1

FACULTY OF LAW, JAMIA MILLIA ISLAMIA

INTERPRETATION OF STATUTES AND PRINCIPLES OF LEGISLATION

PROJECT

INTERPRETATION OF TAX SATUTES

BY: Sameeksha Kashyap

III-Year, Semester-VI
Self-finance
2018-19
 2

ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and assistance from
many people and I am extremely privileged to have got this all along the completion of my
project. All that I have done is only due to such supervision and assistance and I would not
forget to thank them.

I respect and thank to Prof. Md. Enam Firdos, for providing me an opportunity to do the
project work and giving us all support and guidance which made me complete the project
duly.

I am also extremely grateful to the library staff of Faculty of Law, Jamia Millia Islamia for
helping me identifying the relevant material for my project and guiding me through the
library sections on the interpretation of statutes.
 3

TABLE OF CONTENTS

1. INTRODUCTION…………………………………………………….……….. P.4
I. CARDINAL RULES OF INTERPRETATION………………………..P.4

2. INTERPRETATION OF TAXING STATUTES………………….……………P.7

3. CARDINAL RULES FOR INTERPRETING TAXING STATUTES………….P.8

I. RULE OF LITERAL INTERPRETATION…………………………….P.8

II. GOLDEN RULE……………………………………………………….P.10

III. RULE OF HARMONIOUS CONSTRUCTION………...…………….P.10
IV. DOCTRINE OF READING DOWN…………………………………..P.10
V. RULE OF BENEFICIAL CONSTRUCTION…………………………P.13
VI. INTERPRETATION OF CHARGING, BENEVOLENT
AND PROCEDURAL SECTIONS……………………………………P.14
VII. MISCHIEF RULE……………………………………………………..P.15
4. CONSTRUCTION OF PENAL PROVISIONS IN TAXATION
STATUTES…………………………………………………………………....P.16
5. BIBLIOGRAPHY…………………………………………………………….P.18
 4

INTRODUCTION

Interpretation means the art of finding out the true sense of an enactment by giving the words of the
enactment their natural and ordinary meaning. It is the process of ascertaining the true meaning of
the words used in a statute. The Court is not expected to interpret arbitrarily and therefore there have
been certain principles which have evolved out of the continuous exercise by the Courts. These
principles are sometimes called “rules of interpretation”.

The object of interpretation of statutes is to determine the intention of the legislature conveyed
expressly or impliedly in the language used. As stated by SALMOND, "by interpretation or
construction is meant, the process by which the courts seek to ascertain the meaning of the
legislature through the medium of authoritative forms in which it is expressed."

In the process of interpretation, several aids are used. They may be statutory or non- statutory.
Statutory aids may be illustrated by the General Clauses Act, 1897 and by specific definitions
contained in individuals Acts whereas non-statutory aids is illustrated by common law rules of
interpretation (including certain presumptions relating to interpretation) and also by case-laws
relating to the interpretation of statutes.

The present assignment focuses upon cardinal rules and general relevance of interpretation statutes
and interpretation of tax statutes as being applied in Indian context and has been evolved by Indian
Judiciary with the passage of time. The enumeration below is being substantiated with the relevant
case laws of Indian jurisprudence but before that, it is important to analyze historical aspect of rules
of interpretation and the same has been enumerated in the following part.

CARDINAL RULES OF INTERPRETATION

The rules of interpretation are soul of arid body of legislation. With respect to modern principles of
interpretation, Indian Courts have evolved number of rules of interpretation which can help them to
resolve any sort of difficulty. These rules have major role to play in proper and beneficial
implementation of law under the garb of different rule, expressions of interpretation. But before
detailed discussion upon rules and expressions, it is important to keep in mind that to interpret any
statute, three basic rules or processes are to be followed. These processes are:

Primary Rule of Interpretation: This rule has following steps involved which an interpreter has to
follow-
i. Read and analyze a section;
ii. Ascertain the primary meaning of the words used;
iii. Ascertain the grammatical, literal and plain meaning of the words used in the section.
 5

This rule has further been explained in detail in the name of “literal rule of interpretation” in the
subsequent submission.

Secondary Rule of Interpretation -This rule is basically states about application of internal and
external aids to ensure proper interpretation of statute. Application of Internal and External aids has
been explained in the subsequent submission.

Final Rule of Interpretation- Interpretation of every statute must be based upon the aforesaid
primary and secondary rules. But there may be a situation when conflict may arise on simultaneous
application of above rules, to avoid such conflict, final rule i.e. principle of harmonious construction
come into picture. This rule has further been explained in the subsequent submission.
Every effort should be made to ensure that all the primary and secondary rules are simultaneously
satisfied.
Here, it is also to be focus that certain specific statutes have specific pattern of Interpretation as
enumerated in numerous case laws. To illustrate this point, following submission is important.

I. For Penal Statute, it is always need to have a strict interpretation1 and with respect to mens
rea it is always presumed that it is required to prove in each case unless the statute specifically
provides for the absence of the same;
In the case of State of Andhra Pradesh v. Nagoti Venkataramana2, it has been held by the
Supreme Court that in the interpretation of penal provisions, strict construction is required to
be adopted and if any real doubt arises, necessarily the reasonable benefit of doubt would be
extended to the accused.

II. For Beneficial Statute such as Statutes related to Industry/workmen, it is always important to
have beneficial liberal interpretation15. Presently, in the period of social welfare legislation,
beneficial interpretation has become important tool of interpretation of statute.

In the case of Secretary, H.S.E.B v. Suresh & Ors Etc.3 it has been held by the SC that the
Contract Labour Regulation Act being a beneficial piece of legislation as engrafted in the
statute book, ought to receive the widest possible interpretation in regard to the words used
and unless words are taken to their maximum amplitude, it would be a violent injustice to
the framers of the law.

1
M. Narayanan Nambiar v. State of Kerala, 1963 SCR Supl. (2) 724

2
1996 (6) SCC 409.
3
1999 3 SCC 601.
 6

III. For Constitution, the basic spirit in form of social justice, equity fraternity etc. should run
throughout the interpretation4 and the interpretation of the Constitutional provisions should be
harmonious and liberal;

In the Case of Menaka Gandhi v. Union of India5, the Supreme Court widened the protection
of life and liberty contemplated by Article 21 of the Constitution. The Court ruled that the
mere existence of an enabling law was not enough to restrain personal liberty. Such a law
must also be just, fair and reasonable. This wider interpretation ensured inclusion of many
rights under Article 21.

IV. For Taxing Statute, Statutes imposing taxes or monetary burdens are to strictly construe. The
logic behind this principle is that imposition of taxes is also a kind of imposition of penalty
which can only be imposed if the language of the statute clearly says so;6 in many instances,
liberal or beneficial interpretation has an important role to play in taxing statute’s
interpretation.

In the case of, Calcutta Jute Manufacturing Co. v. Commercial Tax office7 the Supreme
Court held that in case of interpreting a taxing statute, one has to look into what is clearly
stated. There is no room of searching the intentions, presumptions.

Apart from above brief submissions on interpretation of different statutes, many types of
Internal and External aids are used for the purpose of interpretation of statute. The term
internal aid is defined as interpretation of statute with those means which are found within the
text of the statutes.8 For example: Preambles, Definitional sections and clauses, Provisos,
Explanations etc.

INTERPRETATION OF TAXING STATUES

4
Kesavananda Bharati v. State of Kerala, AIR 1973 SC 1461.
5
AIR 1978 SC 597.
6
CIT v. T.V. Sundaram Iyyengar (1975) 101 ITR 764 (SC).
7
AIR 1997 SC 2920.
8
Law Commission , A continuum on the General Clauses Act, 1897 with special reference to the
admissibility and codification of external aids to interpretation of statutes {Law Comm. No. 6(3)(79)/2002-
LC(LS), 2002} para 8.
 7

In the case of taxing statutes, as in different type of statutes, there are certain bedrock principles on
which the interpretation or construction of the particular statute is done by the Courts and Tribunals;
and the tax practitioners are required to have the knowledge of these basics in their catalogue to
understand the statute and implications of its provisions. Some important aspects relating to
“Interpretation” of Taxing Statutes are dealt herein.

“Interpretation” and “Construction” – Meaning of

Statutes are embodiments of authoritative formulae and the very words which are used constitute
part of law. The interpretation or construction means the process by which the Courts seek to
ascertain the intent of the Legislature through the medium of the authoritative form in which it is
expressed. The law is deemed to be what the Court interprets it to be. The very concept of
“interpretation” connotes the introduction of elements which are necessarily extrinsic to the words in
the statute. Though the words “interpretation” and “construction” are used interchangeably, the idea
is somewhat different.

The term “construction” has been explained in CWT v. Hashmatunnisa Begum,9 to mean that
something more is being got out in the elucidation of the subject-matter than can be got by strict
interpretation of the words used. Judges have set themselves in this branch of the law to try to frame
the law as they would like to have it.

Further, L.J. Denning in Seaford Court Estates v. Asher10, speaks as hereunder:

“A Judge must not alter the material of which the Act is woven but he can and should iron out the
creases. When a defect appears, a Judge cannot simply fold his hands and blame the draftsman.He
must set to work on the constructive task of finding the intention of the Parliament and then he must
supplement the written words so as to give force and life to the intention of the Legislature.”

The art of correct interpretation would depend on the ability to read what is stated in plain language,
read between the lines, read “through” the provision, examining the intent of the Legislature and call
upon case laws and other aids to interpretation.

CARDINAL RULES FOR INTERPRETING TAXING STATUTES

9
[1989] 176 ITR 98 (SC).
10
[1949] 2 All ER 155.
 8

Rule of literal interpretation-This is the most widely used Rule of Interpretation in taxing
statutes. Some decisions are given hereunder.

In case of CIT v. T.V. Sundaram Iyyengar,11 it was held that if the language of the statute is clear and
unambiguous, the Court cannot discard the plain meaning, even if it leads to an injustice.

In case of CIT v. Elphinstone Spg & Wvg Mills Co Ltd.12, and CIT v. Motors & General Stores Ltd13,
it was held by the court of law that No tax can be imposed on the subject without words in the Act
clearly showing an intention to lay a burden upon him. In other words, the subject cannot be taxed
unless he comes within the letter of the law. The argument that he falls within the spirit of the law
cannot be availed by the Department.
Rowlatt J. in case of Cape Brandy Syndicate v. IRC14, approved in case of CIT v. Ajax Products
Ltd.15,

“In a taxing Act 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
to be implied. One can only look at the language used.”

In case of Citigroup Global Markets India (Pvt.) Ltd. v. Dy. CIT16, In this case payment of salary
was made and the provisions of section 192 were applicable. The words “at the time of payment” in
section 192(1) was interpreted where the ITAT held that the literal meaning is that, it is a point of
time when the assessee actually remits the amount either in cash or through bank which is
contemplated as actual payment in normal commercial practice. Under section 192 TDS is to
deducted at the time of the payment and not when the salary is accrued or credited to the account of
the payee. The tax statutes need to be strictly interpreted and the language used by the Legislature
should not be unnecessarily stretched in the process of finding the intention of the Legislature. [TDS
needs to be deducted u/ss. 194C, 194E, 194H and 194-I at the time of credit or payment whichever
is earlier]. It was held that the assessee’s statutory obligation was to deduct the tax at the time of
payment or remittance of the salary and, hence, the claim of the expenditure towards the salary

11
[1975] 101 ITR 764 (SC).
12
40 ITR 142 (SC).
13
66 ITR 692, 699-700 (SC).
14
[1921] 1 KB 64.
15
[1965] 55 ITR 741 (SC), (p. 747).
16
[2009] 29 SOT 326 (Mum).
 9

payment was not hit by section 40(a) (iii) in the circumstances of the instant case.
In case of Smt. Tarulata Shyam v. CIT17, it was held by the court that there is no scope for importing
into the statute words which are not there. Such importation would be, not to construe, but to amend
the statute. Even if there be a casus omissus, the defect can be remedied only by Legislation and not
by judicial interpretation.

Also in case of Brig. B. Lall v. WTO18, The question was about the application of section 16A of the
Wealth-tax Act, which empowers the WTO to refer the valuation of any property to the VO of the
Government to ascertain the true market value of the property on the date of valuation if he feels that
the value declared by the assessee was low. It can be done only during the pendency of a case before
the WTO. In this case it was the opinion of the audit that it suspected the value declared to be low
and on the basis of such advice, the WTO referred the valuation to the departmental valuer. Since at
the time of such reference no case was pending before the WTO, on a writ petition filed by the
assessee, it was held that the WTO had no jurisdiction to make such reference. He cannot be allowed
to make roving enquiry to make any enhancement in the value of the property. Since the provisions
of section 16(1) apply only where a case is pending, it cannot be read for reopening the completed
assessment after receipt of the valuation report which was to be received.

It rejected the suggestion that although no case was pending, it would come to be so on reopening of
the reassessment. The Court disagreed with the said proposition as it would mean changing the
condition for completing the assessment to the condition for reopening the completed assessment,
which would mean addition of certain words in the statute which cannot be allowed in interpreting
the statute as was held by the Supreme Court in CED v. R. Kanakasabai19.

In case of CIT v. Indian Engg. & Comml. Corpn. (P.) Ltd20, the court observed that besides salary,
certain commission as percentage of sales was paid to the directors, and the revenue sought to
disallow the same being in excess of the provision contained in section 40(a) (v). It was held that the
commission paid did not partake of the character of salary, not it partook of the character of
perquisite. It is not possible to read something in the provision which, by considering the wordings
used, is outside the scope of the provision. The Court is not required to legislate which is the
function of the Legislature.

17
[1971] 108 ITR 345 (SC).
18
[1981] 127 ITR 308/ [1980] 4 Taxman 559 (Raj).
19
[1973] 89 ITR 251 (SC) at 257.
20
[1993] 201 ITR 723/68 Taxman 39 (SC).
 10

In case of Keshavji Ravji & Co. v. CIT21, As long as there is no ambiguity in the statutory language,
resort to any interpretative process to unfold the legislative intent becomes impermissible.

Golden Rule or Doctrine of purposive construction-If the strict interpretation of the taxing
statute is likely to lead to a manifest absurdity, then the golden rule of construction implies that the
meaning of the words should be so affected that such an absurdity is avoided. The application of this
rule is rather limited in the realm of construction of taxing statutes, since the literal rule would gain
precedence over the golden rule and it is often remarked that equity and taxation are strangers: held in
case of Grey v. Pearson22.

Here, it is important to analyze that in Indian Context, there is hardly any example where a statute
have been declared void for sheer vagueness, although theoretically it may be possible to reach such
a conclusion in case of absolute intractability of the language used or when the language is
absolutely meaningless but application of this pattern of interpretation with the following list of
rules prevent redundancy of a statute.

This principle has further been defined by the Court itself as if the choice is between two
interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation,
we should avoid an interpretation which would reduce the legislation to futility and should rather
accept the bolder interpretation based on the view that Parliament would legislate only for the
purpose of bringing about an effective result. At last, Statute should be interpreted as effective as
workable as is possible while lining with following rules.

Rule of harmonious construction-In case of In case of CIT v. Chandanben Maganlal23, When

any provision of a taxing statute is interpreted, it must be so constructed that the meaning of such
provision must harmonise with the intention of the Legislature behind the provision in particular and
the enactment in general. However, this would always be subject to the fact that the particular
provision, or even the entire enactment, should not be held unconstitutional.

Doctrine of “reading down”- Resort to reading down is done where a legal provision; read
literally, seems to offend the Constitutional provisions concerning fundamental rights or is found to be
outside the competence of the particular Legislature. Some relevant decisions are given hereunder.

21
[1990] 49 Taxman 87 (SC).
22
[1857] 6 HL Cas. 61.
23
[2002] 120 Taxman 38 (Guj).
 11

The application of doctrine of reading down is done where a legal provision; read literally, seems to
offend the Constitutional provisions concerning fundamental rights or in case of other statutory
enactment, it is found to be outside the competence of the particular Legislature.

In case of Sri Venkateshwara Timber Depot v. Union of India24, The Court construes the provision in
question in a limited sense to ensure that its meaning falls within the parameters of constitutionality or
is intra vires the powers of the Legislature in question (generally in the case of State Legislatures).

Also in case of Arun Kumar v. Union of India25, it was held that Reading down a provision is based
on the premise that to sustain the law by interpretation is the rule; to add further, as held in Kedar
Nath Singh v. State of Bihar26.

“The Legislature is presumed to be aware of its limitations and is also attributed an intention not to
overstep its limits.”

The Supreme Court in case of Arun Kumar, was required to consider the validity of rule 3 of the
Income-tax Rules, 1962 as amended vide Notification No. S.O. 940 (E), dated September 25, 2001.
The substituted rule revised the method of computing valuation of perquisites in the matter of rental
accommodation provided by employers to the employees. It was contended by the writ petitioner
that rule 3 is invalid on the ground that the amended rule does not provide for giving an opportunity
to the assessee to convince the A.O. that no concession is given by the employer to the employee in
respect of accommodation provided and, hence, rule 3, has no application, as the amended rule is
arbitrary, discriminatory or ultra vires article 14 and inconsistent with the provisions of section 17(2)
(ii). The Court did not accept the petitioner’s contention and has said that (amended) rule 3 is in the
nature of a machinery provision and applies only to cases where concession in the matter of rent is
involved, respecting any accommodation provided by an employer to his employee. The Court held
that the assessee (employee) could contend that there is no concession in the matter of
accommodation provided by the employer to the employee and on that basis, claim that rule 3 is not
applicable

The doctrine of reading down can be applied if the statute is silent, ambiguous or allows more than
one interpretation. But where it is express and clearly mandates to take certain actions, the function
of the Court is to interpret it plainly and declare intra vires or ultra vires without adding, altering or
subtracting anything therein.

Krishna Iyer, J., in Maharao Saheb Shri Bhim Singhji v. Union of India27, has observed:-

24
[1991] 189 ITR 741/155 Taxman 308 (Ori).
25
[2006] 155 Taxman 659 (SC).
26
AIR 1962 SC 955.
 12

“. . . reading down meanings of words with loose lexical amplitude is permissible as part of the
judicial process. To sustain a law by interpretation is the rule. Courts can and must interpret words
and read their meanings so that public good is promoted and power misuse is interdicted. As Lord
Denning said: “A judge should not be a servant of the words used. He should not be a mere
mechanic in the power house of semanties”.

In Sanyasi Rao v. Govt. of A.P28, The constitutional validity of sections 44AC and 206 of the
Income-tax Act, was challenged. These sections were introduced in the Income-tax Act by the
Finance Act, 1988. Section 44AC (which had since been deleted with effect from April 1, 1993 by
the Finance Act, 1992) determined the profits and gains of a buyer from the business in trading in
certain specified goods at a given percentage of the purchase price; and section 206C deals with
collection and recovery of tax relating thereto. It was contended, inter alia, that section 44AC is an
arbitrary and discriminatory provision, the measure of profits and gains prescribed by that section
constitutes an unreasonable restriction upon the assessee’s fundamental rights guaranteed by sub-
clause (g) of clause (1) of article 19 of the Constitution; and that there ought to be income, before
tax is levied. The amount collected at source under section 206C is related to the income component
of the purchase price. In its judgment, the High Court held that the legislative policy of fixing the
rate of profit, as has been done in section 44AC, had to be regarded as in the nature of unreasonable
restriction in cases of some of the assessees. Therefore, section 44AC has to be regarded as violative
of Article 19(1) (g) in the cases of some of the petitioners before the Court.

The High Court then considered whether anything can be done to uphold the validity of section
44AC and the court found the solution in “reading down the provision”. The reading down was to
the extent that section 44AC shall be read not as an independent provision but as an adjunct to and
as explanatory to section 206C; and that it does not dispense with regular assessment altogether with
the result that after the tax is collected in the manner provided by section 206C, a regular assessment
would be made where the profit and gain of business in goods in question would be ascertained in
accordance with sections 28 to 43C.
Legislative response- While the debate about the constitutionality of section 44AC was on, the
Government, realising the deficiencies of section 44AC, omitted section 44AC by the Finance Act,
1992 w.e.f. assessment year 1993-94. However section 206C continued as an aid to collect tax at
source from the buyers of the products/items covered in the section.
The Statute must be read as whole in its context. This one is the very first rule to start with the
interpretation of Statute (as even been mentioned in historical perspective) in Indian Context. It has
been rightly defined in the case of Reserve Bank of India v. Peerless General Finance and

27
AIR 1981 SC 234; (p. 242).
28
[1989] 178 ITR 31 (AP).
 13

Investment Company Limited29 that the art of interpretation depend on the text and the context.
These both are the bases of interpretation in Indian jurisdiction. One may well say if the text is the
texture, context is what gives the color. Neither can be ignored. Both are important. That
interpretation is best which makes the textual interpretation match the contextual. A statute is best
interpreted when we know why it was enacted. With this knowledge, the statute must be read, first
as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a
statute is looked at, in the context of its enactment, with the glasses of the statute- maker, provided
by such context, its scheme, the sections, clauses, phrases and words may take color and appear
different than when the statute is looked at without the glasses provided by the context. With these
glasses we must look at the Act as a whole and discover what each section, each clause, each phrase
and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a
statute and no word of a statute can be interpreted in isolation. Statutes have to be interpreted so that
every word has a place and everything is in its place.

In C.B. Gautam v. Union of India30, The Court had to deal with section 269 UD of the Income-tax
Act, which did not contain any provision for an opportunity to the parties to be heard before an order
for compulsory purchase of the property under Chapter XX-C of the Income tax Act was made.
Therefore, the requirement of an opportunity to show the cause before an order for compulsory
purchase is made by the Central Government must be read into the provisions of Chapter XX-C,
otherwise it would have adverse civil consequences for the parties affected. The provisions were
later amended to incorporate the principle of natural justice vide sub-section (1A) of section 269UD
by the Finance Act, 1993 from November 17, 1992.

Rule of beneficial construction: In cases where there are two interpretations possible, the one
which is beneficial to the assessee would be preferred. This principle was laid down in a landmark
Judgment in IRC v. Duke of Westminister31, wherein Tomlin LJ., stated that an assessee may arrange
his affairs within the bounds of the law so as to minimize the incidence of tax.

In McDowell & Co. Ltd. v. CTO32, The Apex Court clamped down on the liberal construction and

29
1987 AIR 1023.
30
[1992] 199 ITR 530 (SC).
31
1936 AC 1.
32
[1985] 154 ITR 148 (SC).
 14

the pendulum swung to the other extreme, as the Court made fine distinctions between tax evasion,
tax avoidance and tax planning and virtually rendered the Westminister Principle nugatory. Here the
Court followed the interpretation that the letter and spirit of the law must be followed. In this post-
McDowell era, the department generally got favourable verdicts and a lot of assessees suffered due
to the Courts coming down heavily on tax avoidance measures, which were equated with tax
evasion.

In Union of India v. Azadi Bachao Andolan33, The case dealt with conflicts between the Indo-
Mauritius Double Tax Avoidance Agreement and the Income-tax Act, 1961, it was held that an
assessee was entitled to arrange his affairs so as to minimize the incidence of tax, thus, partly
confirming the Westminister Principle.

In CIT v. Naga Hills Tea Co. Ltd.34, and in CIT v. Contr ED v. Kanakasabai35, it was held that
where a literal construction would defeat the obvious intention of the legislation and produce a
wholly unreasonable result, the court must “do some violence to the words” and so achieve that
obvious intention and produce a rational construction. If the interpretation of a fiscal enactment is
open to doubt, the construction most beneficial to the subject should be adopted.

Charging sections to be strictly construed while benevolent and procedural sections should be
liberally construed: This is a very important and practical rule of interpretation and generally
resorted to while interpreting the sections pertaining to incentives, exemptions and deductions where
the spirit is to promote exports, increase earnings in foreign convertible exchange, promote
industrialization, infrastructure development etc. A provision for appeal should also be liberally
construed.

In CIT v. Contr ED v. Kanakasabai36, held that a provision for exemption or relief should be
construed liberally and in favour of the assessee even if it results in his obtaining “a double
advantage”.

In Gursahai Saigal v. CIT37, it was decided by the court of law that those sections which impose the
charge or levy should be strictly construed; but those which deal merely with the machinery of
assessment and collection should not be subjected to a rigorous construction but should be construed

33
[2003] 263 ITR 707 (SC).
34
89 ITR 236, 240 (SC).
35
ITR 236, 240 (SC).
36
Ibid 35.
37
48 ITR (SC) 1.
 15

in a way that makes the machinery workable.

In Bajaj Tempo Ltd.38: A provision in a taxing statute granting incentives for promoting growth and
development should be construed liberally, and since as provision for promoting economic growth
has to be interpreted liberally, the restriction on it too has to be construed so as to advance the
objective of the provision and not to frustrate it. While interpreting the various provisions, the Court
must not adopt a hyper technical approach and apply cut and dry formula. A pragmatic approach
should be adopted so that the object of the introduction/insertion of a particular provision could be
achieved.

In CIT v. Poddar Cement (Pvt.) Ltd.39, it was observed by the court that where there are two possible
interpretations of a particular section which is akin to a charging section, the interpretation which is
assessable should be preferred by construing that particular provision. Reiterating the same view, in
the case of CIT v. Shaan Finance (Pvt.) Ltd.40, it has been held that in interpreting a fiscal statute,
the Court cannot proceed to make good the deficiencies if there be any. The Court must interpret the
statute as it stands and in case of doubt, in a manner favourable to the taxpayer.

In CIT v. Vegetable Products Ltd.41, It has been held that if the Court finds that the language of
taxing provision is ambiguous or capable of more meaning than one, then the Court has to adopt the
interpretation which favours the assessee.

In Gannon Dunkerly & Co. Ltd. v. CBDT42, it was held that the object of section 80-O is to encourage
the export of Indian Technical Know-how and augmentation of foreign exchange resources of the
country and hence a superficial and narrow interpretation can only defeat the benevolent purpose
behind the provision of section 80-O.

Mischief Rule: This rule is one of the canons of statutory interpretation and its basis lies in the
four aspects outlined below:

a. What was the common law prior to the enactment of the statute?
b. What was the defect or mischief which the common law failed to rectify?
c. What remedy did the Legislature provide by way of the statute enacted?
d. What was the legislative intent behind such remedy?
38
196 ITR 188 (SC).
39
[1997] 226 ITR 625 (SC).
40
[1998] 231 ITR 308 (SC).
41
[1973] 88 ITR 192.
42
159 ITR 162 (Bom).
 16

The application of the mischief rule would generally be done very rarely in taxing statutes, since a
Court would have to exhaust all the other modes and aids to interpretation before applying the
“mischief rule”. This rule carries an importance in instances of ambiguity. Thus where a law is clear
and can have only one meaning, this rule generally has no application.43

But in some instances, where the customary meaning of the language falls short of the basic purpose
of the enactment, a more comprehensive meaning may be ascribed to the words used, provided they
are fairly inclined to it.

For the application of this rule four things are considered in the first instance:

1. What was the common law before the making of the Act?
2. What was the Mischief and defect for which law did not provide?
3. What remedy are available to cure damages?
4. The true reason of the remedy.

Applicability of this rule, resolves difficulty of interpretation in number of instances. For example, if
the object of any enactment is public safety, then its working must be interpreted widely to give
effect to that object. Thus in the case of Workmen’s Compensation Act, 1923 the main object being
provision of compensation to workmen, it was held that the Act ought to be so interpreted, as far as
possible, so as to give effect to its primary provisions.

Construction of penal provisions in taxation statutes

There are several penal provisions in taxation statutes and these have special rules of interpretation
and notable among these are:

a. strict construction
b. prospective in operation and not retrospective; thus, any act which is currently not an
offence cannot be made one retrospectively by amendment of a penal provision with
retrospective effect;
c. Presumption of mens rea (i.e., guilty intention to commit the crime) unless the statute
specifically provides for the absence of the same.

To illustrate, concealment of income may be presumed by the department (without mens rea) and

43
Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 2 SCR 603.
 17

the onus of proof lies on the assessee to show that there is no concealment.

In Jarnail Singh v. ITO44 and in CIT v. Gangaram Chapolia45, it was held that to bring an act under
the provisions of section 276 C, the action of the person concerned has to be a willful attempt to
evade any tax, penalty or interest chargeable or imposable under the Act. The word “willful”
imparts the concept of mens rea, and if mens rea is absent, no offence under this section is made out.

In CIT v. Ram Rup Kishan46 and in J.M. Shah v. IT47, it was seen that as per section 277, the
intention of the Legislature in incorporating the words “and which he knows or believes to be false,
or does not believe to be true” is quite obvious. It is that a prosecution will not follow in every case
where a wrong statement is made and it will have to be judged as to whether the assessee harboured
mens rea or not.

In Indian jurisdiction, it is of general believe that a new statute should affect the future not the past
because in general, first and strong presumptions of any law enacted for the first time or amending
the enacted law, is its prospective applicability. The power of retrospective legislation does exist
which is not only subject to the question of competence but is also subject to several judicially
recognized limitations.48 In order to determine the validity of retrospective law the court has to take
into account all relevant surrounding facts and circumstances.49 It has been held that a law will be
retrospective only if the words used must expressly provide or necessarily imply retrospective
operation. Retrospective operation is not taken to be intended unless that intention is manifested by
express words or necessary implication; there is a subordinate rule to the effect that a statute or a
section in it is not to be construed so as to have larger retrospective operation than its language
renders necessary.50Article.20 (1) provides the necessary protection against retrospective application
of penal statute.51 But, in case of reduction in punishment by the subsequent enactment, the rule of
beneficial construction requires that ex-post facto law should be applied to reduce the rigorous
sentence of the previous law on the same subject. Such a law is not affected by Article 20(1) and
other reasons for non-application of retrospective application will also not be applicable.

44
[1989] 179 ITR 426 (P&H).
45
[1976] 103 ITR 613 (Ori) (FB).
46
[1992] 193 ITR 129 (P&H).
47
[1996] 218 ITR 38 (Mad).
48
National Agricultural Co-operative Marketing Federation of India v. Union of India, (2003) 260 ITR 548
(SC).
49
Jawaharmal v. State of Rajasthan, AIR 1966 SC 764.
50
S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India & Anr., 2006 (2) SCC 740.
51
No person shall be convicted of any offence except for violation of the law in force at the time of the
commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have
been inflicted under the law in force at the time of the commission of the offence.
 18

BIBLIOGRAPHY
BOOKS USED:

 Maxwell on the Interpretation of Statutes, Maxwell, revised by P. St. J. Langan, 12th edition,
reprint 2011

 Prakash Sahay's Classification of Goods & Interpretation of Taxing Statutes (in 2 Vols.), 2013.

WEBSITES USED:

 www.scconline.com