Supreme Court: Statutory Amendments Cannot Retrospectively Extinguish Vested Tax Exemptions

Introduction

Recently, the Supreme Court, in the case of State of Maharashtra v. Prism Cement Ltd. & Anr.[i] reaffirmed the cardinal principle of statutory interpretation that every statute is presumed to operate prospectively unless it is expressly or by necessary implication made to have retrospective effect. The Court held that tax exemptions already accrued to a person prior to a statutory amendment cannot be extinguished by such amendment unless the legislation unequivocally provides for retrospective operation.

Brief Fact

• The case involved a challenge to three trade circulars issued by the Commissioner of Sales Tax, Mumbai and notices issued by the Deputy Commissioner of Sales Tax under s. 38 of the Bombay Sales Tax Act, 1959 (‘BST’) for revising the assessment of Prism Cement Ltd., a public limited company (‘Respondent-Assessee’), and directing them to pay/refund the exempted portion of the tax as per the provision of Package Scheme of Incentive 1993 (‘PSI’). 

• Aggrieved by these circulars and notices, the Respondent-Assessee filed a writ petition. The Division Bench of the High Court allowed the petition. It quashed the notices, observing that the State of Maharashtra had erroneously assumed it lacked authority to grant a total or partial exemption under s. 8(2) of the Central Sales Tax Act, 1956 (‘CST Act’) following the 2002 amendment. The State of Maharashtra and others (‘Appellants’) thereafter filed the present appeal.

• The PSI was introduced by the State of Maharashtra to incentivize industrial development in backward regions. The scheme provided for partial or full exemptions from sales tax under both the BST Act and the CST Act

• The scheme was notified under the powers conferred by s. 8(5) of the CST Act via a notification dated 05.07.1980. It prescribed a fixed tenure and a monetary ceiling for tax incentives.

• The Respondent-Assessee was found eligible and was issued an Eligibility Certificate and an Entitlement Certificate, granting exemption from payment of tax under the BST Act and CST Act up to Rs. 273.54 crores or until 2012, whichever was earlier.

• The Respondent-Assessee availed tax exemption for the assessment years (AYs) 2002–03, 2003–04, and 2004–05 under the said scheme. However, this was post the amendment of s. 8(5) of the CST Act via the Finance Act, 2002 ('FA 2002'), which introduced a condition requiring submission of declarations in Forms ‘C’ or ‘D’ under s. 8(4) of the CST Act.

• Consequently, the department proposed revising the tax demand on the grounds that the Respondent-Assessee failed to comply with the declaration requirement under s. 8(4) of the CST Act.

• The key issue was whether the tax exemption granted under the PSI, pursuant to the unamended s. 8(5) of the CST Act and the Eligibility and Entitlement Certificates could be withdrawn by the subsequent amendment to s. 8(5) brought in by the FA 2002 with effect from 11.05.2002.

• A secondary issue was whether the said amendment could be applied retrospectively so as to take away a benefit already accrued prior to the amendment coming into force.

Held

• The Supreme Court, while analysing ss. 8(4) and 8(5) of the CST Act observed that sales under s. 8(1) must be supported by declarations in Form ‘C’ or ‘D’ as mandated under Rule 12 of the Central Sales Tax (Registration and Turnover) Rules, 1957 (‘CST Rules’).

• S. 8(5), being a non-obstante clause, overrides ss. 8(1) and 8(4), and empowers the State Government to grant total or partial exemptions from CST on inter-state sales or commerce.

• In Shree Digvijay Cement Co. Ltd. & Ors. v. State of Rajasthan & Ors.[ii], the Supreme Court had held that under the unamended s. 8(5), the State Government had the discretion to grant tax exemptions even without requiring Form ‘C’ or ‘D’.

• The FA 2002, amended s. 8(5) with effect from 11.05.2002 specifically to override the Digvijay Cement precedent. Post-amendment, the power to grant exemption under s. 8(5) became subject to compliance with s. 8(4), i.e., production of Form ‘C’ or ‘D’.

• The Court categorically held that the amendment is prospective in operation and does not affect any transactions or rights accrued prior to 11.05.2002.

• Accordingly, while the amendment limited the State Government’s erstwhile absolute discretion to grant tax exemptions, this restriction could not apply retrospectively to invalidate prior exemptions granted under the unamended law.

• In the present case, the Respondent-Assessee had already been granted unconditional tax benefits under PSI through certificates issued prior to the amendment. These exemptions were unconditional and not contingent upon the submission of statutory forms.

• The Court reiterated that statutory amendments are presumed to operate prospectively unless expressly or by necessary implication made retrospective. The rights conferred under the unamended statute must be preserved.

• Reliance was placed on s. 6(c) of the General Clauses Act, 1897, which provides that repeal or amendment shall not affect accrued rights unless the statute states otherwise.

• The Court emphasized that a substantive right, once accrued, cannot be revoked unilaterally without notice or affording an opportunity of hearing.

• Since the Eligibility and Entitlement Certificates were never revoked, the Respondent-Assessee’s substantive rights remained unaffected by the amendment to s. 8(5).

• Therefore, the State Government lacked the authority to issue the impugned notices revising assessments and demanding tax solely on the ground of non-submission of Forms ‘C’ and ‘D’, a requirement that only applied prospectively post-amendment.

Our Analysis

The Supreme Court has rightly protected the vested rights of the Respondent-Assessee under the PSI, reaffirming the well-established rule that statutes, particularly taxing statutes, must be construed prospectively unless the legislative intent to the contrary is unambiguously expressed.

This judgment aligns with the broader jurisprudential commitment to legal certainty, non-arbitrariness, and legitimate expectation in fiscal matters. By preventing the retrospective application of restrictive conditions to pre-existing exemptions, the Court has fortified the principle that accrued statutory rights cannot be diluted through subsequent legislative changes unless explicitly mandated.

End Notes

[i] 2025 SCC OnLine SC 298 dated 12.02.2025.

[ii] (2000) 1 SCC 688.

Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.