Mrs. Sujata V. Manohar, J.
1. The assessee is a private limited company manufacturing and selling textile auxiliaries and other allied chemicals, Paints, etc. For the assessment year 1971-72, along with other claim, the assessee claimed depreciation on its laboratory building worth Rs. 71,024 and depreciation with triple shift allowance on laboratory machinery worth Rs. 2,16,206, these being in the nature of capital items used for scientific research relating to the business of the assessee. Before the Income-tax Officer, it was contended that the assessee is entitled to depreciation on these items under section 32(1) of the Income-tax Act, 1961, even though deduction under section 35(1)(iv) and section 32(2)(ia) of the Income-tax Act, 1961, had already been allowed in the previous years in respect of these items.
2. The Income-tax Officer rejected the claim of the assessee for depreciation on the ground that as deduction had already been allowed in the previous years under section 35 in respect of these items, the assessee was not entitled to claim any depreciation.
3. In appeal, the Appellate Assistant Commissioner set aside the order of the Income-tax Officer and held that deduction allowable under section 35 of the Income-tax Act and depreciation claimed under section 32 of the Income-tax Act are disjunctive and cumulative. Both can be allowed, though not in the same year.
4. The Tribunal has also held that although a deduction has been allowed under section 35 in respect of these items in a previous year, the assessee is entitled to depreciation under section 32. From this finding of the Tribunal, the following question has been referred to us by the Tribunal under section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation allowance given under section 32(1) and deduction given under section 35(1)(iv)/35(2)(ia) of the Act. Are disjunctive, cumulative and not alternative and, accordingly, directing the Income-tax Officer to allow to allow depreciation on the cost of the laboratory building or Rs. 71,024 and depreciation including triple shift allowance on the laboratory machinery of Rs. 2,16,206 even though full deduction under section 35(1)(iv)/35(2)(ia) was given to the said capital expenditure in earlier years and the assets under reference were being used for scientific research only ?'
5. During the pendency of this reference, by the Finance (No. 2) Act of 1980, section 35(2)(iv) of the Income-tax Act, 1961, has been amended with retrospective effect from April 1, 1962. As a result, where deduction is allowed for any previous year under section 35, no depreciation shall be allowed under section 32 in respect of the same asset for any previous year.
6. Writ Petition No. 1236 of 1980 challenges the constitutional validity of this retrospective amendment to section 35(2)(iv). The assessee has pointed out that it has its units at Khopoli, Belapur and Mahim. Between 1961 and 1969, the assessee incurred an aggregate expenditure of Rs. 2,46,16,726 in acquiring assets of a capital nature used for scientific research relating to the business of the assessee. The above assets were used by the assessee for the first time during the calendar year 1970, being the previous year relevant to the assessment year 1971-72. Since these capital assets for scientific research relating to the business of the assessee were assets covered by section 32, the assessee claimed depreciation in respect of these assets for the assessment years 1971-72 to 1980-81, before the Income-tax authorities. The claims for depreciation in respect of these assets are as follows :
Assessment year Claim for depreciation(in Rs.)1971-72 70,1111972-73 85,1541973-74 2,41,8581974-75 3,91,3731975-76 4,87,1751976-77 13,36,6221977-78 11,61,9141978-79 12,93,0691979-80 10,69,8981980-81 11,75,187
By reason of the retrospective amendment of section 35, the assessee is denied these claims for depreciation. Hence, the present writ petition in which the assessee has challenged the retrospective operation of this amendment.
7. Mr. S. E. Dastur, learned counsel for the assessee, contends that taking away a benefit granted to the assessee under section 35 retrospectively with effect from April 1, 1962, violates article 19(1)(G) and article 14 of the Constitution, while it is the contention of Mr. Jetley, learned counsel for the Department, that the amendment is merely clarificatory and made in order to carry out the original legislative intent. Hence, retrospective effect given to the amendment is justified and ought not to be considered as violating any fundamental rights under article 19(1)(G) of the Constitution.
8. Legislative history : In order to examine these contentions, it is necessary to look at the legislative history of the benefit given under the Income-tax Act in respect of capital assets used for scientific research related to the business of the assessee. The necessity to give an incentive regarding expenditure on scientific research was first felt in the U.K. after the Second World War. The U.K. Finance Act, 1944, gave for the first time a tax benefit in respect of expenditure on scientific research. The statement of Sir John Anderson, Chancellor of the Exchequer, in moving the U.K. Finance Act, 1944, suggests that the Chancellor perhaps thought that, but for the provisions he was introducing, such an expenditure was not allowable as a deduction at all. It is significant that Sub-section (4) of section 20 of the U.K. Finance Act. 1944, read as under :
'(4) Where a deduction is allowed for any year under this or the last preceding section in respect of expenditure represented wholly or partly by any assets, no deduction shall be allowed under any provisions of the Income-tax Act other than this part of this Act in respect of wear and tear, obsolescence, depreciation or exceptional depreciation of these assets for any year of assessment during any part of which they are used by the person carrying on the trade for scientific research related to the trade.'
9. A somewhat similar provision was introduced for the first time in the Income-tax Act, 1946. This is what was stated in the Indian Legislature while moving the Bill.
'The proposals follow generally the provisions in the United Kingdom Finance Act, 1944; it has been described by the Chancellor of the Exchequer as a comprehensive attempt to relieve from taxation altogether funds devoted by the industries to the support of fundamental research, the translation of laboratory research to production and to the full scale development of the product.'
10. In the Statement of Objects and Reasons for inserting the provisions of section 10(2)(xiv) in the Indian Income-tax Act, it was stated (see [1946] 14 ITR 15) :
'This clause proposes to allow expenditure on scientific research related to a business or to the class of business carried on. The first two items, viz., revenue expenditure by the assessee on such scientific research and sums paid to research associations or institutions will be allowed in the assessments of the profits of the year in which the expenses were incurred. The other item, viz., capital expenditure, will be allowed in five consecutive equal installments and will be given also in respect of such expenditure incurred not more than three years before the commencement of the business. Other provisions, in connection with the allowance safeguard the revenue position, e.g., prevent double allowance or excessive allowance. A provision in the Finance Bill is designed to give retrospective effect for one year to the grant of this allowance.'
11. It is thus clear that when similar provisions were introduced in the Indian Income-tax Act, 1922, in the year 1946, the draftsman had before him the U.K. Finance Act on the basis of which the provision was introduced. Section 10(2)(xiv)(d) of the Indian Income-tax Act, 1922, provided that, in respect of any expenditure of a capital nature on scientific research related to the business of the assess, where a deduction was allowed for any previous year under this clause in respect of expenditure represented wholly or partly by any such asset, no deduction shall be allowed under clause (vi) or clause (vii) for the same previous year in respect of that asset. Clauses (vi) and (vii) deal with depreciation. Under section 10(2)(xiv) of the Indian Income-tax Act, 1922, deduction was to be allowed in respect of such capital assets over a period of five years in five equal installments. Now, on a comparison of the provisions in the U.K. Act with those introduced in the Indian Income-tax Act, 1922, it becomes very clear that the Legislature, in clause (d) of section 10(2)(xiv), provided that no depreciation was allowable in the year in which deduction was allowed under that clause as against the provision in the U.K. Act where deduction on account of depreciation was not to be allowed in the same year or for any subsequent year. There are only two ways of looking at it. One view could be that the difference between the two statutes is accidental or is by mistake. The other is that the difference is deliberate. There is no material to support the view that the difference is accidental or on account of any mistake. After all, the new provision was by way of an incentive to induce persons to spend more money on scientific research. If allowance of the expenditure in five years was an incentive, it cannot be disputed that allowing the expenditure in five years in addition to the depreciation normally allowable to an assessee in years subsequent to the years in which the special deduction was allowed, will be a much better incentive. There was, therefore, no legislative intent to exclude depreciation for all years.
12. Except for a change of phraseology, similar provisions were introduced in the Income-tax Act, 1961, in the form of section 35. The original section 35 was substantially similar to the previous section 10(2)(xiv). Had there been a legislative intent to exclude the right to claim depreciation for all subsequent years, a suitable change could have been made while enacting section 35. But this was not done.
13. By the Finance (No. 2) Act, 1967, with effect from April 1, 1968, section 35 was amended so that instead of one-fifth of the capital expenditure being allowed the whole of such capital expenditure can be deducted for that previous year. Section 35(2)(i), (ia) and (iv), after this amendment, was as follows :
'35. (2) For the purposes of clause (iv) of Sub-section (1), -
(i) in a case where such capital expenditure is incurred before the first day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for the previous year; and the balance of the expenditure shall be deducted in equal installments for each of the four immediately succeeding previous years;
(ia) in a case where such capital expenditure is incurred after the March 31, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year....
(iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (i), (ii), (iii) and (vi) of subsection (1) or under Sub-section (1A) of section 32 for the same previous year in respect of that asset.'
14. Once again section 35(2)(iv) was retained in its original form.
15. As a result of Finance (No. 2) Act. 1980, section 35(2)(iv) now stands amended as from April 1, 1962, to read as follows :
'35. (2) For the purposes of clause (iv) of Sub-section (1), - ...
(iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii), (iia), (iii) and (vi) of Sub-section (1) or under Sub-section (1A) of section 32 for the same or any other previous year in respect of that asset :'
16. The amendment, therefore, makes a material change in the law. Instead of disallowing depreciation in the same year in which a deduction under section 35 is claimed, it now disallows depreciation for all time in a case where deduction has been claimed under section 35. Looking to this change in the law which is brought about retrospectively as from April 1. 1962, we have to consider whether the rights of the assessee under articles 19(1)(G) and 14 are violated.
17. Retrospective legislation : There is no doubt that the Legislature has the power to make a law retrospective. This includes a power to give retrospective effect to a taxing statute. The only question that we have to consider is whether, in the circumstances of the present case, the retrospective amendment of section 35(2)(iv) is reasonable or not, now, there are a number of circumstances in which retrospective amendment of a law may be necessary. For example, a law may be ambiguous. It may be amended retrospectively to remove any doubts as to its interpretation. Such retrospective amendment is clarificatory in nature. It declares the legal position when there was some ambiguity about it in the existing law, such retrospective amendments have been upheld as reasonable, because in effect either on account of judicial interpretation or for any other reason, it is discovered that the law as enacted has some lacuna which requires to be intent. In such a case, any curative amendment to remove such lacunae and to bring out the legislative intent, even if it is enacted retrospectively can be considered as justified. These types of amendments have been often referred to as 'small repairs.' Then, there may be cases where, under any the taxing statute is held unconstitutional by judicial decisions. This may be on the ground of lack of legislative competence, or lack of jurisdiction regarding subordinate legislation, or as violative of fundamental rights, if any retrospective amendment is enacted in order to validate such a taxing statute after complying with constitutional requirements, such a retrospective amendment has also been held to be valid - particularly in cases where the tax has already been collected and the assessees are claiming refund of tax on the ground that the Act under which the tax was collected the fiscal policy of the Government. The taxes already collected may have been spent on various requirements of the State. Retrospective validation of a taxing statute in such circumstances has been upheld. Therefore, normally, unless there are compelling reasons for making a retrospective amendment in public interest, such a retrospective amendment is not enacted, and when a retrospective amendment is enacted without any compelling reasons of public interest, it runs the risk of being declared unreasonable or arbitrary and violative of articles 14 and 19(1)(G) of the Constitution.
18. In the case of Lohia Machines Ltd. v. Union of India : [1985]152ITR308(SC) , the Supreme Court was required to consider the constitutional validity of the Finance (No. 2) Act 1980, in so far as it amended section 80J by incorporating the provisions of rule 19A, as Sub-section (1A) in section 80J, with retrospective effect from April 1, 1972. The majority judgment of the Supreme Court held that the amendment was merely clarificatory in nature and was, therefore, valid even though it operated retrospectively. The majority held that the original rule 19A was a valid exercise of power to enact subordinate legislation. Incorporating the provisions of the rule in section 80J itself, therefore, did not change the law. Sen J., however, differed from the majority view and held that rule 19A, as it originally stood, was invalid. On a proper interpretation of section 80J, the provisions of rule 19A could not be read into it prior to the amendment. He held that, in these was none. He held that, as a result of the amendment, relief which had been granted by parliament was being withdrawn with retrospective effect to be unreasonable and arbitrary. It was, therefore, invalid.
19. Although the judgment of Sen J., in so far as it strikes down the retrospective operation of the amendment is a minority judgment, the observations of Sen J., on the nature of a retrospective amendment and the circumstances in which it may or may not be upheld, cannot be considered as only a minority view, because the majority, having held that the amendment was only clarificatory, was not required to decide in what circumstances a retrospective amendment may be struck down. Hence, the majority did not consider this aspect. Moreover, Sen J., has reconfirmed in this case, the legal position regarding a retrospective amendment of a taxing statute as laid down by him in an earlier decision of the Supreme Court in the case of D. Cawasji and Co. v. State of Mysore : [1984]150ITR648(SC) , where he held that it may be open to the Legislature to impose tax at a higher rate with prospective operation. But levy of taxation at a higher rate which really amounts to imposition of tax, with retrospective operation, has to be justified on proper and cogent grounds. We cannot do better than reiterate his well considered observations on the constitutional validity of a taxing statute which imposes tax retrospectively as propounded in the case of Lohia Machines Ltd. : [1985]152ITR308(SC) . A. N. Sen J., has said that Parliament necessarily enjoys a very wide discretion in the matter of fiscal legislation. Validating Acts have necessarily to be passed with retrospective operation so that the fiscal arrangement of the State and its financial commitments may not in any way be in jeopardy and the State may be relieved of the liability of refunding any tax already collected. But he said (at p. 383) :
'The withdrawal with retrospective effect of any relief granted by a valid statutory provision to an assessee, depriving the assessee of the benefit of the relief vested in the assessee, stands on a footing entirely different from the footing which may necessitate the passing of a Validating Act seeking to validate any statutory provision declared unconstitutional. When Parliament passes an amendment validating any provision which might have been declared invalid for some defect or lacun, Parliament seeks to enforce its intention which was already there by removing the defect or lacuna... However, the withdrawal or modification with retrospective effect of the relief properly granted by the statute to an assessee which the assessee has lawfully enjoyed or is entitled to enjoy as his vested statutory right, depriving the assessee of the vested statutory right has the effect of imposing a levy with retrospective effect for the years for which there was no such levy and cannot, unless there be strong and exceptional circumstances justifying such withdrawal or modification. Be held to be reasonable or in public interest.'
20. Validating Act : There are a number of decisions of the Supreme Court as well as of other High Courts where a Validating Act which retrospectively validates the imposition of a tax has been upheld as valid. Thus, in the case of Asst. Commissioner of Urban Land Tax v. Buckingham and Caranatic Co. Ltd. : [1970]75ITR603(SC) , the Supreme Court observed that it is not right to say as a general proposition that the imposition of tax with retrospective effect per se renders the law unconstitutional. In applying the test of reasonableness to a taxing statute, it is, of course, a relevant consideration that the tax is being enforced with retrospective effect but that is not conclusive in itself. The Supreme Court, after taking into account the legislative history of the Act in question, held that the Madras Urban Land Tax Act of 1966 did not amount to a unreasonable restriction on the right to acquire, hold an dispose of property and was not violative of article 19(1)(f) of the Constitution. It said that, as a general rule, so long as the tax retains its character as a tax and is not confiscatory or extortionate, the reasonableness of the tax cannot be questioned.
21. As far back as 1963, in the case of Rai Ramkrishna v. State of Bihar : [1963]50ITR171(SC) , retrospective validation of a law which was struck down as invalid for lack of Presidential sanction held to be valid. The court took into consideration the fact that tax had already been paid under the old Act by most persons, as a reason for not considering the retrospective operation of the validating law as unconstitutional. See also in this connection Epari Chinna Krishna Moorthy v. State of Orissa, : [1964]7SCR185 , New Shakti Dye Works Pvt. Ltd. v. Union of India [1983] 14 ELT 1936, Empire Industries Ltd. v. Union of India : [1986]162ITR846(SC) and Government of Andhra Pradesh v. Hindustan Machine Tools Ltd., : AIR1975SC2037 .
22. In the case of Ujagar Prints v. Union of India : [1989]179ITR317(SC) , the Supreme Court considered retrospective operation of amendment to the definition of 'manufacture' in the Central Excises and salt Act, 1944, so as to include 'processing' the definition of manufacture. The Supreme Court upheld the retrospective operation of the Amending Act stating that it is necessary that the Legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and seek a windfall from the Legislature's mistakes. It said. 'in testing whether a retrospective imposition of a tax operates so harshly as to violate the fundamental right under article 19(1)(G), the factors considered relevant include the context in which retroactivity was contemplated such as whether the law is one of validation of taxing statute struck down by courts for certain defects, the period of such retroactivity and the defects and extent of any unforeseen or unforeseeable financial burden imposed for the past period, etc.' (p. 348). The Supreme Court reaffirmed its decision on this point in Empire Industries Ltd.'s case : [1986]162ITR846(SC) , upholding the validity of retrospective amendment.
23. There can, therefore, be no doubt that a taxing statute which validates imposition of a tax earlier held invalid by a court of law can be retrospective in operation and be not, on that account, considered unreasonable or violating article 19(1)(G), especially when the tax has already been collected.
24. Curative Acts : Similarly, in a number of cases where the retrospective legislation seeks to cure a defect in the existing legislation and to bring out the original legislative intent. The legislation has been upheld.
25. In the case of Krishnamurthi and Co. v. State of Madras, : [1973]2SCR54 , the Madras General Sales Tax Act was amended in 1964 as a result of which entry 47 in the First Schedule to the principal Act was amended to levy sales tax on all kinds of mineral oils including non-lubricant oils. The Madras High Court, however, held that furnace oil which was a non-lubricant mineral oil was not covered by the entry. In view of this decision, an Amending Act of 1967 was passed to rectify the defect in the language of entry 47 and to validate the past levy and collection of tax in respect of all kinds of non-lubricating mineral oils including furnace oil. This was done with retrospective effect. The retrospective operation of the Amending Act of 1967 was challenged before the Madras High Court and, ultimately, before the Supreme Court. The Supreme Court held that such an amendment and validating Act was for the purpose of making small repairs. It was a permissible mode of legislation and retrospective operation of such an amending Act could not be considered as unreasonable or invalid.
26. In the case of Hira Lal Rattan Lal v.STO [1973] 31 STC 178, the Supreme Court considered the relevant provisions of U.P. Sales Tax Act, 1948. Under section 3D of the U.P. Sales Tax Act, sales tax was levied at the stage of first purchase made by a dealer in respect. Inter alia, of foodgrain, the sales tax authorities sought to bring to tax the first purchases of processed or split dal on the ground that it constituted a separate item of foodgrain distinct from the unprocessed or unsplit dal. This was negatived by the High Court. To get over this decision, an Amending Act was brought in providing that split or processed dal shall be deemed to be a commodity different from unsplit or unprocessed dal and, accordingly, it was legitimate to impose, levy or collect tax in respect of the first purchases of split or processed dal, even though tax may have been imposed, levied or collected earlier in respect of the first purchases of unprocessed or unsplit dal.
27. The Supreme Court said that although the amendment levied retrospectively sales tax on split or processed dal, this was merely a legislation to remove a lacuna in the existing legislation. The amendment was necessitated because of the Legislature's failure to bring out clearly in the principal Act, its intention to separate processed or split foodgrains, and the retrospective amendment became necessary as otherwise the State would have had to refund large sums of money. It, therefore, held that the retrospective levy was not violative of article 19(1) (f) or (g.)
28. We need not consider in details all such cases where retrospective amendments to remove lacunae in existing legislation have been upheld. (See in this connection Pioneer Match Works v. Deputy CTO and Shiv Dutt Rai Fateh Chand v. Union of India : [1984]148ITR664(SC) . Shiv Dutt Rai's case : [1984]148ITR664(SC) dealt with a penalty under the Central Sales Tax Act. In the case of Khemka and Co. (Agencies) P. Ltd. v. state of Maharashtra, : [1975]3SCR753 , the Supreme Court held that a penalty not being merely an adjunct to or consequential to an assessment, could not be levied in the absence of an express provision under section 9 of the Central Sales Tax Act. Section 9 was retrospectively amended. This was challenged in Shiv Dutt Rai's case : [1984]148ITR664(SC) . The Supreme Court upheld the retrospective operation of the newly added Sub-section (2A) of section 9 and held that it did not contravene the provisions of article 19(1)(f) and (g) of the Constitution. The Supreme Court said that it has to be presumed that all the tax had been collected by the dealers from their customers. There was also no dispute that the law requires the dealer to pay the tax within a specified time, the dealers had also knowledge of the provisions relating to penalty in the General Sales Tax law of the respective States. It was only owing to the defect in the Act pointed out by the Supreme Court in Khemka's case. : [1975]3SCR753 , that penalties became not payable. In the Situation, if Parliament calls upon the dealers to pay the penalties in accordance with law as amended with retrospective effect. It cannot be said that there has been any unreasonable restriction imposed on the rights guaranteed under article 19(1)(f) and (g) of the Constitution even though the period of retrospectivity is nearly 19 years. It also pointed out that the Amending Act provided for exclusion of the period between the date on which the judgment in Khemka's case : [1975]3SCR753 , was delivered up to the date of the commencement of the Amending Act in computing the period of limitation for questioning any order levying penalty. Looking to all the circumstances. It said that section 9(2A) cannot be said to be violative of article 19(1)(f) and (g) of the Constitution.
29. Fresh levy : In contrast, when a fresh levy is imposed retrospectively by any legislation. The courts have tended to strike down such levy as being an unreasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) for the Constitution. Thus, in the case of Shew Bhagwan Goenka v. CTO [1973] 32 STC 368, the Calcutta High Court considered the West Bengal Taxation Laws (Amendment) Act of 1969, in so far as it gave retrospective operation to a new definition of 'business' incorporated retrospectively by virtue of the amendment. The court observed that the object of the amendment was not to remove or rectify any defect in phraseology or lacuna or to validate proceedings which had taken place on the basis of the earlier enactment, the object was to enlarge the scope and ambit of the expression 'business' by including within it transactions which without the amendment could not be brought within the meaning of the word 'business' as understood in the commercial world and as interpreted by courts of law. The effect of such retrospective operation of the amendment would be to impose an unexpected liability in respect of transactions which, when they took place, were not subject to any charge or liability under the Act. The retrospective amendment, the court said, imposed an unreasonable restriction upon a person's fundamental right guaranteed under article 19(1)(f) and (g) of the Constitution and was, therefore, invalid.
30. A similar view was taken by the Division Bench of the Calcutta High Court in the case of Bengal Paper Mill Co. Ltd. v.CTO [1976] 38 STC 163.
31. Similarly, a retrospective amendment which does not remove the lacuna which it intended to remove, but merely legislates to impose a new burden has also been held to be unconstitutional. In the case of D. Cawasji and Co. v. State of Mysore : [1984]150ITR648(SC) , the Mysore State Government, with effect from April 1, 1966, had started collecting sales tax on the sale price of arrack as well as on the excise duty and cesses payable on it. So computed. The sales tax came to 24 paise per litre. The validity of the levy of sales tax on the price of arrack inclusive of excise duty and cess was challenged before the High Court, the High Court held that the State Government was not entitled to levy sales tax on excise duty and cess. In order to get over the High Court decision and to retain the tax already recovered, the State Government retrospectively levied sales tax at the increased rate of 45 per cent. instead of 61/2 per cent. with effect from April 1, 1966, and validated, inter alia, all collections already made. The Supreme Court said that the Amending Act did not proceed to cure the defect or lacuna by bringing in an amendment providing for exigibility of excise duty, health cess and education cess to sales tax. Instead of removing the defect, the Amending Act had merely sought to raise the rate of tax with retrospective effect to avoid the liability of refunding the excess amounts collected. Thus, the only object of the amendment was to enable the State Government to nullify the effect of the judgment and retain the amount wrongfully and illegally connected. The enhancement of the rate of tax was, therefore, clearly arbitrary and unreasonable. It could not be considered as rectifying any defect. The Supreme Court, therefore, set aside the Amending Act to the extent that it imposed a higher levy with retrospective effect and considered it as invalid and unconstitutional.
32. Mr. Jetley, learned counsel for the Department, strongly relied upon two decisions of the Punjab and Haryana High Court in the case of Birla Cotton Spinning and Weaving Mills Ltd. v. State of Haryana [1979] 43 STC 158 and in the case of Bharat Engineering Co. v. Assessing Authority [1980] 45 STC 363. In both these cases, the Punjab and Haryana High Court held that a Legislature has the power to enact retrospective legislation. Hence, such retrospective legislation is valid and it cannot be challenged.
33. The Punjab and Haryana High Court purported to rely upon a decision of the Supreme Court in the case of District Controller of Stores, Northern Railway v. Asst. CTO [1976] 37 STC 423. But, in the above case, the Supreme Court has not considered the question of constitutional validity of the law at all as the same was not challenged before the Supreme Court. The above two authorities of the Punjab and Haryana High Court have clearly ignored a large number of authorities of the Supreme Court as well as of the other High Courts where the courts have expressly examined the question of constitutional validity of retrospective legislation. Inter alia, on the ground of such retrospective legislation violating articles 19(1)(f) and (g) of the Constitution. We, therefore, respectfully differ from the view taken by the Punjab and Haryana High Court that retrospective legislation cannot be examined in the light of articles 19(1)(f) and (g) in order to determine whether it is a reasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) of the Constitution (now only article 19(1)(g)).
34. It is submitted by Mr. Jetley, learned counsel for the Department that, in the present case, the amendment should not be considered as taking away retrospectively the benefit which was originally granted. The amendment should be considered as validating in nature or as removing a lacuna in the existing law to bring out the true legislative intent. This contention cannot be accepted looking to the legislative history of the provisions incorporated in sections 35 and 32 of the Income-tax Act, 1961. In order that the amendment may be considered as removing a lacuna and bringing out the true legislative intent, there must be something in the legislative history pertaining to the provision in question which would indicate the original legislative intent which is sought to be brought out by the retrospective amendment. The legislative intent has to be basically ascertained from the language used in the section itself when the language is clear. If one looks at the language of the original section 10(2)(xiv) of the Indian Income-tax Act, 1922, as well as section 35('2) (ia) and (iv) of the Income-tax Act, 1961, before the 1980 amendment, the legislative intent is clearly not to give depreciation under section 32 in the same year in which a deduction is granted under section 35. The intention is not to bar depreciation for all time.
35. Even when the original provision was inserted in 1946 in the Indian Income-tax Act, 1922, the Statement of Objects and Reasons merely stated that other provisions in connection with the allowance safeguard the revenue position, for example, prevent double allowance or excessive allowance. This has a clear reference to depreciation not being allowed in the same previous year in which a deduction is allowed under section 10(2)(iv). So even the initial Statement of Objects and Reasons does not bring out anything which would suggest that this allowance was given on condition that no depreciation would be allowed in respect of the same capital asset for any year (see in this connection [1946] 14 ITR 15.
36. The same provision was carried forward to section 35 of the Income-tax Act, 1961. When the Finance (No. 2) Act, 1967, amended section 35 of the Income-tax Act 1961, as a result of which, after March 31, 1967, the whole of the capital expenditure incurred in any previous year was allowed to be deducted in that previous year, section 35(2)(iv) was not amended. The Notes on Clauses. Naturally, made no comment on section 35(2)(iv). (See in this connection : [1967]64ITR147(AP) .
37. Even in the Notes on Clauses on the Finance (No. 2) Bill of 1980 under which section 35(2)(iv) was sought to be amended retrospectively, the amendment is merely explained as disallowing depreciation on capital assets on which a deduction has been granted under section 35 for the same or any other previous year. However, the Memorandum explaining the provision in the Finance (No. 2) Bill 1980, note 115, after explaining the amendments, state 'it is, accordingly, proposed to make an amendment of a clarificatory nature in the aforesaid section so as to bring out the intention clearly.' (See [1980] 123 ITR 37).
38. It is not at all clear how it can be said that the original legislative intent was not to grant depreciation for any previous year in respect of such assets, nor is it clear how such an amendment can only be considered as clarificatory. A bare reading of section 35(2)(iv), as it stood prior to the amendment, clearly shows that where a deduction is allowed under section 35 for any previous year, no depreciation in respect of the same asset can be granted under section 32 for the same previous year. The phrase 'the same previous year' clearly indicates that there is a prohibition against granting of depreciation only in that previous year in which deduction is allowed under section 35. By necessary implication, the claim for depreciation under section 32 can be granted if it is for any previous year other than the previous year in which deduction is allowed under section 35.
39. It was contended by Mr. Jetley that section 35 and 32 are mutually exclusive. But there is nothing in the language of section 32 or section 35 which would indicate that the two sections are mutually exclusive or that, if any deduction is granted under section 35 depreciation cannot be granted under section 32. Sections 32 and 35 form part of a group of sections which deal with various deductions and allowances granted while computing profits and gains of business or profession. Each of these sections is independent. Wherever the Legislature has intended that a deduction under one section will deprive the assessee of a right to claim a deduction under another section, it has expressly so provided. For example, section 35B provides for export markets developments allowance. Section 35B(2) which was introduced from April 1, 1968, by the Finance Act, 1968 (since deleted), states 'where a deduction under this section is claimed and allowed for any assessment year.... deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or and other assessment year' Section 35C(2)(agricultural development allowance) also contained an identical provision. Section 35(2B)(b) inserted by the Finance (No. 2) Act of 1980, that is to say the same Finance Act which brought in the amendment to section 35(2)(iv). Also contains a similar provision. From 1968 to 1980 and thereafter, there have been a number of amendments to a number of section whereby the Legislature has expressly barred a double deduction for the same or any other previous year. Yet, section 35(2)(iv) which barred a double deduction only in the same previous year was not altered till 1980. Section 35, right from its inception, merely said that when a deduction was allowed under section 35, depreciation under section 32, inter alia, shall not be allowed only for the same previous year. There was clearly no prohibition against claiming depreciation in any other year. The amendment, therefore, clearly brings about a substantial change in the law with retrospective effect from April 1, 1862, as a result of which the assessee is retrospectively denied the benefit of depreciation which the assessee would have otherwise got under the unamended provision.
40. In this connection, it is also necessary to note that, in respect of section 35 as it stood prior to its amendment in 1980, the Department's contention that the assessee was not eligible for any depreciation for any year in respect of assets used for scientific research related to the business of the assessee, when a deduction had been allowed under section 35, had been consistently negatived by the Income-tax Appellate Tribunal in a number of decisions. Only in 1978, for the first time, a Bench of the Tribunal, constituted for this purpose at Bombay, negatived the view taken by the Tribunal at Madras and upheld the earlier view taken by the Tribunal. The Karnataka High Court, in the case of CIT v. Indian Telephone Industries Ltd. : [1980]126ITR548(KAR) , interpreted section 35(2)(iv) as it stood prior to the 1980 amendment and held that section 32 which provides for allowance of depreciation is not subject to any other allowance provided in the Act. And, in particular, not subject to the allowance to be made under section 35(2)(ia). Neither does the latter provision restrict the grant of depreciation allowance on the ground that relief is granted under the section. It said (at p. 549) : 'The prohibition is only in regard to grant of depreciation allowance in the same previous year in which an allowance under section 35 is given.' It also referred to clause (v) of section 35(2) which provides that 'where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research (ii) and (iii) of Sub-section (1) of section 32.' It said that clause (v) was framed in order to enable the assessee to have the benefit of depreciation allowance for subsequent years. This indicates that the Legislature was keen on providing for depreciation allowance whenever a special allowance over a period was to be discontinued.
41. Thus, it is clear that the purpose of allowing a deduction under section 35 has been, throughout, to encourage scientific research related to the business of an assessee. We do not see any previous legislative intent in such circumstances to debar an assessee from claiming depreciation on his assets used for scientific research related to the business of the assessee, the only prohibition was against his claiming depreciation in the same year in which deduction was also allowed under section 35. The legislative history earlier set out and even the Statements of Objects and Reasons accompanying the relevant Amending Acts as earlier set out do not disclose any existing legislative intent to deny the benefit of depreciation to assets covered by section 35 in the years in which deduction under section 35 is not taken. Moreover, when the language of the section is clear-as CID in this case, the legislative intent must be gathered from the language used in the section. Looking to all these factors, in our view, prior to the amendment of 1980, section 35(2)(iv) denied to the assessee depreciation on the assets covered by it only in the year in which deduction was claimed under that section. The amendment now made in section 35 clearly brings about a change in the law by denying retrospectively to the assessee, this right to claim depreciation, and that too for the past 18 years.
42. Mr. Jetley has contended that the length of retrospectivity is not relevant for the purpose of considering whether the amendment is reasonable or not. He has pointed out that even where the validating law was made retrospective for a considerable number of years, the validating law has been upheld as reasonable and not violative of article 19(1)(f) or (g) of the Constitution. But, when a retrospective amendment does not validate a defective law or fill up any lacuna in the existing law, the length of the retrospective operation of a fresh levy does become relevant while considering the extent of hardship which the assessed would suffer if long retrospectivity is given to such a new levy. For example, in the instant case, the assessee has set out in the petition the effect of the retrospective operation of the present amendment on the assessee.
43. Over the last about 14 years, the assess points out, it has spent over Rs. 2.46 crores on research and development activity related to its business. The assessee has pointed out that it has undertaken scientific research and development programmes on such a large scale on the basis of the tax benefits available under sections 32 and 35.
44. In respect of its Income-tax liability, the assessee has proceeded on the basis that it is entitled to depreciation on scientific research assets for the previous years in which a deduction was not claimed in respect of these assets. The annual report of the directors to the shareholders takes into account the tax liability calculated on the basis that the assessee is entitled to depreciation in respect of scientific research assets. Based on such provision for tax, the assessee has been augmenting its reserves from time to time. On this basis, on September 20, 1978, the assessee made an application to the Controller of Capital Issues for the consent of the Central Government to a proposed issue of bonus shares. This application proceeded on the financial calculations and tax liability computed after taking into account depreciation on scientific research assets. On account of the higher reserves in its books, the assessee was able to maintain its reserve above the minimum requirement of 33 1/3 per cent.
45. The assessee has also pointed out that, from time to time, it required additional finances. For this purpose, the assessee had made an application to the Industrial Credit and Investment Corporation of India Limited on February 9, 1977. The financial summary and working results contained in this application proceeded on the basis that the assessee was entitled to depreciation on its scientific research assets. In the middle of 1979, the assessee required further working capital. For this purpose, it made an application dated June 1, 1979, to the Union Bank of India. This application was also based on financial calculations where the tax liability was computed after taking into account depreciation on scientific research assets.
46. In order to increase its finance, the assessee had approached the public for getting fixed deposits. The advertisement in newspapers inviting fixed deposits contained, inter alia, a summarised financial position of the assessee-company which was prepared on the basis that the assessee was entitled to depreciation on scientific research assets. On November 12, 1979, the assessee issued a prospectus for the public issue of five lakhs equity shares of Rs. 10 each and offered for sale 3.3 lakhs fully paid equity share of Rs. 10 each. The prospectus issued by the assessee containing the financial position of the assessee as well as the auditor's report both proceeded on the basis of the tax liability computed after taking into account depreciation on scientific research assets.
47. All the above decisions were taken by the assessee on the basis that it was entitled to depreciation on scientific research asset. Although the Department had contested this position, the assessee was justified in so proceeding, looking to the clear provisions of sections 32 and 35 and the consistent view of the Tribunal. As a result of the retrospective amendment in section 35(2)(iv), the assessee is suddenly faced with a liability for additional tax which would exceed Rs. 47 lakhs. As a result, the debt equity ratio of the assessee will be affected. It would result in paucity of funds and reduction of credit facilities adversely affecting the projects already under way. The assessee contends that, on the basis of internal accruals calcutated on the above basisi, the assessee has decided to put up a Methyl Chloride Chlorophilanez Project with an expected investment of Rs. 8 crores and an Antioxidants project with an expected investment of Rs. 2 crores. The retrospective amendment of section 35(2)(iv) would adversely affect the petitioners' right to carry on business.
48. The assessee has also submitted that, in the light of the law as it stood, it has made representations to the public and to financial institutions and other authorities, which representations would be rendered incorrect by the retrospective amendment of section 35(2)(iv). It may result in the assess violating various provisions of law. The assessee also contends that it may be liable to penalty in respect of its tax liability of over Rs. 47 lakhs which arises on account of the retrospective amendent of section 35(2)(iv).
49. Looking to the impact of the retrospective amendment as spelt out, in our view, the restrospective amendment of section 35(2)(iv) would seriously affect the assessee's right to carry on business under article 19(1)(g) of the Constitution. We do not see any basis for considering this amendment as an amendment to fill in any lacuna in section 35(2)(iv) or to bring out any legislative intent as contended by Mr. Jetley. We have not been shown any public purpose which is sought to be served by such retrospective removal of a benefit which was available to the assessee right from the year 1946. As explained by Sen. J., in the case of Lohia Machines Ltd. : [1985]152ITR308(SC) :
'On the other hand, it is quite clear that if the relief granted is to be withdrawn with retrospective operation from 1972, the assessees who have enjoyed the relief for all those years will have to face a very grave situation... Apart from the heavy financial burden which is likely to upset the economy of the undertaking, the assessee will have to face other serious problems. On the basis that the relief was legitimately and legally available problems. On the basis that the relief was legitimately and legally available to the assessee, the assessee had proceeded to act and to arrange its affairs... The assessee has. In any event, to run the risk and for no fault on his part has to place itself at the mercy of the authorities for facing consequences of violation of the statutory provisions, which but for the introduction of retrospective amendment, would not have been violated by the assessee. To establish arbitrariness or unreasonableness, it does not become necessary to prove that the undertaking of the assessee will be completely crippled and will have to be closed down in consequence of the withdrawal of the relief with retrospective effect... In my opinion, the possibility of very grave prejudice to the assessee by the withdrawal of the relief with retrospective effect, in the absence of any justifiable ground and any serious prejudice to the interests of the Revenue, establishes unreasonableness and arbitrariness of the retrospective amendment.'
50. These observations of Sen J., directly apply to the present case. The retrospective amendment, therefore, is clearly unreasonable and violates articles 19(1)(g) of the Constitution. The assessee whose assessments have been completed prior to the amendment are not affected by such an amendment while only those assessees whose assessments are pending or can be reopened, would be deprived of the benefits which were earlier available. The amendment, therefore, also violates article 14 of the Constitution.
51. Mr. Jetley, learned counsel for the Department, relied upon a decision of this High Court in the case of T. Khemchand Tejoomal v. CIT : [1986]161ITR492(Bom) as also the decision in the case of Union Carbide India Ltd. v. CIT ITR : [1987]165ITR678(Cal) , Mysore Kirloskar Ltd. v. CIT [1986] 166 ITR 836 and the case of Warner Hindustan Ltd. v. CIT : [1988]171ITR224(AP) . All these decisions deal with section 35(2)(iv), as amended in 1980. These decisions are to the effect that, in view of the amendment of section 35(2)(iv), an assessee cannot now claim depreciation in respect of capital assets used for scientific research relating to the business of the assessee in respect of which a deduction has been allowed under section 35. These cases merely interpret the law as amended. They do not deal with the question at issue before us and, therefore, we fail to see how they further the case of the Department in any way.
52. In the premises, the amendment to section 35(2)(iv) of the Income-tax Act, 1961, brought about by the Finance (No. 2) Act of 1980, in so far as it is made retrospective in operation. The rule is made absolute in terms of prayers (a), (b) and (c). In view of the above, the question in Income-tax Reference No. 343 of 1975 is answered in the affirmative and in favour of the assessee. In the circumstances, there will be no order as to costs.