The Levy Of Tax By The States Will Not Apply To Transactions Made Before April 1, 2005: Supreme Court Of India

CASE NAME:

Mineral Area Development Authority and Anr. Vs. M/s Steel Development Authority of India and Anr. Etc.

CASE DATE:

14th August, 2024

PARTIES INVOLVED:-
•    Appellants: Mineral Area Development Authority
•    Respondents: M/s Steel Development Authority of India

BENCH:-
•    CJI DY Chandrachud
•    Justice Hrishikesh Roy
•    Justice Abhay S Oka
•    Justice JB Pardiwala
•    Justice Manoj Misra
•    Justice Ujjal Bhuyan 
•    Justice Satish Chandra Sharma
•    Justice Augustine George Masih

IMPORTANT PROVISIONS:-

1. Entries 49 and 50 of the State List:-
   Pertain to the state’s power to levy taxes on land and mineral rights.
2. Entry 54 of the Union List:-
   Deals with the Union’s power over regulation of mines and mineral development.
3. Article 265 of the Indian Constitution:- 
   Stipulates that no tax shall be levied or collected except by authority of law.
4. Article 142 of the Indian Constitution:- 
   Grants the Supreme Court the power to pass any decree or order necessary for doing complete justice in any cause or matter pending before it.

SUBJECT:-

In this case, the Supreme Court overruled a 35-year-old precedent set by India Cement Ltd. v. State of Tamil Nadu [1990 (1) SCC 12]. After the ruling, submissions were made on whether the judgment should apply prospectively or retrospectively. The Court ultimately decided against prospective application, allowing states to levy taxes retrospectively under Entries 49 and 50 of List II of the Seventh Schedule. 

OVERVIEW:-

• In this case, the Supreme Court addressed whether its earlier ruling in the India Cement Ltd. v. State of Tamil Nadu [1990 (1) SCC 12], which held that royalty is a tax and limited the power of state legislatures to levy taxes on mineral rights, should be applied retrospectively or prospectively after it was overruled by a nine-judge bench.
• The Court heard submissions from various senior counsels who argued for both sides. The arguments focused on the financial impact on industries, consumers and state revenues.
• Ultimately, the Court upheld the retrospective application of the new ruling (MADA), allowing states to levy taxes based on the new interpretation.
• However, it provided some relief by stating that taxes should not apply to transactions before April 1, 2005 and allowed payments to be made in instalments over 12 years with interest and penalties waived for periods before July 2024. 

ISSUES RAISED BEFORE THE COURT:-

1. Whether the judgment in MADA should be applied prospectively or retrospectively?
2. Whether the retrospective application would unfairly impact financial bids for mineral concessions and consumer prices?
3. Whether the doctrine of prospective overruling should be applied to avoid disruption?
4. Whether state revenues can be protected without imposing unfair financial burdens on industries and consumers?

CONTENTIONS RAISED ON BEHALF OF THE APPELLANTS:-

• The learned counsel for the appellants, Mr R Venkatramani, argued that the judgment in India Cement Ltd. v. State of Tamil Nadu had held the field for thirty-five years and tax levies under state legislation were valid and passed on to end consumers. Retrospective application of MADA would disrupt settled financial transactions and place an unfair burden on consumers.
• They contended that since 2015, financial bids for mineral concessions were based on the legal position established in India Cement. If MADA is applied retrospectively, it would undermine commercial bargains and destabilize the outcomes of mineral auctions.
• The counsels argued that the doctrine of prospective overruling is well-established in Indian constitutional jurisprudence and should be applied to MADA. They contended that this doctrine should be invoked to avoid retroactive tax demands.

CONTENTIONS RAISED ON BEHALF OF THE RESPONDENT:-

• The learned counsel for the respondents, Mr. Rakesh Dwivedi, argued that the decision in MADA should be applied retrospectively. They contended that the earlier decision in India Cement Ltd. v. State of Tamil Nadu was incorrect and that the retrospective application of the MADA judgment was necessary to correct the legal error and enforce the legitimate taxation rights of the states.
• They argued that states had relied on the legality of the levies and that denying retrospective effect would result in substantial revenue losses for them, adversely affecting public services and development projects.
• They contended that the industry had been aware of the pending legal challenges and the uncertainty surrounding the tax levies. Therefore, the retrospective application would not come as an unfair surprise and any impact on the industry could be mitigated through legislative or policy measures.
• It was argued that the doctrine of prospective overruling should not be applied in this case. They claimed that this doctrine is not an absolute rule and should not be invoked when it would result in significant revenue losses for the states and disrupt the legitimate tax expectations of the government.

DOCTRINE OF PROSPECTIVE OVERRULING:-

The doctrine of prospective overruling is a legal principle where a court, upon overruling a previous legal precedent, limits the effect of its new ruling to future cases only. This means that the new legal rule does not affect past actions or decisions that were made under the old rule. The doctrine aims to avoid disrupting settled matters, preventing hardship or unfairness that might arise from applying a new legal standard retrospectively. It balances the need to correct past legal errors with the necessity of ensuring stability and fairness in the law.

COURT’S ANALYSIS:-

• The court observed that applying the MADA judgment retrospectively could cause severe financial hardship to the industry.
• It discussed the doctrine of prospective overruling to mitigate the harsh consequences of a sudden legal change.
• The court emphasized equity, fairness and the need to protect businesses that acted in good faith.
• While considering public interest, it also stressed the importance of balancing public revenue concerns with protecting industries from sudden financial liabilities.
• Judicial discretion was highlighted as crucial in ensuring the application of law avoids disproportionate hardship.

JUDGMENT:-

The court rejected the application of the MADA judgment prospectively. States were allowed to levy or renew tax demands based on the new judgment, but these demands would not apply to transactions before 1 April 2005. Tax payments were to be staggered over twelve years starting from 1 April 2026. Additionally, interest and penalties on demands for periods before 25 July 2024 were waived for all assesses. 

CONCLUSION:-

The judgment reflects a balanced approach. The court decided not to apply the MADA judgment prospectively, allowing states to levy taxes based on it but not on transactions before 1 April 2005. It also provided a twelve-year staggered payment plan starting from 1 April 2026 and waived interest and penalties for pre-25 July 2024 demands. Thus, the judgment aimed to balance state revenue interests with industry stability and mitigate financial impacts on businesses.