PROJECT

WORK

ALIGARH MUSLIM UNIVERSITY

Department of Law

PROJECT WORK

INTERPRETATION OF STATUTES

TOPIC : Approaches to interpretation of

taxing statutes

SUBMITTED TO: SUBMITTED BY:

Dr. SYED UZAIR IQBAL
MOHIT SINGH

17 BALLB 77

X Sem

GH-5638

SECTION-B
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CONTENTS

1. INTRODUCTION

2. DILUTION TO THE STRICT RULE

3. INTERPRETATION OF EXEMPTION
NOTIFICATION

4. CONCLUSION

5. BIBIOLGRAPHY
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INTRODUCTION

The classical rule with regard to the construction of taxing statutes is that they should be strictly
construed. It is a well-established rule that can be traced to common law in England and has been
imported into the Indian legal system as well.1

A person should not be taxed unless there are clear words indicating that purpose. Every statute
must be read “according to the natural construction of its words”. 2 In a taxing statute, it is only
what is clearly said that needs to be looked at. Considerations guiding the interpretation of taxing
statutes cannot include equity or presumptions. Nothing must be read in or implied. In the
interpretation of taxing statutes, the language of the statute is the only thing that can be fairly
looked at.3 This has been the classical approach towards the interpretation of tax statutes as
followed in England as well as in India.

The rationale for the strict construction of taxing statutes lies in the fact that they impose pecuniary
burdens. Therefore, in some sense, they operate as penalties. It is on the basis of this that clear and
unambiguous language is required in order to make out a charge of tax.4

This rule of strict construction is also known as the Duke of Westminster principle, being named
after its famous exposition in the case of IRC v. The Duke of Westminster5. In this case, the
respondent i.e. Duke of Westminster, covenanted to pay his gardener an yearly sum for a period of
seven years without prejudice to the remuneration received by the gardener for his services. The
Duke then sought to deduct such payments in order to ascertain his total taxable income for surtax.
The Revenue i.e. Appellant however sought to show these payments as payments of salary or
wages and impose tax thereon. In this case, the court rejected the argument that in the construction
of taxing statutes, it must ignore the legal position and instead focus on “the substance of the
matter”. The court observed that every person is entitled to arrange his affairs in such a manner
that the burden of tax that falls upon him be as low as legally permissible. The
1
G.P. Singh, PRINCIPLES OF STATUTORY INTERPRETATION, 815 (12thedn., 2010).
2
In re Micklethwait, (1885) 11 Ex 452 (Court of Exchequer Chamber); Tennant v. Smith, [1892] A.C. 150 (House of
Lords).
3
Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 (King’s Bench Division).
4
P.B. Maxwell, INTERPRETATION OF STATUTES, 256 (12thedn., 1962).
5
The Commissioners of Inland Revenue v.The Duke of Westminster, [1936] A.C. 1 (House of Lords).
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doctrine of “substance of the matter” cannot be used to impose a greater liability on the person. It
is the true nature of the legal obligation and nothing else that is the substance. On this basis, the
court dismissed the appeal.6

As mentioned before, this line of reasoning has found resonance in India too. The Supreme Court
of India has reiterated the position that it is a maxim of tax law that tax is not to be imposed on a
person unless the words of the taxing statute are unambiguous.7 The Supreme Court has observed
that the strict letter of the law is to be considered in determining tax liability and not other things
such as the spirit of the statute or the substance of the law. If the Court is satisfied that a case falls
within the provisions, then a tax can be imposed. However, if a situation does not fall within the
“four corners of the provisions of the taxing statute”, no tax can be imposed. Inference, analogy
and probing of legislative intent in order to get to the substance of the matter are not permitted in
the interpretation of tax statutes.

A taxing statute has three components: the subject of the tax, the person liable to pay tax and the
rate at which tax is to be paid. In the case of ambiguity regarding any of these three ingredients in
a taxing statute, there is no tax in law. Unless the legislature does not modify the defect, no tax can
be imposed as per law. This is because taxing statutes need to be strictly construed.8

Another principle of statutory interpretation that is seen with respect to taxing statutes is that the
courts must favour the assessee in case there is ambiguity and two or more reasonable
interpretations of the taxing provisions exist.9

Thus, in this section, it has been seen that the judiciary has stressed on the requirement of clear
and unambiguous language in order to impose a tax upon an individual. This strict rule of has
governed the interpretation of tax statutes. However, from the latter half of the previous century,
several dilutions to this strict rule have been seen. In the following sections of this project of mine,
I would seek to discuss these detours from the straight route laid down by the rule of strict
construction.

6
The Commissioners of Inland Revenue v. The Duke of Westminster, [1936] A.C. 1 (House of Lords).
7
Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109.
8
Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109.
9
CIT v. Karamchand Premchand Ltd., AIR 1960 SC 1175.
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DILUTION TO THE STRICT RULE- THE PURPOSIVE CONSTRUCTION

As has been noted above, the strict rule of construction has been subject to some dilution,
especially since the latter half of the previous century.

A good example of this was seen in the decision of the Supreme Court in CCE v. ACER India
Ltd.10. The main question in the case revolved around whether the value of operational software
could be deducted from the total value of computers supplied to customers in the calculation of the
amount of central excise payable as duty. In this background, an entire section of the judgment
was directed towards the principles guiding the interpretation of taxing statutes. The Supreme
Court noted that the imposition of tax is a constitutional function. It referred to the strict
construction that needs to be given to taxing statutes. It also observed that the doctrine of
“substance of the matter” had been rejected. However, the court noted several other considerations
to be made in the interpretation of taxing statutes that fall outside the four corners of the language
of the statute.11

Thus according to me, the above case signifies a departure from the strict rule of interpretation.
Some of these had their basis in previous judgments whereas some others seemed to be pronounced
by the court for the first time. To begin with, the Court noted that existing market practice must be
a consideration behind the interpretation of taxing statutes. Similarly, the court also noted that
public policy could be a guiding factor in the interpretation and application of taxing statutes. 12

The court also noted that the statute must not be interpreted in such a manner that it leads to the
wide scale evasion of duty. An interpretation based on this dictum can have significantly different
results in practice from those seen earlier based upon the strict rule of interpretation. While, in this
case, the dictum was motivated by the desire to prevent consumers of computer products from
having to face the burden of excess duty imposed on the respondent, its

10
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173.
11
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173.
12
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173.
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ramifications on other types of cases involving taxation can be quite telling. The researcher opines
that this would go far in tilting the balance of power in favour of the Revenue.13

Most importantly, the Supreme Court made observations expressly providing that the rule of strict
construction was not to be always applied in the interpretation of tax statutes. The Supreme Court
noted that the principle of strict construction may not be adhered to in case the statutory
construction can reasonably have only one meaning. The court went on to substantiate this by the
statement that the principle of purposive construction will be adhered to in case the literal meaning
results in absurdity. The Supreme Court here explicitly provided that purposive construction could
be given precedence over literal meaning in the case of absurdity and that this maxim is applicable
even in the case of taxing statutes.14 This is reflective of the shift in favour of purposive
construction, at least in some cases, even in the interpretation of taxing statutes. This is extremely
significant because this allows the courts to go beyond the four corners of the statute in order to
determine “legislative purpose” in a manner that was not allowed hitherto. This is an extremely
controversial and significant shift which leaves open a wide range of conclusions open with respect
to the interpretation of tax statutes. It might be argued that it purposive construction would only
come into operation in case literal construction leads to absurd results. Yet, even this must be seen
to be significant. The following paragraph illustrates a case where this difference has been seen.

STRICT PURPOSIV
E
-TION
ON

Statute is clear and unambiguous Tow meanings are possible

13
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173.
14
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173.
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In the case of CWS v. CIT15, the Court delved into provisions of the Income Tax Act, 1961
revolving around the imposition of tax on the appellant, which was the assessee company, with
regard to expenditure on the company’s assets used by its employees either partly or wholly for
their own benefit. A plain reading of the statute would have meant that liability could not be
imposed. However, the court went ahead to uphold the assessment of the Revenue on the basis of
a reading of the statute along with legislative intent to tax. The court compared the impugned
provision with analogous provisions in previous and successive versions of the Income Tax Act
and concluded that the assessee must be held liable for tax in accordance with its reading of
Parliamentary intention. The Court stated that non-taxation here would be a result that would be
incongruous, discriminatory and most importantly, absurd. The court opined that though literal
construction was the general rule in the interpretation of tax statutes, it could not be adhered to in
case the result was incongruous, discriminatory or absurd. It stated that interpretation of statutes
could not be a mechanical exercise. It held that the object of all interpretation was to give effect to
the object of the enactment with regard to the language used. In this manner, the Supreme Court
went ahead to affirm the taxation of the assessee company i.e. the appellant in spite of the fact that
literal interpretation would have led to a contrary result of non-taxation.

It is submitted that while such decisions of the Supreme Court might seem as the right step in order
to ensure that the ends of justice are met in a particular case, they also create a large enough
window of opportunity allowing for some unnecessary judicial flexibility that could negatively
impact the interpretation of tax statutes when they operate as precedents. Grandiose declarations
embracing purposive construction and privileging it over strict construction can lead to unintended
consequences. The problem would lie not in ascertaining the existence of absurdity. Like most
cases, the problem would lie in ascertaining legislative intent and the purpose of the statute. Thus
I feel that the availability of such interpretive capacity in the hands of the judiciary could
lead to a strengthening of the position of the Revenue as against the assessee and seriously
impact the interests of the assessee in this manner.

15
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116.
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INTERPRETATION OF EXEMPTION NOTIFICATION

An area of considerable disagreement in the construction of taxing statutes has been that of
exemptions. An exemption is an exception from the general obligation to pay taxes. There are two
opinions on the matter of construction of exemptions in case of ambiguity. According to one view,
an exemption must be liberally construed so as to benefit the assessee from then operation of the
duty. The other view is that exemptions tend to increase the burden on the general burden of
taxpayers, and for this reason, they must be strictly construed against the assessee.

There is no presumption with regard to the application of exemption. The person claiming the
exemption has to establish that he is entitled to it as per the language of the taxing enactment. 16

An example of the liberal interpretation of exemptions was seen in CCE v. NE Tobacco

Company17. The question was whether the unit or factory established by the respondent in a certain
Export Promotion Industrial Park could be given the status of a ‘new industrial unit’ so as to avail
an exemption. The Supreme Court held that an exemption notification must be liberally construed
in favour of the respondent. It therefore dismissed the appeal.18 However, it must be mentioned
that there are various authorities in opposition to this view, including various other judgments of
the Supreme Court.

An illustration is the case of Orissa State Warehousing Corporation v. CIT19. In this case, the
appellant sought to benefit from an exemption on the basis of Section 10(29) of the Income Tax
Act, 1961. The appellant argued that liberal interpretation must be given to income derived from
“letting out of godowns or warehouses for storage, processing or facilitating the marketing” so as
to include interest derived on fixed deposits. The Supreme Court observed that exemptions are an
exception to the general rule that a taxing statute must be construed in favour of the assessee in
case of ambiguity. The Court, dismissing the appeal, held that entitlement for exemptions should
not be read with any wider connotation or latitude to the taxpayer. This case was an example of
the literal approach to construction of exemptions.
16
Commissioner of Income Tax v. Ramakrishna Deo, AIR 1959 SC 239.
17
Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616.
18
Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616.
19
Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388.
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Therefore, it can be concluded that authorities exist in support of both liberal as well as literal
interpretation of exemption provisions in statutes.

However, where there is a beneficient object, such as increased production or incentives to co-
operatives, exemption provisions are to be liberally construed. In the case of CIT v. Straw Board
Manufacturing20, the Supreme Court employed liberal interpretation to strawboard within the
expression ‘paper and pulp’ so as to enable the respondent to benefit from concessions for the
furtherance of industrial activity.21

Thus I wish to state that the observations of the Supreme Court in UoI v Wood Papers22provides a
part of the solution in resolving the conflicting methods of interpretation of exemptions. The Court
noted that the applicability of an exemption needs to be strictly viewed keeping in mind legislative
intent, inequitable burden on taxpayers and augmentation of revenue. However, once doubt about
applicability is removed, and it is ascertained that the assessee was meant to be entitled, and then
a liberal construction is appropriate. Therefore, strict and liberal constructions are to be invoked at
different stages of interpretation of an exemption provision.23

Thus I am in agreement with this reading by the Supreme Court.

20
Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490.
21
Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490.
22
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049.
23
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049.
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CONCLUSION

Thus according to me , the various dilutions to the rule of strict construction are reflective of
judicial recognition of the fact that the legislature is possibly missing a few steps in its attempt to
grapple with fast paced economic developments. This is visibly seen in the case of tax evasions.
The rate of growth of the nature and functions of the Revenue is far outstripped by the growth of
the creatures and activities subject to taxation. The strict rule of construction was inspired by a
need to balance the powers of the individual against the State and prevent the State from penalizing
the individual unnecessarily. However, economic developments have shifted the balance against
the State and in favour of companies, who have at their disposal considerable resources and tax
expertise. It is no surprise then that most of the dilutions, such as purposive construction and
evasion seem to favour the Revenue. The few constructions that favour the assessee, such as liberal
construction of exemptions, also have underlying economic objectives such as promotion of
industrialization as their basis.

However, I am of the opinion that the judiciary has invited some trouble on itself by creating
dilutions to the rule of strict construction. It has opened up avenues for arguments based on
legislative intent and “real nature” of transactions in cases involving taxation. The researcher
believes that the judiciary will resolve this conflict, more often than not, by favouring the Revenue,
in keeping with the reasons for the creation of dilutions.

The brunt of this change, however, shall be borne by the weaker of the taxpayers. Neither do they
have the wherewithal to come up with intricate arguments to reduce their tax burden nor does
judicial attitude seem to be in their favour.

In order that the interests of these weaker sections are protected, the researcher hopes that the
dilutions to the rule of strict construction be viewed with great caution. From a theoretical point of
view too, the researcher is of the opinion that the dilutions represent a definite compromise and
that they will lead to various problems in statutory interpretation. While the rule of strict
construction still holds a dominant position in the interpretation of taxing statutes, there can be
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no doubt that the departures from the rule have struck its effectiveness in a manner that the
implications will be substantial.
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BIBLIOGRAPHY

1. G.P. Singh, Principles of Statutory Interpretation, 815 (12thedn., 2010).

2. P.B. Maxwell, Interpretation of Statutes, 256 (12thedn., 1962).
3. www.blog.ipleaders.in