Why in News?

The Supreme Court of India, in a recent judgment, has rejected the plea for prospective overruling in Mineral Area Development Authority v. Steel Authority of India (MADA Judgment), which had clarified the legislative powers of States to tax mineral rights.

What are Facts of the Case?

• Constitutional and Legislative Background:
  • The case revolves around Entry 50 of List II of the Seventh Schedule to the Constitution, which deals with taxes on mineral rights.
  • Regulation of mines and mineral development is enumerated under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II).
  • Parliament enacted the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) under Article 246 of the Constitution.
• Previous Judgments:
  • India Cement Ltd. v. State of Tamil Nadu (1990): A seven-Judge Bench held that royalty is a tax. It ruled that state legislatures lack competence to levy taxes on mineral rights as the subject matter is covered by the MMDR Act. The Court also held that royalty cannot be used by State legislatures as a measure of tax on mineral-bearing lands under Entry 49 of List II.
  • State of West Bengal v. Kesoram Industries Ltd. (2004): A Constitution Bench clarified that royalty is not a tax. It stated that the decision in India Cement stemmed from an inadvertent error.
• State Actions Post India Cement Case and Kesoram Case:
  • Several State legislatures exercised powers to impose taxes on mineral-bearing land under Entry 49 of List II.
  • They used mineral value or royalty as the measure of tax.
  • Some states like Rajasthan and Uttar Pradesh imposed environment and health cess and fees for transporting coal and coal-dust from mines.
• Legal Challenges:
  • The constitutional validity of these levies was challenged before various High Courts.
  • Grounds for challenge:
    • Beyond the legislative competence of State legislatures.
    • In violation of the law laid down in India Cement.
• Referral to Larger Bench:
  • On 30^th March 2011, a three-Judge Bench noticed the divergence between India Cement Case and Kesoram Case.
  • The matter was referred to a nine-Judge Bench to provide a decisive ruling on several questions related to legislative competence and interpretation of constitutional provisions.
• MADA Judgment (July 2024):
  • The nine-Judge Bench of Chief Justice of India (CJI) D Y Chandrachud, Justices Hrishikesh Roy, Abhay S Oka, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, S C Sharma, A G Masih and B V Nagarathna in Mineral Area Development Authority v. Steel Authority of India answered the referred questions on 25^th July 2024 in the case of Mineral Area Development Authority v. M/S Steel Authority Of India & Ors.
    • Justice B V Nagarathna gave a dissenting opinion.
  • Majority bench overruled India Cement Case and subsequent decisions relying on it.
  • The Court held that States have legislative competence to tax mineral rights and mineral-bearing lands.
• Current Proceedings:
  • After the MADA judgment, counsel for the assessees requested that it be given prospective effect.
  • The Court listed the matter for hearing submissions on whether the judgment should be applied prospectively.
  • The total amount due by the assessees (including public sector undertakings) to the governments was substantial, raising concerns about the financial implications of the ruling.

What were the Court’s Observations?

• The court rejected the submission to give MADA Judgment prospective effect.
• However, it laid down some conditions to balance the interests of states and assessees:
  • States cannot levy taxes under the relevant entries for transactions before 1^st April 2005.
  • Payment of tax demands to be staggered over 12 years starting 1st April 2026.
  • Interest and penalties on demands for the period before 25th July 2024 to be waived for all assessees.
• The bench also explained the application of doctrine of prospective overruling.

What is Doctrine of Prospective Overruling?

• Definition and Purpose:
  • The doctrine of prospective overruling is applied when a court overrules a well-established precedent by declaring a new rule but limits its application to future situations.
  • The primary objective is to avert injustice or hardships that might arise from sudden changes in the law.
  • It allows for a smooth transition by correcting legal errors without unduly disturbing past transactions and relationships that were formed based on the previous legal understanding.
• Origin and Development:
  • The doctrine originated in United States jurisprudence and was later adopted by the Indian Supreme Court.
  • In India, the doctrine was first applied in the landmark case of Golak Nath v. State of Punjab (1967).
  • The Supreme Court derives its power to apply this doctrine from Article 142 of the Indian Constitution, which allows the Court to make any order necessary for doing complete justice in any case before it.
• Key Principles for Application:
  • It can be invoked only in constitutional matters.
  • It can be applied only by the Supreme Court, as it has the constitutional authority to declare law binding on all courts in India.
  • The scope of retroactive operation is left to the court's discretion, to be molded according to the justice of the cause or matter before it.
  • It is used to validate past actions taken under the overruled law.
  • The doctrine helps avoid reopening settled issues and prevents multiplicity of proceedings.
  • It provides time for affected entities and institutions to make appropriate adjustments to the new legal position.

What are Landmark Cases Related to Doctrine of Prospective Overruling?

• Golak Nath v. State of Punjab (1967):
  • This case marked the first application of the doctrine in India.
  • The Supreme Court overruled its earlier decisions and held that Parliament could not amend the Constitution to abridge fundamental rights.
  • However, to avoid chaos, the Court applied the new rule prospectively, allowing past constitutional amendments to remain valid.
  • Chief Justice K. Subba Rao described it as a "pragmatic solution" to reconcile conflicting doctrines and enable smooth transitions in law.
• Chevron Oil Company v. Huson (1971):
  • Although a U.S. case, it is significant as the Supreme Court of India has referred to it.
  • The U.S. Supreme Court laid down three factors for applying prospective overruling:
    • The decision must establish a new principle of law.
    • The court must weigh the merits and demerits of retroactive application.
    • The court must consider whether retroactive application would produce substantial inequitable results.
• India Cement Ltd. v. State of Tamil Nadu (1990):
  • This case dealt with the legislative competence of states to impose cess on royalty.
  • The Court applied the doctrine of prospective overruling to protect state revenues and avoid the need for refunds of taxes collected under the invalidated legislation.
• Managing Director, ECIL v. B Karunakar (1993):
  • This Constitution Bench decision upheld the prospective application of an earlier ruling that is Union of India v. Mohd. Ramzan Khan (1991) regarding the requirement to furnish inquiry reports to delinquent employees.
  • The Court reasoned that retrospective application would result in grave prejudice to the administration, outweighing the benefits to employees.
• Municipal Council, Kota v. Delhi Cloth & General Mills Co. Ltd. (2001):
  • In this case, the Supreme Court upheld the legislative competence of a municipal council to levy a tax without giving the judgment prospective effect.
  • This illustrates the Court's reluctance to apply prospective overruling when affirming legislative powers.
• Jindal Stainless Ltd. v. State of Haryana (2017):
  • A nine-judge bench overruled long-standing precedents regarding the impact of non-discriminatory taxes on free trade and commerce.
  • Despite arguments for prospective application, the Court gave its ruling retrospective effect.
  • This case further demonstrates the Court's approach to prospective overruling in tax matters, especially when upholding legislative competence.