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Interpretation of Fiscal Statutes

Written by: Ashish Srivastava, - VII Semester, National Law University, Jodhpur
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Should courts interpret laws according to a uniform set of rules, or should they use different tools for interpreting different statutes? This simple question is increasingly at the heart of statutory interpretation scholarship and jurisprudence. If the latter position is correct--if different laws require different interpretive methods--generalizations about statutory interpretation may be of only limited value and the search for a unified theory of interpretation may be a misguided quest. But the lure of uniformity remains great, particularly for appellate courts, which must interpret a multiplicity of statutes and need at least some guiding principles to do so. This project is being divided into two parts, the first part deals with the interpretation of tax statutes & the second part deals with the interpretation of tax treaties

THE THREE basic rules for the interpretation of statutes are the primary rule of construction, secondary rule of construction and the rule of harmonious construction. Primary rule of construction:
The steps to be followed while applying this rule are:
* Read and analyze a section
* Ascertain the primary meaning of the words used
* Ascertain the grammatical, literal and plain meaning of the words used in the section.

Maxwell terms this rule as the Golden Rule. Secondary rule of construction:

This rule is concerned with the application of the eleven canons of theory of interpretation of statutes. These are: The preamble to a statute is a part of the statute and should be read together with the object of the Act, title, marginal notes and legislative history and cannot control or restrict the operation of a main section but they can be used as a guiding factor to know the general drift of a section.

The main part of the section lays down the substantive law and reflects the intention of Parliament. For example, section 12 of the Companies Act, 1956 provides for the mode and manner of forming an incorporated company by laying down a detailed procedure. A proviso is appended to a main section which restricts the main section. It cannot travel beyond the domain of main section to which it is appended.

In the case of CIT v Indo Mercantile Bank, the Supreme Court has explained, "the territory of a proviso, therefore, is to carve out an explanation to the main enactment and exclude something which otherwise would have been under the section."

The definition defines the meaning of the words used. It could be a 'mean type' or an 'inclusive type'. If when defining, the word 'means' is used and the word is restricted to the scope indicated in the definition, it is the 'mean type'.

An example of this kind of definition is found in the definition of "company" given in section 2 (17) of the Income Tax Act, 1961 (I-T Act). The 'inclusive type' is when defining, the word 'includes' is used. It can include items other than those enumerated in the section. Example of this type is found in the definition of 'person' given in section 2(31) of the I-T Act.

An explanation section does not enlarge the scope of the main section but explains it. The I-T Act contains a plethora of explanations. An example is the four explanations to section 43B, which provides that certain deductions are to be allowed only on actual payment. In the case of a conflict between a special provision and a general provision, then the special section would override the general section. A special section confers a special power and a general section confers a general power.

The striking example of general and special, is found in the definition of `body corporate' given under section 2(7) of the Companies Act, 1956 and that given for the purposes of section 43A(1). There can be a `deeming fiction, where the Legislature can deem something to be something else. In the case of CIT v Express News Papers I , the Supreme Court held that-"It (the deeming clause in section 12 (B) only introduces a limited fiction, namely that the capital gains accrued will be deemed to be income of previous year, in which the sale was effected. The fiction does not make them the profits and gains of business." It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate fields.

An example of deeming fiction is found in section 115 J of the I-T Act which was operative for assessment years ?88-89 to ?90-91, where if the company's total income is less than 30 per cent of its book profit, 30 per cent of the book profits deemed to be the total income. Retrospective operation and prospective operation is another indicator. All statutes are prospective in nature. But an Act or a particular section can be given retrospective effect by express statement or by necessary implication.

If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be constructed as prospective only. It must be borne in mind that the rule regarding retrospective operation governs substantive sections only and not procedural sections. The example with regard to retrospective operation of a procedural law was Rule 1 BB of the Wealth Tax Rules, 1957, laying down the manner of valuation of a house.

The Supreme Court in the case of CWT v Sharvan Kumar Swarup & Sons has held that Rule 1BB is procedural in nature and, therefore, applicable to all pending proceedings.

The transforming amendments of substantive sections are always prospective in nature except where they are made retrospective in operation by specific statement or by necessary implication. Again, a procedural amendment can be retrospective in operation. Further, the classificatory amendments are used only in those cases to find out the meaning of earlier sections.

When there is a provision that has two possible interpretations, the one which casts a lesser burden on the subject must be adopted. In the case of CIT v M K Vaidya , the Karnataka High Court held that "...if reasonably two meanings are attributable to a word used in the fiscal law, the meaning which is more beneficial to the tax payers will be applied, specially it is so, when the state itself at one point of time clearly acted as if the wider meaning was not attributable without adding further words". In the case of CIT v New Shorrock Spinning & Manufacturing, the Bombay High Court held that "the question of accepting the principle of beneficial interpretation would arise only in case where two views are reasonably possible in the opinion of the court deciding the point at issue. If this is not the case, the court should not tilt in favour of the assessee.

Another interpretational canon is reference to the speech in Parliament, at the time of introduction of the bill and is only permissible when the court finds the provisions of the Act vague and ambiguous Another tool for interpretation is reference to the memorandum, explaining the provisions of the Finance Act or a circular issued by a competent authority, like the Central Board of Direct Taxes. Generally, the memorandum explaining the provisions of the Act or such circular can not be relied upon for interpreting a particular provision of the Act as they can not curtail or modify the clear provisions of law.

The statement of objects and reasons in the Bill, can not be relied upon to interpret a particular provision of the Act. The recent decision of the Karnataka High Court in the case of Union Home Products v Union of India supports this view.

Rule of harmonious construction: It is true that every statute must be interpreted on the basis of aforesaid primary and secondary rules of construction.
However, they should not conflict with the principle of harmonious construction. Every effort should be made to ensure that all the three rules are simultaneously satisfied.

Maxwell in "Interpretation of Statutes (Twelfth Edition)" states that the words of statute, when there is doubt about their meaning are to be understood in the sense in which they best harmonize with the subject of the enactment and the object which the legislature had in view. An interpretation of fiscal statute which has been reiterated in a recent judgment by the Supreme Court in the case of Commissioner of Customs v Tullow India Operations Ltd is that no interpretation should lead to absurd results. It is strange that the Supreme Court had to once again repeat this fundamental proposition, but this was necessary because a decision by the commissioner of Customs in this particular case had led to an absurd conclusion. An importer was denied an exemption because he was not able to produce a certificate, which was necessary at the time of import. The certificate was, however, produced at a later stage. The Supreme Court set aside the order of the commissioner of Customs on the ground that it would lead to an absurd result, besides many other reasons. Even earlier, on a similar issue of how to understand the expression, at the time of importation, the tribunal had given a decision that if this was interpreted too
literally, it would lead to absurd results.

The tribunal said at the time of importation literally meant at the time when the ship entered India. It would lead to an absurd situation since nobody could claim exemption at that time. The tribunal extended the meaning of at the time of importation to at the time of clearance of goods. The crux of the matter is that depending on the situation of importation, the meaning must lead to a practical result and not an absurd situation. The same principle was reiterated by the Supreme Court in the case of ACC v Commissioner of Customs in this case, the question was about valuation of a drawing and design. The Supreme Court observed that it would be absurd to value such articles or similar articles like paintings for the purpose of Customs duty merely on the basis of the cost of the canvass or the cost of the oil paints.

In another judgment, in CCE v Acer India Ltd. the Supreme Court observed in relation to the value of operating software that the principle of purposive construction should be adhered to when a literal meaning may result in absurdity. In the case of TCS v State of Andhra Pradesh , where the issue was chargeability of computer software in canned form to sales tax, the Supreme Court quoted the above judgment of ACC v Commissioner of Customs with approval. In one of the latest judgments in the case of Compack Pvt Ltd v CCE , the Supreme Court observed in relation to availing of Modvat credit that if it was not written very clearly in a notification that the final product had to be made only or purely from certain inputs, the exemption cannot be denied because it has used other inputs as well. That sort of interpretation would create an absurd situation. The Supreme Court, therefore, observed that a notification had to be construed in terms of the language used, unless the literal meaning led to an anomaly or absurdity. If there is no such absurdity in the literal interpretation, there is no need to go for the intention or the purpose of the notification.

The conclusion is that we have to first resort to literal interpretation of the statute or expression. However, if that leads to an absurd result, we have to look for the intention or the purpose of the legislation so that the legislation itself does not become invalid. The high courts and the Supreme Court have always chosen interpretations which do not lead to an anomaly over the one which leads to an anomaly or an absurdity.

The interpretation of tax statutes, emphasizing the role of legislative purpose in the interpretive process. Although conceding the importance of legislative purpose, upon close examination, most tax cases are--and should be--decided by a practical reason method, balancing text, legislative history, and practical considerations in a manner not terribly different than that used to interpret other statutes. The question of specificity is particularly acute for tax statutes. Scholars have long suggested that the unique features of tax law, including its high level of detail, frequent revision, and largely self-contained nature, require a special set of interpretive tools. In particular, scholars have argued that the underlying structure or "purpose" of the Code may dictate results that are difficult or impossible to reach using non-tax interpretive methods.

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