Subject to Constitution: No bar on legislature to enact laws with retrospective effect, says SC

ISLAMABAD: The Supreme Court has held that there is no restriction on the legislative powers conferred on the parliament and provincial assemblies regarding the enactment of laws with retrospective effect, except that legislative powers are exercised “subject to the Constitution.”

A three-member bench of the apex court headed by Justice Syed Mansoor Ali Shah and comprising Justice Muhammad Ali Mazhar and Justice Shahid Bilal Hassan announced the judgment in some 180 appeals against the judgment of Sindh High Court dated February 7, 2023

The appellants had challenged the constitutionality of the amendments made to Section 65B of the Income Tax Ordinance, 2001 (“ITO”) by the Finance Act, 2019

Section 65B was introduced into the ITO by the Finance Act, 2010 as a tax incentive provision for local industry. It allowed taxpayer companies a tax credit at the rate of 10% of the amount invested in the purchase of plant and machinery for an industrial undertaking set up in Pakistan, provided that the plant and machinery were purchased and installed between 1 July 2010 and 30 June 2015.

The court after converting the petitions into appeals, allowed it and set aside the impugned order and judgment of the High Court to the extent of the interpretation of the amendment made to subsection (2) of Section 65B and are upheld to the extent of striking down the proviso added to subsection (1) of Section 65B of the ITO by the 2019 amendments, but for the reasons recorded in this judgment and the answer to question (iv).

The court held that as the appeals have been partly allowed, the parties shall bear their own costs. The 41-page judgment authored by Justice Syed Mansoor Ali Shah held that the phrase “Subject to the Constitution” used in Article 142 indicates that where the Constitution itself imposes a restriction on the exercise of legislative power in a particular manner or prescribes a specific manner for the exercise of legislative power, then the legislative power conferred by this Article cannot be exercised in the prohibited manner or can only be exercised in accordance with the manner specifically prescribed by the Constitution, as the case may be.

Since Article 8 of the Constitution imposes a restriction on the legislative powers of Parliament and Provincial Assemblies with respect to making any law that takes away or abridges the rights conferred by Articles 9 to 28, neither Parliament nor Provincial Assemblies can exercise their legislative powers in a manner prohibited by this Article.

The court held that Article 12 bars the enactment of retrospective laws concerning criminal liabilities, except for acts of abrogation or subversion of the Constitution.

“Therefore, apart from the specified exception, Parliament and Provincial Assemblies cannot enact criminal laws with retrospective effect; however, there is no restriction on their legislative powers to enact civil laws with retrospective effect”, says the judgment.

Nonetheless, the court held that neither prospective nor retrospective laws can be enacted to take away or abridge any of the fundamental rights guaranteed by Articles 9 to 28 of the Constitution or in contravention of any other provision of the Constitution.

The Constitution’s prohibitions and requirements apply equally to both prospective and retrospective laws”, says the judgment adding that given the above constitutional position, which imposes no restriction on enacting civil laws either prospectively or retrospectively within constitutional limits, the settled principles of law regarding the legislature’s power to enact civil laws with retrospective effect are as follows;

The legislature’s power to legislate includes the power to legislate with retrospective effect. A legislature that is competent to make a law on a particular subject also has the power to legislate such a law with retrospective effect and can, by legislative fiat, even take away vested rights or affect past and closed transactions.

Therefore, when a legislature gives retrospective effect to a law, either by express provision or by necessary implication, no protection can be afforded to vested rights contrary to that law”, says the judgment

Similarly, the court held that when a legislature enacts a law with retrospective effect, the person affected cannot plead the imposition of a previously non-existent civil obligation as a ground for declaring the law invalid.

The court further held that the Constitution only bars retrospective legislation concerning criminal liabilities, not civil rights and obligations while there is no such rule that even if a legislature has sought to take away a vested right, the courts must hold that such legislation is ineffective or strike down the legislation on the ground that it has retrospectively taken away a vested right.

“If a person acts today, he does so with the knowledge of today’s law, not with knowledge of future laws therefore, when a law regulating certain affairs is introduced for the first time, it is presumed to apply to future affairs, not to alter the character of past transactions made under the law as it then existed:, says the judgment.

The court held that courts must lean against giving a statute retrospective effect that affects vested rights and/or past and closed transactions by adhering to two rules: first, if two interpretations are reasonably possible, the one that saves vested rights and/or past and closed transactions should be adopted; and second, no statute should be construed to have retrospective effect to a greater extent than its language necessarily requires.

“Although vested rights may be affected and taken away by express provision or necessary implication, past and closed transactions can be disturbed and reopened only by express provision”, says the judgment.

The court noted that in the impugned judgment, the High Court observed that ‘the curtailing of the benefit extended in section 65B of the Ordinance [ITO], consequent upon the amendment made via [the] Finance Act 2019, amounted to impermissible vitiation of vested rights/past and closed transactions’ 28 (para 14); that ‘the amendment to section 65B of the Ordinance [ITO] via the Finance Act 2019 amounted to impermissible vitiation of vested rights’ (para 22); that ‘notwithstanding the curtailment of the expiration date, protected vested rights had been created in favor of the persons having purchased the pertinent plant and machinery prior to 30th June 2019’ (para 24); that ‘the Proviso is determined to be an unjustified attempt to vitiate protected vested rights’

“With the said observations, the High Court concluded that the ‘two category identified were found to have protected vested rights and it was our much deliberated view that such rights could not be vitiated in the manner intended by the amendment to section 65B of the Ordinance [ITO] by the Finance Act 2019’ (para 35)”, the judgment noted.