INTERPRETATION OF TAXING STATUTES

Taxing Statute:

Fiscal statutes comprise of statutes imposing taxes, fees, duties etc. Taxing statutes comprise of
charging sections and machinery provisions, provisions laying down the procedure to assess the
tax and penalties and method of their collection and may also contain provisions to prevent
pilferage of revenue. A tax is imposed for raising general revenue for state coffers. In contrast to
this, a fee is imposed for rendering services and bears a broad co-relationship with the services
rendered. Sovereignties raise revenue through various fiscal measures.

Taxation is the price we pay for civilization. In olden times the crown or the state in its taxing
capacity was regarded as a public enemy and taxation was considered an impertinent intrusion
into the sacred tights of private property. This is no longer so and it is now increasingly regarded
as a potent fiscal tool of state policy.

The power to levy taxes is derived from the seventh Schedule to the Constitution of India. There
are three lists in this Schedule. Taxes are specifically named and distributed between the Union
and States by various entries in list I and II. Parliament can under its residuary power in Entry 97
of list I levy a tax not mentioned in either of these lists. The power to levy fee is conferred by the
last entry in each list in general terms in respect of any of the matters in the list. A taxing
legislation is therefore controlled by the fundamental rights and other provisions of the
Constitution.

Taxation laws are generally complete codes in themselves. There are three components of a taxing
statute, viz, subject of the tax, person liable to pay the tax and the rate at which the tax is levied.
In case there is any real ambiguity in respect of any of these components which is not removable
by reasonable construction, there would be no tax in law till the defect is removed by the
legislature.

Construction of Taxing Statute:

The principle of construction of fiscal statute does not differ from that of any other kind of law.
Lord Cairns in Partington v Attorney-General concluded that in determining of the liability of a
subject to tax, one must have regard to the strict letter of the law, not merely to the spirit of the
statute or the substance of the law.

In Attorney General v Calton Bon, Lord Russel said—

“I see no reason why any special cannons of construction should be applied to any Act of
parliament, and I know no authority for saying that a taxing statue is to be construed differently
from any other Act”

Statutes imposing taxes or monetary burdens are to be strictly construed. The logic behind this
principle is that imposition of taxes is also a kind of imposition of penalty which can only be
imposed if the language of the statute unequivocally so say. A person cannot be taxed unless the
language of the statute unambiguously imposes the obligation without straining itself.

Intention of the legislature to tax must be gathered from the natural meaning of the words by
which it has expressed itself. Any kind of intendment or language must be explicit. It the person
sought to be taxed comes within the letter of the law he must be taxed, however great the hardship
may appear to the judicial mind to be. However if the State, seeking to recover the tax, cannot
bring the subject within the letter of the law , the subject is free, however apparently within the
spirit of law the case might otherwise appear to be. In other words, if there be admissible, in any
statute, what is called an equitable construction, certainly such a construction is not admissible in
a taxing statute where you simply adhere to the words of the statute.

If the words of a taxing statute are clear, effect must be given to them irrespective of the
consequences. Statutes imposing pecuniary burdens are interpreted strictly in favour of those on
whom the burden is desired to be imposed. Neither can the language of a taxing legislation be so
stretched as to do favour to the State nor can it be so narrowed as to benefit the person sought to
be taxed.

If the language used in a fiscal statute is so wide as to include within it a large number of cases
which perhaps were not intended to be covered, the court has no option but to give effect to it. If
the words in taxing enactment are capable of two reasonable interpretations without doing
violence to the language used, the interpretation which favours the person sought to be taxed has
to be accepted. A taxing enactment does not apply by implication, and logical extensions are
prohibited. Equitable considerations cannot be taken into account while construing a taxing
statute. A taxing statute generally has no retrospective operation unless the language
unequivocally makes it so.

TAXING STATUTES DISTINGUISHED FROM CONTRACT:

There is no authority for construing a taxing statue as if it was a contract. Muthusami Ayyar said
that

“ Taxing Acts may confer general or special benefits, but in construing them we must be guided
by the language both as to what are , or what are not, conditions precedent and as to what
remedies are available for the withholding of the benefit contemplated by Legislature”.

In the case of a contract, the reciprocal relation between rights and duties in the sense that they
either exist together or neither could exist at all, in an implied condition and is a matter of legal
inference, while in the case of a taxing Act, it must be the result of a statutory direction.

NO EQUITABLE CONSIDERATION:

The court must look squarely at the words of the statute and interpret them. It must interpret a
taxing statute in the light of what is clearly expressed. It cannot import provisions in the statue so
as to supple any assumed deficiency. While equitable considerations are of no avail in the
construction of a taxing statutes, a proper balance must be struck between the essential needs for
Revenue of a modern welfare state on the one hand and the desirability that the citizen must know
his liability clearly before he can be called upon to contribute to the Revenue on the other.

CASE LAWS INVOLVING TAXING STATUTES

In New Piece Goods Bazaar Company v Commissioner of Income tax, Bombay, the appellant
had paid certain municipal taxes as also immovable property taxes. He claimed deductions for the
same under section 9 (1) (iv) and section 9 (1) (v) of the Income Tax Act 1922. The Supreme
Court held that since such deductions were clearly and unambiguously permissible under section 9
(1) (iv) as per words used therein, the appellant had a right to claim these deductions.
Legislature’s intention has clearly been expressed in the language of the enactment.
In Union of India v Commercial Tax Officer, certain goods were sold to the Ministry of
Industry and Supplies, Government of India. The question was whether these were exempt from
payment of sales tax under section 5 (2) of the Bengal Finance ( Sales Tax) Act, 1941 which
exempts from payment of sales tax, sales to the Indian Stores Department, the Supply Department
of the Government of India, and Administration of the Railway or Water Transport.

The Supreme Court agreed with the decision of the High Court in holding that the Ministry of
Industry and Supplies to whom the goods were sold was not the same as the Indian Stores
Department or Supply Department of Government of India who were exempted from payment of
sales tax. It was observed that section 5 (2) OF the Act names the two Departments
unambiguously sales to whom were not subject to payment of sales tax. Since the Department to
whom the good were actually sold does not figure in the section, no benefit on such a transaction
could be given. There is no room for extension or analogy. If the legislature intended to give the
same facility to sale of goods to other Department also, it could have done so by merely naming
those Departments in the section.

In Associated Cements Co Ltd v State of MP the Supreme Court was considering whether the
production of ‘refractory cement’ was liable to imposition of export tax. The main issue was
whether refractory cement fell within the Entry ‘all types of cement’ which was liable to export
tax. Expatiating on the question, the court pointed out that cement was exclusively used as a
building material and as a commodity of everyday use, whereas the main property of ‘refractory
cement’ was that it could withstand very high temperatures, corrosion and abrasion. Anyone
buying cement for building would under no circumstances buy refractory cement. As the word
‘cement’ had not been defined, it has to be understood as used in common parlance. Hence,
refractory cement was held to not be liable to the imposition of export tax.

In Sevantilal v Commissioner of Income Tax, Bombay the appellant gifted some shares to his
wife who sold them. He argued that these capital gains could not be included in his income under
section 16 (3) (iii) of the Income Tax Act 1922 on the ground that when this provision was added
to the Act in 1937 by an amendment, the expression income did not include capital gains. The
concept of capital gains was included in the expression ‘income’ only in 1947 by an amendment
in the Act.

Rejecting the argument, the Supreme Court observed that even though it was correct that capital
gains were included in the term ‘income’ by an amendment in the form of section 2 (6c) of the
Act in 1947, the expression income will always be interpreted as including capital gains after
1947.Once the form is amended, the amended for takes the place of the old form. Consequently,
there is only one natural meaning of the word income and that is that it includes capital gain.
Since there is no ambiguity in the meaning of the word ‘income’ used in the statute, the appellant
has no option but to pay taxes as per the law. In the absence of any ambiguity, therefore there is
no question of interpreting the word ‘income’ strictly in his favour.

A taxing statute should be strictly construed in favour of the assessee in such cases only where the
expression used in the statute is capable of two reasonable interpretations. That being not the
situation here, the appellant is bound to pay the duties under the Act.

FAIR INTERPRETATION:

The rule of strict construction of taxing statues is often misunderstood. It is not the same thing as
saying that a taxing statute should not receive a reasonable construction. It is true that a taxing
statute must receive a strict construction at the hands of the courts and if there is any ambiguity,
the benefit of that ambiguity must go to the assessee. But that is not the same thing as saying that
a taxing provision should not receive a reasonable construction. The tendency of modern
decisions upon the whole is to narrow down materially the difference between what is called a
strict and a beneficial construction. The principle of strict construction is applicable only to
charging provisions or a provision imposing penalty and is not applicable to parts of the taxing
statute which contain machinery provisions.

In Indian Cable Co Ltd v Collector of Central Excise, the court was considering whether
excise duty was validly levied on the production of ‘PVC compound’ form PVC resin . It was
argued by the appellant that the process was one of polymerization, which would not qualify as
‘manufacture’ within section 2 9f) of the Central Excises and Salt Act 1944. The Court applied
the test of ‘marketability’ to agree with the appellant and observed

“In construing the relevant item or entry in fiscal statutes, if it is one of everyday use, the
concerned authority must normally, construe it, as to how it is understood in common parlance or
in the commercial world or trade circles, it must be given its popular meaning. The meaning given
in the dictionary must not prevail. Nor should the entry be understood in any technical or botanical
or scientific sense. In the case of technical words, it may call for a different approach”

In Ramavtar v Assistant Sales Tax Officer, the question was whether betel leaves are
vegetables and, therefore exempt from imposition of sales tax. The dictionary meaning of
vegetable was sought to be relied on wherein it has been defined as pertaining to, comprised or
consisting of, or derived or obtained from plants, or their parts. The court was requested to apply
the rule of strict interpretation with reference to the taxing statute and since the word could have
more than one reasonable meaning, the meaning favouring the subject was to be accepted. The
Supreme Court refused to apply any technical or botanical considerations. It was observed that
when the legislature uses a particular word of everyday use in a statute the presumption is that it
has been used in this popular sense unless, there are compelling reasons for the Court to think
otherwise. Such being not the case here, there is no doubt about the meaning of the term.
Therefore of sale of betel leaves is subject to the sales tax law.

NO EXTENSION BY ANALOGY

Court fees legislations are covered in the category of fiscal enactments and must be construed
strictly. At the same time it is an established principle that court fees is payable on the substance
of the relief asked for, and that, even though the plaintiff might try to conceal the real relief which
he seeks and has framed his relief in a manner which might attract the provision of the Court Fees
Act under which a lesser court fee is payable, the court is entitled to look to the substance and not
the mere form of the relief.

In State of Uttar Pradesh v Kores ( India) Limited, the question was whether carbon paper was
paper within the meaning of a notification issued by the appellant under Section 3-A of the U.P
Sales Tax Act 1948. The Supreme Court held that carbon paper was not a paper within the
meaning of the notification. The term paper should be understood in its popular sense. Its ordinary
and natural meaning is that it is used for writing, printing or packaging purposes. The context of
the Act and the notification issued there under do not indicate any other meaning.

The carbon paper is used for making carbon copies of written or typed matter and has to be
manufactured through a different complicated process. The meaning is quite clear and there is no
need of interpreting it in favour or against anyone.
In Dunlop India Limited v Union of India, the question was whether the commodity known as
V.P Latex comes within the meaning of rubber. The Supreme Court said that while using a word
in a taxing statute the legislature always keeps in mind the popular meaning of that word as
understood in trade and commerce circles. So interpreted, there is no doubt that V.P Latex is
rubber. The natural and popular sense of the term has no ambiguity and the legislature while using
the term had this meaning in mind.

EXEMPTION FROM TAXATION:

It is true that when in a fiscal provision of benefit of exemption is to be considered this should be
strictly considered. However, the strictness of the construction of exemption notification does not
mean that the full effect to the exemption notification should not be given by any circuitous
process of interpretation. After all, exemption notifications are meant to be implemented. They
have to be interpreted strictly and in its entirety and not in parts.

Where an exemption is conferred by a statute by an exemption clause, that clause has to be

Taxation laws are not in the nature of penal laws; they are substantially remedial in their character
and are intended to prevent fraud, suppress public wrong and promote the public good. They
should therefore be construed in such a way as to accomplish those objects.

In Grasim Industries Limited v State of Madhya Pradesh, the Supreme Court held that an
exemption notification in connection with a fiscal statute has to be read in its entirely and not in
parts.

In Tata Oil Mills Company Collector of Central Excise, there was a notification which
exempted imposition of excise duty on ‘such soap as is made from indigenous rice bran oil’. This
oil can be used in making soap only after it get converted into fatty acid. The Supreme Court held
that the exemption applied to both rice bran oil and rice bran fatty acid.

TAX PLANNING, TAX AVOIDANCE AND TAX EVASION:

According to Odgers

“The word ‘evasion’ may mean either of two things. It may mean an evasion of the Act by
something which, while it evades Act, is within the sense of it, or it may mean an evasion of the
Act by doing something to which the Act does not apply. The first of these methods suggests
underhand dealing, the second merely the intentional avoidance of something disagreeable which
is a wholly different thing. There is no obligation not to do what the legislature has not really
prohibited and it is not evading an Act to keep outside it”

Lord Cranworth has said in the case of Edwards v Hall

“I never understood what is meant by an evasion of an Act of Parliament; either you are within the
Act or you are not within it. If you are not within it you have a right to avoid it, to keep out of the
prohibition”.
In Union of India v Play World Electronics Pvt.Ltd, it has been observed m, tax planning is
legitimate provided it is within the framework of the law, but colourable devices, cannot be part of
tax planning.

The distinction between acceptable tax mitigation and unacceptable tax avoidance needs to be
carefully understood. Acceptable tax mitigation involves tax planning within the framework of
law so as to minimize the incidence of tax. Unacceptable tax avoidance typically involves the
creation of complex artificial structures by which the tax payer as though by wave of a magic
wand conjures out of thin air a loss or a gain or expenditure or whatever it may be which
otherwise would never have existed.

There has for years been going on a constant struggle, a battle of Manoeuvre between legislature
and those who are minded to throw the burden of taxation off their shoulders. In this battle
cunningly advised taxpayers do mostly succeed by continuously coming up with newer and more
sophisticated ingenious devices and schemes to avoid tax. Attempts at evading incidence of
taxation though not commendable are not illegal. The recent trend of authorities is to deprecate
such devices.

Lately, the courts have adopted a new approach known as ‘Ramsay principle’ and gone to the
extent of not recognizing tax avoidance schemes or devices even if they are strictly not no-
genuine. This trend which can be seen in decisions of the House of Lords in W.T Ramsay Ltd v
Inland Revenue Commissioners and Furniss, Inspector of taxes v Dawson.The conditions for
application of this principle as laid down in Dawson’s case are as follows—

1. There must be a pre-ordained series of transactions or one single composite transaction,

If these conditions are satisfied the inserted steps are to be disregarded for fiscal purposes and the
court is to look at the end result for the purpose of taxing it in accordance with the provisions of
the taxing statute.

TAXING LEGISLATION SUBJECT TO CONSTITUTIONAL PROVISONS:

A taxing statute is not per se a restriction on the freedom under Article 19 (1) (g) of the Indian
Constitution. The policy of a tax, in its effectuation, might of course bring in some hardship in
some individual case. But that is inevitable, so long as law represents a process of abstraction
from the generality of case and reflects the highest common factor. Then again, the mere
excessiveness of a tax or even the circumstance that its imposition might tend towards diminution
of earning or profits of the persons of incidence does not per se constitute violation of rights.

A taxing statute if divisible in nature and partly falls within and partly outside the Constitution
should not be declared wholly ultra vires. The principle of severability includes separability in
enforcement and this principle should be applied in cases of all taxing statutes.

In order that a tax may be valid it is, firstly within the competency of the legislature imposing it.
Secondly that it is for a public purpose. Thirdly that it does not violate the fundamental right
guaranteed by part II of the Constitution.

In Cibatul Ltd v Union of India, the court held that while the charging section may not be ultra
vires , the procedural section could be held to be ultra vires if it exceeded the constitutional
competence of the legislature which enacted it. It was held that while section 3, the charging
section of the Central Excise and Salt Act 1944 was valid, section 4, the machinery or procedural
section, was invalid as it impinged upon the legislative authority of the state.

CONCLUSION:

Legislative draftsman need to demonstrate greater precision in language whilst drafting fiscal
statutes. Use of imprecise or ambiguous language, could in the wake of the strict construction
rule, cause the entire legislative enterprise to collapse. In tandem with the strict reading of the
charging section goes the liberal reading of the exemption provisions. This is on the reasoning
that an exemption provision is something akin to a beneficent provision and hence the rule
applicable for such provisions generally should also apply when such provisions are part of taxing
statutes. In more recent times however, Courts have adopted the same strict scrutiny of exemption
provisions as is extended to charging sections. The rationale being that a liberal reading of the
exemption provisions will reduce the revenues that can be raised and this reduction impacts upon
the welfare of the population at large. Consequently, these judges have perceived pro-revenue
interpretations as interpretations which were advancing social welfare. Thus the rule of strict
construction has been used to interpret taxing statutes both in favour of the assessee and in favour
of the revenue.

The intention of the legislature in a taxing statute is to be gathered from the language of the
provisions particularly where the language is plain and unambiguous. In a taxing statue it is not
possible to assume any intention or governing purpose of the statute more than what is stated in
the plain language. Words cannot be added to or substituted so as to give a meaning to a statue
which will serve the spirit and intention of the legislature. The statute should clearly an
unambiguously convey the true components of the tax law that is to say, the subject of the tax, the
person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any
ambiguity regarding any of these ingredients in taxation statute then there is no tax law. Then it is
for the legislature to do the needful in the matter. There is no room for any intendment in taxing
statute. There is no equity about a tax. Nothing is to be read in and nothing is to be implied. One
can only look fairly at the language used.

It is settled that interpreting a taxing statute, equitable considerations are entirely out of place. Nor
can taxing statutes be interpreted on any presumptions or assumptions. The court must look
squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light
of what is clearly expressed. It cannot imply anything which is not expressed. It cannot import
provisions in the statutes so as to supply any assumed deficiency.