Legal Notes by Arvind Datar: Retrospectivity v. retroactivity and the need for a clear distinction

What is the difference between a retrospective and a retroactive law? As this important question remains unanswered till date, this article suggests what the proper tests should be.

Although most laws are prospective, it is settled that Parliament and the State legislatures have the competence to make laws with retrospective effect. These laws are declared to have come into effect on a date that is before the date of its enactment. Some laws have been declared to be effective decades earlier. The Finance Act, 1981 amended certain excise law provisions from 1944, while amendments made by the Finance Act, 2012 were to be effective from April 1, 2012.

A “retroactive” law is also a law that is declared to be operative from an earlier date, but this category has a vital difference that is discussed a little later.

The Supreme Court has referred to the two categories in several decisions.  However, there is no clear distinction made in any of them. [See Shanti Conductors v. Assam State Electricity Board (2019); Shanti Conductors v. Assam State Electricity Board (2016); Vineeta Sharma v. Rakesh Sharma, (2020); SEBI v. Rajkumar Nagpal (2023); Jay Mahakali Rolling Mills v. Union of India (2007); State Bank’s Staff Union v. Union of India (2005)]

In Wilson v. First County Trust Ltd (2004), the House of Lords considered the effect of the Human Rights Act, 1998 on past transactions. In his concurring opinion, Lord Rodger has given a useful definition of a “retroactive” provision:

“A provision is retroactive where it changes the substantive law as at a past date — where it deems the law or the rights of the parties, as of an earlier time, to have been other than they were.”

It must be stated that this English decision has also used the words “retrospectivity” and “retroactivity” inter-changeably and has not given any clear distinction between the two categories.

It is submitted that both retrospective and retroactive laws take effect from an earlier point of time. In a retrospective law, the amendment or a new enactment is made to operate from an earlier date, but there is no change in the factual situation. However, in a retroactive law, the law not only operates from an earlier point of time, but alters the factual situation by creating a legal or deeming fiction. The difference between the two categories can be illustrated by some examples.

The Central Board of Direct Taxes (CBDT) issued a circular stating that any communication, or an order passed by the Department, that did not have a Document Identification Number (DIN) would be invalid.  Based on this circular, several orders were set aside. The Finance Act, 2026 has now inserted section 292BA with retrospective effect from October 1, 2019, providing that no assessment will be invalid merely because it does not have a DIN number. This is a simple “retrospective” amendment that seeks to validate assessment orders that did not have DIN numbers. No further legal fiction or substantive change is made.

Another example is the insertion of Section 292BC by the Finance Act, 2026. Under Section 151, the Principal Chief Commissioner has to approve and grant sanction to the reopening of an assessment. The Supreme Court and the High Courts have held that granting sanction mechanically and without application of mind will make the reassessment invalid. Section 292BC, which is inserted with retrospective effect from April 1, 2021, provides that an approval will not be invalid due to insufficiency of reasons and that the grant of approval is an administrative decision. This amendment is also “retrospective”, as there is no alteration of the factual situation by a deeming fiction.

Both amendments changed the law but merely make it effective from an earlier date.

In Vodafone International Holdings BV v. Union of India (2012), the Supreme Court held that the transfer of shares of a foreign company would not attract capital gains as the situs of a share would be the country where its registered office was situated, even though most of the assets of that company were in India. In other words, if there is a transfer of shares outside India, by an English company to another non-resident, there would be no liability to capital gains, even though all the assets of the British company were in India.

To overcome this decision, the Finance Act, 2012 amended the Income-tax Act, 1961 with retrospective effect from April 1, 1962. Explanation 5 to Section 9(1)(i) of the Income Tax Act, 1961 was inserted by the Finance Act, 2012. It created a legal fiction whereby if the value of such a British share is substantially derived from underlying assets located in India, then such share will be deemed to be situated in India. This change was made retrospective from April 1, 1962 and, in effect, the transfer of shares of a British company would be deemed to be a transfer of shares of an Indian company. This amendment is “retroactive” because a foreign share is treated to be an Indian share, thereby altering the factual situation by a deeming fiction. It is on this altered factual situation that income tax is demanded retrospectively.

A second example of retroactive legislation is the amendment to the Central Excise Rules, 1944. Until 1981, excise duty was leviable only at the time of removal of the goods from the factory - when the goods left the factory. If certain goods were captively consumed in the factory itself, they were not liable to duty as they were not “removed”. This was the view of the Delhi High Court in Caltex Oil Refining (India) Ltd. v. Union of India (1972). This decision was overcome by a retrospective amendment to Rules 9 and 49 of the Central Excise Rules, 1944, which took effect from April 1, 1944. It provided that even if the goods were captively consumed, they would be deemed to be “removed” and liable to excise duty. This is another case where the factual situation was altered and captive consumption was deemed to be “removal”. Thus, goods which never left the factory were deemed to have been “removed” and subjected to excise duty. The law was amended from 1944, but the Supreme Court sustained the retroactive amendment only because the excise duty was not recoverable for almost the entire earlier period. [JK Cotton, Spinning and Weaving Company Ltd v. Union of India (1988)].

Generally speaking, a “retroactive” amendment is likely to have greater adverse consequences.

As there is no clear test to distinguish a retrospective law from a retroactive one, it is suggested that the following tests may be applied:

(i) If an amendment or a new law is merely declared to be effective from an earlier date, without any other change of a substantive nature, it will be retrospective in nature.

(ii) If an amendment or a new law is not only declared to be effective from an earlier date but also deems the factual or legal situation to be different from it was, the law would be “retroactive” in nature.

Arvind Datar is a Senior Advocate of the Supreme Court of India.