* 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 % 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 AMC, CIT 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