STRICT CONSTRUCTION OF TAXING STATUTES

TAXING STATUTES:

A tax is imposed for raising general revenue of the State for public purposes. In contrast
to tax, a fee is imposed for rendering services and bears a broad co-relationship with the
services rendered.
Taxes are distributed between the Union and States by various entries in List I and List II
of the Constitution. Parliament can under its residuary power in entry 97 of List I levy a tax not
mentioned in these lists.
A taxing statute means a statute or an Act making compulsory imposition whether of tax
or fee. There are following three stages in the imposition of tax:
 Declaration of liability in respect of persons or property;
 Assessment of tax that qualifies the sum which the person liable has to pay;
 Methods of recovery if the person taxed does not voluntarily pay.

GENERAL PRINCIPLES OF STRICT CONSTRUCTION:

A taxing statute is to be strictly construed [Hansraj & Sons v. State of J&K, (2002)]. In the
words of Lord CAIRNS: “If the person sought to be taxed comes within the letter of the law, he
must be taxed, however great the hardship may appear to the judicial mind to be. On the other
hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the
law, the subject is free, however apparently within the spirit of law the case might otherwise
appear to be. In other words, if there be admissible in any statute, what is called an equitable
construction, certainly, such a construction is not admissible in a taxing statute where you can
simply adhere to the words of the statute” [Partington v. A.G., (1869)].
There is nothing like implied power to tax. The source of power which does not
specifically speak of taxation cannot be interpreted by expanding its width as to include therein
the power to tax by implication or by necessary inference.
The judicial opinion of binding authority flowing from several pronouncements of the
Supreme Court has settled the following principles:-
 In interpreting a taxing statute, equitable considerations are entirely out of place. Taxing
statutes cannot be interpreted on any presumption or assumption. A taxing statute has to be
interpreted in the light of what is clearly expressed. It cannot import provisions in the statute
so as to supply any deficiency. It cannot imply anything which is not expressed.
 Before taxing any person it must be shown that he falls within the ambit of the charging
section by clear words used in the section, and
 If the words are ambiguous and open to two interpretations, the benefit of interpretation is to
be given to the subject.
 There is nothing unjust in the tax payer escaping if the letter of the law fails to catch him
on account of the legislature’s failure to express itself clearly [State of W. B. v. Kesoram
Industries Ltd., (2004)].

Although normally a taxing statute is to be strictly construed but when the statutory
provision is reasonably akin to only one meaning, principle of strict construction may not be
adhere to [Per SINHA, J., Tata Consultancy Services v. State of A.P.,(2005)].
Lord SIMONDS while interpreting a section in a taxing statute said: “The question is not
at what transaction the section is according to some alleged general purpose aimed, but what
transaction its language according to its natural meaning fairly and squarely hits” [St. Aubyn
(LM) v. A.G., (1951)]
Lord SIMONDS gave this maxim of tax law that, “the subject is not to be taxed unless
the words of the taxing statute unambiguously impose the tax on him” [Russell v. Scot (1948)].
The Supreme Court has also stated that before taxing any person it must be shown that
he falls within the ambit of the charging section by clear words used in the section
[Commissioner of Wealth Tax, Gujarat v. Ellis Bridge Gymkhana, AIR 1998].
BHAGWATI, J., has also expressed the principle regarding the interpretation of taxing
laws. In his words: “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 taxed. If, on the other hand,
the case is not covered within the four corners of the provisions of the taxing statutes, no tax
can be imposed by an inference or by analogy or by trying to probe into intentions of the
legislature and by considering what was the substance of the matter” [A.V. Farnandez v. State
of Kerala, AIR 1957].
Another important principle pertinent here is that avoidance of double taxation by the
same Act. The principle is that if the words of the Act on one construction results in double
taxation of the same income, that result will be avoided by adopting another construction which
may reasonably be open. On the basis of this general rule it is said that several heads of
income mentioned in the Income tax Laws are mutually exclusive and a particular income can
come under only one of the heads.
The rule of avoidance of double taxation is merely a rule of construction; therefore, it
ceases to have application when the legislature expressly enacts a law which results in double
taxation of the same income. The law so made cannot be held invalid merely on the ground that
it results in double taxation. In the absence of clear provisions stipulating double or multiple
levies, the courts would lean in favour of avoiding double taxation [Municipal Council, Kota v.
Delhi Cloth & General Mills Co. Ltd., (2001)].
QUALIFICATIONS OF RULE OF STRICT CONSTRUCTION:

When the statutory provision is reasonably open to only one meaning, no question of
strict construction of taxing statutes arises. Strict construction of a taxing statute does not mean
that where the subject falls clearly within the letter of law, the court can avoid the tax by putting
a restricted construction on the basis of some supposed hardship or on the ground that the tax
or penalty imposed is heavy or oppressive. Where two views are possible, the one in favour of
the assesse must be adopted [Union of India v. Onkar S. Kanwar, (2002); Cemento Corpn. Ltd.
v. CCE, (2002)]. The interpretation favouring the assessee which has been acted upon and
accepted by Revenue for a long period should not be disturbed except for compelling reasons
[Birla Cement Works v. CBDT, (2001); AIR 2001; (2001)].
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 [CWT, Bihar v.
Kripashankar, AIR 1971].
The object of the legislature has to be kept in view and a construction consistent with the
object has to be placed on the words used if there by ambiguity, is also applicable in construing
a taxing statement [Administrator, Municipal Corpn., Bilaspur v. Dattatraya Dahankar, AIR 1992].
Considerations of public policy are also held to be relevant in interpreting and applying a
taxing statute. It has been held that payments tainted with illegality cannot be treated as money
wholly and exclusively spent for the purpose of business for being allowed as a deduction in
computation of profits of the business for taxation purposes under the Income Tax Act [Maddi
Venkataraman & Co. (P.) Ltd. v. Commissioner of Income-Tax, AIR 1998].
It has been held regarding the liability to pay interest on delayed payment of tax that
interest can be levied and charged only if the statute that levies and charges the tax makes a
substantive provision in this behalf [India Carbon Ltd. v. State of Assam, AIR 1997].
A provision of exemption from tax in a fiscal statute is to be strictly construed [Oxford
University Press v. CIT, (2001): AIR 2001: (2001)]. It is a well-known principle that a person who
claims an exemption has to establish it and the rule of strict construction does not negative its
application. There is ample authority for the view that the principle applies to exemptions
granted in taxing law as well [CIT v. Ram Krishna Deo, AIR 1959]. There are two options
regarding construction of exemptions:
 One view says that an exemption in case of ambiguity should be liberally construed in
favour of the subject confining the operation of the duty;
 Second view says that the 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.
 In interpreting an exemption legislative intent is also material. Where the legislative
intent was to grant exemption to live saving drugs or medicines or equipments, only if imported
for being used in India and not for export, it was held that such construction could be properly
placed on exemption provision [Collector of Customs v. M.J. Exports Ltd., (2001)].
In Commissioner of Income-Tax v. Kurti Jina Bhai Kotecha [AIR 1977] it was noted that
the rule of strict construction does not permit the tax-payer to take benefit of an illegality. Section
24(2) of the Income-Tax, 1922, was construed not to permit the assesses to carry forward the
loss of an illegal speculative business for setting it off against profits in subsequent years. So
even a taxing statute is to be construed consistent with morality avoiding a result which gives
recognition to continued illegal activities or benefits attached to it.
The provisions of taxing statutes regulating limitation period must be given strict
construction [2002]. In a recent case, it has been held that 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 [J.K. Cotton Spinning & Weaving Mills Co.
Ltd. v. Collector of Central Excise, AIR 1998].