THE issues before the Bench are - Whether Explanation introduced in Section 80IA(4) by the Finance Act, 2009 having retrospective operation w.e.f 1.4.2000 is unconstitutional, although it only attempts to clarify that deduction under section 80IA(4) of the Act would not be available in case of execution of works contracts; Whether the intrinsic difference between developing an infrastructure facility and executing a 'works contract' was already made clear in the amendment itself introduced in the year 2002; Whether the amended Section 80IA(4) with effect from 1.4.2002 could be construed as not including execution of 'works contract' as one of the eligible activities for claiming deduction and Whether when the intention of the legislature is clear from the substantive provision of a Section, can an explanation later introduced in the same Section be interpreted as something different, from a mere clarification. And the verdict goes in favour of the Revenue.
Facts of the case
The assessee is engaged in the business of developing infrastructure. Section 80IA of the Act was introduced for the first time in the year 1991, granting deduction of income from industrial undertakings, etc. in certain cases. Infrastructure development was not contained in the said provision at the inception. Sub-section (4A) was introduced in section 80IA of the Act with effect from 1.4.96 making deduction applicable to any enterprise carrying on developing, maintaining and operating any infrastructure facility subject to fulfillment of the conditions contained therein. The assessee availed benefits of tax exemption under this section. A significant legislative change came with effect from 1.4.2002, wherein the language used in sub-section (4) of section 80IA was materially altered. The language used in sub-section (4) of Section 80IA was changed from the requirement of “developing, operating and maintaining” to any enterprise “carrying on business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility”. Thus, instead of the previous requirement of cumulative satisfaction of the said conditions, the Legislature now permitted the same deduction to those enterprises carrying on business of either developing or operating or maintaining or developing, operating and maintaining any infrastructure facility. Explanation to sub-section (4) of section 80IA which defines “infrastructure facility” was also slightly changed to refer to road including toll road.
In 2007, an explanation was added below sub-section (13) of section 80IA by the Finance Act 2007, with retrospective effect from 1.4.2000. The explanation reads as “Explanation: For the removal of doubts, it is hereby declared that nothing contained in this section shall apply to a person who executes a works contract entered into with the undertaking or enterprise, as the case may be.” This explanation was substituted by a new explanation by Finance Act No. 2 of 2009 with effect from 1.4.2000, which read as:“Explanation: For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business referred to in sub-section (4) which is in the nature of works contract awarded by any person (including the Central or Sate Government and executed by the undertaking or enterprise refereed to in sub-section (1).”
Since, as a result of this Explanation, the deductions claimed by the assessee stood withdrawn with retrospective operation, the assessee filed a writ petiton before the High Court vehemently challenging the constitutional validity of this amendment, to be precise the Explanation inserted in sub-section (4) to Section 80IA introduced by the Finance Act No.2 of 2009 with effect from 1.4.2000.
The Counsel for the assessee contended that till introduction of the impugned amendment, deductions were available to all undertakings and enterprises executing infrastructure development projects and it was not insisted that the assessee itself must develop such infrastructure facilities by investing its own funds. Such explanation, therefore, changes the very complexion of the deductions which were available for years together and, thus creates a levy with retrospective effect. It was submitted that though the Parliament has the power to enact a law, including taxing law, with retrospective effect, when such provision creates a levy for the first time, the same must be reasonable and the retrospectivity must be justified on the basis of reasons for which such amendment was necessary. It was also contended that an explanation cannot enlarge the substantive portion of a section. According to the counsel, the impugned amendment would alter the nature of deduction available under sub-section (4) of section 80IA. It was further submitted that if by virtue of such explanation, certain deduction which was available till introduction of such legislative change, would stand discontinued, the amendment itself would be rendered unconstitutional, since such amendment would be creating a levy of tax with retrospective effect without any justification. The amendment was challenged to be in violation of Article 14 and 19(1)(G) of the Constitution.
In the counter argument, the counsel for the Union of India contended that the Parliament has competence to enact laws including in the field of taxation, as also to give retrospective effect in appropriate cases. He submitted that there is clear distinction between a 'developer' and a 'contractor'. It was submitted All along, the benefits intended u/s 80IA(4) of the Act were always for a developer and not for a contractor. It was further argued that the impugned Explanation only puts the issue beyond controversy and is merely clarifactory in nature. The counsel relied upon contemporaneous materials in the form of notes on clauses, explanatory memorandum, etc. for introducing special deductions for infrastructure development projects, and contended that the basic object of granting such tax deductions was to give impetus to infrastructure development which was found to be lagging. Therefore, it was submitted that the amendment was within the legislative competence of the Parliament, and not arbitrary or unreasonable.
Having heard the parties, the High Court held that,
++ it is now well settled that there is always a presumption of constitutionality whenever a legislation enacted by the Parliament or the State Legislature is questioned on the ground of unconstitutionality and the burden is on the petitioner bringing such a challenge. In the case of J & K v. T.N.Khosa, a Constitution Bench of the Supreme Court, observed that there is always a presumption in favour of the constitutionality of an enactment and the burden is on him who attacks it to show that there has been a clear transgression of the constitutional principles;
++ it is equally well settled that an enactment of the Parliament or the State Legislature can be questioned only on the ground of lack of competence or on the ground that the statute violates the fundamental rights or any other constitutional provisions;
++ in the present case, it is not even the case of the petitioners that the Parliament lacked legislative competence to enact the law. It was, however, their case that the enactment being unreasonable and arbitrary, violates Articles 14 and 19(1)(g) of the Constitution;
++ in the case of S.T.Swamiar, the Apex Court observed that the fact that retrospective legislation may be enacted is not open to question. The observations made in the case of J.K.Jute Mills Co. to the effect that the power of the Legislature to enact law with reference to the topic entrusted to it is unqualified subject only to any limitation imposed by the Constitution and that in exercise of such power, it will be competent for the Legislature to enact a law which is either prospective or retrospective, were noted with approval;
++ the case of the petitioners is that the impugned explanation below sub-section (13) to section 80IA provides for a levy of tax which was hitherto unknown. It is, therefore, urged that the Court should examine the reasonableness of such provision particularly when the same is brought into operation with retrospective effect. Section 80IA(4) provides for deduction under certain circumstances. If such deductions are withdrawn with retrospective effect, surely there would be a case of providing for a levy which was till then not known. In that context, if the impugned explanation provides for withdrawal of the deductions, that too, retrospectively, question of judging the reasonableness thereof in the background of the same being made retrospectively applicable from a long period of time would certainly arise. The question, however is, does this explanation provide for a fresh levy? In other words, did the Legislature in introducing the impugned explanation materially change the exemption which existed till such explanation was introduced? To our mind, this is the crucial test which would ultimately decide the outcome of these petitions. To put it differently, if the effect of the explanation is to withdraw the existing deductions, the question of the same being unreasonable or arbitrary would arise;
++ to be able to judge the question, we need to first understand the nature of the explanation. Ordinarily, an explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may be possible from the existing provisions. Normally, therefore, an explanation would not expand the scope of the main provision and the purpose of the explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit;
++ in the case of S.Sundaram Pillai v. V.R.Pattabhiraman, the Apex Court observed that an explanation added to a statutory provision is not a substantive provision, but as the plain meaning of the word itself shows, it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision;
++ there are, however, other judicial pronouncements of the Supreme Court suggesting that though the rule that an explanation is meant only for filling a gap in the statute or removing any ambiguity or clearing a mischief, such rule of normal application is not unknown to exceptions;
++ In the case of Hiralal Ratan Lal, the The Apex Court observed as under:
[“24. On the basis of the language of the Explanation this Court held that it did not widen the scope of clause (c). But from what has been said in the case, it is clear that if on a true reading of an Explanation it appears that it has widened the scope of the main section, effect must be given to legislative intent notwithstanding the fact that the legislature named that provision as an Explanation. In all these matters the Courts have to find out the true intention of the legislature.”]
++ In the case of M/s. Aphali Pharmaceuticals Ltd. v. State of Maharashtra, the Supreme Court observed as under:
["..............We have to remember what was held in Dattatraya Govind Mahajan v. State of Maharashtra, AIR 1977 SC 915 (928): (1977) 2 SCR 790, that mere description of a certain provision, such as "Explanation" is not decisive of its true meaning. It is true that the orthodox function of an explanation is to explain the meaning and effect of the main provision to which it is an explanation and to clear up any doubt or ambiguity in it, but ultimately it is the intention of the legislature which is paramount and mere use of a label cannot control or deflect such intention.........In Hiralal Ratanlal v. State of U.P. (1973) 1 SCC 216 (225) : (AIR 1973 SC 1034 (1040)), it was ruled that if on a true reading of an Explanation it appears that it has widened the scope of the main section, effect be given to legislative intent notwithstanding the fact that the Legislature named that provision as an Explanation. In all these matters courts have to find out the true intention of the Legislature. In D. G. Mahajan v. State of Maharashtra, (supra) this Court said that legislature has different ways of expressing itself and in the last analysis the words used alone are repository of legislative intent and that if necessary an Explanation must be construed according to its plain language and 'not on any a priori consideration’.”];
++ it can thus be seen that ordinarily legislation uses an explanation for filling up a gap in statute or removing some ambiguity or making explicit which was otherwise implicit. However, it is an accepted proposition that if the language of the explanation is plain and suggests departure from the above conventional usage of an explanation, full effect to the contents of the explanation would be given as would emerge from the plain language of the provision;
++ in the present case, therefore, from both the angles, namely, whether the explanation aims to expand the prevailing provision and whether being in the nature of a tax statute, such change can be permitted with retrospective effect, it would be crucial for us to discern the true effect of such explanation. In this context, we may recall that the impugned explanation below sub-section (13) to section 80IA starts with an expression “for the removal of doubts, it is hereby declared that” and provides that nothing contained in this section shall apply to in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person including the Central or State Government and executed by the undertaking or enterprise referred to in sub-section (1). Thus the explanation in question was introduced for the removal of doubts and it declared that nothing containing in sub-section (4) would apply to a business in the nature of works contract. We may recall that sub-section (4) of section 80IA even after amendment of 2002, envisaged deduction in case of any enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. Thus, the Legislature by way of the impugned amendment distinguished between the cases of developing/operating and maintaining/developing, operating and maintaining any infrastructure facility from the works contract awarded by any person, be it the Central or the State Government, executed by the undertaking or enterprise seeking such an exemption. That there is an intrinsic difference between developing an infrastructure facility and executing a works contract, in our opinion, can hardly be disputed;
++ in the case of CIT v. Radhe Developers, a Division Bench of this Court had an occasion to examine these aspects in the context of a deduction provided under section 80IB(10) of the Act for development of housing projects. The Revenue had contended that since the assessees did not own the lands in question and only developed the same for and on behalf of some one else would not be eligible for the deduction in question. This Court examined the question what can be the meaning of the term ‘develop’ and who consequently can be stated to be a ‘developer’. Noting that section 80IB(10) of the Act provides for deduction to an undertaking engaged in the business of developing and constructing housing projects and does not provide that the land must be owned by the assessees seeking such deduction, it was held that the assessees cannot be treated as works contractors. Noting that the assessees took full risk of executing the housing project and thereby making profit or loss, as the case may be, and that the assessees invested their own funds in the cost of construction and engagement of several agencies, it was held that the deduction was available to assessees;
++ in our, opinion, what the explanation aims to achieve is to clarify that deduction under section 80IA(4) of the Act would not be available in case of execution of works contract. The fact that such interpretation of the existing provisions of sub-section (4) of section 80IA of the Act, even without the aid of the explanation was possible, in our opinion, is not disputable. As noted, sub-section (4) of section 80IA even after the amendment in the year 2002 envisaged deduction in case of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. Even without the aid of the explanation, it was possible to contend that such expression did not include an enterprise executing a works contract. Particularly, bearing in mind the observations made by this Court in the case of Radhe Developers, there would certainly be a demarcation between developing the facility and execution of works contract awarded by an agency engaged in developing such facility;
++ from the inception, thus the concept of development of infrastructure through private participation was clearly discernible. Principal purpose was to infuse private investment in such projects to speed up infrastructure development which required massive expansion. Even after bifurcation of section 80IA into section 80IA and section 80IB, with effect from 1.4.2000, this fundamental concept was not discarded. Sub-section (4) which formed part of the recast section 80IA did not carry any material changes from the earlier provisions of subsection (4A) of section 80IA which existed prior to 1.4.2000;
++ it is true that with effect from 1.4.2002 some significant changes were made in the said provisions. We have already noticed three of these changes which are material for our purpose. Such changes were (i) that sub-section (4) of section 80IA now required the enterprise to carry on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility. This was in contrast to the previous requirement of all three conditions being cumulatively satisfied; (ii) that the explanation of the term ‘infrastructure facility’ was changed to besides others, a road including toll road instead of hitherto existing expression ‘road’ and (iii) that the requirement of transferring the infrastructural facilities developed by the enterprise to the Central or the State Government or the local authority within the time stipulated in the agreement was done away with;
++ to our mind, these changes, however, would not alter the situation vis-a-vis the impugned amendment. These legislative changes did enlarge the scope of the deduction and in a sense, made it available to certain assessees who would not have been, but for the changes eligible for such deduction. Nevertheless, the basic requirement of the enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining infrastructure facility was not done away with. In other words, in our understanding, even the amended section 80IA(4) with effect from 1.4.2002 could be construed as not including execution of works contract as one of the eligible activities for claiming deduction;
++ clearly, thus, post 1.4.2002 also, the involvement of the enterprise in developing infrastructure facility when the claim was covered under such expression was essential. In the same context, we must understand the expression “developing or operating and maintaining or developing, operating and maintaining”. Keeping in mind the new areas where such private participation would be required and therefore had to be encouraged and keeping in mind that such areas, such as, surface transport, water supply, water treatment system, irrigation project, etc. would necessarily be highly investment intensive, the Legislature provided for a tax break of 10 consecutive years out of a total of 20 years period and also proposed to do away with the requirement of such infrastructure facility being transferred to the Central or the State Government or the local authority;
++ in 2007, the explanation below sub-section (13) of section 80IA came to be added which clarified that nothing contained in the said section shall apply to a person who executes a works contract entered into with the undertaking or enterprise, as the case may be. In clear terms, this explanation targeted the second level works contractor who might have been employed by the enterprise developing the infrastructure facility. However, this was not found to be sufficient explanation clearing doubts with respect to the exclusion of the enterprise engaged in execution of a works contract. It was, therefore, that the impugned explanation came to be introduced substituting the existing explanation below sub-section (13) to section 80IA. The explanatory memorandum recorded that profit linked deductions were prone to considerable misuse. With a view to preventing such misuse of the tax holiday under section 80IA, it was proposed to amend the explanation to the said section to clarify that nothing contained in the section shall apply in relation to a business which is in the nature of a works contract executed by an undertaking;
++ we, therefore, notice that from the inception, deduction was envisaged for development of infrastructure facilities with private participation. Of course, post 2002, certain relaxations were granted and in addition to extending tax holiday period, requirement for claiming such deduction was split into developing or operating and maintaining or developing, operating and maintaining infrastructure facility. The Revenue could therefore, legitimately contend that no such deduction was envisaged for mere execution of works contract. If this was the position, in our understanding, what the explanation, did was to clarify a statutory provision which was at best possible of a confusion. If that be so, the explanation must be seen as one being in the nature of plain and simple explanation and not either adding or subtracting anything to the existing statutory provision. When we hold that the impugned explanation was purely explanatory in nature and did not mend the existing statutory provisions, the question of levying any tax with retrospective effect would not arise. If we agree with the submission of the counsel for the petitioners that such explanation restricted or aimed to restrict the provisions of deduction, certainly a question of reasonableness in the context of retrospective operation would arise. In the present case, however, we have come to the conclusion that the explanation only supplied clarity where, at best confusion was possible in the unamended provision. In that view of the matter, this cannot be seen as a retrospective levy even if we were to accept that withdrawal of a deduction would amount to a fresh levy;
++ much stress was laid by the petitioners on the decision of this Court in the case of Parixit Industries Pvt. Ltd. to contend that the impugned explanation did not in any manner alter the statutory provisions contained in section 80IA(4) of the Act and therefore, deductions which were previously available cannot be withdrawn. We have already expressed our opinion on the effect of the explanation under challenge. In our understanding, we have not taken any stand different from the decision of this Court in the case of Parixit Industries Pvt. Ltd. We must appreciate that such decision was rendered in the background of the assessee’s challenge to a notice for reopening of the assessment which was previously framed after scrutiny. The assessment pertained to the assessment year 2006-07 and the notice for reopening was issued within four years from the end of the relevant assessment year. Revenue relied on the impugned explanation which substituted the previous explanation introduced with effect from 1.4.2007. This change was also given retrospective effect of 1.4.2000. The Court was thus of the opinion that introduction of the explanation in question did not amount to introduction of a new provision of law with retrospective operation. The assessee was, therefore, given the benefit of deduction considering the then explanation which was introduced with effect from 1.4.2007, which according to the Court was substantially the same and any attempt on the part of the Revenue, therefore, to reopen the assessment would be in the nature of second opinion. Thus, we do not think that we have stated anything which runs contrary to the ratio in the case of Parixit Industries Pvt. Ltd. In fact, the context of the said decision was entirely different from the challenge being considered by us in the present group of petitions;
++ in that view of the matter, challenge to the vires of the explanation must fail.
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