This article is written by Tanmay Mangal and updated by Prity. It provides insight into the interpretation of taxing statutes and how tax laws are interpreted. It also deals with the importance and need for interpretation in tax laws and which principles or rules are to be followed while interpreting the tax laws with relevant case laws.

Introduction 

Interpretation means to give meaning to some words that are ambiguous or unclear by looking into the intention or context in which those words are used. It is a word derived from the Latin term ‘interpretari’ that means to explain, expound, understand, or translate. The role of interpretation comes into play when there is an ambiguity in the wording of the legal statutes made by the legislature.

As we know, the government of India is divided into three branches, namely, the  Legislature, Executive, and Judiciary in the Constitution of India. It is the function of the legislature to make the laws and that of the executive to enforce those laws. The judiciary, which is the third branch of the government, interprets those laws if there is an ambiguity or vagueness in them.

Since the main purpose of this article is to deal with the interpretation of tax statutes, it provides insights on what tax statutes are and their features. This article also addresses the need and importance of interpretation in taxing statutes through various principles and doctrines. Furthermore, the article also addresses how some rules of interpretation evolved in taxation laws with time. 

Interpretation of statues 

As from the intro of this article, it is clear that this article deals with the interpretation of taxing statutes, firstly it is pertinent to know about what the interpretation is. Therefore, under this heading, what interpretation means is discussed. 

The interpretation of statutes is the process of explaining, expounding, and translating any texts, phrases, or sentences in written form. It is an act of analysing the words or sentences to see if there is any ambiguity or obscurity in them. 

According to John Salmond, “interpretation is the process by which the court seeks to ascertain the meaning of the legislature through the medium of authoritative forms in which it is expressed”. 

It is the process by which courts determine the exact intention of the legislature behind the enactment of that law. In another way, we can say that the purpose or object behind the interpretation of any law when there is ambiguity arises is to concur with the true intention of the legislature behind the enactment of the laws.

This heading makes it clear to the reader what the interpretation means in a nutshell. 

Further to make this article more comprehensive and understanding for the reader, the below mentioned subheading provides insights on what tax means and what are the features of tax prior to addressing what the interpretation of taxing statutes are. 

Tax statutes and their features 

Tax and tax statutes 

Tax is a pecuniary burden imposed by the state on taxpayers. A taxation statute is a fiscal statute through which the state imposes the pecuniary burden on the taxpayer, i.e., tax, to generate and collect revenue. 

Lord Dunedin in Whitney vs. Commissioner of Inland Revenue (1925) stated that any taxation statute involves three stages. First, the subject on which tax is levied or imposed; secondly, the assessment of the liability of the assessee and lastly, the recovery once the assessment is made. 

Constitutional power of enacting tax statutes 

In the Constitution of India, rights or powers to make laws on several issues are embodied in the legislature. In respect of taxing statutes, the legislature derives its power of imposing taxes from Article 265 of the Constitution, which states that “no tax can be levied or collected unless it has the authority of law.” 

It is through this article that the legislature acquires the right to impose tax and prescribe various conditions under which such tax is applied by enacting tax statutes. 

The legislature also has the power to delegate its law-making power to the executive for proper implementation of the laws. Such delegation of power is exercised in the form of rules, regulations, circulars, clarifications, and notifications.

Delegation of law-making power in the case of taxing statutes has been transferred to the Central Board of Indirect Taxes and Customs (CBEC) in the case of indirect tax and the Central Board of Direct Taxes (CBDT) in the case of direct tax. Through this delegate power, the said authority issued notifications, rules, or circulars as exemptions, clarifications, explanations, or declarations of the main taxing statutes.

Features of tax statutes 

Though tax law is a part of general law, it has some distinct features. The distinct features of the tax statutes are as follows:

• The words or provisions of tax statutes are not simple, very complex, and difficult for taxpayers to understand. 
• Single Section of the tax statutes contain several clauses and subclauses. 
• Taxing statutes also contain several provisos that curtail the scope and meaning of that particular section in which these are inserted. 
• Sections of taxing statutes contain more than one explanation that broadens the scope and meaning of that particular section in which these are included. 
• Many deemed provisions are also included in taxation statutes. 
• Some clarificatory provisions are also inserted in tax statutes. 
• Some clauses added to the taxation statute have retrospective effects. 
• In addition to this, the concerned executive departments of income tax, namely, CBDT and CBEC, for effective or efficient implementation of the tax statutes, issue notifications or circulars as mentioned in subheading ‘Constitutional power of enacting tax statutes’. These are more complex to understand by general people. 

Interpretation of taxing statutes 

From the heading “features of taxing statutes” it is clear to the reader that the taxing statutes have some distinct features. 

Now, under this heading, the reader will understand what is the interpretation of taxing statutes. 

Further under another heading immediately followed by this heading, this article addresses the need and importance of taxing statutes. 

The interpretation of taxing statutes is gaining more and more importance with the passage of time. Earlier, only a few of the subjects came within the purview of taxation by the government, like income tax or land revenue. 

In the present time, several other new subjects are also covered under taxation, namely, tax on holding property, transfer of property, tax on capital gains, tax on business and profession, tax on the profit or interest, and so on. 

Several deemed provisions are also inserted into the taxation statutes, besides several new subjects. 

These deeming provisions, when applied in actuality, sought the need for interpretation. These new tax laws lead to more new words, and more new words lead to more problems about the meaning of those words. 

Hence, the importance of interpretation increases in taxation statutes. The judiciary came to interpret those words for knowing the true meaning of the same. Interpretation of statutes is a specialised branch of legal studies. 

Hence, a large number of taxing enactments have made interpretation of those taxing enactments a sub-specialised branch of legal studies.

Need and importance of interpretation of taxing statutes

According to Salmond, the essence of the laws lies in the spirit, not in its letter, for the letter is significant only as being the external manifestation of the intention that underlies it. 

As the social, economic, and political conditions of society keep on changing, interpretations of the laws also require change. The legislature is not equipped to meet such changing conditions, and the legislature can not anticipate every situation that might occur in real life. 

The lawmaking process is an ongoing process. The legislature, keeping the laws more effective or efficient for the user, makes amendments to them either by inserting, substituting, or deleting some provisions.

Changes in science, technology, or any other sphere are pertinent, and always newer facts and conditions arise. Therefore, legislatures come up with new laws to maintain coherence in society or to regulate the new facts or conditions that arise due to changes in different spheres. Similarly, the interpretation of such laws also changes, and hence, interpretation is also an ongoing process. 

Particularly in the tax statutes, changes occur every year through the presentation of the budget by the Finance Minister that needs interpretation of those provisions inserted newly in the tax laws. 

Thus, it is the courts that play the role and interpret the laws to adapt as per the needs of society that change with time. In such cases, it is the duty of the judges to look at the particular case placed before them to see whether the case falls within the broad principles of law enacted by the legislature or not. 

As we know, the lawmaking process is a lengthy and time-consuming process, and laws can not change rapidly as science, technology, or other things are developing or changing. In this case, if there is any question, doubt or ambiguity arise as to whether any situation or act falls within a particular law or not, then the interpretation of such law needs to be done by the court. 

Different laws are drafted or enacted with the assistance of an expert in different areas and by concurring several steps. Sometimes, a situation arises where the words or phrases used in such laws, acts, or rules are ambiguous or unclear. Such laws or provisions may create absurdity, inconvenience, or injustice. Hence, to eschew such circumstances in such tax statutes, the interpretation is required by the judicial system. 

Lord Denning, in Seaford Court Estate Ltd. vs. Asher (1949), observed that it is not within the human powers to foresee the manifold permutations and combinations that may arise in the actual implementation of the act and also to provide for each one of them in terms free from all ambiguities. Judges in such a case can not sit silently and blame the legislature but rather try to find out the intention of the legislature. 

For this, they will not only take assistance of the language of the provision but also the social conditions under that such statute come out. Hence, interpretation of statutes becomes an ongoing process as newer facts and  conditions continue to arise.

Keshavji Ravji and Co. Etc. Etc vs. Commissioner of Income Tax (1990), the Supreme Court held that when words used in the statute do not manifest the intention of the legislature, then the need for interpretation arises. 

Sometimes, interpretation of statues by court in certain cases provokes or compels the legislature to amend the old laws or to enact totally new laws in respect of certain areas.

Till now, readers have understood the nature and features of tax statutes and what interpretation of taxing statutes means and their needs and importance. But that much information does not make this article exhaustive or comprehensive. Therefore, in the below-mentioned headings, this article addresses the principles of interpretation that applied on taxing statutes. 

Principles of interpretation applicable to taxation statutes

Practical applicability of laws is different from drafting and enforcing the law. Therefore, when laws made by the legislature are enforced by the executive, the difference of opinion happens due to unclear or ambiguous wording in the law amidst the executive or the person upon whom these laws applied. 

It leads to litigation or dispute, and matters come before the judicial system, and they interpret such laws or provisions by applying different rules or principles of interpretation on a case-to-case basis.

Following are the principles of interpretation applicable on taxation statutes:

Strict interpretation 

The most important principle that is used in the taxing statutes for the interpretation is the strict rule of interpretation. 

The strict rule of interpretation is one of the most important principles used to interpret fiscal and penal statutes. 

According to this rule, plain, clear, and direct meaning is given to words that are used in common parlance by the general public to which such law is applicable. 

There can be no presumption by the court with respect to a particular meaning. A court can not give particular meaning to a word that is not clear by making a presumption that particular meaning is the intention of the legislature. It is also known as a close and narrow reading of interpretation. 

In The Commissioner of Income Tax, Bombay vs. The Jalgaon Electricity Supply Co. Ltd. (1960), it was ruled by the court that, the legislature will be treated as defaulter not the assessee if the legislature fails to express itself in any of the taxing statutes and the taxpayer takes advantage of this lacuna. The court further stated that it can not be treated as unjust.

Similarly, in the case of Azam Jha Bahadur (Dead) by his Legal Representative vs. Expenditure Tax Officer Hyderabad (1971), the court ruled that there is no much importance of logic or reason in the interpretation of taxing statutes.  

Literal rule or plain meaning rule

In the strict interpretation of taxing statutes, the literal rule of interpretation is applied by the courts . 

In a taxation statute, if a word has a clear meaning, the court is bound to follow the clear meaning even if such meaning results in absurd results. It is in the legislature’s domain to rectify such absurdity. 

In the case of taxation statutes, courts can not extend the scope of law by giving meanings to words that are unclear or uncertain. If the legislature or taxation authorities had thought of such a situation, they must have covered it by using an appropriate description under the statute or have issued some notification clarifying the same. 

In Kanai Lal Sur vs. Paramnidhi Sadhukhan (1957) the court held that if the words used in the statute are capable of one interpretation only, it would not be open to the courts to adopt any other hypothetical interpretation on the ground that such interpretation is more consistent with the alleged object and policy of the Act. 

Further, in the case of the State of Uttar Pradesh vs. M/s. Kores (India) Ltd. (1976), the above-mentioned principle was followed by the Supreme Court. The issue pertaining to the inclusion of carbon paper in the definition of the word “paper.” It was held by the Hon’ble Supreme Court that in common parlance, word paper is one that is used for writing, packaging, and printing, whereas carbon paper is used entirely for different purposes. 

Moreover, the manufacturing process of carbon paper is entirely different and complicated from that of normal paper. Hence, the Court held carbon paper will not be included in normal paper so as to make it subject to taxation. 

It was further held that the meaning of the paper is quite clear, and there is no need to interpret it so as to extend its meaning to include carbon paper. Thus, courts are not required to extend the meaning to cover the subjects, which, on the face of it, can not be included in common parlance. It is only when specifically provided by statute that it becomes subject to tax, then only it will be subject to taxation. 

Reasons for applicability of strict rule on taxation statute

Tax is a mandatory extraction of money from the assessee (taxpayer) by the sovereign authority in which the taxpayer is not entitled to any assured benefit. Taxes place a compulsory monetary burden on the taxpayer that is imposed under the authority of law. Thus, unless the imposition of tax is clearly backed by law, no tax can be imposed. 

A taxation statute is a fiscal statute that is enacted on the basis of the trial-and-error method or on an experimentation basis. It is not practicable for the legislature to anticipate all the possible situations or conditions that may arise after the law is enacted. There is a possibility that the assessee might use some shortcomings  found in the law as a loophole and take advantage of it. As tax results in pecuniary burden, the benefit of doubt is given to the assessee in case of any contradictions.

The strict rule is applicable to taxation statutes, so courts are bound to give clear and plain meaning to the words without delving into the consequences it can result in. There is no presumption of tax or the intendment of the legislature to impose tax unless clearly and specifically provided. Thus, it is the legislature or subordinate authority to come forward and introduce amendments and clarifications to rectify the loopholes.

Thus, direct meaning is given to words used in the statute, and in case of two interpretations coming out, then in that case such interpretation is given to the words, which is in favour of the taxpayer. 

Until and unless clear words are used in the statute, which imposes the liability on the taxpayer, there can be no burden to pay tax.

Liberal interpretation 

In a few of the cases liberal rule of interpretation is also followed in taxing statutes. In liberal interpretation, judges give broader or flexible meaning to the words of the statute while interpreting the statute. 

This interpretation applies through mischief rule or golden rule construction. It applies to remedial or beneficial statutes or provisions.

Beneficial provisions can not be  interpreted strictly so that it construed the main objective and purpose of the provision.

Generally, in taxation statutes, strict interpretation or literal rule of interpretation applies. However, there are some beneficial provisions where the court prefers to apply liberal interpretation. For example, exemptions, clauses, and some beneficial circulars. 

In M/S G. P. Ceramics Pvt. Ltd vs. Commissioner Trade Tax UP.(2008), the Honourable Supreme Court stated that  the eligibility criteria in exemption notification of the tax statutes should be interpreted strictly. When the applicant has fulfilled the eligibility criteria, the exemption notification should be interpreted liberally. 

Principle of equity and taxing statute 

This one is the most pivotal issue to discuss while dealing with the interpretation of taxing statutes to make this article more comprehensive. 

The principle of equity has no role to play in taxation law due to the presence of a lot of deeming legal fiction in tax laws. 

Thus, whatever is written must be strictly followed without considering its justness. If the words of the tax laws are clear, the court has to give meaning to the words that come from the words of such tax laws, irrespective of the consequences it resulted in. 

In other words, even if such construction is unequitable, the court is bound due to legal fiction. The court can not meet the deficiency by extending the provisions of the statute. It is the duty of the legislature to rectify it through amendments. 

Kapil Mohan vs. Commissioner of Income Tax, Delhi (1998), this case related to the fact that equity and tax are strangers to each other. The Supreme Court held that hardship or equity has no role to play in determining eligibility to pay tax. It is the duty of the legislature to determine the eligibility criteria to pay tax. 

Though equity and tax are strangers to each other but with time this principle is diluted by the courts in a few cases that are discussed in the below-mentioned headings. 

Deviation from established principles of interpretation of taxing statutes 

In the Cape Brandy Syndicate vs. The Commissioner Inland Revenue (1921), Justice Rowlett stated that “There is no room for any intendment. There is no equity about a tax. There is no assumption as to tax. Nothing is to be read in; nothing is to be implied. One can only look fairly at the language used.”

The above-mentioned passage of Justice Rowlett has often been quoted in various decisions of the Indian judicial system whenever the question of interpretation of taxing statutes comes into play.

Tax laws are not as simple as Justice Rowlett stated in the above case. But with the passage of time, more tax statutes are enacted in India to cover more subjects for taxation. These may be difficult for taxpayers to understand. 

Due to this, a need arises to interpret the words, provisos, and explanations of various provisions of the tax statutes and hence diverse rules, doctrines and principles of interpretation developed and used for interpretation of the same. 

Instead of this, the core principles that were developed in the Cape Brandy Syndicate case (1921) still hold good in the Indian judicial system while interpreting the taxing statutes.

In the Commissioner of Income Tax vs. Sri J. H. Gotla (1985), the Supreme Court, while deciding the case, put emphasis on certain rules of interpretation of taxing statutes as follows:

• If strict literal interpretation of the provision leads to absurdity, the interpretation that does not lead to absurdity would be preferred over the strict literal interpretation. 

In other words, if strict literal interpretation does not result in a situation that is intended in the object and purpose of the statute, such interpretation can be avoided.

• It is a known fact that the principle of equity has no role to play in the interpretation of taxing statutes. Both are strangers to each other. But if a literal interpretation of the taxing statute leads to injustice rather than equity, then in such situations, the principle of equity should be adopted. 
• While interpreting any provision of the tax statute, the whole scheme of such statute has to be kept in mind besides the object or purpose of that provision and try to make balance in between them. 

In Southern Motors vs. State of Karnataka & Ors. (2017), Sections 29 and 30 of the Karnataka Value Added Tax Act, 2003, were challenged before the Supreme Court. 

The Supreme Court, in this case, cited and followed its own decisions in K.P. Varghese vs. Income Tax Officer, Ernakulam, and Anr. (1981) and other cases. In the K.P. Varghese (1981) case, interpretation of Section 52(2) was in question. 

The Supreme Court held that when the plain literal interpretation of a statutory provision leads to an absurd or unjust result that was not intended by the legislature. 

The court can modify the language of such provisions to reach the true intention of the legislature. Such modification is necessary to make the provisions rational and sensible. 

Interpretation of specific provisions of the taxing statutes 

Earlier in this article, it is mentioned that the interpretation of taxing statutes in itself creates a sub-specialised branch of legal studies. Hence, this article, under this heading, dealt with the principles of taxing statutes that apply to the specific provisions of the tax statutes. 

An interpretation of specific provisions of tax statutes by the courts is dealt with in the below-mentioned subheadings.

Interpretation of proviso clause

Proviso, in any provision, generally provides an exception to the provision in which it is added or may qualify a part of the Section. A proviso of any provision can not be read independently. It has to be read with the main provision in which it is inserted or added, and vice versa. 

In Allied Motors (P) Ltd. vs. Commissioner of Income Tax (1997),  a question relating to interpretation of Section 43B of the Income Tax Act, 1961, was before the Supreme Court. In this case, the Supreme Court held that the proviso or explanation is added to Section 43B to remove the hardship or problem caused to certain taxpayers from the main Section of 43B. To give Section 43B a reasonable interpretation, the proviso or explanation added is required to be read in Section 43B. 

The court further ruled that for the reasonable interpretation of Section 43B, such a proviso should be interpreted in liberal manners and should be given a retrospective effect.

Interpretation of explanation clause

An explanation is generally added to the main provision to explain some concept or expression embodied in the main provision. 

It is not a substantive provision in any sense. It is merely meant to clarify or explain certain ambiguities that may have been found in the main provision of the statute. 

In Bihta Cooperative Development Cane Marketing Union Ltd. and Anr. vs. The Bank of Bihar and Ors. (1966), the court observed that the “Explanation must be read so as to harmonise with and clear up any ambiguity in the main section. It should not be interpreted as to widen the ambit and scope of the main section in which it is inserted.” It provides additional support to the dominant object of the statute. 

Interpretation of beneficial provisions

Tax exemption notification or provision 

In cases of exemptions, strict rules do not apply; rather, liberal rules are applied. All the conditions under which exemptions are given must be clearly specified. Once the assessee has shown that all the conditions precedent required to claim exemptions are fulfilled, then he is entitled to claim exemptions. 

Once the assessee falls within the category of exemptions, then such exemption should be allowed. It can not be denied on the basis of the assumed or likely intention of the authority making the law. 

If there is an ambiguity in the exemption notification, then the interpretation of such a clause is construed in the favour of the taxpayer or assessee. 

It is an old principle of interpretation of exemption provisions. The catena of judicial decisions applied this principle of interpretation. 

The cases referenced below are related to the historical principle and its deviation.

In the M/S Sun Export Corporation, Bombay vs. The Collector of Customs, Bombay & Anr (1997) case, it was ruled that an ambiguity in the tax exemption provisions or notifications must be interpreted in such a way that it benefitted the assessee claiming the exemption. 

The court further stated that if there are two views possible in interpreting the exemption notification or provision in taxation, the view favourable to the assessee has to be preferred. 

The principle of interpretation applied in the Sun Export case was followed in Commissioner of Central Excise Pune vs. Abhi Chemical and Pharmaceuticals Pvt. Ltd. (2005), Commissioner of Customs (import), Mumbai vs. Konkan Synthetic Fibres (2012), and Commissioner of Customs (preventive), Gujarat vs. Reliance Petroleum Ltd. (2008).

Courts have started to dilute the historical principle of interpretation for exemption notification developed by them in its subsequent judgments. 

In the case of Commissioner of Central Excise, New Delhi vs. M/S Hari Chand Shri Gopal & Others etc. etc. (2010), the question before the Supreme Court was whether the respondents are entitled to get the benefit of exemption notification  121/94-CE on the ground of ‘intended use’ and the ‘principle of ‘substantial compliance’ of the procedure provided in chapter X of the Excise Rules. 

The Supreme Court ruled that while interpreting the exemption notification, courts should keep in mind to distinguish between the mandatory conditions and the directory conditions claiming exemptions. 

The Court further ruled that mandatory conditions  of exemption notification must be interpreted strictly, whereas the conditions that are directory in nature may be literally interpreted. 

Furthermore, the Supreme Court ruled that while taking into consideration the ambiguity in exemption notification or clauses, a strict rule of interpretation should be applied. 

Thereupon, when the time came to apply the exemption provision, the liberal rule of interpretation should be applied. 

The distinction between the stage of finding out the eligibility to seek exemption and the stage of applying the nature of exemption for applying different rules of interpretation was made out in the case of Union of India vs. Wood Papers Ltd. (1990). 

In this case, the court held that the principle applied for interpretation of exemption notification will be different from the principle applied on charging provisions. It is because the meaning of the exemption is contextual. It changes with the context in which it is used. 

In order to determine whether the subject comes within the parameters of exemption notification or not, a strict rule of interpretation should be applied. Once it is decided that the exemption notification is applicable on the subject, here the rule of liberal interpretation is applied.

The 21-year-old ratio propounded in the Sun Export case (1997) was reconsidered by the Constitutional Bench of the Supreme Court in the case of Commissioner of Customs (Import) Mumbai vs. M/s. Dilip Kumar and Company and ors. (2018) (known as the Dilip Kumar case 2018) and overruled. The Constitution Bench, while dealing with the application of interpretive rule in exemption clauses or notification of taxing statute, stated that every taxing statute, including charging, computation, and exemption clause (at the threshold stage), should be interpreted strictly. 

The Court further said that if there is an ambiguity in the exemption notification, benefit must go to revenue. Thus, here, the burden of proof lies upon the taxpayer claiming the benefits of exemption notification. Once a taxpayer establishes the burden of proof, the onus of proof lies on the department of tax to prove the disentitlement of the taxpayer.

The Supreme Court, however, upheld an old established principle that if there is an ambiguity with respect to the taxing provisions other than the exemptions provision, the benefit goes to the taxpayer or assessee. 

Further, the Court held that the ratio propounded in the Sun Export case is incorrect. Therefore, the Sun Export case, with all other cases based on a similar view or ratio, stands overruled. 

Mention of the doctrine “substantial compliance” or “intended use” in this heading will make the reader curious to know the meaning of the said doctrine and how these are used by the court in the interpretation of taxing statutes. 

Therefore, below mentioned subheading addresses the doctrine as follows:

Doctrine of substantial compliance and intended use

It is a doctrine enunciated by the Supreme Court in the case of Hari Chand Gopal (2011) (Supra) while addressing this case. The doctrine of substantial compliance is based on the principle of equity and invented by the judiciary. 

Substantial compliance means actual compliance of essential or substantial requirements of any provision of the statute or exemption notification of the taxing statute. 

According to this doctrine, if the conditions for claiming exemptions are met substantially  by the taxpayer or only a few minor procedural requirements that are not the essence of the requirements are not fulfilled, which does not hamper the purpose for which such law was made, then in that case it will be said that the assessee substantially complied with the requirements of the exemption notification. Such substantial compliance makes the assessee entitled to claim exemptions. 

The applicability of such doctrine is based on a case-to-case basis, as its results are different depending on the facts of each case, the extent of compliance, and whether partial compliance fulfils the essence, object and purpose of the law. Subsequent to the verdict of Dilip Kumar (2018), the doctrine of substantial compliance cannot be used as a defence to rule out the strict rule of interpretation principle with respect to exemption notification that is contingent on fulfilment of certain requirements. 

Interpretation of charging or taxing section or provision of the taxing statutes 

The first stage is where charging provisions of the act are involved. These charging provisions must be clearly provided in the statute. These charging provisions provide the extent and coverage of the subjects as to whom the tax is applicable. 

It also provides the outline in the form of subjects that the legislature wants to cover under the law. Charging provisions are to be interpreted strictly as they result in financial burdens. 

There can not be any ambiguity, and meaning that is clear, obvious, or direct is given. Nothing can be inferred to substantiate the intention of the legislature or purpose for which the law was made. Once the revenue shows that particular subject is covered by law, then tax is applicable for all those subjects. But if it fails to prove, then no tax can be imposed by extending the meaning.

In the Collector of Customs and Central Excise, Guntur and ors. vs. Surendra Cotton Oil Mills and Fertilisers Co. and ors. (2000), it was observed that in the interpretation of the charging sections in taxing statutes, the strict rule of interpretation is mandatory. 

It was also observed that if two views of interpretation are possible in the charging provisions, then the view that is in favour of the assessee would be applied in the case.

Interpretation of machinery or procedural provisions 

The second and third stages involved in any tax laws are assessments of the liability and recovery of dues, respectively. These provisions are machinery provisions that provide for technicalities and procedures to be followed under the act to make it functional. These provisions are to be interpreted fairly and liberally to promote the intention of the legislature. 

In cases of contradiction whereby two meanings are coming out, then one that is reasonable and will assist in fulfilling the intention of the legislature and solving the purpose for which the law was enacted is preferred. They are to be interpreted in such a way so as to enforce and apply charging provisions smoothly.

In Commissioner of Wealth Tax, Meerut vs. Sharavan Kumar Swarup and Sons (1994), the Supreme Court, to clear the distinction amidst machinery provisions and charging of tax provisions or substantive provisions of tax statutes, cited the decision of Dixon, CJ., in Maxwell vs. Murphy (1957). In this case it was stated that “No suitor has any vested interest in the course of procedure, nor any right to complain, if during the litigation the procedure is changed, provided, of course, that no injustice is done”. 

In accordance with Halsbury’s Law of England, machinery provisions neither impose charges nor extend or restrict a charge imposed elsewhere. 

In the case of Associated Cement Company Ltd. vs. Commercial Tax Officer, Kota and Ors. (1981), some of the provisions of Rajasthan Sales Tax Act, 1954 and Central Sales Tax Act, 1956 were in issue. 

The Court laid down that while interpreting the charging provisions or machinery provisions, the court should keep in mind the distinction amidst them. Charging provisions are provisions that impose the charge on the tax, whereas machinery provisions are those provisions that provide machinery for the quantification of the tax. It also provides machinery for levying and collecting taxes that are imposed. 

The court further stated that a strict rule of interpretation should be applied to charging provisions, while in interpretation of machinery provisions, a strict rule of interpretation should not  apply. 

Furthermore, the court held that interpretation of machinery provisions done in such a way that they should not defeat the charges imposed on tax. 

In Commissioner of Income Tax ­III vs. Calcutta Knitwears, Ludhiana (2014), the court pronounced that, while interpreting the machinery provisions of a taxing statute, the court must give effect to its purpose manifested in the statute. Machinery provisions should not be interpreted in such a way that they defeat the purpose and object of the statute. 

The court further said that if the intention to impose liability is clear, it must apply a commonsense interpretation of machinery provisions so that the charge does not fail.

Prospective or retrospective aspects of machinery provisions of tax statutes 

Any statutes or laws generally have a prospective effect unless expressly mentioned about their retrospective application or effect. 

The word retrospective comes from two Latin terms, ‘retro’ and ‘specere’. Retro means backwards, and Specere means to look at. Here, the retrospective effect of taxing provisions means the provision that is applied to the subjects that have occurred in the past. Whereas the word prospective comes from the Latin maxim ‘Lex prospicit non respicit’ that means the binding effect of any tax provision is from the present point in time.

In Commissioner of Income Tax vs. Vatika Township Private Ltd. (2014), the Supreme Court tried to clear out the confusion regarding the prospective or retrospective application of tax amendments. 

The court quoted the paragraph from its own judgement delivered in Govind Das vs. Income Tax Officer (1975) that an established rule of interpretation is that a piece of legislation, unless expressly or explicitly provided, has not to be intended to have retrospective effects. This principle is based on the maxim ‘lex prospicit non respicit,” which means the law looks forward, not backwards. 

In the case of Commissioner of Income Tax 5, Mumbai vs. M/s. Essar Teleholdings Ltd. Through its Manager (2018), the court observed similarly on the prospective or retrospective effect of amendments as observed in supra judgments. 

The court held that the legislature has the power to legislate on prospective law and retrospective law equally. The Court further observed that the fiscal statutes or remedial statutes imposing liabilities are generally presumed to be interpreted as having prospective effects. Since they may impose new liability or obligation, attract new disability, or take away vested rights.

Interpretation of deeming provisions or legal fictions

Deemed provisions in tax statutes are as important as in other statutes. Legal fiction is used by courts or legislatures as a tool to treat certain circumstances as in existence, even though in reality, those circumstances do not exist.

In St. Aubyn vs. Attorney General (1952), Lord Radcliffe observed that the use of the  word ‘deemed’ has been increasing day by day in modern legislations. It also plays a pivotal role in the legal provisions. Generally, it is used as an artificial construction for words or phrases that would not otherwise prevail in the statute. It is also used for a particular interpretation that might otherwise be uncertain. Occasionally, it is used to give a comprehensive description that includes what is obvious, what is uncertain, and what is, in the ordinary sense, impossible.

Observations of Lord Radcliffe about legal fiction are cited and followed by the Supreme Court in several other decisions. While interpreting the legal fiction or deemed provisions, the courts have evolved certain principles. For example, the provisions of legal fiction have limited scope. It can not be extended by going for a purposeful rule of interpretation. Such rules of interpretation will not be applicable in such provisions, especially when such interpretation transforms the concept of chargeability. This was held in  Vodafone International Holdings B. V. vs. Union of India and Anr. (2012).

Interpretation of penal provisions of taxing statutes 

Generally, the principle of strict interpretation applies to the penal provisions of taxing statutes. To impose penal provisions on taxpayers, some mental elements, i.e., mens rea, are also required. Whereas Section 273A has to be interpreted liberally. If there is any ambiguity or doubt in the penal provisions, the benefit of doubt or ambiguity is provided to the assessee. 

In the Union of India and Ors. vs. M/S Dharmendra Textile Processors (2008), the question before the Supreme Court was what is the nature of the liability arising in the penal provisions of the taxing statutes. In another way, we can say the Court had to decide, is the penal liability in taxing statutes civil or criminal in nature. The Supreme Court held that liability that arises in penal provisions of taxing statutes is civil in nature because it provides a remedy for loss of revenue.

In the case of an appeal in taxing provisions, the liberal rule of interpretation is applicable. The liberal rule of interpretation also applies to the provisions of the tax statute that are in favour of the assessee and giving a refund to the assessee. 

Other aids to interpretation of taxing statutes 

There are certain other tools or sources that are used by interpreting bodies if some provisions of any law are unclear or vague and that are known as external aids or internal aids.

External aids to interpretation of tax statutes 

External aids of interpretation include: 

• legislative history and background,
• circulars and interpretations by tax authorities, 
• the speech of a minister,
• statements of objects and reasons,
• reports of commissions, 
• an integrated scheme of direct taxes and equities, and 
• dictionary meaning or ordinary meaning
• International conventions or treaties
• Previous judicial interpretation or legislation on the same subject matters 
• Provisions of other statutes and subsequent enactments.

Internal aids to interpretation of tax statutes 

Internal aids of interpretation include:

• Preamble and long titles, 
• Marginal notes and headings,
• Scope and application 
• punctuation, 
• non-obstacle clauses, 
• definition clauses, 
• schedules, 
• exemptions, 
• provisos, and 
• explanations in or of tax statutes.

Maxims used in the interpretation of taxing statutes 

Latin maxims or principles generally used in the interpretation of taxing statutes are as follows:

Noscitur a sociis 

It is a Latin phrase. Noscitur a sociis  means if the meaning of any word in legal statutes is not clear, the meaning  of that unclear word can be derived from the surrounding words of that unclear word. 

In the case of Commissioner of Income Tax vs. Bharti Cellular Ltd. (2008), Delhi High Court applied this latin phrase. The court held that the meaning for the word technical services used under Section 194J of the Income Tax Act, 1961, can be derived from its surrounding words. The surrounding words around technical services under Section 194J are ‘managerial services’ and ‘consultancy services’. The terms managerial services and consultancy services involved human intervention. Therefore, by applying the Latin term Noscitur A Sociis, meaning for the term technical services will be determined. As the above-mentioned two words involve human intervention, the word technical services will also involve human intervention.  

Ejusdem generis

The word  ejusdem generis means ‘of the same kind or same nature’. If particular words are followed by general words in any provisions of law. General words should not be interpreted in their widest terms and get meaning from those particular words. It is a rule of interpretation, not a rule of law. 

In Mangalore Electric Supply Co. Ltd. vs. The Commissioner of Income Tax West Bengal (1978),  the appellant was carrying on the business of distribution of electricity in Mangalore, under a licence granted by the Government of Madras in favour of M/s Octavious steel Co. Ltd. 

The licensee had assigned its rights to the appellant with the previous consent of the state government.  

Under Section 4  of the  Madras Electricity Supply Undertaking (Acquisition) Act, 1954 the state government  had  the power to take over any electricity undertaking, declaring that it shall vest in the government on the date specified therein. 

In the exercise of power given under above mentioned Section 4, the Government of Madras passed an order, declaring that the  appellant’s undertaking would vest in the government on December 31, 1956 and acquired the undertaking. 

Section 5 of the above mentioned same Act provided for the compensation to a licensee whose undertaking was taken over by the government. 

The appellant was paid compensation of worth Rs. 18, 42,312, and entire property belonging to the undertaking, including the fixed assets, were vested in the state government. 

For the assessment year of 1957-58, the question before the Income Tax Officer was whether the compensation received by the appellant was in the nature of capital gain within the meaning of Section 12B(1) of the Income Tax Act,  1922.

The Income Tax Officer, after deducting the sum of Rs. 6, 46, 710 for the fixed assets from the compensation amount, treated the sum of Rs. 11, 95, 602 as capital gain, which was liable to tax.

The appellant appealed to the assistant commissioner that the compulsory acquisition of its undertaking was not a transfer within the meaning of Section 12B(1) and hence not liable to capital gain tax.

Section 12B(1) of the Income Tax Act, 1922, is as follows:

The tax shall be payable by assessee under the head “capital gains” in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset affected after the 31st March of 1956 and such profits  and gains shall be deemed to be income of the previous  year in which the sale, exchange, relinquishment,  or transfer took place. 

Finally, this case came before the Supreme Court, where the issued framed were:

• Whether the word transfer occurring in Section 12B(1) of the Income Tax Act, 1961 refers to voluntary transfer only?
• Whether the word transfer should be construed ejusdem generis with the words sale, exchange, and relinquishment?

It was argued by the party that the word transfer must be construed ejusdem generis with the words sale, exchange, or relinquishment and hence transfer to be only voluntary transfer. The court held that the principle of ejusdem generis must apply with caution and in the same class or category of words. Where the words are clearly wide in their meaning, they ought not to be qualified on the ground of their association with other words. 

In the present case, in the absence of a distinct category, no presumption can arise that the word ‘transfer’ must be construed in the sense of the voluntary act. The transfer since sale, exchange, or relinquishment is generally accepted as voluntary acts.

The Court further said that the word transfer shall be construed in a wide sense. It should not be restricted to voluntary transfer like in sale, exchange, or relinquishment. The word transfer means both voluntary and non voluntary transfer. 

The appeal is accordingly dismissed. 

Expressio unius est exclusio alterius 

Expressio Unius est exclusio alterius is a Latin phrase, which means that if something is expressly mentioned in statutes, then it is presumed that something that is not specified or mentioned is excluded. 

In the Parbhani Transport Co-Operative Society Ltd. vs. The Regional Transport Authority Aurangabad and others (1960), chapter IV and IVA of the Motor Vehicle Act, 1939 as amended by Act 100 of 1956 were in issues. In this case, the petitioner is a registered cooperative society carrying on a business to run buses on certain routes. State applied for the grants of permits to run buses on those same routes under chapter  IV of Motor Vehicle Act, 1939, and petitioner applied for renewal of the permits. The regional transport authority rejected the application of the petitioner and allowed the government application and grant permit to run buses  to the state. Petitioner opposed this and said it is a violation of his fundamental rights under Article 14 and 19(1)(g).

Chapter IV consists of Sections 46 to 68 and chapter IVA consists of Sections 68A to 68-I, Both these chapters deal with grants of permits to run buses on roadways Chapter IVA under Section 68F(1) confers a special advantage to the government and entitles  it to necessary permits as a matter of right. 

Whereas under chapter IV state can’t seek such advantage and it has to fight with other competitors for grants of permit. 

Hence, the Court said that the power given by these two chapters is not the same power. Both are two distinct and different powers. 

The Supreme Court further ruled that when the court try to find out the intention of the legislature behind the enactment of any statute uses this maxim. There is no scope for the application of this maxim when the language of the statutes is plain and meaning is clear.

From chapter IV, it is clear that it does not prohibit the government from running the buses, but for this, grants of permits are required for the government, too. Hence, the above-mentioned maxim has no role to play in this case. There is no violation of the fundamental right of the petitioner. 

Other subsidiary rules of interpretation of taxing statutes 

There are few other subsidiary rules of interpretation of taxing statutes that are also available, such as special law overruling general law, the statute must be read as a whole, conjunction disjunction, avoiding adding or substituting of words.

Conjunction disjunction rule

Use of the words ‘and’ and ‘or’ in taxing statutes have meanings conjunctive and disjunctive, respectively. These are read as they are written in the tax statutes unless the intention of the legislature is otherwise. 

In the case of Kamta Prasad Aggarwal Etc. vs. Executive Officer Ballabgarh & Anr (1973), the Supreme Court ruled that the words in Article 276 of the Constitution of India that the total amount payable to the state or to any one municipality, district board, local board, or local authority can not mean that the word is used in a conjunctive sense as a substitute for the word ‘and’. This connotation was further clarified by the proviso of Article 276(2).

The Court further stated that the word ‘or’ present in between  the words “the State” and “to anyone municipality” can not be read as the word “and” in a conjunctive sense.  The use of the word ‘or’ under Article 276 means that any of the authorities mentioned in this article are liable to imposed tax of or up to the sum of Rs. 250 separately. 

Lex specialis

According to this doctrine, generally, if there are two laws, one is general law and another is special law, in the same situation or subject, then the law that is special in nature will prevail over the general law. 

In Maya Mathew vs. State of Kerala & Ors. (2010), the Court held that if there are already special rules or laws available and applied on any subject matter, and subsequently, general rules are framed on the same subject. The language of the subsequent general law signifies the intention of the law-making authority that the subsequent general law should prevail. The subsequent general law or rule will prevail over the old special law or rule.

Doctrine of Reading Down 

This doctrine is used by the courts in order to preserve or protect a provision of law from invalidation. 

Supreme Court in the landmark decision of the Chief Commissioner of Central Goods and Services Tax & Ors. vs. M/s Safari Retreats Private Ltd. & Ors.(2024) applied the doctrine of reading down. 

This judgement is discussed in the below mentioned subheading. In this case, the Supreme Court read down Section 17(5) (c) and (d) of the Central Goods and Services Tax (CGST) Act, 2017, and declared them constitutional. 

Summarisation of principles of interpretation for taxing statutes by the Supreme Court 

The Honourable Supreme Court on 3rd October 2024 delivered a landmark judgement in the case of Chief Commissioner of Central Goods and Services Tax & Ors. vs. M/s Safari Retreats Private Ltd. & Ors.(2024). 

The issue in this case was whether the input tax credit (ITC) is available or applicable on the supplies, such as steel rods, cements, sand, bricks, and consultancy services, legal professional services, etc used or availed by the assessee in the construction of immovable property. In this case, the construction of immovable property was a mall. The purpose of construction of the mall was to let out the mall on rent after construction. Goods and services used in the construction of a mall were taxed under the CGST Act, 2017 under Section 17(5)(c) and (d).

Defence counsel challenged the  constitutional validity of Section 17(5) (c) and (d) of the Central Goods and Services Tax (CGST) Act, 2017 on the grounds that these provisions of the CGST Act, 2017, violate Articles 14, 19 (1)(g), and 300A of the Constitution of India. They also argued that these provisions debar the assessee from taking tax credit benefits. In other words, we can say these provisions block the input tax credit (ITC) of the assessee in certain cases.

The third issue was that Section 17(5)(c) and (d) are vague. The distinction between the expression ‘plant and machinery’ used in Section 17(5)(c) and the expression ‘plant or machinery’ used in Section 17(5)(d) has not been clarified by the government.

Therefore, in this case the question was whether the meaning of ‘plant and machinery’ provided in explanation of  Section 17 would apply to the expression plant or machinery used in clause (d) of subsection (5) of Section 17 ? If the explanation does not apply, then what is the meaning of  the word plant? 

The Supreme Court summarised all the principles of interpretation for taxing statutes in this case as follows:

1. Plain meaning rule  of interpretation should be applied in the interpretation of taxing statutes.
2. If the literal rule of interpretation of taxing statutes leads to absurdity, it is the legislature’s responsibility to step in and remove the absurdity. 
3. Strict rules of interpretation should be applied for the interpretation of taxing statutes. 
4. If two possible meanings are coming out from the interpretation, the court interprets the provisions in favour of the assessee and against the revenue. 
5. Equity has no role to play in the interpretation of taxing statutes. 
6. Presumption or assumption has no role to play in the interpretation of taxing statutes. 
7. A taxing statute should be interpreted in a sense of what is expressly mentioned in the provisions. If there is any deficiency in provisions, it could not be mated out by the court.
8. If the taxpayer is getting the benefit of the loopholes in the laws due to the legislature’s fault, It is the legislature being held liable for this, not the assessee. 
9. If literal interpretation of a taxing statute leads to a result that was not intended by the legislature, in this case, only the court modifies the language of the taxing statutes. 
10. Equity and taxation are strangers. But in case  interpretation of taxing statutes leads to equity rather than injustice, the interpretation that leads to equity should be preferred. 
11. In the fiscal arena, it is not the function of the court to pressure the Parliament to go further and do more.
12. Where words of taxing statutes are to be interpreted and that are not expressly defined in the taxing statutes, they must not be interpreted based on the definitions provided in other statutes that do not deal with a cognate subject. In such scenarios, commercial interpretation should be applied. The meaning of undefined words in taxing statutes should be curved out from its role in business operations. Such words should be interpreted as per the trade understanding, commercial and technical practice, and usage of such words. 

The Court observed that the use of the word plant and machinery at one place and plant or machinery at another place connotes two different meanings. The use of words ‘plant or machinery’ in Section 17 (5)(d) has a different meaning than the words ‘plant and machinery’ used in explanation Section 17 of the CGST Act, 2017.

Hence, the plain meaning of interpretation should be applied here, and the word plant will have to be interpreted by taking recourse to ‘functionality tests’. The court further said whether a building qualifies as a plant or not depends on a case to case basis. 

In this case, therefore the Supreme Court, remanded the writ petition to the Orissa High Court to decide whether in the fact of this case, the shopping mall is a plant in terms of clause (d) of subsection (5) of Section 17 of the CGST Act, 2017.

Interpretation of international taxing statutes 

Until now this article has addressed interpretation of domestic taxing statutes only but not international taxing statutes. Without dealing with the international perspective of interpretation of taxing statutes this article will not be exhaustive or. Therefore, this article in this subheading, in nutshell, deals with how international taxing statutes are interpreted.

With globalisation  as business increases amongst countries various international tax statutes have come up into existence. Several countries involved in cross border investment in other countries. To avoid the double taxation on the profit generated from the investment the countries enter into bilateral tax treaties such as double taxation avoidance agreements (Hereinafter DTAAs). India has been entered into DTAAs with more than 90 countries. 

International tax treaties are subject to the interpretation in accordance with international law principles. There is a treaty known as the Vienna convention. It provides rules for the interpretation of international laws. Thus, interpretation of international tax statutes govern by the principles of the Vienna convention. 

India is not a signatory member of this convention but still follows its rules while interpreting the DTAA provisions. The courts in India while interpreting the tax treaties follow the rules of interpretation provided in the Vienna convention. It is known as the ‘grund norm’ for interpretation of treaties.

After discussing the various aspects of interpretation of taxing statutes this article in the below-mentioned para provides recommendations.

Recommendations

At the international level, there is an interpretation Act that applies while interpreting the laws. There is a need for a similar kind of Act in the Indian context, too. Such a law or Act will provide smooth and efficient implementation of the principles of interpretation in the cases filed before the courts. Such an Act will not only assist courts in interpretation of taxing statutes but will also provide assistance to chartered accountants, lawyers, income tax officers or assessees  to understand the intricacies of tax laws easily, effectively and efficiently.

Codification of interpretation rules or principles will also assist the legislature or lawmaking bodies in framing the tax laws. It will help in finding the loopholes in the present tax law and making corrections in those laws. It will also provide insight on the regulation of tax evasion and tax avoidance.

Conclusion 

As the tax laws are interpreted strictly, the legislature must ensure that words used in the statute are clear and wide enough to cover all subjects that it intends to be taxed. Words and descriptions should be used with proper care and sophistication so as to avoid any ambiguity. 

While making the tax laws, the assistance of such experts should be taken who have expertise in such tax laws. For example, experienced chartered accountants, litigators and officers of the tax department. 

Such experts can understand the intricacies and complexities of tax laws that could help in drafting such laws involving the intricacies and complexities.  Because if the tax laws are drafted with loopholes, the purpose of that law is not fulfilled, and the whole law collapses.

The imposition of tax is a burden on the assessee. It should be interpreted strictly. Interpretation should not be made on the basis of presumptions and assumptions by treating them as to the intention of the legislature. 

No addition or subtraction should be allowed in the case of charging provisions in furtherance of fulfilling the purpose of the act or meeting the intention of the legislature. 

Tax laws should be interpreted in a manner so as to maintain a balance between the interests of both the revenue department and the assessee. 

The Indian judicial system has created diverse rules or principles of interpretation in general statutes and particularly in tax statutes as well. The role of courts is not to apply the tax laws blindly and strictly, but it should check whether the transactions of the assessee amount to evasion of tax, avoidance of tax, or just tax planning. 

If the assessee deliberately makes the complex transactions so as to avoid taxes. His intention is to misuse the taxation system. Here, the courts should adopt reasonable and equitable interpretations in favour of revenue. Through this, courts can set examples for future jurisprudence of interpretation of taxation laws. 

Frequently Asked Questions (FAQs)

What does construction mean in a legal context ?

Construction is the process of using the legal text to draw conclusions that go beyond its plain language to solve inconsistencies.

What are the differences between construction and interpretation?

Interpretation are certain rules or principles followed by the court to interpret the words of laws, whereas construction intends to provide a conclusion to the whole law. There are also certain Latin maxims that are used for interpretation of the laws. There are several rules, principles or maxim of interpretation such as strict rules, liberal rules, literal rules, mischief rule, golden rules, etc. Similarly, there are different rules of construction such as the rule of harmonious construction, beneficial construction, etc.

References

• https://nja.gov.in/Concluded_Programmes/2017-18/SE-3_PPTs/SE-3%20PPT%20Session-2.pdf
• https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://ijtr.nic.in/I/terpretation%2520of%2520taxing%2520statutes.pdf&ved=2ahUKEwjdwZCNkKGIAxV4RmwGHXlADcsQFnoECCQQAQ&usg=AOvVaw1MvCmQE9eOq0Gi3dIM3RvT
• https://blog.ipleaders.in/rules-interpretation-statutes/
• https://www.scribd.com/document/535409727/G-P-Singh-Interpretation-of-Statutes
• https://jaa.assam.gov.in/storage/article_pdf/si1623066954Article-52.pdf
• https://blog.ipleaders.in/retrospective-taxes-the-need-to-get-rid-of-them/