Strict construction of taxing or fiscal statutes

INTRODUCTION

• Tax is imposed by the state to raise its general revenue. The statutes dealing with tax are termed as taxing or fiscal statutes.
• In other words, taxing statutes are those which impose taxes on income or other kinds of transactions.
• A taxing statute is to be strictly construed. Where a person clearly falls within the scope of a taxing provision, he should not be allowed to escape, but if he does not, he should not be dragged.
• Examples– Income Tax Act, Gift Tax Act, Wealth Tax Act.

OBJECT OF THE TAXING STATUTES

• To collect revenue from people to run the government. Tax is the source of income of the state. The money so collected is utilized for the welfare activities of the people and for public administration.

MEANING

• According to LORD CAIRNS, tax laws must be read strictly.
  If a person clearly falls under the exact words of the tax law, they must pay tax, even if it feels unfair.
  But if the exact words of the law do not cover the person, then they cannot be taxed, even if it seems like they should be.

IMPORTANT JUDICIAL PRONOUNCEMENTS

Commissioner of Customs v. Dilip Kumar & Co.

• In this case, a five-Judge Bench of the Supreme Court held that the government cannot collect any tax unless there is clear authority of law under Article 265 of the Constitution.
• Therefore, tax laws must always be interpreted strictly. If the law says that only certain people or things can be taxed, it cannot be expanded to include others not mentioned by the Legislature.
• The Court explained that strict interpretation means that a tax law applies only when the case clearly falls within the exact words of the statute.
• Courts cannot add words, assume intentions, or apply fairness or equity in tax matters. If the tax provision is unclear or has two meanings, the interpretation must favour the taxpayer.
• Strict interpretation does not always mean narrow interpretation, but it necessarily means adhering tothe plain language of the law. There is no room for assumptions or presumptions in taxation.

District Registrar & Collector, Hyderabad v. Canara Bank

• The Supreme Court observed that laws enacted for public protection or relief may be interpreted liberally.
• However, tax laws impose a burden on citizens and therefore must be interpreted strictly.
• Where the words of a tax statute are clear, courts cannot apply fairness or equity.
• If there is any doubt or ambiguity, the benefit must go to the taxpayer and not to the government.

Tata Consultancy Services v. State of A.P.

• The Supreme Court said that tax laws are usually interpreted very strictly.
• However, where a tax provision has only one reasonable and clear meaning, the court need not apply strict construction and may follow the obvious meaning of the provision.

Hansraj and Sons v. State of J. and K.

• In this case, the court held that a taxing statute should be construed strictly.

PRINCIPLES OF STRICT CONSTRUCTION OF TAXING OR FISCAL STATUTES

The fundamental principle is that any person liable to tax under the charging section must pay tax irrespective of hardship or inconvenience.
In State of West Bengal v. Kesoram Industries Ltd., the Supreme Court settled the following principles:

1. Equity or fairness has no place in taxation. Tax laws must be read as they are written, without adding or assuming anything.
2. Tax can be imposed only by clear words of the statute. The charging section must clearly and expressly cover the person sought to be taxed.
3. Ambiguity must benefit the taxpayer. If the Legislature fails to express its intention clearly, the taxpayer cannot be penalised for it.

WORDS NOT TO BE STRETCHED AGAINST A TAX-PAYER

Views of Eminent Jurists

• Lord Reid stated that the words of a tax law should never be stretched to tax a person. Tax laws must be applied using their natural and ordinary meaning to ensure certainty and predictability.
• Lord Wensleydale emphasised that no person can be taxed unless the law clearly says so, and tax statutes must be read according to their natural meaning.
• Viscount Simon observed that in tax law, only the actual words matter. There is no room for fairness, presumptions, or inferred intention. Nothing can be added or implied.
• Justice Bhagwati held that courts must strictly follow the exact wording of tax statutes. If a case falls within the law, tax can be imposed. If not, taxation cannot be justified by analogy, substance, or supposed legislative intention.

AMBIGUOUS WORDS TO BE CONSTRUED IN FAVOUR OF THE TAX-PAYER

If the words of a taxing statute are capable of more than one interpretation, the interpretation favourable to the taxpayer must be adopted.

Empress Mills, Nagpur v. Municipal Committee, Wardha

If the words in a tax law are unclear and can be read in two different ways, the interpretation that favours the taxpayer must be applied.

Union of India v. Onkar S. Kanwar

If two different views are possible on a tax issue, the view that favours the assessee (taxpayer) must be accepted.

APPLICATION OF STRICT CONSTRUCTION TO TAXING OR FISCAL STATUTES

The courts have construed the taxing statutes by way of strict construction.

Martand Dairy and Farm v. Union of India

• Facts: Milk products were exempt when sold loose but taxable when sold in sealed containers.
• Judgment: The Court applied strict literal interpretation and held that the word “sealed” must be given its ordinary meaning. Therefore, products sold in sealed containers were taxable.

Atlas Cycles Industries Ltd. v. State of Haryana

• Facts: Whether a provision extending “rules, by-laws, orders, directions and powers” also extended a tax-imposing notification.
• Judgment: The Court held that taxation cannot be inferred unless expressly stated, and the notification could not be extended by implication.

EVASION OF STATUTES

• A person can be punished only for acts that the law clearly prohibits.
• If two courses of action lead to the same result, and only one is prohibited, a person is free to choose the lawful course.
• Courts cannot extend the scope of a statute to punish conduct not clearly covered.
• However, if a prohibited act is disguised as a lawful one, courts may look behind the form and enforce the law.

Meaning of “Evade”

1. Secretly or dishonestly breaking the law.
2. Legally avoiding tax by choosing a lawful alternative.

Judges such as Lord Hobhouse, Grove J., Lindley LJ, and the Lord Chancellor clarified that tax avoidance within the law is permissible, whereas tax evasion by violating the law is punishable.
As stated by Subba Rao J., tax may be evaded illegally or avoided lawfully, and only illegal evasion attracts punishment.

C.I.T. v. Sivakasi Match Exporting Co.

• In this case, the Court held that when a genuine transaction, not prohibited by law, results in reduction of tax liability, it does not amount to tax evasion.
• Such an arrangement is only a legal device to reduce tax liability, which every taxpayer is entitled to adopt.
• The decision clearly draws a distinction between illegal tax evasion and lawful tax avoidance, reinforcing the principle that courts cannot penalise taxpayers for acting within the framework of the law.

CONCLUSION

Strict construction of taxing statutes is a cornerstone of taxation law. Since taxation imposes a compulsory burden on citizens, no tax can be levied without clear and express authority of law. Courts cannot enlarge the scope of taxing provisions based on equity, fairness, or presumed intention. Where the language of a tax statute is clear, it must be applied as it stands; where it is ambiguous, the benefit must go to the taxpayer. This principle safeguards individual rights, ensures certainty in taxation, and upholds the constitutional mandate under Article 265 that no tax shall be levied or collected except by authority of law.

Reference

1. Interpretation of statutes by D.N. Mathur, 6^th edition.

Read Latest posts The Bharat Law