Taxing
Power
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[1].
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[2]. 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[3]. 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[4] 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.
Revenue
Statute
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[5] 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[6]. 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. CTO[7]took 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[8] (ii) I
R vs. Burmah Oil[9] (iii) Furniss
vs Dawon[10].
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.
Conclusion
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[11]:
“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’.
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[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
[2] Union of India and Others vs. Filip Tiago De Gama of Vedem Vasco
De Gama; (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336)
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