adoptive Acts, and (iv) Indemnity Acts. The Law Reform Acts include Codification Acts, Declaratory Acts and Statute Law Revision Acts.

It is axiomatic that there is a presumption against retrospective operation of a law made by the legislature.  Every Act, unless expressly made so, would operate prospectively when it is brought into force by any of the known legislative methods.  But a law, which is declaratory in nature, is an exception to the general rule and considered to operate retrospectively from the very beginning when the statute was enacted.  The exercise to ascertain whether the Act under consideration is declaratory or clarificatory would arise only when there is some ambiguity in the law so made, or the enacting history does not leave any doubt to the same being declaratory.  If the plain meaning of the law does not leave any doubt that the language of the law itself is the intention of the lawmakers no further exercise is necessary.  This view gets support from textbook writers as well as precedents to which a brief reference is made infra. A declaratory Act or enactment declares what the law is on a particular point often ‘for avoidance of doubt’.  The subject matter may be a rule either of common law or of a statute.  The declaration need not be express but may arise by implication.  Since a declaratory provision does not purport to change the law it is presumed to have retrospective effect.  All this means that the law so declared is taken always to have been operative (in the case of a common law rule) or to have been operative since the commencement of the enactment as respects which the declaration is made (in the case of a statutory provision). (Bennion on Statutory Interpretation, 2008, Fifth edn., Indian Reprint 2010, p.188)

A declaratory Act, for avoidance of doubt, is some times known as ‘statutory exposition’. Where the meaning of the enactment is doubtful, and a later enactment having power to override it is so worded as to show that the legislature treated it as having a particular meaning, this is said to be a statutory exposition. Whether the statutory exposition is equivalent to an implied amendment depends on whether the later enactment indicates an intention to clarify the meaning of the earlier one, thus serving as a declaratory enactment, or merely a reference to it (see Bennion, p.293)

Crawford’s ‘Statutory Construction’ classifies declaratory statutes into those which declare the common law and those declaring the meaning of an existing statute.  The learned author suggests that the first category of declaratory statutes should be construed according to the common law, and the second as intending to lay down a rule for future cases and to act retrospectively.  A declaratory statute is like an interpretation clause for the purpose of removing doubt as to the meaning of an existing law or to correct a construction considered erroneous by the legislature.

‘The Statute Law’ by Craies (1971, 7th edn.,) defines a declaratory Act as one, “to remove doubts existing as to common law, or the meaning or effect of statute law” (p.58).  Craies further opines that where a statute is passed for the purpose of supplying an obvious omission in a former statute, or to explain a former statute, the subsequent statute has relation back to the time when the prior Act was passed.  A gross mistake or omission in a former statute can be clarified by a subsequent enactment in which event the latter would be declaratory relating back to the time when the original enactment was passed.  In such an event, the presumption against construing it retrospectively is inapplicable (Ibid, p.395).

Justice G.P.Singh in ‘Principles of Statutory Interpretation’ (2010, 12th edn.,), while quoting the passage from Craies as approved by the Supreme Court in Central Bank of India v Their Workmen[11], summed up the Statement of Law (approved in R.Rajagopal Reddy) as follows.

But the use of the words ‘it is declared’ is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will not only be amending the law and will not necessarily be retrospective.  In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form.  If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospective.  An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.  It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.  The language ‘shall be deemed always to have meant’ or ‘shall be deemed never to have included’ is declaratory, and is in plain terms retrospective.  In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous.  An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit.  A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the constitution came into force, the amending Act also will be part of the existing law.

 

Before we deal with the cases cited at the Bar, the various principles in relation to declaratory Acts may be summed up.

(i)                 A Declaratory Act is intended to remove doubts regarding common law which are to be construed according to common law;

(ii)              Declaratory Acts are also made to rectify or clarify a gross mistake, or the omission in the former statute, in which event the latter statute relates back to the time when the former Act is made;

(iii)            The purpose of Declaratory Act is to remove a doubt as to the meaning of an existing law or to correct a construction considered erroneous by the legislature.  If a Declaratory Act is by way of an Explanatory Act, one should see whether it is intended to supply an obvious omission or clear up doubts as to the meaning of the previous Act.  In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous;

(iv)             If a statute is curative, or a mere declarative, retrospective operation is generally intended; and

(v)                In determining the nature of the Act, substance is more important than the form.  If the provision is clear and unambiguous, the question of treating the amending Act as declaratory would not arise, even if the amending Act uses the expression “for the removal of doubts” which itself is not conclusive as to an amendment being clarificatory or declaratory in nature.

 

Case Law

In R.Rajagopal Reddy, a Division Bench of the Supreme Court considered the issue whether Section 4(1) of the Benami Transactions (Prohibition) Act, 1988 can be applied to a suit initiated by a person claiming to be the real owner prior to coming into force of the said Act.  Section 4 thereof barred a suit to enforce any right to property held benami against the person in whose name the property is held.  The plea was that the Act being declaratory is retrospective and it bars even the suits filed prior to coming into force of the Act.  The Statement of Law in Justice G.P.Singh’s Treatise that, “declaratory enactment declares and clarifies the real intention of the legislature in connection with earlier existing transaction of an enactment, it does not create new rights or obligations” was approved.  Applying the same Section 3 of the said Act, which prohibited benami transactions, was held not to be declaratory but, in substance, prohibitory in nature since it destroyed the rights of the real owners qua properties held benami, and the Act destroyed rights flowing from such transactions as existed earlier.

Podar Cement (P) Ltd is a case where the amendment of Section 27 of the Act was made by substituting clauses (iii), (iii-a) and (iii-b) in place of old clause (iii) by the Finance Act, 1987 with effect from 01.4.1988, and was intended to supply an obvious omission or to clear up doubts as to the meaning of the word “owner” in Section 22 of the Act, and was declaratory/clarificatory in nature, as a result of which they operated retrospectively.  Prior to the Finance Act, 1987, there was a sharp division among the High Courts with regard to the meaning and purport of “owners” for the purpose of Section 22 of the Act which provided that the annual value of properties consisting of any building or lands appurtenant thereto “of which the assessee is the owner” shall be chargeable to income tax under the head “income from house property”.  The question was whether promoters/contractors, after parting with the possession, and on receipt of full consideration thereby enabling purchasers to enjoy the property, even though registered document as required under Section 54 of the Transfer of Property Act, 1882 was not executed, can still be owners for the purpose of section 22 of the Act. The Finance Act, 1987 enlarged the meaning of “owner of house property” by amendment to Section 27 of the Act by providing that a person who comes to have control over the property by virtue of a transaction as referred to in clause (f) of Section 269UA of the Act will also be deemed to be the owner of the property.  While holding that the amendment was declaratory/ clarificatory in nature, which was brought because of divergence of opinions among the High Courts on the issue, the Supreme Court observed as follows.

In our view, the circumstances under which the amendment was brought into existence and the consequence of the amendments will have a greater bearing in deciding the issue placed before us. In other words, if after discussion we come to a conclusion that the amendment was clarificatory/declaratory in nature and, therefore, it will have retrospective effect then it will set at rest the controversy finally.   …   …   We have seen that the High Courts are sharply divided on this issue, one set of High Courts taking the view that the promoters/contractors after parting with possession on receipt of full consideration thereby enabling the “purchasers” to enjoy the fruits of the property, even though no registered document as required under Section 54 of the Transfer of Property Act was executed, can be “owners” for the purpose of Section 22 of the Act. The other set of the High Courts had taken a contrary view holding unless a registered sale document transferring the ownership as required under the Transfer of Property Act the so-called purchasers cannot become owners for the purpose of Section 22 of the Act.

 

          Brij Mohan Das Laxman Das v CIT[12] is a case which applied the principle that enactments declaratory of common law should be construed according to common law.  The facts therein are as follows.  Section 40(b) of the Act mandated that the amount of interest paid to a partner of the firm shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”.  By Taxation Laws (Amendment) Act, 1984 with effect from 01.4.1985, Explanations 1, 2 and 3 were added. Explanation 2 provides that where an individual is a partner in a firm, on behalf of or for the benefit of any other person, any interest paid by the firm to such individual, otherwise than as partner in a representative capacity, shall not be taken into account for the purpose of clause (b) of Section 40 of the Act.  In the case before the Supreme Court a partner of the appellant firm was paid interest, during the assessment 1974-75, as Karta representing his Hindu Undivided Family (HUF).  The assessing officer added back the same relying on Section 40(b) rejecting the plea of the assessee which was based on Explanation 2 to Section 40(b) of the Act.  The Supreme Court was concerned with the question whether the 1984 amendment was declaratory, and was applicable to assessments prior thereto.  Noticing the conflict of opinion among several High Courts in the country, majority of the High Courts taking the view in favour of the assesses, the Supreme Court while relying on Lindley on ‘The Law of Partnership’ held that, “a partner representing HUF shall not be taken into account for the purpose of Section 40(b) of the Act”.  The relevant observations are as follows.

The question yet remains where an individual is a partner in one capacity, e.g., as a representative of another person, can he have no other capacity vis-à-vis the firm. To be more precise, does the above position of law preclude an individual, who is a partner representing a HUF, from depositing his personal funds with the partnership and receiving interest thereon? Explanation 2 says in clear terms that there is no such bar. This is the legislative recognition of the theory of different capacities an individual may hold — no doubt confined to clause (b) of Section 40. Once this is so, we see no reason to hold that this theory of different capacities is not valid or available for the period anterior to 1-4-1985. Accordingly, we hold that even for the period anterior to 1-4-1985, any interest paid to a partner, who is a partner representing his HUF, on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of Section 40. In this view of the matter, we agree with the view taken by the Rajasthan High Court in Gajanand Poonam Chand and Bros v CIT, (1988) 174 ITR 346 (Raj), that Explanation 2, in the context of clause (bof Section 40, is declaratory in nature.

 

Brij Mohan Das was followed and applied in Suwalal Anandilal Jain v CIT[13]. While referring to CIT v RM Chidambaram Pillai[14] it was held that, Section 40(b) of the Act is based upon and is recognition of the common law relationship between the firm and its partners.

Yet again in CIT v Khanji Shivji & Co[15] a Division Bench of the Supreme Court followed Brij Mohan Das and Suwalal.

In Allied Motors (P) Ltd v CIT[16], the Supreme Court considered the question of retrospectivity of Section 43B of the Act inserted by the Finance Act, 1983 with effect from 01.4.1984.  For the assessment year 1984-1985 the appellant claimed deduction of certain sum which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year.  The assessing officer disallowed the same relying on Section 43B of the Act.  The Tribunal referred the case to the Supreme Court under Section 256(1) of the Act.  The question was whether sales tax, collected by the assessee and paid after the end of relevant previousyear, is to be disallowed under Section 43B of the Act.  The said provision barred a deduction allowable under the Act in respect of any sum payable by the assessee by way of tax, duty, cess or fee under any law for the time being in force unless it is actually paid by the assessee.  By the Finance Act, 1987 the first proviso was inserted with effect from 01.4.1988 and Explanation 2 was added subsequently by the Finance Act, 1989 but with retrospective effect from 01.4.1984.  Under these the assessee could claim deduction in relation to any sum paid by way of a tax, duty, cess or fee which is actually paid before the due date applicable in his case for furnishing the return of income under Section 39(1) of the Act in respect of the previous year in which the liability to pay such sum was incurred. Though the proviso came into effect from 01.4.1988 the Explanation came into effect from 01.4.1984.  Relying on the memorandum, explaining the provisions and the respective Finance Bills, a Division Bench of the Supreme Court held that, the first proviso also operated retrospectively with effect from 01.4.1984 as it was intended to be clarificatory.  It was further held that the proviso supplies an obvious omission, and the amendment could not serve its object unless it is construed as retrospective.  It was observed as follows.

An assessee who had adopted the mercantile system of accounting would be entitled to account for his income and expenditure on the basis of accrual and not on the basis of actual receipt or disbursement. After insertion of Section 43B, however, even if the assessee had regularly adopted mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the assessee incurred the liability to pay that tax. Hence an assessee (as in the present case), who had collected sales-tax in the last quarter of the previous accounting year and deposited it in the treasury within the statutory period falling in the next accounting year, would not be entitled to claim any deduction for it. The sales-tax so collected will form a part of the assessee’s income. To obviate this kind of unexpected outcome of Section 43B, the first proviso was added in Section 43B by the Finance Act of 1987. The proviso makes it clear that the Section will not apply in relation to any sum which is actually paid by the assessee in the next accounting year if it is paid on or before the due date for furnishing the return of income in respect of the previous year in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with the return.

 

In Zile Singh, while reiterating the principles of law with regard to declaratory laws, the Supreme Court quoted with approval the four factors suggested as relevant in Craies Statute Law while determining whether a law is declaratory or not. These are:
(i) General scope and purview of the statute; (ii) Remedy sought to be applied; (iii) Former state of the law; and (iv) what it was the legislature contemplated.  It was further held that, where a statute is enacted for the purpose of supplying an obvious omission in a former statute, the subsequent statute is treated as retrospective ignoring the rule against retrospectivity of a legislation.

CIT v Suresh N. Gupta[17] is a case where the Supreme Court, inter alia, considered the question whether the proviso to Section 113 of the Act inserted by Finance Act, 2002 is retrospective.  In pursuance of a search under Section 132 of the Act, the assessing officer computed the tax on the undisclosed amount at 60% as per Section 113 of the Act and also levied surcharge at 17%, placing reliance on the Finance Act, 2001.  By the Finance Act, 2002 proviso to Section 113 of the Act was inserted clarifying that the surcharge applicable in the assessment year relevant to the previous year in which the search is initiated under Section 132 of the Act shall be the rate at which surcharge can be levied.  In the said case, the search was conducted on 17.1.2001 and surcharge at 17% was levied as was applicable for that financial year.  Prior to amendment by the Finance Act, 2002, there was divergence of opinion with regard to the levy of surcharge; whether it was leviable with reference to the rates provided for in the Finance Act of the year in which the search was initiated, or the year in which the search was concluded, or the year in which the block assessment proceedings were initiated, or the year in which the assessment order was passed.  The Supreme Court rejected the plea of the assessee that the proviso cannot be interpreted as retrospective and held that the proviso was intended to supply obvious omission in the Section which has to be read thereinto.  While holding that the said proviso clarified that out of the four dates, the Parliament opted for the date, namely, year in which the search is initiated, the Supreme Court observed as follows.

… …. To clear this doubt precisely, the proviso has been inserted in Section 113 by which it is indicated that FA of the year in which the search was initiated would apply. Therefore, in our view, the said proviso was clarificatory in nature. In taxation, the legislation of the type indicated by the proviso has to be read strictly. There is no question of retrospective effect. The proviso only clarifies that out of the four dates, Parliament has opted for the date, namely, the year in which the search is initiated, which date would be relevant for applicability of a particular FA. Therefore, we have to read the proviso as it stands.  …  … There is one more reason for rejecting the above submission. Prior to 1-6-2002, in several cases, tax was prescribed sometimes in the 1961 Act and sometimes in FA and often in both. This made liability uncertain. In the present case, however, the rate of tax in case of block assessment at 60% was prescribed by Section 113 but the year of FA imposing surcharge was not stipulated. This resulted in the above four ambiguities. Therefore, clarification was needed. The proviso was curative in nature. Hence, the proviso inserted in Section 113 merely clarifies that out of the above four dates, the relevant date for applicability of FA would be the year in which the search stood initiated under Section 158-BC (sic 132).

 

Here, we may also refer to CIT v Alom Extrusions[18]. Section 43B of the Act allowed an assessee to claim deduction of the amount of sales tax collected by him in the last quarter of the relevant accounting year.  A proviso was added by the Finance Act, 1987 with effect from 01.4.1988 followed by Explanation 2, which was added by the Finance Act, 1989 with retrospective effect from 01.4.1984.  The effect of these amendments is that actual amount paid by an assessee by way of tax, duty, cess or fee before the due date of furnishing the return under Section 139(1) of the Act can be claimed as deduction for the purpose of tax.  The deduction claimed, however, did not include the sum paid by way of contribution to labour welfare fund like Employees Provident Fund (EPF) and Employees State Insurance Corporation (ESI).  Realising the hardship of the employers as recommended by Khelkar Committee, by the Finance Act, 2003, the second proviso was deleted and the first proviso was amended which allowed the employers to claim deduction of fees, taxes, cess and contribution made to EPF.  Before the Supreme Court the Income Tax department contended that omission of the second proviso, giving relief to the assesses, operated only with effect from 01.4.2004 and not retrospectively with effect from 01.4.1988. The Supreme Court rejected the department’s plea relying on Allied Motors (P) Ltd, wherein it was held that when a proviso is inserted to remedy unintended consequences, and to make the Section workable, it has to be given a reasonable interpretation.  While doing so, it could be read as retrospective in operation particularly to such a Section as a whole.  What was the unintended consequence and obvious omission in the Section?  Adverting to this aspect, the apex Court observed as follows.

… … At the same time, Section 43-B (main section) made it mandatory for the Department to grant deduction in computing the income under Section 28 in the year in which tax, duty, cess, etc. is actually paid. However, Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under the Provident Fund Act, the Municipal Corporation Act (octroi) and other tax laws. Therefore, by way of first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the return under the Income Tax Act (due date), the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds.  … … However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of the Finance Act, 2003, deleting the second proviso and bringing about uniformity in the first proviso by equating tax, duty, cess and fee with contributions to welfare funds. Once this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by Parliament only with effect from 1-4-2004, would become curative in nature, hence, it would apply retrospectively with effect from 1-4-1988.

 

Yet another reason for reading the amendment to Section 43B of the Act as retrospective, as held in Alom Extrusions, is to remove the hardship and invidious discrimination which should be caused to assesses if the provision is taken to operate prospectively.

The conspectus of the case law especially those precedents, which considered the Finance Acts of various years amending different provisions of the Act on the question whether they are retrospective or prospective, is as follows.          Brij Mohan Das,Suwala and Khanji Shivji are decisions where the Supreme Court construed the provisions as declaratory of common law and, therefore, retrospective.  Podar Cement (P) Ltd, Allied Motor (P) Ltd and Suresh N.Gupta dealt with the Finance Acts amending Section 43B of the Act which enabled an assessee to claim deduction of any sum payable by way of tax, duty, cess or fee or whatever name called.  These provisions were held to be retrospective on the ground that there was divergence of opinion among the High Courts and also as the provisions were clarificatory in nature.  If the enforcement of an amended provision prospectively results in hardship and invidious discrimination among assesses, the said provision, as held in Alom Extrusions, has to be read as retrospective being clarificatory in nature.  From these decisions it follows that if any provision is amended by way of an insertion or substitution or enacting a new provision, while dealing with the question of retrospectivity, the Court has to address the questions  (i) whether the provision under consideration is by way of declaration of common law; and (ii) whether it is intended to get over divergence of judicial opinion and to bring uniformity with a view to supply an omission which caused unintended hardship to the assesses.

 

Whether Section 10(26AAB) of the Act is retrospective

Chapter III of the Act contains 14 Sections which enumerated the incomes which do not form part of the total taxable income. These can be conveniently grouped into four categories.  Section 10 of the Act enumerates various types of income and incomes of various statutory, non-statutory entities, concerns and institutions, which shall not be included in computing the total income of the previous year of any person.  The income of newly established undertakings in free trading zones and special economic zones as well as income of hundred per cent export-oriented undertakings and those industrial undertakings in the North-Eastern Region also stand exempted under Sections 10A, 10AA, 10B, 10BA, 10BB and 10C of the Act.  Sections 11 to 13 of the Act, constituting a Code, deal with income from charitable or religious purposes. The last group comes under Section 13A which relates to income received by political parties by way of voluntary contributions.

 

Exemption of AMCs as local authorities

The exemption from tax liability of the AMCs constituted under Section 4(1) of the Andhra Pradesh (Agricultural Produce & Livestock) Markets Act, 1956 (the AMC Act), has a chequered history.  In view of the enacting history and precedent law, we can visualize three distinct periods.

Section 10(20) of the Act, extracted hereinabove, exempts a local authority from tax.  The term “local authority” was not defined prior to the Finance Act, 2002. The Supreme Court in Union of India v R.C.Jain[19], Calcutta STC v CIT[20] and the Delhi High Court in AMPC adopted the meaning of “local authority” as defined in Section 3(31) of the General Clauses Act, 1897.  In Budha Veerinaidu and Kadapa AMC, this Court, having regard to various provisions of the AMC Act, held that a Market Committee is a local authority.

The Finance Act, 2002 inserted an Explanation defining the expression “local authority” from 01.4.2003.  As a result, units of local self Government like Panchayats and Municipal bodies governed by Part IX and Part IXA of the Constitution of India, and Cantonment Boards, were alone brought within the expression “local authority”.  The immediate effect is that from the financial year 2003-2004 onwards all AMCs were barred from claiming exemption as local authorities under Section 10(20) of the Act.

AMCs constituted under the AMC Act, or AMCs situated in other places constituted under other relevant statutory enactments, could not claim the benefit of exemption under Section 10(20) of the Act with effect from 01.4.2003. In Narela AMC, the Supreme Court while rejecting the plea that Parliament had bodily lifted the term “local authority” under Section 3(31) of the General Clauses Act while inserting an Explanation to Section 10(20) of the Act, and AMCs continued to be local authorities even after the amendment to Section 10(20) of the Act, ruled that “all the AMCs at different places were enjoying exemption from income tax under Section 10(20) of the Act prior to its amendment by the Finance Act, 2002 with effect from 01.4.2003”; the entire definition of “local authority” from Section 3(31) of the General Clauses Act was not bodily lifted and incorporated deliberately by Parliament in the Explanation to Section 10(20) of the Act; AMCs are neither Municipalities nor District Boards under the Explanation to Section 10(20) of the Act; and they are not entitled to exemption under Section 10(20) of the Act after insertion of the Explanation to Section 10(20) of the Act.

Thus AMCs, which were exempted from income tax till 31.3.2003, became disentitled to claim exemption due to Parliamentary intervention in inserting an Explanation to expand the tax base, and to prohibit all local authorities except those mentioned in the Explanation. In other words, with effect from 01.4.2003, AMCs could not be considered local authorities nor would it be said that there is ambiguity or doubt after 01.4.2003 as to the status of AMCs being local authorities because of the clear language in the Explanation to Section 10(20) of the Act, and also the decision of the Supreme Court in Narela AMC.

 

Exemption of AMCs as juridical persons for the advancement of the object of general public utility

 

The second period is from 01.4.2003 to 31.3.2009.  As noticed supra, under Chapter III of the Act, an assessee may claim exemption from payment of tax on the income derived from property held for charitable or religious purposes.  This is subject, however, to the condition that the assessee obtains registration under Section 12AA of the Act.  An assessee, who is covered by any of the clauses in Section 10 of the Act, is neither precluded nor disqualified from seeking registration under Section 12A of the Act, on the statutory exemption under Section 10 of the Act having been withdrawn by Parliament.  After insertion of the Explanation to Section 10(20) of the Act, AMCs in many States sought registration under Section 12AA of the Act.  The jurisdictional Commissioners denied such registration and various AMCs approached Courts.

The Bombay High Court in Commissioner of Income Tax v Agricultural Produce and Market Committee[21], Punjab and Haryana High Court in Commissioner of IT v Market Committee[22], and Madhya Pradesh High Court in two decisions inCommissioner of Income Tax v Krishi Upaj Mandi Samiti (1)[23] and Commissioner of Income Tax v Krishi Upaj Mandi Samiti (2)[24] ruled that, after the amendment of Section 10(20) of the Act having the effect of withdrawing exemption to AMCs, they can seek registration under Section 12AA of the Act as charitable institutions as defined under Section 2(15) of the Act.  All the High Courts relied on the decision of the Supreme Court in CIT v Gujarat Maritime Board[25] wherein it was held that, even if the said Board ceased to be a ‘local authority’, it was not precluded from claiming exemption under Section 11(1) of the Act; and, if the primary purpose and predominant object of an assessee is to promote welfare of the general public, the purpose would be charitable purpose.

This Court, in Commissioner of Income Tax, Guntur v Agricultural Market Committee, Giddalur[26], considered the question of registration of an AMC under Section 12A of the Act. It was held as follows.

…  …  we are convinced that an AMC, constituted under the enactment of the State legislature, is deriving income from the property held under legal obligation for a charitable purpose to wit the advancement of general object of utility. It is, therefore, entitled to be registered under Section 12A/12AA to enable AMC to claim exemption as per law. We have reasons for this conclusion which are as follows. AMC is constituted under the State Act for the sole purpose of protecting the interest of agriculturists, farmers and growers. The purpose of marketing legislation is to enable purchasers to get a fair price for the commodities by eliminating middlemen and provide regular market with all necessary facilities.  Secondly, the AMC is under legal obligation to provide all necessary infrastructure and market facilities within the market place/yard in notified market area, including water, electricity, auction/trading platforms, facilities for receiving, paying and depositing money, and resolving disputes. Thirdly, the income of AMC from different sources – licence fees, market fees, loans etc., which is derived without any profit motive is to be used to meet the expenditure for providing market facilities named supra. Fourthly, all the income has to be deposited in the market committee fund, out of which ten per cent shall be contributed to the Central Market Fund which shall vest in the Government, which exercises power of supervision and superintendence over the market committees. The Government administers and applies Central Market Fund inter alia for providing grants to needy AMCs. Fifthly, AMCs serve an important aspect of rural economy, i.e., providing facilities for marketing agricultural produce and products of livestock.

 

Exemption of AMCs after 01.4.2009

 

After insertion of Section 10(26AAB) of the Act, in computing the total income of the previous year of an AMC, for the period commencing from 01.4.2009, its income shall not be included in the total income.  It is plain that from 01.4.2009 an AMC is exempted from paying income tax not as a ‘local authority’, or as an assessee with the income derived from property held for charitable purposes, but as an AMC under Section 10(26AAB) of the Act.

The conspectus of periodical tax immunity enjoyed by AMCs is as follows.  From the beginning till 31.3.2003, an AMC was exempted from tax as a ‘local authority’.  From 01.4.2003 to 31.3.2008 it could claim exemption under Section 11(1) of the Act subject to satisfying the conditions in Section 12A of the Act.  Thereafter, indisputably, it is exempted from tax not as a ‘local authority’, or an institution for charitable purpose, but as an AMC established under a State law.  The exemption from income tax under one category is different from exemption under another category.  Section 10 of the Act exempts various categories of incomes, as well as the income of statutory entities, concerns and institutions. Once the income, of any such entity, stands included in Section 10 of the Act, no assessing authority can deny them the benefit. The same is not case when an assessee claims exemption under Section 11(1) of the Act which can be denied when the conditions of registration are violated or when Section 13 is attracted.

It is not possible to countenance the plea that Section 10(26AAB) of the Act is declaratory in nature.  Before its enactment, there was no doubt or ambiguity in understanding the nature of exemption from income tax availed by the AMCs.  After insertion of the Explanation to Section 10(20) of the Act, with effect from 01.4.2003, an AMC ceased to be a ‘local authority’.  There cannot be any doubt or ambiguity on this score.  Thereafter, before insertion of Section 10(26AAB) of the Act, an AMC could claim exemption, under Section 11(1) of the Act, as a charitable institution.  Here also there is no ambiguity or doubt, nor is it a case of Parliament supplying an omission to redress a hardship.  In the pre-2003 period, it may be reiterated, AMCs were treated as local authorities, but post 01.4.2009 they are not treated as local authorities but are grouped as a separate category of statutory creations entitled to the benefit under Section 10 of the Act.  The submission of the AMCs, therefore, cannot be accepted.  Section 10(26AAB) of the Act is operative only from 01.4.2009 and it cannot operate retrospectively nor can AMCs be treated as local authorities under Section 10(20) of the Act especially when Parliament advisedly intended to give exemption under Section 10(20) of the Act only to the four named categories of local authorities, and not to AMCs.

 

Speech of Ministers as an External Aid to construction

Whether the speech of an Hon’ble Minister, while piloting the Bill, can be pressed into service for interpreting the law?  As a general principle of law, speeches made by Members during the debate are not relevant while construing a statute, but the speech of the Hon’ble Minister, while introducing the Bill, stands on a different footing. The Constitution of India mandates special procedure in respect of money bills when they are made into law (Articles 109 and 207 of the Constitution in Parliament and State Legislature respectively).  Therefore the speech made by the Hon’ble Finance Minister, while introducing a money bill in the Parliament, may be relevant in understanding the nature of the levy of tax.  Nonetheless the speech made by the Hon’ble Minister, in reply to the debate by the Members, at best may stand on par with speeches of other Members, but it cannot be equated with the speech of the Hon’ble Minister while introducing the Bill.  As the Mover of the Bill, it is presumed that the Minister knows the answers as to why such a law is being made, and what it seeks to achieve.  The same is not the case with the comments or speeches made by Members of the House during the debate. Some Members (say from Treasury Bench) may support the Bill and speak of the good elements of the Bill.  Some Members (say opposition Members) may point out inadequacies in the Bill with reference to why and what of the law to be made.  The Hon’ble Minister, who pilots the Bill, while replying to the debate would certainly be one among those supporting the Bill, and his reply to the debate may not have much assistance for the purpose of interpretation.  We may, however, hasten to add that the Constituent Assembly debates are important external aids while interpreting Constitutional provisions (see Indra Sawhney v Union of India[27],S.R. Bommai v Union of India[28] and Aruna Roy v Union of India[29]).

In K.P.Varghese v ITO[30], the Supreme Court relied on the speech made by the Hon’ble Finance Minister while moving the amendment introducing sub-section (2) to Section 52 of the Act.  In this regard, the Court observed as follows.

Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted.This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In fact there are at least three decisions of this Court, one in Loka Shikshana Trust v. CIT, (1976) 101 ITR 234 : (1976) 1 SCC 254, the other in Indian Chamber of Commerce v. Commissioner of Income Tax, (1976) 101 ITR 796: (1976) 1 SCC 324, and the third in Additional Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers’ Association, (1980) 121 ITR 1 : (1980) 2 SCC 31, where the speech made by the Finance Minister while introducing the exclusionary clause in Section 2, clause (15) of the Act was relied upon by the Court for the purpose of ascertaining what was the reason for introducing that clause.

(emphasis supplied)

 

In Commissioner of Wealth Tax v Yuvraj Amrinder Singh[31], Gold Coin Health Food (P) Ltd and Martin Lottery Agencies Ltd, the Supreme Court relied on the speech of the Hon’ble Finance Minister to interpret the provisions in the Act as well as the Finance Act, 1994.  In these cases, the speech of the Hon’ble Minister, at the time of introduction of the Bill, was used as an external aid.  No authority has been brought to our notice which would lend support to the view that even speeches made by Members during the debate, and the reply of the Hon’ble Minister thereto, could also be used for interpreting the provisions of law.  Indeed, as seen from the decided cases, while referring to the Notes on Clauses appended to the Bill, the speech of the Hon’ble Minister was relied on to understand the provision.  These principles are relevant when we consider the submission of the AMCs regarding the issue of retrospectivity.

While replying to the debate on the Finance Bill 2008, the Union Finance Minister stated as follows.

6.  …   … A number of Honourable Members have written to me expressing their concern on the possible impact of the proposal on Agricultural Produce Market Committees (APMC) or State Agricultural Marketing Boards (SAMB).  Since there is no intention to tax such committees or boards, and in order to remove any doubts, I propose to insert a new clause (26AAB) in Section 10 of the Income Tax Act to provide exemption to any income of an APMC or SAMB constituted under any law for the time being in force for the purpose of regulating the marketing of agricultural produce.  …  …

7. Similarly, I also propose to extent the exemption to the Coir Board with retrospective effect from 1st day of April, 2002.

 

As per the settled principles of interpretation, the speech made by the Union Finance Minister while replying to the debate to the Finance Bill is not conclusive regarding the intention of the legislature whether or not a new provision is inserted by way of a declaration.  Even otherwise, the speech of the Finance Minister extracted to the extent relevant as above does not support the contention of the AMCs.  There are four reasons to arrive at this conclusion.

The Finance Bill, 2008 did not contain any proposal to insert clause (26AAB) in Section 10, nor there was any such proposal to insert sub-clause (h) in clause (29A) dealing with the Coir Board.  The speech of the Finance Minister does not specifically refer to retrospectivity of the proposed clause (26AAB) in Section 10.  In so far as Section 10(29A)(h) of the Act is concerned, the Finance Minister says that exemption is being extended to coir board retrospectively from 01.4.2002.  If there had been any inadvertence in so far as giving retrospectivity to Section 10(26AAB) as well, the same would have been rectified and corrected in the Finance Act.  It is not so.  The Finance Act, 2008, relevant to our purpose, reads as under.

Amendment of Section 10

4. In section 10 of the Income-tax Act,-

(a) after clause (26AA) as omitted by the Finance Act, 1997, the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1990, namely:- (26 of 1997)

‘(26AAA) in case of an individual, being a Sikkimese, any income which accrues or arises to him –

(a)               from any source in the State of Sikkim; or

(b)               by way of dividend or interest on securities:

(Provision and Explanation are omitted as not relevant.)

(b)               after clause (26AAA) as so inserted, the following clause shall be inserted with effect from the 1st day of April, 2009, namely:-

(26AAB) any income of an agricultural produce market committee or board constituted under any law for the time being in force for the purpose of regulating the marketing of agricultural produce;

(c)   in clause (29A), after sub-clause (g), the following sub-clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2002, namely : –

(A) the Coir Board established under section 4 of the Coir Industry Act, 1953; (45 of 1953)

          When the Union Finance Minister, while replying to the debate on the Finance Bill, proposed to extend exemption in the case of Coir Board with retrospective effect from 01.4.2002, but while proposing to insert clause (26AAB) to provide exemption to any income of AMCs without specific mention of retrospectivity, it has to be given a plain meaning.  The intention was never to insert a new provision as declaratory nor to give it retrospective effect.  The plain words of the provision themselves best reflect the intention of the legislature and it is not possible to read something regarding enforcement of the provision which was not intended by the Mover of the Bill.  It is well settled that the Act, as it stands when amended on the 1st day of April of the financial year, is applicable to the assessment year relevant to the said financial year unless the provision itself was inserted or amended with retrospective effect.

Secondly, as already concluded above, the AMCs enjoyed exemption from paying income tax as ‘local authority’ under Section 10(20) of the Act till 31.3.2002.  They enjoyed such exemption from 01.4.2003 not as ‘local authorities’ but as juridical persons deriving income from the property for charitable purposes, assuming that they have obtained registration under Section 12A for the purpose of availing exemption under Section 11 of the Act and indisputably they would be availing exemption from tax, under the Income Tax Act, from 01.4.2009 as creations under the State law. There is no doubt or ambiguity whatsoever with regards this position and, therefore, Section 10(26AAB) of the Act cannot be construed as declaratory in nature.

Thirdly, as held by the Supreme Court in Narela AMC, Section 3(31) of the General Clauses Act, 1897 was not bodily lifted and incorporated in the Explanation to Section 10(20) of the Act.  In view of the deliberate omission by Parliament to restrict the meaning of ‘local authority’, only to four categories of legal entities, it is not possible to accept the plea of the learned Advocate General.  If the Parliament intended to clarify the position, vis-à-vis the Explanation to Section 10(20) of the Act and AMCs, nothing prevented them to insert another entity, namely, AMCs in the Explanation. Instead the proposal was to insert a new clause (26AAB) to Section 10 of the Act which leaves no doubt that the Finance Act, 2008 exempted AMCs as distinct entities for the purpose of exemption under Section 10 of the Act.

Lastly, following the usual practice, the Central Board for Direct Taxes (CBDT) issued circular containing guidelines vide Circular No.1/2009, dated 27.3.2009.  The portion relevant for the purpose of these cases is as follows.

[32]Circular No.1 of 2009, dated 27th March, 2009.

          Sub: Finance Act, 2008 – Explanatory Notes on the provisions

                  relating to direct taxes.

1. Introduction

1.1 The Finance Act, 2008 (hereafter referred to as “the Act”) as passed by the Parliament, received the assent of the President on the 10th day of May, 2008 and has been enacted as Act No.18 of 2009[33].  This circular explains the substances of the provisions of the Act relating to direct taxes.

7. Exemption of income of Agricultural Produce Marketing Committee or Board

7.1 Clause (26AAB) has been inserted in section 10 to provide for tax exemption with respect to the income of an Agricultural Product Marketing Committee or Board which has been constituted under any law for the purpose of regulating the marketing of agricultural produce.

7.2 Applicability.- This amendment has been made applicable with effect from 1st April, 2009 and shall accordingly apply for the assessment year 2009-10 and subsequent assessment years.

8. Exemption of income of Coir Board

8.1 Clause (29A) of section 10 provides that any income of certain specified commodity boards and export development authorities shall be exempt from income-tax.  As a measure to promote socio-economic development, a similar exemption has been provided in respect of any income accruing or arising to the Coir Board established under the Coir Industry Act, 1953 by inserting sub-clause (h) in clause (29A) of section 10.

8.2 Applicability.- This amendment has been made applicable with retrospective effect from 1st April, 2002 and shall accordingly apply for the assessment year 2002-03 and subsequent assessment years.

(emphasis supplied)

 

The above explanatory circular concerning Section 10(26AAB) on the one hand, and Section 10(29A)(h) on the other, abundantly makes it clear that, in the case of the former clause, the enforceability is w.e.f. 01.4.2009 and it shall accordingly apply for the assessment year 2009-10 whereas in the case of the latter sub-clause, it is made applicable with retrospective effect from 01.4.2002 and shall apply for assessment year 2002-03. It is settled legal position that CBDT circulars are binding on all Income Tax authorities (Union of India v Muralidhara Menon[34] and CIT v Hotel Blue Moon[35]), and do not fetter the Court from interpreting the law. But they do certainly have significance in understanding the provision under consideration. If the CBDT’s clarificatory circular issued on the heels of the Finance Act does not deviate from the Finance Bill and the Act, there is no bar to rely on the CBDT Circular.  A combined reading of Paragraphs 7.1 and 7.2 with 8.1 and 8.2 of the CBDT Circular No.1 of 2009, dated 27.3.2009 negatives the submission of the AMCs that Section 10(26AAB) of the Act was intended to be retrospective. 

 

Conclusion

In the result, for the conclusions on the points urged and the reasons as above, we hold that Section 10(26AAB) of the Act inserted by the Finance Act, 2008 w.e.f. 01.4.2009 cannot be applied retrospectively w.e.f. 01.4.2003 and that the new clause (26AAB) in Section 10 of the Act is applicable w.e.f. 01.4.2009 and shall accordingly apply for the assessment year 2009-10 and for the subsequent assessment years.

Accordingly all these matters shall stand disposed of in the following manner.

(1)         the appeals filed by Agricultural Market Committees being ITTA Nos.523, 524, 525, 526, 527, 528 and 529 of 2010  are dismissed;

(2)         the appeals filed by the Commissioner (s) of Income Tax being ITTA Nos.421 of 2010, and 2, 3, 4, 6, 7, 11, 20, 22, 32, 36, 37, 38, 39, 40, 41, 42 and 43 of 2011 are allowed; and

(3)         there shall be no order as to costs.

 

_______________

(V.V.S.RAO, J)

______________________________

(RAMESH RANGANATHAN, J)

March         , 2011

NOTE:

LR copy be marked.

          (By order)

          YS


[1] (2008) 305 ITR 1 (SC) : (2008) 9 SCC 434

[2] (1997) 226 ITR 625 (SC) : (1997) 5 SCC 482 : AIR 1997 SC 2523

[3] (2001) 250 ITR 369 (Delhi)

[4] (2004) 8 SCC 1

[5] (2005) 7 SCC 396

[6] (2008) 304 ITR 308 (SC) : (2008) 9 SCC 622

[7] (1983) 143 ITR 1020 (AP)

[8] (1983) 143 ITR 1021 (AP)

[9] (1995) 2 SCC 630 : AIR 1996 SC 238

[10] (2009) 12 SCC 209

[11] AIR 1960 SC 12

[12] (1997) 223 ITR 824 (SC) : (1997) 1 SCC 352 : AIR 1997 SC 1651

[13] (1997) 4 SCC 89

[14] (1977) 106 ITR 292 (SC) : (1977)  1 SCC 431

[15] (2000) 2 SCC 253

[16] (1997) 224 ITR 677 (SC) : (1997) 3 SCC 472

[17] (2008) 297 ITR 322 (SC) : (2008) 4 SCC 362 : AIR 2008 SC 572

[18] (2010) 1 SCC 489

[19] (1981) 2 SCC 308 : AIR 1981 SC 951

[20] (1996) 219 ITR 515 (SC) : (1996) 8 SCC 758

[21] (2007) 291 ITR 419 (Bom)

[22] (2007) 294 ITR 563 (P&H)

[23] (2009) 308 ITR 380 (MP)

[24]  (2009) 308 ITR 401 (MP)

[25] (2007) 295 ITR 561 : (2007) 14 SCC 704

[26] ITTA Nos.251 of 2008 and batch, dated 01.3.2011.

[27] 1992 Supp (3) SCC 217 : AIR 1993 SC 477

[28] (1994) 3 SCC 1 : AIR 1994 SC 1918

[29] (2002) 7 SCC 368 : AIR 2002 SC 3176

[30] (1981) 131 ITR 597 (SC) : (1981) 4 SCC 173 : AIR 1981 SC 1922

[31] (1985) 156 ITR 525 (SC) : (1985) 4 SCC 608 : AIR 1986 SC 959

[32] (2008) 310 ITR (St.) 42

[33] (2008) 300 ITR (St.) 17

[34] (2009) 9 SCC 304

[35] (2010) 321 ITR 362 (SC) : (2010) 3 SCC 259

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