CARDINAL RULES FOR INTERPRETATION OF TAX STATUTES
Interpretation of Statutes – Importance of Subject:
For understanding the provisions of a statute, knowledge to apply the ‘correct’ interpretation, is an essential pre-requisite.
In the case of taxing statutes, as in different type of statutes, there are certain bedrock principles on which the interpretation or construction of the particular statute is done by the Courts and Tribunals; and the tax practitioners are required to have the knowledge of these basics in their catalogue to understand the statute and implications of its provisions. Some important aspects relating to ‘Interpretation’ of Taxing Statutes are dealt herein.
‘Interpretation’ and ‘Construction’ – meaning of:
Statutes are embodiments of authoritative formulae and the very words which are used constitute part of law. The interpretation or construction means the process by which the Courts seek to ascertain the intent of the Legislature through the medium of the authoritative form in which it is expressed. The law is deemed to be what the Court interprets it to be.
The very concept of ‘interpretation’ connotes the introduction of elements which are necessarily extrinsic to the words in the statute. Though the words ‘interpretation’ and ‘construction’ are used interchangeably, the idea is somewhat different.
The term ‘construction’ has been explained in CWT v. Hashmatunnisa Begum  176 ITR 98 (SC) to mean that something more is being got out in the elucidation of the subject-matter than can be got by strict interpretation of the words used. Judges have set themselves in this branch of the law to try to frame the law as they would like to have it.
Further, L.J. Denning in Seaford Court Estates v. Asher  2 All ER 155 speaks as hereunder:
“A Judge must not alter the material of which the Act is woven but he can and should iron out the creases. When a defect appears, a Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of the Parliament and then he must supplement the written words so as to give force and life to the intention of the Legislature.”
The art of correct interpretation would depend on the ability to read what is stated in plain language, read between the lines, read ‘through’ the provision, examining the intent of the Legislature and call upon case laws and other aids to interpretation.
Cardinal Rules for Interpretation of taxing Statutes:
Rule of literal interpretation – This is the most widely used Rule of Interpretation in taxing statutes. Some decisions are given hereunder.
(a) CIT v. T.V. Sundaram Iyyengar  101 ITR 764 (SC) –
If the language of the statute is clear and unambiguous, the Court cannot discard the plain meaning, even if it leads to an injustice.
Golden Rule (Doctrine of purposive construction) – If the strict interpretation of the taxing statute is likely to lead to a manifest absurdity, then the golden rule of construction implies that the meaning of the words should be so effected that such an absurdity is avoided. The application of this rule is rather limited in the realm of construction of taxing statutes, since the literal rule would gain precedence over the golden rule and it is often remarked that equity and taxation are strangers – Grey v. Pearson  6 HL Cas. 61.
Rule of harmonious construction – When any provision of a taxing statute is interpreted, it must be so constructed that the meaning of such provision must harmonise with the intention of the Legislature behind the provision in particular and the enactment in general – CIT v. Chandanben Maganlal  120 Taxman 38 (Guj.). However, this would always be subject to the fact that the particular provision, or even the entire enactment, should not be held unconstitutional.
External aids to interpretation – The Court may also use certain external aids like works of prominent authors, dictionaries, legislative debates, etc., to interpret a statute correctly.
Relevance of Finance Minister’s speech to interpret tax statutes: The words of the statute do themselves best declare the intention of the law given. It is only if there is any ambiguity in the language, in understanding the intention of the Legislature, that the aid can be taken of the proceedings in the Parliament including the aims and objects of the Act. Section 57 of the Evidence Act not only enables but enjoins the duty upon the Courts to take judicial notice of the course of proceedings in the Parliament. In Sole Trustee, Loka Shikshana Trust v. CIT  101 ITR 234 (SC), it was held that:
“if the real meaning and purpose of the words used cannot be understood at all satisfactorily reference can be made to the past history of legislation on the subject and the speech of the mover of the amendment who was, undoubtedly, in the best position to explain what defect in the law the amendment had sought to remove. If the reason given by him only elucidates what is also deducible from the words used in the amended provision, we do not see why we should refuse to take it into consideration as an aid to a correct interpretation.. . . . Interpretation of a statutory provision is always a question of law on which the reasons stated by the mover of the amendment can only be used as an aid in interpretation if we think, as I do in the instant case, that it helps us considerably in understanding the meaning of the amended law. We find no bar against such a use of the speech.” (p. 252)
There is no bar in resorting to or referring to speech of FM. Interpretation of a statute being an exercise in the ascertainment of meaning, every thing which is logically relevant should be admissible – Chunnilal Onkarmal (P.) Ltd. v. UOI  221 ITR 459 (MP); K.P. Varghese v. ITO  131 ITR 597 (SC); CIT v. M.K. Vaidya  224 ITR 186 (Kar.); CIT v. Export India Corporation (P.) Ltd.  219 ITR 461 (P&H); Ganji Krishna Rao v. CIT  220 ITR 654 (AP); Addl. CIT v. Sarvaraya Textiles Ltd.  137 ITR 369 (AP)
Contrary decisions where it is held that FM’s Speech is not admissible: In the cases of CIT v. Bhandari Machinery Co. (P.) Ltd.  231 ITR 294 (Del.); Aswini Kumar Ghose v. Arabinda Bose AIR 1952 SC 369; State of Travancore, Cochin v. Bombay Company Ltd. AIR 1952 SC 366; CWT v. Yuvraj Amrinder Singh  156 ITR 525 (SC); B.R. Sound-n-Music v. O.P. Bhardwaj  173 ITR 433 (Bom.), it was held that:
“The speeches made by the members of the House in the course of the debates are not admissible as external aids to the interpretation of a statutory provision. A statute, as passed by Parliament, is the expression of the collective intention of the Legislature as a whole, and any statement made by the individual, albeit a Minister, of the intention and objects of the Act cannot be used to cut down the generality of the words used in the statute.
The Statement of Objects and Reasons, seeks only to explain what reasons induced the mover to introduce the Bill in the House and what objects he sought to achieve. But those objects and reasons may or may not correspond to the objective, which the majority of members had in view when they passed it into law. The Statement of Objects and Reasons appended to the Bill should be ruled out as an aid to the construction of a statute. Strictly speaking, even the speech of the Finance Minister and Notes on Clauses do not lend support to the view taken by the Tribunal.”
[also see Express Newspapers (P.) Ltd. v. UOI AIR 1958 SC 578, para 173; State of West Bengal v. UOI AIR 1963 SC 1241, para 13].
Generalia Specialibus Non Derogant : General provisions must yield to the special provision – Generally speaking, the sections in the Act do not overlap one another and each section deals only with the matter specified therein and goes no further. If a case appears to be governed by either of two provisions, it is clearly the right of the assessee to claim that he should be assessed under the one, which leaves him with a lighter burden.
The literal meaning of the expression ‘Generalia Specialibus Non Derogant’ is that general words or things do not derogate from the special. The Courts have held the expression to mean that when there is a conflict between a general and special provision, the latter shall prevail as held in the cases of CIT v. Shahzada Nand and Sons 60 ITR 392 (SC) and UOI v. Indian Fisheries (P.) Ltd. AIR 1966 SC 35, or the general provisions must yield to the special provision.
Where there is a conflict between two statutes: The general rule to be followed in case of a conflict between two statutes is that a later statute abrogates the earlier (‘leges posteriors priores contrarias abrogant’) and the well-known exception is that general legislations do not derogate special legislations.
Partnership Act v. Income Tax Act: The above maxim was applied when the questions relating to assessments of a firm and its partners arose under the Income-tax Act, 1961 where the dissolution of the firm and its succession was held to be governed by the Special Act viz., the Income-tax Act and not the Partnership Act. The Karnataka High Court has held in the case of CIT v. Shambulal Nathalal & Co.  145 ITR 329 (Kar.) that when the Legislature has deliberately made a specific provision to cover a particular situation, for the purpose of making an assessment of a firm under the Income-tax Act, there is no scope for importing the concept and the provisions of the Partnership Act. The legal position of a firm under the income-tax law is different from that under the general law of partnership in several respects.
Claim as Donation u/s 80G or Business Expenses u/s 37(1): In Jaswant Trading Co. v. CIT 212 ITR 24 (Raj): 128 CTR 306: 85 Taxman 639 (Raj.) the Rajasthan High Court held that the provisions of section 37 are general in nature and the provisions of section 80G are specific. Applying the maxim generalia specialibus non derogant if an amount is liable for deduction under section 80G it cannot be claimed under the general provisions of section 37(1).
Mimansa Rules of Interpretation: In Ispat Industries Ltd. v. Commissioner of Customs, pronounced on September 29, 2006, Hon’ble Justice Markandey Katju has referred to the Mimansa Rules of Interpretation of the ancient times while deciding an appeal under the Customs Tariff Act, 1975. The issue for decision involved the interpretation of section 14 of the Customs Act and some relevant rules, especially Rule 9(2)(a) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. The decision required consideration of deeming provisions in a statute, legal fictions, how decisions are to be taken, when two interpretations of a provision/rule are possible, how the principle (primary) and subordinate legislations work and similar other related issues.
According to the Court, every legal system has a hierarchy of laws. Whenever there is conflict between a norm in a higher layer in this hierarchy and a norm in a lower layer, the norm in the higher layer will prevail. The hierarchy in our country has the Constitution of India right at the top. Next comes the statutory law, which may be either the Parliamentary law or law made by the State Legislature. Third is delegated or subordinate legislation, which may be in the form of rules and regulations made under the Act. And last in the hierarchy are administrative orders or executive instructions. The theory of the eminent positivist jurist Kelsen (The Pure Theory of Law) [see Kelsen’s ‘The General Theory of Law and State’], were relied on.
On the basis of existing rules of interpretation generally followed by Courts, the Court has summarized the position with respect to statute and rules, as hereunder –
(a) If there are two possible interpretations of a rule, one which serves the object of a provision in the parent statute and the other, which does not, the former has to be adopted because adopting the latter will make the rule ultra vires the Act.
(b) The Act falls in the second layer in this hierarchy, the rules made under the Act fall in the third layer. Hence, if there is any conflict between the provisions of the Act and the provisions of the Rules, the former will prevail.
Rules and notification – Rules made under the Act have the same force as the sections in the Act. But no exercise of the rule-making power can affect control or detract from the full operative effect of the provisions of the sections. Any rule, which purports to do so, would be ultra vires and void. – Hukumchand Mills Ltd v State of MP 52 ITR 583, 589 (SC).
(a) Definition clause – In CIT v The Hindu 18 ITR 237, 250; CIT v Srinivasan & Gopalan 23 ITR 87 (SC) it was held that a definition or interpretation clause, which extends the meaning of a word, should not be construed as taking away its ordinary meaning. Further, such a clause should be so interpreted as not to destroy the basic concept or essential meaning of the expression defined, unless there are compelling words to the contrary.
(b) Undefined words – Words, which are not specifically defined, must be taken in their legal sense or their dictionary meaning or their popular or commercial sense as distinct from their scientific or technical meaning, unless a contrary intention appears.
(c) Legal fiction – In CIT v Godavari Sugar Mills Ltd 63 ITR 310, 315-6 (SC) it was held that the word “deemed” is apt to include the obvious, the uncertain and the impossible. A legal fiction has to be carried to its logical conclusion. However, in CIT v Vadilal Lallubhai 86 ITR 2, 8 (SC) it was held that the fiction operates only within the field of the definite purpose for which the fiction is created.
(d) Marginal notes- Marginal notes to the sections cannot control the construction of the statute – CIT v Ahmedbhai Umarbhai 18 ITR 472, 487 (SC); Chandroji Rao v CIT 77 ITR 743, 745-6 (SC)], but they may throw light on the intention of the legislature – CIT v Vadilal Lallubhai 86 ITR 2,11 (SC).
(e) Punctuation – Punctuation may assist in arriving at the correct construction of a statutory provision.
(f) Retrospective effect of rules and notifications – An authority cannot make rules or issue notifications adversely affecting the assessee’s rights with retrospective effect, unless the statute, whether expressly or by necessary intendment, empowers the authority to do so – ITO v Ponnoose  75 ITR 174 (SC). This principle received statutory recognition in section 295(4) w.e.f. 18.8.1974 inserted by Direct Taxes (Amendment) Act, 1974.
(g) A completed assessment may be reopened or rectified – A completed assessment may be reopened u/s 147 or rectified u/s 154 -Venkatachalam v Bombay Dyeing & Manufacturing Co Ltd. 34 ITR 143 (SC), if the relevant provisions of the law are amended with appropriate retrospective effect.
(h) Necessity of speaking orders – Where under the provisions of the Act an authority is empowered to grant approval or exemption, and the taxpayer has a right to claim it on fulfillment of the statutory conditions, the authority is bound to pass a speaking order and give reasons in support of its finding that the taxpayer is not entitled to the approval or exemption. The appellate and revisional authorities likewise must pass speaking orders. In fact Article 141 of the Constitution of India also mandates this.
(i) Double taxation not permitted – In Jain Bros v Union of India 77 ITR 107, 112 (SC) it has been broadly stated the principle of the Income-tax Act is to charge all income with tax, but in the hands of the same person only once. There could be double taxation if the legislature distinctly enacted it.
CIT v Murlidhar Jhawar & Purna Ginning & pressing Factory 60 ITR 95 (SC) – If an association or unregistered firm is taxed in respect of its income, the same income cannot be charged again in the hands of the members individually and vice versa.
Nagappa v CIT 73 ITR 626, 633 (SC) – Trust income cannot be taxed in the hands of the settlor and also in the hands of the trustee or the beneficiary.
T.N.K. Govindraju Chetty & Co. (P) Ltd. v CIT  51 ITR 731 (Mad.) – The same person can be taxed both as individual as well as the karta of his family but same income cannot be charged twice over in the hands of the same person is well settled. There is rule of law that income which has borne tax in the hands of a particular individual becomes wholly immune from tax in all its subsequent devolutions or passage to another person.
High Court decisions – Whether binding in nature and binding on whom – Though there is no express provision in the Constitution like Article 141, in respect of the High Courts, the Tribunals within the jurisdiction of a High Court are bound to follow its judgments as the High Court has the power of superintendence over them under Article 227 of the Constitution.
The Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 has observed:
“. . . We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and that they cannot ignore it . . . .” (p. 1905)
In K.N. Agrawal v. CIT  189 ITR 769 (All.) it was observed that the orders of the Tribunal and the High Court are binding upon the A.O.
In State of A.P. v. CTO  169 ITR 564 (AP), it was held that it is not permissible for the authorities and the Tribunals to ignore the decisions of the High Court or to refuse to follow the decisions of the High Court on the pretext that an appeal is pending in the Supreme Court or that steps are being taken to file an appeal. The Court then made the following important and bold observations:
“. . . If any authority or the Tribunal refuses to follow any decision of this High Court on the above grounds, it would be clearly guilty of committing contempt of this High Court and is liable to be proceeded against.” (p. 572)
Position in regard to different Benches of the same High Court – The position in regard to the different Benches of the same High Court is as follows :
- A Single Judge or a Division Bench order of a High Court is binding on the single Judge of the same High Court.
- It is obligatory on the part of a Division Bench to follow the decision of another Division Bench of equal strength or a Full Bench of the same High Court.
- Judicial propriety requires a Single Judge to follow and apply earlier Division Bench judgment of the same Court which is very much binding on him sitting as a Single Judge of the same High Court
- Where a Single Judge does not subscribe to the views expressed in a Single Judge’s order or Division Bench’s order of the same High Court, he should place the papers before the Chief Justice to enable him to constitute a larger Bench to examine the question.
- Similarly where a Division Bench differs from another Division Bench of the same High Court, it should refer the case to a larger Bench.
The above position has been culled out from CIT v. Thana Electricity Supply Ltd.  206 ITR 727 (Bom.). CIT v. Hari Nath & Co.  168 ITR 440 (All.); Super Spg. Mills Ltd. v. CIT  199 ITR 832 (Mad.); Koduru Venkata Reddy v. LAO  170 ITR 15 (AP); Sundarjas Kanyalal Bhatija v. Collector  183 ITR 130 (SC).
Whether decision of a High Court extends beyond its territorial jurisdiction – In Patil Vijaykumar v. UOI  151 ITR 48 (Kar.) it was observed that -
“. . . But we wish to add that although a decision of another High Court is not binding on this Court, we see no reason for not accepting, with respectful caution, any help they can give in the elucidation of questions which arise before this Court.” (p. 60)
It is a well-settled position that decision rendered by a High Court is not binding on other High Courts or the Tribunals or authorities beyond its territorial jurisdiction. At best, its decision can have persuasive value.
In Benoy Kumar Sahas Roy 32 ITR 466 (SC) it was held that a decision of a High Court would have binding force in the State in which the Court has jurisdiction but do not have binding force outside that State.
Contrary decisions: However, the courts have also held that normally, more so, in regard to the Income-tax Act, which is a piece of all India legislation, if any High Court has construed any section or rule, that interpretation should be followed by the other High Court unless there are compelling reasons to depart from that view – Peirce Leslie & Co.’s case (supra); CIT v. Deepak Family Trust No. 1  72 Taxman 406 (Guj.); CIT v. Alcock Ashdown & Co. Ltd.  119 ITR 164 (Bom.); and Sarupchand Hukamchand, In re  13 ITR 245 (Bom.).