Tax Statutes: Rules for Interpretation

    The essence of law rests in the spirit, not its letter, for the letter is essential only as being the external manifestation of the intention that underlies it.”

    – Salmond

    INTRODUCTION

    The interpretation of laws to courts of law is limited. With time, courts have evolved a large and elaborate body of rules to guide them in construing or interpreting statutes. Some Interpretation Acts shall be deemed remedial and shall accordingly receive such fair, broad, and liberal construction and interpretation.

    The primary objective of statutory interpretation is to ascertain the Legislature’s intention conveyed expressly or impliedly in the language used. As stated by Salmond, “interpretation or construction is meant, the courts seek to determine the meaning of the Legislature through the medium of authoritative forms in which it is to be expressed.”

    Interpretation is as old as language. Elaborate rules of interpretation emerged even at a very initial stage of the Hindu civilisation and culture. The importance of avoiding literal interpretation has been stressed in various ancient textbooks. Concerning statutory law, interpretation is of significant importance because of the legislation’s inherent nature as a source of direction. The means of statute making and the process of interpretation of statutes are two different activities.

    Words are necessary for means of communication, whether they are spoken or written. When a word or a sentence has only one meaning, there arises no problem of interpreting the same. Interpretation is the art of finding out what the real sense of the enactment is. It is the method of determining the true essence of the words used in a statute. In a usual scenario, the Legislature, after enacting legislations, becomes functus officio so far as those statutes are concerned.[1] They are not obliged to interpret the statutes enacted by them. Thus, the two functions are restricted within their domain, i.e., the Legislature enacts, and the judges interpret.

    INTERPRETATION OF TAX STATUTES

    In the case of taxing statutes, certain bedrock principles enable the courts and tribunals to interpret a particular law. Some crucial aspects relating to interpretation of taxing statutes, i.e. the cardinal rules of interpretation, are dealt with herein.

    The Classic Rule of Strict Construction

    Laws are expressions of authoritative directions and the words which are used form part of the law. The very concept of “interpretation” connotes the introduction of elements that are necessarily irrelevant to the statute’s words.  The term “construction” has been explained in CWT v. Hashmatunnisa Begum[2] to describe that “something more is being in the subject-matter’s elucidation than can be obtained by a strict interpretation of the words used”. This classical approach of interpreting the tax statute is also followed in England as well as in India. In England, this rule of strict construction is also known as the ‘Duke of Westminster principle’[3].

    In the case of Commissioner of IT v. Elphinstone Spg & Wvg Mills Co Ltd.[4], and Commissioner of IT  v. Motors & General Stores Ltd.[5], it was held by the Court of law that the subject cannot be taxed unless it comes within the ambit of the statute. The department cannot avail of the argument that it falls within the ambit of the statute.

    The views of Rowlatt J. in the case of Cape Brandy Syndicate v. IRC[6] were approved in the case of CIT v. Ajax Products Ltd.[7], that “in tax laws, an individual has to look merely at what is mentioned. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing in the provision is to be read, nothing to be suggested. One can only study the language used in the statute.”

    Literal Interpretation 

    It is the most broadly used rule in taxing statutes. Some landmark judgements in this regard are given hereunder. In the case of Commissioner of IT v. T.V. Sundaram Iyengar,[8] it was held that if the language of the law is explicit and unambiguous, the court cannot dismiss the plain meaning, even if it leads to prejudice. Tax cannot be required on the subject without terms in the Act, apparently showing an intention to put a burden on him. The agency cannot avail of the argument that he comes within the spirit.

    In Brig. B. Lall v. World Trade Organisation[9], the issue was regarding the purpose of Section 16A of Wealth-tax Act, which empowers the WTO to refer to the estimate of the property to the government to ascertain the actual market value of the property on the date of valuation stated by the assessee. 

    Golden Rule / Doctrine of Purposive Construction

    Often, the strict rule of interpretation of the tax statute is likely to lead to an evident absurdity. The golden rule states that the meaning of the words should be so affected that any improbability is avoided. Golden rule’s purpose is limited in the realm of construction of taxing statutes since the literal rule would gain precedence over the golden rule.The Court has further defined this principle that the choice is between two interpretations, the narrower of which would fail to achieve the legislation’s evident purpose[10].

    Rule of Harmonious Construction

    In the case of Commissioner of IT v. Chandanben Maganlal,[11] it was held that any provision relating to a tax statute must be interpreted that the meaning of such provision must harmonise with the Legislature’s intention behind the law. However, it is subject to the fact that the appropriate section, or even the entire enactment, should not be held unconstitutional. 

    Legislative Response

    The statute (provisions) must be read as a whole. This is the primary rule to start with the interpretation of statutes in the Indian context. That interpretation is best, which addresses the textual interpretation that matches the contextual. Law is best interpreted when we understand the nature of enactment.

    In CB Gautam v. Union of India[12], the Hon’ble Court had to deal with Section 269UD of the IT Act for an opportunity to parties, i.e. to be heard before an order for the compulsory purchase of the property under Chapter XX-C of the IT Act. Hence, the requirement of an opportunity to show cause before the Central Government makes an order for compulsory purchase that must be read into the provisions of Chapter XX-C. The laws were later altered to include the principle of natural justice vide section 269UD (1A) by the Finance Act, 1993.

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    Mischief Rule 

    The mischief rule’s, as laid down in Heydon’s Case, application generally is made very unusually in taxing enactments since a Court would have to exhaust all the other modes and aids to interpretation before applying the mischief rule. This rule carries significance occurrences of vagueness. Thus, where a law is straightforward and can have only one definition, this rule regularly has no utilisation.[13] Denning L.J.[14] stated, “it would be futile to expect that laws need to be drafted with divine prescience and perfect clarity.”[15] In the backdrop of this recital is to keep the focus on the value of other rules of interpretation.

    Construction of Penal Provisions

    There are various penal provisions in tax laws. These have selective interpretation rules and notable among these are strict construction, prospective in operation, and not retrospective. Presumption of mens rea[16] unless the statute explicitly gives for the absence of the corresponding. To bring an act under Section 276C, 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[17].

    Rule of  “Noscitur a Sociis

    The rule is that the purpose of a general word is restricted by the unique term appearing along with it. The meaning of a word must be exercised by the company it keeps. Noscere means to “know” and social means “association”. Therefore, ‘Noscitur a Sociis’ means knowing from the association. It means that where two or more words which are susceptible to similar meaning are linked together, they are understood to be done in their cognate sense. They grasp, as it were, their colour from each other, the meaning of the more general being confined to a sense analogous to that of the less [18].

    In Commissioner of IT v. Raj Kumar[19], the deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961[20], the word ‘advance’, appearing in the company of the term ‘loan’ was interpreted. It was held that advance could only mean such ‘advance’ which bears the obligation of repayment. A business advance, which is like money transacted to give effect to a commercial transaction, cannot be treated as a “deemed dividend” falling within the ambit of Section 2(22)(e).

    The above rules are the most fundamental rules of interpretation. The Courts use them along with individual Acts like the General Clauses Act, 1897, and the State General Clauses Act to ascertain meanings of words not defined in the Act.

    External Aids

    The Court may use several external aids like works of prominent authors, dictionaries, legislative debates to interpret a statute correctly. The relevance of the Finance Minister’s speech to interpret tax statutes, the words of the statute do themselves best declare the intention of the law given. Suppose there is any uncertainty in the language, in understanding the intention of the Legislature. In that case, the aid can be taken of the Parliament’s proceedings including the aims and objectives of the Act. In Sole Trustee, Loka Shikshana Trust v. Commissioner of IT[21], it was held that there is no limit in resorting to or referring to the speech of the Finance Minister. Interpretation of a statute or provision being an exercise in the ascertainment of meaning, everything which is reasonably relevant should be permissible.[22]

    “Generalia Specialibus Non-Derogant”

    The literal meaning of the expression “Generalia Specialibus Non-Derogant” is that “words or things do not derogate from the special”. The maxim implies that general provisions must yield to the particular provisions. The Courts observed that the phrase means that when there is a dispute between a general and particular provision, the following shall prevail[23], or the laws must yield to the particular provision.

    Exception: Where there is a dispute between two statutes

    The enactments to be followed in case of a conflict between two statutes is that a later law abrogates the earlier (leges posteriores priores contrarias abrogant). The exception is that general legislations do not derogate special legislations.

    The Partnership Act v. Income Tax Act: The Legislature has deliberately made a specific provision to cover a particular situation to assess a firm under the IT Act. There is no scope for importing the concept and the sections of the Partnership Act. The legal status under the IT law is different from that under the general rule of partnership in several respects.[24]

    “Mimansa Rules” of Interpretation

    In Ispat Industries Ltd. v. Commissioner of Customs[25], the Hon’ble Court has referred to “the Mimansa Rules of Interpretation of the ancient times while deciding an appeal under the Customs Tariff Act, 1975. According to the Court, all legal systems have a hierarchy of laws. Our country has an order of the Constitution right at the summit. Next appears the statutory law, which may be either the Parliamentary law or law made by the State Legislature. The third is delegated or subordinate legislation, which may be in the form of rules and regulations made under the Act. Moreover, last in the hierarchy are administrative orders or executive directions. 

    CONCLUSION

    Lastly, it is to be concluded that the art of interpretation is a remarkable tool to paint citizens living with numerous beneficial colours of joy, peace, and happiness. Indian judiciary has wonderfully authorised Indian statutes in a manner that is fair, equitable, and in conformity with the object for which the law is outlined. The above is a fundamental overview of the rules of interpretation of taxing statutes and is designed to give an insight into the courts’ various methods to ascertain the meaning of legal provisions. To conclude, one must endeavour hard to read between the lines by using the interpretative techniques.

    REFERENCES:

    [1] Justice A.K. Srivastava, “Interpretation of Statutes”, 3 JTRI 1 (1995).

    [2] [1989] 176 ITR 98 (SC).

    [3] [1936] AC 1. 

    [4] 40 ITR 142 (SC).

    [5] (1967) 066 ITR 0692.

    [6] [1921] 1 KB 64.

    [7] [1965] 55 ITR 741 (SC).

    [8] [1975] 101 ITR 764 SC.

    [9] [1981] 127 ITR 308/ [1980] 4 Taxman 559 (Raj).

    [10] Grey v. Pearson 35 [1857] 6 HL Cas. 61.

    [11] [2002] 120 Taxman 38 (Guj).

    [12] 43 [1992] 199 ITR 530 (SC).

    [13] Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 2 SCR 603. 

    [14]Seaford Court Estates Ltd. v. Asher, 1949 (2). 

    [15] H. P. Ranina, “Placing Life into the Letter of the Law” The Hindu Feb. 18, 2016. 

    [16] State Of Maharashtra v. Mayer Hans George, 1965 AIR 722, 1965 SCR (1) 123.

    [17]. Jarnail Singh v. ITO [1989] 179 ITR 426 (P&H) and CIT v. Gangaram Chapolia [1976] 103 ITR 613 (Ori.)(FB).

    [18] Rainbow Steels Ltd. and Anr v. CST 1981 SCR (2) 727.

    [19] [2009] 181 Taxman 155 (Del.).

    [20]The Income-tax Act,s.2(22)(e).

    [21] [1975] 101 ITR 234 (SC).

    [22] Chunnilal Onkarmal (P.) Ltd. v. Union Of India [1996] 221 ITR 459 (MP); K.P. Varghese v. Income Tax Officer [1981] 131 ITR 597 (SC); Commissioner of IT v. M.K. Vaidya [1997] 224 ITR 186 (Kar); Commissioner of IT v. Export India Co Ltd. (1996) 219 ITR 461 (P&H); Ganji Rao v. Commissioner of IT [1996] 220 ITR 654 (AP).

    [23] Commissioner of  IT v. Shahzada Nand and Sons 60 ITR 392 (SC); Union of India v. Indian Fisheries (P.) Ltd. AIR 1966 SC 35.

    [24] CIT v. Shambulal Nathalal and Co. [1984] 145 ITR 329 (Kar).

    [25] (2006) 202 ELT 561 (SC).

    BY- POULOMI BARIK | KIIT SCHOOL OF LAW

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