Commissioner Of Income Tax, Rajahmundry And Others v. $ Agricultural Market Committee, Tanuku And Others

* THE HON’BLE SRI JUSTICE V.V.S.RAOAND 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 VERSUS ... Appellant $ 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 referred1.(2008) 305 ITR 1 (SC) : (2008) 9 SCC 4342.(1997) 226 ITR 625 (SC) : (1997) 5 SCC 482 : AIR 1997 SC 25233.(2001) 250 ITR 369 (Delhi)4.(2004) 8 SCC 15.(2005) 7 SCC 3966.(2008) 304 ITR 308 (SC) : (2008) 9 SCC 6227.(1983) 143 ITR 1020 (AP)8.(1983) 143 ITR 1021 (AP)9.(1995) 2 SCC 630 : AIR 1996 SC 23810.(2009) 12 SCC 20911.AIR 1960 SC 1212.(1997)223 ITR 824 (SC) : (1997) 1 SCC 352 : AIR 1997 SC 165113.(1997) 4 SCC 8914.(1977) 106 ITR 292 (SC) : (1977) 1 SCC 43115.(2000) 2 SCC 25316.(1997) 224 ITR 677 (SC) : (1997) 3 SCC 472 17.(2008) 297 ITR 322 (SC) : (2008) 4 SCC 362 : AIR 2008 SC 57218.(2010) 1 SCC 48919.(1981) 2 SCC 308 : AIR 1981 SC 95120.(1996) 219 ITR 515 (SC) : (1996) 8 SCC 75821.(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 70426.ITTA Nos.251 of 2008 and batch, dated 01.3.2011.27.1992 Supp (3) SCC 217 : AIR 1993 SC 47728.(1994) 3 SCC 1 : AIR 1994 SC 191829.(2002) 7 SCC 368 : AIR 2002 SC 317630.(1981) 131 ITR 597 (SC) : (1981) 4 SCC 173 : AIR 1981 SC 192231.(1985) 156 ITR 525 (SC) : (1985) 4 SCC 608 : AIR 1986 SC 95932.(2008) 310 ITR (St.) 4233.(2008) 300 ITR (St.) 1734.(2009) 9 SCC 30435.(2010) 321 ITR 362 (SC) : (2010) 3 SCC 259 THE HON'BLE SRI JUSTICE V.V.S.RAOAND 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 AND … Appellant Agricultural Market Committee, Tanuku … Respondent THE HON'BLE SRI JUSTICE V.V.S.RAOAND THE HON'BLE SRI JUSTICE RAMESH RANGANATHANI.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) exemptsincome of Agricultural Market Committees (AMCs) from the levy ofincome tax under the Act. It was inserted by the Finance Act, 2008 witheffect from 01.4.2009. This batch of appeals, under Section 260A of the Act, filed by the Revenue against the orders of the Income TaxAppellate Tribunal, Visakhapatnam (the Visakhapatnam Bench), andthe appeals filed by the AMCs against the orders of the Income TaxAppellate Tribunal, Hyderabad (the Hyderabad Bench) throw up thequestion whether the said provision is retrospective in operation? Be itnoted, all the appeals of the year 2010 except ITTA No.421 of 2010, arefiled by the AMCs, and all the appeals of 2011 and ITTA No.421 of 2010are filed by the Revenue. Be it also noted, the Visakhapatnam Benchtook the view that the said provision is intended to declare the intentionof the legislature of not taxing AMCs, and hence it has to be treated asretrospective in operation. The Hyderabad Bench, relying onAgricultural Produce Market Committee, Narela, Delhi v CIT[[1]](Narela AMC), took a contra view, and held that AMCs are not eligiblefor exemption under Section 10(26AAB) of the Act for the assessmentyears 2003-2004 and 2004-2005. The learned Advocate General Mr.A.Sudershan Reddy, appearingfor AMCs made the following submissions. AMCs availed taxexemption under Section 10(20) of the Act till 01.4.2002. By reason ofinsertion of the Explanation thereto, with effect from 01.4.2003, theywere denied the exemption and, therefore, Section 10(26AAB) of the Actwas enacted providing exemption with effect from 01.4.2009. NarelaAMC is a case which conclusively decided that AMCs are not localauthorities in view of explanation/definition clause to Section 10(20) ofthe Act. It is not an authority to hold that Section 10(26AAB) of the Actoperates prospectively. In reply to the Finance Bill, the Union FinanceMinister made it clear not to tax AMCs to prevent hardship caused tothem unintentionally from the assessment year 2003-2004. Thepresumption against a statute not being retrospective has no applicationas Section 10(26AAB) of the Act is clarificatory and declaratory innature. It only removed any doubt regarding eligibility of AMCs forexemption 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. ProduceCommittee[[3]](AMPC), Zile Singh v State of Haryana[[4]],Govt. ofIndia v Indian Tobacco Association[[5]]and CIT v Gold Coin HealthFood (P) Ltd[[6]]. The Senior Standing Counsel for Income Tax Mr. S.R.Ashokwould contend that, as held by the High Courts of Allahabad, AndhraPradesh, Bombay, Madhya Pradesh and Punjab & Haryana, AMCs areeligible for tax exemption under Section 11 of the Act as institutionsengaged in charitable purposes. This would make it clear that they arenot local authorities. Before the Finance Act, 2002, by interpretativeprocess, AMCs were treated as local authorities for the purpose of exemption under Section 10(20) of the Act. After insertion of theExplanation to Section 10(20) of the Act giving a restrictive meaning tothe term ‘local authorities’, AMCs are disqualified from seekingexemption. The Legislature is presumed to be aware of this legalposition and, once unambiguously Section 10(26AAB) of the Act ismade applicable only with effect from 01.4.2009, it cannot be said to bedeclaratory nor it can be given retrospective operation. He relies on Narela AMC, CIT v Agrl. Market Committee, Kadapa[[7]],BudhaVeerinaidu v State of Andhra Pradesh[[8]],R.Rajagopal Reddy vPadmini Chandrasekharan[[9]]and Union of India v Martin LotteryAgencies Limited[[10]]. The point for considerationThe relevant provisions of the Act – for ready reference – areextracted hereunder. Chapter III Incomes which do not form part of total incomeIncomes 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 followingclauses shall not be included – (20) the income of a local authority which is chargeableunder the head “Income from house property”, “Capital gains” or“Income from other sources” or from a trade or business carriedon by it which accrues or arises from the supply of a commodityor service not being water or electricity within its ownjurisdictional area or from the supply of water or electricity withinor outside its own jurisdictional area. Explanation.- For the purposes of this clause, theexpression “local authority” means – (i) Panchayat as referred to in clause (d) of article 243 of theConstitution; or (ii) Municipality as referred to in clause (e) of article 243P of theConstitution; or (iii)Municipal Committee and District Board, lecally entitled to, orentrusted by the Government with, the control or management ofa Municipal or local fund; or (iv) Cantonment Board as defined in Section 3 of theCantonments Act, 1924 (2 of 1924); (26-AAB) Any income of an agricultural marketcommittee or board constituted under any law for the time beingin force for the purpose of regulating the marketing of agriculturalproduce; Explanation.- For the purposes of this clause, theexpression “local authority” means – (i) Panchayat as referred to in clause (d) of article 243 of theConstitution; or (ii) Municipality as referred to in clause (e) of article 243P of theConstitution; or (iii)Municipal Committee and District Board, lecally entitled to, orentrusted by the Government with, the control or management ofa Municipal or local fund; or (iv) Cantonment Board as defined in Section 3 of theCantonments Act, 1924 (2 of 1924); (26-AAB) Any income of an agricultural marketcommittee or board constituted under any law for the time beingin force for the purpose of regulating the marketing of agriculturalproduce; A plain reading of the above provisions would show that, from thedate of coming into force of the newly inserted clause, the income of anAMC 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 AMCstands exempted from charge to income tax. Indisputably the Act, as itstands amended as on the 1[st] day of the financial year, applies to theassessment of that year unless and otherwise it is made applicableretrospectively. There is also no dispute that, ex facie,Section 10(26AAB) was inserted with effect from 01.4.2009. It is agreed that till31.3.2002 all the AMCs were deemed to be local authorities qualified forexemption as local authorities. From the assessment year 2003-2004,by reason of explanation/definition of “local authority” inserted by theFinance Act, 2002, AMCs were not considered to be local authoritiesnor Parliament intended them to be treated as such for the purpose ofthe Act. Therefore the situation that emerges is as follows. By reason ofSection 10(20) of the Act all AMCs were considered local authoritieseligible for exemption under Section 10(20) of the Act. For the periodfrom 01.4.2003 till 31.3.2009 they ceased to be local authorities and,therefore, not eligible for exemption unless they obtained registrationunder Section 12A/ 12AA of the Act as institutions for charitablepurposes as defined under Section 2(15) of the Act. With effect from01.04.2009, however, all AMCs were brought under the ambit of Section10 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 regulatingmarketing of agricultural products. Thus, during the period between theassessment years 2003-2004 to 2008-2009, the AMCs were specificallydenied exemption as local authorities although they could claim suchexemption under Section 11 of the Act if they were registered asinstitutions employed in charitable purposes. The AMCs contend that, even during the interregnum from 2003to 2009, they ought to be treated as local authorities and made eligibleautomatically for exemption under Section 10(26AAB) of the Act. According to them Section 10(26AAB) of the Act is only declaratory, andmust 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 Actscan 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 andStatute Law Revision Acts. It is axiomatic that there is a presumption against retrospectiveoperation of a law made by the legislature. Every Act, unless expresslymade so, would operate prospectively when it is brought into force byany of the known legislative methods. But a law, which is declaratory innature, is an exception to the general rule and considered to operate Declaratory Acts Acts of legislature or Parliament, according to Francis A.R.Bennion, are Public General Acts and Private Acts. Public General Actscan 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 andStatute Law Revision Acts. It is axiomatic that there is a presumption against retrospectiveoperation of a law made by the legislature. Every Act, unless expresslymade so, would operate prospectively when it is brought into force byany of the known legislative methods. But a law, which is declaratory innature, 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 isdeclaratory or clarificatory would arise only when there is someambiguity in the law so made, or the enacting history does not leave anydoubt to the same being declaratory. If the plain meaning of the lawdoes not leave any doubt that the language of the law itself is theintention of the lawmakers no further exercise is necessary. This viewgets support from textbook writers as well as precedents to which a briefreference is made infra. A declaratory Act or enactment declares whatthe law is on a particular point often ‘for avoidance of doubt’. Thesubject matter may be a rule either of common law or of a statute. Thedeclaration need not be express but may arise by implication. Since adeclaratory provision does not purport to change the law it is presumedto have retrospective effect. All this means that the law so declared istaken always to have been operative (in the case of a common law rule)or to have been operative since the commencement of the enactment asrespects which the declaration is made (in the case of a statutoryprovision). (Bennion on Statutory Interpretation, 2008, Fifth edn., IndianReprint 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 toshow that the legislature treated it as having a particular meaning, this issaid to be a statutory exposition. Whether the statutory exposition isequivalent to an implied amendment depends on whether the laterenactment indicates an intention to clarify the meaning of the earlierone, thus serving as a declaratory enactment, or merely a reference to it(see Bennion, p.293) Crawford’s ‘Statutory Construction’ classifies declaratory statutesinto those which declare the common law and those declaring themeaning of an existing statute. The learned author suggests that thefirst category of declaratory statutes should be construed according tothe common law, and the second as intending to lay down a rule forfuture cases and to act retrospectively. A declaratory statute is like aninterpretation clause for the purpose of removing doubt as to themeaning of an existing law or to correct a construction considerederroneous by the legislature. ‘The Statute Law’ by Craies (1971, 7[th] edn.,) defines a declaratoryAct as one, “to remove doubts existing as to common law, or themeaning or effect of statute law” (p.58). Craies further opines that wherea statute is passed for the purpose of supplying an obvious omission ina former statute, or to explain a former statute, the subsequent statutehas relation back to the time when the prior Act was passed. A grossmistake or omission in a former statute can be clarified by a subsequent enactment in which event the latter would be declaratory relating back tothe time when the original enactment was passed. In such an event, thepresumption against construing it retrospectively is inapplicable (Ibid,p.395). ‘The Statute Law’ by Craies (1971, 7[th] edn.,) defines a declaratoryAct as one, “to remove doubts existing as to common law, or themeaning or effect of statute law” (p.58). Craies further opines that wherea statute is passed for the purpose of supplying an obvious omission ina former statute, or to explain a former statute, the subsequent statutehas relation back to the time when the prior Act was passed. A grossmistake or omission in a former statute can be clarified by a subsequent enactment in which event the latter would be declaratory relating back tothe time when the original enactment was passed. In such an event, thepresumption against construing it retrospectively is inapplicable (Ibid,p.395). Justice G.P.Singh in ‘Principles of Statutory Interpretation’ (2010,12[th] edn.,), while quoting the passage from Craies as approved by theSupreme Court in Central Bank of India v Their Workmen[[11]],summed up the Statement of Law (approved in R.Rajagopal Reddy) asfollows. But the use of the words ‘it is declared’ is not conclusive thatthe Act is declaratory for these words may, at times, be used tointroduce new rules of law and the Act in the latter case will notonly be amending the law and will not necessarily beretrospective. In determining, therefore, the nature of the Act,regard must be had to the substance rather than to the form. Ifa new Act is ‘to explain’ an earlier Act, it would be without objectunless construed retrospective. An explanatory Act isgenerally passed to supply an obvious omission or to clear updoubts as to the meaning of the previous Act. It is well settledthat if a statute is curative or merely declaratory of the previouslaw retrospective operation is generally intended. The language‘shall be deemed always to have meant’ or ‘shall be deemednever to have included’ is declaratory, and is in plain termsretrospective. In the absence of clear words indicating that theamending Act is declaratory, it would not be so construed whenthe pre-amended provision was clear and unambiguous. Anamending Act may be purely clarificatory to clear a meaning ofa provision of the principal Act which was already implicit. Aclarificatory amendment of this nature will have retrospectiveeffect and, therefore, if the principal Act was existing law whenthe constitution came into force, the amending Act also will bepart of the existing law. Before we deal with the cases cited at the Bar, the variousprinciples in relation to declaratory Acts may be summed up.(i)A Declaratory Act is intended to remove doubts regardingcommon law which are to be construed according to commonlaw; (ii)Declaratory Acts are also made to rectify or clarify a grossmistake, or the omission in the former statute, in which event thelatter statute relates back to the time when the former Act ismade;mistake, or the omission in the former statute, in which event thelatter statute relates back to the time when the former Act ismade; (iii)The purpose of Declaratory Act is to remove a doubt as to themeaning of an existing law or to correct a constructionconsidered erroneous by the legislature. If a Declaratory Act isby way of an Explanatory Act, one should see whether it isintended to supply an obvious omission or clear up doubts as tothe meaning of the previous Act. In the absence of clear words indicating that the amending Act is declaratory, it would not be soconstrued when the pre-amended provision was clear andunambiguous; (iv) If a statute is curative, or a mere declarative, retrospectiveoperation is generally intended; and (v) In determining the nature of the Act, substance is moreimportant than the form. If the provision is clear andunambiguous, the question of treating the amending Act asdeclaratory would not arise, even if the amending Act uses theexpression “for the removal of doubts” which itself is notconclusive as to an amendment being clarificatory or declaratoryin nature. Case Law indicating that the amending Act is declaratory, it would not be soconstrued when the pre-amended provision was clear andunambiguous; (iv) If a statute is curative, or a mere declarative, retrospectiveoperation is generally intended; and (v) In determining the nature of the Act, substance is moreimportant than the form. If the provision is clear andunambiguous, the question of treating the amending Act asdeclaratory would not arise, even if the amending Act uses theexpression “for the removal of doubts” which itself is notconclusive as to an amendment being clarificatory or declaratoryin nature. Case Law In R.Rajagopal Reddy,a Division Bench of the Supreme Courtconsidered the issue whether Section 4(1) of the Benami Transactions(Prohibition) Act, 1988 can be applied to a suit initiated by a personclaiming 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 heldbenami against the person in whose name the property is held. Theplea was that the Act being declaratory is retrospective and it bars eventhe suits filed prior to coming into force of the Act. The Statement of Lawin Justice G.P.Singh’s Treatise that, “declaratory enactment declaresand clarifies the real intention of the legislature in connection withearlier existing transaction of an enactment, it does not create new rightsor obligations” was approved. Applying the same Section 3 of the saidAct, which prohibited benami transactions, was held not to bedeclaratory but, in substance, prohibitory in nature since it destroyed therights of the real owners qua properties held benami, and the Actdestroyed 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) inplace of old clause (iii) by the Finance Act, 1987 with effect from01.4.1988, and was intended to supply an obvious omission or to clearup doubts as to the meaning of the word “owner” in Section 22 of theAct, and was declaratory/clarificatory in nature, as a result of which theyoperated retrospectively. Prior to the Finance Act, 1987, there was asharp division among the High Courts with regard to the meaning andpurport of “owners” for the purpose of Section 22 of the Act whichprovided that the annual value of properties consisting of any building orlands appurtenant thereto “of which the assessee is the owner” shall bechargeable to income tax under the head “income from house property”. The question was whether promoters/contractors, after parting with thepossession, and on receipt of full consideration thereby enabling purchasers to enjoy the property, even though registered document asrequired under Section 54 of the Transfer of Property Act, 1882 was notexecuted, can still be owners for the purpose of section 22 of the Act. The Finance Act, 1987 enlarged the meaning of “owner of houseproperty” by amendment to Section 27 of the Act by providing that aperson who comes to have control over the property by virtue of atransaction as referred to in clause (f) of Section 269UA of the Act willalso be deemed to be the owner of the property. While holding that theamendment was declaratory/ clarificatory in nature, which was broughtbecause of divergence of opinions among the High Courts on the issue,the Supreme Court observed as follows. purchasers to enjoy the property, even though registered document asrequired under Section 54 of the Transfer of Property Act, 1882 was notexecuted, can still be owners for the purpose of section 22 of the Act. The Finance Act, 1987 enlarged the meaning of “owner of houseproperty” by amendment to Section 27 of the Act by providing that aperson who comes to have control over the property by virtue of atransaction as referred to in clause (f) of Section 269UA of the Act willalso be deemed to be the owner of the property. While holding that theamendment was declaratory/ clarificatory in nature, which was broughtbecause 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 amendmentwas brought into existence and the consequence of theamendments will have a greater bearing in deciding the issueplaced before us. In other words, if after discussion we come toa conclusion that the amendment was clarificatory/declaratoryin nature and, therefore, it will have retrospective effect then itwill set at rest the controversy finally. ... ... We have seenthat the High Courts are sharply divided on this issue, one setof High Courts taking the view that the promoters/contractorsafter parting with possession on receipt of full considerationthereby enabling the “purchasers” to enjoy the fruits of theproperty, even though no registered document as requiredunder Section 54 of the Transfer of Property Act was executed,can be “owners” for the purpose of Section 22 of the Act. Theother set of the High Courts had taken a contrary view holdingunless a registered sale document transferring the ownershipas required under the Transfer of Property Act the so-calledpurchasers cannot become owners for the purpose of Section22 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 beconstrued according to common law. The facts therein are as follows. Section 40(b) of the Act mandated that the amount of interest paid to apartner of the firm shall not be deducted in computing the incomechargeable under the head “profits and gains of business orprofession”. By Taxation Laws (Amendment) Act, 1984 with effect from01.4.1985, Explanations 1, 2 and 3 were added. Explanation 2 providesthat where an individual is a partner in a firm, on behalf of or for thebenefit of any other person, any interest paid by the firm to suchindividual, otherwise than as partner in a representative capacity, shallnot be taken into account for the purpose of clause (b) of Section 40 ofthe Act. In the case before the Supreme Court a partner of the appellantfirm was paid interest, during the assessment 1974-75, as Kartarepresenting his Hindu Undivided Family (HUF). The assessing officeradded 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 theAct. The Supreme Court was concerned with the question whether the1984 amendment was declaratory, and was applicable to assessmentsprior thereto. Noticing the conflict of opinion among several High Courtsin the country, majority of the High Courts taking the view in favour of theassesses, the Supreme Court while relying on Lindley on ‘The Law ofPartnership’ held that, “a partner representing HUF shall not be takeninto account for the purpose of Section 40(b) of the Act”. The relevantobservations are as follows. assessee which was based on Explanation 2 to Section 40(b) of theAct. The Supreme Court was concerned with the question whether the1984 amendment was declaratory, and was applicable to assessmentsprior thereto. Noticing the conflict of opinion among several High Courtsin the country, majority of the High Courts taking the view in favour of theassesses, the Supreme Court while relying on Lindley on ‘The Law ofPartnership’ held that, “a partner representing HUF shall not be takeninto account for the purpose of Section 40(b) of the Act”. The relevantobservations are as follows. The question yet remains where an individual is a partner inone capacity, e.g., as a representative of another person, canhe have no other capacity vis-à-vis the firm. To be moreprecise, does the above position of law preclude an individual,who is a partner representing a HUF, from depositing hispersonal funds with the partnership and receiving interestthereon? Explanation 2 says in clear terms that there is nosuch bar. This is the legislative recognition of the theory ofdifferent capacities an individual may hold — no doubt confinedto clause (b) of Section 40. Once this is so, we see no reasonto hold that this theory of different capacities is not valid oravailable for the period anterior to 1-4-1985. Accordingly, wehold that even for the period anterior to 1-4-1985, any interestpaid to a partner, who is a partner representing his HUF, on thedeposit of his personal/individual funds, does not fall within themischief of clause (b) of Section 40. In this view of the matter,we agree with the view taken by the Rajasthan High Court inGajanand Poonam Chand and Bros v CIT, (1988) 174 ITR 346(Raj), that Explanation 2, in the context of clause (b) of Section40, 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]]itwas held that, Section 40(b) of the Act is based upon and is recognitionof the common law relationship between the firm and its partners. Yet again in CIT v Khanji Shivji & Co[[15]]a Division Bench of theSupreme Court followed Brij Mohan Das and Suwalal. In Allied Motors (P) Ltd v CIT[[16]], the Supreme Court consideredthe question of retrospectivity of Section 43B of the Act inserted by theFinance Act, 1983 with effect from 01.4.1984. For the assessment year1984-1985 the appellant claimed deduction of certain sum which wason account of sales tax collected by the assessee for the last quarter ofthe relevant accounting year. The assessing officer disallowed thesame relying on Section 43B of the Act. The Tribunal referred the caseto the Supreme Court under Section 256(1) of the Act. The questionwas whether sales tax, collected by the assessee and paid after the endof relevant previousyear, is to be disallowed under Section 43B of theAct. The said provision barred a deduction allowable under the Act in In Allied Motors (P) Ltd v CIT[[16]], the Supreme Court consideredthe question of retrospectivity of Section 43B of the Act inserted by theFinance Act, 1983 with effect from 01.4.1984. For the assessment year1984-1985 the appellant claimed deduction of certain sum which wason account of sales tax collected by the assessee for the last quarter ofthe relevant accounting year. The assessing officer disallowed thesame relying on Section 43B of the Act. The Tribunal referred the caseto the Supreme Court under Section 256(1) of the Act. The questionwas whether sales tax, collected by the assessee and paid after the endof relevant previousyear, is to be disallowed under Section 43B of theAct. 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 orfee under any law for the time being in force unless it is actually paid bythe assessee. By the Finance Act, 1987 the first proviso was insertedwith effect from 01.4.1988 and Explanation 2 was added subsequentlyby the Finance Act, 1989 but with retrospective effect from 01.4.1984. Under these the assessee could claim deduction in relation to any sumpaid by way of a tax, duty, cess or fee which is actually paid before thedue date applicable in his case for furnishing the return of income underSection 39(1) of the Act in respect of the previous year in which theliability to pay such sum was incurred. Though the proviso came intoeffect from 01.4.1988 the Explanation came into effect from 01.4.1984. Relying on the memorandum, explaining the provisions and therespective Finance Bills, a Division Bench of the Supreme Court heldthat, the first proviso also operated retrospectively with effect from01.4.1984 as it was intended to be clarificatory. It was further held thatthe proviso supplies an obvious omission, and the amendment couldnot serve its object unless it is construed as retrospective. It wasobserved as follows. An assessee who had adopted the mercantile system ofaccounting would be entitled to account for his income andexpenditure on the basis of accrual and not on the basis ofactual receipt or disbursement. After insertion of Section 43B,however, even if the assessee had regularly adoptedmercantile system of accounting, the amount of tax payable bythe assessee could be deducted only in the year in which thesum was actually paid and not in the year in which theassessee incurred the liability to pay that tax. Hence anassessee (as in the present case), who had collected sales-taxin the last quarter of the previous accounting year anddeposited it in the treasury within the statutory period falling inthe next accounting year, would not be entitled to claim anydeduction for it. The sales-tax so collected will form a part of theassessee's income. To obviate this kind of unexpectedoutcome of Section 43B, the first proviso was added in Section43B by the Finance Act of 1987. The proviso makes it clear thatthe Section will not apply in relation to any sum which isactually paid by the assessee in the next accounting year if it ispaid on or before the due date for furnishing the return ofincome in respect of the previous year in which the liability topay such sum was incurred and the evidence of such paymentis furnished by the assessee along with the return. In Zile Singh, while reiterating the principles of law with regard todeclaratory laws, the Supreme Court quoted with approval the fourfactors suggested as relevant in Craies Statute Law while determiningwhether a law is declaratory or not. These are: (i) General scope and purview of the statute; (ii) Remedy sought to beapplied; (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 thepurpose of supplying an obvious omission in a former statute, thesubsequent statute is treated as retrospective ignoring the rule againstretrospectivity of a legislation. In Zile Singh, while reiterating the principles of law with regard todeclaratory laws, the Supreme Court quoted with approval the fourfactors suggested as relevant in Craies Statute Law while determiningwhether a law is declaratory or not. These are: (i) General scope and purview of the statute; (ii) Remedy sought to beapplied; (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 thepurpose of supplying an obvious omission in a former statute, thesubsequent statute is treated as retrospective ignoring the rule againstretrospectivity 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 ofthe Act inserted by Finance Act, 2002 is retrospective. In pursuance of asearch under Section 132 of the Act, the assessing officer computed thetax on the undisclosed amount at 60% as per Section 113 of the Act andalso levied surcharge at 17%, placing reliance on the Finance Act,2001. By the Finance Act, 2002 proviso to Section 113 of the Act wasinserted clarifying that the surcharge applicable in the assessment yearrelevant to the previous year in which the search is initiated underSection 132 of the Act shall be the rate at which surcharge can belevied. In the said case, the search was conducted on 17.1.2001 andsurcharge at 17% was levied as was applicable for that financial year. Prior to amendment by the Finance Act, 2002, there was divergence ofopinion with regard to the levy of surcharge; whether it was leviable withreference to the rates provided for in the Finance Act of the year inwhich the search was initiated, or the year in which the search wasconcluded, or the year in which the block assessment proceedings wereinitiated, or the year in which the assessment order was passed. TheSupreme Court rejected the plea of the assessee that the proviso cannotbe interpreted as retrospective and held that the proviso was intended tosupply obvious omission in the Section which has to be read thereinto. While holding that the said proviso clarified that out of the four dates, theParliament opted for the date, namely, year in which the search isinitiated, the Supreme Court observed as follows. ... .... To clear this doubt precisely, the proviso has beeninserted in Section 113 by which it is indicated that FA of theyear in which the search was initiated would apply. Therefore,in our view, the said proviso was clarificatory in nature. Intaxation, the legislation of the type indicated by the proviso hasto be read strictly. There is no question of retrospective effect.The proviso only clarifies that out of the four dates, Parliamenthas opted for the date, namely, the year in which the search isinitiated, which date would be relevant for applicability of aparticular FA. Therefore, we have to read the proviso as itstands. ... ... There is one more reason for rejecting the abovesubmission. Prior to 1-6-2002, in several cases, tax wasprescribed sometimes in the 1961 Act and sometimes in FAand often in both. This made liability uncertain. In the presentcase, however, the rate of tax in case of block assessment at60% was prescribed by Section 113 but the year of FAimposing surcharge was not stipulated. This resulted in theabove four ambiguities. Therefore, clarification was needed.The proviso was curative in nature. Hence, the proviso insertedin 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 (sic132). which the search stood initiated under Section 158-BC (sic132). Here, we may also refer to CIT v Alom Extrusions[[18]]. Section43B of the Act allowed an assessee to claim deduction of the amount ofsales tax collected by him in the last quarter of the relevant accountingyear. A proviso was added by the Finance Act, 1987 with effect from01.4.1988 followed by Explanation 2, which was added by the FinanceAct, 1989 with retrospective effect from 01.4.1984. The effect of theseamendments is that actual amount paid by an assessee by way of tax,duty, cess or fee before the due date of furnishing the return underSection 139(1) of the Act can be claimed as deduction for the purpose oftax. The deduction claimed, however, did not include the sum paid byway of contribution to labour welfare fund like Employees ProvidentFund (EPF) and Employees State Insurance Corporation (ESI). Realising the hardship of the employers as recommended by KhelkarCommittee, by the Finance Act, 2003, the second proviso was deletedand the first proviso was amended which allowed the employers toclaim deduction of fees, taxes, cess and contribution made to EPF. Before the Supreme Court the Income Tax department contended thatomission of the second proviso, giving relief to the assesses, operatedonly with effect from 01.4.2004 and not retrospectively with effect from01.4.1988. The Supreme Court rejected the department’s plea relyingon Allied Motors (P) Ltd,wherein it was held that when a proviso isinserted to remedy unintended consequences, and to make the Sectionworkable, it has to be given a reasonable interpretation. While doing so,it could be read as retrospective in operation particularly to such aSection as a whole. What was the unintended consequence andobvious omission in the Section? Adverting to this aspect, the apexCourt observed as follows. ... ... At the same time, Section 43-B (main section) made itmandatory for the Department to grant deduction in computingthe income under Section 28 in the year in which tax, duty,cess, etc. is actually paid. However, Parliament tookcognizance of the fact that accounting year of a company didnot always tally with the due dates under the Provident FundAct, the Municipal Corporation Act (octroi) and other tax laws.Therefore, by way of first proviso, an incentive/relaxation wassought to be given in respect of tax, duty, cess or fee byexplicitly stating that if such tax, duty, cess or fee is paid beforethe date of filing of the return under the Income Tax Act (duedate), 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 labourwelfare 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 legislationsby delaying payment of contributions to the welfare funds. ... ...However, as stated above, the second proviso resulted inimplementation problems, which have been mentionedhereinabove, and which resulted in the enactment of theFinance Act, 2003, deleting the second proviso and bringingabout uniformity in the first proviso by equating tax, duty, cessand fee with contributions to welfare funds. Once this uniformityis brought about in the first proviso, then, in our view, theFinance Act, 2003, which is made applicable by Parliamentonly with effect from 1-4-2004, would become curative innature, hence, it would apply retrospectively with effect from 1-4-1988. Yet another reason for reading the amendment to Section 43B ofthe Act as retrospective, as held in Alom Extrusions,is to remove thehardship and invidious discrimination which should be caused toassesses if the provision is taken to operate prospectively. Yet another reason for reading the amendment to Section 43B ofthe Act as retrospective, as held in Alom Extrusions,is to remove thehardship and invidious discrimination which should be caused toassesses 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 differentprovisions of the Act on the question whether they are retrospective orprospective, is as follows. Brij Mohan Das, Suwala and KhanjiShivji are decisions where the Supreme Court construed the provisionsas declaratory of common law and, therefore, retrospective. PodarCement (P) Ltd, Allied Motor (P) Ltd and Suresh N.Gupta dealt withthe Finance Acts amending Section 43B of the Act which enabled anassessee to claim deduction of any sum payable by way of tax, duty,cess or fee or whatever name called. These provisions were held to beretrospective on the ground that there was divergence of opinion amongthe High Courts and also as the provisions were clarificatory in nature. If the enforcement of an amended provision prospectively results inhardship and invidious discrimination among assesses, the saidprovision, as held in Alom Extrusions,has to be read as retrospectivebeing clarificatory in nature. From these decisions it follows that if anyprovision is amended by way of an insertion or substitution or enacting anew provision, while dealing with the question of retrospectivity, theCourt has to address the questions (i) whether the provision underconsideration is by way of declaration of common law; and (ii) whether itis intended to get over divergence of judicial opinion and to bringuniformity with a view to supply an omission which caused unintendedhardship to the assesses. Whether Section 10(26AAB) of the Act is retrospective Chapter III of the Act contains 14 Sections which enumerated theincomes which do not form part of the total taxable income. These can be conveniently grouped into four categories. Section 10 of the Actenumerates various types of income and incomes of various statutory,non-statutory entities, concerns and institutions, which shall not beincluded in computing the total income of the previous year of anyperson. The income of newly established undertakings in free tradingzones and special economic zones as well as income of hundred percent export-oriented undertakings and those industrial undertakings inthe North-Eastern Region also stand exempted under Sections 10A,10AA, 10B, 10BA, 10BB and 10C of the Act. Sections 11 to 13 of theAct, constituting a Code, deal with income from charitable or religiouspurposes. The last group comes under Section 13A which relates toincome received by political parties by way of voluntary contributions. Exemption of AMCs as local authorities The exemption from tax liability of the AMCs constituted underSection 4(1) of the Andhra Pradesh (Agricultural Produce & Livestock)Markets Act, 1956 (the AMC Act), has a chequered history. In view ofthe enacting history and precedent law, we can visualize three distinctperiods. Section 10(20) of the Act, extracted hereinabove, exempts a localauthority from tax. The term “local authority” was not defined prior to theFinance Act, 2002. The Supreme Court in Union of India vR.C.Jain[[19]],Calcutta STC v CIT[[20]]and the Delhi High Court inAMPC adopted the meaning of “local authority” as defined in Section3(31) of the General Clauses Act, 1897. I n Budha Veerinaidu andKadapa AMC, this Court, having regard to various provisions of theAMC Act, held that a Market Committee is a local authority. The exemption from tax liability of the AMCs constituted underSection 4(1) of the Andhra Pradesh (Agricultural Produce & Livestock)Markets Act, 1956 (the AMC Act), has a chequered history. In view ofthe enacting history and precedent law, we can visualize three distinctperiods. Section 10(20) of the Act, extracted hereinabove, exempts a localauthority from tax. The term “local authority” was not defined prior to theFinance Act, 2002. The Supreme Court in Union of India vR.C.Jain[[19]],Calcutta STC v CIT[[20]]and the Delhi High Court inAMPC adopted the meaning of “local authority” as defined in Section3(31) of the General Clauses Act, 1897. I n Budha Veerinaidu andKadapa AMC, this Court, having regard to various provisions of theAMC Act, held that a Market Committee is a local authority. The Finance Act, 2002 inserted an Explanation defining theexpression “local authority” from 01.4.2003. As a result, units of localself Government like Panchayats and Municipal bodies governed byPart IX and Part IXA of the Constitution of India, and CantonmentBoards, were alone brought within the expression “local authority”. Theimmediate effect is that from the financial year 2003-2004 onwards allAMCs were barred from claiming exemption as local authorities underSection 10(20) of the Act. AMCs constituted under the AMC Act, or AMCs situated in otherplaces constituted under other relevant statutory enactments, could notclaim the benefit of exemption under Section 10(20) of the Act with effectfrom 01.4.2003. In Narela AMC, the