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TMI Blog2018 (7) TMI 1826X X X X Extracts X X X X X X X X Extracts X X X X ..... uled 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 two-Judges. The matter then went before a three-Judge Bench consisting one of us (Ranjan Gogoi, J.). The three-Judge Bench having noticed the unsatisfactory state of law as it stands today, opined that the dicta in Sun Export Case (supra), requires reconsideration and that is how the matter has been placed before this Constitution Bench. 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 Export Case (supra) and claimed the benefit of exemption. The benefit of Customs Notification No. 20/1999 was, however, denied to the respondents on the plea of the department that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sun Export Case (supra), which 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision reading the language therein and no 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 Sun Export Case (supra), which was doubted in Surendra Cotton Oil Mills Case (supra), is not correct 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 submit that the ratio and observations in Sun Export Case (supra) has to be considered holistically without 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re cannot be any doubt that the ratio in Sun Export Case (supra) that, if two views are possible in 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 Sun Export Case (supra), in the year 2000, this Court in Surendra Cotton Oil Mills Case (supra), expressed reservations as to the soundness of the dicta in Sun Export Case (supra), observing that Sun Export Case (supra) ignored catena 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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." 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 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. If a 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 of general words to cover similar problems arising in future. But, from the very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 statutes are concerned, Article 265 of the Constitution (265. Taxes not to be imposed save by authority of lawNo tax shall be levied or collected except by authority of law.) 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) sense is not necessarily the strict (i.e., literal) sense." John Salmond , Jurisprudence 171 n. (t) (Glanville L. Williams ed., 10th ed. 1947). 24.As contended by Ms. Pinky Anand, learned Additional 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be strictly construed. The well-established 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xation, hardship or equity has no role to play in determining eligibility to tax and it is for 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 Bengal vs. Kesoram Industries Limited, (2004) 10 SCC 201 [hereinafter referred as 'Kesoram Industries Case' for brevity]. In the later decision, a Bench of seven Judges, after citing the above 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be unreasonable to suppose that an exemption was wide as practicable to make the 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 Industries Case (supra)). 29.The first case with which we need to concern ourselves is the case in Union of India v. The Commercial Tax Officer, West Bengal and Ors., AIR 1956 SC 202. It may be noted that this case was dealt with by five learned Judges of this Court resulting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 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 terms refer to the newly created department which now goes by the name of the Ministry of Industry and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." 34. In Hansraj Gordhandas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the judgment of the Privy Council in Crawford v. Spooner. '... we cannot aid the Legislature's defective phrasing of the Act, we cannot add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then full play should be given to it and it calls for a wider and liberal construction..." (emphasis supplied) 36. In 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 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatute 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 Sales Tax, 1985 Supp (SCC) 205, this Court pointed 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 Madhya Pradesh, (1999) 8 SCC 667; Indian Banks' A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. In Parle Exports Case (supra), a bench of two Judges of this Court considered the question whether nonalcoholic 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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." 46.The above decision, which is also a decision of twoJudge Bench of this Court, for the first time took a view that liberal and strict construction of exemption pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on provision to 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)." 51. In Hari Chand Case (supra), as already discussed, the question was whether a person claiming exemption is required to comply with the procedure strictly to avail 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 condit ..... 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