revenue analyzing the 5-judge constitution bench …...sep 01, 2018 · volume iv ambiguous...

VOLUME IV INDIAN JOURNAL OF TAX LAW 2018

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AMBIGUOUS EXEMPTION NOTIFICATIONS TO BE INTERPRETED IN FAVOUR OF

REVENUE: ANALYZING THE 5-JUDGE CONSTITUTION BENCH OF THE SUPREME

COURT

- Mukesh Butani*, Bhagyashree

**, Shrikant Gupta

ABSTRACT

Authors have analyzed the recent judgment of the Constitution Bench of the Supreme Court in

relation to principles of Statutory Interpretation in general and in particular interpretation of

an exemption notification, analyzing a catena of judgments rendered by the Supreme court

and foreign court decisions. In this regard, the authors have also analyzed the impact of the

said judgment on other taxing statutes namely, Income-tax Act and Goods & Services Tax

Act.

INTRODUCTION

A 21-year-old settled position of law that ‘in case of ambiguity, a tax exemption provision or

notification should be construed in favor of the taxpayer’ does not hold good in light of the

recent supreme court ruling1, overruling Sun Exports case

2 and catena of judgments

3 holding

a similar view. The ruling, however, reiterates an established principle that in the event of

ambiguity with respect to interpretation of taxing statute, the benefit should go to the

taxpayer.

Brief facts of the case are that the respondents imported a consignment of Vitamin-E50

powder (feed grade) under Bill of Entry No. 8207, dated 19.08.1999. Classifying the product

under Chapter 2309.90 (which admittedly pertains to prawn feed), they claimed benefit of

*

Partner, BMR Legal Advisors **

Associate, BMR Legal Advisors

Intern, BMR Legal Advisors 1 Commissioner of Customs (Import), Mumbai v. M/s. Dilip Kumar & Company & Ors., (2018) SCC Online

747. 2 Sun Export Corporation, Bombay v. Collector of Customs, Bombay & Anr., (1997) 6 SCC 564. 3 Commissioner of Central Excise, Pune v. Abhi Chemicals and Pharmaceuticals Pvt. Ltd, (2005) 3 SCC 541;

Commissioner of Customs (Import), Mumbai v. Konkan Synthetic Fibres, (2012) 6 SCC 339; Commissioner of

Customs (Preventive), Gujarat v. Reliance Petroleum Ltd, (2008) 7 SCC 220; Orient Weaving Mills (P) Ltd. v.

Union of India, AIR 1963 SC 98; Kailash Nath v. State of UP, AIR 1957 SC 790.

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AMBIGUOUS EXEMPTION NOTIFICATIONS TO BE INTERPRETED

IN FAVOUR OF REVENUE

2018

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concessional rate of duty at 5%, instead of standard 30%, as per the Customs Notification No.

20/1999, by placing reliance upon the ratio in Sun Exports case to support the claim. The

adjudicating authority (Commissioner of Customs) distinguished Sun Exports case and

accepted the plea of the department to deny the concessional rate of duty on the ground that

the imported goods contained chemical ingredients for animal feed and not animal

feed/prawn, as such, the concessional rate of duty under the extant notification was not

available. The Commissioner of Customs (Appeals) reversed the order and concluded that the

Sun export case would be applicable which was also upheld by the Customs, Excise and

Service Tribunal (CESTAT). Aggrieved by the decision of the CESTAT, the revenue filed

the present appeal.

Against this background, the Constitution Bench while dealing with the issue of interpretive

rule to be applied for interpreting tax exemption notification in the event of any ambiguity,

believed that the unsatisfactory state of law existing necessitated reconsideration. The Apex

Court held that every taxing statue including, charging, computation and exemption clause (at

the threshold stage) should be interpreted strictly. Further, in case of ambiguity in an

exemption provision, benefit must go to the Revenue. Thus, the ‘burden of proof’ is upon the

taxpayer claiming the benefit of exemption or exception clause to prove the applicability of

such exemption. Once the assesee has successfully discharged its ‘burden of proof’, the ‘onus

of proof’ shifts to the department to prove assessee’s disentitlement to the benefit.4

The Apex Court Constitution Bench has drawn references to its several pronouncements and

international court decisions, which are summarized below:

S. No. Name of the Case Ratio of Judgment Remarks

I. General Principles applicable to Statutory Interpretation

1. District Mining Officer v.

Tata Iron and Steel Co5

(Purposive Interpretation)

Process of interpretation involves both literal and

purposive approaches. In case, the provision is

capable of more than one meaning, the Court has

to choose the interpretation which represents the true intention of the Legislature. The intention of

the legislature can be derived by giving regards to

the literal meaning of the words used in the

statute in the light of any intended object or

Followed

4 Customs, Excise and Gold (Control) Appellate Tribunal, Bangalore Bench v. Fabricon (P.) Ltd. [2003] 161

ELT 459 (CEGAT-Bangalore); Bordubi Engineering Works v. Union of India [2016] 42 STR 803 (Gauhati);

Commissioner of Sales Tax v. New Standard Engineering Co. Ltd [2015] 82 VST 446 (Bombay). 5 (2001) 7 SCC 358.


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purpose which it seeks to achieve.

2. Kanai Lal Sur v.

Paramnidhi Sadhukhan.6

(Natural and Ordinary

Meaning)

If the words used in the enactment are open to

more than one construction, only then Courts are

expected to adopt any other hypothetical

interpretation on the ground that such approach

will be more consistent with the intended object

and policy of the statute.

Followed

3. Assistant Commissioner,

Gadag Sub-Division,

Gadag v. Mathapathi

Basavannewwa.7(Plain

Meaning rule or clear and

unambiguous rule)

For interpretation of taxing and penal statutes, if

the plain meaning rule is applied, any hardship

and inconvenience caused cannot be the basis to

alter the meaning to the language employed by

the legislation. However, if the adoption of the

plain meaning rule results in absurdity, the Court

may determine the meaning of the word giving regard to the legislative purpose and the context

in which it is used.

Followed

4. Punjab Land Development

and Reclamation

Corporation Ltd., Chandigarh v. Presiding

Officer, Labour Court

Chandigarh and Ors.8

(literal and Strict

Interpretation-Distinction)

The literal rule of interpretation requires the

wording of the statute to be construed according

to its literal and grammatical meaning whatever consequences may be. Unless otherwise provided,

the same word must normally be construed

throughout the Act in the same sense, and in the

case of old statutes regard must be given to its

contemporary meaning if there has been no

change with the passage of time.

Followed

II. Interpretation of Exemption Notification

5. Commissioner of Central

Excise, Pune v. Abhi

Chemicals and

Pharmaceuticals Pvt. Ltd.9

(in favour of assessee)

Recovit are animal feed supplements and that the

animal feed supplements were rightly included in

Tariff Item 23.02 being preparation of a kind used

in animal feeding including dogs and cats food.

Overruled

6. Sun Export Corporation,

Bombay v. Collector of

Customs, Bombay 10 (in

favour of assessee)

If two views are possible in interpreting an

exemption notification, the one favourable to the

assessee in the matter of taxation has to be

preferred.

Distinguished

7. Collector of Central

Excise, Bombay-I and Anr.

v. Parle Exports (Pvt.) Ltd.11

Though in a taxing Act, provision enacting an

exception to the general rule of taxation has to be

construed strictly against those who invoke its benefit, but while interpreting an exemption

clause, liberal interpretation should be imparted to

the language thereof, provided no violence is

done to the language employed.

View concurred

6 (2001) 1 SCC 578. 7 (1995) 6 SCC 355. 8 (1990) 3 SCC 682. 9 (2005) 3 SCC 541. 10 (1997) 6 SCC 564. 11 (1989) 1 SCC 345.

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8. Commissioner of Customs

(Import), Mumbai v.

Konkan Synthetic Fibres12


Principle 1: In a fiscal or taxation law, while

ascertaining scope or expressions used in a

particular entry, opinion of expert in field of

trade, who deals in those goods, should be given

due importance.

Not dealt

Principle 2: Beneficial notification providing for

levy of duty at a concessional rate should be

given liberal interpretation.

Overruled

9. Collector of Customs

(Import), Bombay v.

Swastic Wollens (Pvt.) Ltd.

and Ors13.

When no statutory definition is provided in

respect of an item in the Customs Act or the

Central Excises Act, the trade understanding i.e.

opinion of those who deal with the goods in

question, is the safest guide.

Not dealt

(in favour of assessee) Determination of question relating to rate of duty

or value of goods for purpose of assessment is a

question of fact and falls within tribunal’s jurisdiction. If the tribunal has made such

decision honestly and bonafide having regard to

the material and relevant facts and correct legal

principles, then such finding is undisputable. The

fact that another competent authority of law

(SC/HC) may have an alternate view is no ground

for interfering with such finding in an appeal from

such finding.

Distinguished

10. Commissioner of Customs (Preventive), Gujarat v.

Reliance Petroleum Ltd14.


An exemption notification should be read as a whole. For its interpretation, regard must be given

to the nature and extent thereof and the purpose

and object for which such exemption is granted.

The terminologies used in the notification have to

be given its natural meaning.

Overruled

11. Commissioner of Inland

Revenue v. James Forrest15

Principle 1: It would be unreasonable to suppose

that an exemption was wide as practicable to

make the tax inoperative, that it cannot be

assumed to have been in the mind of the

Legislature.

Principle 2: Exemption from taxation to some

extent increases the burden on other members of

the community.

Followed

12 (2012) 6 SCC 339. 13 (1988) Supp. SCC 796. 14 (2008) 7 SCC 220. 15 (1890) 15 AC 334 (HL).


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12. Union of India v. The

Commercial Tax Officer,

West Bengal and Ors.16

The exemption clause [S.5 of the Bengal Finance

(sales Tax) Act, 1941] being the creation of the

statute has to be construed strictly having regard

to the legislative intent to ascertain the meaning

of the statute in accordance with the objective intent of the legislature.

Distinguished

13. Orient Weaving Mills (P)

Ltd. v. Union of India 17 ;

Kailash Nath v. State of UP18

Principle 1: When a notification is issued in

accordance with power conferred by the statute, it

has statutory force and validity and, therefore, the exemption under the notification is as if it were

contained in the Act itself.

Principle 2: The principle is well settled that when

two views of a notification are possible, it should

be construed in favour of the subject as

notification is part of a fiscal enactment.

Followed

14. Coroline M. Armytage v.

Frederick Wilkinson19

Principle 1: The question of strict or liberal

construction arises only in the where it is difficult

to ascertain the meaning of a particular provision

of an enactment.

Principle 2: In a taxing Act, provisions enacting

an exception to the general rule of taxation are to

be construed strictly against those who invoke its

benefit. While interpreting an exemption clause,

liberal interpretation should be imparted to the

language thereof, provided no violence is done to

the language employed. It must, however, be

borne in mind that absurd results of construction

should be avoided.

Followed

15. Mangalore Chemicals &

Fertilizers Ltd. v. Dy.

Commissioner of

Commercial Taxes20

Principle 1: Interpretation of statutory language is

not required when words are clear and convey the

meaning.

Followed

(Strict Interpretation

subordinate to Plain

meaning rule)

Principle 2: Benefit granted under earlier

notification cannot be taken away by a subsequent

notification.

Distinguished

Principle 3: A distinction between provisions of

statute which are of substantive nature and those

Followed

16 AIR 1956 SC 202. 17 1962 Supp 3 SCR 481. 18 AIR 1957 SC 790. 19 (1878) 3 AC 355. 20 (1992) Supp. 1 SCC 21.

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of which are technical/procedural in nature must

be drawn. Non-compliance with the statute would

ensue if substantive conditions in an exemption

notification are not satisfied.

16. Union of India v. Wood

Papers Limited21

The interpretation of exemption notification,

unlike charging provision, has to be tested on

different touchstone considering its varied

meaning in different contexts. An exemption

provision is like an exception and on normal

principle interpretation of statutes, it is construed strictly because of legislative intention or on

economic justification of inequitable burden or

progressive approach of fiscal provisions intended

to augment State revenue. But once its

applicability is proved, it need not be construed

strictly.

liberal and strict construction of an exemption

provision are to be invoked at different stages of

interpreting it. When the question is its

applicability on the subject then it being in 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.

Followed

17. Hansraj Gordhandas v.

H.H. Dave, Asst. Collector

of Central Excise &

Customs, Surat and Ors.22

The operation of the notifications has to be judged

not by the object and the purpose which the rule

making authority had in mind, but by the words

which it has employed to effectuate the legislative

intent.

Followed

18. Novopan India Ltd. v.

Collector of Central Excise

and Customs23

The principle that in case of ambiguity, a taxing

statute should be construed in favour of the

assessee does not apply to the construction of an

exemption provision. They have to be construed

strictly.

A person invoking an exception or an exemption

provision to relieve him of the tax liability must

establish clearly that he is covered by the said

provision. In case of doubt or ambiguity, benefit

of it must go to the State.

Followed

19. Tata Iron & Steel Co. Ltd.

v. State of Jharkhand24

The principle that in the event of ambiguity with

respect to interpretation of provision of fiscal,

Followed

21 (1990) 4 SCC 256. 22 AIR 1970 SC 755. 23 1994 Supp (3) SCC 606.


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such construction which favours the assessee may

be adopted, would have no application to

construction of an exemption notification, as in

such a case the burden is upon the assessee to

show that he falls within the parameters of exemption notification.

20. Commissioner of Central

Excise, New Delhi v. Hari

Chand Shri Gopal25

While construing an exemption notification, the

court has to distinguish the conditions which

require strict compliance, the non-compliance of

which would render the assessee ineligible to

claim exemption and those which require

substantial compliance to be entitled for

exemption.

Followed

II. Rules of Interpretation with respect to Taxation

21. Collector of Customs and

Central excise, Guntur and

Ors. v. Surendra Cotton

Oil Mills and Fertilizers

Co. and Ors.26

In the matter of interpretation of charging section

of a tax statute, strict rule of interpretation is

mandatory and if there are two views possible in

the matter of interpretation of a charging section,

the one favourable to the assessee need to be

applied.

Followed

22. Re, Micklethwait 27 ;

Partington v. A.G. 28 ;

Rajasthan Rajya Sahakari Spinning & Ginning Mills

Federation Ltd. v. Deputy

CIT, Jaipur29 ; State Bank

of Travancore v.

Commissioner of Income

Tax 30 ; Cape Brandy

Syndicate v. IRC31

Principle 1: A taxing statute is to be strictly

construed. Equity does not play any role in

matters of taxation. If the person sought to be taxed comes within the letter of the law he must

be taxed, however great the hardship be. If the

subject does not fall within the letter of the law,

the subject is free, however apparently within the

spirit of law, the case might otherwise appear to

be.

Principle 2: In a taxing statute, one has to merely

look at what is clearly said. There is no room for any intendment. Simply because one class of legal

entities is given a benefit which is specifically

stated in the Act, does not mean that benefit can

be extended to legal entities not referred to in the

Act There is no presumption as to tax.

Followed

23. Russel v. Scott32

Subject is not to be taxed unless the words of the

taxing statute unambiguously impose the tax on

him.

Followed

24 (2005) 4 SCC 272. 25 (2011) 1 SCC 236. 26 (2001) 1 SCC 578. 27 (1885) 11 Ex 452 28 (1869) LR 4 HL 100 29 (2014) 11 SCC 672. 30 (1986) 2 SCC 11 31 (1921) 1 KB 64. 32 (1948) 2 All ER 1.

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24. Ormond Investment Co. v.

Betts33

The proper course in constructing revenue Acts is

to give a fair and reasonable construction to the

language employed by the statute but keeping in

mind that no tax can be imposed without words

clearly showing an intention to lay the burden and

that equitable construction of the words is not permissible.

Followed

25. Mapp v. Oram34 Considerations of hardship, injustice or anomalies

do not play any useful role in construing taxing

statutes unless there be some real ambiguity.

Followed

26. IRC v. Ross Coutler35 If taxing provision is so wanting in clarity that no

meaning is reasonably clear, the courts will be

unable to regard it as of any effect.

Followed

27. Express Mill v. Municipal

Committee, Wardha36

If the words used are ambiguous and open to two

interpretations, benefit of doubt is to be given to

the subject.

Followed

28. CIT v. Jalgaon Electric

Supply Co.37

If the Legislature fails to express itself clearly and

the taxpayer escapes by not being brought within

the letter of the law, no question of unjustness as

such arises.

Followed

29. CIT, W.B. v. Central India

Industries38

Equitable considerations are not relevant in

construing a taxing statute.

Followed

30. Azam jha v. Expenditure

Tax Officer, Hyderabad39

Logic or reason cannot be of much avail in

interpreting a taxing statute.

Followed

31. Kapil Mohan v.

Commissioner of Income

Tax, Delhi40

In the field of taxation, hardship or equity has no

role to play in determining eligibility to tax and it

is for the Legislature to determine the same.

Followed

32. State of Madhya Pradesh v.

Rakesh Kohli and Anr.41

Hardship or equity is not relevant in interpreting

provisions imposing stamp duty, which is a tax,

and the court should not concern itself with the

intention of the Legislature when the language expressing such intention is plain and

unambiguous.

Followed

33. Commissioner of Income

Tax v. Kasturi Sons Ltd.42;

Principle 1: In interpreting a taxing statute,

equitable considerations are entirely out of place.

Followed

33 (1928) AC 143. 34 (1969) 3 All ER 215. 35 (1948) 1 All ER 616. 36 AIR 1958 SC 341. 37 AIR 1960 SC 1182. 38 AIR 1972 SC 397. 39 AIR 1972 SC 2319. 40 AIR 1999 SC 573. 41 (2012) 6 SCC 312.


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State of West Bengal v.

Kesoram Industries

Limited43

It has to be interpreted 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 deficiency.

Principle 2: 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.

Principle 3: If the words are ambiguous and open

to two interpretations, the benefit of interpretation is given to the subject and it does not matter if the

taxpayer escapes the tax net on account of

legislature’s failure to express itself clearly.

34. Saloman v. Saloman & Co.44

Intention of the Legislature may signify anything from intention embodied in positive enactment to

speculative opinion as to what the legislature

probably would have meant, although there has

been an omission to enact it. In a Court of Law or

Equity, what the Legislature intended to be done

or not to be done can only be legitimately

ascertained from that which it has chosen to

enact, either in express words or by reasonable

and necessary implication. It is an application of

this principle that a statutory notification may not

be extended so as to meet a casus omissus.

Followed

35. Crawford v. Spooner45 We cannot aid the Legislature’s defective

phrasing of the Act, we cannot add, and mend,

and, by construction, make up deficiencies which

are left there.

Followed

36. Govind Saran Ganga

Saran v. Commissioner of Sales Tax 46 ; Mathuram

Agrawal v. State of

Madhya Pradesh47; Indian

Banks’ Association v.

Devkala Consultancy

Service 48 ; Consumer

Online Foundation v.

Union of India49

If there is any ambiguity in relation to three

components of a taxing statute, namely subject of the tax; person liable to pay tax; and the rate at

which the tax is to be levied, no tax can be levied

till the ambiguity or defect is removed by the

legislature.

Followed

42 (1999) 3 SCC 346. 43 (2004) 10 SCC 201. 44 (1897) AC 22. 45 1846 4 MIA 179. 46 1985 Supp (SCC) 205. 47 (1999) 8 SCC 667. 48 (2004) 4 JT 587. 49 (2011) 5 SCC 360.

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37. Orient Weaving Mills (P)

Ltd. v. Union of India50;

Kailash Nath v. State of

UP51

Principle 1: When a notification is issued in

accordance with power conferred by the statute, it

has statutory force and validity and, therefore, an

exemption notification is as if it were contained in

the Act itself.

Principle 2: When two views of a notification are

possible, it should be construed in favour of the

subject as notification is part of a fiscal

enactment.

Distinguished &

Overruled

38. Coroline M. Armytage v.

Frederick Wilkinson52

It is only in the event of there being a real

difficulty in ascertaining the meaning of a

particular enactment that the question of strictness

or of liberality of construction arises.

Followed

Fig1: Table of cases referred by the Bench

INTERPRETATION OF TAXING STATUTES V. INTERPRETATION OF EXEMPTION

NOTIFICATION

The ruling marks a distinction in interpreting a taxing provision (charging provision) and in

the matter of interpretation of an exemption notification. It reiterates and concurs with the

general principles of interpretation that when two views are principle, one favorable to the

assessee in matters of taxation has to be preferred when interpreting the charging section of

the statute, but opposite principle would be applicable in interpretation of an exemption

notification.

General principles of interpretation applicable to taxing statutes

In construing taxation statutes, ‘strict rule of interpretation’ will be adhered. The

jurisprudential support for this rule is derived from Article 265 of the Constitution which

prohibits the State from extracting tax from citizens without an authority of law. In a taxation

statute, State cannot at their whims and fancies burden the citizens without authority of law.

In other words, when competent Legislature mandates taxing certain persons/certain objects

in certain circumstances, it cannot be expanded/interpreted to include those, which were not

intended by the Legislature. The bench has placed reliance on certain observations made in

50 1962 Supp 3 SCR 481. 51 AIR 1957 SC 790. 52 (1878) 3 AC 355.


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the cases of Novopan India Ltd.53

, Mangalore Chemicals & Fertilisers Ltd54

, Parle Exports

(P) Ltd.55

, etc. to support its strict interpretation rule concerning exemption. There has been

congruity in some of the judicial opinions that ‘an exemption notification has to be

interpreted in the light of the words employed by it and not on any other basis, in the context

of the principle that in a taxing statute and there is no room for intendment, and regard must

be given to the clear meaning of the words’56

. This is for the reason that exemptions from

taxation have a tendency to increase the burden on other unexempted class of tax payers and

hence should be construed against the subject in case of ambiguity57

.

The ‘plain meaning rule’, with respect to tax laws, suggests that when the language of the

statute is plain and unambiguous, courts have to read and understand the plain language as

such, and there is no scope for any interpretation. This principle flows from the maxim “cum

inverbis nulla ambiguitas est, non debet admitti voluntatis quaestio58

”. Following this maxim,

court has often made strict interpretation subordinate to plain meaning rule,59

wherein courts

resort to any interpretative process (i.e. strict interpretation) only when the meaning of the

statute is ambiguous or not manifest on the plain words of the statute.

The Constitution bench has reiterated that strict interpretation of a statute certainly involves

‘literal or plain meaning’ test. However, other tools of interpretation, namely ‘contextual or

purposive’ interpretation cannot be applied, nor any resort can be sought to look to other

supporting material, especially in taxation statute.

Meaning and scope of strict interpretation

To say that strict interpretation involves plain reading of the statute in general circumstances

and to say that one has to utilize strict interpretation in the event of ambiguity is self-

contradictory. For this, one has to consider the ‘meaning and scope’ of strict interpretation

while interpreting tax statute on the one hand and tax exemption notification on the other.

53 Novopan India Ltd. v. Collector of Central Excise and Customs, 1994 Supp (3) SCC 606. 54 Mangalore Chemicals & Fertilisers Ltd. v Deputy Commissioner of Commercial Taxes, 1992 Supp (1) SCC

21. 55 CCE v. Parle Exports (P) Ltd, (1989) 1 SCC 345. 56 Hansraj Gordhandas v. CCE and Customs, AIR 1970 SC 755. 57 Commissioner of Inland Revenue v. James Forest [(1890) 15 AC 334]; Liberty Oil Millls (P) Ltd., Bombay v.

Collector of Central Excise, Bombay (1995) 1 SCC 451. 58 Roman Law Maxim used for interpretation of contracts. If words of a plain legal meaning are used, and

especially in the dispositive clause of a charter, you cannot deny effect to them, unless there is plain declaration

in the instrument itself, that the maker of the deed used them in a different sense. In other words, intention of the

author of the text was irrelevant if the words were not ambiguous. 59 Mangalore Chemicals & Fertilizers Ltd. v. Dy. Commissioner of Commercial Taxes, (1992) Supp. 1 SCC 21.

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Black’s Law Dictionary describes ‘Strict Interpretation’ as “an interpretation according to the

narrowest, most literal meaning of the words without regard for context and other permissible

meanings. This rule of construction refuses to expand the law by implications or equitable

considerations, but confines its operation to cases which are clearly within the letter of the

statute, as well as within its spirit or reason, not as to defeat the manifest purpose of the

legislature, but so as to resolve all reasonable doubts against the applicability of the statute to

a particular case”.60

Strict interpretation is an equivocal expression, for it means either literal

or narrow. When a provision is ambiguous, one of its meaning may be wider than the other,

and the strict (i.e., narrow) sense is not necessarily the strict (i.e., literal) sense.61

Interplay between strict interpretation and literal interpretation

The court has dealt with the principles of literal interpretation and the principle of strict

interpretation and remarked that they are sometimes used interchangeably. However, this

principle may not be sustainable in all contexts and situations. It would not be wrong to say

that ‘all cases of literal interpretation would involve strict rule of interpretation, but strict rule

may not necessarily involve the former, especially in the area of taxation’. Strict

interpretation does not encompass strict-literalism into its fold, which leads to absurdity and

go against the legislative intent. If literalism is at the far end of the spectrum, wherein it

accepts no implications or inferences, then strict interpretation can be implied to accept some

form of essential inferences which literal rule may not accept.

Interpretation of exemption notification

Flexibility in operation of a taxing statute is required with the change in circumstances. This

gives competent authorities scope to provide for some form of relief to the taxpayers by

issuing an exemption notification in the interest of general public. As per Section 11 of CGST

and S.6 of IGST Act, Competent authorities is empowered to issue exemption notification

upon the recommendation of GST Council. The exemption can be either absolute or subject

to conditions, as specified in the notification. Identical provision can be found in section 5A

of Central Excise Act in respect of excise duty and section 25 of the Customs Act in respect

of customs duty.

60 William M. Lile et al., Brief Making and the use of Law Books 343 (Roger W. Cooley & Charley Lesly Ames

eds., 3d ed. 1914). 61 John Salmond, Jurisprudence 171 n. (t) (Glanville L. Williams ed., 10th ed. 1947).


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With regard to interpretation of exemption clauses or notifications issued under a taxing

statute, historically courts have in many cases taken a view that the ambiguity in an

exemption notification should be construed in favour of the taxpayer. Subsequently, the

principle was diluted with Hari Chand’s62

case holding that mandatory requirements of

exemption notification should be interpreted strictly and failure to comply with the directory

conditions is justifiable, if there is sufficient compliance with the main requirements. The

court here applied different tests when considering the ambiguity of an exemption

notification which requires strict construction and after doing so at the stage of applying the

notification, one has to consider liberal rule of interpretation. The distinction between ‘stage

of finding out’ the eligibility to seek exemption and ‘stage of applying’ the nature of

exemption was made in the case of Wood Papers Ltd63

Case wherein the rule of construction

of exemption notification is well-explained in the following words:

“Unlike charging provision, construction of exemption notification has to be tested on a

different touchstone as the term ‘exemption’ may have varied meanings depending upon the

context in which it is used. Literally, exemption is freedom from liability, tax or duty.

Fiscally, it may assume varying shapes in the form of tax holiday to new units, concessional

rate of tax to goods or persons for limited period or with the specific objective etc. Moreover,

Liberal and strict construction of an exemption provision are to be invoked at different stages

of interpreting it. In order to determine whether a subject fall within the parameters of the

exemption notification then it being in nature of exception, strict interpretation rule is to be

followed against the subject but once the ambiguity regarding applicability is lifted and

subject falls in the notification then full play should be given to it and it calls for wider and

liberal interpretation”.

DOCTRINE OF SUBSTANTIAL COMPLIANCE AND INTENDED USE

While dealing with the issue whether a person claiming exemption is required to comply with

the procedure strictly to avail the benefit, the Supreme Court in Hari Chand case64

enunciated

the ‘doctrine of substantial compliance’ which implies that the principle of strict construction

cannot be applied in all circumstances and is subject to exceptions depending upon the

settings on which the provision has been placed in the statute and the object and purpose to

be achieved. The doctrine advocates that if mandatory requirements are complied with, it will

62 Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236. 63

Union of India v. Wood Papers Ltd, (1990) 4 SCC 256. 64 Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236.

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be proper to say that the enactment has been substantially complied with notwithstanding the

non-compliance of directory requirements or mere technical provisions.

To invoke such doctrine, a mere attempted compliance is not sufficient but actual compliance

with essential factors is required. On similar principles of reasonableness, the doctrine

provides remedy to a person who takes all reasonable steps expected but has faulted in some

minor or inconsequential aspects, which cannot be described as the ‘essence’ or the

‘substance’ of the requirement. The acceptance or otherwise of a plea of “substantial

compliance” depends upon facts and circumstances of each case and the ‘purpose and object’

to be achieved and the context of prerequisites essential to achieve the object and purpose of

the rule.

WIDE IMPACT OF RULING

The ruling is likely to entrust wider authority to tax administration to ensure that tax

exemptions are granted in circumstances where strict eligibility criteria is established by the

taxpayer. If the judgment is given retrospective effect, revenue department may seek

backdated taxes from past cases pending assessment or adjudicating. The burden of proof will

be on the assessee to show to the Revenue Department that they are eligible for availing a tax

exemption. The impact of the judgment (which is relating to an exemption from custom duty)

on other taxing statutes including Income Tax Act and GST will have to be examined with

tooth-comb.

Under The Income-Tax Act

The framework of the Income-Tax Act is different from indirect tax statutes. The charging,

deeming, exemption provision and the method of computation of income are ingrained in the

Statute, since no charge can be brought unless statute permits. Even the rate of Income-Tax

forms integral part of law. The rates are not changed on a regular basis. Unlike indirect taxes,

exemption notifications, if any, are not routine as the administrative circulars focus more in

alleviating difficulties for taxpayers instead of granting exemption on a daily basis under the

Income-Tax Act. Further, the provisions of the Income-Tax Act are amended through the

Finance Act every year.

The approach of the court has been that the beneficial provision should be given liberal

interpretation as held in several cases. For instance, Delhi High Court in its decisions of


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Amadeus India Pvt. Ltd. and Inter Globe Technology Quotient Pvt. Ltd.65

reiterated the

principle that a beneficial provision has to be construed beneficially holding that Section 10A

and 10AA forms part of an integrated policy of the Government of India for export

promotion and have to be interpreted in a manner to make the scheme workable. The benefit

of the said provisions should not ordinarily be denied on hyper procedural and minor

grounds.

It is equally important to consider the effect of the ruling on circulars issued by the Central

Board of Direct Taxes (CBDT) under section 119 of the Income-tax Act, in light of

Hindustan Aeronautics Ltd. v. CIT66

verdict, wherein the court observed that “Circulars or

instructions given by the board are binding in law on the authorities under the Act but when

the Supreme Court or the High Court has declared the law on the question arising for

consideration, it will not be open to a Court to direct that a circular should be given effect to

and not the view expressed in a decision of the Supreme Court or the High Court.” Section

119 empowers the CBDT to issue orders/circulars setting forth directions or instructions to be

followed by subordinate officers in their role relating to assessment or collection of revenue

or the initiation of proceedings for the imposition of penalties. However, such directions and

instructions should not be prejudicial to the assessee, as stated in sub-section 2(a). Following

the principle laid down in Hindustan Aeronautics case, tax authority may use this judgement

as a precedent to disallow the claims of taxpayers regarding benefit of exemption granted in

accordance with the order/directions issued in the circular. This may cause hardship to

taxpayers.

Take for instance, the SEZ Act, 2005, which has brought in some changes in the Income-tax

Act as well. Section 10A and 10AA have been inserted to give income-tax concession to

newly established units in Free Trade Zone and Special Economic Zone. There are various

decisions wherein it was held that section 10A is an exemption provision. However, the

Supreme Court in the case of Yokogawa India Ltd67

held that section 10A is a provision for

deduction and would be considered while computing the gross total income under Chapter VI

of the Income-Tax Act. The Court observed that the amendment of section 10A of the Act, by

Finance Act, 2000, specifically uses expression ‘deduction of profits and gains derived by an

eligible unit…’ There were several Circulars that were placed on record by taxpayers to

65 Principal Commissioner of Income Tax v. Amadeus India Pvt. Ltd & Principle Commissioner of Income Tax

v. Inter Globe Technology Quotient Pvt. Ltd. TS-197-HC-2017 (Delhi H.C.). 66 [2000] 342 ITR 808 (SC); CCE, Bolpur v. Ratan Melting & Wire Industries [2008] 231 ELT 22 (SC). 67 [2017] 391 ITR 274 (SC).

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explain the ‘purpose and object’ of the amendment. Having looked at the aforesaid Circulars,

issued from time to time, there was a fair bit of ambiguity as to the true nature and effect of

the amendment particularly, Circular No. 7 dated 16-7-2013 and Circular No. 1/2013 dated

17-1-2013 as they appeared to be conflicting and contradictory to each other. In the former

Circular section 10A was referred to as providing deductions whereas the later Circular uses

the expression ‘exemption’, while referring to the provisions of sections 10A and 10B. As it

is held in a catena of judgements and is in practice, tax provisions are to be literally

construed, it was further observed that the true and correct purport of the amended section

will have to be construed from the language used. The introduction of the word ‘deduction’,

in the absence of any contrary material, has to be understood as a clear enunciation of the

legislative decision to alter its nature from exemption to one providing for deductions.

Under The Goods & Services Tax Regime

Since this judgment has now set a new precedent for examining applicability of exemption

notification, wide repercussions will follow in GST regime. As categorically stated by the

Constitution Bench, all the decisions which followed the principles adopted in Sun Export

Case stand overruled, it is conceivable that the court will now take a different approach while

dealing with the pending cases of taxpayers or department’s appeal against the decisions

favoring the assessee and limitation period for filing appeal, if favorable order was given

after applying liberal interpretation rule with respect to interpretation of exemption

notification. How the Department is going to utilize this judgment to deny benefit of

exemption to the person claiming the benefit unless parameters of the exemption notification

are strictly complied by the assessee and whether condonation for non-compliance with the

conditions of the exemption notification would be given on the ground of procedural or

technical error, only time will test. Going forward, assessees will now have to be more

cautious while claiming benefit of exemption notification. Being a new code, which is yet to

settle several interpretational aspects on exemption and characterization (for rate purposes)

will arise and this will accentuate litigation, unless specific administrative guidance is issued

by the administration as to how the Constitution bench decision will be interpreted, which

now assumes the status of law under Article 141 of the Constitution.

[Disclaimer: This article only expresses personal views of the authors.]

revenue analyzing the 5-judge constitution bench …...sep 01, 2018 · volume iv ambiguous...

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