CONSTRUCTION OF TAXING STATUTES

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.

• PRESUMPTION REGARDING JURISDICTION
• CONSTRUCTION OF TAXING STATUTES
•  CONSTRUCTION TO PREVENT ABUSE IN INTERPRETATION OF STATUTES
• EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :
• LIBERAL CONSTRUCTION OF REMEDIAL STATUTES 
• STRICT CONSTRUCTION OF PENAL STATUTES

CONSTRUCTION TO PREVENT ABUSE IN INTERPRETATION OF STATUTES

CONSTRUCTION TO PREVENT ABUSE :

                      General principle of construction is that whenever a statute confers discretionary power

on an adjudicatory authority, it should be so construed that such discretionary power is not

abused. Thus authority whether it be administrative, quasi-judicial or administrative, upon whom

the discretionary power is conferred must exercise it in good faith and must taken in account the

object of the statute. As a matter of fact, discretionary power given to an authority by a statute

does not imply absolute of unqualified power, but implies a power exercised in accordance with

the rules of reason and justice.

Whenever a statute empowers exercise an authority to exercise discretion, the authority

must exercise it to achieve justice. However, the exercise of discretion must be fair and honest.

Where a power is deposited with a public officer for the purpose of being used for the benefit of

persons specifically mentioned and upon the conditions specifically provided for such persons

are entitled to call for the exercise of such discretionary power by that public offer and that

discretionary power ought to be exercised and the court will require it to be exercised.

Whenever a discretionary power is conferred upon any statutory authority, it must be exercised

reasonably and no authority is at liberty to decide what the law is according to their notion. In a

system governed by rule of law, discretion when conferred upon statutory authorities is deemed

to be conferred with clearly defined limits.

When actual power is different from that which is authorized by law, and that the

discretionary power is used ostensibly for the authorized but in reality for the unauthorized

purpose, such exercise of power is said to be ultra vires exercise of power. In Nalini Mohan Vs.

District Magistrate, AIR 1967 Cal 346, the High Court of Calcutta held an order ultra vires and

illegal because the power given by enabling statute for the purpose of rehabilitating the persons

displaced from their residence within the state as a result of communal violence was used for a

person who came from Pakistan due to communal riots in that country. Whenever an authority

exercises its discretion, it must be exercised in conformity with the spirit with which the statute

was enacted. As the basic principle of construction of any statute is to give effect to the intention

of the legislature and not to defeat it.

Statutes which confer powers on statutory authorities to adjudicate are so construed as

to meet all attempts to abuse these powers. In doing so, the judicial courts enquire into the bona

fide of a purported exercise of a statutory power. Accordingly, Maxwell opines that modern

tendency seems to be against construing statutes so as to leave the person or body upon whom

a power is conferred absolutely untrammeled in the exercise of it. It has been firmly established

that the discretionary powers given to the governmental or quasi-governmental authorities must

be hedges by policy, standards, procedural safeguards or guidelines, failing which the exercise

of discretion and its delegation may be quashed by the court.

The discretionary power conferred upon any authority under any statute must not be

construed as arbitrary fanciful which is influenced by extraneous considerations. In matters of

discretion, the choice must be dictated by public interest and must not be unprincipled or

unreasoned. The courts have laid down it clearly that before the exercise of discretion, the

authority must frame rules for the proper exercise of the discretion. Court have also emphasized

that even the power of the President or the Governor to grant pardon and to suspend, remit or

commute sentences or power of the Chief Minister to allot cement, plots or house from

discretionary quota or to make nominations to medical or engineering college must conform to

judicial norms.

• PRESUMPTION REGARDING JURISDICTION
• CONSTRUCTION OF TAXING STATUTES
•  CONSTRUCTION TO PREVENT ABUSE IN INTERPRETATION OF STATUTES
• EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :
• LIBERAL CONSTRUCTION OF REMEDIAL STATUTES 
• STRICT CONSTRUCTION OF PENAL STATUTES

EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :

EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :

It is permissible to evade an Act of Parliament in the sense that a person may not do that

which the Act prohibits but he is free to do anything which though equally advantageous to him

as that which is prohibited is nevertheless outside the prohibition, penalty or burden imposed by

the Act. It is well established that penal and taxing laws are not to be extended by analogy to

cover acts and situations not within the words of the state on any doctrine of substance of the

matter. But this principle has no application where what is done is really the thing prohibited

although under colour or cloak of different transaction not prohibited by the statute. It is not

permissible to evade an Act of Parliament by resorting to a fraudulent device or by covering the

reality by a non-genuine transaction. The word ‘evade’ is thus ambiguous and is used in two

senses, and in spite of various explanations given by the courts as to the two different meanings

of that word, the position is not very much different from what Lord Cranworth, LC found in

1855. Lord Chancellor said “I never understood what is meant by an evasion of an Act of

Parliament; either you are within the Act or you are not within it; if you are not within it you have

a right to avoid, to keep out of prohibition. A citizen is free to so arrange his business that he is

able to avoid a law and its evil consequences so long as he does not break that or any other

law. A blatant tax avoidance scheme which brings profit to a person cannot lead to the taxation

of the person on the ground that he has earned profit by trade unless his activities an the part

played by him in furtherance of the scheme amount to trade in the accepted sense or unless the

legislature enacts a special definition or provision to tax such activities. The taxing laws have

constantly been the subject of evasion in the sense of avoiding something disagreeable and

there are many dicta to the effect that a citizen is entitled to so arrange his affairs that the tax

burden does not fall on him and that there is nothing illegal or immoral in adopting such a

course.

Section 195, Code of Criminal Procedure, 1898, which provides that cognizance of

certain offences is not to be taken except on the complaint in writing made by the relevant court,

cannot be evaded by the device of charging a person with an offence to which that section does

not apply and then convicting him of an offence to which it does apply on the ground that the

latter offence is a minor one of the same character or by describing the offence as punishable

under some other section of the Penal Code, though in reality the offence falls in the category of

offences mentioned in Section 195.

The principle, that the courts can go behind the form and reach the reality, has to be

applied with certain reservations in determining correct amount of duty payable on documents

under the Indian Stamps Act, 1899. The duty being imposed on instruments and not upon

transactions, court can only construe the document as it stands for determining the proper

amount of duty, and although the name given to the document by the parties may not be

decisive of its character, it is not permissible to go behind the document and to hold an enquiry

as to the real nature of the transaction as distinguished from the real nature of the document.

On the general principle that when alternative constructions are open, a statute should be so

construed as to give effect to its object or policy, the courts to the extent the language permits,

will be slow to adopt such a construction which may lead to large scale evasion of the Act

resulting in its object being defeated.

• PRESUMPTION REGARDING JURISDICTION
• CONSTRUCTION OF TAXING STATUTES
•  CONSTRUCTION TO PREVENT ABUSE IN INTERPRETATION OF STATUTES
• EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :
• LIBERAL CONSTRUCTION OF REMEDIAL STATUTES 
• STRICT CONSTRUCTION OF PENAL STATUTES

LIBERAL CONSTRUCTION OF REMEDIAL STATUTES

LIBERAL CONSTRUCTION OF REMEDIAL STATUTES :

Every modern legislation is actuated with some policy and speaking broadly has some

beneficial object behind it. But then there are legislations which are directed to cure some

immediate mischief and bring into effect some type of social reform by ameliorating the

condition of certain class of person who according to present-day notions may not have been

fairly treated in the past. Such legislations prohibit certain acts by declaring them invalid and

provide for redress or compensation to the persons aggrieved. If a statute of this nature does

not make the offender liable to any penalty in favour of the State, the legislation will be classified

as remedial. Remedial statutes are also known as welfare, beneficial or social justice oriented

legislations.

Remedial statutes are one which remedy a defect in the pre-existing laws, statutory or

otherwise. Their purpose is to keep pace with the views of society. They serve to keep our

system of jurisprudence upto date and in harmony with new ideas or conceptions of what

constitutes just and proper human conduct. Their legitimate purpose is to advance human rights

and relationships. Unless they do this, they are not entitled to be known as remedial legislations.

Manifestly, a construction which far promotes improvement in the administration of justice and

the eradication of defects in our system of jurisprudence should be favoured over one which

perpetuates wrong.

Remedial statutes are liberally construed and in cases of doubt or ambiguity that

construction is adopted which will best advance the remedy provided and help to suppress the

mischief against which it was aimed. The words of a remedial statute must be construed so far

as they reasonably admit so as to secure that the relief contemplated by the statute shall not be

denied to the class intended to be relieved.

In construing a remedial statue the courts ought to give to it the widest operation which

its language will permit. The words of such a statute must be so construed as to give the most

complete remedy which the phraseology will permit, so as to secure that the relief contemplated

by the statute shall not be denied to the class intended to be relieved. In the field of labour and

welfare legislation which have to be broadly and liberally construed the Court ought to be more

concerned with the colour and content and the context of the statute rather than with its literal

import.

Equitable considerations may find an important place in the construction of beneficent

provisions particularly in the field of criminal law. The rule as stated and explained above only

means that if a section in a remedial statute is reasonably capable of two constructions that

construction should be preferred which furthers the policy of the Act and is more beneficial to

those in whose interest the Act may have been passed; and the doubt if any should be resolved

in their favour.

The provisions of a statute must be construed with reference to their context and with

due regard to the object to be achieved and the mischief to be prevented. Rent Control Act

should be interpreted reasonably and literally. They should be interpreted so as to give effect to

the objects of the statute and not to defeat them.

Even while giving liberal construction to socially beneficent legislation, if the language is

plain and simple, the working of law-making being a matter for the Legislature and not the

Courts, the Court must adopt the plain grammatical construction. The Court must take the law

as it is. And, accordingly, it is not entitled to pass judgment on the propriety or wisdom of

making a law in the particular form and further the Court is not entitled to adopt the construction

of a statute on its view of what Parliament ought to have done. However, when two

constructions are possible and legitimate ambiguity arises from the language employed, it is a

plain duty of the court to prefer and adopt that construction which enlarges the protection of a

protection of a socially beneficent statute rather than on which restricts it. In case of ambiguity, a

remedial should, however, be construed beneficially.

Equitable considerations may find an important place in the construction of beneficial

provisions particularly in the field of criminal law. In Bhagirath Vs. Delhi Administration, AIR

1985 SC 1050, the Supreme Court overruled its earlier decision and held that the beneficent

provisions of Section 428 of the Criminal Procedure Code directing set off of the period of pre-

conviction detention against the term of imprisonment is applicable even to cases where the

sentence is imprisonment for life and that such a sentence is also imprisonment for a term

within the Section.

• PRESUMPTION REGARDING JURISDICTION
• CONSTRUCTION OF TAXING STATUTES
•  CONSTRUCTION TO PREVENT ABUSE IN INTERPRETATION OF STATUTES
• EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :
• LIBERAL CONSTRUCTION OF REMEDIAL STATUTES 
• STRICT CONSTRUCTION OF PENAL STATUTES

STRICT CONSTRUCTION OF PENAL STATUTES

STRICT CONSTRUCTION OF PENAL STATUTES :

The general rule for the construction of a penal statute is that it would be strictly

interpreted, that is, if two possible and reasonable constructions can be put upon a penal

provision, the Court must lean towards that construction which exempts the subject from penalty

rather than the one which imposes a penalty.

A penal statute has to be construed narrowly in favour of the person proceeded against.

This rule implies a preference for the liberty of the subject, in case of ambiguity in the language

of the provision. The courts invariably follow the principle of strict construction in penal statutes.

In constructing a penal Act, if a reasonable interpretation in a particular case can avoid the

penalty the Court adopts that construction.

It is well settled that a penal statute must be strictly construed, that is to say, in the

absence of clear compelling language, the provision should not be given a wider interpretation

and “no cause should be held to fall within it which does not come within the reasonable

interpretation of the statute. If two conditions are possible on the language of the statute, the

court must choose the one which is consistent with good sense and fairness, and eschew the

other which makes its operation unduly oppressive or unreasonable or which would lead to

change, inconsistent results or otherwise introduce an element of bewildering uncertainty and

practical inconvenience in the working of the statute.

Normal rule in the construction of a penal statute is that if there is any ambiguity in the

language and a doubt arises as to whether a particular Act falls within the statutory provision or

not, the court should always interpret the words in favour of the accused.

The rule of strict construction of penal statutes is justified on the ground that the

enormous growth of penal laws in the present time may not become traps for honest and

unwary men through strict construction of a penal statute, which limits its operation to the clear

meaning of the language and excludes uncertainty in its application, injustice can be avoided.

There are some exceptions to the general rule of construction of penal statues: (1)

wherever the intention of the legislature is clear and it is found that by a narrower construction,

would lead to frustration of the very purpose of the statute, then there would be no objection that

a wide construction be given to the words, in accordance with the legislative intent; (2) when the

purpose is to remove a defect and achieve a certain object, the courts should not hesitate to

give a wide meaning to the words of a penal statute.

The rule of strict construction does not also prevent the court in interpreting a statute

according to its current meaning and applying the language to cover developments in science

and technology not known at the time of passing of the statute.

The ultimate object of construction either of a penal or of any other statute is to ascertain

the legislative intent. The rule of strict construction is not violated by permitting the words to

have their full meaning if that would effectuate the intention. The words as used in a penal

statue are taken in a wider sense than their etymological denotation may permit or meaning

which is colloquially or popularly attached to them. This is necessary to carry out the legislative

1. Mens rea in statutory offences:

Existence of a guilty intent is an essential ingredient of a crime at common law and the

principle is expressed in the maxim – actus non facit reum nisi mens sit rea. The legislature

may, however, create an offence of strict liability where mens rea is wholly or partly not

necessary. Such a measure is resorted to in public interest and moral justification of laws of

strict liability.  When a statute creates an offence, the question whether the offence involves the

existence of mens rea as an essential element of it or whether the statute dispenses with it and

creates strict liability are questions which have to be answered on a true construction of the

statute. The courts, however, regard it as a fundamental principle that an offence cannot be

made out without the existence of mens rea, unless from a consideration of the terms of the

statute and other relevant circumstances it clearly appears that that must have been the

intention of Parliament.

Offences in respect of which mens rea is not required to be established are usually of a

comparatively minor character and sentences prescribed for them are not of a severe type.

Therefore, the provision of a sentence of imprisonment or any other severe penalty may prima

facie indicate the mens rea, as a constituent part of the crime, was not intended to be excluded.

But it is not uncommon to find statutes concerning public health, safety and morals to provide

severe penalties for offences of strict liability.

Absence of the word ‘knowingly’ or some such other word expressing a guilty intention in

the relevant section of the statute and its presence in other sections or in other part of the same

section is not in itself conclusive to indicate that a guilty intention is excluded. But it is certainly a

material consideration and may in a proper case taken along with other relevant fact so to rebut

the presumption of existence of mens rea.

It has already been noticed that in applying the rule of construction under discussion,

regard must be had to the words of the statue and to the subject matter with which it deals. It is

pertinent also to enquire whether putting the defendant under strict liability will assist in the

enforcement of the statue, and where it can be shown that the imposition of strict liability would

result in the prosecution and conviction of a class of persons whose conduct could not in any

way affect the observance of the law, even where the statute is dealing with a grave social evil

strict liability is not likely to be intended.

The Supreme Court in Kalpnath Rai Vs. State, AIR 1998 SC 201, considered section

3(4) of the Terrorists and Disruptive Activities (Prevention) Act, 1987. This section enacts that

‘whoever harbours – any terrorist’ shall be punishable with imprisonment which shall not be less

than five years but which may extent to imprisonment for life. The court held that the section

provided for harsh punishment could not be held to have excluded mens rea; and a person

giving shelter to a terrorist without knowing that he was a terrorist could not be punished under

section 3(4).

Prohibitory laws are enforced if the statute required the offenders violating the law

whether knowingly or unknowingly must be brought to book. The statutes regulating particular

activities for public welfare like sale of food, drinks out the presumption of mens rea, as it has

been frequently inferred that the legislature intends such activities to be carried out under

conditions of strict liability.

The intention of legislature as evident from the language of the prevention of Food

Adulteration Act is to provide for strict liability. Therefore, every person selling adulterated food

commits an offence under this Act whether he had the guilty intention or not.

2. Vicarious liability in statutory offences :

The general presumption is that the master is not criminally liable for any act committed

by the servant, unless the legislature prohibits the act and imposes an absolute duty. The

general rule is that ‘criminal liability in a matter that might result either as a principal or as an

accessory springs from the authorization and not simply from the relationship of a master and

servant.

While prima facie a principal is not to be made criminally responsible for the acts of his

servants, yet the Legislature may prohibit an act or enforce a duty in such words as to make the

prohibition or the duty absolute; in which case the principal is liable if the act is in fact done by

his servants. To ascertain whether a particular Act of Parliament has that effect or not, regard

must be had to the object of the statute, the words used, the nature of the duty laid down, the

person upon whom it is imposed, the person by whom it would in ordinary circumstances be

performed, and the person upon whom the penalty is imposed. It may also be that the statutory

provision is so drafted that it only makes the employer liable for the offence but does not make

the employee liable for whose act or default the employer is made liable. Further, where the

nature of the activity makes the premises, where it is carried on, a major hazard site, Parliament

may impose upon the employer a duty, failure of which makes him liable for a criminal offence,

‘to conduct his undertaken in such a way’ that subject to reasonable practicability, it did not

create risks to people’s health and safety and the employer may become liable for the offence

irrespective of the question that the risk originated not because of some lapse of his employee

but because of the lapse of some other person over whom he had no control. In such cases the

statute makes the employer liable for the offence, though he has personally no mens rea or has

not committed any actus reus, as the duty is laid on the employer himself by reference to a

certain kind of activity carried on by him. This duty is conceptually entirely different from the

vicarious liability for the tortuous acts of his servants and agents.

• PRESUMPTION REGARDING JURISDICTION
• CONSTRUCTION OF TAXING STATUTES
•  CONSTRUCTION TO PREVENT ABUSE IN INTERPRETATION OF STATUTES
• EVASION OF STATUTES – CONSTRUCTION TO PREVENT EVASION :
• LIBERAL CONSTRUCTION OF REMEDIAL STATUTES 
• STRICT CONSTRUCTION OF PENAL STATUTES