Interpretation of Taxing Statutes

A tax takes property by force of law, so the law must clearly impose it. Taxing statutes are therefore construed strictly: the State must bring the subject within the plain words of the charge, and doubt in the charging provision goes to the taxpayer. But the rules differ for different provisions. Machinery provisions are read to make the charge work, exemptions are read strictly against the person claiming them, and incentive provisions are read liberally once eligibility is shown. This note sets out each rule and its leading authority.

1. The Rule of Strict Construction

The classic statement is that of Rowlatt J in Cape Brandy Syndicate v Inland Revenue Commissioners (1921): 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 is to be implied. One can only look fairly at the language used.

• Adopted in India. In A.V. Fernandez v State of Kerala (1957) the Supreme Court held that if the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed; if not, he is free, whatever the apparent spirit of the law.
• No equity. A tax cannot be imposed by analogy or by appeal to the spirit of the statute; the words alone govern.
• Doubt to the subject. A genuine ambiguity in a charging provision is resolved in favour of the assessee.

2. Different Provisions, Different Rules

Figure 1: How each kind of tax provision is read

• Charging provisions. Impose the tax; construed strictly, and the State must show the case falls within them.
• Machinery provisions. Provide for assessment and collection; construed to make the charge effective. In CIT v B.C. Srinivasa Setty (1981) the Court held that where the computation provisions cannot apply to an asset, such as self-generated goodwill, the charge itself fails.
• Exemption notifications. Read strictly; the person claiming an exemption must bring himself squarely within it (Section 3)
• Incentive provisions. Provisions granting incentives to promote growth are construed liberally, so as to advance their object, as held in Bajaj Tempo v CIT (1992)

3. Exemption Notifications: Dilip Kumar (2018)

In Commissioner of Customs v Dilip Kumar and Company (2018), a five-judge Constitution Bench settled the approach to exemption notifications and overruled the contrary view in Sun Export Corporation (1997).

• Strict construction. An exemption notification is interpreted strictly.
• Burden on the assessee. The assessee must prove that the case falls within the exemption.
• Ambiguity favours the revenue. Any ambiguity in an exemption notification must be resolved in favour of the revenue, not the assessee.
• Charging provisions distinct. The contrary rule continues for charging provisions, where ambiguity still benefits the assessee.
• Sun Export overruled. The view that an ambiguous exemption should be read in the assessee's favour was held incorrect.

4. Tax Avoidance and Tax Planning

Figure 2: Legitimate planning and colourable devices

• McDowell (1985). A Constitution Bench held that colourable devices cannot be part of tax planning, and that dubious methods of avoiding tax are not to be encouraged.
• Azadi Bachao Andolan (2003). The Court held that tax planning within the law is legitimate, and that McDowell did not outlaw genuine arrangements made to reduce tax.
• Vodafone (2012). The Court held that a genuine transaction must be respected, and that the revenue must look at the transaction as a whole rather than dissecting it, disregarding only sham or artificial arrangements.

5. Frequently Asked Questions

Why are taxing statutes construed strictly?

Because a tax takes property by force of law, it may be imposed only by clear words. As Rowlatt J said in Cape Brandy Syndicate (1921), there is no equity about a tax and no presumption as to a tax; nothing is to be read in and nothing is to be implied. The Supreme Court adopted this approach in A.V. Fernandez v State of Kerala (1957).

How are exemption notifications interpreted after Dilip Kumar?

In Commissioner of Customs v Dilip Kumar and Company (2018), a Constitution Bench held that exemption notifications must be interpreted strictly, that the burden is on the assessee to show that the case falls within the exemption, and that any ambiguity in an exemption must be resolved in favour of the revenue. It overruled Sun Export Corporation (1997) to the extent it held otherwise, while preserving the rule that ambiguity in a charging provision benefits the assessee.

What is the difference between a charging and a machinery provision?

A charging provision imposes the liability to tax, while a machinery provision provides the means of assessing and collecting it. Charging provisions are construed strictly. Machinery provisions are construed so as to make the charge effective, but the two form an integrated code, so that where the machinery cannot apply to a particular case, the charge fails, as held in CIT v B.C. Srinivasa Setty (1981).

6. Related Topics

• Topic 9: Strict Construction of Penal Statutes. The parallel rule for penal laws.
• Topic 19: Presumptions in Interpretation. Presumptions that protect property.