TECHNIQUE
OF INTERPRETATION OF TAXING STATUTES - NO ROOM FOR ANY INTENDMENT
By K P C Rao., FICWA
kpcrao.india@gmail.com
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 of State 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’.
[Published in Circuit, a Monthly magazine of ICAI, Hyderabad]
[1] L. Hirday
Narain vs. I.T.O; (1970) 78 I.T.R. 26 (S.C.)
[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)
[3] State of
Orissa vs. M. A. Tullock & Co; 1964 (15) STC 641 (SC)
[4] Kedarnath
Jute Manufacturing Co. vs. CTO; AIR 1966 SC 12
[5] I R C vs.
Ross and Coulter; 1948 (1) All E.R. 616 at 625 (H.L.)
[6] Duke of
Westminster vs. I.R; 19 TC 490, 520, 524
[7] McDowell vs.
CTO; (1985) (154 ITR 148 (SC)
[8] Ramsay vs I
R; 54 T C 101
[9] I R vs.
Burmah Oil; 54 T C 200
[10] Furniss vs
Dawon; 55 T C 324
[11] Cape Brandy
Syndicate vs. I R C; 1921 (1) KD 64, 71
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