1.Introduction: No enactment has been enacted by the Legislature for Interpretation of Statues including on Tax Laws. However, in many an acts, definition clause is inserted to mean a ‘word’ or ‘expression’. Explanations and Provisos are inserted to expand or curtail. No codified rules have been made by the rule making authority or the Legislature. Rules are judge made, keeping due regard of the objects, intent and purpose of the enacted provision. Interpretation is the primary function of a court of law. The Court interprets the provision whenever a challenge is thrown before it. Interpretation would not be arbitrary or fanciful but an honest continuous exercise by the Courts.
1.1. The expression “interpretation” and “construction” are generally understood as synonymous even though jurisprudentially both are distinct and different. “Interpretation” means the art of finding out of true sense of the enactment whereas “Construction” means drawing conclusions on the documents based on its language, phraseology clauses, terms and conditions. Rules for Interpretation of “Tax Laws” are to some extent different than the General Principles of Interpretation of Common Law. Rules of Interpretation which govern the tax laws are being dealt in this series of articles.
2. Particulars in a Statute:
Every enactment normally contains Short title; Long title; Preamble; Marginal notes; Headings of a group of sections or of individual sections; Definition of interpretation clauses; Provisos; Illustrations; Exceptions and saving clauses; Explanations; Schedules; Punctuations; etc. Title may be short or long. Preamble contains the main object. Marginal notes are given. Chapters and Headings are group of sections. In the Finance Bill, Memorandum containing explanation on every clause, intent and purpose for the proposal is given. Central Board of Direct Taxes issues Circulars explaining each clause. Finance Minister in his speech refers to the proposed insertions, amendments, alterations, modifications etc. It is highly desirable to go through such material apart from unmodified provision for proper understanding, pleadings and arguments.
3. Classification of the Statute:
Statute can be of various classifications. Providing date of commencement, territorial jurisdiction, mandatory or directory, object, whether codifying or consolidating or declaratory or remedial or enabling or disabling, penal, explanatory, amending retrospective or retroactive or repeal with savings or curative, corrective or validating. Applicability can be on all the subjects or class of persons or specified territorial area or specified industries etc. Assent of the President is a requisite condition. Rules have to be framed by the rule making authority and to be operative from specified date or notified date.
4. The General Principles of Interpretation:
Broadly, the general principles, as applied from time to time by the Courts are : The literal or grammatical interpretation; The mischief rule; The golden rule; Harmonious construction; The statute should be read as a whole; Construction ut res magis valeat quam pereat; Identical expressions to have same meaning; Construction noscitur a sociis; Construction ejusdem generis; Construction expression unius est exclusion alterius; Construction contemporanea exposition est fortissimo in lege; etc. Taxation statutes collecting taxes, duty, cess, levies, etc. from the subjects, have to be beneficially and liberally construed in favour of the tax payers. Penal statutes have to be construed strictly and the benefit of doubt to go to the culprit. Penalty provisions are a civil liability, but have to be construed reasonably. Penalty is corrective and not revenue earner. Levy of interest is compensatory and is treated as mandatory. Charge should be specific and there must be satisfaction of the authority issuing show-cause and levying penalty.
4.1. Other statutes in pari-materia have to be cautiously applied and if phraseology and intent is identical, may apply. Ratio decendai may also apply. Amending statutes are normally prospective unless specifically stated as retrospective. There are mandatory and directory or conjunctive and disjunctive enactments. There exist internal or external aids to interpretation. There can be retrospective, prospective or retroactive operation of a provision. Many maxims are used for interpretation. While interpreting tax laws ‘Double Taxation Avoidance Agreements’ have to be considered as supreme and would prevail even if meaning and language in the statute is different and there exists a confrontation. No provision should be in infringement of the Constitution and it should not be violative or unconstitutional but intravires – not ultravires. Certain issues may be resintegra or nonintegra.
4.2. There are binding precedents under articles 141 and 226 – 227 of the Constitution of India. Even order of the Income Tax Appellate Tribunal and High Court, other than the jurisdictional High Court, have to be respected. Judgment of larger bench as well as co-ordinate bench has to be followed unless and until raised issue is referred to the President of the Income Tax Appellate Tribunal or the Chief Justice, as the case may be, for constituting a larger bench. Judgment of the Constitutional Bench prevails over judgments of lower authorities and single benches. However recently it has been noticed that even orders of the Income Tax Appellate Tribunal or Single or Division Bench of High Courts have been referred and considered, if no appeal has been filed by the Revenue and their ratio has been accepted impliedly or explicitly.
4.3. The General Clauses Act, 1897, contains definitions, which are applicable to all common laws including tax laws, unless and until any repugnant or different definition is contained in the definition section of the tax laws. It also contains general rules of construction, which are applied on common law as well as tax laws. Provisions of Civil Law, Criminal Law, Hindu Law, Evidence Act, Transfer of Property Act, Partnership Act, Companies Act and other specific, relevant and ancillary laws equally apply unless until a different provision is enacted in tax statute and such laws expressly excluded. As analysed, about 108 Acts other than tax statutes need be read, referred and relied upon to make an effective representation, knowledge whereof is imperative.
4.4. Ordinances are also issued, which have limited life, till the statute is enacted or for the specified period. Its purpose is to be operative during the intervening period, where after it automatically lapses. Circulars, instructions, directions are issued statutorily as well as internally, which are binding on tax administration, but not on a tax payer. By such circulars, scope of exemption, deduction or allowance can be expanded, even though literal meaning of the relevant provision may be to the contrary; being beneficial to the tax payer.
5. The Tax and Litigation:
Return is filed. Assessment is framed by the assessing authority. First appeal lies with the Commissioner of Income-tax (Appeals), a superior assessing authority. Second appeal lies, and lis commences, on appeal to the Income Tax Appellate Tribunal. Income Tax Appellate Tribunal is final fact finding body. Third appeal lies with the Division Bench of the jurisdictional High Court, on substantial question of law and finality is given by the Supreme Court, where an appeal as well as a Special leave Petition can be filed. Appeal is statutory and S.L.P. is discretionary. Scope is larger on SLP. Revisional power is with the Commissioner of Income-tax u/s. 263 as well as 264. Writ remedy can be availed before the jurisdictional High Court, if there is no alternative, effective, efficacious remedy of appeal or if there is lack of jurisdiction or violation of principles of natural justice or perversity or arbitrariness, disturbing conscious of the Court. The Hon’ble High Courts are slow in permitting writ jurisdiction. Even notice u/s.148 can be challenged by writ, on lack of jurisdictional requirements. Substantial disputes can be settled through the medium of Income Tax Settlement Commission and Dispute Resolution mechanism. Interpretation of documents is a substantial question of law as held by the Apex Court in Unitech Ltd. vs. Union of India (2016) 381-ITR-456 (S.C.).
5.1. Eminent Jurist Cardozo states, “You may say that there is no assurance that judges will interpret the mores of their day more wisely and truly than other men. I am not disposed to deny this, but in my view it is quite beside the point. The point is rather that this power of interpretation must be lodged somewhere, and the custom of the Constitution has lodged it in the Judges. If they are to fulfill their function as Judges, it could hardly be lodged elsewhere. Their conclusions must, indeed, be subject to constant testing and retesting, revision and readjustment; but if they act with conscience and intelligence, they ought to attain in their conclusions a fair average of truth and wisdom.”
5.2. Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted i.e. by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the constitution.
5.3. No tax can be imposed by any bye-law, rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax.”
5.4. Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. In Jaipur Hosiery Mills (P.) Ltd. vs. State of Rajasthan (1970) 26-STC-341; the apex court while upholding the classification made on the basis of the value of sold garments, held that the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. The same view has been taken in State of Gujarat vs. Shri Ambica Mills Ltd., (1974) 4-SCC-916. In ITO vs. N. Takin Roy Rymbai (1976) 103-ITR-82 (SC); (1976) 1 SCC 916, the apex court held that the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax.
5.5. With National litigation policy of the Government of India, the Central Board of Direct Taxes issued Instruction No. 5 dated July 10, 2014 and lately in exercise of powers conferred u/s. 268(A) of the Income-tax Act issued Circular dated December 10, 2015 bearing No. 21 of 2015, enhancing monetary limits for an appeal before the Tribunal exceeding tax Rs. 10 lakh, before the High Court exceeding tax Rs. 20 lakh and before the Hon’ble Supreme Court exceeding tax Rs. 25 lakh with specified exceptions. Tax would not include interest. Same limit for penalty appeals. It applies to pending appeals and references. Writs have been excluded. The instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunals. Pending appeals below the specified tax limits may be withdrawn or not pressed. Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed.
5.6. The Hon’ble Bombay High Court in C.I.T. vs. Sunny Sounds Pvt. Ltd. (2016) 281-ITR-443 (Bom.) at 452 observed: “The need for the Central Board of Direct Taxes to issue the December 15, 2015, Circular and to clarify that it would apply retrospectively to govern even pending appeals arose on account of the enormous increase in the number of appeals being filed by the Revenue over the years”. It also observed: “This policy of non-filing and of not pressing and/or withdrawing admitted appeals having tax effect of less than Rs. 20 lakh has been specifically declared to be retrospective by the Circular dated December 10, 2015. There is no reason why the circular4 should not apply to pending references where the tax effect is less than Rs. 20 lakh as the objective of the Circular would stand fulfilled on its application even to pending references”. Ultimately reference application of the Revenue was returned unanswered. The Ahmedabad Bench of I.T.A.T. in Dy. Commissioner vs. Some Textiles & Industries Ltd. and Others (2016) 175-TTJ (Ahd.) 1 by Order dated 15.12.2015 have also held so for pending appeals. Thus cost of the Government has been saved. Fairly large number of pending appeals have been / are being withdrawn. Appeals / References which fall under the Circular as interpreted by the Courts and Tribunals need be brought to the notice of the relevant forum or the concerned Commissioner for its expeditious withdrawal. It is ‘Professional Social Responsibility’ of each one of us. I have noticed department is slack and is not filing withdrawal applications or providing lists to the I.T.A.T./ High Courts. It is improper.
5.7. Regularly at short intervals, Voluntary Disclose or Declaration Schemes and Schemes to reduce / waive outstanding demands like Kar Vivad Samadhan Scheme etc. are introduced. The Finance Bill, 2016 also introduces (1) The Income Declaration Scheme, 2016; (2) The Direct Tax Dispute Resolutions Scheme, 2016, benefit whereof deserves to be availed of by the eligible persons. It is advisable to cut down tax disputes, purchase peace and concentrate on earning income after developing tax culture. Our duty is to guide clients for payment of due and legitimate taxes.
5.8. In tax administration, accountability is absent, work culture is missing and slackness is apparent. High pitched additions are made, arbitrarily, capriciously, with perversity and malafides. Corruption is flagrant. The Raja Chelliah report suggested that black marks be given to such officers, whose additions do not stand test of appeal. But the same was not accepted. However, by the Finance Bill, 2016 some steps towards accountability and expeditious are proposed. Such steps need to be implemented vigorously to usher in discipline. Many more measures are necessary and expedient in the interest of just collection.
6. Charging and Machinery Provision :
The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. The Supreme Court in CWT vs. Ellis Bridge Gymkhana and Others (1998) 229 ITR 1 held: “The Legislature deliberately excluded a firm or an association of persons from the charge of wealth-tax and the word “individual” in the charging section cannot be stretched to include entities which had been deliberately left out of the charge.
6.1. The charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (See Whitney vs. Commissioner of Inland Revenue (1926) AC 37, Commissioner of Income-tax vs. Mahaliram Ramjidas (1940) 8-ITR-442 (PC), India United Mills Ltd. vs. Commissioner of Excess Profits Tax, Bombay (1955) 27-ITR-20 (SC); and Gursahai Saigal vs. Commissioner of Income-tax, Punjab (1963) 48-ITR-1 (SC).
6.2. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature, manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only when the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. Liberal and strict construction of an exemption provision are, as stated in Union of India vs. Wood Papers Ltd. (1991) 83-STC-251 (SC) “to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject. But once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.”
6.3. The Apex Court in C.I.T. vs. Calcutta Knitwears (2014) 362-ITR-673 (S.C.) stated: “The courts, while interpreting the provisions of a fiscal legislation, should neither add nor subtract a word from the provisions. The foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule”. It also observed: “Hardship or inconvenience cannot alter the meaning of the language employed by the Legislature if such meaning is clear and apparent. Hence, departure from the literal rule should only be in very rare cases, and ordinarily there should be judicial restraint to do so” and : It is the duty of the court while interpreting machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the courts ought not to be hesitant in espousing a common sense interpretation of the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat it”.
