Retrospective Amendment
Legislative Intent or Error: Puzzle of Indian Tax Policy
Introductory Questions
Let me start with a question: how does one discover legislative intent in a provision of tax statute? Through a plain reading of the provision or through a subsequent statement by the State’s legal counsel stating its intent? Positivist thinking would point us to the former, and rightly so. A statement, even a sworn statement in a court shouldn’t override what is contained in the statute. Deference to the legislature cannot extend to a point where despite what the statute contains, court interprets the provision based on legislature’s statement explaining its intent.
The question in your mind may be: why am I asking this question? Well, for those who follow tax developments, you may already know. For others, I’m asking the question in the context of Safari Retreats case and the latest amendment to CGST Act, 2017 via the Finance Act, 2025.
One key question that the Supreme Court had to answer in Safari Retreats case was: Did the legislature intentionally use the conjunction ‘or’ instead of ‘and’? Or did the legislature commit a mistake? A simple question that acquires tremendous urgency if a taxpayer needs the answer to assess its tax liability which in this was a few crores.
During the hearing, the State’s counsel argued that use of the conjunction ‘or’ was a legislative error and further pressed that ‘or’ should be read as ‘and’. What should have been the ideal response of the Supreme Court? One view – subscribed by the State – is that Supreme Court should have declared ‘or’ means ‘and’ and interpreted the provision accordingly even if it meant throwing all grammar and interpretive rules out of the court complex. Or was there more justification in the Supreme Court responding the way it did: legislative intent can only be revealed by the legislative text and not by the State counsel’s statement about the text. And in doing so, restrict the amount of deference that courts accord to the legislature in tax laws.
And equally importantly, how should we respond? Resign to yet another retrospective amendment to a tax statute and raise our hands in exasperation while letting out a huge sigh. Or do we try to understand this entire episode like a puzzle and use it as an example of how Indian State approaches tax policy. I prefer to do the latter, and hence this article.
‘Or’ Means ‘And’
I’ve commented on the case in detail here and here. In this article, I intend to provide a limited overview of the controversy with an aim to highlight Indian State’s tax policy choices.
In 2019, the Orissa High Court allowed taxpayer to claim Input Tax Credit (‘ITC’) on construction of a shopping mall. In 2024-25, one of State’s arguments before the Supreme Court was that use of ‘or’ instead of ‘and’ was a legislative error. The reason for the argument, from a revenue perspective, was straightforward: it would ostensibly allow the State to block the taxpayer’s ITC claim. But the State was aware of the ‘legislative error’ since 2019, why not correct the error via a legislative amendment and bury the issue instead of making elaborate arguments before the Supreme Court? Commenting on the same the Supreme Court in its judgment observed the following:
The writ petition in which the impugned decision was rendered is a six-year-old writ petition. If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression “plant or machinery” in clause (d) as distinguished from the expression “plant and machinery”, which has been used in several places. (emphasis added) (para 43)
As is evident, the Supreme Court rejected the State’s claim of an error. If use of ‘or’ was indeed an error, there was ample time for the State to step in and rectify it. And its failure to do so, in my books, counts as lack of bona fide. For the Supreme Court it was sufficient to dismiss the entire argument and proceed solely on the basis of what was written in the statute.
What did the State achieve by not amending the law and correcting what it claimed was a ‘legislative error’? For one, if the Supreme Court had actually ruled that ‘or’ should be read as ‘and’, it would have armed the State with a decision that could have been conveniently used by it to block ITC in the future as well.
Second, if the Supreme Court refused to interpret ‘or’ to mean ‘and’, the State could have claimed that the decision did not reflect ‘legislative intent’. Both things did happen. The latter is no longer a surprise. Each time the State loses a major tax case, its response is that the judicial decision does not reflect legislative intent. And subsequently, it leads to an amendment of the provision in question. And even more often, the amendment is given retrospective effect.
Legislative Intent – Legislative Error
The Supreme Court in its above cited paragraph makes it sufficiently apparent that legislative intent must be reflected through the statute itself. If the State claims that a legislative error crept into the statute, it should have rectified it in the intervening 6 years it had to act on it.
Legislative intent thus cannot be superimposed on a statute by the State on discovering its error or mistake. That would upset the balance of power in State’s favor and would violate a cardinal rule of tax law interpretation, i.e., strict interpretation of tax statutes is necessary to determine the taxpayer’s liability.
But does that mean that legislative error can never be acknowledged by courts? Apparently so.
One, there is no telling if an error is truly an error. In Safari Retreats case, the petitioners pointed out that:
In the model GST law, which the GST Council Secretariat circulated in November 2016 for inviting suggestions and comments, the expression “plant and machinery” was used both in clauses (c) and (d) of Section 17(5). However, while enacting the law, the legislature has advisedly used the expression “plant and machinery” in clause (c) and “plant or machinery” in clause (d) of Section 17(5). Therefore, the intention of the legislature cannot be brushed aside by contending that the use of the word “or” in Section 17(5)(d) is a mistake of the legislature. (para 9)
In such circumstances, who is to know if the legislature intentionally replaced ‘and’ with ‘or’ when finalising the text of the bill or an error crept in while editing the Model law. Presumably only the State can reveal the mystery through detailed document history and accompanying notes on the provisions. But do we want to go down that rabbit hole. Forget us, I doubt the State would like that like that level of transparency in law making.
Second, it would defeat a core tenet of not just tax law but also law in general. Tax liability is as per the law that exists and not what the law was intended to be. A taxpayer has no way of knowing what the legislature ‘intended’ to enact except by interpreting the provisions as they exist. And if one argues that the legislative debates, and other pre-legislative reports would provide a clue, it is a heavy burden to impose on the taxpayer. Then not only must the taxpayer know the law but also whether the law contains an error or not. Hardly just or fair. And one would argue such a stance is also devoid of common sense.
Puzzle of Indian Tax Policy
Hidden in the steps of Safari Retreats case and its aftermath is the puzzle of Indian tax policy decisions.
One, why wait for the Supreme Court’s decision and then amend the provision retrospectively? Because beyond the immediate urgency of losing or wining a case, was a question of policy. Do we allow taxpayers to claim ITC on construction of shopping malls when they further rent it for business? While a timely amendment of ‘or’ to ‘and’ may not have answered the question with certainty, it would have provided a clear signal of proactive policy making including correcting errors. Instead, the post-decision amendment reveals a policy of amending laws as per convenience.
Two, where were the States? Since the entire dispute centred around CGST Act, 2017 we expect response from the Union, but GST is a federal levy. Why didn’t any State openly and persuasively argue for an amendment and perhaps end a long winding litigation? It was only after the Supreme Court’s judgment, that States were visible. But just about. States were on board for the GST Council’s recommendation for amendment. Or at least no State objected to the amendment. So, my impression is that either ALL States were either clueless about the litigation or all of them unanimously approve retrospective amendments to GST laws instead of proactive amendments to thwart resource consuming litigation. Maybe, this is the kind of uniformity that was aimed through GST.
Third, why file a review after deciding to introduce the amendment? Again, it seems the Court’s stamp of approval or its views on the amendment will prevent sprouting of similar issues from the provision. In this case, though the litigation may not end because even the amendment may not prove enough as courts will still need to interpret the phrase ‘plant and machinery’. But a review seems like a circuitous way of making tax policy when there can be direct and straightforward ways. Only we prefer to be clever by half and like to prevent transparency on fundamental tax policy issues. Else, the State may be held to its word and that is not something it will enjoy.
Way Forward
The promise of no retrospective amendments to GST laws was buried long ago. And now it is dead. We can only hope for a more sane approach to tax disputes and a saner reaction to court decisions that are not in the State’s favor. Else, the familiar cycle of dispute, decision, amendment will continue till perpetuity until one fine day we feel the need to ‘simplify’ GST by removing all the Provisos and Explanations which were added via numerous reactive amendments.
Machinery Provisions Brook No Vested Rights: Supreme Court Holds that Amendment to Section 153C, IT Act, 1961 is Retrospective
On 6 April 2023, a Division Bench of the Supreme Court in Vikram Bhatia case[1], held that the amendment to Section 153C, IT Act, 1961 was retrospective in nature and would be applicable to searches conducted even before the date of amendment, i.e., 1.06.2015. The Supreme Court’s decision is another example of its deferential approach to the State in tax matters. The impugned case also highlights that the Revenue Department is not hesitant to argue that an amendment is retrospective on the pretext that the pre-amendment provision was interpreted contrary to legislative intent. An argument that the Supreme Court and other Courts have not scrutinized with necessary rigor.
Background to Amendment of Section 153C, IT Act, 1961
The relevant portion of Section 153C, as it stood before its amendment vide the Finance Act, 2015, provided that where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other a person against whom search is conducted, then such books of account or assets shall be handed over to the assessing officer having jurisdiction over the other person. And the other person may be issued notice and their income reassessed under Section 153-A, IT Act, 1961.
The Delhi High Court in Pepsico India case[2] held that the words ‘belongs or belong to’ should not be confused with ‘relates to or refers to’. In this case, the Delhi High Court noted that if the purchaser’s premises are searched and a registered sale deed is seized, it cannot be said that it ‘belongs to’ to the vendor just because his name is mentioned in the document. (para 16) The Delhi High Court’s interpretation meant that the assessing officer could only initiate proceedings against a third party if the incriminating material found during search proceedings ‘belonged to’ the third party and not merely ‘related to’ the third party. The Revenue Department’s stance was that the Delhi High Court’s interpretation did not align with the intent of the provision. Though the Revenue Department’s disagreement with the Delhi High Court’s ruling could also stem from the fact that its interpretation set a high threshold for the assessing officer to invoke Section 153C against a third party.
To overcome the effect of the Delhi High Court’s judgment, Finance Act, 2015 amended Section 153C, and Section 153C(1)(b) now states that where the assessing officer is satisfied that any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, person other than against whom search is conducted, then such books of account or assets shall be handed over to the assessing officer having jurisdiction having jurisdiction over the other person. And the other person may be issued notice and their income reassessed under Section 153-A, IT Act, 1961.
The scope of Section 153C was clearly widened, the threshold to proceed against a third party was lowered with the phrase ‘belongs to’ being replaced with ‘relates to’. The expression ‘belongs to’ though continued to qualify money, bullion, jewellery or other valuable article or thing mentioned in Section 153C(1)(a).
Interpretation of Amended Section 153C, IT Act, 1961
The Supreme Court heard appeals from common judgment[3] of the Gujarat High Court pronounced in April 2019. The Gujarat High Court observed that though Section 153C was a machinery provision, but by virtue of its amendment new class of assessees were brought within the scope of the provision and it affected their substantive rights and resultantly Section 153C could not be interpreted to be a mere procedural/machinery provision. Further, the Gujarat High Court reasoned that the amended provision was much wider in scope as compared to its predecessor. The Gujarat High Court concluded that amendment to Section 153C shall not be given a retrospective effect, and no notices could be issued post-amendment of Section 153C for searches conducted before its amendment, i.e., 1.06.2015. Against this decision of the Gujarat High Court, the Supreme Court heard appeals filed by the Revenue Department.
The precise question before the Supreme Court was whether amendment to Section 153C, IT Act, 1961 was retrospective? And whether Section 153C, IT Act, 1961 would be applicable to searches conducted before 1.06.2015, i.e., the date before amendment. The Supreme Court answered in the affirmative. There are several limitations in the Supreme Court’s approach, let me highlight a few below.
First, the Supreme Court accepted the State’s argument that the amendment to Section 153C, IT Act, 1961 was ‘a case of substitution of the words by way of amendment’. (para 10.1) The Supreme Court cited numerous precedents to the effect without really explaining the basis on which it was deciphering that the amendment in question was a ‘substitution’ amendment. In fact, the Supreme Court adopted a broad brush approach and neglected to observe that even post-amendment Section 153C(1)(a) retains the phrase ‘belongs to’. Section 153C(1), after amendment vide the Finance Act, 2015 states that:
Nothwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Office is satisfied that,-
- any money, bullion, jewellery or other valuable article or thing, seized or requistioned, belongs to; or
- any books of account or documents, seized or requistioned, pertains or pertain to, or any information contained therein, relates to,
a person other than the person referred to in section 153A, … (emphasis added)
Clearly, both phrases ‘belong to’ and ‘relates to’ have been retained in Section 153C. And the afore cited portion of Section 153C provides reasonable basis to argue that the Finance Act, 2015 did not effectuate a ‘substitution amendment’ of Section 153C. The amendment only lowers the threshold to initiate the proceedings against the third person for certain kinds of documents and does not fully substitute the pre-amended provision.
Second, the Supreme Court reasoned that Section 153C, IT Act, 1961 was a machinery provision and it must be construed to give effect to the purpose and object of the statute. (para 10.6) The Supreme Court then cited a host of decisions to support its stance that machinery provisions must be construed liberally. However, the decisions cited by the Supreme Court such as Calcutta Knitwears case[4], hold that machinery provisions should be interpreted liberally to give meaning to the charging provision. The judicial precedents on this issue do not state that machinery provisions should be interpreted liberally per se. Neither do any of the precedents cited by the Supreme Court state that legislative intent needs to be placed at the highest pedestal without weighing it against other factors such as taxpayer rights.
Third, the Supreme Court rejected the assessee’s contention that Section 153C, IT Act, 1961 should not be interpreted to have retrospective effect since it affected the substantive rights of the third party. The Supreme Court rejected the argument on the ground that the pre-amended Section 153C was also applicable to the third party. While the Supreme Court is right, its statement does not sufficiently appreciate that the threshold to proceed against the third party after amendment to Section 153C was lowered directly affecting the rights of such party. Instead, it stressed that there was legislative intent to proceed against the third party before and after the amendment without delving into the details. Equally, the Supreme Court dismissed the argument that there is presumption against retrospectivity of a statute. The Supreme Court examined the jurisprudence on presumption against/for retrospectivity superficially. At no place in the judgment is there an examination as to why and how the amendment to Section 153C is ‘declaratory’ and why presumption against its retrospectivity is inapplicable.
Fourth, which overlays with the second point, is that the Supreme Court laid considerable emphasis on legislative intent. Despite immense emphasis on legislative intent, the Supreme Court did not examine as to why one sub-clause of Section 153C continued to retain ‘belongs to’ after the amendment. And, neither did it refer to any source that helps us understand the original legislative intent or the intent behind amendment to Section 153C. In the absence of such references, legislative intent is a malleable phrase in the hands of any adjudicating authority, and it was used as such in the impugned case.
Fifth, the Supreme Court stated that the Delhi High Court construed the term ‘belongs’ unduly narrowly and restrictively, but never clarified the precise objection to the High Court’s interpretive approach. Strict interpretation of tax statutes is the default approach of Courts, and deviations from it need to be justified not adherence to it. The Delhi High Court was clear in its judgment that a tax statute must be interpreted strictly and in case of doubt or dispute must be interpreted in favor of the assessee. (para 7) And the Delhi High Court adopted such an approach in construing Section 153C, IT Act, 1961. The Supreme Court never truly explained how adopting such an approach by the Delhi High was an unjust or restrictive interpretation.
Sixth, the Supreme Court took made an interesting point when it referred to First Proviso to Section 153C. The said Proviso contains a deeming fiction where in case of a third person, the reference to the date of initiation of the search under Section 132 shall be construed as reference to the date of receiving of books of account or documents or assets seized or requisitioned by the assessing officer having jurisdiction over such person. The deeming fiction in the First Proviso moves the date of initiation of search to the date the assessing officer of the third person receives the documents. In the impugned case, while the search took place before 1.06.2015, the assessing officer of the third party received the documents on 25.04.2017 and issued notice to the third party on 04.05.2018. Thus, as per the deeming fiction, the search against the third party was initiated after 1.06.2015. Given these set of facts, it was not unreasonable to suggest that the applicable provision should have been the amended Section 153C. The Supreme Court’s used the First Proviso to support its conclusion (para 10.3) But the Supreme Court did not delve into the implication of the First Proviso adequately vis-à-vis its repeated emphasis on legislative intent. The Supreme Court observed that not allowing the Revenue Department to proceed against the third party ‘solely on the ground that the search was conducted prior to the amendment’ would frustrate the object and purpose of the amendment. In arriving at this conclusion, the Supreme Court did not satisfactorily examine how the deeming fiction in the First Proviso to Section 153C makes the actual date of initiation of search irrelevant for the third person.
Conclusion
The Supreme Court granting the State leeway in tax (and economic) laws is a well-entrenched doctrine in Indian tax jurisprudence. In this case, the Supreme Court used the doctrine impliedly to stamp its approval to an amendment to IT Act, 1961, stating that the amendment was retrospective in effect, without articulating its reasoning in a cogent and defensible manner. While the deeming fiction in the First Proviso to Section 153C lends some support to the Supreme Court’s conclusion, there was need for more robust reasoning to interpret the amendment to be retrospective in nature. The amendment of Section 153C has an appreciable impact on the substantive rights of the third parties. This factor alone was sufficient for the Supreme Court’s conclusion to be based on impeccable reasoning, but we only saw a glimpse of it in the judgment.
[1] Income Tax Officer v Vikram Sujit Kumar Bhatia 2023 SCC OnLine SC 370.
[2] Pepsico India Holdings Private Limited v ACIT 2014 SCC OnLine Del 4155.
[3] Supreme Court, in its judgment, did not specifically state the name of parties and the exact decision. Though one of the Gujarat High Court’s decision decided in 2019 is Anikumar Gopikishan Aggarwal v CIT [2019] 106 taxmann.com 137 (Guj). In this case, the Gujarat High Court decided that amendment to Section 153C, IT Act, 1961 was prospective in nature.
[4] Commissioner of Income Tax, III v Calcutta Knitwears, Ludhiana (2014) 6 SCC 444.
