The word retrospective signifies looking back at, thus retrospective effect of law means giving effect to the amendment in the existing law before the date in which the changes/amendment was brought in. Authors Rajesh Kumar & Anjali Jain, Advocates in their article discuss the nuances of the principle of retrospectivity under different laws. The authors elucidate that Statutes dealing with Procedure, in contrast to statutes dealing with substantive rights, are presumed to be retrospective unless such a construction is textually inadmissible. Speaking of the principle of retrospectivity in taxation laws, the authors state that general provisions regarding retrospectivity of amending acts, as applicable to other laws are also applicable to tax laws. They highlight that “A Validating Act validating any fiscal provision with retrospective operation is usually held not to be unreasonable or arbitrary. In the case of any Validating Act, the intention of the legislature is generally made sufficiently clear in the section or in the Act which is declared invalid on account of some flaw or defect which is within the competence of Parliament to rectify.”

Retrospective Operations of Amendments in Taxation Laws

The word retrospective signifies looking back at, thus retrospective effect of law means giving effect to the amendment in the existing law before the date in which the changes/amendment was brought in. In the matter of Hitendra Vishnu Thakur v. State of Maharashtra [TS-5034-SC-1994-O], the Hon’ble Supreme Court laid down the ambit and scope of an amending Act and its retrospective operation as follows:

“(i) A statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible, is presumed to be retrospective in its application, should not be given an extended meaning and should be strictly confined to its clearly defined limits.

(ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal even though remedial is substantive in nature.

(iii) Every litigant has a vested right in substantive law but no such right exists in procedural law.

(iv) A procedural statute should not generally speaking be applied retrospectively where the result would be to create new disabilities or obligations or to impose new duties in respect of transactions already accomplished:

(v) A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in operation unless otherwise provided, either expressly or by necessary implication.”

The Supreme Court held in Mohd. Rashid Ahmad v. State of U.P., [(1979) 1 SCC 596],

“Perhaps no rule of construction is more firmly established than this — that retrospective operation is not to be given to a statute so as to impair an existing right or obligation other than as regards the matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in a language which is fairly capable of either interpretation, it ought to be construed as prospective only. But where, as here, it is expressly stated that an enactment shall be retrospective, the courts will give it such an operation. It is obviously competent for the legislature in its wisdom, to make the provisions of an Act of Parliament retrospective.”

Plenary Power to Legislate:

The Union Parliament and State Legislatures have plenary powers of legislation within the fields assigned to them and competence to make a law for a past period on a subject depends upon present competence to legislate on that subject. The Supreme Court was emphatic in Rai Ramkrishna v. State of Bihar [TS-5003-SC-1963-O], about the power of the legislature in India to enact retrospective taxation laws. It held that if in its essential features a taxing statute is within the competence of the legislature, it would not cease to be so if retrospective effect is given to it. A power to make a law, therefore, includes within its scope to make all relevant provisions which are ancillary or incidental to it. The provision for levying of interest and to levy penalties retrospectively and to validate earlier proceedings under laws which have been declared unconstitutional after removing the element of unconstitutionality is included within the scope of legislative power.

The scope of the power of a legislature to make a law validating the levy of a tax or a duty retrospectively was considered by the Supreme Court in Chhotabhi Jethabhai Patel & Co. v. Union of India [(1962) Suppl. 2 SCR 1; AIR 1962 SC 1006]. The court held that Parliament acting within its legislative field had the power and could by law both prospectively and retrospectively levy excise duty under the Central Excise and Salt Act, 1944, even where it was established that by reason of the retrospective effect being given to the law, the assessees were incapable of passing on the excise duty to the buyers. In the case of J. K. Jute Mills Co. Ltd. v. State of Uttar Pradesh [(1961) 12 STC 429 (SC)], the Supreme Court has held that the power to make retrospective legislation in cases relating to tax on sale of goods is the same as in  the income tax.

In the case of Asstt. CIT of Urban Land Tax v. Buckingham & Carnatic Co. Ltd. [TS-5028-SC-1969-O], 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 that law unconstitutional, but 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. Thus, a competent legislature’s power to enact retrospective legislation cannot be curtailed or challenged. However, as the Supreme Court explained, “while there could not be any dispute that the legislature in India had the power to make retrospective legislation, it would be open to a party affected by such laws to contend that the retrospective operation creates a situation which could be described as an unreasonable restriction which violates the right to carry on business or the right to hold and dispose property”.

Retrospective Operations in Procedural laws:

Statutes Dealing with Procedure, in contrast to statutes dealing with substantive rights, statutes dealing with merely matters of procedure are presumed to be retrospective unless such a construction is textually inadmissible. As stated by Lord Denning: "The rule that an Act of parliament is not to be given retrospective effect applies only to statute' which affect vested rights. It does not apply to statutes which only alter the form of procedure or the admissibility of evidence, or the effect which the courts give to evidence". If the new Act affects matters of procedure only, then, prima facie, "it applies to all actions pending as well as future". In stating the principle that "a change in the law of procedure operates retrospectively and unlike the law relating to vested right is not only prospective".

"No person has a vested right in any course of procedure. He has only the right of prosecution or defense in the manner prescribed for the time being by or for the court in which the case is pending and if by an Act of Parliament the mode of procedure is altered he has no other right than to proceed according to the altered mode”. The general rule as stated by Halsbury laws of England has been reiterated in several decision of the Supreme Court as well as English Courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment.

Bombay High Court in, New Shorrock Spinning & Manufacturing Co. Ltd. Vs. N. V. Raval [ITO [TS-5141-HC-1958(Bombay)-O], held that a statue which deals with matter of substantive law and taxation is matter of substantive law-would not be construed to have retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary implication. It is well settled rule of interpretation allowed by time and sanctified by judicial decisions that, unless the terms of a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure.

It was observed by the Andhra Pradesh High Court, in Kanumarlapudi L. Chetty v. First Addl. ITO [TS-5149-HC-1955(Andhra pradesh)-O], that a statute affecting vested rights is prima facie prospective unless the statute expressly or by necessary implication indicated to the contrary. Thus, as per general rule, procedural amendments are applied retrospectively whereas substantive amendments are applied prospectively. Nevertheless, the legislature has plenary power and can make even substantive amendments retrospectively. If an enactment is expressed in a language which is fairly capable of either interpretation, it ought to be construed as prospective only as held in Govinddas v. ITO [TS-5067-SC-1975-O]. In CIT v. Mrs. Ayodhyakumari [TS-5093-HC-1984(Rajasthan)-O], the High Court held that all laws are considered to be prospective except when made retrospective by express words or by necessary implication.

Effect of Judicial Precedents:

It has been observed by the Kerala High Court in Kil Kotagiri Tea and Coffee Estates Co. Ltd. v. ITAT [TS-5326-HC-1988(Kerala)-O], that a binding decision rendered by a court is always retrospective and the decision which has been overruled was never the law. A subsequent binding decision of the Supreme Court or of the High Court has retrospective operation as in the case of subsequent legislation and overruling is always retrospective.

Effect in Tax Laws:

General provisions regarding retrospectivity of amending acts, as appliable to other laws are also applicable to tax laws. Further, in view of the complexity of fiscal management, the legislatures necessarily enjoy a very wide discretion in the matter of fiscal legislation. A Validating Act validating any fiscal provision with retrospective operation is usually held not to be unreasonable or arbitrary. In the case of any Validating Act, the intention of the legislature is generally made sufficiently clear in the section or in the Act which is declared invalid on account of some flaw or defect which is within the competence of Parliament to rectify. Such Validating Acts, it may be observed, do not in fact have the effect of imposing a fresh tax with retrospective effect and they only legalise the levy already imposed. There is in effect and substance no imposition of any new tax for the earlier years by virtue of the retrospective operation and the retrospective operation merely validates the levy already imposed and possibly collected [Lohia Machines v. Union of India, [TS-5000-SC-1985-O].

A validating act is normally presumed to be reasonable. A Validating Act seeks to validate the earlier Acts declared illegal and unconstitutional by courts by removing the defect or lacuna which led to 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. Though, the legislatures are empowered to enact tax laws with retrospective effect, and it cannot be challenged on the ground of incompetency of the legislatures, a retrospective imposition of taxes may be “unreasonable and arbitrary” and thereby, be violative of the Constitution of India.

When taxes were raised with retrospective effect, the Supreme Court held in D. Cawasji and Co. v. State of Mysore [TS-5011-SC-1984-O],

“In our opinion, the enhancement of the rate of duty from 6 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 of illegal 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 the higher rate with retrospective effect. It may be open to the Legislature to impose the levy at the higher rate with prospective operation but 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.”