AUGUST 17, 2024

By Abhijit Saha

RECENTLY Supreme Court, Nine Member Bench in the case of Mineral Area Development Authority vs SAIL (MADA) - 2024-TIOL-65-SC-MISC-CB on 25 July, 2024 has overruled the Seven Member Bench Decision of the Supreme Court in the case of India Cement Ltd. - 2002-TIOL-2785-SC-MISC-CB after 34 years and held that mining is a lease arrangement for utilizing the benefits arising from land. Hence Royalty is not a tax; that Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. In a separate judgment the same Nine Member Bench - 2024-TIOL-74-SC-MISC-CB held on 14 August 2024 that the above decision would have retrospective effect from 2005.

The extract of the judgment is reproduced below for ease of reference:

Held: The doctrine of prospective overruling is applied when a constitutional court overrules a well-established precedent by declaring a new rule but limits its application to future situations - The underlying objective is to avert injustice or hardships - This Court has adopted the doctrine of prospective overruling, partly inspired by the jurisprudence developed in the US - Although Golak Nath (supra) was subsequently overruled in Kesavananda Bharati v. State of Kerala, (1973) 4 SCC 225 the doctrine of prospective overruling has been accepted by this Court - This Court has often used its powers under Article 142 to limit the retroactivity of its decisions - The doctrine of prospective overruling has been applied by this Court in situations where the new declaration results in the invalidation of legislation, which would otherwise have been valid under the old declaration - In the case of taxing statutes, such a declaration would make the State liable to refund all amounts collected under the invalid legislation - Therefore, this Court declares the new rule to apply prospectively not only to secure the revenues of the State but also to protect the rights and obligations crystallized by persons and entities under the old regime - This Court generally does not declare prospective overruling when upholding the legislative competence of legislatures - MADA (supra) has upheld the legislative competence of States under Entries 49 and 50 of List II - If MADA (supra) is given a prospective application, the validity of all relevant legislation enacted before the date of the decision, that is 25 July 2024, will have to be tested on the touchstone of the previous law - The previous law on the aspects of interpretation of Entry 54 of List I and Entries 23 and 50 of List II of the Seventh Schedule was unsettled because of the conflicting decisions in India Cement (supra) and Kesoram (supra) - There is always a presumption of constitutionality in favor of a statutory enactment - It is based on the theory that the elected representatives are aware of the needs of the citizens and are best placed to frame policies to resolve them - Legislation represents the will of the people and cannot be lightly interfered with unless it transgresses constitutional principles - If MADA (supra) is applied prospectively, the relevant taxing legislations may conceivably be invalidated, requiring the States to refund the amount collected to the assesses - Since MADA (supra) has answered the reference and resolved the conflict, it would be iniquitous to apply the decision prospectively - Article 265 of the Constitution prescribes that no tax shall be levied or collected except by authority of law - The law must be valid in the sense that it must be within the legislative competence of the legislature and consistent with other provisions of the Constitution - If we are to give a prospective application to MADA (supra), it would result in a situation where the legislation enacted by the States in pursuance of their plenary powers under Entries 49 and 50 of List II may conceivably be invalidated based on a position of law which has been overruled - This would not be a constitutionally just outcome - A pragmatic solution to reconcile the financial interests of the States and the assesses can be achieved by proscribing the States from demanding taxes pertaining to Entries 49 and 50 of List II of the Seventh Schedule for the period before Kesoram (supra) - The total amount, that is the principal plus the interest, due by the assessees in the pending matters may be substantial in comparison to their total net worth - Steel Authority of India has stated on affidavit that retrospective application of MADA (supra) will lead to revival of cumulative demands to the tune of approximately Rupees three thousand crores from different States - The delay in the court proceedings should not be to the detriment of the assessees - Taking into consideration the lapse of more than three decades since India Cement (supra) and more than a decade since the matter was referred to a larger Bench, equities will be balanced if the State governments waive the outstanding interest accrued on the principal due from the assessees - This direction applies to all assessees, regardless of whether they have approached this Court or the High Courts challenging the validity of the relevant statutes - Submission that MADA (supra) should be given prospective effect is rejected: Supreme Court Constitution Bench [para 5, 7, 11, 12, 14, 15, 17, 19, 20, 22, 24]

As per Author's understanding of the law and economics, it is humbly submitted that the above decision of the Supreme Court to give retrospective effect to such a massive financial impact issue may not be prudent from the overall perspective of the socio-economic situation of our country for inter alia the following reasons:

1) Firstly, India Cement (supra) held the field for thirty-four years before it was overruled in MADA. Seven Member Bench Decision of Supreme Court is also the law of the land as per Article 141 of the Constitution of India. Hence, overruling the India Cement decision effectively means declaring the existing law as withdrawn. So, such decision should not be retrospective as the taxpayers have acted bona-fide as per existing law.

2) The doctrine of prospective overruling is well-established in Indian constitutional jurisprudence. MADA (supra) should be given prospective effect because it lays down new constitutional principles.

3) The US Supreme Court has considered the existence of a statute or judicial decision as an "operative fact" having "consequences which cannot justly be ignored" or "erased by a new judicial declaration.

4) US Supreme Court identified factors to be considered while deciding the applicability of prospective overruling: the decision to be applied prospectively must establish a new principle of law, by overruling clear past precedent on which litigants may have relied.

5) It is applied to bring about a smooth transition of the operation of law without unduly affecting the rights of the people who acted upon the overruled law;

6) It is a device innovated to avoid: (i) re-opening settled issues, (ii) refund of amounts collected under invalid legislation, and (iii) multiplicity of proceedings;

7) It is applied to avoid social and economic disruptions and give sufficient time to the affected entities and institutions to make appropriate changes and adjustments.

In view of the above, as per author's view, Supreme Court should not have given retrospective effect to its recent judgment dated 25 July that granted States the right to levy tax on mineral rights. The huge burden on the mining companies will not just impact their financials and investment plans but also have a ripple effect across the value chain, possibly leading to inflationary trends for the end products. It will affect the general business climate of the country and would bring uncertainty and volatility to our reputation as an investment destination.

(The views expressed are strictly personal.)