The principle of strict interpretation of taxing statutes was best enunciated by Rowlatt J. in his classic statement in Cape Brandy Syndicate v I.R.C. (1 KB 64, 71): "In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used."

In A. V. Fernandes v State of Kerala (8 STC 561; SC; AIR 1957 SC 657), the Supreme Court stated the principle that if the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case does not fall within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter.

Hence, in taxing statutes the language cannot be stretched (State of Punjab v Jullundar Vegetables Syndicate; 17 STC 326; SC). If the words of a taxing statute fail, so must the tax. The courts cannot, except in clear cases, help the draftsman by a favourable construction (I.T.O. v T. S. Devinatha Nadar (68 I.T.R. 252; SC) and C.I.T. v Elphinstone Spg. and Wvg. Mills Co. Ltd. (40 I.T.R. 142; SC). However, a fair and reasonable construction must be given (C.W.T. v Kripashankar Dayashanker Worah (81 I.T.R. 763; SC) and R. B. Jodha Mal Kuthiala v C.I.T. (82 I.T.R. 570; SC).

It is a cardinal principle of interpretation that a statute should be read in its ordinary, natural and grammatical sense.

In Innamuri Gopalam and Maddala Nagendrudu v State of A. P. (14 STC 742; SC), the exemption was denied to the assessee on the ground that the intention of the notification was to avoid double taxation, and as this was not a case of double taxation no exemption could be granted.

The Supreme Court held that on the plain language of the notification, the assessee was entitled to exemption, and since the intention was not reflected in plain words, it could not be taken into consideration.

As observed by the apex court: "In construing a statutory provision the first and foremost rule of construction is the literary construction. All that the court has to see at the very outset is what does the provision say. If the provision is unambiguous and if from the provision the legislative intent is clear, the court need not call into aid the other rules of construction of statutes. The other rules of construction are called into aid only when the legislative intent is not clear."

In C.I.T. v G. Hyatt (80 I.T.R. 177; SC) the question was whether under Section 17(3) of the Income-Tax Act, 1961, the interest on the assessee's own contribution to an unrecognised provident fund could be treated as salary. The Supreme Court held that the language of Section 17(3) was plain and unambiguous, and hence the said amount was not salary but income from other sources and taxable under Section 56.

In Polyster and Co. Ltd. v Addl. C.S.T. (41 STC 409) the question was whether sales outside Delhi could also be included in taxable income. The Supreme Court held that the section used the word "resale" simplicitor, and hence it referred to all resales and could not be limited to resales within Delhi alone. Thus, the Supreme Court went by the plain language of the statute, and did not speculate on the intention of the legislature.

In Hemraj Gordhandas v H. H. Dave, Assistant Collector (2 ELT 350), the Supreme Court considered the language of a notification under the Central Excise Tariff and held that all that was required for claiming an exemption was that the cotton fabric must be produced on powerlooms owned by the co-operative society.

There was no further requirement in the language of the notification that the cotton fabric must be produced by the society for itself. The Supreme Court refused to go into the question of the intention behind the exemption since the language of the notification was clear. In C.W.T. v Ellis Bridge Gymkhana (229 I.T.R. 1; SC), the Supreme Court held that the word "individual" in the charging Section could not be stretched to include an association of persons. The court held that the charging Section had to be construed strictly, and if a person could not be brought within the ambit of the charging Section by clear words, he could not be taxed at all.

A liberal interpretation of a taxing provision cannot be adopted on the plea that this would advance the purported object of the Act by encouraging the establishment of industrial undertakings in backward areas (C.I.T. v N. C. Budharaja and Co. (204 I.T.R. 412; SC).

In Steel Authority of India Ltd. v C.C.E. (AIR 1996 SC 2544), the question was whether raw naphtha intended for use in the manufacture of fertilisers was exempted although it was not actually used.

It was held that the exemption notification only required proof that the raw naphtha was intended for use in the manufacture of fertilisers, and there was no further requirement that it was actually so used. Hence, if it was purchased with the intention to be used for the manufacture of fertilisers, it was exempt, even though it could not be used for some reason subsequently.

In Partington v Attorney General ([1869] LR HL 100), Lord Cairns observed 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.

On the other hand if the court seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law the case might otherwise appear to be."

Thus, in interpreting a taxing statute one cannot go by the notion as to what is just and expedient (C.I.T. v Shahzada Nand and Sons; 60 I.T.R. 392; SC).

The Supreme Court has held that equity is out of place in tax laws (C.I.T. v MR. P. Firm, Muar; 56 I.T.R. 67; SC). In C.I.T. v Madho Pd. Jatia (105 I.T.R. 179; SC), it held that there could be no consideration of equity if the language of the provision was plain and clear, but where it was not, and two interpretations were possible, the one in consonance with equity and fairness should be preferred.

Where the language of a provision is plain, courts cannot ordinarily concern themselves with the policy behind the provision (Baidyanath Ayurved Bhawan P. Ltd. v Excise Commissioner; AIR 1971 SC 378) or the intention of the Legislature (I.T.O. v T. S. Devinatha Nadar; 68 I.T.R. 252; SC). As Lord Watson said in Salomon v Salomon and Co. Ltd. ([1897] AC 22; HL) "intention of the Legislature is a common but slippery phrase."

In C.I.T. v B. M. Kharwar (72 I.T.R. 603; SC), the assessee transferred some machinery of a firm to a private limited company. He sought to avoid the liability to be taxed on the excess realised over the written down value of the machinery on the plea that the substance of the transaction was only a step to readjust the business relation of the partners inter se. The Supreme Court rejected this contention holding that while the taxing authorities were entitled to determine the true legal relation resulting from a transaction to unravel the device adopted by a party, the legal effect of a transaction could not be displaced by probing the "substance of the transaction".

The aforesaid authorities create a veritable paradise for lawyers and chartered accountants. While judicial authorities are well-versed in principles of interpretation, the applicability thereof to the facts and circumstances of each case requires an extremely balanced and objective approach.

(The author is a Mumbai-based advocate specialising in direct tax laws.)

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