2. Fowler in ‘Modern English Usages’ explains the principle
with the help of example of an order giving “special leave for men to be out of
barracks tonight till 11 p.m.” Application of the maxim will interpret grant of
special leave as implying a general rule requiring men to be in earlier.
Similarly, a sign that says “parking prohibited on Sundays” (the exception)
proves that parking is allowed on other six days of the week (the rule). The
phrase is also invoked to claim the existence of a rule that usually applies,
when a case to which it does not apply is specially mentioned.
3. The above is, however, a view of the rule somewhat loosely
worded and works differently in different contexts. At times the word ‘prove’
actually means ‘test’. An unusual case in that sense is used to test whether or
not a rule is valid. If the rule stands up to the unusual case, then that
reinforces its truth, if not, then the rule is disproved. In such a case the
main rule and the exception supplement each other in which one gives meaning to
other.
4. Exceptions in law are generally by way of a negative
provision, specific exclusion, proviso or explanation. In tax laws while the
general rule is stated by way of the main provision, exclusions are provided for
by proviso to the general rule. A proper understanding of the law therefore,
requires reading the general rule and the proviso together. The proviso in tax
laws apart from proving the existence of the general rule, confirming,
explaining or harmonising the provision, gets its scope and meaning from the
general rule of which it is an exception.
5. Explaining the purpose of a proviso in a taxing statute,
the Supreme Court in Commissioner of Income-Tax vs. Indo-Mercantile Bank Ltd.
[1959] 36 ITR 1, observed, “The proper function of a proviso is that it
qualifies the generality of the main enactment by providing an exception and
taking out, as it were, from the main enactment, a portion which, but for the
proviso, would fall within the main enactment. Ordinarily, it is foreign to the
proper function of a proviso to read it as providing something by way of an
addendum or dealing with a subject which is foreign to the main enactment.” In
this case whereas the main provision contained in Section 24(1) of the
Income-tax Act, 1922 provided for set-off of loss under one head against profit
under another, the proviso which restricted such set-off was attempted to be
used to prevent set off within the same business head arising from two different
businesses. The Court refused to accept the argument observing that a proviso
must be considered with relation to the principal matter to which it stands as a
proviso. Since the proviso in dispute has no positive words which would support
an interpretation in favour of the disintegration of the head ‘business’, it
cannot stop set-off within the same head of income.
6. To put if differently, in taxing statutes an exception
contained in a proviso takes its scope and meaning from the main provision.
Being a carved out exception, in no circumstance can it be construed in such a
manner as to obliterate and swallow up the main provision to which it is a
proviso. In Commissioner of Income-Tax vs. Ajax Products Ltd., (55 ITR
741 SC) Section10(2)(vii) of the I.T. Act, 1922 [Section 41(2) of I.T. Act,
1961] came for consideration in reference to insertion of words “whether during
the continuance of the business or after cessation thereof” in the proviso by
Act 67 of 1949. Arguments were advanced for the Revenue that insertion of these
words takes away the essential condition in the main provision that the asset
should have been used for business conducted during the previous year. Rejecting
the argument and reiterating their observations in Indo- Mercantile Bank case (supra)
about the scope of the proviso, the Court held that as a result of the amended
proviso, surplus arising from machinery sold or discarded or demolished or
destroyed can be taxed even when such events take place after cessation of
business, but only if the machinery was used in the business carried on for any
part during that financial year, as the amended provision has to be considered
with relation to the principal matter to which it stands as a proviso. Unless
the language is so clear that a proviso may be construed as a substantive
clause, it cannot do violence to the main provision.
7. Harmonious construction of the provision and the exception
contained in proviso thereto require consideration of the two as a whole so as
not to set at naught the real object of the main enactment or put in danger the
legitimacy of the rule in its globality. Deciding about retrospective or
prospective application of the proviso to Section 43B inserted by the Finance
Act, 1987 making exception to the general rule contained in Section 43B in
respect of payments of tax, duty, cess or fees, if payment of such liability is
made on or before the due date of furnishing of return, the Orissa High Court in
Commissioner of Income Tax vs. Pyarilal Kasam Manji and Co. 198 ITR 110
went into the intention of the Legislature, the objects and reasons of the main
provision, the mischief sought to be remedied and came to the conclusion that
the proviso, although stated to be applicable w.e.f. 1.4.1988, is to
cover cases from April 1, 1984.
8. In CIT vs. Hico Products Pvt. Ltd. (No.2) Bom, 201
ITR 575 the issue was whether proviso to Section 40A (5)(a) carves out a
different category of director-employees so as to free them from separate
ceilings of allowability of expenditure on payment of salary as laid down in
sub-clause (i) of clause (a) and on provision of perquisite as laid down in
sub-clause (ii) or subjects them, like any other employee, to such separate
ceilings subject to overall ceiling of Rs.72,000. Applying the characteristics
of a proviso as laid down by the Courts, the Bombay High Court held that the
proviso carves out a separate category of employee-directors and, unlike other
employees, subjects them to uniform ceiling of Rs.72,000.
9. What applies to provisos equally applies to specific
provisions laying down exceptions to the general rule. Reference may be made to
the provisions of Section 37(1) containing the general rule of allowability of
business expenditure laid out or expended wholly and exclusively for the
purposes of the business or profession. Exceptions to the general proposition
are contained in Sections 40 and 40A. It will be too simplistic to hold that what is not excepted is allowable under the general rule as the allowability of unexcepted is still to be judged by the touchstone of the broad basis in Section 37(1). The same applies to exceptions contained in explanations. Section 37(1) itself has an explanation carving out exception to the general rule in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law.
10. To sum up ‘exceptio probat regular’ is a rule of commonsense in which exceptions prove existence of a general rule and the two make a cohesive whole wherein each derives its scope and meaning from the other. The two cannot be read independently unless there are clear words indicating the exception as laying down a substantive provision.
