[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
Saturday, April 21, 2012
INTERPRETATION OF TAXING STATUTES
Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted; i.e., by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the Constitution. The tax in question must be authorised by such valid law. Taxation, in order to be valid, must not only be authorised by a statute but, must also be levied or collected in strict conformity with the statute, which authorises it. No tax can be imposed by any bye-law rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax”.
The ‘tax’, ‘duty’, ‘cess’ or ‘fee’ constituting a class denotes to various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. This power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as envisaged under Article 265 which uses only expression that no ‘tax’ shall be levied and collect except authorised by law. It in its elementary meaning conveys that to support a tax legislative action is essential, it cannot be levied and collected in the absence of any legislative sanction by exercise of executive power of State under Article 73 by the Union or Article 162 by the State Under Article 266(28) “taxation” has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. “Impost” means compulsory levy.
The well known and well settled characteristic of ‘tax’ in its wider sense includes all imposts. Imposts in the context have following characteristics: (I) The power to tax is an incident of sovereignty; (ii) ‘Law’ in the context of Art, 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority; (iii) The term ‘tax’ under Article 265 read with Article 266(28) includes imposts of every kind viz., tax, cess or fees; (iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a ‘tax’ in its technical sense as an impost, general, local or special.
Article 246 deals with the distribution of legislative powers as between the Union and the State legislatures, with reference to the different lists in the Seventh Schedule. The gist of the article, in short is, that the Union Parliament has fully and exclusive power to legislate with respect to matters in List I and has also power to legislate in respect to matters in list III. The State legislatures, on the other hand, has exclusive power to legislate with respect to matters in List II, minus matters falling in Lists I and III and has a concurrent power with respect to matters included in List III. The Parliament and the State legislature can legislate only in respect to the matters contained relating to tax in such List. One cannot travel beyond the power conferred under the said Article.
Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.
Rules of Interpretation
In every treatise upon interpretation of statutes, different attitudes are attributed to the subject matter or nature of the statute so as to consider as to the effect of the object of the particular statute which is sought to be achieved. For such purpose the expressions “shall” or “may” or laying down an affirmative procedure etc. used in the statute frequently came for judicial consideration. Having regard to the subject matter of statute such in as beneficial or welfare legislature the word “may” which generally confer a discretion upon the authority exercising the power is very often construed as a discretion coupled with duty so as to construe the expression “may” as a mandatory provision in that what was not explicitly stated in the statute is construed as mandatory, as if this is implicit in the statute.
Mandatory and Directory
The question as to whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The meaning and intention of the Legislature must govern, and these are to be ascertained not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other. The use of the word shall in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. In the setting in which the word “may” has been used need consideration and given due weightage.
Sec 154 of IT Act 1961, is to ensure that injustice to the assessee or to the revenue may be avoided. It is implicit in the nature of the power and its entrustment to the authority invested ,with quasi-judicial functions under the Act, that to do justice it shall be exercised when a mistake apparent from the record is brought to his notice by a person concerned with or interested in the proceeding. That power is not discretionary and the Income-tax Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise it as held by the Supreme Court in L. Hirday Narain vs. I.T.O.
The use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such unless there is something in the context in which the word is used which would justify a departure from this meaning. Where the assessee seek to claim the benefit under the statutory scheme, they are bound to comply strictly with the condition under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to the assessee.
It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and Others vs. Filip Tiago De Gama of Vedem Vasco De Gama. In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising there from. The ‘Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statute or read something into it which is not there. It cannot re-write or recast legislation.
It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.
In India, however, the Courts of law in construing a taxing statute lean on the ratio of the case of Cape Brandy Syndicate and goes by the words used in the statute without searching for any intendment of use of such expressions as they often do in construing different nature of statute such as beneficial statute, welfare statute more particularly the legislation relating to protection of the rights of industrial workers. However, an exception to this rule has been made by the Supreme Court in the case ofState of Orissa vs. M. A. Tullock & Co. In that case while the statute namely sec. 5 (2)(a)(ii) of the Orissa Sales Tax Act, 1947 did not make it mandatory for a dealer that he must produce a true declaration in writing by the purchasing dealer or by such responsible person as may be authorised in writing in this behalf by dealer that the goods in question are specified in that purchasing dealer’s certificate of registration being required for resale by him or in the execution of a contract the rule made by the rule making authority made it mandatory. The Supreme Court held in the case of Kedarnath Jute Manufacturing Co. vs. CTO that the said mandatory provision in the Orissa Sales Tax Rule was inconsistent with sec. 5(2)(a)(ii) of the Orissa Sales Tax Act and to avoid that conflict that notwithstanding the use of the expression “shall produce a true declaration” that the rule was only directory and therefore it would be enough if it was substantially complied.
In a revenue statute where by the legislature by an enactment imposes a tax or charge the rule of construction or interpretation of such statute has been more or less unanimously construed by Courts in England as also in India in a simpler manner.
In the words of Lord Thankerton in the case of I R C vs. Ross and Coulter observed “counsel are apt to use the adjective ‘Penal’ in describing the harsh consequences the taxing provisions, but if the meaning of the provisions, is reasonably clear, the Courts have no jurisdiction to mitigate such harshness. On the other hand, if the provision is capable of two alternative meanings, the Courts will prefer that meaning more favourable to the subject. If the provision is so wanting in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect.”
These fundamental principles have been accepted by Supreme Court in a number of cases. To illustrate Bhagawati J. stated the principle as follows:
“In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of law. If the revenue satisfies the court that the case falls strictly with the provisions of the law, the subject can be taxed, If, on the other hand, the case is not covered within the four corners of the provisions of the statute, no tax can be imposed by inference or by analogy or by trying to prove into the intentions of the legislature and by considering what was the substance of the matter”.
Long days back the House of Lord expressly affirmed the cardinal principles of Duke of Westminster vs. I.R. in applying the principle of construction implicit in a revenue statute that the citizen has the legal right to dispose of his capital and income so as to attract upon himself the least amount of tax. Avoidance of tax is not a tax evasion and it carries no ignominy with it anybody can so arrange his affairs so as to reduce the burden of tax to minimum. In the case of Duke of Westminster the House of Lords so observed that “given that a document of transaction is genuine the Court cannot go behind it to some supposed underlying substance”.
However, the Supreme Court in a Sales Tax case in McDowell vs. CTOtook the view that the legal position in case of tax avoidance should be taken as altered in the light of three judgments of the House of Lords (i)Ramsay vs I R (ii) I R vs. Burmah Oil (iii) Furniss vs Dawon.
The eminent jurist Mr. N. A. Palkhivala in one of his books “We The Nation, The Lost Decades” in an illuminating article have analysed the judgment of Supreme Court in McDowell vs. CTO and considered the validity of ruling of the Supreme Court blurring the distinction between tax avoidance which is legitimate and tax evasion. By an in depth analysing the said judgment in McDowell’s case, Mr. Palkhivala observed that the Courts’ pronouncement obliterating such distinction is patently incorrect and proceeds on a total misreading of three decisions of the House of Lords. In the said article he also observed “the whole object is that in a taxing statute the courts have little scope to find out the underlying intention of the legislature beyond what is stated in the plain language of the statute” is relevant in this context.
I conclude this Article by quoting a classic passage of words of the Late Rowlatt J who explained the rule of interpretation of revenue statute in the case of Cape Brandy Syndicate vs. I R C:
“In a taxing enactment, one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”
The Author of this article is a co-author of the book titled ‘The Principles of Interpretation of Statutes’.
[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
 L. Hirday Narain vs. I.T.O; (1970) 78 I.T.R. 26 (S.C.)
 Union of India and Others vs. Filip Tiago De Gama of Vedem Vasco De Gama; (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336)
 State of Orissa vs. M. A. Tullock & Co; 1964 (15) STC 641 (SC)
 Kedarnath Jute Manufacturing Co. vs. CTO; AIR 1966 SC 12
 I R C vs. Ross and Coulter; 1948 (1) All E.R. 616 at 625 (H.L.)
 Duke of Westminster vs. I.R; 19 TC 490, 520, 524
 McDowell vs. CTO; (1985) (154 ITR 148 (SC)
 Ramsay vs I R; 54 T C 101
 I R vs. Burmah Oil; 54 T C 200
 Furniss vs Dawon; 55 T C 324
 Cape Brandy Syndicate vs. I R C; 1921 (1) KD 64, 71F