RULES FOR INTERPRETATION OF TAX STATUTES – PART – II

1. Interpretation of Double Taxation Avoidance Agreements :

The principles set out in Vienna Convention as agreed on 23rd May, 1969 are recognised as applicable to tax treaties. Rules embodied in Articles 31, 32 and 33 of the Convention are often referred to in interpretation of tax treaties.S Some aspects of those Articles are good faith; objects and purpose and intent to enter into the treaty. Discussion papers are referred to resolve ambiguity or obscurity. These basic principles need to be kept in mind while construing DTAA .

1.1. Maxwell on the Interpretation of Statutes mentions the following rule, under the title ‘presumption against violation of international law’: “Under the general presumption that the legislature does not intend to exceed its jurisdiction, every statute is interpreted, so far as its language permits, so as not to be inconsistent with the comity of nations or the established rules of international law, and the court will avoid a construction which would give rise to such inconsistency, unless compelled to adopt it by plain and unambiguous language. But if the language of the statute is clear, it must be followed notwithstanding the conflict between municipal and international law which results”.

2.2. In John N. Gladden vs. Her Majesty the Queen, the Federal Court observed:”Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.” The Federal Court in N. Gladden vs. Her Majesty the Queen 85 D.T.C. 5188 said : “”The non-resident can benefit from the exemption regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the U.S. were to abolish capital gains completely, while the other country did not, a resident of the country which had abolished capital gains would still be exempt from capital gains in the other country.”

1.3. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions.

1.4. The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.

1.5. The Supreme Court in Vodafone International Holdings B.V. vs. Union of India (2012) 341-ITR-1 (SC) observed: “The court has to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope and cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability. It also reiterated and declared “All tax planning is not illegal or illegitimate or impermissible”. McDowell ‘s case has been explained and watered down.

1.6. Tax treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage vis-a-vis other taxpayers. Section 90(2) of the Income-tax Act lays down that in relation to the assessee to whom an agreement u/s. 90(1) applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 789 dated April 13, 2000 (2000) 243-ITR-(St.) 57 has been declared as valid in Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 ) SC) at 101. The Supreme Court in C.I.T. vs. P.V.A.L. Lulandagan Chettiar (2004) 267-ITR-657 (SC) has held : “In the case of a conflict between the provisions of this Act and an Agreement for Avoidance of Double Taxation between the Government and a foreign State, the provisions of the Agreement would prevail over those of the Act.

1.7. The Jaipur Bench of I.T.A.T. (TM) in Modern Threads Case 69-ITD-115 (TM) relying on the Circular dated 2.4.1982 held that the terms of DTAA prevail. It also observed: “The tax benefits are provided in the DTAA as an incentive for mutual benefits. The provisions of the DTAA are, therefore, required to be construed so as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon’ble Supreme Court in the case Bajaj Tempo Ltd. vs. CIT 196-ITR-188 and CIT vs. Shan Finance Pvt. Ltd. 231-ITR-308”. The Bangalore Bench in IBM World Trade Corp. vs. DIT (2012) 148 TTJ 496 held that the provisions of the Act or treaty whichever is beneficial are applicable to the assessee.

2. Explanation :

The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause. If the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. If there is conflict in opinion on the construction of a provision, the Legislature steps in by inserting the Explanation, to clarify its intent. Explanation is normally clarificatory and retrospective in operation. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly.

2.1. The orthodox function of an Explanation is to explain the meaning and effect of the main provision. It is different in nature from a proviso, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. An Explanation is also different from rules framed under an Act. Rules are for effective implementation of the Act whereas an Explanation only explains the provisions of the section. Rules cannot go beyond or against the provisions of the Act as they are framed under the Act and if there is any contradiction, the Act will prevail over the Rules. This is not the position vis-à-vis the section and its Explanation. The latter, by its very name, is intended to explain the provisions of the section, hence, there can be no contradiction. A section has to be understood and read hand in hand with the Explanation, which is only to support the main provision, like an example does not explain any situation, held in N. Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

2.2. Ordinarily, an Explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may possibly arise from the existing provisions. Normally, therefore, an Explanation would not expand the scope of the main provision and the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit as held in Katira Construction Ltd. vs. Union of India (2013) 352-ITR-513 (Gujarat).

3. Proviso :

A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing by way of an addition to the main provision which is foreign to the principal provision itself. Indeed, in some cases, a proviso may be an exception to the main provision though it cannot be inconsistent with what is expressed thereinand, if it is, it would be ultra vires the main provision and liable to be struck down. As a general rule, in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justifying its necessity.

3.1. A proviso to a provision in a statute has several functions and while interpreting a provision of the statue, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without the proviso and if the same is found to be ambiguous only then recourse maybe had to examine the proviso. On the other hand, an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially.

3.2. A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. “Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context” (Thompson vs. Dibdin, 1912 AC 533). The rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause. To expand the enacting clause, inflated by the proviso, is a sin against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction” as observed in: Union of India & Others vs. Dileep Kumar Singh (2015) AIR 1421 at 1426-27.

4. Retrospective or Prospective or Retroactive :
It is a well-settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute, so as to take away or impair an existing right, or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in several decisions of the Supreme Court as well as English courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.

4.1. In Hitendra Vishnu Thakur vs. State of Maharashtra, AIR 1994 S.C. 2623, the Supreme Court held: (i) A statute which affects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature; (iii) Every litigant has a vested right in substantive law, but no such right exists in procedural law. (iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished. (v) A statute which not only changes the procedure but also creates new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. This principle stands approved by the Constitution Bench in the case of Shyam Sunder vs. Ram Kumar AIR 2001 S.C. 2472.

4.2. It has been consistently held by the Supreme Court in CIT vs. Varas International P. Ltd. (2006) 283-ITR-484 (SC) and recently, that for an amendment of a statute to be construed as being retrospective, the amended provision itself should indicate either in terms or by necessary implication that it is to operate retrospectively. Of the various rules providing guidance as to how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock, that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips vs. Eyre3, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated, when introduced for the first time to deal with future acts, ought not to change the character of past transactions carried on upon the faith of the then existing laws as observed in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 486.

4.3. If a legislation confers a benefit on some persons, but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators’ object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In the Government of India & Ors. vs. Indian Tobacco Association, (2005) 7-SCC-396, the doctrine of fairness was held to be a relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay vs. State of Maharashtra (2006) 6-SCC-289. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. Refer CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 487. In my view, in such circumstances, it would have a retroactive effect.

4.4. In the case of CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42-ITR-589 (SC), the court held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year, i.e., the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax.

4.5. There are three concepts: (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; (iii) clarificatory amendments which are retrospective in nature; and (iv) an amendment made to a taxing statute can be said to be intended to remove “hardships” only of the assessee, not of the Department. In ultimate analysis in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 496-497 (SC), surcharge was held to be prospective and not retrospective.

4.6. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubt as the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act, which was already implicit. A clarificatory amendment of this nature will have retrospective effect. It is called as retroactive.

5 May or Shall :
The use of the word “shall” in a statutory provision, though generally taken in a mandsssatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. The setting in which the word “may” has been used needs consideration, and has to be given due weightage.

5.1. When a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case, when a party interested and having a right to apply moves in that behalf and circumstances for exercise of authority are shown to exist. Even if the words used in the Statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right – public or private – of a citizen. When a duty is cast on the authority, that power to ensure that injustice to the assessee or to the revenue may be avoided must be exercised. It is implicit in the nature of the power and its entrustment to the authority invested with quasi-judicial functions. That power is not discretionary and the Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise power conferred as held by the Supreme Court in L. Hirday Narain vs. I.T.O. (1970) 78 I.T.R. 26.

5.2. Use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used which would justify a departure from this meaning. Where an assessee seeks to claim the benefit under a statutory scheme, he is bound to comply strictly with the conditions under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to a tax payer. The provisions contained in an Act are required to be interpreted, keeping in view the well recognised rule of construction that procedural prescriptions are meant for doing substantial justice. If violation of the procedural provision does not result in denial of fair hearing or causes prejudice to the parties, the same has to be treated as directory notwithstanding the use of word ‘shall’, as observed in Shivjee Singh vs. Nagendra Tiwary AIR 2010 S.C. 2261 at 2263.

5.3. In certain circumstances, the word ‘may’ has to be read as ‘shall’ because an authority charged with the task of enforcing the statute needs to decide the consequences that the Legislature intended to follow from failure to implement the requirement. Hence, the interpretation of the two words would always depend on the context and setting in which they are used.

6. Mandatory or Directory :

It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and others vs. Filip Tiago De Gama of Vedem Vasco De Gama, (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336). In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom. In E. Palanisamy vs. Palanisamy (Dead) by Lrs. And others, (2003) 1 SCC 122), a Division Bench of the Supreme Court observed: “The rent legislation is normally intended for the benefit of the tenants. At the same time, it is well settled that the benefits conferred on the tenants through the relevant statutes can be enjoyed only on the basis of strict compliance with the statutory provisions. Equitable consideration has no place in such matter.”

6.1. The Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case, the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statue or read something into it which is not there. It cannot rewrite or recast legislation. It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used, the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.

7. Stare Decisis :

To give law a finality and to maintain consistency, the principle of stare decisis is applied. It is a sound principle of law to follow a view which is operating for a long time. Interpretation of a provision rendered years back and accepted and acted upon should not be easily departed from. While reconsidering decisions rendered a long time back, the courts cannot ignore the harm that is likely to happen by unsettling the law that has been settled. Interpretation given to a provision by several High Courts without dissent and uniformly followed; several transactions entered into based upon the said exposition of the law; the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora’s box of uncertainty.

7.1. The Supreme Court referring to Muktul vs. Manbhari, AIR 1958 SC 918; and relying upon the observations of the Apex Court in Mishri Lal vs. Dhirendra Nath (1999) 4 SCC 11, observed in Union of India vs. Azadi Bachao Andolan (2003) 263 ITR at 726: “A decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view.”

8. Subject to and Non-obstante :
It is fairly common in tax laws to use the expression ‘Notwithstanding anything contained in this Act or Other Acts” or “Subject to other provisions of this Act or Other Acts”. The principles governing any non obstante clause are well established. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “Notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non-obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

8.1 The Apex court in Union of India vs. Kokil (G.M.) AIR 1984 SC 1022 stated : “It is well known that a non -obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.” In Chandavarkar Sita Ratna Rao vs. Ashalata S. Guram, AIR 1987 SC 117, it observed : “A clause beginning with the expression ‘notwithstanding anything contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract’ is more often than not appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non obstante clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned in the enactment following it will have its full operation, or that the provisions embraced in the non-obstante clause would not be an impediment for an operation of the enactment. The above principles were again reiterated in Parayankandiyal Eravath Kanapravan Kalliani amma vs. K. Devi AIR 1996 SC 1963 and are well settled.

8.2 The distinction between the expression “subject to other provisions’ and the expression “notwithstanding anything contained in other provisions of the Act” was explained by a Constitution Bench of the Supreme Court in South India Corporation (P.) Ltd. vs. Secretary, Board of Revenue (1964) 15 STC 74. About the former expression, the court said while considering article 372: “The expression ‘subject to’ conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.” About the non obstante clause with which article 278 began, the court said : “The phrase ‘notwithstanding anything in the Constitution’ is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278.”

To be continued in the next issue.