India adopts a federal structure of governance, therefore the extent of legislative powers is distributed between the Centre and the States. As per Article 245, Parliament may make laws for whole or any part of India and the legislature of a State may make laws for whole or any part of the State and Article 246 clearly mentions the extent of legislative powers of the Parliament and State governments. Schedule VII of the Constitution has three lists viz: List I (Union List), List II (State List) and List III (concurrent list). The Centre has the exclusive power to legislate over the topics mentioned in List I and the State governments have the exclusive authority to legislate on the subject-matters included in List II. The Concurrent list included those items which can be legislated upon by both the Centre and the States. When the subject of legislation may not squarely fall in any specific entry in the three Lists. In such a situation Parliament would have the power to legislate on the subject in the exercise of residuary powers of legislation under Article 248 and Entry 97 of List I. Tax is such a subject which is not falling in the State List (List II) or the Concurrent List (List III). Then as per provision of Article 248 and Entry 97 of List I, the Parliament is conferred with power to enact taxing statutes. In this article, we shall study the strict construction of taxing statutes.
In the State of West Bengal v. Kesoram Industries Ltd., AIR 2005 SC 1646 case, the Court held that scrutiny of Lists I and II would reveal that the Constitution gives independent sources of taxation to the Union and the States and that there is no overlapping anywhere in the taxing power of the Union and States.
A tax is a mandatory fee or financial charge levied by any government on an individual or an organization, to collect revenue for public works providing the best facilities and infrastructure. It is a forceful extraction of money from the assessee (taxpayer) by the sovereign authority in which the taxpayer is not entitled to any assured benefit. In its wider sense, the word ‘tax’ 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.” Since fiscal statutes fall in the category of statutes imposing pecuniary burdens, the charging sections are to be strictly construed. Hence before taxing any person it must be shown that he falls within the ambit of the charging section by clear words in the section.
Tax is a monetary burden on the taxpayer imposed under the authority of law. Thus, unless the imposition of the tax is clearly backed by law, no tax can be imposed. Taxing statutes may be defined as those statutes that impose taxes on the citizens. It is not practicable for the legislature to anticipate all the possible situations or conditions which may arise after the law is enacted. It is possible that the assessee might use some shortcomings in the law as a loophole and take advantage of it. As tax results in pecuniary burden so the benefit of the doubt is given to the assessee in case of any contradictions. Hence these statutes are enacted on the basis of trial and error method or on an experimentation basis.
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. No tax can be imposed by any bye-law, rule, or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorizes the imposition and the authorization must be express not implied. The procedure prescribed by the statute must be followed.
Principle of Strict Construction:
Statutes are normally drafted by legal experts who are experts in the particular branch of the law of which the statute was to be a part but even after taking care, there may be some ambiguity in the statute. Then the interpretation of such ambiguity of word or expression should be resolved by the Court. This process is called the interpretation of statutes. Tax laws are highly complex, complicated, and beyond the understanding of a tax-payer. The words and expressions used are not simple. Many sections contain subsections, clauses, sub-clauses. Many deeming provisions have been inserted. The meaning of an expression is extended by way of Explanation and is curtailed by way of the proviso, sometimes more than one provisos and explanations meaning differently. During the interpretation of taxing statutes, certain rules are used. The principle of strict construction is one of them
The manner in which the Income-Tax Act has been drafted leaves great scope for litigation. For this purpose, principles of interpretation have to be applied. These principles themselves are not infallible and would depend on the facts of each case. The two well-settled principles of interpretation, as applicable in taxing statutes, are: (a) Taxing enactments should be strictly construed and (b) the right to tax should be clearly established.
- In construing such Acts, we have no governing principle of the Act to look at. We simply have to go to the Act itself, to see whether the duty or tax claimed is that which the Legislature has enacted.
- There is no equity in tax, and the principle of strict or literal construction applies in interpreting tax statutes. Hence, on the plain language of the statute, if the assessee is entitled to two benefits, he has to be granted both these benefits; and
- If there are two reasonable interpretations of taxing statutes, the one that favors the assessee has to be accepted.
In Cape Brandy Syndicate v I.R.C. (1 KB 64, 71) case, Rowlatt J. observed: “In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used.”
If the revenue satisfied the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is covered within the four corners of the provision of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intention of the legislature and by considering what was the substance of the matter.
In construing such Acts, we have no governing principle of the Act to look at. We have simply to go to the Act itself, to see whether the duty or tax claimed is that which the Legislature has enacted.
- There is no equity in tax, and the principle of strict or literal construction applies in interpreting tax statutes. Hence, on the plain language of the statute, if the assessee is entitled to two benefits, he has to be granted both these benefits; and
- If there are two reasonable interpretations of taxing statutes, the one that favors the assessee has to be accepted.
In Innamuri Gopalan and Maddala Nagendrudu v State of A. P., 1964 2 SCR 888 case, the exemption was denied to the assessee on the ground that the intention of the notification was to avoid double taxation, and as this was not a case of double taxation no exemption could be granted. The Supreme Court held that on the plain language of the notification, the assessee was entitled to exemption, and since the intention was not reflected in plain words, it could not be taken into consideration. The Court also said: “In construing a statutory provision the first and foremost rule of construction is the literary construction. All that the court has to see at the very outset is what does the provision says. If the provision is unambiguous and if from the provision the legislative intent is clear, the court need not call into aid the other rules of construction of statutes. The other rules of construction are called into aid only when the legislative intent is not clear.”
In IRC v. F. S. Securities Ltd., (1964) 2 All ER 691 HL case, the Court held that in case of income tax legislation, if the words of the Act on the construction results in double taxation of the same income, that result will be avoided by adopting another construction which may be reasonably open.
In the case of C.I.T. v B. M. Kharwar, 1966 60 ITR 370 Guj case, the assessee transferred some machinery of a firm to a private limited company. He sought to avoid the liability to be taxed on the excess realized over the written down value of the machinery on the plea that the substance of the transaction was only a step to readjust the business relation of the partners inter se. The Supreme Court rejected this contention holding that while the taxing authorities were entitled to determine the true legal relation resulting from a transaction to unravel the device adopted by a party, the legal effect of a transaction could not be displaced by probing the “substance of the transaction”.
In Commissioner of Income Tax v. Orissa State Warehousing Corporation, 1993 201 ITR 729 Orissa the court has held that: “While interpreting a taxing statute, equitable considerations are entirely out of place. 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 statute so as to supply any assumed deficiency. One has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing has to be read in, nothing is to be implied. One can only look fairly at the language used. In case of reasonable doubt, the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the court as to what is just or expedient. The expressed intention must guide the court. If the intention of the Legislature is clear and beyond doubt, then the fact that the provisions could have been more artistically drafted cannot be a ground to treat any part of a provision as otiose. Though in recent times there has been change from emphasis on grammatical meaning to intention of the Legislature or purpose of statute, yet if the words are ambiguous, uncertain or any doubt arises as to the terms employed, the court has a paramount duty to put upon the language of the Legislature a rational meaning. In the past, the judges and lawyers spoke of a golden rule by which statutes were to be interpreted according to the grammatical and ordinary sense of the word. They took the grammatical or literal meaning unmindful of the consequences. Even if such a meaning gave rise to unjust results which the Legislature never intended, the grammatical meaning alone was held to prevail. They said that it would be for the Legislature to amend the Act and not for the court to intervene by its innovation. During the last several years, the golden rule has been given a farewell. Now the words of the statute are examined rationally. If the words are precise and 9 cover the situation at hand, there is no necessity to go any further. The court expounds those words in the natural and ordinary sense of the words.”
In the case of State of Haryana and others v. Bharti Teletech Limited, (2014) 3 SCC 556, the Supreme Court while dealing with Haryana General Sales Tax Rules, 1975, on the applicability of exemption with regard to Interpretation of taxing/ fiscal statute, observed that: “It is clear as crystal that a statutory rule or an exemption notification which confers benefit on the assessee on certain conditions should be liberally construed but the beneficiary should fall within the ambit of the rule or notification and further if there are conditions and violation thereof are provided, then the concept of liberal construction would not arise. Exemption being an exception has to be respected regard being had to its nature and purpose. There can be cases where liberal interpretation or understanding would be permissible, but in the present case, the rule position being clear, the same does not arise.”
Limitation to the Rule of strict construction:
The principle of strict construction applicable to taxing statute does not, however, mean that where the subject falls clearly within the letter of the law, the court can avoid the tax by putting a restricted construction on the same supposed hardship or on the grounds that the tax, or penalty imposed is heavy or oppressive. The rule of strict construction does not negative the applicability of the well-known principle that a person who claims an exemption has to establish it, and there is ample authority for the view that this principle applies to exemptions granted in tax laws as well. The Courts, in dealing with the taxing statute, will not presume in favour of any special privilege of exemption for taxation.
It is to be noted that the rule of strict construction applies primarily to the charging provisions in the taxing statute and has no application to the machinery provisions. Machinery provision means the procedure for the calculation and collection of taxes. These are to be construed by the ordinary rules of construction. While construing the machinery section of a taxing statute, it should be strictly observed that the construction should effectuate the liability imposed by the charging section of the statute and at the same time, it should render the machinery workable.
Conclusion:
Tax is a monetary burden on the taxpayer imposed under the authority of law. Thus, unless the imposition of the tax is clearly backed by law, no tax can be imposed. In construing Taxing Statutes, we have no governing principle of the Act to look at. We have simply to go to the Act itself, to see whether the duty or tax claimed is that which the Legislature has enacted. In construing a statutory provision of taxing Acts the first and foremost rule of construction is the literary construction. All that the court has to see at the very outset is what does the provision says. If the provision is unambiguous and if from the provision the legislative intent is clear, the court need not call into aid the other rules of construction of statutes.