Full Judgment Text
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3327 OF 2007
OMMISSIONER OF CUSTOMS MPORT UMBAI PPELLANT S
C (I ), M …A ( )
VERSUS
S ILIP UMAR AND OMPANY RS ESPONDENT S
M/ . D K C & O . …R ( )
J U D G M E N T
N . V . R A M A N A , J .
1. This Constitution Bench is setup to examine the
correctness of the ratio in Sun Export
Corporation, Bombay v. Collector of Customs,
, (1997) 6 SCC 564 [ hereinafter referred as
Bombay
‘ ’ for brevity ], namely the question
Sun Export Case
Signature Not Verified
is What is the interpretative rule to be applied
Digitally signed by
VINOD LAKHINA
Date: 2018.07.30
11:00:29 IST
Reason:
while interpreting a tax exemption
2
provision/notification when there is an ambiguity as
to its applicability with reference to the entitlement
of the assessee or the rate of tax to be applied?
2. In Sun Export Case (supra), a threeJudge Bench
ruled that an ambiguity in a tax exemption
provision or notification must be interpreted so as to
favour the assessee claiming the benefit of such
exemption. Such a rule was doubted when this
appeal was placed before a Bench of twoJudges.
The matter then went before a threeJudge Bench
consisting one of us (Ranjan Gogoi, J.). The three
Judge Bench having noticed the unsatisfactory state
as it stands today, opined that the dicta in
of law
(supra), requires reconsideration
Sun Export Case
and that is how the matter has been placed before
this Constitution Bench.
3
3. Few facts necessary, to appreciate the issue involved
are as follows the respondents imported a
consignment of Vitamin – E50 powder (feed grade)
under Bill of Entry No. 8207, dated 19.08.1999.
They claimed the benefit of concessional rate of duty
at 5%, instead of standard 30%, as per the Customs
Notification No. 20/1999 and classified the product
under Chapter 2309.90 which admittedly pertains
to prawn feed. They relied on the ratio in Sun
(supra) and claimed the benefit of
Export Case
exemption. The benefit of Customs Notification No.
20/1999 was, however, denied to the respondents
on the plea of the department that the goods under
import contained chemical ingredients for animal
feed and not animal feed/prawn feed, as such, the
concessional rate of duty under the extant
notification was not available. The department
classified the consignment under Chapter 29 which
4
attracts standard rate of customs duty. The
adjudicating authority, namely, the Assistant
Commissioner of Customs, distinguished Sun
Export Case (supra), while accepting the plea of the
department to deny the concessional rate. The
Commissioner of Customs (Appeals) reversed the
order of the Assistant Commissioner and came to
the conclusion that Sun Export Case (supra) was
indeed applicable. The department then
approached the Customs, Excise and Service Tax
Tribunal (CESTAT), which affirmed the order of the
Commissioner of Customs (Appeals). Aggrieved
thereby, the present appeal is filed.
When the appeal was placed, as noticed earlier,
4.
before a Bench of twoJudges, the ruling in
Sun
Export Case (supra) was doubted, observing as
follows
5
“We have serious doubts as to whether
the Bombay High Court judgment
affirmed in Sun Export Corporation's
case is correct. First and foremost, it is
clear that the subsequent exemption
Notification largely expanded the first
Notification which referred only to
animal feeds and nothing else. That
being the case, it would be difficult to
say that a large number of other
categories which have subsequently
been added would be clarificatory and
therefore, retrospective. Further, we
also feel that in view of the catena of
judgments of this Court which have
held that an exemption Notification has
to be strictly construed (that is, if the
person claiming exemption does not fall
strictly within the letter of the
Notification, he cannot claim
exemption), have also been ignored by
this Court in Sun Export Corporation's
case in paragraph 13 thereof. Apart
from this, the view of this Court in
paragraph 13 that it is wellsettled that
if two views are possible, one favourable
to the assessee in matters of taxation
6
has to be preferred is unexceptionable.
However, this Court was not concerned
in that case with the charging Section
of a taxation statute. It was concerned
with the interpretation of an Exemption
Notification which, as has been stated
above, would require the exactly
opposite test to be fulfilled.”
Further this Court found that the subsequent judgment
in
Collector of Customs and Central Excise, Guntur
and Ors. V. Surendra Cotton Oil Mills and
Fertilizers Co. and Ors. , 2001 (1) SCC 578 [ hereinafter
referred as ‘ Surendra Cotton Oil Mills Case ’ for
brevity ], distinguished (supra), which
Sun Export Case
mandated this Court to take a relook at the proposition
laid down by the earlier cases in the following manner
We also find that in the
“
subsequent judgment of this Court,
Surendra Cotton Oil Mills's case, this
Court has distinguished the Sun
Export Corporation's case and held
7
that it dealt with 'animal feed' which
was large enough to include 'animal
feed supplements' whereas the facts
of Surendra Cotton Oil Mills's case
showed that ingredients of animal
feed could not be held to be included
in 'animal feed'. In our opinion, this
Court did not adequately deal with
why Sun Exports Corporation's case
which is a binding decision of a three
Judges Bench should not be followed,
apart from a specious distinction
between 'ingredients' and
'supplements' which is logically
speaking a distinction without a
difference.
…
This being the unsatisfactory state
of law as it stands today, we feel
that this matter should be placed
before Hon’ble the Chief Justice of
India to constitute an appropriate
Bench to resolve the doubts
pointed out by us in the body of
this Order.”
(emphasis supplied)
8
5. We feel that the reference to Surendra Cotton Oil
Mills Case (supra) , may not be necessary as the
distinction was drawn on a factual footing, which
this Court may not concern itself with, as we are
only concerned with the principle of law. With this,
the Division Bench was of the tentative view that the
opinion expressed in (supra)
Sun Export Case
would require reconsideration, as the proposition
laid down therein was unsatisfactory, and therefore
placed before the Chief Justice of India for
constituting an appropriate Bench.
6. When the matter was placed before a three Judge Bench
presided over by one of us (Ranjan Gogoi, J.), the Bench
reiterated the view for reconsideration of the Sun
(supra) and again placed the matter,
Export Case
9
before Hon’ble the Chief Justice of India for constitution
of an appropriate Bench, considering the fact that
Sun
Export Case (supra) was decided by a Bench
comprising of three learned judges of this Court. Hence,
this matter came to be placed before this Bench of Five
Judges with following observations
“In paragraph 13 of the order of
this Court in Sun’s case, views
have been expressed with regard
to the interpretation of an
exemption notification to
support the conclusion reached.
The same may require a
reconsideration.
That apart, in the referral order it
has been noticed that Sun’s Case
(supra) has been distinguished in
‘ Collector of Central Excise, Guntur
vs. Surendra Cotton Oil Mills & Fert.
Co. The basis on which the said
distinction has been drawn needs
to be further pursued.
10
Having considered the matter at
some length, we are of the
tentative view, that the opinion
expressed in Sun’s case (supra)
may require a reconsideration.
Being a coordinate Bench, we
believe we ought not to proceed
any further in the matter. Hence,
we direct the Registry to lay the
papers before the Hon’ble the
Chief Justice of India for
appropriate orders .”
( emphasis supplied )
7. The learned Additional Solicitor General, Ms. Pinky
Anand, submits that a tax exemption statute or
notification needs to be strictly interpreted. According
to her, strict interpretation is literal rule of
interpretation, which means that Court has to apply the
provision reading the language therein and no
11
interpretation is required if the language is clear. In the
event of any ambiguity, according to her, the benefit has
to be given to the revenue and that such ambiguity in
tax exemption provision must not be interpreted to
benefit the assessee who fails to demonstrate without
any doubt that such assessee is covered by the tax
exemption notification. She elaborated her arguments
by relying on various judgments and contends that the
ratio in (supra), which was doubted in
Sun Export Case
(supra), is not correct
Surendra Cotton Oil Mills Case
law. On merits of the case, she submitted that the
artificial distinction created by Surendra Cotton Oil
Mills Case (supra), in distinguishing the ingredients
from supplements is not sound and may not be
accepted by the Court.
8. Per contra , among others, Mr. Somnath Shukla, learned
counsel appearing on behalf of the respondents would
12
submit that the ratio and observations in
Sun Export
(supra) has to be considered holistically without
Case
giving any narrow meaning to the conclusion arrived
therein. The rule of strict interpretation cannot be
applied in abstract. It has to be applied keeping in view
the interpretation to be used in relation to Customs
Tariff Entry. According to the learned counsel, when
the Customs Tariff Entry is interpreted broadly, the
same should be adopted in interpreting exemption
notification. Indeed, the learned senior counsel would
contend that the rule of strict interpretation should be
limited to the eligibility conditions of an exemption
notification and while conferring the benefits to such
exemption. He distinguished all the judgments relied on
by the appellants and submits that “ prawn feed
” would also be included under the head
supplements
“ prawn feed ”, and the judgment of the Tribunal
13
impugned in these appeals does not warrant any
interference.
9. Sun Export Case (supra) was a case against the
judgment of the High Court of Judicature, Bombay. It
was concerned with the interpretation of tax exemption
notification, being Notification No. 234/1982 – CE,
dated 01.11.1982, issued by the Central Government
under subsection (1) of Section 25 of the Customs Act.
The High Court considered the issue whether Vitamin
AD3 mix (feed grade)/animal feed supplement could be
included under the head ‘animal feed, including
compound livestock feed’. The Bombay High Court
decided, in the affirmative, in favour of the assessee.
The case then landed in this Court, which was
persuaded to expand the meaning of ‘animal feed’ in the
light of subsequent notification issued in 1984, which
largely expanded the scope of exemption to the effect
14
that ‘ animal feed, including compound livestock feed,
animal feed supplements and animal feed concentrates ’.
This Court indeed countenanced the plea, namely,
whenever there is ambiguity as to whether the subject
matter was included or not, then the benefit of the same
should be conferred on the assessee. The relevant
portion in Sun Export Case (supra), reads as follows:
“13. We are in agreement with the above
view expressed by the Bombay High
Court. No doubt it was contended on
behalf of the Revenue that the contrary
view taken by the Tribunal has been
challenged in this Court which was
rejected in limine at the admission stage.
We do not think that dismissal at the
admission stage can be relied upon as a
binding precedent. Even assuming that
there are two views possible, it is well
settled that one favourable to the
assessee in matters of taxation has to
be preferred .”
( )
emphasis supplied
15
10. There cannot be any doubt that the ratio in Sun Export
(supra) that, if two views are possible in
Case
interpreting the exemption notification, the one
favourable to the assesseee in the matter of taxation has
to be preferred. This principle created confusion and
resulted in unsatisfactory state of law . In spite of
catena of judgments of this Court, which took the contra
view, holding that an exemption notification must be
strictly construed, and if a person claiming exemption
does not fall strictly within the description of the
notification otherwise then he cannot claim exemption.
11. About three years after (supra), in the
Sun Export Case
year 2000, this Court in
Surendra Cotton Oil Mills
(supra), expressed reservations as to the
Case
soundness of the dicta in Sun Export Case (supra),
observing that Sun Export Case (supra) ignored catena
16
of judgments of this Court expressing contra view. This
Court prima facie came to the conclusion with regard to
the principle that when two views are possible, one
favourable to the assessee in matters of taxation has to
be preferred, is unexceptionable when interpreting the
charging section of a taxation statute, but the opposite
principle would be applicable in interpretation of
exemption notification. The threeJudge Bench in the
referral order further observed that the views expressed
in (supra) with regard to
Sun Export Case
interpretation of exemption notification to support the
conclusion, required reconsideration.
We may, here itself notice that the distinction in
12.
interpreting a taxing provision (charging provision) and
in the matter of interpretation of exemption notification
is too obvious to require any elaboration. Nonetheless,
in a nutshell, we may mention that, as observed in
17
(supra), in the matter
Surendra Cotton Oil Mills Case
of interpretation of charging section of a taxation
statute, strict rule of interpretation is mandatory and if
there are two views possible in the matter of
interpretation of a charging section, the one favourable
to the assessee need to be applied. There is, however,
confusion in the matter of interpretation of exemption
notification published under taxation statutes and in
1
this area also, the decisions are galore .
13. We may passingly, albeit, briefly reiterate the general
principles of interpretation, which were also adverted to
1 See:
Sun Export Corporation, Bombay v. Collector of
Customs, Bombay and Anr., (1997) 6 SCC 564;
Commissioner of Central Excise, Pune v. Abhi
., (2005) 3 SCC
Chemicals and Pharmaceuticals Pvt. Ltd
541;
Collector of Central Excise, Bombay1 and Anr. v.
Parle Exports (Pvt.) Ltd ., (1989) 1 SCC 345;
Commissioner of Customs (Import), Mumbai v. Konkan
, (2012) 6 SCC 339;
Synthetic Fibres Collector of
Customs, Bombay v. Swastic Wollens (Pvt.) Ltd. And
Ors ., (1988) Supp. SCC 796; Commissioner of Customs
., (2008) 7
(Preventive), Gujarat v. Reliance Petroleum Ltd
SCC 220.
18
by both the counsel. In his treatise, ‘
Principles of
’ Justice G.P. Singh, lucidly
Statutory Interpretation
pointed the importance of construction of statutes in a
modern State as under :
“Legislation in modern State is
actuated with some policy to curb
some public evil or to effectuate some
public benefit. The legislation is
primarily directed to the problems
before the Legislature based on
information derived from past and
present experience. It may also be
designed by use of general words to
cover similar problems arising in
future. But, from the very nature of
things, it is impossible to anticipate
fully the varied situations arising in
future in which the application of the
legislation in hand may be called for,
and, words chosen to communicate
such indefinite ‘referents’ are bound to
be, in many cases lacking in clarity
and precision and thus giving rise to
19
controversial questions of
construction.”
14. An Act of Parliament/Legislature cannot foresee all types
of situations and all types of consequences. It is for the
Court to see whether a particular case falls within the
broad principles of law enacted by the Legislature.
Here, the principles of interpretation of statutes come in
handy. In spite of the fact that experts in the field
assist in drafting the Acts and Rules, there are many
occasions where the language used and the phrases
employed in the statute are not perfect. Therefore,
Judges and Courts need to interpret the words.
15. In doing so, the principles of interpretation have been
evolved in common law. It has also been the practice for
the appropriate legislative body to enact Interpretation
Acts or General Clauses Act. In all the Acts and
Regulations, made either by the Parliament or
20
Legislature, the words and phrases as defined in the
General Clauses Act and the principles of interpretation
laid down in General Clauses Act are to be necessarily
kept in view. If while interpreting a Statutory law, any
doubt arises as to the meaning to be assigned to a word
or a phrase or a clause used in an enactment and such
word, phrase or clause is not specifically defined, it is
legitimate and indeed mandatory to fall back on General
Clauses Act. Notwithstanding this, we should
remember that when there is repugnancy or conflict as
to the subject or context between the General Clauses
Act and a statutory provision which falls for
interpretation, the Court must necessarily refer to the
provisions of statute.
16. The purpose of interpretation is essentially to know the
intention of the Legislature. Whether the Legislature
intended to apply the law in a given case; whether the
21
Legislature intended to exclude operation of law in a
given case; whether Legislature intended to give
discretion to enforcing authority or to adjudicating
agency to apply the law, are essentially questions to
which answers can be sought only by knowing the
intention of the legislation. Apart from the general
principles of interpretation of statutes, there are certain
internal aids and external aids which are tools for
interpreting the statutes.
17. The long title, the preamble, the heading, the marginal
note, punctuation, illustrations, definitions or dictionary
clause, a proviso to a section, explanation, examples, a
schedule to the Act etc., are internal aids to
construction. The external aids to construction are
Parliamentary debates, history leading to the legislation,
other statutes which have a bearing, dictionaries,
thesaurus.
22
18. It is well accepted that a statute must be construed
according to the intention of the Legislature and the
Courts should act upon the true intention of the
legislation while applying law and while interpreting
law. If a statutory provision is open to more than one
meaning, the Court has to choose the interpretation
which represents the intention of the Legislature. In
this connection, the following observations made by this
Court in
District Mining Officer vs. Tata Iron and
Steel Co. , (2001) 7 SCC 358, may be noticed:
“… A statute is an edict of the Legislature
and in construing a statute, it is
necessary, to seek the intention of its
maker. A statute has to be construed
according to the intent of them that make
it and the duty of the Court is to act upon
the true intention of the Legislature. If a
23
statutory provision is open to more than
one interpretation the Court has to choose
that interpretation which represents the
true intention of the Legislature. This task
very often raises the difficulties because of
various reasons, inasmuch as the words
used may not be scientific symbols having
any precise or definite meaning and the
language may be an imperfect medium to
convey one’s thought or that the assembly
of Legislatures consisting of persons of
various shades of opinion purport to
convey a meaning which may be obscure.
It is impossible even for the most
imaginative Legislature to forestall
exhaustively situations and circumstances
that may emerge after enacting a statute
where its application may be called for.
Nonetheless, the function of the Courts is
only to expound and not to legislate.
Legislation in a modern State is actuated
with some policy to curb some public evil
or to effectuate some public benefit. The
legislation is primarily directed to the
problems before the Legislature based on
information derived from past and present
experience. It may also be designed by use
24
of general words to cover similar problems
arising in future. But, from the very
nature of things, it is impossible to
anticipate fully the varied situations
arising in future in which the application
of the legislation in hand may be called for,
and, words chosen to communicate such
indefinite referents are bound to be in
many cases lacking in clarity and precision
and thus giving rise to controversial
questions of construction. The process of
construction combines both literal and
purposive approaches. In other words the
legislative intention i.e., the true or legal
meaning of an enactment is derived by
considering the meaning of the words used
in the enactment in the light of any
discernible purpose or object which
comprehends the mischief and its remedy
to which the enactment is directed…”
19. The well settled principle is that when the words in a
statute are clear, plain and unambiguous and only one
meaning can be inferred, the Courts are bound to give
25
effect to the said meaning irrespective of consequences.
If the words in the statute are plain and unambiguous,
it becomes necessary to expound those words in their
natural and ordinary sense. The words used declare the
intention of the Legislature. In
Kanai Lal Sur v.
, AIR 1957 SC 907, it was
Paramnidhi Sadhukhan
held that if the words used are capable of one
construction only then it would not be open to the
Courts to adopt any other hypothetical construction on
the ground that such construction is more consistent
with the alleged object and policy of the Act.
In applying rule of plain meaning any hardship and
20.
inconvenience cannot be the basis to alter the meaning
to the language employed by the legislation. This is
especially so in fiscal statutes and penal statutes.
Nevertheless, if the plain language results in absurdity,
the Court is entitled to determine the meaning of the
26
word in the context in which it is used keeping in view
2
the legislative purpose. Not only that, if the plain
construction leads to anomaly and absurdity, the court
having regard to the hardship and consequences that
flow from such a provision can even explain the true
intention of the legislation. Having observed general
principles applicable to statutory interpretation, it is
now time to consider rules of interpretation with respect
to taxation.
21. In construing penal statutes and taxation statutes, the
Court has to apply strict rule of interpretation. The
penal statute which tends to deprive a person of right to
life and liberty has to be given strict interpretation or
else many innocent might become victims of
discretionary decision making. Insofar as taxation
3
statutes are concerned, Article 265 of the Constitution
2
Assistant Commissioner, Gadag SubDivision, Gadag
v. Mathapathi Basavannewwa , 1995 (6) SCC 355.
3
265. Taxes not to be imposed save by authority of law
No tax shall be levied or collected except by authority of law.
27
prohibits the State from extracting tax from the citizens
without authority of law. It is axiomatic that taxation
statute has to be interpreted strictly because State
cannot at their whims and fancies burden the citizens
without authority of law. In other words, when
competent Legislature mandates taxing certain
persons/certain objects in certain circumstances, it
cannot be expanded/interpreted to include those, which
were not intended by the Legislature.
22. At the outset, we must clarify the position of ‘plain
meaning rule or clear and unambiguous rule’ with
respect of tax law. ‘The plain meaning rule’ suggests
that when the language in the statute is plain and
unambiguous, the Court has to read and understand
the plain language as such, and there is no scope for
any interpretation. This salutary maxim flows from the
phrase “ cum inverbis nulla ambiguitas est, non debet
28
admitti voluntatis quaestio” . Following such maxim, the
courts sometimes have made strict interpretation
4
subordinate to the plain meaning rule , though strict
interpretation is used in the precise sense. To say that
strict interpretation involves plain reading of the statute
and to say that one has to utilize strict interpretation in
the event of ambiguity is selfcontradictory.
Next, we may consider the meaning and scope of ‘strict
23.
interpretation’, as evolved in Indian law and how the
higher Courts have made a distinction while interpreting
a taxation statute on one hand and tax exemption
th
notification on the other. In Black’s Law Dictionary (10
Edn.) ‘strict interpretation’ is described as under:
Strict interpretation. (16c) 1. An
interpretation according to the narrowest,
most literal meaning of the words without
regard for context and other permissible
4
Mangalore Chemicals Case (Infra para 37 ) .
29
meanings. 2. An interpretation according
to what the interpreter narrowly believes
to have been the specific intentions or
understandings of the text’s authors or
ratifiers, and no more. Also termed (in
senses 1 & 2) strict construction, literal
interpretation; literal construction;
restricted interpretation; interpretatio
stricta; interpretatio restricta;
interpretatio verbalis. 3. The philosophy
underlying strict interpretation of
statues. Also termed as close
interpretation; interpretatio restrictive.
See strict constructionism under
constructionism. Cf. large interpretation;
liberal interpretation (2).
“Strict construction of a statute is
that which refuses to expand the law by
implications or equitable considerations,
but confines its operation to cases which
are clearly within the letter of the statute,
as well as within its spirit or reason, not
so as to defeat the manifest purpose of
the legislature, but so as to resolve all
reasonable doubts against the
applicability of the statute to the
particular case.’ Willam M. Lile et al.,
30
Brief Making and the use of Law Books
343 (Roger W. Cooley & Charles Lesly
Ames eds., 3d ed. 1914).
“Strict interpretation is an equivocal
expression, for it means either literal or
narrow. When a provision is ambiguous,
one of its meaning may be wider than the
other, and the strict (i.e., narrow) sense is
not necessarily the strict (i.e., literal)
sense.” John Salmond , Jurisprudence
th
171 n. (t) (Glanville L. Williams ed., 10
ed. 1947).
As contended by Ms. Pinky Anand, learned Additional
24.
Solicitor General, the principle of literal interpretation
and the principle of strict interpretation are sometimes
used interchangeably. This principle, however, may not
be sustainable in all contexts and situations. There is
certainly scope to sustain an argument that all cases of
literal interpretation would involve strict rule of
interpretation, but strict rule may not necessarily
involve the former, especially in the area of taxation.
31
The decision of this Court in
Punjab Land
Development and Reclamation Corporation Ltd.,
Chandigarh v. Presiding Officer, Labour Court
Chandigarh and Ors. , (1990) 3 SCC 682, made the
said distinction, and explained the literal rule
“The literal rules of construction require
the wording of the Act to be construed
according to its literal and grammatical
meaning whatever the result may be.
Unless otherwise provided, the same word
must normally be construed throughout
the Act in the same sense, and in the case
of old statutes regard must be had to its
contemporary meaning if there has been
no change with the passage of time.”
That strict interpretation does not encompass strict
literalism into its fold. It may be relevant to note that
simply juxtaposing ‘strict interpretation’ with ‘literal
rule’ would result in ignoring an important aspect that
32
is ‘apparent legislative intent’. We are alive to the fact
that there may be overlapping in some cases between
the aforesaid two rules. With certainty, we can observe
that, ‘strict interpretation’ does not encompass such
literalism, which lead to absurdity and go against the
legislative intent. As noted above, if literalism is at the
far end of the spectrum, wherein it accepts no
implications or inferences, then ‘strict interpretation’
can be implied to accept some form of essential
inferences which literal rule may not accept.
We are not suggesting that literal rule the strict
25. de hors
interpretation nor one should ignore to ascertain the
interplay between ‘strict interpretation’ and ‘literal
interpretation’. We may reiterate at the cost of
repetition that strict interpretation of a statute certainly
involves literal or plain meaning test. The other tools of
interpretation, namely contextual or purposive
33
interpretation cannot be applied nor any resort be made
to look to other supporting material, especially in
taxation statutes. Indeed, it is well settled that in a
taxation statute, there is no room for any intendment;
that regard must be had to the clear meaning of the
words and that the matter should be governed wholly by
the language of the notification. Equity has no place in
interpretation of a tax statute. Strictly one has to look to
the language used; there is no room for searching
intendment nor drawing any presumption.
Furthermore, nothing has to be read into nor should
anything be implied other than essential inferences
while considering a taxation statute.
26. Justice G.P. Singh, in his treatise ‘ Principles of
th
Statutory Interpretation ’ (14 ed. 2016 p. – 879) after
referring to , (1885) 11 Ex 452;
Re, Micklethwait
, (1869) LR 4 HL 100;
Partington v. A.G. Rajasthan
34
Rajya Sahakari Spinning & Ginning Mills
, (2014) 11 SCC
Federation Ltd. v. Deputy CIT, Jaipur
672,
State Bank of Travancore v. Commissioner of
Income Tax , (1986) 2 SCC 11 and Cape Brandy
Syndicate v. IRC , (1921) 1 KB 64, summed up the law
in the following manner
“A taxing statute is to be strictly
construed. The wellestablished rule in the
familiar words of LORD WENSLEYDALE,
reaffirmed by LORD HALSBURY AND
LORD SIMONDS, means: ‘The subject is
not to be taxed without clear words for that
purpose; and also that every Act of
Parliament must be read according to the
natural construction of its words. In a
classic passage LORD CAIRNS stated the
principle thus: “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
35
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. VISCOUNT SIMON
quoted with approval a passage from
ROWLATT, J. expressing the principle in
the following words: “In a taxing Act one
has to look merely at what is clearly said.
This is no room for any intendment. There
is no equity about a tax. There is no
presumption as to tax. Nothing is to be
read in, nothing is to be implied. One can
only look fairly at the language used.”
It was further observed:
“In all tax matters one has to interpret the
taxation statute strictly. Simply because
one class of legal entities is given a benefit
which is specifically stated in the Act, does
not mean that the benefit can be extended
to legal entities not referred to in the Act as
there is no equity in matters of taxation….”
36
Yet again, it was observed:
“It may thus be taken as a maxim of
tax law, which although not to be
overstressed ought not to be forgotten
that, “the subject is not to be taxed unless
the words of the taxing statute
unambiguously impose the tax on him”,
[Russel v. Scott, (1948) 2 All ER 1]. The
proper course in construing revenue Acts
is to give a fair and reasonable
construction to their language without
leaning to one side or the other but
keeping in mind that no tax can be
imposed without words clearly showing
an intention to lay the burden and that
equitable construction of the words is not
permissible [Ormond Investment Co. v.
Betts, (1928) AC 143]. Considerations of
hardship, injustice or anomalies do not
play any useful role in construing taxing
statutes unless there be some real
ambiguity [Mapp v. Oram, (1969) 3 All ER
215]. It has also been said that if taxing
provision is “so wanting in clarity that no
meaning is reasonably clear, the courts
will be unable to regard it as of any effect
37
[IRC v. Ross and Coutler, (1948) 1 All ER
616].”
Further elaborating on this aspect, the learned
author stated as follows:
“Therefore, if the words used are
ambiguous and reasonable open to two
interpretations benefit of interpretation is
given to the subject [Express Mill v.
Municipal Committee, Wardha, AIR 1958
SC 341]. If the Legislature fails to express
itself clearly and the taxpayer escapes by
not being brought within the letter of the
law, no question of unjustness as such
arises [CIT v. Jalgaon Electric Supply Co.,
AIR 1960 SC 1182]. But equitable
considerations are not relevant in
construing a taxing statute, [CIT, W.B. v.
Central India Industries, AIR 1972 SC
397], and similarly logic or reason cannot
be of much avail in interpreting a taxing
statute [Azam Jha v. Expenditure Tax
Officer, Hyderabad, AIR 1972 SC 2319]. It
is well settled that in the field of taxation,
hardship or equity has no role to play in
determining eligibility to tax and it is for
38
the Legislature to determine the same
[Kapil Mohan v. Commr. of Income Tax,
Delhi, AIR 1999 SC 573]. Similarly,
hardship or equity is not relevant in
interpreting provisions imposing stamp
duty, which is a tax, and the court should
not concern itself with the intention of the
Legislature when the language expressing
such intention is plain and unambiguous
[State of Madhya Pradesh v. Rakesh Kohli
& Anr., (2012) 6 SCC 312]. But just as
reliance upon equity does not avail an
assesse, so it does not avail the Revenue.”
The passages extracted above, were quoted with
approval by this Court in at least two decisions
being Commissioner of Income Tax vs. Kasturi
Sons Ltd . , (1999) 3 SCC 346 and State of West
, (2004) 10
Bengal vs. Kesoram Industries Limited
SCC 201 [ hereinafter referred as ‘
Kesoram
Industries Case ’ for brevity ]. In the later decision,
a Bench of seven Judges, after citing the above
39
passage from Justice G.P. Singh’s treatise, summed
up the following principles applicable to the
interpretation of a taxing statute:
“(i) In interpreting a taxing statute,
equitable considerations are entirely out of
place. A taxing statute 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 imply anything which
is not expressed; it cannot import
provisions in the statute so as to supply
any deficiency; (ii) 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 (iii) If
the words are ambiguous and open to two
interpretations, the benefit of
interpretation is given to the subject and
there is nothing unjust in a taxpayer
escaping if the letter of the law fails to
catch him on account of Legislature’s
failure to express itself clearly”.
40
27. Now coming to the other aspect, as we presently
discuss, even with regard to exemption clauses or
exemption notifications issued under a taxing statute,
this Court in some cases has taken the view that the
ambiguity in an exemption notification should be
construed in favour of the subject. In subsequent
cases, this Court diluted the principle saying that
mandatory requirements of exemption clause should be
interpreted strictly and the directory conditions of such
exemption notification can be condoned if there is
sufficient compliance with the main requirements. This,
however, did not in any manner tinker with the view
that an ambiguous exemption clause should be
interpreted favouring the revenue. Here again this
Court applied different tests when considering the
ambiguity of the exemption notification which requires
strict construction and after doing so at the stage of
41
applying the notification, it came to the conclusion that
one has to consider liberally.
28. With the above understanding the stage is now set to
consider the core issue. In the event of ambiguity in an
exemption notification, should the benefit of such
ambiguity go to the subject/assessee or should such
ambiguity should be construed in favour of the revenue,
denying the benefit of exemption to the
subject/assessee? There are catena of case laws in this
area of interpretation of an exemption notification,
which we need to consider herein. The case of
Commissioner of Inland Revenue vs. James Forrest ,
[(1890) 15 AC 334 (HL)] – is a case which does not
discuss the interpretative test to be applied to
exemption clauses in a taxation statute – however, it
was observed that ‘ it would be unreasonable to suppose
that an exemption was wide as practicable to make the
42
tax inoperative, that it cannot be assumed to have been
in the mind of the Legislature ’ and that exemption ‘ from
taxation to some extent increased the burden on other
members of the community ’. Though this is a dissenting
view of Lord Halsbury, LC, in subsequent decisions this
has been quoted vividly to support the conclusion that
any vagueness in the exemption clauses must go to the
benefit of the revenue. Be that as it is, in our country,
at least from 1955, there appears to be a consistent view
that if the words in a taxing statute (not exemption
clause) are ambiguous and open to two interpretations,
the benefit of interpretation is given to the subject and it
does not matter if the taxpayer escapes the tax net on
account of Legislatures’ failure to express itself clearly
(See the passage extracted hereinabove from Kesoram
(supra)).
Industries Case
43
29. The first case with which we need to concern ourselves
is the case in
Union of India v. The Commercial Tax
AIR 1956 SC 202. It
Officer, West Bengal and Ors .,
may be noted that this case was dealt with by five
learned Judges of this Court resulting in two different
opinions; one by the then Chief Justice of India, S.R.
Das for the majority, and Justice B.P. Sinha (as His
Lordship then was) rendering minority view. The
question before this Court was whether the sale of goods
made by one private mill to the Government of India,
Ministry of Industries and Supplies were to be deducted
as taxable turnover of the mill for the exemption given
under Section 5 of the Bengal Finance (Sales Tax) Act,
1941 (Bengal Act VI of 1941). The exemption under
Section 5(2)(a)(iii) of the Bengal Finance (Sales Tax) Act,
1941 provided for exemption ‘ to sales to the Indian
Stores Department, the Supply Department of the
Government of India, and any railway or water transport
44
administration ’. The Court was to interpret the
aforesaid provision in order to ascertain whether the
sale to the Government of India, Ministry of Industries
and Supplies would be covered under the Section.
30. The majority was of the view that the Government of
India, Ministry of Industries and Supplies was not
similar to those mentioned in the exemption
notification. The majority extensively relied on the
history and origin of Ministry of Industries and Supplies
and concluded that the functions of the aforesaid
Ministry were different from the erstwhile departments
mentioned under the exemption provision. The majority
reasoned that the exemption being the creation of the
statute itself, it should have to be construed strictly and
the interpretation cannot be extended to sales to other
departments. We might find some clue as to the
content of a strict construction also. It was canvassed
45
before the Court that the object of Section 5(2)(a)(iii) of
the relevant statute, was to give exemption not to the
particular departments but to the sale of such goods to
those departments and, therefore, sale of those goods
made to any Departments of the Government of India,
which came to be charged with the duty of purchasing
those goods should also come within the purview of the
exemption. The Court while repelling the aforesaid
interpretation, reasoned as under:
“We are unable to accept this line of
reasoning. This interpretation will unduly
narrow the scope and ambit of the exemption
by limiting it to sales of only those goods as,
at the date of the Act, used to be sold to
those two departments and sales of other
goods even to those two departments,
however necessary for the prosecution of the
war, would not get benefit of the exemption.
Such could not possibly be the intention of
the Legislature as expressed by the language
used by it in framing the Section.”
46
31. The aforesaid placitum is suggestive of the fact that the
Courts utilized the rule of strict interpretation in order
to decipher the intention of the Legislature and
thereafter provide appropriate interpretation for the
exemption provided under the provisions of the Act
which was neither too narrow nor too broad. It may be
noted that the majority did not take a narrow view as to
what strict interpretation would literally mean; rather
they combined legislative intent to ascertain the
meaning of the statute in accordance with the objective
intent of the Legislature.
32. On the contrary, the minority opinion of Justice B.P.
Sinha (as His Lordship then was) provided a purposive
interpretation for Section 5(2)(a)(iii) of the Act, which is
clear from the following passage:
“The judgment under appeal is based
chiefly on the consideration that the
exemption clause in question does not in
47
terms refer to the newly created
department which now goes by the name
of the Ministry of Industry and Supply.
But this department in so far as it deals
with industry, is not concerned with the
main purchasing activities of the
Government of India. The exemption was
granted in respect of the purchasing
activity of the Government of India and
that function continues to be assigned to
the Supply Department which has now
become a wing of the newly created
department of the Government. The
question therefore arises whether in those
circumstances the Government of India
could claim the benefit of the exemption.
The High Court in answering that question
in the negative has gone upon mere
nomenclature. It has emphasized the
change in the name and overlooked the
substance of the matter.”
33. The minority construed ‘strict interpretation’ to be an
interpretation wherein least number of “determinates in
terms of quantity” would fall under the exemption. The
minority referred to an old English case of
48
,
Commissioner of Inland Revenue v. James Forrest
(1890) 15 AC 334. It may be relevant to note that the
minority could not find the justification to apply strict
interpretation as the exemption notification was broad
enough to include exemptions for commodities
purchased by the Government of India. The Court was
of the opinion that the strict interpretation provided by
the majority was uncalled for as there was no additional
burden on others by giving such exemptions. The
relevant observations are as follows
“The High Court referred to the
observations of Lord Halsbury in the case of
Commissioner of Inland Revenue v. James
Forrest (1890) 15 AC 334, to the effect that
exemptions from taxation should be strictly
construed because otherwise the burden of
taxation will fall on other members of the
community. Those observations, in my
opinion, have no relevance to the facts and
circumstances of the present controversy,
because we know that the exemption was
granted to the Government of India in the
49
department dealing with purchase of certain
commodities and articles without reference
to quantity. As already pointed out, the
Indian Stores Department was concerned
with purchase of stores for public services on
behalf of all Central Departments of
Government and local Government, etc., and
the Government of Bengal as then
constituted was one of the provinces of India
which have been receiving subsidies and
subventions to make up the deficit in their
budgets. As a matter of fact, as stated on
behalf of the Bengal Government the
concession was granted in order to enable
business communities within the province of
Bengal to compete on favourable terms with
others outside Bengal in the matter of
supplying the needs of the Government.
Hence, there is no question of liberal
construction of the exemption resulting in
throwing a greater burden on other citizens.
On the other hand, the larger the sales in the
province of Bengal as it used to be, the
greater the benefit to the business
community doing business within that
province. It was therefore stated at the Bar
that though the present case involved taxes
50
amounting to less than Rs.10,000, the
question arising for determination in this
case affected much larger amounts because
such sales within the province amounted to
several crores. I should have thought that
the business community in the province of
Bengal having had the advantage of the
transactions of sale, the Government of
Bengal in all fairness should have allowed
the purchasing agency of the Government of
India the benefit of the exemption until that
benefit was in terms withdrawn sometimes in
the beginning of 1949.”
In
34. Hansraj Gordhandas v. H.H. Dave, Asst. Collector
of Central Excise & Customs, Surat and Ors. , AIR
1970 SC 755 = (1969) 2 SCR 253 [ hereinafter referred
as ‘ Hansraj Gordhandas Case ’ for brevity ], wherein
this Court was called upon to interpret an exemption
notification issued under the Central Excise Act. It
would be relevant to understand the factual context
which gave rise to the aforesaid case before the Court.
The appellant was sole proprietor who used to procure
51
cotton from a cooperative society during the relevant
period. The society had agreed to carry out the weaving
work for the appellant on payment of fixed weaving
charges at Re.0.19 np. per yard which included
expenses the society would have to incur in transporting
the aforesaid cotton fabric. In the years 1959 and 1960,
the Government issued an exemption notification which
exempted cotton fabrics produced by any cooperative
society formed of owners of cotton power looms,
st
registered on or before 31 March, 1961. The question
before the Court was whether the appellant who got the
cotton fabric produced from one of the registered co
operative society was also covered under the aforesaid
notification. It may be of some significance that the
revenue tried to interpret the aforesaid exemption by
relying on the purposive interpretation by contending
that the object of granting the above exemption was to
encourage the formation of cooperative societies which
52
not only produced cotton fabrics but also consisted of
members, not only owning but having actually operated
not more than four power looms during the three years
immediately preceding their having joined the society.
The policy was that instead of each such member
operating his looms on his own, he should combine with
others by forming a society to produce clothes. It was
argued that the goods produced for which exemption
could be claimed must be goods produced on his own
and on behalf by the society. The court did not
countenance such purposive interpretation. It was held
that a taxing legislation should be interpreted wholly by
the language of the notification. The relevant
observations are:
“It is wellestablished that in a taxing
statute there is no room for any intendment
but regard must be had to the clear meaning
of the words. The entire matter is governed
wholly by the language of the notification. If
the taxpayer is within the plain terms of the
53
exemption it cannot be denied its benefit by
calling in aid any supposed intention of the
exempting authority. If such intention can
be gathered from the construction of the
words of the notification or by necessary
implication therefrom, the matter is different,
but that is not the case here. In this
connection we may refer to the observations
of Lord Watson in Salomon vs. Salomon &
Co., (1897) AC 22):
‘Intention of the Legislature is a common but
very slippery phrase, which, popularly
understood may signify anything from
intention embodied in positive enactment to
speculative opinion as to what the legislature
probably would have meant, although there
has been an omission to enact it. In a Court
of Law or Equity, what the Legislature
intended to be done or not to be done can
only be legitimately ascertained from that
which it has chosen to enact, either in
express words or by reasonable and
necessary implication.’
It is an application of this principle that a
statutory notification may not be extended so
as to meet a casus omissus. As appears in
54
the judgment of the Privy Council in
Crawford v. Spooner.
‘… we cannot aid the Legislature’s defective
phrasing of the Act, we cannot add, and
mend, and, by construction, make up
deficiencies which are left there.’
Learned Counsel for the respondents is
possibly right in his submission that the
object behind the two notifications is to
encourage the actual manufacturers of
handloom cloth to switch over to power
looms by constituting themselves in co
operative Societies. But the operation of the
notifications has to be judged not by the
object which the rule making authority had
in mind but by the words which it has
employed to effectuate the legislative intent.”
In the judgment of two learned Judges in
35. Union of
India v. Wood Papers Limited , (1990) 4 SCC 256
[ hereinafter referred as ‘ Wood Papers Ltd. Case ’ for
brevity ], a distinction between stage of finding out the
eligibility to seek exemption and stage of applying the
nature of exemption was made. Relying on the decision
55
in
Collector of Central Excise vs. Parle Exports (P)
, (1989) 1 SCC 345, it was held “ Do not extend or
Ltd.
widen the ambit at the stage of applicability. But once
”. The
that hurdle is crossed, construe it liberally
reasoning for arriving at such conclusion is found in
para 4 of Wood Papers Ltd. Case (supra), which reads
“… Literally exemption is freedom from
liability, tax or duty. Fiscally, it may assume
varying shapes, specially, in a growing
economy. For instance tax holiday to new
units, concessional rate of tax to goods or
persons for limited period or with the specific
objective etc. That is why its construction,
unlike charging provision, has to be tested
on different touchstone. In fact, an
exemption provision is like an exception and
on normal principle of construction or
interpretation of statutes it is construed
strictly either because of legislative intention
or on economic justification of inequitable
burden or progressive approach of fiscal
provisions intended to augment State
revenue. But once exception or exemption
56
becomes applicable no rule or principles
requires it to be construed strictly. Truly
speaking liberal and strict construction of
an exemption provision are to be invoked
at different stages of interpreting it.
When the question is whether a subject
falls in the notification or in the
exemption clause then it being in nature
of exception is to be construed strictly
and against the subject, but once
ambiguity or doubt about applicability is
lifted and the subject falls in the
notification then full play should be given
to it and it calls for a wider and liberal
”
construction…
( emphasis supplied )
In
36. Mangalore Chemicals & Fertilizers Ltd. vs. Dy.
Commissioner of Commercial Taxes , (1992) Supp. 1
SCC 21 [ hereinafter referred as ‘ Mangalore Chemicals
Case ’ for brevity ], the facts of the case were that the
State Government issued a notification in exercise of
power under Section 8A of the Karnataka Sales Tax
57
Act, 1957, providing certain incentives to entrepreneurs
starting new industries in the State pursuant to State’s
policy for “rapid industrialization”. The notification
contains a package of reliefs and incentives including
one concerning relief from payment of sales tax with
which the case was concerned. There was no dispute
that the appellant was entitled to the benefit of the
Notification dated June 30, 1969. There was also no
dispute that the refunds were eligible to be adjusted
against sales tax payable for respective years. The only
controversy was whether the appellant, not having
actually secured the “prior permission” would be
entitled to adjustment having regard to the words of the
Notification of August 11, 1975, that “until permission
of renewal is granted by the Deputy Commissioner of
Commercial Taxes, the new industry should not be
allowed to adjust the refunds”. The contention of the
appellants therein was that the permission for the three
58
years had been sought well before the commencement of
the respective years but had been withheld for reasons
which were demonstrably extraneous. Therefore,
contention was that if, in these circumstances, the
Deputy Commissioner could withold the permission.
37. This Court while accepting the interpretation provided
by the appellant, observed on the aspect of strict
construction of a provision concerning exemptions as
follows:
“… There is support of judicial opinion to
the view that exemptions from taxation
have a tendency to increase the burden on
the other unexempted class of tax payers
and should be construed against the
subject in case of ambiguity. It is an
equally well known principle that a person
who claims an exemption has to establish
his case.
… The choice between a strict and a
liberal construction arises only in case of
59
doubt in regard to the intention of the
legislature manifest on the statutory
language. Indeed, the need to resort to
any interpretative process arises only
where the meaning is not manifest on the
plain words of the statute. If the words are
plain and clear and directly convey the
meaning, there is no need for any
interpretation. It appears to us the true
rule of construction of a provision as to
exemption is the one stated by this Court
in Union of India v. Wood Papers Ltd.
[(1990) 4 SCC 256 = 1990 SCC (Tax) 422 =
JT (1991) SC 151]”
Three important aspects which comes out of the
discussion are the recognition of horizontal equity by
this court as a consideration for application of strict
interpretation, subjugation of strict interpretation to the
plain meaning rule and interpretation in favour of
exclusion in light of ambiguity.
60
38. We will now consider another Constitution Bench
decision in
Commissioner of Central Excise, New
, (2011) 1 SCC 236
Delhi v. Hari Chand Shri Gopal
[ ‘ ’ ].
hereinafter referred as Hari Chand Case for brevity
We need not refer to the facts of the case which gave
rise to the questions for consideration before the
Constitutional Bench. K.S. Radhakrishnan, J., who
wrote the unanimous opinion for the Constitution
Bench, framed the question, viz., whether manufacturer
of a specified final product falling under Schedule to the
Central Excise Tariff Act, 1985 is eligible to get the
benefit of exemption of remission of excise duty on
specified intermediate goods as per the Central
Government Notification dated 11.08.1994, if captively
consumed for the manufacture of final product on the
ground that the records kept by it at the recipient end
would indicate its “intended use” and “substantial
compliance” with procedure set out in Chapter 10 of the
61
Central Excise Rules, 1994, for consideration? The
Constitution Bench answering the said question
concluded that a manufacturer qualified to seek
exemption was required to comply with the pre
conditions for claiming exemption and therefore is not
exempt or absolved from following the statutory
requirements as contained in the Rules. The
Constitution Bench then considered and reiterated the
settled principles qua the test of construction of
exemption clause, the mandatory requirements to be
complied with and the distinction between the eligibility
criteria with reference to the conditions which need to
be strictly complied with and the conditions which need
to be substantially complied with. The Constitution
Bench followed the ratio in
Hansraj Gordhandas Case
(supra), to reiterate the law on the aspect of
interpretation of exemption clause in para 29 as follows
62
“The law is well settled that a person
who claims exemption or concession has to
establish that he is entitled to that
exemption or concession. A provision
providing for an exemption, concession or
exception, as the case may be, has to be
construed strictly with certain exceptions
depending upon the settings on which the
provision has been placed in the statute
and the object and purpose to be achieved.
If exemption is available on complying with
certain conditions, the conditions have to
be complied with. The mandatory
requirements of those conditions must be
obeyed or fulfilled exactly, thought at
times, some latitude can be shown, if there
is failure to comply with some
requirements which are directory in
nature, the noncompliance of which
would not affect the essence or substance
of the notification granting exemption.”
39. The Constitution Bench then considered the doctrine of
substantial compliance and “intended use”. The
63
relevant portions of the observations in paras 31 to 34
are in the following terms –
“31. Of course, some of the provisions of
an exemption notification may be directory in
nature and some are mandatory in nature.
A distinction between the provisions of a
statute which are of substantive character
and were built in with certain specific
objectives of policy, on the one hand, and
those which are merely procedural and
technical in there nature, on the other, must
be kept clearly distinguished…
Doctrine of substantial compliance and
“intended use”
32. The doctrine of substantial compliance
is a judicial invention, equitable in nature,
designed to avoid hardship in cases where a
party does all that can reasonably be
expected of it, but failed or faulted in some
minor or inconsequent aspects which cannot
be described as the “essence” or the
“substance” of the requirements. Like the
concept of “reasonableness”, the acceptance
or otherwise of a plea of “substantial
compliance” depends upon the facts and
circumstances of each case and the purpose
64
and object to be achieved and the context of
the prerequisites which are essential to
achieve the object and purpose of the rule or
the regulation. Such a defence cannot be
pleased if a clear statutory prerequisite
which effectuates the object and the purpose
of the statute has not been met. Certainly, it
means that the Court should determine
whether the statute has been followed
sufficiently so as to carry out the intent for
which the statute was enacted and not a
mirror image type of strict compliance.
Substantial compliance means “actual
compliance in respect to the substance
essential to every reasonable objective of the
statute” and the Court should determine
whether the statute has been followed
sufficiently so as to carry out the intent of
the statute and accomplish the reasonable
objectives for which it was passed.
33. A fiscal statute generally seeks to
preserve the need to comply strictly with
regulatory requirements that are important,
especially when a party seeks the benefits of
an exemption clause that are important.
Substantial compliance with an enactment is
insisted, where mandatory and directory
65
requirements are lumped together, for in
such a case, if mandatory requirements are
complied with, it will be proper to say that
the enactment has been substantially
complied with notwithstanding the non
compliance of directory requirements. In
cases where substantial compliance has
been found, there has been actual
compliance with the statute, albeit
procedurally faulty. The doctrine of
substantial compliance seeks to preserve the
need to comply strictly with the conditions or
requirements that are important to invoke a
tax or duty exemption and to forgive non
compliance for either unimportant and
tangential requirements or requirements that
are so confusingly or incorrectly written that
an earnest effort at compliance should be
accepted.
34. The test for determining the
applicability of the substantial compliance
doctrine has been the subject of a myriad of
cases and quite often, the critical question to
be examined is whether the requirements
relate to the “substance” or “essence” of the
statute, if so, strict adherence to those
requirements is a precondition to give effect
66
to that doctrine. On the other hand, if the
requirements are procedural or directory in
that they are not of the “essence” of the thing
to be done but are given with a view to the
orderly conduct of business, they may be
fulfilled by substantial, if not strict
compliance. In other words, a mere
attempted compliance may not be sufficient,
but actual compliance with those factors
which are considered as essential.”
40. After considering the various authorities, some of which
are adverted to above, we are compelled to observe how
true it is to say that there exists unsatisfactory state of
law in relation to interpretation of exemption clauses.
Various Benches which decided the question of
interpretation of taxing statute on one hand and
exemption notification on the other, have broadly
assumed (we are justified to say this) that the position is
well settled in the interpretation of a taxing statute: It is
the law that any ambiguity in a taxing statute should
enure to the benefit of the subject/assessee, but any
67
ambiguity in the exemption clause of exemption
notification must be conferred in favour of revenue –
and such exemption should be allowed to be availed
only to those subjects/assesses who demonstrate that a
case for exemption squarely falls within the parameters
enumerated in the notification and that the claimants
satisfy all the conditions precedent for availing
exemption. Presumably for this reason the Bench
which decided (supra)
Surendra Cotton Oil Mills Case
observed that there exists unsatisfactory state of law
and the Bench which referred the matter initially,
seriously doubted the conclusion in Sun Export Case
(supra) that the ambiguity in an exemption notification
should be interpreted in favour of the assessee.
41. After thoroughly examining the various precedents some
of which were cited before us and after giving our
anxious consideration, we would be more than justified
68
to conclude and also compelled to hold that every taxing
statue including, charging, computation and exemption
clause (at the threshold stage) should be interpreted
strictly. Further, in case of ambiguity in a charging
provisions, the benefit must necessarily go in favour of
subject/assessee, but the same is not true for an
exemption notification wherein the benefit of ambiguity
must be strictly interpreted in favour of the
.
Revenue/State
42. In
Govind Saran Ganga Saran v. Commissioner of
, 1985 Supp (SCC) 205, this Court pointed
Sales Tax
out three components of a taxing statute, namely
subject of the tax; person liable to pay tax; and the rate
at which the tax is to be levied. If there is any
ambiguity in understanding any of the components, no
tax can be levied till the ambiguity or defect is removed
by the legislature [See Mathuram Agrawal v. Sate of
69
, (1999) 8 SCC 667;
Madhya Pradesh Indian Banks’
, (2004)
Association vs. Devkala Consultancy Service
4 JT 587 = AIR 2004 SC 2615; and
Consumer Online
Foundation vs. Union of India , (2011) 5 SCC 360.]
43. There is abundant jurisprudential justification for this.
In the governance of rule of law by a written
Constitution, there is no implied power of taxation. The
tax power must be specifically conferred and it should
be strictly in accordance with the power so endowed by
the Constitution itself. It is for this reason that the
Courts insist upon strict compliance before a State
demands and extracts money from its citizens towards
various taxes. Any ambiguity in a taxation provision,
therefore, is interpreted in favour of the
subject/assessee. The statement of law that ambiguity
in a taxation statute should be interpreted strictly and
in the event of ambiguity the benefit should go to the
70
subject/assessee may warrant visualizing different
situations. For instance, if there is ambiguity in the
subject of tax, that is to say, who are the persons or
things liable to pay tax, and whether the revenue has
established conditions before raising and justifying a
demand. Similar is the case in roping all persons within
the tax net, in which event the State is to prove the
liability of the persons, as may arise within the strict
language of the law. There cannot be any implied
concept either in identifying the subject of the tax or
person liable to pay tax. That is why it is often said that
subject is not to be taxed, unless the words of the
statute unambiguously impose a tax on him, that one
has to look merely at the words clearly stated and that
there is no room for any intendment nor presumption as
to tax. It is only the letter of the law and not the spirit
of the law to guide the interpreter to decide the liability
to tax ignoring any amount of hardship and eschewing
71
equity in taxation. Thus, we may emphatically reiterate
that if in the event of ambiguity in a taxation liability
statute, the benefit should go to the subject/assessee.
But, in a situation where the tax exemption has to be
interpreted, the benefit of doubt should go in favour of
the revenue, the aforesaid conclusions are expounded
only as a prelude to better understand jurisprudential
basis for our conclusion. We may now consider the
decisions which support our view.
44.
In Hansraj Gordhandas Case (supra), the
Constitutional Bench unanimously pointed out that an
exemption from taxation is to be allowed based wholly
by the language of the notification and exemption
cannot be gathered by necessary implication or by
construction of words; in other words, one has to look to
the language alone and the object and purpose for
granting exemption is irrelevant and immaterial.
72
45. In Parle Exports Case (supra), a bench of two Judges of
this Court considered the question whether non
alcoholic beverage base like Gold spot base, Limca base
and Thumps Up base, were exempted from payment of
duty under the Central Government notification of
March, 1975. While considering the issue, this Court
pointed out the Strict interpretation to be followed in
interpretation of a notification for exemption. These
observations are made in para 17 of the judgment,
which read as follows:
“How then should the courts proceed?
The expressions in the Schedule and in the
notification for exemption should be
understood by the language employed
therein bearing in mind the context in which
the expressions occur. The words used in
the provision, imposing taxes or granting
exemption should be understood in the same
way in which these are understood in
ordinary parlance in the area in which the
law is in force or by the people who
73
ordinarily deal with them. It is, however,
necessary to bear in mind certain principles.
The notification in this case was issued
under Rule 8 of the Central Excise Rules and
should be read along with the Act. The
notification must be read as a whole in the
context of the other relevant provisions.
When a notification is issued in accordance
with power conferred by the statute, it has
statutory force and validity and, therefore,
the exemption under the notification is as if
it were contained in the Act itself. See in this
connection the observations of this Court in
Orient Weaving Mills (P) Ltd. v. Union of
India, 1962 Supp 3 SCR 481 = AIR 1963 SC
98. See also Kailash Nath v. State of U.P.,
AIR 1957 SC 790. The principle is well
settled that when two views of a notification
are possible, it should be construed in favour
of the subject as notification is part of a
fiscal enactment. But in this connection, it
is well to remember the observations of the
Judicial Committee in Coroline M. Armytage
v. Frederick Wilkinson, (1878) 3 AC 355, that
it is only, however, in the event of there being
a real difficulty in ascertaining the meaning
of a particular enactment that the question
74
of strictness or of liberality of construction
arises. The Judicial Committee reiterated in
the said decision at page 369 of the report
that in a taxing Act provisions enacting an
exception to the general rule of taxation are
to be construed strictly against those who
invoke its benefit. While interpreting an
exemption clause, liberal interpretation
should be imparted to the language thereof,
provided no violence is done to the language
employed. It must, however, be borne in
mind that absurd results of construction
should be avoided.”
In the above passage, no doubt this Court observed
that “ when two views of a notification are possible, it
should be construed in favour of the subject as
notification is part of fiscal document ”. This
observation may appear to support the view that
ambiguity in a notification for exemption must be
interpreted to benefit the subject/assessee. A
careful reading of the entire para, as extracted
hereinabove would, however, suggest that an
75
exception to the general rule of tax has to be
construed strictly against those who invoke for their
benefit. This was explained in a subsequent
decision in Wood Papers Ltd. Case (supra). In para
6, it was observed as follows:
“… In Collector of Central Excise v.
Parle Exports (P) Ltd., (1989) 1 SCC 345,
this Court while accepting that exemption
clause should be construed liberally
applied rigorous test for determing if
expensive items like Gold Spot base or
Limca base of Thums Up base were
covered in the expression food products
and food preparations used in Item No. 68
of First Schedule of Central Excises and
Salt Act and held ‘that it should not be in
consonance with spirit and the reason of
law to give exemption for nonalcoholic
beverage basis under the notification in
question’. Rationale or ratio is same. Do
not extend or widen the ambit at stage of
applicability. But once that hurdle is
crossed construe it liberally. Since the
respondent did not fall in the first clause of
76
the notification there was no question of
giving the clause a liberal construction and
hold that production of goods by
respondent mentioned in the notification
were entitled to benefit.”
The above decision, which is also a decision of two
46.
Judge Bench of this Court, for the first time took a view
that liberal and strict construction of exemption
provisions are to be invoked at different stages of
interpreting it. The question whether a subject falls in
the notification or in the exemption clause, has to be
strictly construed. When once the ambiguity or doubt is
resolved by interpreting the applicability of exemption
clause strictly, the Court may construe the notification
by giving full play bestowing wider and liberal
construction. The ratio of Parle Exports Case (supra)
deduced as follows:
“Do not extend or widen the ambit at
stage of applicability. But once that hurdle
is crossed, construe it liberally”.
77
We do not find any strong and compelling reasons to
47.
differ, taking a contra view, from this. We respectfully
record our concurrence to this view which has been
subsequently, elaborated by the Constitution Bench in
Hari Chand Case (supra).
The next authority, which needs to be referred is the
48.
case in (supra) As we have
Mangalore Chemicals .
already made reference to the same earlier, repetition of
the same is not necessary. From the above decisions,
the following position of law would, therefore, clear.
Exemptions from taxation have tendency to increase the
burden on the other unexempted class of tax payers. A
person claiming exemption, therefore, has to establish
that his case squarely falls within the exemption
notification, and while doing so, a notification should be
construed against the subject in case of ambiguity.
78
49. The ratio in Mangalore Chemicals Case (supra) was
approved by a threeJudge Bench in
Novopan India
,
Ltd. v. Collector of Central Excise and Customs
1994 Supp (3) SCC 606. In this case, probably for the
first time, the question was posed as to whether the
benefit of an exemption notification should go to the
subject/assessee when there is ambiguity. The three
Judge Bench, in the background of English and Indian
cases, in para 16, unanimously held as follows:
“We are, however, of the opinion that,
on principle, the decision of this Court in
Mangalore Chemicals – and in Union of
India v. Wood Papers, referred to therein –
represents the correct view of law. The
principle that in case of ambiguity, a
taxing statute should be construed in
favour of the assessee – assuming that the
said principle is good and sound – does not
apply to the construction of an exception
or an exempting provision, they have to be
construed strictly. A person invoking an
exception or an exemption provision to
79
relieve him of the tax liability must
establish clearly that he is covered by the
said provision. In case of doubt or
ambiguity, benefit of it must go to the
State….”
50. In Tata Iron & Steel Co. Ltd. v. State of Jharkhand ,
(2005) 4 SCC 272, which is another twoJudge Bench
decision, this Court laid down that eligibility clause in
relation to exemption notification must be given strict
meaning and in para 44, it was further held –
“The principle that in the event a provision
of fiscal statute is obscure such
construction which favours the assessee
may be adopted, would have no application
to construction of an exemption
notification, as in such a case it is for the
assessee to show that he comes within the
purview of exemption (See Novopan India
Ltd v. CCE and Customs).”
In (supra), as already discussed, the
51. Hari Chand Case
question was whether a person claiming exemption is
required to comply with the procedure strictly to avail
80
the benefit. The question posed and decided was indeed
different. The said decision, which we have already
discussed supra, however, indicates that while
construing an exemption notification, the Court has to
distinguish the conditions which require strict
compliance, the noncompliance of which would render
the assessee ineligible to claim exemption and those
which require substantial compliance to be entitled for
exemption. We are pointing out this aspect to dispel
any doubt about the legal position as explored in this
decision. As already concluded in para 50 above, we
may reiterate that we are only concerned in this case
with a situation where there is ambiguity in an
exemption notification or exemption clause, in which
event the benefit of such ambiguity cannot be extended
to the subject/assessee by applying the principle that
an obscure and/or ambiguity or doubtful fiscal statute
must receive a construction favouring the assessee.
81
Both the situations are different and while considering
an exemption notification, the distinction cannot be
ignored.
52. To sum up, we answer the reference holding as under
(1) Exemption notification should be interpreted
strictly; the burden of proving applicability
would be on the assessee to show that his case
comes within the parameters of the exemption
clause or exemption notification.
(2) When there is ambiguity in exemption
notification which is subject to strict
interpretation, the benefit of such ambiguity
cannot be claimed by the subject/assessee and
it must be interpreted in favour of the revenue.
(3) The ratio in Sun Export case (supra) is not
correct and all the decisions which took similar
view as in Sun Export Case (supra) stands
overruled.
The instant civil appeal may now be placed before
53.
appropriate Bench for considering the case on merits
82
after obtaining orders from the Hon’ble Chief Justice of
India.
…………………………..J.
( Ranjan Gogoi )
…………………………..J.
( N.V. Ramana )
…………………………..J.
( R. Banumathi )
…………………………………..J.
( Mohan M. Shantanagoudar )
…………………………..J.
( )
S. Abdul Nazeer
New Delhi
July 30, 2018