TAXING STATUTE
A Statute is a formal written enactment of Legislative authority that governs a country, state,
city or county. In simple words, it is the Law, Enactment, Act. The parliament is given the
authority of lawmaking, Parliament is competent to withdraw any law from operation at any
time and also competent to fix the lifetime of a statute.
A statute may generally be classified with reference to its duration, method object, and extent
of application.
Taxing statutes are those Statutes which imposes taxes on income or certain other kinds of
transactions. It may be in the form of Income Tax, Wealth Tax, Sales Tax, Gifts Tax etc.
Object of taxing statute -
The object of taxing Statute is to collect revenue of the government. Tax is levied for the
public purpose. As we all know that tax is a source of revenue generation for the state. The
money collected in the form of tax is utilized for the welfare activities of the public.
Tax can be levied only when a Statute unequivocally so provides by using Express language
to that effect and any doubt is resolved in favor of the assessee.
Reasons for Applicability of Strict Rule on Taxation Statute
Tax is a forceful extraction of money from the assessee (taxpayer) by the sovereign authority
in which the taxpayer is not entitled to any assured benefit. So, taxes place a monetary burden
on the taxpayer and thus to some extent it is considered as penalty on the taxpayer which is
imposed under the authority of law. Thus, unless the imposition of tax is clearly backed by
law, no tax can be imposed.
Taxation statute is a fiscal statute which is enacted on the basis of trial and error method or on
experimentation basis. It is not practicable for legislature to anticipate all the possible
situations or conditions which may arose after the law is enacted. It is possible that the
assessee might use some shortcomings in the law as a loophole and take advantage of it. As
tax results in pecuniary burden so the benefit of doubt is given to assessee in case of any
contradictions.
Strict rule is applicable to taxation statutes, so courts are bound to give clear and plain
meaning to the words without delving into the consequences it can result in. There is no
presumption of tax or intendment of the legislature to impose tax unless clearly and
specifically provided. Thus, it is the legislature or subordinate authority to come forward and
bring amendments and clarifications to rectify the loopholes.
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Thus, direct meaning is given to words used in the statute and in case of two interpretations
coming out than in that case that such interpretation is given, which is in favour of the
taxpayer. Until and unless, clear words are used in the statute which imposes the liability on
the taxpayer, there can be no burden to pay tax.
Rule of Interpretation applicable to Taxation Statute
Taxation statute is a fiscal statute which imposes the pecuniary burden on the taxpayer. So
such statutes are construed strictly. Plain, clear and direct grammatical meaning is given.
Where there are two possible outcomes then that interpretation is given which is in favour of
assessee.
Any taxation statute involves three stages firstly, the subject on which tax is levied or
imposed, secondly, the assessment of the liability of assessee and lastly, the recovery once the
assessment is made. The first stage is where charging provisions of the act are involved.
These charging provisions must be clearly provided in the statute. These charging provisions
provide the extent and coverage of the subjects as to whom the tax is applicable. It also
provides the outline in form of subjects which the legislature wants to cover under the law.
Charging provisions are to be interpreted strictly as it results in financial burden. There
cannot be any ambiguity and meaning which is clear, obvious, direct is given. Nothing can be
inferred to substantiate the intention of the legislature or purpose for which the law was
made. Once the revenue shows that particular subject is covered by law then tax is applicable
for all those subjects. But if it fails to proof then no tax can be imposed by extending the
meaning.
Principal of equity has no role to play in case of taxation law. It is because there is lot of
deeming legal fiction involved in tax laws. Thus, whatever is written must be strictly
followed without considering its justness. If the words are clear, then court has to give that
meaning irrespective of consequences it resulted into or in other words even if such
construction is unequitable, then also Court is bound due to legal fiction. Court cannot meet
the deficiency by extending the provisions of the statute. It is duty of the legislature to rectify
it through amendments.
In a Taxation statute, if a word has a clear meaning, then in that case, the court is bound to
follow the clear meaning even if such meaning results in absurd results. It is in legislature’s
domain to rectify such absurdity. In case of taxation statutes, Courts cannot extend the scope
of law by giving meanings to word which are unclear or uncertain. This is based on the
reason that if legislature had thought of such situation then it would have covered it by using
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appropriate description and words under the principal act or taxation authority would have
issued some notification clarifying the same.
The case of State of Uttar Pradesh v. Kores India Ltd. (AIR 1977 SC 132) is relevant. In this
case, the issue was pertaining to inclusion of carbon paper in the definition of word “paper”.
It was held by the Hon’ble Supreme Court that in common parlance word paper is one which
is used for writing, packaging and printing whereas carbon paper is used entirely for different
purpose. Moreover, manufacturing process of carbon paper is entirely different and
complicated from that of normal paper. So, Court held carbon paper will not be included in
normal paper so as to make it subject to taxation. It was held that meaning of paper is quiet
clear and there is no need to interpret it so as to extend its meaning to include carbon paper.
Thus, Courts are not required to extend the meaning to cover the subjects which on the face
cannot be included in common parlance. It is only when specifically provided by statute then
only it becomes subject to tax.
The words used in the taxation law should be given meaning which is understood by general
public in daily routine and one which is popular. Such meaning should be given to words
which people to whom law is applicable are familiar with.
The second and third stage involved in any tax laws are assessment of the liability and
recovery of dues respectively. These provisions are machinery provisions which provides for
technicalities and procedure to be followed under the act to make it functional. These
provisions are to be interpreted fairly and liberally to promote the intention of the legislature.
In case of contradiction whereby two meaning are coming out then one which is reasonable,
which will assist in fulfilling the intention of the legislature and solving the purpose for
which law was enacted is preferred. They are to be interpreted in such a way so as to enforce
and apply charging provisions smoothly.
In case of exemptions, strict rule does not apply rather liberal rule is applied. All the
conditions under which exemptions are given must be clearly specified. Once the assessee
has shown that all the conditions precedent required to claim exemptions are fulfilled then he
is entitled to claim exemptions. Once the assessee falls within the category of exemptions,
then such exemption should be allowed. It cannot be denied on the basis of assumed or likely
intention of the authority making the law.
The doctrine of Substantial Compliance is based on the principle of equity which is also
applicable to taxation laws. According to this doctrine, if the conditions for claiming
exemptions are met substantially or only a few minor procedural requirements are not
fulfilled which does not hamper the purpose for which such law was made then in that case
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substantial compliance can also entitles one to claim exemptions. Applicability of such
doctrine is based on case to case basis as it results are different depending on facts of each
case, extent of compliance, whether partial compliance fulfils the essence, object and purpose
of the law.
