This article is written by Tanmay Mangal, a student of Rajiv Gandhi National University of Law, Patiala, Punjab. This article explains the importance of interpreting a statute and critically analyses the Taxation statute.
Government of India is divided into three branches i.e. Legislature, Executive and Judiciary. It is the function of the legislature to make the laws and that of the executive, to enforce those laws. 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 applicable.
Interpretation means to give meaning to some words which are ambiguous or unclear by looking into the intention of the legislature, purpose which the law fulfils or the mischief it eliminates which existed prior to enactment of that law. It is a common rule that words are to be given their direct and grammatical meaning. But in case there are any ambiguities then the help of interpretation is taken by understanding the context in which such words are used. Such meaning is given which solves the purpose of the law and which seems to be intention of the legislature. Practical applicability of laws is different from drafting & enforcing the law. It is the role of judiciary to interpret the laws made by the legislature. It is the function of Judiciary to apply the law made by the legislature on case to case basis.
The Legislature also has power to delegate its law-making power to the Executive for proper implementation of the laws. Such delegation of power is exercised in form of rules, regulations, circular, clarifications and notifications. In India, such power to issue above subordinate legislation is with Central Board of Indirect Tax and Customs (CBEC) in case of indirect tax and Central Board of Direct Tax (CBDT) in case of direct tax. But all these subordinate legislations are limited to powers given to the subordinate authorities through the principal statute and these subordinate legislations has the same legal and binding authority as if they are part of the parent statute.
Need & Importance of Interpretation
As the social, economic and political conditions of the society keeps on changing, interpretations of the laws also require change. Legislature is not equipped to meet such changing conditions and legislature cannot anticipate every situation which might occurred in real life. Thus, it is Courts which play the role and interpret the laws to adapt as per needs of the society.
Rule of Strict Interpretation
Strict rule of interpretation is one of the principles used to interpret fiscal and penal statutes. According to this rule, plain, clear and direct meaning is given to words which are used in common parlance by the general public to which such law is applicable. There can be no presumption by court with respect to particular meaning. Court cannot give particular meaning to a word which is not clear by making a presumption that particular meaning is the intention of the legislature. Court cannot under the guise of possible or likely intention of the legislature, give meaning to the words which are not clear and where contextual meaning cannot be made out.
Reasons for Applicability of Strict Rule on Taxation Statute
Tax is a forceful extraction of money from the assessee (taxpayer) by the sovereign authority in which the taxpayer is not entitled to any assured benefit. So, taxes place a monetary burden on the taxpayer and thus to some extent it is considered as penalty on the taxpayer which is imposed under the authority of law. Thus, unless the imposition of tax is clearly backed by law, no tax can be imposed.
Taxation statute is a fiscal statute which is enacted on the basis of trial and error method or on experimentation basis. It is not practicable for legislature to anticipate all the possible situations or conditions which may arose after the law is enacted. It is possible that the assessee might use some shortcomings in the law as a loophole and take advantage of it. As tax results in pecuniary burden so the benefit of doubt is given to assessee in case of any contradictions.
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 intendment of the legislature to impose tax unless clearly and specifically provided. Thus, it is the legislature or subordinate authority to come forward and bring 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 than in that case that such interpretation is given, 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.
Rule of Interpretation applicable to Taxation Statute
Taxation statute is a fiscal statute which imposes the pecuniary burden on the taxpayer. So such statutes are construed strictly. Plain, clear and direct grammatical meaning is given. Where there are two possible outcomes then that interpretation is given which is in favour of assessee.
Any taxation statute involves three stages firstly, the subject on which tax is levied or imposed, secondly, the assessment of the liability of assessee and lastly, the recovery once the assessment is made. 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 form of subjects which the legislature wants to cover under the law. Charging provisions are to be interpreted strictly as it results in financial burden. There cannot be any ambiguity and meaning which is clear, obvious, 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 proof then no tax can be imposed by extending the meaning.
Principal of equity has no role to play in case of taxation law. It is because there is lot of deeming legal fiction involved in tax laws. Thus, whatever is written must be strictly followed without considering its justness. If the words are clear, then court has to give that meaning irrespective of consequences it resulted into or in other words even if such construction is unequitable, then also Court is bound due to legal fiction. Court cannot meet the deficiency by extending the provisions of the statute. It is duty of the legislature to rectify it through amendments.
In a Taxation statute, if a word has a clear meaning, then in that case, the court is bound to follow the clear meaning even if such meaning results in absurd results. It is in legislature’s domain to rectify such absurdity. In case of taxation statutes, Courts cannot extend the scope of law by giving meanings to word which are unclear or uncertain. This is based on the reason that if legislature had thought of such situation then it would have covered it by using appropriate description and words under the principal act or taxation authority would have issued some notification clarifying the same.
The case of State of Uttar Pradesh v. Kores India Ltd. (AIR 1977 SC 132) is relevant. In this case, the issue was pertaining to inclusion of carbon paper in the definition of word “paper”. It was held by the Hon’ble Supreme Court that in common parlance word paper is one which is used for writing, packaging and printing whereas carbon paper is used entirely for different purpose. Moreover, manufacturing process of carbon paper is entirely different and complicated from that of normal paper. So, Court held carbon paper will not be included in normal paper so as to make it subject to taxation. It was held that meaning of paper is quiet 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 cannot be included in common parlance. It is only when specifically provided by statute then only it becomes subject to tax.
The words used in the taxation law should be given meaning which is understood by general public in daily routine and one which is popular. Such meaning should be given to words which people to whom law is applicable are familiar with.
The second and third stage involved in any tax laws are assessment of the liability and recovery of dues respectively. These provisions are machinery provisions which provides for technicalities and procedure 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 case of contradiction whereby two meaning are coming out then one which is reasonable, which will assist in fulfilling the intention of the legislature and solving the purpose for which law was enacted is preferred. They are to be interpreted in such a way so as to enforce and apply charging provisions smoothly.
In case of exemptions, strict rule does not apply rather liberal rule is 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 cannot be denied on the basis of assumed or likely intention of the authority making the law.
The doctrine of Substantial Compliance is based on the principle of equity which is also applicable to taxation laws. According to this doctrine, if the conditions for claiming exemptions are met substantially or only a few minor procedural requirements are not fulfilled which does not hamper the purpose for which such law was made then in that case substantial compliance can also entitles one to claim exemptions. Applicability of such doctrine is based on case to case basis as it results are different depending on facts of each case, extent of compliance, whether partial compliance fulfils the essence, object and purpose of the law.
As the tax laws are interpreted strictly, legislature must ensure that words used in the statute are clear and wide enough to cover all subjects which it intend to be taxed. Words and descriptions should be used with proper care and sophistication so as to avoid any ambiguity. While making the laws assistance of such experts should be taken who deal with such laws on daily basis as they are the ones who understand the intricacies and could help in drafting the law involving the intricacies and complexities. Experienced Chartered Accountants, Litigators and officers of tax department should be consulted and their experience should be considered while enacting the laws. If the tax laws are drafted with loopholes, then the purpose of that law is not fulfilled and the whole law collapses.
Imposition of tax is burden on the assessee so it should be interpreted strictly and no such construction should be made on the basis of presumptions and assumptions as to intention of the legislature. No addition or subtraction should be allowed in case of charging provisions in furtherance of fulfilling the purpose of the act or to meet intention of the legislature. Tax laws should be interpreted in manner so to maintain a balance between interest of both revenue department and the assessee.
Also, the role of Courts is not to apply the tax laws blindly and strictly but it should check whether the transactions of assessee amounts to evasion of tax, avoidance of tax or its just tax planning. If assessee deliberately makes the complex transactions so as to avoid taxes and thereby intends to game the system, then the Courts should adopt for reasonable and equitable construction in favour of revenue and to set examples for future jurisprudence of interpretation of taxation laws.
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