Norms of Interpretation of Tax Laws

Introduction

No enactment has been enacted by the Legislature for Interpretation of Statues including on Tax Laws. However, in many an act, definition clause is inserted to mean a ‘word’ or ‘expression’. Explanations and Provisos are inserted to expand or curtail. No codified rules have been made by the rule making authority or the Legislature. Rules are judge made, keeping due regard of the objects, intent and purpose of the enacted provision. Interpretation is the primary function of a court of law. The Court interprets the provision whenever a challenge is thrown before it. Interpretation would not be arbitrary or fanciful but an honest continuous exercise by the Courts.

The Concept of Tax

Tax” has been pithily described as a compulsory exaction of money for public purposes. This is a good description from the point of view of political science and economics. But there are some basic aspects of the process, which need to be mentioned.

The expression “interpretation” and “construction” are generally understood as synonymous even though jurisprudentially both are distinct and different. “Interpretation” means the art of finding out of true sense of the enactment whereas “Construction” means drawing conclusions on the documents based on its language, phraseology clauses, terms and conditions. Rules for Interpretation of “Tax Laws” are to some extent different than the General Principles of Interpretation of Common Law. Rules of Interpretation which govern the tax laws are being dealt in this series of articles.[1]

Retrospective Operation

Laws against this, the principle that an Act must not be given retrospective effect (in the absence of clear words) a principle that finds reflection in section 6, General Clauses Act[2] has been re-affirmed in the context of taxing enactments[3]. When a surcharge on agricultural income tax was enforced from 1st September, 1957, it was held that it could not apply to the assessment year 1957-58, as it was not brought into force from the beginning of that year, i.e., from 1st April, 1957.[4]. Even if a taxing provision has been given retrospective effect, it will be subject to strict construction.[5] Accordingly, Suca legislation will not be so construed as to authorise the income tax authorities to commence proceedings which, before the new Act came into force, had, by the expiry of the period then provided, already become barred.[6]

Enactment’s taxing Commodities

Another rule of interpretation of taxing statutes is the rule that in statutes imposing a tax on commodities, the words used should be used in the way in which they are under stood in the ordinary course of business.[7] The rule is strikingly illustrated in a recent judgment of the Supreme Court under the U.P. Sales Tax Act, 1948, which held that ammonia paper and ferro paper do not fall within “paper other than handmade paper.[8]

Chapter 1 Interpretation of Tax Laws: Sources of Rules

Sources of Rules

The sources of rules of interpretation of taxing statutes are, broadly speaking the same as the sources of rules of statutory interpretation in general. These may be (a) statutory or (b) non-statutory.

1. Statutory sources of rules of interpretation are to be found in –

i. The General Clauses Act, 1897; and

ii. Definitions provisions for interpretation provided in the particular Act.

2. Non-statutory sources of statutory interpretation are represented by the great mass of case law that has, in the course of time, given birth to several principles.

Non-Statutory Sources

One should not, however, forget that the non-statutory rules of interpretation – the “common law” of interpretation does not consist of rigid mathematical formula. Its “rules” are merely guidelines which may operate to start with, but which may have to be modified or even substantially reversed in a concrete case, where the enactment to be construed and its surroundings indicate a different intention. The reason is that the non-statutory rules of interpretation have been evolved principally on a presumption of legislative intent. These presumptions themselves are based on some principle of justice. Unfortunately, what happens is that the original rationale of justice that gave rise to a presumption is forgotten in the course of time. What was initially intended to be a mere pointer hardens into a categorical rule. It acquires a sanctity and rigidity of its own, causing injustice and hardship in concrete cases. In this manner, what had its genesis in justice results ultimately in injustice. TO avoid such anomalies, courts must constantly be on the guard against treating non-statutory guidelines of statutory interpretation as irrevocable mandates from the judiciary of the past to the judiciary of the present.

Constitutional Considerations

Of course, where constitutional considerations are at issue, the position is different. For example, the Indian Constitution, in article 265, provides that no tax shall be levied or collected except by authority of law. This provision is supreme. If no authority of law can be established, no tax can be levied or collected. The expression law here, of course, means a valid law.

Administrative Instructions

To students of statute law, tax law presents some peculiar features. In the first place, the network of statutes on taxation is vast, prolific, complex and technical. Secondly, statutes statutory rules proper is supplemented by a host of non-statutory instructions in this sphere, known variously as departmental “circulars” Board “directions”, administrative instructions and so on. These seek to interpret the statutory material.[9] Barring cases where a specific power is given to some Board or other authority, the exact status of these instructions has always remained a matter of ambiguity. The utmost that can be said is that while departmental instructions may be taken note of by the court, they cannot have a binding character in law. They are prepared in the halls of bureaucracy, without public discussion, without notice to affected interests and (though infrequently) without independent legal consultation.[10] In any case, they cannot override the strict letter of the law to the prejudice of the citizen.

Doctrine of Precedent

Non-statutory rules of interpretation whether in the sphere of taxation or any other sphere are derived from case law. Indian case law (for this purpose) embraces not only decisions the higher judiciary, but also those of tribunals created under special enactments. At the Central level, such tribunals to give some examples have been created for Income tax, customs, excise and gold control and forfeiture of smuggled property. At the State level, they have been created for sales tax, in some States – to give only one important example. Decisions of most of these tribunals are now being reported regularly in official/unofficial series, and themselves constitute a source of law.[11]

Administrative instructions cannot override statutory rules.[12] One reason for this position is that assessing authorities are quasi-judicial authorities and must act only on relevant material and for relevant reasons.[13]

Chapter – 2 Constitutional Aspects of Taxation

Meaning of Levy and Collection

Article 265 of the Constitution of India lays down that no tax shall be levied or collected except by authority of law. According to the Madras ruling in Rayalsema Constructions v. Dy. Commercial Tax Officer, Madras[14], “the words ‘levy and collection’ are used in Article 265…. in a comprehensive manner and they are intended to include and envelope the entire process of taxation commencing from the taxing statutes to the taking away of the money from the pocket of the citizen. Article 265 enjoins that every stage in this entire process must be authorised by law”. Hence the recovery of the outstanding tax should equally be authorised by law.[15]

Constitutional Mandate

Article 265 of the Indian Constitution provides that no tax shall be levied or collected except by authority of law. This postulates three requirements:

1. There must be a law authorising the tax.[16]

2. It must be a valid law.[17]

3. The levy or collection of the tax must be in conformity with the authority conferred by the law.[18]

It is well established that law does not include an executive order.[19] In fact, the very object of provisions like article 265 is to guarantee that there shall be no taxation without representation. Hence, “law” means enacted law in this context.[20]

Constitutional Limitations

Limitations on the taxing power, as arising under the Constitution, can be classified into the following four categories:

1. Limitations arising from fundamental rights (Part 3 of the Constitution).

2. Limitations arising from constitutional provisions relating to freedom of trade, commerce or intercourse (articles 301 to 307, Part 13).

3. Limitations relating to inter-Governmental immunities.

4. Limitations relating to specific kinds of taxes.

Fundamental Rights

Under category (1) above, one may note that. a taxing law must not infringe fundamental rights.[21] Of particular relevance in this context are the following propositions. A taxing statute which violates equality by undue discrimination is void under article 14.[22]

1. A taxing statute which imposes an unreasonable restriction (or even a reasonable restriction but not for the specified purpose) on the six freedoms guaranteed by article 19 of the Constitution, would be void.[23] These are the right –

i. to freedom of speech and expression;

ii. to assemble peaceably and without arms;

iii. to form associations or unions.

iv. to move freely throughout the territory of India;

v. to reside and settle in any part of the territory of India; and

vi. to practise any profession or to carry on any occupation, trade or business.

Fundamental Rights how Violated

It should be mentioned that fundamental rights may, in a conceivable case, be infringed by a taxing statute. Thus, a tax imposed upon the press, deliberately calculated to limit the circulation of information, would be unconstitutional are permissible.[24] At the same time taxes which have a direct & immediate impact by restricting trade or commerce may offend the provisions of Art. 301, which provides as under: –

“Subject to the other provisions of this part, trade, commerce and intercourse throughout the territory of India shall be free”

State of Kerala v. Abdul Kadir, (1969) 2 SCC. 363. It follows that a tax which is excessive and prohibitive, thus impeding the free flow of trade and commerce, would be unconstitutional.[25] In any case, no State can levy a tax which is discriminatory between State and State. Article 304(a) of the Constitution provides that the Legislature of a State may by law impose, on goods imported from other States or the Union territories, any tax to which similar goods manufactured or produced in the State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced. Thus, it would be a straightaway violation of this provision if a State, while taxing goods produced in another State, does not tax similar goods produced in the State.[26] If goods of the particular type are not at all produced within the State, and the State seeks to impose tax on goods (e.g., foreign liquor, brought from outside the State), the law would be definitely void.[27]

Inter-Governmental Immunities

With reference to category (3) above, it is pr per to mention that a State legislature or any authority within the State cannot tax the property of the Union (article 285) and the Union cannot tax the property and income of a State (article 289).

Specific Taxes

Finally, as regards category (4) above, the Constitution imposes prohibitions or restrictions on imposition of certain taxes. These are contained in articles 276, 286 and 287 of the Constitution.

Chapter – 3 Rules & Doctrines: Related to Tax

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.

Rules of Consistency, Resjudicata & Estoppel

The principle of consistency is a principle of equity and would not override the clear provisions of law. It is well accepted that each assessment year is separate and if a particular aspect was not objected to in one year, it would not fetter the Assessing Officer from correcting the same in a subsequent year as the principles of res judicata are not applicable to tax proceedings. In Radhasomi Satsang the Supreme Court held that (page 329 of 193-ITR): “where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year”. As is apparent from the said decision, the rule of consistency has limited application –where a fundamental aspect permeates through several assessment years; the said aspect has been found as a fact one way or the other; and the parties have not challenged the said finding and allowed the position to sustain over the years. Clearly, the said principle will have no application where the position canvassed militates against an express provision of law as held by Delhi High Court in Honey Enterprises v. C.I.T.[28]

 In Radhasaomi itself, the Supreme Court acknowledged that there is no res judicata, as regards assessment orders, and assessments for one year may not bind the officer for the next year. This is consistent with the view of the Supreme Court that there is no such thing as res judicata in income-tax matters.[29] Similarly, erroneous or mistaken views cannot fetter the authorities into repeating them, by application of a rule such as estoppel, for the reason that being an equitable principle; it has to yield to the mandate of law. A deeper reflection would show that blind adherence to the rule of consistency would lead to anomalous results, for the reason that it would endanger the unequal application of laws, and direct the tax authorities to adopt varied interpretations, to suit individual assessees, subjective to their convenience – a result at once debilitating and destructive of the rule of law. The rule of consistency cannot be of inflexible application.

Res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or precedential value of the earlier pronouncement. Where the facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam.

However, these are fetters only on a co-ordinate Bench, which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior jurisdiction. In tax cases relating to a subsequent year involving the same issues as in the earlier year, the court can differ from the view expressed if the case is distinguishable as per incuriam, as held by the Apex Court in Bharat Sanchar Nigam Ltd. v. Union of India.[30]

Estoppel normally means estopped from re agitating same issue. However, it is settled position in law that there cannot be an estoppel against a statute. There is no provision in the statute which permits a compromise assessment. The above position was indicated by the apex court in Union of India v. Banwari Lal Agarwal.[31]

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 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 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.

Conclusion

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 intends 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.

General principles of interpretation of Law including the Tax Laws are to protect a citizen against the excesses of the Executive, Administration, Corrupt authority, erring individuals and the Legislature. It is an aid to protect and uphold ‘enduring values’ enshrined in the Constitution and Laws enacted by the Parliament/Legislatures. It is to assist, to arrive at the real intention, object and purpose for which Laws are enacted and to make life of each citizen worth living. Let the hopes of the framers of the Constitution and the father of Nation, Mahatma Gandhi, inspire all Constitutional functionaries, Judges, Jurists, Members of Tribunals, Advocates, Chartered Accountants and the people of India to preserve their freedom and mould their lives on sound principles of interpretation of Laws. Endeavour should be to deliver justice, which is a divine act.

[1] C.I.T. Bombay v. Mahindra and Mahindra Ltd., (1983) 4 S.C.C. 392.

[2] General Clause Act, S6.

[3] C.I.T. Bombay V. Scindia Steam Navigation Co. Ltd., A.I.R. 1961 S.C. 1633, 1646.

[4] Karimtharuvi Tea Estate Ltd. v. State of Kerala, A.I.R. 1966 S.C. 1385.

[5] C.I.T. v. Onkarmal Meghtaj, A.I.R. 1973 S.C. 2585, 2587.

[6] S.S. Gadgil v. Lal & Co., A.I.R. 1965 S.C. 171, 177, para 13.

[7] Annapoorna Biscuit Manufacturing Co. v. Commissioner of Sales Tax, A.I.R. 1931 S.C. 1656: (1981) 3 S.C.C. 542.

[8] Commissioner of Sales Tax, U.P. v. Macneil and Barry Ltd., Kanpur, A.I.R. 1986 S.C. 386.

[9] N. Saxena v. State of M.P., A.I.R. 1967 S.C. 1264.

[10] Raman S Raman v. State of Madras, A.I.R. 1959 S.C. 694.

[11] Mannalal Jain v. State of Assam, A.I.R. 1962 S.C. 386.

[12] Gestetner Duplicators Private Ltd. v. C.I.T. (1979) I.T.R. 1.

[13] Orient Paper Mills Ltd. v. Union of India, A.I.R. 1969 S.C. 48.

[14] Rayalsema Constructions v. Dy. Commercial Tax Officer, Madras (1959) 10 S.T.C. 345 (Mad.).

[15] State of Kerala v. Kutty, A.I.R. 1969 S.C. 378.

[16] Chholabhai v. Union of India, A.I.R. 1952 Nag. 139, 144.

[17] Poona Municipality v. Duttatraya, A.I.R. 1965 S.C. 555.

[18] State of Mysore v. Cawasji, (1970) 3 SCC 710, 715.

[19] Bimal v. State of M.P. A.I.R. 1971 S.C. 517, 520.

[20] Ram Krishna v. State of Bihar, A.I.R. 1963 S.C. 166.

[21] Ganga Sugar Corporation v. State of U.P., A.I.R. 1980 S.C. 286, paragraphs 42-46.

[22] Kunno that v. State of Kerala, A.I.R. 1961 S.C. 552.

[23] N.M.C.S. Mills v. Municipal Corporation, (1967) 2 S.C.R. 679, 693.

[24] Express Newspapers v. Union of India, A.I.R. 1958 S.C. 578.

[25] Kalyani Stores v. State, (1966) 1 S.C.R. 865, 867, 874.

[26] State of Rajasthan v. Mangi Lal, (1969) 2 S.C.C. 710.

[27] Kalyani Stores v. State of Orissa, I.R. 1966 S.C. 1686, 1691.

[28] Delhi High Court in Honey Enterprises v. C.I.T. (2016) 381-ITR-258 at 278.

[29] Raja Bahadur Visheshwara Singh v. CIT, AIR 1961 SC 1062.

[30] Bharat Sanchar Nigam Ltd. v. Union of India (2006) 282-ITR-273 (SC) at 276-277.

[31] Union of India v. Banwari Lal Agarwal (1999) 238-ITR-461 (S.C.).

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The article is written by Rishiraj Singh Bhati and Swati Dehairya, students of 4th year B.A.LL.B(Hons.) at Dharmashastra National Law University, Jabalpur.