Rule of Literal Interpretation
The rule of literal construction is
widely accepted rule for interpreting the taxing statutes. If the language
of the statute is clear and unambiguous, we have to accept the plain
meaning even if it leads to some harshness or injustice to the assessee.
As long as there is no ambiguity in the statutory language, the rule of
literal interpretation has to be applied. A dealer or
assessee cannot be subjected to tax without clear and unambiguous words
for the purpose of levying the tax which is authorised by law, enacted by
the Parliament or by the State Legislature.
If the person sought to be taxed
comes within the letter of law he must be taxed, howsoever, great the
hardship may appear to be as held by the Hon’ble Apex Court in various
decision, e.g., CTT v. T. C. Sundaram Iyyengar [1975] 101 ITR 764 (SC),
Smt. Tarulata Shyam v. CIT [1971] 108 ITR 345 (SC), Keshavji Ravji & Co.
v. CIT [1990] 49 Taxman 87 (SC) and CIT vs. Indian Enggt. & Comml. Corpn.
(P.) Ltd. [1993] 201 ITR 723/68 Taxman 39 (SC).
However, if a person cannot be
brought within the purview of the law for levying the tax he cannot be
subjected to tax if the plain language of the statute does not provide for
it.
In the taxing statute a person or a
transaction cannot be subjected to tax on the ground of spirit of the law
or by inference or by analogy as held by the Apex Court in cases of
Mathuram Agrawal v.State of Madhya Pradesh AIR 2000 SC
109 at page 113 and
Hansraj & Sons v. State of Jammu & Kashmir, AIR 2002 SC 2692
at pages 2698 and 2699.
In these circumstances, neither any
tax can be levied nor assessment can be made on the basis of the
presumption or assumption that subject falls within the taxing provision.
One has to merely look to the language by applying the rule of literal
construction if the subject falls within the provisions of law, it can be
subjected to tax and not otherwise.
Rule of Beneficial Construction
In cases where there are two
interpretations possible, the one which is beneficial to the assessee
would be preferred. This principle was laid down in a landmark judgment in
IRC v. Duke of Westminister 1936 AC 1
wherein Tomlin L J. stated that an assessee may arrange his
affairs within the bounds of the law so as to minimise the incidence of
tax.
In the case of
McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC)
the Apex Court clamped down on the liberal construction
and the pendulum swung to the other extreme, as the Court made fine
distinctions between tax evasion, tax avoidance and tax planning and
virtually rendered the Westminister principle nugatory. Here the Court
followed the interpretation that the letter and spirit of the law must be
followed.
In this post-McDowell era, the
department generally got favourable verdicts and a lot of assessees
suffered due to the Courts coming down heavily on tax avoidance measures,
which were equated with tax evasion.
The decision in the case of McDowell
& Co. was considered in detail by the Hon’ble Supreme Court in the case of
Union of India v. Azadi Bachao Andolan, 2004 (10)
SCC, 1 : also reported in (2003) Vol. 263 ITR,
page 707. Paras 142 to 154 of the judgment has dealt in detail with the
decision of McDowell & Co.
In this case Court dealt with
conflicts between the Indo-Mauritius Double Tax Avoidance Agreement and
the Income-tax Act, 1961. It was held that an assessee was entitled to
arrange his affairs so as to minimise the incidence of tax, thus, partly
confirming the Westminister principle.
The Supreme Court has repeatedly held
that if two views are possible with respect to any provisions under a
taxing statute, the view which is in favour of the assessee should be
accepted.
It has now become well established
that if the words used in a taxing statute are reasonably open to two
interpretations, the interpretation which goes in favour of the assessee
should be accepted, as held by the Apex Court in
Hindustan Lever Ltd. v. Municipal Corporation of Greater Bombay, 1995 (3)
Scale, page 24, and in the case of Birla
Cement Works v. CBDT, 2001 Vol. 3 JT, page 256.
It was held by the Supreme Court in :
CIT v. Poddar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) – Where
there are two possible interpretations of a particular section which is
akin to a charging section, the interpretation which is favourable to the
assessee should be preferred while construing that particular provision.
Reiterating the same view, in the case of CIT v. Shaan Finance (P.)
Ltd. [1998] 231 ITR 308 (SC) it has been held that in interpreting a
fiscal statute, the Court cannot proceed to make good the deficiencies if
there be any. The Court must interpret the statute as it stands and in
case of doubt, in a manner favourable to the taxpayer. CIT v. Vegetable
Products Ltd [1973] 88 ITR 192 It has been held that if the Court
finds that the language of taxing provision is ambiguous or capable of
more meaning than one, then the Court has to adopt the interpretation
which favours the assessee.
The rule of beneficial construction
will also be applicable while determining the levy of tax on a commodity
regarding its classification. The question as to whether a particular
commodity is taxable under specific entry or it is taxable under the
residuary entry, the attempt should be made to find out as to whether the
said commodity answers the description of a specific entry.
The Hon’ble Apex Court in the case of
Mauri Yeast India Private Ltd. v. State of U.P. & Others, reported in
2008 UPTC, 729, para 42, has held as follows:
“It is now a well settled principle
of law that in interpreting different entries, attempt shall be made to
find out as to whether the same answers the description of the content of
the basic entry and only in the event it is not possible to do so,
recourse to the residuary entry should be taken by way of last resort.”
The Apex Court in the case of
Bharat Forge & Press Industries Pvt. Ltd. v. Collector of Central Excise,
reported in 1990(1) SCC, 532, para 4, has held as follows:
“….Unless the department can
establish that the goods in question can by no conceivable process of
reasoning be brought under any of the tariff items, resort cannot be had
to the residuary item.” Even otherwise, it has also been held in the case
of Mauri Yeast India Private Limited (supra) and also in the case of
Bihar State Electricity Board v. Usha Martin Industries, 1997 (5) SCC,
289, as follows:
“It is now well settled principle of
law that when two views are possible, one which favours the assessee
should be adopted.”
Doctrine of Purposive
Construction
If the strict interpretation of the
taxing statute is likely to lead to a manifest absurdity, then the golden
rule of construction implies that the meaning of the words should be so
effected that such an absurdity is avoided. The application of this rule
is rather limited in the realm of construction of taxing statutes, since
the literalrule would gain precedence over the golden rule and it is often
remarked that equity and taxation are strangers.
For the purpose of construction of a
taxing statute, the context, scheme of the relevant provision as a whole
and its purpose are also relevant. Hence the object of the Legislature has
to be kept in mind for giving a purposive construction of the various
provisions of the Act. Under Entry 54, List-II of the 7th Schedule of the
Constitution, Sales Tax Laws and VAT Laws have been enacted for levy of
tax on the transaction of purchase or sale. Hence the provisions raising
presumptions of not surrendering the transit passes in respect of the
goods passing through the State to be deemed sales and provisions relating
to imposition of penalty in absence thereof has been treated as legal and
valid by the Hon’ble Supreme Court in the case of Sindhi Transport
Company v. State of U.P. reported in 1986 (2) SCC 486. Hence the
doctrine of purposive construction ought to be applied and the
transactions must be considered in the sense in which the Legislature
intended it to be done.
Doctrine of Harmonious Construction
When any provision of a taxing
statute is interpreted, it must be so constructed that the meaning of such
provision must harmonise with the intention of the Legislature behind the
provision in particular and the enactment in general – CIT v.
Chandanben Maganlal [2002] 120 Taxman 38 (Guj.). However, this would
always be subject to the fact that the particular provision, or even the
entire enactment, should not be held unconstitutional.
Construction of Penal Provisions
There are several penal provisions in
taxation statutes and these have special rules of interpretation and
notable among these are:
(a) Strict construction.
(b) Prospective in operation and not
retrospective; thus, any act which is currently not an offence cannot be
made one retrospectively by amendment of a penal provision with
retrospective effect;
(c) Presumption of mens rea
(i.e., guilty intention to commit the crime) unless the statute
specifically provides for the absence of the same. With regard to the
penalty proceedings the Hon’ble Supreme Court has given two important
decisions:
(1) In Union of India & Ors. v.
Dharamendra Textile Processors & Ors. 2008 (13) SCC 369 while
examining the scope of Section 11-AC of the of the Central Excise Act,
1944, a three Judge Bench of Supreme Court, observed that: “A penalty
imposed for a tax delinquency is a civil obligation, remedial and coercive
in its nature, and is far different from the penalty for a crime or a fine
or forfeiture provided as punishment for the violation
of criminal or penal laws.”
(2) However, in Union of India v.
Rajasthan Spinning & Weaving Mills 2009 (13) SCC 448 Supreme Court
observed that:
“We fail to see how the decision in
Dharamendra Textile can be said to hold that Section 11-AC would apply to
every case of non-payment or short-payment of duty regardless of the
conditions expressly mentioned in the section for its application… The
decision in Dharamendra Textile must, therefore, be understood to mean
that though the application of Section 11-AC would depend upon the
existence or otherwise of the conditions expressly stated in the section.”
These decisions were considered by
the Supreme Court in connection with the penalty proceedings under Section
10-A read with 10(b) of the Central Sales Tax Act in Civil Appeal No.
2344-2347 of 2004 CST v. M/s. Sanjiv Fabrics and Civil Appeal Nos.
6382-6383 of 2004 M/s. Hari Oil & General Mills v. CST reported in 2010
(Vol.9) SCC 630 and after considering the various decisions, the Apex
Court has held in para 22 of its judgment as follows :
"We are of the considered opinion
that the use of the expression “falsely represents” is indicative of the
fact that the offence under Section 10(b) of the Act comes into existence
only where a dealer acts deliberately in defiance of law or is guilty of
contumacious or dishonest conduct. Therefore, in proceedings for levy of
penalty under Section 10-A of the Act, burden would be on the revenue to
prove the existence of circumstances constituting the said offence.
Furthermore, it is evident from the heading of Section 10-A of the Act
that for breach of any provision of the Act, constituting an offence under
Section 10 of the Act, ordinary remedy is prosecution which may entail a
sentence of imprisonment and the penalty under Section 10-A of the Act is
only in lieu of prosecution. In light of the language employed in the
Section and the nature of penalty contemplated therein, we find it
difficult to hold that all types of omissions or commissions in the use of
Form ‘C’ will be embraced in the expression "false representation”. In our
opinion, therefore, a finding of mens rea is a condition precedent
for levying penalty under Section 10(b) read with Section 10-A of the
Act.”
Charging sections to be strictly
construed while procedural sections should be liberally construed
The charging section in a taxing
statute has to be strictly construed but the provisions which do not
create any charge but lay down the machinery for its calculation or
procedure for assessment of tax or its collection has to be construed by
the ordinary rule of construction. For interpreting the machinery
provisions it should be so construed as to effectuate the liability
imposed by the charging section and to make the machinery provisions
workable. If the provision gives an incentive, exemption and deduction,
then such provision has to be construed liberally so as to determine the
liability.
In construing the machinery
provisions literal construction can always be departed and an
interpretation which gives the benefit, incentive should be liberally
accepted.
Interpretation of Exemption
Provisions This is a very important and practical rule of interpretation
and generally resorted to while interpreting the sections pertaining to
incentives, exemptions and deductions where the spirit is to promote
exports, increase earnings in foreign convertible exchange, promote
industrialisation, infrastructure development, etc. Similarly,
interpretation will have to be adopted where certain exemptions are
provided to any person or industry then the provision of such exemption
has to be strictly construed but once the subject comes within the
eligibility of exemptions, the other provisions to effectuate the
exemption should be liberally construed as held by the Supreme Court in
the case of :
Bajaj Tempo Ltd. 196 ITR 188 (SC) A
provision in a taxing statute granting incentives for promoting growth and
development should be construed liberally, and since as provision for
promoting economic growth has to be interpreted liberally, the restriction
on it too has to be construed so as to advance the objective of the
provision and not to frustrate it. While interpreting the various
provisions, the Court must not adopt a hyper technical approach and to
apply cut-and-dry formula. A pragmatic approach should be adopted so that
the object of the introduction/insertion of a particular provision could
be achieved.
[Similar views have been expressed in
Juggilal
Kamlapat v. CIT [1969] 73 ITR 702
(SC); CIT v. Strawboard Manufacturing Co. Ltd. [1989] 177 ITR 431 (SC)
at page 434
and CIT v. South Arcot District Co-operative
Marketing Society Ltd. 176 ITR 117 (SC) at page 119].
The object of provisions of taxing
statute being to promote the setting of the new units and to increase the
production of goods such provision has to be interpreted liberally so that
the object can be achieved, as held by Supreme Court in the case of
Commissioner Trade Tax vs. DSM Group
of Industries,
reported in 2005 UPTC page
121. Paragraph 13, at pages 136 and 137 of the said judgment are
important, which is reproduced below :
13. Mr. Sudhir Chandra cited a number
of authorities for the proposition that Notifications have to be
interpreted keeping in view the object. He submitted that the object was
to encourage investments and production. He submitted that a liberal
interpretation which advances the object of the Notification should be
given. Mr. Sudhir Chandra relied upon the authorities in the cases of
Oblum Electrical Industries Pvt. Ltd., Hyderabad
v. Collector of Customs, Bombay
reported in (1997) 7 SCC 581; Commissioner of Sales Tax v. Industrial Coal
Enterprises, reported in (1999) 2 SCC 607 and K.K. Steel Union Ltd., v.
Commissioner of Customs, Kanda, Gujarat, reported in (2001) 4 SCC 736.
In our view, there
can be no dispute with the above mentioned proposition of law. Therefore,
there is no necessity to consider in detail the authorities relied upon.”
In the case of
Sriniwas Cable Components
v. State of M.P., (2012) 10 SCC, page 421
it was held in para 29 as
follows : ’29. It is now a well-established principle of law that whereas
eligibility criteria laid down in an exemption notification are required
to be construed strictly, once it is found that the applicant satisfies
the same, the exemption notification should be construed liberally [See
CIT v. DSM Group of Industries (SCC
para 26); TISCO Ltd. v. State of Jharkhand (SCC paras 42 to 45); State
Level Committee v. Morgandshammar India Ltd., Navopan India Ltd. v. CCE &
Customs A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala and Reiz
Electrocontrols (P) Ltd. v. CCE.] ’
In the case of G.P. Ceramics Pvt.
Ltd. v. Commissioner Trade Tax, (2009) 2 SCC, 90, which has been
referred in (2012) 10 SCC, page 421 it was considered in paras 15 & 16, it
has been mentioned that the sole question which was considered by the Apex
Court was as to whether land allotted in favour of industrial undertaking
which was followed by execution of lease-deed, supply of a copy of letter
of allotment will satisfy the statutory requirement of a registered
leasedeed and the court found that the criteria was fulfilled and
therefore the benefit of exemption for 10 years was granted in para 36 of
the judgment. Para 29, at page 101, of the judgment is very important
which fully applies in our case and is quoted below:
’29. It is now a well-established
principle of law that whereas eligibility criteria laid down in an
exemption notification are required to be construed strictly, once it is
found that the applicant satisfies the same, the exemption notification
should be construed liberally. [See CIT v. DSM Group of Industries (SCC
para 26); TISCO Ltd. v. State of Jharkhand (SCC paras 42 to 45); State
Level Committee v. Morgandshammar India Ltd., Navopan India Ltd. v. CCE &
Customs A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala and Reiz
Electrocontrols (P) Ltd. v. CCE.] ’
Rule of ‘ejusdem generis’
or noscitur a sociis
The Rule is that the meaning of a
general word is restricted by the special words appearing along
with it. To illustrate:
“If a man tells his wife to go to the
market to buy vegetables, fruits, groceries and anything else she needs,
the ‘anything else’ would be taken to mean food and grocery items due to
the rule of ejusdem generis and not cosmetics or other feminine
accessories.”
Thus, the meaning of a word must be
taken by the company it keeps (Rule of noscitur a sociis).
In the case of CIT v. Raj Kumar
[2009] 181 Taxman 155 (Del.) regarding Deemed dividend under Section
2(22)(e) of the Income-tax Act, 1961, the word ‘advance’, which appears in
company of word ‘loan’ was interpreted. Section 2(22)(e) reads as:
“Any payment by a company, not being
a company in which the public are substantially interested, of any sum
(whether as representing a part of the assets of the company or otherwise)
[made after the 31st day of May, 1987, by way of advance or loan to a
shareholder, …….]
It was held that advance can only
mean such advance which carries with it an obligation of repayment. A
trade advance, which is in nature of money transacted to give effect to a
commercial transaction, cannot be treated as ‘deemed dividend’ falling
within ambit of provisions of Section 2(22)(e). Rule of noscitur a
sociis was applied.
External aids to interpretation
The Court may also use certain
external aids like works of prominent authors, dictionaries, legislative
debates, etc., to interpret a statute correctly.
Relevance of Finance Minister’s
speech to interpret tax statutes: The words of the statute do themselves
best declare the intention of the law given. It is only if there is any
ambiguity in the language, in understanding the intention of the
Legislature, that the aid can be taken of the proceedings in the
Parliament including the aims and objects of the Act. Section 57 of the
Evidence Act not only enables but enjoins the duty upon the Courts to take
judicial notice of the course of proceedings in the Parliament. In Sole
Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC), it was
held that:
“if the real meaning and purpose of
the words used cannot be understood at all satisfactorily reference can be
made to the past history of legislation on the subject and the speech of
the mover of the amendment who was, undoubtedly, in the best position to
explain what defect in the law the amendment had sought to remove. If the
reason given by him only elucidates what is also deducible from the words
used in the amended provision, we do not see why we should refuse to take
it into consideration as an aid to a correct interpretation.
Interpretation of a statutory provision
is always a question of law on which the reasons stated by the mover of
the amendment can only be used as an aid in interpretation if we think, as
I do in the instant case, that it helps us considerably in understanding
the meaning of the amended law. We find no bar against such a use of the
speech.” (p. 252).
There is no bar in resorting to or
referring to speech of FM. Interpretation of a statute being an exercise
in the ascertainment of meaning, everything which is logically relevant
should be admissible – Chunnilal Onkarmal (P.) Ltd. v. UOI [1996] 221
ITR 459 (MP); K. P. Varghese v. ITO [1981] 131 ITR 597 (SC); CIT v. M. K.
Vaidya [1997] 224 ITR 186 (Kar.); CIT v. Export India Corporation (P.)
Ltd. [1996] 219 ITR 461 (P&H); Ganji Krishna Rao v. CIT [1996] 220 ITR 654
(AP); Addl. CIT v. Sarvaraya Textiles Ltd. [1982] 137 ITR 369 (AP).
Contrary decisions where it is held that FM’s Speech is not admissible: In
the cases of CIT v. Bhandari Machinery Co. (P.) Ltd. [1998] 231 ITR 294
(Del.); Aswini Kumar Ghose v. Arabinda Bose AIR 1952 SC 369; State of
Travancore, Cochin v. Bombay Company Ltd. AIR 1952 SC 366; CWT v. Yuvraj
Amrinder Singh [1985] 156 ITR 525 (SC); B.R. Sound-n-Music v. O.P.
Bhardwaj [1988] 173 ITR 433 (Bom.), it was held that:
“The speeches made by the members of
the House in the course of the debates are not admissible as external aids
to the interpretation of a statutory provision. A statute, as passed by
Parliament, is the expression of the collective intention of the
Legislature as a whole, and any statement made by the individual, albeit a
Minister, of the intention and objects of the Act cannot be used to cut
down the generality of the words used in the statute.
The Statement of Objects and Reasons,
seeks only to explain what reasons induced the mover to introduce the Bill
in the House and what objects he sought to achieve. But those objects and
reasons may or may not correspond to the objective, which the majority of
members had in view when they passed it into law. The Statement of Objects
and Reasons appended to the Bill should be ruled out as an aid to the
construction of a statute. Strictly speaking, even the speech of the
Finance Minister and notes on Clauses do not lend support to the view
taken by the Tribunal.” [Also see Express Newspapers (P.) Ltd. v. UOI
AIR 1958 SC 578, para 173; State of West Bengal v. UOI AIR 1963 SC 1241,
para 13].
Generalia Specialibus Non
Derogant : General provisions must yield to the special provision
Generally speaking, the sections in
the Act do not overlap one another and each section deals only with the
matter specified therein and goes no further. If a case appears to be
governed by either of two provisions, it is clearly the right of the
assessee to claim that he should be assessed under the one, which leaves
him with a lighter burden.
The literal meaning of the expression
‘Generalia Specialibus Non Derogant’ is that general words or
things do not derogate from the special. The Courts have held the
expression to mean that when there is a conflict between a general and
special provision, the latter shall prevail as held in the cases of CIT
v. Shahzada Nand and Sons 60 ITR 392 (SC) and UOI v. Indian
Fisheries (P.) Ltd. AIR 1966 SC 35, or the general provisions must
yield to the special provision.
[Source: Article published in souvenir
of All India Taxclave held on 26th & 27th October, 2013 at Vadodara)
