CONSTRUCTION OF TAXING STATUTES :
The primary rule of construction of any taxing statute is that its plain, literal and
grammatical meaning should be taken, if that meaning is ascertainable. If the meaning be plain,
then there is no room for any rule of interpretation for, if meaning is clear and unambiguous then
that is the law. That is the golden rule. There is an important corollary to this golden rule, which
is of fundamental significance in the interpretation of taxing statutes.
From the rule of literal construction follows the rule of strict construction, which is often
deemed to be identical with it. However, we think that it is an independent principle which is
distinct though it arises directly form the aforesaid principle of literal construction – one relates
to the meaning, the other to its legal effect. The principle can be called the principle of strict
construction of taxing statutes and can be stated as follows :
If the meaning of a taxing statute is found to be unambiguous then that is the law. It must
be strictly applied. It must be applied irrespective of any consideration of equity, hardship,
difficulty, or illogicality, or of escapement. In other words, it rests on the supposition that if the
precise meaning is ascertainable on a liberal construction, then no other view of law is allowed
or is permissible.
Bhagwati, J. in A. V. Fernandez Vs. State of Kerala, AIR 1957 SC 657, 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 the law. If the revenue satisfies the court that the
case falls strictly within the provisions of the law, the subject can be tax. If, on the other hand,
the case is not covered within the four corners of the provisions of the taxing statute, no tax can
be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature
and by considering what was the substance of the matter.
Shah, J. in Sales Tax Commissioner Vs. Modi Sugar Mills, AIR 1961 SC 1047, has
formulated the principle thus: “In interpreting a taxing statute, equitable considerations are
entirely out of place. Nor can taxing statutes be interpreted on any presumptions or
assumptions. The court must look squarely at the words of the statute and interpret them. It
must interpret a taxing statute in the light of what is clearly expressed; it cannot imply anything
which is not expressed; it cannot import provisions in the statute so as to supply any assumed
deficiency.
If the words used are ambiguous and reasonably open to two interpretations, benefit of
interpretation is given to the subject. If the Legislature fails to express itself clearly and the tax-
payer escapes by not being brought within the letter of the law, no question of justness as such
arises. But equitable considerations are not relevant in construing a taxing statute, and similarly
logic or reason cannot be of much avail in interpreting a taxing statute.
The principle of strict construction applicable to taxing statutes does not, however, mean
that where the subject falls clearly within the letter of the law, the court can avoid the tax by
putting a restricted construction on some supposed hardship, or on the ground that the tax or
penalty imposed is heavy or oppressive. When the intention to tax is clear, it cannot be defeated
by a mere defect in phraseology on the ground that the provision could have been more
artistically drafted. The rule that where a literal interpretation leads to absurd or unintended
results, the language of the statute can be modified to accord with the legislative intention and
to avoid absurdity also applies in interpreting a taxing statute. Therefore, the rule, that object of
the Legislature has to be kept in view and a construction consistent with the object has to be
placed on the word used if there be ambiguity, is also applicable in construing a taxing
enactment.
Though equity and taxation are often strangers, attempts should be made that they do
not remain always so and if a construction results in equity rather than in injustice, then such a
construction should be preferred to the literal construction. Further, considerations of public
policy may also be relevant in interpreting and applying a taxing Act. Thus, it has consistently
been held that payments tainted with illegality cannot be treated as money wholly or exclusively
spent for the purpose of business for being allowed as a deduction in computation of profits of
the business for taxation under the Income Tax Act.
Again penal provisions enacted to meet tax evasion are subject to the rule of strict
construction and it is for the Revenue to prove that the conditions laid down for imposition of
penalty are satisfied. It must also be remembered that in applying a statute designed for
detection of fraud for example, one providing for search and seizure of tax-payer’s property two
competing public interest are involved: that offences involving tax frauds should be detected and
punished and that the right of the individual to the protection of law from unjustified interference
with his use and enjoyment of his private property should be upheld. If the statutory words are
ambiguous or obscure, a construction should be placed on them that is least restrictive of
individual’s rights. But a Judge should not be over-zealous in searching ambiguities or
obscurities in words which are plain simply because he is out of sympathy with the policy which
the Act appears to give effect.
The rule of strict construction does not negative the application of the well-known
principle that a person who claims an exemption has to establish it, and there is ample authority
for the view that this principle applies to exemptions granted in taxing laws as well. As regards
construction of exemption, an exemption in case of ambiguity should be liberally construed in
favour of the subject confining the operation of the duty. However, exemptions from taxation
have a tendency to increase the burden on the other members of society, and should, therefore,
be deprecated and construed in case of doubt against the subject. There can, however, be no
doubt that exemptions made with a beneficent object, e.g. to give incentive to cooperative
movement or for the purpose of developing urban or rural areas for public good, or for
encouraging investment in new machinery or plant have to be liberally construed. Similarly,
when a provision is made permitting concessional rate of tax for the purpose of encouraging an
industrial activity, the provision has to be liberally construed.
Whatever approach may be adopted in case of a real ambiguity, it is clear that there is
no justification for the view that if a word of exemption is not defined, it must be given its widest
meaning and the correct rule in construing words of exemption as in construing other word is to
find out the sense of the words in their context by reading the statute as a whole and by bearing
in mind the purposes of the statute and the consequences by flowing from rival interpretations.
The rule of strict construction does not permit the tax payer to take the benefit of an
illegality. That rule that a taxing Act is to be construed with strictness, is based on the principle
that inasmuch as there was not any a priori liability in a subject to pay any particular tax, nor any
antecedent relationship between the tax payer and the taxing authority no reasoning founded
upon any supposed relationship of the tax payer and the taxing authority could be brought to
bear upon the construction of the Act.
A penal provision in a taxing Act is not to be equated to a criminal statute requiring
impliedly the element of mens rea and unless there is something in the language of the Act
indicating the need to establish mens rea, it is generally sufficient to prove that a default in
complying with the provisions of the Act for which the penalty is imposed has occurred.
But provisions introduced to open up liability which had become barred by lapse of time,
will be subject to the rule of strict construction and will not be given larger retrospectively than
necessitated by express words of clear implication. Similarly, a limitation provision within which
steps have to be taken for recovery of duties not levied or not paid or short paid or erroneously
refunded, is subject to the rule of strict construction.
