The recent judgment by the Hon'ble Supreme Court in M.M. Aqua, which was also the last judgment by the legendary Justice R.F. Nariman, brings us to delve deeper into the legal position on declaratory statutes. The retrospective applicability of declaratory statutes, typically inserted as an Explanation with the words "for the removal of doubts", enjoys a rather notorious status in the tax framework. Such statutory amendments have often been used to alter the settled legal position and saddle the taxpayers with an unanticipated liability. 

Mr. A. Sekar (Chartered Accountant) traces India's experience with the declaratory statutes in the light of plethora of judgments delivered across the board. He discusses the time-tested case laws with divergent views to demonstrate the expanse and the impact of the quintet - for the removal of doubts. He lays emphasis on the legal position that declaratory statutes meant only to explain the pre-existing legal provision cannot be retrospective in its effect.

Mr. Sekar is of the view that the draftsmen need to go beyond the words "for the removal of doubts", to bring an end to the controversy inexorably arresting the judicial minds due to its repetitive usage in the legislations and mostly leading to the conclusion that favours the taxpayers.

"Removing Doubts on Amendments Meant "For The Removal of Doubts"

Declaratory statutes can be divided into two clauses: (1) those declaratory of the common law and (2) those declaring the meaning of an existing statute. Obviously, those declaratory of the common law should be construed according to the common law. Those of the second class are to be construed as intended to lay down a rule for future cases, and to act for retrospectively. They closely resemble interpretation clauses, and their paramount purpose is to remove doubt as to the meaning of existing law, or to correct a construction considered erroneous by the legislature [1]. “A declaratory Act or enactment declares what the law is on a particular point, often for the avoidance of doubt” [2]

Declaratory statutes: The presumption against retrospective operation is not applicable to declaratory statutes. As said in CRAIES [3] and approved by the Supreme Court: “For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning and effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what the Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act has a preamble, and the word ‘declared’ as well as the word ‘enacted’.  But the use of the words ‘it is declared ‘is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In deciding, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.  It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language shall be deemed always to have meant ‘is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and therefore, if the principal Act was existing law when the constitution came into force, the amending Act also will part of the existing law”

So far, so good on declaratory statutes. But the question remains is what is the significance of the use of the words “for the removal of doubts”? Does it mean wherever the words ‘for the removal of doubts’ are used, it automatically means that it is only clarificatory and a procedural law and therefore has retrospective application? What happens if such provision introduced with the words ‘for the removal of doubts’ precedes such provision and the law itself explicitly states that the new provision takes effect from a specified date there and that date happens to be a retrospective date? Or is that in every case where substantive law is introduced, it will have no retrospective effect even by reason of an explanation?

Now let us look at the role of an Explanation in a statute.

The decision of the Supreme Court in the case of M.M. Aqua Technologies Limited [4] is not the first decision to provide answers to all these questions.

An explanation may only explain and may not expand or add to the scope of the original section [5]. An explanation could introduce, a fiction or settle a matter of controversy [6]. The construction of an explanation [7],  must depend upon its terms and no theory of its purpose can be entertained unless it is to be inferred from the language used. Explanation was meant to explain the article and must be interpreted according to its own tenor and that it was an error to explain the Explanation with the aid of the Article to which it was annexed.[8] 

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.[9] The interpretation must obviously depend upon the words used therein, but this must be borne in mind that when the provision is capable of two interpretations, which should be adopted which fits the description.  An explanation is different in nature from a proviso, for a proviso excepts, excludes or restricts while an explanation explains or clarifies.  Such an explanation or clarification may be in respect of matters whose meaning is implicit or not explicit in the main section itself. [10] 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. The 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 priori consideration” [11]

These decisions appear to lay down that an explanation is not decisive of the true meaning of a certain provision under which it appears and if an explanation widens the scope of the main section, legislative intent must prevail. How do we infer the legislative intent?

It has been noted that the speech made by the Mover of the Bill explaining the reason for introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted.  This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statue being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. [12]

This brings us back to the question of meaning and purpose for which the words “For removal of doubts” is used in a statute. It is obvious that such words can be found only in an explanation and not in the main section or for that matter even in a proviso. The use of these words does not mean that the resultant law is not a substantive law.

The Supreme Court has held that it is well settled legal proposition that an amendment can be considered to be declaratory and clarificatory only if the statute itself expressly and unequivocally states that it is a declaratory and clarificatory provision. If there is no such clear statement in the statute itself, the amendment will not be considered to be merely declaratory or clarificatory.”[13]

Applying this principle, the Supreme Court , while approving the decisions of Eicher Motor Limited [14] and the subsequent decision of the Telangana and Andhra Pradesh High Court in Pennar Profiles Limited [15] wherein  Explanation 3C appended to Section 43B which was inserted with retrospective effect from 01-04-1989 was considered to be declaratory, has held that the statutory Explanation 3C inserted by the Finance Act 2006 appears not to have been brought to the notice of Gujarat High Court and the Assessing officer has rightly disallowed the deduction applying the Explanation 3C to Section 43B.

But then in Virtual Soft Systems Ltd.,[16] the Supreme Court has not stopped with what is quoted earlier in this article. It goes on to add as under:

“Even if the statue does contain a statement to the effect that the amendment is declaratory or clarificatory, that is not the end of the matter. The Court will not regard itself as being bound by the said statement in the statute itself, but will proceed to analyze the nature of the amendment and then conclude whether it is in reality a clarificatory or declaratory provision or whether it is an amendment which is intended to change the law and which applies to future periods”

This appears to be in conformity with the decision of the Apex Court rendered in 2005 in the case of  [17] wherein it has been observed that irrespective of the fact that the phrase used are ‘it is declared’ or ‘for the removal of doubts’, the law is not presumed to be retrospective, if it changes the law.

Now this is found to be one of the established cannons of interpretation by the Supreme Court in the case of M.M. Aqua Technologies Limited [18]

It is a different matter that the Supreme Court ultimately concludes on the facts of the M.M. AquaTechnologies’ case that the impugned High Court ruling was in error in concluding that the interest had been converted into a loan and were in departure with factual finding of the lower authorities.  It is to be noted that in the said case the lender has accepted the debentures issued by the appellant in discharge of the debt and interest and the Supreme Court held that the interest was actually paid by means of issuance of debentures.

The controversy as to what is the real effect of the words “for the removal of doubts” would persist in the light of the conflicting observations in the case of rulings in Gujarat Cypromet [19] and M.M. Aqua Technologies [20]. However, the decisions of the Supreme Court in Martin Lottery Agents Limited [21] case, Greatship (India) Limited [22] case and Sedco Forex International [23] case would certainly come to the rescue of the assessee in all cases where explanatory amendments containing “for the removal of doubts” are brought in statute books. It looks like the revenue authorities should look for some better terms to bring an end to this controversy. Until then “For the removal of doubts’ would continue to create new doubts and controversies!

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[1]  Crawford’s Statutory Construction at Page 107, para 74

[2]  Francis Bennion Statutory Interpretation (second edition 1992 page 105)

[3]  Craies – Book on legislation

[4]  M.M. Aqua Technologies Ltd  [TS-5044-SC-2021-O]

[5]  Bihta Marketing Union Vs. Bank of Bihar (AIR 1967 SC 389)

[6]  State of Bombay Vs. United Motors, (AIR 1953 SC 252)

[7]  Collector of Customs Vs. G. Dass & Co., AIR 1966 SC 1577

[8]  Burmah Shell Oil Limited Vs.  Commercial Tax Officer, AIR 1961 SC 315

[9]  Dattatraya Govind Mahajan Vs. State of Maharashtra AIR 1977 SC 915 (928)

[10] State of Bombay Vs. United Motors, AIR 1953 SC 252

[11] Hiralal Ratanlal Vs. State of UP (1973) 1 SCC 216 (225)

[12] K.P.Vergese Vs. Commissioner of Income tax, Ernakulam & Another (1981) 4 SCC 173 at 184

[13] Virtual Soft Systems Limited Vs. Commissioner of Income tax, Delhi-1 [TS-36-SC-2007-O]

[14] [TS-5432-HC-2006(MADHYA PRADESH)-O]

[15] [TS-5823-HC-2015(ANDHRA PRADESH)-O]

[16] [TS-36-SC-2007-O]

[17] [TS-5218-SC-2017-O]

[18] M.M. Aqua Technologies Ltd.  (supra)

[19] Gujarat Cypromet 412 ITR 398

[20] M.M. Aqua Technologies Ltd.  (supra)

[21] Martin Lottery Agents Limited Vs Union of India 2009 12 SCC 209

[22] Greatship (India) Limited Vs CST 39 STR 754

[23] Sedco Forex International Drill Vs CIT (supra)