DR.

RAM MANOHAR LOHIYA

Final Draft

Subject:- Law of Taxation-I

Submitted to: Submitted by:

Assistant Prof. (Law) ROLL NO. 25

RMLNLU Sem- VII, Sec- A

. B.A.L.LB (Hons)

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 Acknowledgment

A major research project like this is never the work of anyone alone. Apart from the
efforts taken by me, the success of this project depends largely on the
encouragement and guidelines of many other people who have been instrumental in
the success. The contributions of many different people, in their different ways have
made this possible.

My deepest thanks to Mr. Anil Sain (Asst. Prof) without whose valuable support,
guidance and advice this project would have been a distant reality. I would also like
to thank the library staff for working long hours to facilitate us with required material
going a long way in quenching our thirst for education. I would also like to thank my
seniors for guiding me through tough times they themselves have been through, and
lastly I would like to thank my friends for keeping alive the spirit of competition in me.

Thank you.....

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Table of Contents

1. Introduction.....4
2. Various Principles of interpretation5-9
Rule of Literal Interpretation
Rule of Beneficial Construction
Doctrine of Purposive Construction
Charging sections to be strictly construed while procedural sections
should be liberally construed
Rule of ejusdem generis and noscitur a sociis
Doctrine of Harmonious Construction

Construction of Penal Provisions

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Introduction
As per Article 265 of the Constitution of India-
No tax shall be levied or collected except by the authority of law

There are three components of a taxing statute, viz., subject of the tax, person liable to pay
the tax and the rate at which tax is levied. There are three stages in the imposition of tax
(1) Declaration of liability in respect of persons and property
(2) Assessment of tax that quantifies the sum which the person liable has to pay
(3) Methods of recovery if the person taxed does not voluntarily pay

The term interpretation means to give meaning to there are three bodies which divided
government power namely legislature, the executive and the judiciary. Interpretation of
statutes to render justice is primary function of the judiciary. The most common rule of
interpretation is that every part of the statute must be understood in a harmonious manner by
reading and construing every part of it together.

Tax laws are highly complex, complicated and beyond understanding of a tax-payer. The
words and expressions used are not simple. Many sections contain sub-sections, clauses, sub-
clauses. Many deeming provisions have been inserted. Meaning of an expression is extended
by way of explanation and is curtailed by way of proviso, sometimes more than one proviso
and explanations meaning differently. In fact, taxes are as complex as life. The moralist calls
for just taxes, but taxes cannot just be just, they cannot simply be simple. Statues imposing
taxes or monetary burdens are strictly construed. The logic behind this principle is that
imposition of taxes is also a kind of imposition of penalty which can only be imposed if the
language of the statute unequivocally says so. The principles of interpretation themselves are
not infallible and would depend on the facts of each case. The two well-settled principles of
interpretation, as applicable in taxing statutes, are: There is no equity in tax, and the principle
of strict or literal construction applies in interpreting tax statutes. Hence, on the plain
language of the statute, if the assessee is entitled to two benefits, he has to be granted both
these benefits.

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Various Principles of interpretation
The maxim A Verbis legis non est recedendum means that you must not vary the words of
the statute while interpreting it. Principle of interpretation which have evolved are those
based on plain meaning of the words used and their grammatical meaning and those based on
the intention or purpose of the legislature.

In India tax law provides a useful set of cases for exploring the interpretative approaches of
the judiciary in India. Some general observations made by the courts are first mentioned
before analyzing the cases on different approaches. Interpretation of statute means that the
court has to ascertain the facts and then interpret the law to apply to such facts. It is the
function of the legislature to say what shall be the law and it is for the court to say that what
the law is. Where the language is plain and unambiguous and admits of only one meaning no
question of construction of statute arises for the statute speaks for itself.

Thus, when the language of a taxing statute is clear, if an assessee falls within the four
corners of the statute, he is to be taxed; if not, no tax is to be levied. Keeping in view the
aforesaid dictum regarding the interpretation of the taxing statutes, there are various cardinal
principles with respect to the interpretation of taxing statutes which can be bifurcated in the
following broader categories:

(1) 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 Honble Apex Court in various decision,
e.g., CIT v. T. C. Sundaram Iyyengar1, Smt. Tarulata Shyam v. CIT2. However, if a person

1
[1975] 101 ITR 764 (SC)
2
[1971] 108 ITR 345 (SC)

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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 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.

(2) 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 Westminister3 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. CTO4 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.

The decision in the case of McDowell & Co5 was considered in detail by the Honble
Supreme Court in the case of Union of India v. Azadi Bachao Andolan6, 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.

3
(1935) All ER 259 (HL)
4
[1985] 154 ITR 148 (SC)
5
Ibid
6
2004 (10) SCC, 1

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It is now well settled principle of law that when two views are possible, one which favours
the assessee should be adopted.

(3) 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 affected
that such an absurdity is avoided. The application of this rule is rather limited in the realm of
construction of taxing statutes, since the literal rule 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 Honble Supreme Court in the
case of Sindhi Transport Company v. State of U.P.7. 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.

(4) 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.8 However, this would always be subject
to the fact that the particular provision, or even the entire enactment, should not be held
unconstitutional.

(5) Construction of Penal Provisions

There are several penal provisions in taxation statutes and these have special rules of
interpretation and notable among these are:

7
1986 (2) SCC 486
8
CIT v. Chandanben Maganlal [2002] 120 Taxman 38 (Guj.).

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(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.

(6) Charging sections to be strictly construed while procedural sections should be

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

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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.

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.

(7) 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.

In the case of CIT v. Raj Kumar9 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.

9
[2009] 181 Taxman 155 (Del.)

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Judicial Trend in India with regard to taxing statute

It is a recognized principle of law which was laid down by the British courts known as the
Westminster principle that tax planning is the prerogative of the tax payer and he can resort to
legal measures in order to avoid tax.

However this principle was overruled by the Indian Supreme Court in the case of Mc Dowell
and Company v. CTO10. In this case the Supreme Court blurred the distinction between tax
avoidance and tax evasion. It interpreted the power of the government to collect and levy
taxes in a broad way and held that any avoidance or planning by a person to avoid tax is
incorrect and should not be allowed. They based their decision on the fact that the English
courts had departed from the Westminster principle.

However the court lay down in the case of Union of India vs. Azadi Bachao Andolan11. That
the presumption made in the Mc Dowell case was wrong. It criticized the judgment given in
the case. It held that the decision in the Mc Dowell case was an exception and not the norm.

In Mathuram Agrawal v. State of Madhya Pradesh12, Constitution Bench had occasion to

"The intention of the legislature in a taxation statute is to be gathered from the language of
the provisions particularly where the language is plain and unambiguous. In a taxing Act it is
not possible to assume any intention or governing purpose of the statute more than what is
stated in the plain language. It is not the economic results sought to be obtained by making
the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an
interpretation which does not follow from the plain, unambiguous language of the statute.
Words cannot be added to or substituted so as to give a meaning to the statute which will
serve the spirit and intention of the legislature."

The Constitution Bench reiterated the observations in Bank of Chettinad Ltd. v. CIT13,
quoting with approval the observations of Lord Russell in IRC v. Duke of Westminster and
the observations of Lord Simonds in Russell v. Scott.14

10
[1985] 154 ITR 148 (SC)
11
2004 (10) SCC, 1
12
AIR 2000 SC 109
13
(1940) 8 ITR 522 (PC)

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Thus the position in India as it stands now is the same as earlier and the temporary havoc
created by the McDowell case has been avoided.

Conclusion

Thus as can be seen that there are rules for interpretation of a taxation statute are different
from that of an ordinary statute. The reason being that tax is a compulsory levy by the state to
the citizens of the country. This is one reason that the courts are required to construe the
statute strictly and there are no grounds of equity or unjustness while construing a taxing
statute.

Secondly in our constitution the separation doctrine though not strictly followed is
recognized. The power of each body is recognized. Thus there should not be any interference
of one body to another body. That is why the courts have to strictly construe the statute. They
cannot go into the intent or the purpose for which the tax is levied or the rate of tax which is
levied etc. This aspect clearly falls within the legislative area. Thirdly where there is any
ambiguity in relation to a tax the benefit of the doubt should be given to the assessee. This is
because it is the tax payer who has to suffer and making him liable unnecessarily would be
clearly unfair.

Thus the interpretation of taxing statutes is somewhat different from that of ordinary statutes
due to the nature of the statutes.

Taxing statutes are mostly complex and require calculations and many deductions. The
Income tax Act is very complex and has been amended several number of times. Thus due to
the ever changing and flexibility of the statutes there is a different interpretation given to
them.

Due to the various amendments in the statute and the changing policies of the government it
becomes difficult of not impossible for the court to understand the legislative intent. Thus this
can also be one of the reasons as to why these statutes are to be construed strictly.

The adjudicating authority should always to follow the accepted and settled principles of
interpretation of tax statutes and should not interpret the provisions to suit the revenue.

14
(1948) 2 All ER 15.

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Consideration of equity is wholly out of place in a taxing statute and only principle of strict
interpretation applies to taxing statutes.

I conclude this Article by quoting a classic passage of words of the Late Rowlatt, J. who
explained the rule of interpretation of revenue statute in the case of Cape Brandy Syndicate v
I.R.C.15

In a taxing enactment, one has to look at what is clearly said. There is no room for any
intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to
be read in, nothing is to be implied. One can only look fairly at the language used.

15
[1921] 1 KB 64

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Bibliography:

Primary Sources
Income Tax Act, 1961
General Clauses Act, 1897

Secondary Sources
Justice G.P Singh, Principles of Statutory Interpretation, 9th Edition, Wadhwa and
Company, Nagpur.
Maxwell on Interpretation of Statutes, 2003 Edition, LexisNexis Butterworths
Wadhwa, Nagpur.
B. M. Gandhi, Interpretation of Statutes, 2nd Edition, Eastern Book Co., Lucknow.

Rao, M.N. and Dhanda, Amita, N.S. Bindra's Interpretation of Statutes, LexisNexis,
Butterworths, Nagpur.

Income Tax Act, 57th Edition, Taxmanns. as amended by Finance Act 2013

Singhania, Vinod K., Direct taxes- Law and practice, 52nd Edition, Taxmanns.

Websites

http://www.itatonline.org
http://www.thehindubusinessline.com
www.manupatra.com
www.westlaw.com

Articles

http://www.legalservicesindia.com/article/article/interpretation-of-taxing-statute-as-
strict-construction-and-exemption-1451-1.html
https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1609
http://www.aiftponline.org/journal/Dec_Journal%202013/Interpretation%20of%20Ta
xing%20Statutes.htm
http://iasaspirations.blogspot.in/2012/04/interpretation-of-taxing-statutes.html

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