THE issue before the Bench is - Whether the insertion of Explanation to Section 80-IB(9) of the Income Tax Act, 1961 by Finance (No.2) Act, 2009 with retrospective effect from 1.4.2000 explaining the meaning of the term "undertaking" is unconstitutional and ultra vires to Article 14 of the Constitution of India. YES is the answer.
Facts of the case
The assessee is a foreign company based in Canada. It had set up a project office in India with the permission of RBI. It is engaged in exploration, development and production of mineral oil and natural gas. The assessee had been awarded the right to explore, develop and produce mineral oil in various blocks. For this purpose, it had entered into a "Production Sharing Contract" with the Government of India for exploration, development and production of "mineral oil". The PSC specifies the area over which assessee had been given such rights. PSC defines the Contract Area as a Block. One such PSC was entered into on 23rd September, 1994 and another on 17th July, 2001 for the exploration, development and production of mineral oil in the Hazira and Surat block respectively. The assessee had been producing crude oil and natural gas from such Blocks. It had also been claiming deduction u/s 80IB(9) of 100% of the profits and gains from the production of mineral oil and natural as it stood prior to an amendment which was introduced by the Finance (No.2) Act 2009. In these proceedings the constitutional validity of the amendment to sub-Section (9) of Section 80-IB and Explanation added to it under the Act by the Finance (No.2) Act, 2009, had been challenged.
The assessee had treated each well/cluster of wells as an "undertaking" for the purpose of claiming deductions u/s 80-IB(9). In the Hazira block, assessee commenced commercial production of mineral oil in some of the wells before 1.4.1997, but in some of the well/cluster of wells, the commercial production commenced after 1.4.1997. On the basis that a well/ cluster of wells was an 'undertaking', the assessee had claimed the benefits of deduction of the profits and gains from such 'undertakings' which commenced production after 1.4.1997 u/s 80-IB(9). This claim was disallowed by AO for AY 2001-02 relating to the Hazira block on the ground that since commercial production from the Hazira block (even though from a different well) commenced before 1.4.1997, it did not satisfy the requirement of Section 80-IB(9). According to AO it was the date of first commercial production from the block, as a whole, was to be considered to determine the entitlement of the benefit under this Section. On appeal, Tribunal held that each well/cluster of wells constituted a separate undertaking and therefore the assessee was entitled to a deduction u/s 80-IB(9) in respect of profits derived from each such well/cluster of wells for a period of seven consecutive years from the commencement of the commercial production, in each such undertaking, consisting of a well/cluster of wells. The ITAT thereafter allowed similar claims for the AYs 2000-01, 2002-03 and 2003-04. The Revenue had gone in appeal against the orders of ITAT before HC, which was pending.
Consequent upon the introduction of the Explanation to Section 80-IB(9) by the Finance (No.2) Act, 2009, defining the term "undertaking" to mean "all blocks licensed under single contract" with retrospective effect from 1.4.2000, by an Order dated 7th September 2009, the claim of the assessee for the AY 2006-07 u/s 80-IB(9) was disallowed by AO. The assessee challenged the constitutional validity of the retrospective amendment to Section 80-IB(9) on the ground of it being arbitrary and unreasonable and thus ultra vires Article 14 of the Constitution of India as well as on other grounds.
Held that,
++ Section 80-IB(9)(ii) provides for the same exemption to undertakings located in any part of India which began commercial production of mineral oil on or after 1st April 1997. Apart from use of the term "undertaking", this provision also uses the term "mineral oil". It is necessary to consider the scope and amplitude of these terms in the context of the provisions of Sections 80-IB particularly in view of the fact that while amending the provisions of this Section in the manner aforesaid, Section 80IB(9)(ii) has remained unamended. The question whether natural gas is encompassed in the term "mineral oil" came up for consideration before a Constitutional Bench of the Apex Court in the case of Association of Natural Gas and others v. Union of India and others, (2004) 4 SCC 489. The question arose as to the legislative competence of the State to enact laws on natural gas in terms of Entry 25 of List II of the Seventh Schedule of the Constitution. Union of India contended that the exclusive domain power and competence to legislate on natural gas is available only to the Parliament by virtue of Entry 53 List I of the Seventh Schedule. The State contended that the expression 'gas' in Entry 25 List II takes within its ambit "natural gas", Natural gas is widely used as energy source and State alone would be in a position to exploit the resources and distribute them to the consumer. Natural gas is classified in several broad categories such as wet gas, lean gas, dry gas, sour gas and sweet gas. State also contended that natural gases are not associated with any petroleum products, and therefore State has the legislative competence to pass legislation in respect of natural gas, as it is not a petroleum gas;
++ the Constitutional Bench, after considering "natural gas is a mineral in the form of vapor"; "a gas characterized by hydrocarbon in mixtures"; "Natural gas is found in areas of earth covered by sedimentary rocks. Gas and petroleum being less dense than water present in the rocks tends to migrate upwards"; and "Liquid and gaseous hydrocarbon are so intimately associated in nature that it has become customary to shorten the expression petroleum and natural gas to petroleum when referring to both", concluded that all the materials produced before us would only show that the natural gas is a petroleum product. The Apex Court in unequivocal terms has held that, "natural gas in raw and liquefied form is a petroleum product and part of mineral oil resources." In light of the above judgment, and in absence of any specific definition of mineral oil under Section 80-IB, any reference to mineral oil in its natural, commercial and technical sense will include petroleum products and natural gas. The decision rendered by the Apex Court in Association of Natural Gas case would squarely apply. In the absence of the definition under Section 80-IB of the Act, if reliance has to be placed on allied enactments passed by Parliament, this would also lead to a clear conclusion that mineral oil includes natural gas. It is therefore clear, that the expression "mineral oil" would include and encompass within itself, both, petroleum products and natural gas. When one deals with the provisions of the PSC or any taxing statute, without doubt mineral oil is the genus and contains within its ambit petroleum products and natural gas as its species. The term natural gas may not be sufficient to include petroleum product or mineral oil. On the contrary the expression "mineral oil" is wide enough to encompass within itself petroleum products and natural gas. The contention of the Respondent that petroleum products and natural gas have been made part of mineral oil only through inclusive provisions contained in Sections 42, 44BB and 293A and its conspicuous absence in section 80-IB has to be inferred that the purpose of Section 80-IB, mineral oil would not include petroleum products and natural gas;
++ the Constitutional Bench resolved the conflict as to the domain competence to legislate on natural gas by holding that natural gas is nothing but part of mineral oil and the exclusive competence to regulate is vested only with the Union or Parliament and the power of the State are completely denuded. It is by virtue of its power under Entry 53, Central Government has entered into the Production Sharing Contract (PSC) with parties like the Petitioner granting them rights to explore, develop and produce mineral oil which also encompasses natural gas. The proposition that even though the findings of the Apex Court are unequivocal, for the purpose of Section 80-IB the term "mineral oil" would not encompass within its purview, natural gas only has to be stated to be rejected. The judgment of the Apex Court holds the field. The ratio of this judgment remains unaffected by the subsequent amendments to Section 80-IB(9)(ii). The insertion of sub clause (iv) to Section 80-IB(9) does not militate against meaning attributed to the expression "mineral oil" by the Apex Court, Entry 53 of List I does not refer to Natural Gas separately. The Apex Court has also read it only as part of mineral oil, but for which Parliament would not have had the power and competence to legislate. Various enactments such as the Oil Fields (Regulation and Development) 1948, Mines Act 1952, The Mines and Minerals (Development and Regulation) Act 1957, Petroleum and Natural Gases Rules 1959, The Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act 1962 and The Oil Industry Development Act 1974 have been passed by the Parliament. Since there was no explicit entry "Natural Gas" in Entry 53, all the aforesaid legislations while referring to Mineral Oil had indicated explicitly, what is otherwise implicit that Mineral Oil includes Natural Gas. If Natural Gas is not part of the term Mineral Oil, Parliament could not have legislated in any manner on any issues relating to Natural Gas which position has been made explicit;
++ these amendments are not in the nature of a Validating Act and they have not been given retrospective effect. In fact, the Notes on Clauses merely set out the stand of the revenue authorities. This exercise is insufficient to construe that the term mineral oil does not include natural gas or that the benefits of Section 80-IB have been extended to natural gas for the first time with effect from 1.4.2009 by virtue of insertion of sub clause (iv) to Section 80-IB(9). At the best, sub clause (iv) has to be construed to mean that the benefit would also be available for NELP VIII bidders who satisfy the conditions set out in the said sub clause. In the absence of specific wordings in the Statute, to draw a conclusion that only undertakings engaged in the commercial production of 'mineral oil" other than "natural gas" will be entitled to deductions of profits and gains under the above mentioned sub-section, is wholly incorrect. For the aforesaid reasons, we hold that the insertion of sub clause (iv) to Section 80-IB(9) of the Act by the Finance (No.2) Act, 2009 cannot be interpreted to mean that the term "mineral oil" as used in Section 80-IB does not include natural gas and cannot result in denial of the benefit of deduction under Section 80-IB(9) to undertakings engaged in commercial production of natural gas under contracts entered into prior to VIIIth round of bidding. In view of the decision of the Constitutional Bench of the Apex Court, the term "mineral oil" includes and has always included "natural gas";
++ the Apex Court relying on the Constitution Bench decision in Deoki Nandan Prasad v. State of Bihar and others, AIR 1971 SC 1409 held that the benefit of pension which accrued to an employee is in the nature of "property" which cannot be taken away without the due process of law as per the provisions of Article 300A of the Constitution of India. State of Jharkhand and others v. Jitendra Kumar Srivastava and another, 2013-TIOL-44-SC-SERVICE. Right to receive pension under the Service Rule for service rendered before retirement is 'property' and subsequent reduction of pension would be 'deprivation' of property within the purview of Article 300A. State of Kerala v. Padmanabhan AIR 1985 SC 356. Copyright is a right to property and the same can be acquired only on payment of compensation. Entertainment Network (India) Ltd. v. Super Cassette Industries Ltd. (2008) 13 SCC 30. The right to property under Article 300A of the Constitution of India is not a fundamental right but it is a Constitutional right. The Legislature can deprive a person of his property only by authority of law. The Constitution Bench of the Apex Court in K. T. Plantation (P) Ltd. v. State of Karnataka (2011) 9 SCC 1, has held in paragraph 168 that Article 300A proclaims that no person can be deprived of his property save by authority of law, meaning thereby that a person cannot be deprived of his property merely by an executive fiat, without any specific legal authority or without the support of law made by a competent legislature. The expression `Property' in Article 300A confined not to land alone, it includes intangibles like copyrights and other intellectual property and embraces every possible interest recognized by law;
++ similarly, valid contracts are property. But the question is as to what extent a persons rights will be protected when they are sought to be illegally deprived of their properties on the strength of a legislation. Accrued right or a vested right is a mature right which is capable of enforcement in law. Deprivation of property within the meaning of Article 300A, must take place for public purpose or public interest. Any law, which deprives a person of his property has to be justified upon the purpose and object of the statute and the policy of legislation otherwise it will be unlawful and unfair and undermines the rule of law and can be subjected to judicial review. Requirement of public purpose, for deprivation of a person of his property under Article 300A, is a pre-condition. The legislation providing for deprivation of property under Article 300A must be "just, fair and reasonable" as understood in terms of Articles 14 of the Constitution. The Petitioners are carrying on business of mineral oil. When they entered in contract with the Government they were enjoying seven years tax holiday on multiple undertakings in the block. They were entitled to 100% exemption on their profits and gains under the Act. They acquired a vested right on their 100% exemption on their profits and gains which was the property of the Petitioners. By the Amendment in the Act they are being deprived of vested right of property by amending the Act retrospectively. In our opinion, the right given to the Petitioner for enjoying seven years tax holiday on each well/cluster of wells or on each undertaking in the block was an accrued and a vested right which could not have been taken away expressly or by necessary implication. In view of Section 6 (c) of the General Clauses Act, the accrued and vested right of the Petitioner should have been preserved and could not be destroyed by the impugned amendment by adding Explanation to Section 80-IB(9) with retrospective effect. We do not find any material on record which may demonstrate that the Parliament intended to destroy a right, privilege or benefit enjoyed by the Petitioner under the unamended Section 80-IB(9) of the Act, without authority of a valid law. In J. S. Yadav, the SC had held that "vested right" is a right which can arise from a contract, statute or by operation of law. A vested right can be taken away only if the law specifically or by necessary implication provide for such a course. Thus, the State cannot deprive any person, any corporation or company of his property, without following the rule of law, violating Article 300A of the Constitution of India;
++ expansion of an existing business would not deprive the benefit since every new creation in business is some kind of expansion or advancement. The true test is not whether a new industrial undertaking connotes expansion of the existing business of the assessee, but whether it is a new and identifiable undertaking separate and distinct from the existing business. The new undertaking must exist on its own as a viable unit. A new undertaking can exist even after cessation of the principal business of the assessee and vice versa. It does not matter whether the new activity produces the same commodity of the old business or distinct marketable commodity or even commodities which may feed the old business. What is relevant is that the new undertaking must be an integrated unit by itself capable of its own production. It would be a new undertaking if there is no transfer of any asset from the old business. If the results achieved are commercially tangible and undertakings can be carried out separately without losing its identity in the old business, it would constitute a new undertaking. Maintenance of separate books of accounts and discernible profits would also aid the conclusion. In short, an undertaking is one which on a standalone basis is an economically independent unit. As long as this test is satisfied, it is immaterial whether the undertaking carries out the same business or different business. Economically independent units doing the same business would constitute separate undertakings. Applying the above law laid down by the Apex Court, the sole test is if a unit is able to conduct or perform commercial production of mineral oil that unit would become an undertaking irrespective of the fact it is engaged in production of the very same product, namely, mineral oil. It is important to highlight that the expression "undertaking" should not be equated or read as an assessee. This is the essential principle evolved by Courts over a period of time. An assessee is entitled to have more than one undertaking and it can even carry on the same business or distinct business. The test is, the undertaking economically independent and commercially carrying out the activities as a self sustainable unit;
++ from the above, it is clear that Commercial Production involves a step by step process identified to every Development Area comprising a well or cluster of wells. The PSC further obligates that the investment, costs, work programme, budget and expenditure is separately identified for each such Development Area. Revenue streams are identifiable from mineral oil produced from each of the Development Area/Field. Therefore, it is clear that Commercial Production in terms of Section 80-IB(9)(ii) would arise when a Contractor proceeds to commercially produce mineral oil from each and every Development Area/Field with standalone, independent, identified investment, costs, budgets and revenues. The activities of commercial production of every Development Area/Field qualifies as an undertaking being standalone and economically independent unit in terms of the principles laid out by the Apex Court in Textile Machinery Corporation Ltd. Case, followed without deviation by various courts subsequently. Accordingly, a Block or a Contract Area can have more than one undertaking since it involves more than one Commercial Discovery, Development Area, Development Plan and execution of the commercial production on an independent standalone basis. The expressions "shall be treated as a "single" undertaking in the Act by inserting Explanation would evidently bring to light the fact that prior to the insertion of the Explanation, even Government was of the view that each Block can have more than one undertaking in view of the various articles in the PSC as set out above. The usage of the expression "single" in the Explanation would automatically give rise to the legal inference of existence of multiple undertakings for the same assessee within the same Contract Area or Block. The Explanation proceeds to deem multiple undertakings as a single undertaking with reference to the Block licensed. This is the plain and simple meaning and interpretation one can extend to the Explanation;
++ the Petitioner has been claiming a well or a cluster of wells each as a separate undertaking and according to him, in a block, there may be various fields and various undertakings and each undertaking had been granted benefit of deductions under the benefits of deductions under Section 80-IA were expressly made available with effect from 1.4.1999 by amending the then existing Section 80-IA. Later on Section 80-IB(9) was introduced to provide for such benefits. The argument of counsel for the respondent, if accepted, would be contrary to the legislative intent as the seven years tax holiday was provided by inviting public private participation contract as huge expenditure was involved in exploration, discovery and commercial production of mineral oil. The benefit of 100% deduction on profits and gains was granted by the legislature under the Act to invite investment and encourage mineral oil exploration, discovery and commercial production. The legislature gave a clear message to foreign and domestic investors that the State is encouraging mineral oil and gases exploration and commercial production by granting seven years tax holiday to an undertaking. We propose to test the argument of counsel for the respondent. It is not disputed that the benefit of seven years tax holiday was available to the Petitioner and is still available to the Petitioner. The question is as to whether the benefits of tax holiday of seven years was available on each undertaking which has now been taken away by the amendment made in Section 80-IB(9) by adding an Explanation that provides that all blocks licensed under a single contract shall be treated as a single undertaking. The PSC provides a period of four years for exploration of mineral oil etc. The argument of counsel for the respondent is that the moment the first well starts commercial production of mineral oil, the clock of seven year tax holiday starts ticking and even if the other wells may have been explored or discovered or started commercial production after two, three or about the end of four years period, the Petitioner would be entitled only to a limited part of tax holiday which may be three or four years which may be available when the commercial production starts in a well, as the period of seven years tax holiday has to be counted from the date the first well started commercial production;
++ the object of the amendment, as it appears from the statements of the Finance Minister while moving the Finance (No.2) Bill 2009, was to define the term "undertaking" in the context of mineral oil which was subject matter of considerable dispute. The assessees who are claiming every well in a block licensed constitutes a single undertaking entitled for tax holiday separately for each well. According to the Finance Minister, the view taken by the assessee were against the legislative intent. What was the legislative intent when 100% tax deduction on profits and gains was granted by the legislature was neither stated nor explained by the Finance Minister. The expression "legislative intent" was used by the Finance Minister in the Bill to impose Income Tax on the Petitioner by withdrawing tax holiday which was vested in the Petitioner from an earlier point of time. Under the garb of clarification or defining the term "undertaking", the Finance Minister by amendment almost withdrew the benefit of tax deduction substantially. From the facts of the case in hand, it is clear that the judgment of ITAT was against the revenue as the ITAT had found that each well/cluster of wells was a separate undertaking entitled to seven years tax holiday. The Revenue had challenged the decision of the ITAT before the High Court and thereafter, they have a remedy before the Apex Court. But, arbitrarily, the 100% tax deduction benefit could not be withdrawn by the Finance Minister or the legislature by amending Section 80-IB(9) of the Act retrospectively from an anterior date. The amendment in such cases where already benefit had accrued and vested in the assessee could not be taken away by giving retrospective amendment to Section 80-IB(9) which is nothing but a substantive provision inserted by amendment and it can only operate prospectively and not retrospectively.
++ the Constitutional Bench of the Apex Court in Vatika Township Private Limited has held in paragraph 34 that it would also be pertinent to mention that assessment creates a vested right and an assessee cannot be subjected to reassessment unless a provision to that effect inserted by amendment is either expressly or by necessary implication retrospective. The Apex Court in Gold Coin Health Food Pvt. Ltd., held in paragraph 8 that even if the statute does contain a statement to the effect that the amendment is clarificatory or declaratory, that is not the end of the matter. The Court has to analyse the nature of the amendment to come to a conclusion whether it is in reality a clarificatory or declaratory provision. Therefore, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether amendment is clarificatory or substantive. Same principle would apply where the legislature had made a statement in the statute that it would apply retrospectively. We have examined the history of enactment for mineral oil, the old and the amended provisions. We are satisfied that the Explanation added to Section 80-IB(9) has levied income tax on all wells/cluster of wells and all undertakings, except the first one which commences commercial production for which still seven years tax holiday is available. The legislature or the Parliament had by inserting the Explanation had widened the main Section 80-IB(9) and imposed an altogether new tax by widening the tax net which would be applicable for different periods depending upon the date of starting commercial production would be substantive change in the law with different tax liability. Such substantive provision could only be construed prospective in operation. For the reasons given above, we are of the considered opinion that the amendment made in Section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made "small repair" in the Act, but on the contrary takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT, therefore, the Explanation added by Finance (No.2) 2009 was a substantive law. We have no hesitation to hold that the Explanation added to Section 80-IB(9) by Finance Act (No.2) of 2009 is clearly unconstitutional, violative of Article 14 of the Constitution of India and is liable to be struck down. Therefore, for the reasons given above, we are of the considered opinion that the Explanation added to Section 80-IB(9) by amendment is substantive law and could not apply retrospectively. The Explanation added to Section 80-IB(9) breaches the rule of law and is arbitrary being violative of Article 14 of the Constitution of India is struck down. In the result, both the writ petitions succeed and are allowed. The Explanation to Section 80-IB(9) of the Act is held to be ultra vires to Article 14 of the Constitution of India. Rule is made absolute. Parties to bear their own costs.
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