(2014) 367 ITR 466 (SC)
Prospective and retrospective operation of fiscal legislation
The presumption is against retrospectivity. An amendment imposing a new burden operates prospectively unless the legislature clearly provides otherwise; only a clarificatory or beneficial provision that creates no new liability may be applied to earlier periods.
When does an amendment to a fiscal statute operate retrospectively, and who bears the burden of showing that it does?
The dispute concerned whether a surcharge introduced by an amendment applied to a period before the amendment took effect. The Revenue contended that the amendment merely clarified the existing position and therefore governed earlier years. Because conflicting approaches to retrospectivity had emerged in a number of decisions, the matter was placed before a Constitution Bench, which took the opportunity to restate the governing principles comprehensively.
A five-judge Constitution Bench of the Supreme Court heard the matter and reconsidered an earlier decision that had been read as supporting retrospective application.
For the assessee
Legislation is presumed to operate prospectively. A provision that increases the burden on the taxpayer cannot be applied to transactions already completed, since taxpayers arrange their affairs by reference to the law in force at the time. Describing an amendment as clarificatory does not make it so.
For the Revenue
The amendment did not create a new levy but removed doubt about what the law had always required. A clarificatory provision is declaratory in nature and takes effect from the date the provision it clarifies was introduced.
The Constitution Bench grounded the presumption against retrospectivity in fairness. Legislation that affects vested rights or imposes new obligations is presumed to be prospective because people regulate their affairs on the basis of the law as it stands, and it would be unjust to alter the consequences of completed transactions after the event. The Court held that this presumption is displaced only where the legislature has made its intention clear, either expressly or by necessary implication, and that the burden of establishing retrospective operation lies on the party asserting it. It drew a distinction between two categories: provisions that impose a new liability or enlarge an existing one, which must be prospective unless clearly stated otherwise; and provisions that are genuinely clarificatory or that confer a benefit while creating no new burden, which may be applied to earlier periods. Crucially, the Court held that the label the legislature or the Revenue attaches is not decisive — whether a provision is clarificatory is determined by examining what it actually does, and a provision that changes the law cannot be made retrospective by calling it a clarification.
A principle of general application rather than a provision-specific holding, and directly relevant to the transition to the IT Act 2025, where the characterisation of changes as clarifying or altering the earlier position will arise repeatedly. It is the authority relied on in every dispute over retrospective amendments, and it underpins decisions such as New Skies Satellite, which refused to let a retrospective domestic amendment rewrite a treaty term.