This article analyses the applicability of ‘Doctrine of Noscitur a Sociis’ as a rule of construction in the interpretation of Income tax statute in India. This has been explained with the help of provisions contained under clause (e), sub section 22 of section 2 of the Indian Income Tax Act, 1961 .i.e. Deemed dividend.
First let us understand the term ‘Noscitur a Sociis’, it is related to legal doctrine and statutory interpretation of laws. It is used in the construction of contractual documents of the law. In Latin the term ‘Noscitur a Sociis’ means ‘the meaning of a word may be known from accompanying words’. It is also used for interpreting questionable words in statutes. When a word is ambiguous, its meaning may be determined by reference to the rest of the statute. It is one of the rules of the language used by the courts that helps to interpret legislation. For the case with “noscitur a sociis” the questionable meaning of a word or doubtful words can be derived from its association with other words within the context of the phrase. This indicates that words in a list which is within a statute have meanings that are related to each other.
This rule is explained in the Maxwell on the interpretation of statutes in the 12th edition in following words – When two or more words susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. The words take their color from and are quantified by each other, the meaning of the general words being restricted to a sense analogous to that of the less general. This doctrine needs a word or phrase or even a whole provision that stands alone has a clear meaning, will be given quite a different meaning while viewed in the light of its context.
Now, in order to analyze the applicability of ‘Doctrine of Noscitur a Sociis’ in direct taxation laws, let us understand this with the help of interpreting the statutory provisions contained under Section 2(22)(e) of the Income Tax Act, 1961, which is provided as under;
Dividend includes any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
In above mentioned provision, the word ‘any payment’ by a company, by the way of advance or loans, has to be interpreted. As decided in ACIT, New Delhi vs Siddharth Gupta, New Delhi, (ITAT Delhi) on 30 May, 2017 the word ‘any payment’ used in the aforesaid provision is not defined anywhere in the Income Tax Act, 1961. Therefore, its ordinary or commercial meaning is to taken. While Cambridge dictionary, defines payment as ‘any amount of money paid’ or ‘reward’, the Oxford dictionary defines it as ‘the action or process of paying someone or something or being paid’. Thus, in the ordinary sense the word payment means a payment or reward or benefit in cash in consideration for some goods or service or favors.
The attribute of a loan is that it is a positive act of lending money coupled with the acceptance by the other side of the money as loan and carries interest and there is an obligation of repayment. The term ‘advance’ may or may not include lending. The word ‘advance’ if not found in the company or in conjunction with the word, loan, may or may not include the obligation of repayment. If it does, then it would be a loan. Therefore, both these words are used to mean different things. The principle of statutory interpretation by which a generic word receives a restricted interpretation by reason of its company is well established. In such circumstances, one can legitimately draw on the doctrine of Noscitur a Sociis is a rule of construction.
When one looks at the aforesaid provision, it is clear that any payment made by a company by the way of ‘advance’ or ‘loan’ has to be understood in the context of the object with which the said provision is introduced. Though the legislature has introduced ‘advance’ as well as ‘loan’ which are two different words, the meaning of each of those words has to be understood in the context in which they are used. Each word takes its color from the other. The meaning of the word ‘advance’ is to be understood by the meaning of the word ‘loan’ which is used immediately thereafter. Associates words take their meaning from one another under the doctrine of Noscitur a Sociis, the philosophy of which is that the meaning of a doubtful word may be ascertained with reference to the meaning of words associated with it.
In the case of ‘loan’, money is advanced generally on payment of interest. In other words, the loan advanced has to be repaid along with the interest. In case of advance also, the element of repayment is there but such a repayment may be with interest or even without interest. Therefore, when the two said words are used in the aforesaid provision with the intent to levy tax, if the intent of such advance or loan is avoidance of DDT u/s 115 O of profits the Act, then such a payment by a company certainly amounts to deemed dividends. But if firstly such a payment, is made not out of the accumulated profit and secondly even if it is made out of accumulated profit, but as a trade advance as a consideration for goods received or for purchase of a capital asset which indirectly would benefit the company advancing the loan, such advance cannot be brought within the ambit of term ‘advance’ used in the aforesaid provisions. The trade advance which is in the nature of money transacted to give effect to the commercial transactions would not fall within the ambit of Sec 2(22)( e ) of the Income Tax Act, 1961.
In context to the above, the “Doctrine of Noscitur a sociis” cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It can also be applied where the meaning of the words of wider meaning import is doubtful; but, where the object of the Legislature in using wider words is clear and free from ambiguity, the rule of construction cannot be applied.
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