Evolution of Strict Tax Interpretation: From Literalism to Purpose in Sterling Holiday Decision

From Literalism to Purpose: The Evolution of Strict Interpretation in Tax Law and the Sterling Holiday Decision

ABSTRACT

The ITAT Mumbai’s ruling in Sterling Holiday Resorts Limited v. DCIT (ITA No. 843/MUM/2024, pronounced 25 June 2026) denied Rs. 2,40,15,01,124 in tax losses and unabsorbed depreciation on the ground that a court-approved three-party demerger scheme did not satisfy the literal requirements of Sections 2(19AA)(iv) and 2(41A) of the Income-tax Act, 1961. The Tribunal invoked the doctrine of strict interpretation as reaffirmed by the Constitution Bench in Commissioner of Customs v. Dilip Kumar & Co. (2018) and the Supreme Court’s December 2025 ruling in DCIT v. American Express Bank. This article examines a question deeper than the case itself: what does ‘strict interpretation’ truly mean in modern tax jurisprudence? Drawing upon the historical lineage from Partington v. Attorney General (1869) through the Canadian transition documented by Gwyneth McGregor in ‘Literal or Liberal?’ (Canadian Bar Review, 1954), through India’s own evolution from A.V. Fernandez to Bajaj Tempo to Dilip Kumar, this article argues that strict interpretation has never been synonymous with mechanical literalism. The Tribunal’s failure to engage with the anti-surplusage canon — which is itself a rule of literal, not purposive, construction — represents the most significant analytical gap in the order. The article further argues that the parenthetical phrase ‘(including a wholly owned subsidiary thereof)’ in Section 2(41A), read under the anti-redundancy principle, may yield a construction favourable to structured group demergers, and that this question constitutes a genuine substantial question of law for the Bombay High Court.

PART I — INTRODUCTION: ONE CLAUSE, RS. 240 CRORE

On 25 June 2026, a two-member bench of the Income Tax Appellate Tribunal, Mumbai, pronounced a ruling that will be studied not for any dramatic legal innovation, but for a sobering illustration of a structural tension that has long haunted Indian tax law: the gap between commercial coherence and statutory compliance.

Thomas Cook Group’s reorganisation of its Indian hospitality assets was commercially logical. Sterling Holiday Resorts India Limited (SHRIL) operated resorts, time-share properties, and hospitality businesses. Its assets were earmarked for integration with Thomas Cook (India) Limited’s (TCIL’s) broader travel portfolio. A court-sanctioned three-party scheme of arrangement was designed: SHRIL’s resort undertaking (Undertaking I) would be demerged into TCISL, a wholly owned subsidiary (WOS) of TCIL; simultaneously, SHRIL’s residual business (Undertaking II) would be amalgamated into TCIL. TCIL would issue shares to SHRIL’s shareholders as consideration for the entire scheme. The Bombay High Court approved the arrangement. Employees were transferred. Businesses continued. Shareholders received consideration.

Yet, one statutory condition in Section 2(19AA)(iv) — which requires the ‘resulting company’ to issue shares to shareholders of the demerged company — determined the fate of Rs. 2,40,15,01,124 in business losses and unabsorbed depreciation. TCISL, the entity receiving the undertaking, had issued no shares. TCIL, the holding company, had issued them. The Tribunal held that this split — undertaking received by one entity, consideration issued by another — violated the literal text of Sections 2(19AA) and 2(41A) as strictly interpreted. The loss carry-forward under Section 72A(4) was denied.

The judgment raises a question more significant than its outcome: What does ‘strict interpretation’ actually require in modern tax jurisprudence? Has the Supreme Court, through Dilip Kumar and American Express Bank, authorised courts to suppress the anti-surplusage canon — which is itself a canon of literal construction — in the name of strictness? And has the Tribunal in Sterling Holiday correctly applied the interpretive framework it claimed to follow?

These are not merely academic questions. Their answers may reshape the future of corporate restructuring, tax incentive design, and statutory interpretation in India.

PART II — THE BIRTH AND PURPOSE OF STRICT INTERPRETATION

2.1  Partington and Cape Brandy: The Classical Formulation

The doctrine that taxing statutes must be strictly construed is one of the oldest principles in tax jurisprudence. Its most cited formulation appears in the 1869 judgment of Lord Cairns in Partington v. Attorney General, where His Lordship declared that if a person sought to be taxed comes within the letter of the law he must be taxed however great the hardship may appear to be, and conversely, if the Crown cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. Lord Cairns added that equitable construction is not admissible in a taxing statute where the court can simply adhere to the words of the statute.

Rowlatt J. sharpened this formulation in Cape Brandy Syndicate v. CIR (1921), holding that in a taxing statute there is no room for any intendment, there is no equity about a tax, there is no presumption about a tax, you read nothing in, you imply nothing. This dictum — pithy and memorable — became the touchstone of classical tax interpretation across the common law world.

2.2  Why This Rule Emerged: The Historical Context

Gwyneth McGregor, writing in the Canadian Bar Review (1954), explains that the strict construction rule developed because early taxing statutes were purely financial enactments — revenue-collecting media with no social or economic purpose, comprising few provisions (the first Canadian Income War Tax Act of 1917 had a mere twenty-four sections). They were not designed to put right any inadequacy in the social or economic structure. The correct interpretation of such simple statutes was therefore not a matter of consuming importance, and courts insisted upon precise statutory language as protection against arbitrary impositions.

In India, early judicial thinking followed the same lineage. The Supreme Court in A.V. Fernandez v. State of Kerala (1957) confirmed that charging provisions must be strictly construed and that nothing is to be read in or implied. The rule that there can be no taxation except by clear legislative words became axiomatic in Indian jurisprudence.

2.3  The Critical Insight: Strictness Is Not Synonymous With Literalism

McGregor identifies a critical insight that becomes central to this article’s argument. As tax legislation grew in complexity — moving from pure revenue collection to instruments of social policy, industrial incentives, and economic direction — the equation of ‘strict’ with ‘literal’ began to break down. She observes:

‘Up to this time, the word “strict” had been felt to be almost synonymous with “literal”; but now it begins to be felt that it is not necessarily so in the matter of interpretation. Strictness, in the sense of ensuring that the provisions of the act are exactly applied, is the essence of good interpretation; but literalness may be the reverse of good interpretation if it goes counter to the real intention of those provisions.’ — McGregor, ‘Literal or Liberal?’ (1954) 32 Canadian Bar Review 281.

This distinction — between strictness (fidelity to statutory language and design) and literalism (mechanical grammatical reading) — is the jurisprudential key that unlocks the Sterling Holiday puzzle. The Tribunal in Sterling Holiday applied literalism when it claimed to be applying strictness. Whether these are the same thing is the question the Bombay High Court must confront.

PART III — THE RULES OF STATUTORY INTERPRETATION

3.1  The Classical Triad

Three classical rules of statutory interpretation are recognised in common law jurisdictions. The literal rule gives words their plain grammatical meaning, even if the result is undesirable. The golden rule modifies the literal rule to avoid absurdity — ordinary meanings are accepted unless interpretation produces an absurdity or contradiction. The mischief rule (Heydon’s case, 1584) requires courts to consider four questions: the state of the law before the Act, the mischief or defect for which the law did not provide, the remedy Parliament resolved to apply, and the true reason of the remedy. The court’s function under this rule is to suppress the mischief and advance the remedy, and the application of this rule has long been treated in tax law with caution.

A fourth approach — the purposive rule — builds upon the mischief rule and directs courts to interpret legislation in light of the purpose the legislature intended to achieve. This is the dominant approach in European statutory interpretation, in DTAA interpretation under the Vienna Convention, and increasingly in international tax law. In Indian domestic tax law, its application has been contested.

3.2  The Common Misconception

As the TaxGuru analysis of interpretation norms observes, courts are bound to give clear and plain meaning to the words without delving into the consequences it can result in when applying strict interpretation to taxing statutes. There can be no presumption by a court with respect to a particular meaning. Yet even within strict interpretation, the plain meaning of words is understood to include the context of the statute. Gerald Sanagan, writing in the Canadian Bar Review in 1940, identified that strict interpretation means: first, that the tax must be imposed in clear and unambiguous language; second, that there must be no equitable construction; and third, that the onus is on the Crown to establish that the subject is within the operation of the tax. Crucially, strict interpretation does NOT mean: ignoring context, treating each word in isolation, rendering statutory words purposeless, or overriding the anti-surplusage canon.

This distinction is fundamental. Strict interpretation is a constraint on how far courts may go in expansive or equitable construction. It is not a licence to produce readings that make statutory words redundant.

PART IV — EVOLUTION OF TAX INTERPRETATION IN INDIA

Phase One — Classical Revenue Statutes (Pre-1961)

The early Indian income tax cases followed the English model. A.V. Fernandez (1957), Ajax Products Ltd. Vs Commissioner of Income Tax, Madras (Madras High Court), [1961] 43 ITR 297 (Mad), decided on 07.03.1960, and their contemporaries established that charging provisions must be strictly construed, that nothing is to be read into them, and that ambiguity benefits the taxpayer. In Tolaram Relumal v. State of Bombay (1954), the Supreme Court extended strict construction to penal provisions. The pattern was clear: fiscal and penal impositions require explicit legislative authority, and courts will not supply by implication what the legislature has omitted to say.

Phase Two — Machinery Provisions: A Different Standard

Even within this classical era, the Supreme Court recognised that machinery provisions — those dealing with the procedure for assessment, computation, and recovery — are to be interpreted functionally and liberally to serve the legislative objective. In Gursahai Saigal v. CIT (1963), the Court held that machinery provisions should be construed to make them effective instruments of the charging provision. This early bifurcation — strict for charging, functional for machinery — established a foundational principle: no single interpretive rule governs the entire taxing statute.

Phase Three — Beneficial and Incentive Provisions

The post-1961 period saw the Income-tax Act transformed from a revenue instrument into a vehicle for social and economic policy. Industrial incentives, export deductions, research and development allowances, accelerated depreciation, and corporate restructuring provisions were added. The Supreme Court responded by developing differentiated interpretive standards.

In Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188, the Court held that a provision in a taxing statute granting incentives for promoting economic growth should be liberally construed and that such provision must be interpreted to advance its object, not to frustrate it. In CIT v. Vegetable Products Ltd. (1973) 88 ITR 192, the Court established that where two constructions are reasonably possible, the one more favourable to the assessee should be adopted. In Mangalore Chemicals & Fertilisers Ltd. Vs Deputy Commissioner of Commercial Taxes (Karnataka High Court), [1993] 89 STC 265 (Kar), 1992 (4) Kar LJ 760, decided on 20.11.1992, the Court applied purposive construction to beneficial provisions.

These cases created a distinct tier in the interpretive hierarchy: beneficial, incentive, and relief provisions are not governed by the same strict literalism applicable to charging provisions.

Phase Four — The Constitution Bench: Commissioner of Customs (Import), Mumbai Vs M/s. Dilip Kumar and Company & Ors. (Supreme Court of India), Civil Appeal No. 3327 of 2007, decided on 30.07.2018

In Commissioner of Customs v. Dilip Kumar & Co., a nine-judge Constitution Bench of the Supreme Court overruled a line of cases that had applied the beneficial-interpretation principle to exemption notifications. The Court held that where an exemption notification is ambiguous, the ambiguity must be resolved against the claimant and in favour of the Revenue. The Court emphasised that charging provisions and exemption provisions must both be strictly construed, and that contextual or purposive interpretation is impermissible.

Dilip Kumar is the most important tax interpretation judgment in the post-liberalisation era. Its doctrinal significance cannot be overstated. However, three aspects of the decision deserve careful attention when considering its application to the Sterling Holiday facts.

First, Dilip Kumar was decided in the context of a customs exemption notification — a subordinate legislative instrument — not a statutory definition embedded in the primary Act itself. Second, the Court expressly acknowledged that the interpretive approach depends upon the nature of the provision, and its table of authorities distinguished charging provisions, exemption provisions, and beneficial provisions. Third, and most critically, the Court did not address the anti-surplusage canon. Dilip Kumar prohibits purposive construction and equitable extension. It does not prohibit grammatical coherence in reading a statute as a whole.

Phase Five — Director of Income Tax (IT)-I, Mumbai Vs M/s. American Express Bank Ltd. (Supreme Court of India), Civil Appeal No. 8291 of 2015 with Civil Appeal No. 4451 of 2016, decided on 15.12.2025

In DCIT v. American Express Bank / Oman International Bank, Supreme Court reiterated the Dilip Kumar principle in the context of Section 44C of the Income-tax Act, concerning the deduction of head office expenditure attributable to Indian operations. The Court held that taxing statutes must be strictly interpreted and that courts cannot add words to advance supposed legislative intent.

The Tribunal in Sterling Holiday imported this ruling into the demerger context, holding that the plain text of Sections 2(19AA) and 2(41A) admits of no liberal construction. This application of American Express Bank — a case about Section 44C computation — to a definitional question about restructuring provisions is itself a jurisprudential move that deserves scrutiny.

PART V — WHAT STRICT INTERPRETATION ACTUALLY REQUIRES

5.1  The Core Principles

Distilled from the lineage traced above, strict interpretation in tax law means five things and not a syllable more.

First, no taxation by implication. Tax liability must arise from clear statutory language; it cannot be imported by inference, analogy, or equitable reasoning. Second, no exemption by implication. Relief provisions must be clearly expressed; they cannot be expanded by supposing legislative intent. Third, every statutory word must be respected. The legislature’s choice of language must be given effect; courts cannot strike out or ignore words. Fourth, no rewriting of legislation. Courts cannot supply omissions, cure drafting errors, or substitute what the legislature ought to have said for what it actually said. Fifth — and this is the principle that the Sterling Holiday Tribunal failed to apply — no interpretation that renders statutory language redundant is permissible within the literal framework.

5.2  The Anti-Surplusage Canon: A Rule of Literal Construction

The anti-surplusage or anti-redundancy canon holds that every word in a statute must be given independent operative content. An interpretation that renders a word, phrase, or parenthetical meaningless is disfavoured — not because courts are pursuing legislative purpose, but because the legislature is presumed to have chosen its words carefully and with intent.

The canon is a fixture of strict statutory interpretation. The Supreme Court applied it in CIT v. Hindustan Bulk Carriers (2003) 3 SCC 57, holding that statutes must be read so as to avoid any part of them becoming superfluous. This is not a purposive principle — it is a principle of grammatical coherence that operates entirely within the framework of textual fidelity.

The Tribunal in Sterling Holiday applied Dilip Kumar to suppress the assessee’s anti-surplusage argument. This was an error of legal analysis. Dilip Kumar prohibits purposive extension of statutory language. It does not authorise courts to adopt readings that make parliamentary language purposeless. The anti-surplusage canon, properly understood, is a constraint within strict interpretation — not an escape from it.

5.3  The Table of Interpretive Approaches

Table 1: Interpretive Approaches by Provision Type in Indian Tax Law

PART VI — STERLING HOLIDAY RESORTS: THE CASE

6.1  Facts and Structure

Thomas Cook (India) Limited (TCIL) was a listed company and the sole shareholder of Thomas Cook Insurance Services (India) Limited (TCISL). SHRIL was an independent listed company. A three-party scheme of arrangement was entered into among SHRIL, TCIL, and TCISL. Undertaking I (the resort and time-share business) was demerged from SHRIL and transferred to TCISL. Undertaking II (the holiday activity business) was amalgamated into TCIL. TCIL issued shares to SHRIL’s shareholders as consideration for the entire scheme. TCISL issued no shares. SHRIL ceased to exist.

TCISL filed a return for A.Y. 2015-16 claiming carry-forward of SHRIL’s accumulated business losses of Rs. 1,21,66,74,982 and unabsorbed depreciation of Rs. 1,13,29,15,829, along with set-off of Rs. 5,19,10,313 of unabsorbed depreciation — an aggregate claim of Rs. 2,40,15,01,124 under Section 72A(4).

6.2  The Statutory Framework

Section 2(19AA) defines ‘demerger’ as the transfer of one or more undertakings by a demerged company to any resulting company pursuant to a court-sanctioned scheme of arrangement, subject to cumulative conditions including: (i) all properties and liabilities of the undertaking must be transferred at book value; (ii) the resulting company must issue its shares to shareholders of the demerged company in consideration of the demerger on a proportionate basis; (iii) the transfer must be on a going-concern basis; and (iv) additional conditions notified by CBDT under Section 72A(5) must be met.

Section 2(41A) defines ‘resulting company’ as: ‘one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.’

Section 72A(4) provides that accumulated losses and unabsorbed depreciation of the demerged company, directly relatable to the transferred undertaking, shall be carried forward and set off in the hands of the resulting company. It activates only upon satisfaction of Section 2(19AA).

6.3  The Tribunal’s Reasoning

The Tribunal dismissed Ground No. 4 in seven analytical stages. It correctly identified the core issue, then reproduced the statutory text, then rejected the assessee’s reliance on Vegetable Products and Bajaj Tempo on the ground that those cases involved ambiguous provisions whereas Sections 2(19AA) and 2(41A) were unambiguous. It anchored its interpretive methodology in Dilip Kumar and American Express Bank. It held that TCIL and TCISL are separate legal entities and that the holding company cannot discharge the subsidiary’s statutory obligations. It noted the absence of any High Court or Supreme Court precedent supporting the assessee’s construction. And it confirmed the disallowance.

The Tribunal’s conclusion is legally defensible on a literal reading of Section 2(41A)’s structure. The definition links receipt of undertaking and issuance of shares to ‘the resulting company’ through the conjunction ‘and’, creating what appears to be a conjunctive obligation on a single entity. However, the order is analytically incomplete in at least four significant respects.

PART VII — CRITICAL EVALUATION OF THE TRIBUNAL’S ORDER

7.1  The Redundancy Problem

The assessee’s most powerful argument was textual: if the Revenue’s interpretation is correct, the parenthetical phrase ‘(including a wholly owned subsidiary thereof)’ in Section 2(41A) is rendered surplusage. Under the Revenue’s reading, the opening phrase ‘one or more companies’ already encompasses a wholly owned subsidiary — since a WOS is a company. The parenthetical, on the Revenue’s construction, adds nothing and means nothing.

The Tribunal’s order does not engage with this argument. The order implicitly assumes that the parenthetical merely confirms a WOS’s eligibility to receive the undertaking. But this is precisely what the anti-surplusage canon prohibits: an interpretation that renders legislative language purposeless.

The only reading of the parenthetical that gives it independent operative content is that it addresses a scenario not covered by the opening phrase — namely, that in a demerger scheme, the holding company may receive the undertaking while its WOS issues the consideration shares (or, conversely, the WOS receives the undertaking while the holding company — here TCIL — issues the shares). This is the only scenario that the parenthetical adds to what the opening phrase already covers. The Tribunal’s failure to engage with this analysis represents the most significant analytical gap in the order.

7.2  Dilip Kumar Does Not Override the Anti-Surplusage Canon

The Tribunal applied Dilip Kumar to reject the assessee’s argument. But Dilip Kumar does not authorise courts to ignore statutory words or treat them as meaningless. Indeed, the prohibition in Dilip Kumar is against reading words into a statute — not against reading all words in the statute. The anti-surplusage canon requires courts to give operative content to words that the legislature has chosen to include. Applying the canon in Sterling Holiday is not purposive interpretation — it is a grammatical exercise in reading Section 2(41A) as a coherent textual unit.

As McGregor observed in the Canadian context, and as the Supreme Court has repeatedly confirmed, strict interpretation requires that every statutory word be respected. An interpretation that makes the parenthetical in Section 2(41A) superfluous does not respect every statutory word — it ignores one. That interpretation cannot be strict in any meaningful sense.

7.3  The Structural Asymmetry Between Section 2(19AA) and Section 2(1B)

A compelling textual argument that the Tribunal did not consider is the asymmetry between the demerger definition (Section 2(41A)) and the amalgamation definition (Section 2(1B)). The amalgamation definition contains no parenthetical comparable to ‘(including a wholly owned subsidiary thereof)’. The legislature’s conscious choice to insert this phrase specifically in the demerger definition — and not in the amalgamation definition — suggests that the legislature intended to address a distinct structural feature of demerger schemes: the possibility of a multi-entity arrangement where the holding company and its WOS play differentiated roles.

The Tribunal’s interpretation, which treats the parenthetical as merely confirmatory, undercuts this legislative choice. If the parenthetical adds nothing, the legislature wasted words. Courts are not permitted to assume that the legislature wastes words.

7.4  Consequences Unexplored: Section 47 Capital Gains Exposure

The Tribunal’s order does not address a downstream consequence of considerable magnitude. If the demerger is non-qualifying under Section 2(19AA), the exemptions under Sections 47(vib) and 47(vid) — which protect the demerged company and its shareholders from capital gains tax — would also be unavailable. SHRIL’s transfer of Undertaking I to TCISL would become a taxable transfer under Section 45. SHRIL’s shareholders, who exchanged their shares for TCIL shares, would also face capital gains exposure under Section 45 read with Section 47(vid). The aggregate capital gains exposure from a non-qualifying determination could dwarf the Rs. 2,40,15,01,124 in lost carry-forwards, affecting the shareholders of a listed company.

Courts have recognised that where an interpretation leads to disproportionate or cascading consequences that frustrate the evident purpose of a statutory scheme, those consequences inform the construction of ambiguous provisions. The Tribunal did not address this, nor did either party appear to have argued it vigorously.

7.5  The High Court Sanction Argument

The assessee sought comfort from the Bombay High Court’s sanction of the scheme under Sections 230-232 of the Companies Act, 2013. The Tribunal correctly held that the High Court’s approval does not guarantee tax compliance — the High Court itself expressly reserved the question of Section 2(19AA) compliance for examination by the tax authorities. Commercial court approval under company law and tax-neutral treatment under the Income-tax Act are governed by distinct statutory regimes, and compliance with one does not establish compliance with the other. This aspect of the Tribunal’s reasoning is sound.

PART VIII — COMPARATIVE PERSPECTIVE

8.1  The Canadian Experience

McGregor’s survey of Canadian income tax interpretation identifies a developmental arc remarkably similar to India’s. In the classical period, courts applied strict literalism. As taxation became more complex and socially purposive, McGregor observed the emergence of a subtler understanding: that Heydon’s rule (the mischief rule) was sometimes invoked not in place of strict interpretation but in order to achieve it — to ensure that the actual words of the statute were given their correct meaning in light of the legislative design. The progression she identified was: strict interpretation against the Crown (benefiting taxpayers), then Heydon’s rule against the Crown (still benefiting taxpayers), and finally the possibility of Heydon’s rule against the taxpayer — a development she found intriguing and presented as an open question for future evolution.

The Canadian experience illustrates that the core principle — no tax without clear words — has remained constant. What has evolved is the methodology for ascertaining what the clear words mean. Context, structural design, and internal grammatical coherence have all become legitimate tools of strict interpretation, without compromising the fundamental prohibition on implication and equitable extension.

8.2  The United Kingdom

English tax jurisprudence has moved decisively toward purposive-textual interpretation under the influence of the Ramsay principle and subsequent case law. The House of Lords in Barclays Mercantile Business Finance Ltd. v. Mawson (2004) confirmed that the correct approach is purposive construction in the light of the statutory context — though still anchored in the statutory text. The equation of strict with literal has been decisively rejected in England; what persists is the requirement that any fiscal burden or relief must arise from clear statutory language.

8.3  India’s Distinctive Challenge

India’s post-Dilip Kumar environment is more constrained than either the Canadian or English positions. The Constitution Bench’s rejection of contextual and purposive interpretation in exemption and tax matters represents a deliberate jurisprudential choice. The practical challenge is that this choice, applied rigidly, suppresses even the anti-surplusage canon — a canon that operates within textual fidelity and not against it. The Sterling Holiday case crystallises this challenge.

PART IX — ISSUES BEFORE THE BOMBAY HIGH COURT

The ITAT’s order presents at minimum four substantial questions of law that are appropriate for High Court examination.

The first question is whether Section 2(41A), when read with Section 2(19AA)(iv), requires that the entity issuing shares to shareholders of the demerged company must be the same entity as the entity receiving the demerged undertaking, or whether — in a court-approved scheme involving a holding company and its wholly owned subsidiary as co-resulting companies — the holding company’s issuance of shares satisfies the statutory condition.

The second question is whether the Tribunal erred in failing to apply the anti-surplusage canon of statutory construction to give independent operative content to the parenthetical ‘(including a wholly owned subsidiary thereof)’ in Section 2(41A), in circumstances where the Revenue’s reading renders the parenthetical entirely purposeless.

The third question is whether the Dilip Kumar principle, which prohibits purposive and contextual interpretation, extends to suppressing the anti-surplusage canon, which is itself a rule of literal construction requiring that every word of a statute be given operative effect.

The fourth question is whether Sections 2(19AA) and 2(41A), which define the conditions for tax-neutral corporate restructuring, are properly characterised as exemption provisions (to which Dilip Kumar applies) or as definitional and incentive provisions (to which different interpretive standards may apply under Bajaj Tempo and related authority).

PART X — IMPLICATIONS FOR CORPORATE RESTRUCTURING PRACTICE

10.1  Immediate Structural Lesson

The most immediate lesson from Sterling Holiday is structural: in every demerger, the entity receiving the demerged undertaking must also be the entity issuing consideration shares to shareholders of the demerged company. The split observed in the Thomas Cook restructuring — undertaking received by the WOS, shares issued by the holding company — will disqualify the transaction from tax-neutral treatment under the current ITAT position, and there is no safe harbour or substantial compliance doctrine that softens this requirement.

10.2  Multi-Tier Group Structures

For holding companies seeking to integrate acquired businesses into a subsidiary, the correct structural sequence is: first, ensure that the WOS (as resulting company) issues consideration shares directly to the target company’s shareholders; then, if group economics require the holding company to ultimately consolidate ownership, achieve this through a subsequent intra-group transaction (a rights issue, a buy-back, or a further reorganisation). The initial demerger must satisfy Section 2(19AA) on its own terms before any subsequent steps are contemplated.

10.3  Pre-Scheme Tax Opinion: Non-Negotiable

The Sterling Holiday judgment confirms that High Court approval of a scheme of arrangement under the Companies Act does not carry any tax warranty. A comprehensive pre-scheme tax opinion from senior counsel, addressing each condition of Section 2(19AA) as applied to the actual scheme structure, is not merely advisable — it is essential. Tax counsel must be involved at the term-sheet stage, not after the scheme has been filed with the High Court.

10.4  Book Value Transfer and Ind AS Considerations

Section 2(19AA)(ii) requires that properties and liabilities of the demerged undertaking be transferred at book value without upward revaluation immediately before the demerger. In an Ind AS environment, this requires careful coordination between the financial reporting team and tax counsel. Revaluation adjustments under Ind AS 16 (PPE), Ind AS 40 (Investment Property), and Ind AS 38 (Intangibles) must be reviewed before scheme effectiveness to ensure that no value uplift immediately precedes the transfer.

10.5  The NCLT Remedy and Its Limits

For schemes already executed with a non-compliant structure, the NCLT may have jurisdiction under the Companies Act to permit a variation of the scheme. The tax implications of any such variation — including the effective date of the variation and whether it cures the original non-compliance retroactively — require careful analysis. This remains an unexplored avenue in the post-Sterling Holiday landscape.

PART XI — CONCLUSION: THE ENDURING QUESTION

The enduring principle that taxing statutes must be strictly construed has never authorised courts to ignore statutory design or render legislative language redundant. From Partington to Dilip Kumar, the law has evolved from nineteenth-century literalism to a more disciplined textual approach that respects both legislative language and statutory architecture. The real significance of Sterling Holiday Resorts therefore lies not in the denial of Rs. 240 crore of tax losses, but in reopening a fundamental jurisprudential question: what does ‘strict interpretation’ truly require in modern tax law?

McGregor’s 1954 insight — that strictness and literalism are not synonyms, and that literalness may sometimes be the reverse of good interpretation if it goes counter to the real intention of statutory provisions — deserves renewed attention in India’s post-Dilip Kumar environment. The Constitution Bench rightly prohibited purposive extension and equitable interpolation. But the anti-surplusage canon does not extend the statute — it ensures that the statute means what it says, with every word respected.

The Bombay High Court, when it hears this case, will have the opportunity to clarify whether the anti-surplusage canon survives within the strict interpretation framework post-Dilip Kumar, and whether the parenthetical ‘(including a wholly owned subsidiary thereof)’ in Section 2(41A) has independent operative content that supports structured group demerger arrangements. The answer to that question may shape the future of corporate restructuring tax planning in India for years to come.

For now, the practitioner community must proceed on the basis of the Tribunal’s ruling. The entity receiving the demerged undertaking must issue the consideration shares. Commercial coherence is not a substitute for statutory compliance. And, as Sterling Holiday demonstrates with rare starkness, the cost of the gap between the Companies Act’s commercial framework and the Income-tax Act’s technical regime can be measured — with great precision — at Rs. 2,40,15,01,124.

Keywords: Strict Interpretation, Literal Rule, Purposive Construction, Section 2(19AA), Section 2(41A), Demerger, Section 72A, Dilip Kumar, Anti-Surplusage, Indian Tax Jurisprudence

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CA Tirth Shah  |  ADIT (Pursuing)  |  LexTax Advisory | TaxEyes Research Desk  |  Ahmedabad  |  July 2026