Kumar Rajaratnam, J.
1. In all these appeals the constitutional validity of the Explanation to Section 26(4) of the Karnataka Agricultural Income-tax Act, 1957, introduced retrospectively with effect from April 1, 1975, by the Karnataka Taxation Laws (Second Amendment) Act, 1997 (Act No. 18 of 1997), falls for determination.
2. The provisions of Section 26(4) and the Explanation thereto of the Karnataka Agricultural Income-tax Act, 1957, as amended by Act 18 of 1997 (hereinafter referred to as the Act), read as follows :
'26. (4) Where any business through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after the discontinuance or dissolution shall be deemed to be income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance or dissolution.
Explanation.--For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or, as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regularly employed by it immediately before such discontinuance or dissolution.'
3. As stated earlier this was introduced as an amendment by Act No. 18 of 1997 with retrospective effect from April 1, 1975.
4. When Sections 26 and 27 of the Karnataka agricultural Income-tax Act, 1957 (hereinafter referred to as 'the Act'), were originally incorporated in the Act these two sections provided only for assessment or reassessment of pre-dissolution or pre-discontinuance of a firm. In other words if a firm was dissolved during the middle of the assessment year, there was no provision for assessment in the post-dissolution period of the assessment year. Section 26 as it originally stood in the Act before the amendment reads as follows :
'26. Assessment in case of discontinued company, firm or association.--(1) Where agricultural income is received by a company, firm or association of persons and the business through which such income is received is discontinued in, any year, an assessment may be made in that year on the basis of the agricultural income received during the period between the end of the previous year and the date of such discontinuance, in addition to the assessment, if any, made on the basis of the agricultural income received in the previous year.
(2) Any person discontinuing any such business shall give to the agricultural Income-tax Officer notice of such discontinuance within thirty days thereof and where any person fails to give the notice required by this subsection, such officer may direct that a sum shall be recovered from him by way of penalty not exceeding the amount of agricultural income-tax subsequently assessed on him in respect of any agricultural income of the company, firm or association of persons up to the date of the discontinuance of the business.
(3) Where an assessment is to be made under Sub-section (1), the agricultural Income-tax Officer may serve on the person whose agricultural income is to be assessed or, in the case of a firm on any person who was a member of such firm at the time of the discontinuance or, in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 18 and the provisions of the Act shall, so far as may be, apply accordingly, as if the notice were a notice issued under that sub-section.'
5. It is common ground that after the Coffee Board came into existence auction was conducted for the coffee seeds produced by the planters. The income in respect of any coffee delivered to the Coffee Board was rarely received in one year and may have been received over a period of three to four years. The actual income was liable to be computed in accordance with the method of accounting regularly employed by an assessee. It was open to the assessee to keep accounts on the cash system. There was a glaring gap with respect to post-dissolution and that escaped tax. There was no provision for income received subsequently after say two or three years from the Coffee Board with respect to post-dissolution period during the relevant accounting year. This had to be remedied.
6. The remedy was by an amendment to Section 26. Accordingly, Section 26 of the Act was substituted by Act 10 of 1987, by inserting Section 26(4) to prevent escape of tax with respect to the post-dissolution period.
7. Section 26(4) as it then was before the impugned amendment in effect states that after discontinuance of the firm the sums received shall be deemed to be the income of the recipient and shall be charged to tax in the account of the recipient.
8. In other words with respect to pre-dissolution the tax was deemed to be the income of the firm and with respect to post-dissolution the tax was deemed to be the income of the recipient and charged to tax in the account of the recipient. ,
9. Accordingly a fiction was created under Section 26(4) with respect to pre-dissolution up to the point of dissolution. With respect to pre-dissolution the firm was deemed to have been in existence and with respect to post-dissolution the actual amount received was to be taxed at the hands of the recipient. This was in fact the effect of the amendment by Act 10 of 1987. Section 26(4) reads as follows :
'Where any business through which agricultural income is received is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.'
10. The Division Bench of this court reported in L.P. Cardoza v. Agrl. ITO : [1997]227ITR421(KAR) , while interpreting Section 26(4) of the Act pronounced as follows (page 427) :
'Learned counsel for the petitioners contended that Section 26(4) applies only to a case of discontinuance of the business and not to a case of dissolution of the firm, that Section 27 makes a distinction between discontinuance of a business and dissolution of the firm, and that as such Section 26(4) does not apply to a case of dissolution of the firm. It is no doubt true that discontinuance of business need not necessarily imply dissolution of the firm. A firm may continue to exist but may discontinue carrying on a particular business. But where a firm is dissolved it necessarily involves discontinuance of business. As such it cannot be said that Section 26(4) cannot be applied as it does not refer to dissolution of the firm, but what we are concerned with is as to whether this provision creates any legal fiction regarding the continuance of the firm notwithstanding its dissolution for purposes of assessing an income received after the dissolution. All that this provision lays down is that, any sum received after the discontinuance of business shall be deemed to be the income of the 'recipient' and charged to tax in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had suchsum been received before such discontinuance. Explaining this provision the Division Bench of this court in E.M.V. Muthappan's case : [1990]184ITR161(KAR) , has pointed out that since the sale proceeds received is income relating to agricultural activity carried on during the earlier years, it must be deemed to be the income of the recipient, as the original assessee is no longer continuing the business and, therefore, is liable to tax in the year of receipt in the hands of the recipient. It is, therefore, clear that this provision applies to a case where the person carrying on the business discontinues it and the income due to him, he being the original assessee, is received by another after the discontinuance of the business. In such a case, income received by the recipient could be charged to tax in the year of receipt. There is nothing in this provision to indicate that where the firm is dissolved and some income is received after the dissolution in respect of agricultural produce supplied by the firm before its dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution. Even in Uddappa Gowda's case, referred to above, the Division Bench dealing with the Explanation to Section 30(2) which had been added by means of an amendment has held that nowhere the Explanation creates a fiction about the Hindu undivided family being in existence for the purpose of the said income deemed to have been received by it and that in the absence of such a specific provision it was not possible for the court to supply the omission, since the statute in question is a taxing provision. In the instant case also a legal fiction regarding the continuance of the firm even after its dissolution for the purpose of assessing it in respect of income received after the date of its dissolution cannot be spelt out from Section 26(4). The amendment effected by Act 10 of 1987 has not in any way changed the legal position with regard to the point at issue and the agricultural Income-tax Officer could not have relied on the amended Section 26 to assess the dissolved firm after its dissolution in respect of the income received from the Coffee Board though it related to the supply of agricultural produce before the date of dissolution. In the light of this conclusion Section 13 of Act 10 of 1987 dealing with validation cannot be of any help to the respondents.
For the above reasons these writ petitions are allowed in part and in W. P. Nos. 2397 and 2398 of 1988 recovery proceedings pursuant to annexure 'C letter, annexure 'D' notice and the notices of demand annexures 'F' and 'G' are quashed. The respondents shall also refund the amount that might have been collected in pursuance of the proceedings which have now been quashed.' (emphasis supplied)
11. The High Court in Cardoza's case : [1997]227ITR421(KAR) , on a plain reading of Section 26(4) held that pre-dissolution income received subsequently were to be deemed to be the income of the recipient and charged to his account.
In this context it would be necessary to read Section 27 of the Act. Section 27 which remains unchanged even to this day stipulates that the firm is deemed to have been in existence till it was actually dissolved and the income received subsequent to the period when the firm was in existence shall be relatable to the firm till the date of its dissolution even though when the income was received the firm was not in existence.
12. If an assessee is not in existence, there should be an enabling provision to assess the said income which is liable to be taxed. The section permits assessment to be made in respect of a firm as if it was not dissolved for the purpose of assessment. Section 27 of the Act reads as follows :
'27. Liability in case of discontinued firm or association.--(1) Where the business of a firm or association of persons is discontinued or such firm or association is dissolved, the Assistant Commissioner of agricultural Income-tax shall make the assessment of the agricultural income of the firm or association of persons as if no such discontinuance or dissolution has taken place and all the provisions relating to the levy of penalty or any other sum chargeable under any provisions of this Act shall apply so far as may be, to such assessment.
(2) Every person who was at the time of such discontinuance or dissolution, a partner of such firm or a member of such association and the legal representative of any such person who is deceased, shall be jointly and severally liable to the assessment on such agricultural income and also to pay the amount of agricultural income-tax, penalty or other sum payable and all the provisions of this Act, so far as may be shall apply to any such assessment or imposition of penalty or other sum.'
13. The existence of an assessee at the time of making an assessment order is very necessary and an order cannot be passed when the assessee is no longer in existence. Section 27 gives the legal fiction to enable an assessee to be taxed for the income of a firm even after dissolution as if no dissolution had taken place. However, Section 27 does not carry the fiction to post-dissolution. The object of Section 27 is to empower an officer to assess the income of the firm which accrued prior to the dissolution but till the point of dissolution. This fiction cannot be extended to a case where the income is received after the dissolution of the firm by the erstwhile partners. Post-dissolution will have to be dealt with under Section 26(4) as it then was. As stated earlier post-dissolution under Section 26(4) shall be deemed to be an income at the hands of the recipient and charged to tax in the year of receipt as if the total income of the person who carried on the business had such sum being received before such discontinuance. Section 26(4) read with Section 27 clearly indicates two kinds of situations. One is pre-dissolution at the hands of the firm as it is deemed to be and post-dissolution at the hands of the recipient. The Legislature in its wisdom did not amend Section 27 to carry forward the fiction with respect topost-dissolution. Instead Section 26(4) was amended with an Explanation. Section 26(4) hardly changes anything since it sill speaks about the recipient. The Explanation to Section 26(4) defines the recipient.
14. In effect, the Division Bench in Cardoza's case : [1997]227ITR421(KAR) , held that the fiction under Section 26(4) cannot be extended to the income that is received after the dissolution of the firm by erstwhile partners.
15. It is necessary to bear in mind that Section 30 of the Act was amended from time to time for bringing pre-dissolution income of a Hindu undivided family in respect of coffee delivered earlier but received subsequent to disruption or dissolution of the joint family. A deeming provision was introduced to hold that such income in the hands of the Hindu undivided family by deeming Hindu undivided family to be in existence and by deeming that the deemed Hindu undivided family to be in receipt of such income.
16. With respect to firms no such simultaneous amendment was brought by the Legislature.
17. In fact the Division Bench of this court in Cardoza's case : [1997]227ITR421(KAR) had specifically held that there was no ambiguity in the interpretation of Section 26(4) of the Act. The Division Bench in Cardoza's case : [1997]227ITR421(KAR) , further held that the agricultural Income-tax Officer shall refund the amount that might have been collected in pursuance of the proceedings contrary to Section 26(4).
18. It is thereafter by the Karnataka Taxation Laws (Second Amendment) Act, 1997, the whole of Section 26 has been amended which is impugned in the writ petitions. Section 26(4) has been extracted earlier. Since the grievance of the appellants is only with regard to the Explanation to Section 26(4), we shall extract the Explanation once again as contained in Section 26(4). Explanation to Section 26(4) of the Act reads as follows :
'Explanation.-- For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or, as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regularly employed by it immediately before such discontinuance or dissolution.'
19. Needless to say that the Explanation was introduced in the year 1997 (by Act 18 of 1997) with retrospective effect from April 1, 1975, to overcome the Division Bench judgment of this court in Cardoza's case : [1997]227ITR421(KAR) . InCardoza's case : [1997]227ITR421(KAR) the Division Bench had directed the agricultural Income-tax Officer to refund the amount.
20. Whether such legislation with retrospective effect to nullify a settled position of law as enunciated in Cardoza's case : [1997]227ITR421(KAR) is permissible or not is squarely covered by the judgment of the Supreme Court in D. Cawasji and Co, v. State of Mysore : [1984]150ITR648(SC) .
21. In Cawasji's case : [1984]150ITR648(SC) , in order to overcome a decision of the Division Bench of the High Court the Legislature introduced legislation to the provisions of the Mysore Sales Tax Act, 1957, by substituting the words 61/2 per cent. to 45 per cent. with retrospective effect on sales tax collected on excise duty. The validity of the amending Act made retrospectively was under challenge before the Supreme Court.
22. The Supreme Court culled out the statement of objects and reasons for passing the amendment. The Supreme Court noticed that the object of the exercise was only to get over the judgment of the Division Bench which entailed refund of sales tax. The Supreme Court held that the amendment was not a validating Act. A validating Act seeks to validate the earlier Acts declared illegal and unconstitutional by courts by removing the defect or lacuna which led to the invalidation of the law. In other words with the removal of the defect or lacuna resulting in the validation of any Act held to be invalid by a competent court, the Act may become valid, if the validating Act is lawfully enacted. The statement of law is best reflected in the poignant words of the Supreme Court at paragraphs 15 and 16 of the judgment of Cawasji's case : [1984]150ITR648(SC) . Paragraphs 15 and 16 read as follows (page 1787) (page 660 of 150 ITR) :
'15. In view of the aforesaid judgment and order passed by the High Court, amounts collected by the State by way of sales tax on items of excise, health cess and education cess on arrack or special liquor from the appellant became refundable to the appellant. The impugned amendment has been passed, as the Statement of Objects and Reasons which we have earlier set out clearly indicates, to override the judgment of the High Court and to enable the State to hold on to the amount collected as sales tax on excise duty, health cess and education cess, if any, on arrack or special liquor. It has to be noted that the said judgment of the High Court in the earlier case had become final and conclusive inasmuch as the special leave petition filed against the judgment by the State was withdrawn. The State, instead of seeking to test the correctness and effect of the judgment and order of the High Court, thought it fit to have the judgment and order nullified by introducing the impugned amendment. The amendment does not proceed to cure the defect or the lacuna by bringing in an amendment providing for exigibility of sales tax on excise duty, health cess and education cess. The impugned Amending Act may not, therefore, be considered tobe a Validating Act, A validating Act seeks to validate the earlier Acts declared illegal and unconstitutional by courts by removing the defect or lacuna which led to the invalidation of the law. With the removal of the defect or lacuna resulting in the validation of any Act held invalid by a competent court, the Act may become valid, if the Validating Act is lawfully enacted. But the question may still arise as to what will be the fate of acts done before the Validating Act curing the defect has been passed. To meet such a situation and to provide that no liability may be imposed on the State in respect of such acts done before the passing of the Validating Act making such Act valid, a Validating Act is usually passed with retrospective effect. The retrospective operation relieves the State of the consequences of acts done prior to the passing of the Validating Act. The retrospective operation of a Validating Act properly passed curing the defects and lacuna which might have led to the invalidity of any act done may be upheld, if considered reasonable and legitimate.
16. In the instant case, the State, instead of remedying the defect or removing the lacuna has by the impugned amendment sought to raise the rate of tax from 61/2 per cent. to 45 per cent. with retrospective effect from April 1, 1966, to avoid the liability of refunding the excess amount of sales tax collected and has further purported to nullify the judgment and order passed by the High Court directing the refund of the excess amount illegally collected by providing that the levy at the higher rate of 45 per cent. will have retrospective effect from April 1, 1966. The judgment of the High Court declaring the levy of sales tax on excise duty, education cess and health cess to be bad become conclusive and is binding on the parties. It may or may not have been competent for the State Legislature to validly remove the lacuna and remedy the defect in the earlier levy by seeking to impose sales tax through any amendment on excise duty, education cess and health cess; but, in any event, the State Government has not purported to do so through the Amending Act. As a result of the judgment of the High Court declaring such levy illegal, the State became obliged to refund the excess amount wrongfully and illegally collected by virtue of the specific direction to that effect in the earlier judgment. It appears that the only object of enacting the amended provision is to nullify the effect of the judgment which became conclusive and binding on the parties to enable the State Government to retain the amount wrongfully and illegally collected as sales tax and this object has been sought to be achieved by the impugned amendment which does not even purport or seek to remedy or remove the defect and lacuna but merely raises the rate of duty from 61/2 per cent. to 45 per cent. and further proceeds to nullify the judgment and order of the High Court. In our opinion, the enhancement of the rate of duty from 61/2 per cent. to 45 per cent. with retrospective effect is, in the facts and circumstances of the case, clearly arbitrary and unreasonable. The defect or lacuna is not even sought to be remedied and the only justification for the steep rise in the rate of duty by the amended provision is to nullify the effect of the binding judgment. The vice ofillegal collection in the absence of the removal of the illegality which led to the invalidation of the earlier assessments on the basis of illegal levy, continues to taint the earlier levy. In our opinion, this is not a proper ground for imposing the levy at a higher rate with retrospective effect. It may be open to the Legislature to impose the levy at a higher rate with prospective operation but the levy of taxation at higher rate which really amounts to imposition of tax with retrospective operation has to be justified on proper and cogent grounds. This aspect of the matter does not appear to have been properly considered by the High Court and the High Court, in our view, was not right in holding that 'by the enactment of Section 2 of the impugned Act, the very basis of the complaint made by the petitioner before this court in the earlier writ petition as also the basis of the decision of this court in Cawasji's case [1969] 1 Mys LJ 461, that the State is collecting amounts by way of tax in excess of what was authorised under the Act has been removed'. We, accordingly, set aside the judgment and order of the High Court to the extent it upholds the validity of the impugned amendment with retrospective effect from April 1, 1966, and to the extent it seeks to nullify the earlier judgment of the High Court. We declare that Section 2 of the impugned amendment to the extent that it imposes the higher levy of 45% with retrospective effect from April 1, 1966, and Section 3 of the impugned Act seeking to nullify the judgment and order of the High Court are invalid and unconstitutional.'
23. The Amending Act No. 18 of 1997 which is under challenge before us bears similar resemblance to the facts of the case in the judgment cited by us and reported in Cawasji's case : [1984]150ITR648(SC) . The resemblance is clear by the Statement of Objects and Reasons in the Amending Act. The objects and reasons for introducing the Bill reads as follows :
'In view of the decision of the High Court of Karnataka in 2397 of 1988 and other connected matters, it has become necessary to amend the Karnataka agricultural Income-tax Act, 1957, retrospectively with effect from April 1,1975, to facilitate assessment of income received after dissolution of a firm even though at the time of such assessment the firm stood dissolved.' (all emphasis by the court)
24. A reading of the Objects and Reasons indicate that the effect of the amendment was to nullify the Division Bench judgment of this court in W. P. No. 2397 of 1988 (L. P. Cardoza's case : [1997]227ITR421(KAR) ) and other connected matters.
25. The reference to W. P. No. 2397 of 1988 and other connected matters in the Reasons and Objects of the impugned amendment is the judgment rendered by the Division Bench reported in L. P. Cardoza's case : [1997]227ITR421(KAR) .
26. In other words in L. P. Cardoza's case : [1997]227ITR421(KAR) the Division Bench of this court directed refund of the amount to the assessees by the Agricul-tural Income-tax Officer since the proceedings were quashed. It is exactly to overcome the judgment in L P. Cardoza's case : [1997]227ITR421(KAR) , the Amending Act was introduced retrospectively. This finds a place in the Objects and Reasons set out in the Bill of the impugned amendment.
27. The learned single judge was perfectly right in holding that the State has every right to bring in amendments retrospectively and to bridge a lacuna or a defect. The State has also every right to add Explanations by way of amplification of a section in the parent Act by an amendment ; but, we are of the view that such amendments brought retrospectively must not be only for the purpose of nullifying a judgment where there was no lacuna or defect pointed out in the parent Act. The judgment of the Supreme Court in Cawasji's case : [1984]150ITR648(SC) , was not brought to the notice of the learned single judge. The law pronounced by the Supreme Court in Cawasji's case : [1984]150ITR648(SC) , squarely applies to the facts of this case.
28. Accordingly we uphold the validity of the Amending Act; but the retrospective effect of the Amending Act is contrary to the pronouncement of the Supreme Court in Cawasji's case : [1984]150ITR648(SC) , since no lacuna or defect was pointed out to us by the Government advocate in the interpretation of Section 26(4) rendered by the Division Bench in L.P. Cardoza v. Agrl. ITO : [1997]227ITR421(KAR) .
29. While respectfully agreeing with the views expressed by the learned single judge, we are however, unable to accept that the retrospective nature of the Amending Act is valid. The Act, if any, for the reasons stated above can be held to be valid prospectively and not retrospectively as was held by the Supreme Court in Cawasji's case : [1984]150ITR648(SC) in similar circumstances.
30. We accordingly, set aside the order of the learned single judge to that extent and hold that the retrospective effect of the Act is contrary to the pronouncement of the Supreme Court in Cawasji's case : [1984]150ITR648(SC) .
31. Accordingly, the impugned demand notices at annexure F and annexure G for the assessment year 1996-97 are quashed for the reasons stated above. The writ appeals are disposed of accordingly. No costs.
32. The C. R. Ps. are disposed of in terms of the writ appeals.