DISTRIBUTORS BARODA PRIVATE LIMITED Vs. UNION OF INDIA

JUDGEMENT

(1.) - This writ petition raises an interesting question of construction of S. 80M of the Income-tax Act, 1961. This question would appear to be concluded in favour of the assessee by the decision of this Court in Cloth Traders Limited v. Addl. Commr. of Income-tax, 118 ITR 243: (AIR 1979 SC 1691), but the correctness of the view taken in that case has been challenged in the present writ petition. Since the decision in Cloth Traders case (supra) was given by a Bench of three Judges, it is obvious that its validity can be canvassed before this Bench which consists of five Judges. If this Bench too takes the same view in regard to the construction of S. 80M as that taken in Cloth Traders case (supra), it would become necessary to consider the question of constitutional validity of S. 80AA which was introduced in the Income-tax Act, 1961 by S. 12 of the Finance (No. 2) Act, 1980 with a view to overriding with retrospective effect the construction placed on S. 80M by this Court in Cloth Traders case (supra). If on the other hand, this Bench disagrees with the view taken in Cloth Traders case (supra) and hold that even before the introduction of S. 80AA, S. 80K on a true interpretation of its language, meant exactly what S. 80AA now retrospectively declares it to mean, no question. of constitutional validity of S. 80AA would arise since S. 80AA would then be merely declaratory of the law as it always was and would not be imposing any new tax burden with retrospective effect. The first question that we must therefore consider is as to what is the true construction of S. 80M unaided by the subsequent legislative interpretation imposed upon it by the enactment of S. 80AA : do we affirm the view taken in Cloth Traders case (AIR 1979 SC 1691) (supra) or do we dissent from it.

(2.) We have given our most anxious consideration to this question, particularly since one of us, namely, P. N. Bhagwati, J. was a party to the decision in Cloth Traders case (supra). But haying regard to various considerations to which we shall advert in detail when we examine the arguments advanced on behalf of the parties, we are compelled to reach the conclusion that Cloth Traders case must be regarded as wrongly decided. The view taken in that case in regard to the construction of S. 80M must be held to be erroneous and it must be corrected. To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. In this we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. Delameter A. M. Y. at page 18 : "A Judge ought to be wise enough to know that he is fallible and therefore ever ready to learn : great and honest enough to discard all mere. pride of opinion and follow truth wherever it. may lead : and courageous enough to acknowledge his errors".

(3.) We may begin our discussion by referring to the legislative history of the provision enacted in S. 80M but before we do so, a brief statement of facts may help to provide the backdrop against which the question of construction of S. 80M arises for consideration. Petitioner No. 1 was incorporated as a limited company on 10th November, 1941 under the Baroda Companies Act, 1918 and at all material times it carried on business of an investment company. Petitioner No. 2 is a Director and shareholder of Petitioner No. 1. Throughout the material period with which we are concerned in this writ petition, Petitioner No. 1 received dividends on shares held by it in different domestic companies and paid interest on monies borrowed for the purpose of investment in such shares. In the course of its assessments for the assessment years 1970-71 up to 1980- 81, Petitioner No. 1 claimed that the deduction permissible under. S. 80M must be calculated with reference. to the full amount of dividends received by Petitioner No. 1 from domestic companies and not with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act, 1961. This claim was liable to succeed if the view taken in Cloth Traders case (AIR 1979 SC 1691) (supra) in regard to the construction of S. 80M was correct and some of the assessments of Petitioner No. 1 were actually completed on the basis that this claim was justified. The Revenue preferred appeals against such assessments and these appeals were pending at different stages at the time of filing of the present writ petition. The assessments for some. of the assessment years were also pending before the Income-tax Officer. So long as the decision in Cloth Traders case (supra) stood unaffected by any constitutionally valid legislative amendment, Petitioner No. 1 was entitled to succeed in the appeals as well as in the original assessments which were pending consideration before different authorities. But with a view to overriding the decision in Cloth Traders case (AIR 1979 SC 1691) (supra) with retrospective effect, Parliament enacted S. 80AA and since this section was deemed to have been introduced in the Income-tax Act, 1961 with effect from ist April, 1968 and it provided that the deduction required to be allowed under S. 80M shall be computed not with reference to the gross, amount of dividend received by the assessee from a domestic companies but with reference to the dividend income as computed in accordance with the provisions of the Act, the claim of petitioner No. 1 for deduction on the basis of the full amount of dividend received by it from domestic companies was liable to be rejected and deduction could be allowed to petitioner No. 1 only with reference to the dividend income computed in accordance with the provisions of the Act. The introduction of S. 80AA thus had the effect of enhancing the tax liability of petitioner No. 1 and the petitioners accordingly filed the present writ petition challenging the constitutional. validity of S. 80AA on the ground that it enhanced the tax burden of petitioner No. 1 with retrospective effect going back for a period of almost 12 years and thus imposed unreasonable restriction on the right of petitioner No. 1 to carry on its business in breach of Art. 19(1)(g) of the Constitution.