NATIONAL

LAW

INSTITUTE

UNIVERSITY
BHOPAL

A
PROJECT REPORT
INTERPRETATION OF STATUTES_ II
11th TRIMESTER

ON

Interpretation of taxing statutes and exemption notification

Submitted to:
Debarshree Sarkar
Associate Professor

Submitted by:
Balaji Sai Krishnan
2012BALLB16

Table of Contents
ACKNOWLEDGMENT................................................................................................... 3
INTRODUCTION........................................................................................................... 4
DILUTION TO THE STRICT RULE- THE PURPOSIVE CONSTRUCTION.............................7

INTERPRETATION OF EXEMPTION NOTIFICATION.......................................................10

CONCLUSION............................................................................................................ 12
BIBLIOGRAPHY.......................................................................................................... 13

ACKNOWLEDGMENT

I take immense pleasure in thanking Debashree madam our teacher for having
permitted me to carry out this project work. I express my gratitude to her for giving

me an opportunity to explore the world of information concerning my project

topic.
Words are inadequate in thanking my seniors and batch mates for their support and
cooperation in carrying out the project work.
Finally, I would like to thank my family members for their blessings and wishes for
the successful completion of the project.

INTRODUCTION

The classical rule with regard to the construction of taxing statutes is that they should be strictly
construed. It is a well-established rule that can be traced to common law in England and has been
imported into the Indian legal system as well.1
A person should not be taxed unless there are clear words indicating that purpose. Every statute
must be read according to the natural construction of its words. 2 In a taxing statute, it is only
what is clearly said that needs to be looked at. Considerations guiding the interpretation of taxing
statutes cannot include equity or presumptions. Nothing must be read in or implied. In the
interpretation of taxing statutes, the language of the statute is the only thing that can be fairly
looked at.3 This has been the classical approach towards the interpretation of tax statutes as
followed in England as well as in India.
The rationale for the strict construction of taxing statutes lies in the fact that they impose
pecuniary burdens. Therefore, in some sense, they operate as penalties. It is on the basis of this
that clear and unambiguous language is required in order to make out a charge of tax.4
This rule of strict construction is also known as the Duke of Westminster principle, being named
after its famous exposition in the case of IRC v. The Duke of Westminster5. In this case, the
respondent i.e. Duke of Westminster, covenanted to pay his gardener an yearly sum for a period
of seven years without prejudice to the remuneration received by the gardener for his services.
The Duke then sought to deduct such payments in order to ascertain his total taxable income for
surtax. The Revenue i.e. Appellant however sought to show these payments as payments of
salary or wages and impose tax thereon. In this case, the court rejected the argument that in the
construction of taxing statutes, it must ignore the legal position and instead focus on the
1G.P. Singh, PRINCIPLES OF STATUTORY INTERPRETATION, 815 (12thedn., 2010).
2In re Micklethwait, (1885) 11 Ex 452 (Court of Exchequer Chamber); Tennant v. Smith, [1892] A.C.
150 (House of Lords).
3Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 (Kings Bench Division).
4 P.B. Maxwell, INTERPRETATION OF STATUTES, 256 (12thedn., 1962).
5The Commissioners of Inland Revenue v.The Duke of Westminster, [1936] A.C. 1 (House of Lords).

substance of the matter. The court observed that every person is entitled to arrange his affairs in
such a manner that the burden of tax that falls upon him be as low as legally permissible. The
doctrine of substance of the matter cannot be used to impose a greater liability on the person. It
is the true nature of the legal obligation and nothing else that is the substance. On this basis, the
court dismissed the appeal.6
As mentioned before, this line of reasoning has found resonance in India too. The Supreme Court
of India has reiterated the position that it is a maxim of tax law that tax is not to be imposed on a
person unless the words of the taxing statute are unambiguous. 7 The Supreme Court has observed
that the strict letter of the law is to be considered in determining tax liability and not other things
such as the spirit of the statute or the substance of the law. If the Court is satisfied that a case
falls within the provisions, then a tax can be imposed. However, if a situation does not fall within
the four corners of the provisions of the taxing statute, no tax can be imposed. Inference,
analogy and probing of legislative intent in order to get to the substance of the matter are not
permitted in the interpretation of tax statutes.8
A taxing statute has three components: the subject of the tax, the person liable to pay tax and the
rate at which tax is to be paid. In the case of ambiguity regarding any of these three ingredients
in a taxing statute, there is no tax in law. Unless the legislature does not modify the defect, no tax
can be imposed as per law. This is because taxing statutes need to be strictly construed.9
Another principle of statutory interpretation that is seen with respect to taxing statutes is that the
courts must favour the assessee in case there is ambiguity and two or more reasonable
interpretations of the taxing provisions exist.10
6The Commissioners of Inland Revenue v.The Duke of Westminster, [1936] A.C. 1 (House of Lords).
7MathuramAgrawal v.The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
8A.V. Fernandez v. State of Kerala, AIR 1957 SC 657 (Supreme Court of India).
9MathuramAgrawal v.The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
10CIT v. KaramchandPremchand Ltd., AIR 1960 SC 1175 (Supreme Court of India).

Thus, in this section, it has been seen that the judiciary has stressed on the requirement of clear
and unambiguous language in order to impose a tax upon an individual. This strict rule of has
governed the interpretation of tax statutes. However, from the latter half of the previous century,
several dilutions to this strict rule have been seen. In the following sections of this project of
mine, I would seek to discuss these detours from the straight route laid down by the rule of strict
construction.

STRICT CONSTRUCTION OF TAXING STATUTE

DILUTION EXPERIENCED TZO THE STRICT RULE OF

CONSTRUCTION OF TAXING STATUTE AND ADVENT OF
PURPOSIVE CONSTRUCTION

DILUTION TO THE STRICT RULE- THE PURPOSIVE

CONSTRUCTION

As has been noted above, the strict rule of construction has been subject to some dilution,
especially since the latter half of the previous century.
A good example of this was seen in the decision of the Supreme Court in CCE v. ACER India
Ltd.11. The main question in the case revolved around whether the value of operational software
could be deducted from the total value of computers supplied to customers in the calculation of
the amount of central excise payable as duty. In this background, an entire section of the
judgment was directed towards the principles guiding the interpretation of taxing statutes. The
Supreme Court noted that the imposition of tax is a constitutional function. It referred to the
strict construction that needs to be given to taxing statutes. It also observed that the doctrine of
substance of the matter had been rejected. However, the court noted several other
considerations to be made in the interpretation of taxing statutes that fall outside the four corners
of the language of the statute.12
Thus according to me, the above case signifies a departure from the strict rule of interpretation.
Some of these had their basis in previous judgments whereas some others seemed to be
pronounced by the court for the first time. To begin with, the Court noted that existing market
practice must be a consideration behind the interpretation of taxing statutes. Similarly, the court
also noted that public policy could be a guiding factor in the interpretation and application of
taxing statutes. 13

11Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court
of India).
12Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court
of India).

The court also noted that the statute must not be interpreted in such a manner that it leads to the
wide scale evasion of duty. An interpretation based on this dictum can have significantly
different results in practice from those seen earlier based upon the strict rule of interpretation.
While, in this case, the dictum was motivated by the desire to prevent consumers of computer
products from having to face the burden of excess duty imposed on the respondent, its
ramifications on other types of cases involving taxation can be quite telling. The researcher
opines that this would go far in tilting the balance of power in favour of the Revenue.14
Most importantly, the Supreme Court made observations expressly providing that the rule of
strict construction was not to be always applied in the interpretation of tax statutes. The Supreme
Court noted that the principle of strict construction may not be adhered to in case the statutory
construction can reasonably have only one meaning. The court went on to substantiate this by the
statement that the principle of purposive construction will be adhered to in case the literal
meaning results in absurdity. The Supreme Court here explicitly provided that purposive
construction could be given precedence over literal meaning in the case of absurdity and that this
maxim is applicable even in the case of taxing statutes. 15 This is reflective of the shift in favour
of purposive construction, at least in some cases, even in the interpretation of taxing statutes.
This is extremely significant because this allows the courts to go beyond the four corners of the
statute in order to determine legislative purpose in a manner that was not allowed hitherto.
This is an extremely controversial and significant shift which leaves open a wide range of
conclusions open with respect to the interpretation of tax statutes. It might be argued that it
purposive construction would only come into operation in case literal construction leads to
absurd results. Yet, even this must be seen to be significant. The following paragraph illustrates a
case where this difference has been seen.

13Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court
of India).
14Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court
of India).
15Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court
of India).

STRICT
INTEPRETA-TION

Statute is clear and unambiguous

PURPOSIVE
CONSTRUCTION

Tow meanings are possible

In the case of CWS v. CIT16, the Court delved into provisions of the Income Tax Act, 1961
revolving around the imposition of tax on the appellant, which was the assessee company, with
regard to expenditure on the companys assets used by its employees either partly or wholly for
their own benefit. A plain reading of the statute would have meant that liability could not be
imposed. However, the court went ahead to uphold the assessment of the Revenue on the basis of
a reading of the statute along with legislative intent to tax. The court compared the impugned
provision with analogous provisions in previous and successive versions of the Income Tax Act
and concluded that the assessee must be held liable for tax in accordance with its reading of
Parliamentary intention. The Court stated that non-taxation here would be a result that would be
incongruous, discriminatory and most importantly, absurd. The court opined that though literal
construction was the general rule in the interpretation of tax statutes, it could not be adhered to in
case the result was incongruous, discriminatory or absurd. It stated that interpretation of statutes
could not be a mechanical exercise. It held that the object of all interpretation was to give effect
to the object of the enactment with regard to the language used. In this manner, the Supreme
Court went ahead to affirm the taxation of the assessee company i.e. the appellant in spite of the
fact that literal interpretation would have led to a contrary result of non-taxation.17
It is submitted that while such decisions of the Supreme Court might seem as the right step in
order to ensure that the ends of justice are met in a particular case, they also create a large
enough window of opportunity allowing for some unnecessary judicial flexibility that could
16C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).
17C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).

negatively impact the interpretation of tax statutes when they operate as precedents. Grandiose
declarations embracing purposive construction and privileging it over strict construction can lead
to unintended consequences. The problem would lie not in ascertaining the existence of
absurdity. Like most cases, the problem would lie in ascertaining legislative intent and the
purpose of the statute. Thus I feel that the availability of such interpretive capacity in the
hands of the judiciary could lead to a strengthening of the position of the Revenue as
against the assessee and seriously impact the interests of the assessee in this manner.

INTERPRETATION OF EXEMPTION NOTIFICATION

An area of considerable disagreement in the construction of taxing statutes has been that of
exemptions. An exemption is an exception from the general obligation to pay taxes. 18 There are
two opinions on the matter of construction of exemptions in case of ambiguity. According to one
view, an exemption must be liberally construed so as to benefit the assessee from then operation
of the duty. The other view is that exemptions tend to increase the burden on the general burden
of taxpayers, and for this reason, they must be strictly construed against the assessee.19
There is no presumption with regard to the application of exemption. The person claiming the
exemption has to establish that he is entitled to it as per the language of the taxing enactment.20
An example of the liberal interpretation of exemptions was seen in CCE v. NE Tobacco
Company21. The question was whether the unit or factory established by the respondent in a
18A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).
19 Singh, supra note 1, at 839 and 840.
20Commissioner of Income Tax v. Ramakrishna Deo, AIR 1959 SC 239 (Supreme Court of India).
21 Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616 (Supreme
Court of India).

certain Export Promotion Industrial Park could be given the status of a new industrial unit so as
to avail an exemption. The Supreme Court held that an exemption notification must be liberally
construed in favour of the respondent. It therefore dismissed the appeal. 22 However, it must be
mentioned that there are various authorities in opposition to this view, including various other
judgments of the Supreme Court.
An illustration is the case of Orissa State Warehousing Corporation v. CIT23. In this case, the
appellant sought to benefit from an exemption on the basis of Section 10(29) of the Income Tax
Act, 1961. The appellant argued that liberal interpretation must be given to income derived from
letting out of godowns or warehouses for storage, processing or facilitating the marketing so as
to include interest derived on fixed deposits. The Supreme Court observed that exemptions are an
exception to the general rule that a taxing statute must be construed in favour of the assessee in
case of ambiguity. The Court, dismissing the appeal, held that entitlement for exemptions should
not be read with any wider connotation or latitude to the taxpayer. This case was an example of
the literal approach to construction of exemptions.24
Therefore, it can be concluded that authorities exist in support of both liberal as well as literal
interpretation of exemption provisions in statutes.
However, where there is a beneficient object, such as increased production or incentives to cooperatives, exemption provisions are to be liberally construed. In the case of CIT v. Straw Board
Manufacturing25, the Supreme Court employed liberal interpretation to strawboard within the

22 Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616 (Supreme
Court of India).
23Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388 (Supreme
Court of India).
24Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388 (Supreme
Court of India).
25Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490
(Supreme Court of India).

expression paper and pulp so as to enable the respondent to benefit from concessions for the
furtherance of industrial activity.26
Thus I wish to state that the observations of the Supreme Court in UoI v Wood Papers27provides
a part of the solution in resolving the conflicting methods of interpretation of exemptions. The
Court noted that the applicability of an exemption needs to be strictly viewed keeping in mind
legislative intent, inequitable burden on taxpayers and augmentation of revenue. However, once
doubt about applicability is removed, and it is ascertained that the assessee was meant to be
entitled, and then a liberal construction is appropriate. Therefore, strict and liberal constructions
are to be invoked at different stages of interpretation of an exemption provision.28
Thus I am in agreement with this reading by the Supreme Court.

CONCLUSION
Thus according to me , the various dilutions to the rule of strict construction are reflective of
judicial recognition of the fact that the legislature is possibly missing a few steps in its attempt to
grapple with fast paced economic developments. This is visibly seen in the case of tax evasions.
The rate of growth of the nature and functions of the Revenue is far outstripped by the growth of
the creatures and activities subject to taxation. The strict rule of construction was inspired by a
26Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490
(Supreme Court of India).
27Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
28Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).

need to balance the powers of the individual against the State and prevent the State from
penalizing the individual unnecessarily. However, economic developments have shifted the
balance against the State and in favour of companies, who have at their disposal considerable
resources and tax expertise. It is no surprise then that most of the dilutions, such as purposive
construction and evasion seem to favour the Revenue. The few constructions that favour the
assessee, such as liberal construction of exemptions, also have underlying economic objectives
such as promotion of industrialization as their basis.
However, I am of the opinion that the judiciary has invited some trouble on itself by creating
dilutions to the rule of strict construction. It has opened up avenues for arguments based on
legislative intent and real nature of transactions in cases involving taxation. The researcher
believes that the judiciary will resolve this conflict, more often than not, by favouring the
Revenue, in keeping with the reasons for the creation of dilutions.
The brunt of this change, however, shall be borne by the weaker of the taxpayers. Neither do
they have the wherewithal to come up with intricate arguments to reduce their tax burden nor
does judicial attitude seem to be in their favour.
In order that the interests of these weaker sections are protected, the researcher hopes that the
dilutions to the rule of strict construction be viewed with great caution. From a theoretical point
of view too, the researcher is of the opinion that the dilutions represent a definite compromise
and that they will lead to various problems in statutory interpretation. While the rule of strict
construction still holds a dominant position in the interpretation of taxing statutes, there can be
no doubt that the departures from the rule have struck its effectiveness in a manner that the
implications will be substantial.

BIBLIOGRAPHY
Books Referred:
1. A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).
2. G.P. Singh, Principles of Statutory Interpretation, 815 (12thedn., 2010).
3. P.B. Maxwell, Interpretation of Statutes, 256 (12thedn., 1962).