Interpretation of Statues PPT.pdf

Interpretation of
Statutes
Tarun Jain
https://t.me/LawCollegeNotes_Stuffs
https://t.me/LawCollegeNotes_Stuffs 1

Overview
• Part A – General rules for interpretation
• Part B – Special considerations in interpretation of fiscal legislations
• Part C – Case Studies

Part – A
General rules for interpretation

What is interpretation : Basic tenets
• Interpretation – “the action of explaining the meaning of something”
• Not a function of law
• But a function of language
• Deciphering the plain meaning – (i.e. what the words say)
• Deciphering the intent (subjective) – (i.e. what the words mean)
• Francis Bennion
“It is, as so often in the linguistic field, a question of feel. A reader may ‘interpret’
anything from a single work to an entire Act. One ‘construes’ a sentence a longer passage,
but not a word by itself. Interpretation perhaps connotes, more than construction does,
the idea of determining the legal effect. Construction is more concerned with
extracting a grammatical meaning.”

What is interpretation : Legal meaning
• Justice GP Singh – ‘Interpretation’ is the method by which true sense of the word or
meaning is understood.
• Salmond - The process by which the Courts seek to ascertain the meaning of the
Legislature through the medium of authoritative forms in which it is expressed.

Interpretation of Statute: Why it differs!
• Legislature does not interact directly with the subjects.
• Legislature expresses its mandate in form of statutes.
• Legislature does not lay guidelines besides enactment of the law. It is the duty of the
Executive and the subjects to understand and follow.
Additional considerations
• Legislature delegates in its wisdom and trust on delegate
• In the realm of ‘separation of powers’, Legislature legislates where the Judiciary
interprets.

Literal Construction: Dynamics
• Phrases and sentences of a statute are interpreted according to the ordinary or popular and
grammatical meaning.
• Basic and preferred rule of interpretation unless such a construction leads to an absurdity
or the content or object of the statute suggest a different meaning.
• Most widely used Rule of Interpretation in taxing statutes.
• CIT vs. T.V. Sundaram Iyyengar (1975) 101 ITR 764 (SC)
“The hypothetical illustration which was cited before the Income-tax Officer and which is relied upon by
the High Court may at the highest, if its fundamental premise is true, show that the interpretation
canvassed by the Revenue may conceivably work out injustice. But if the language of the statute
is clear and unambiguous, and if two interpretations are not reasonably possible,
it would be wrong to discard the plain meaning of the words used in order to meet
a possible injustice.”

Literal Construction: Thumb Rule
• CCE v. Bhalla Enterprises 2004 (173) E.L.T. 225 (S.C.)
“The basic rule in interpretation of any statutory provision is that the plain words of the statute must be given
effect to……”
• Tata Iron and Steel Co. Ltd. v. UOI 1988 (33) E.L.T. 297 (Pat.)
“21. ….The first rule of interpretation of a document is to give it a literal construction. Other rules of
interpretation are attracted only when the literal construction does not bring out the idea correctly and fully and
that there is some ambiguity left in it. In giving a literal construction there is no ambiguity I do not think why it
should not be given a literal construction.”
• Commissioner v. Doaba Steel Rolling Mills 2011 (269) E.L.T. 298 (S.C.)
“19. The principle that a taxing statute should be strictly construed is well settled. It is equally trite that the
intention of the Legislature is primarily to be gathered from the words used in the statute. Once it is shown that an
assessee falls within the letter of the law, he must be taxed however great the hardship may appear to the judicial
mind to be.”

Golden Rule or Rule of ‘purposive construction’
• Alternate to Literal Rule
• Applies in case where literal interpretation of the taxing statute is likely to lead to a manifest
absurdity
• Provides that the meaning of the words should be so effected that such an absurdity is
avoided and legislative intention is given effect.
• Periyar and Pareekanni Rubbers Ltd. State of Kerela (2008) 13 VST 538 (SC)
“28. Tax liability of the business concern is not in dispute. Correctness of the orders of assessment is also
not under challenge. The Tribunal or for that matter the High Court were, therefore, not concerned with
the liability fastened upon the dealer. The only question was as to what extent the appellant was liable
therefore. It is impossible for the legislature to envisage all situations. Recourse to statutory interpretations
therefore should be done in such a manner so as to give effect to the object and purport thereof. Doctrine of
purposive construction should, for the said purpose, be taken recourse to.”

Golden Rule (cont.)
• Tata Consultancy Services v. State of AP [2004] 271 ITR 401(SC)
“68. It is now well-settled that when an expression is capable of more than one meaning,
the Court would attempt to resolve that ambiguity in a manner consistent with the purpose
of the provisions and with regard to the consequences of the alternative constructions.
[See Clark & Tokeley Ltd. (t/a Spellbrook) v. Oakes [1998 (4) All ER 353].
69. In Inland Revenue Commissioners v. Trustees of Sir John Aird's Settlement [1984] Ch. 382, it is
stated:
Two methods of statutory interpretation have at times been adopted by the court. One,
sometimes called literalist, is to make a meticulous examination of the precise words
used. The other sometimes called purposive, is to consider the object of the relevant
provision in the light of the other provisions of the Act - the general intendment of the
provisions. They are not mutually exclusive and both have their part to play even in the
interpretation of a taxing statute.”

Mischief rule (Heydon’s Rule)
• An alternative rule of interpretation
• Applies for those cases where legislation carries a particular background / context
• Rule stipulates that law be interpreted taking note of the ‘mischief’ (anomaly) should
to be addressed by it.
• Requires examination of following ingredients
• What was the law prior to the enactment of the statute?
• What was the defect or mischief which the law failed to rectify?
• What remedy did the Legislature provide by way of the statute enacted?
• What was the legislative intent behind such remedy?

Mischief rule (cont.)
• Engee Industrial Services v. UOI 2004 (164) E.L.T. 242 (Kar.)
“17. When the material words in a statute are capable of bearing two or more
considerations, the most firmly established rule for construction of such words is the rule
in Heydon’s case (1584) 76 ER 637 which has now attained the status of a classic described
by the Supreme Court in the case of Kanailal Sur v. Paramnidhi Sadhukhan - AIR 1957 SC
307. In the case of Anderton v. Ryan - 1985 (2) All. ER 355, it was held that the rule in
Heydon’s (supra) case which is also known as “purposive construction” or “mischief rule”,
enables consideration of four matters in construing an Act : (i) what was the law before
the making of the Act; (ii) what was the mischief or defect for which the law did not
provide; (iii) what is the remedy that the Act has provided, and (iv) what is the reason of
the remedy. The rule then directs that the Courts must adopt that construction which shall
suppress the mischief and advance the remedy.”

Rule of harmonious construction
• Reconciling different provisions.
• CTO v. Binani Cements Ltd. (2014) 68 VST 459 (SC)
“30. Generally, the principle has found vast application in cases of there being two statutes: general or
specific with the latter treating the common subject matter more specifically or minutely than the former.
Corpus Juris Secundum, 82 C.J.S. Statutes § 482 states that when construing a general and a specific
statute pertaining to the same topic, it is necessary to consider the statutes as consistent with
one another and such statutes therefore should be harmonized, if possible, with the objective of
giving effect to a consistent legislative policy. On the other hand, where a general statute and a
specific statute relating to the same subject matter cannot be reconciled, the special or specific statute
ordinarily will control. ..”
• Kamrup Industrial Gases Ltd. v. Commissioner 2004 (172) E.L.T. 454 (All.)
“15. The provisions of one section of the statute cannot be used to defeat those of another unless it is
impossible to effect reconciliation between them. Thus a construction that reduces one of the provisions
to a “useless lumber” or “dead letter” is not a harmonised construction. To harmonise is not to destroy.”

To look out for in interpretative space …
Rajinder Singh v. State of Punjab (2015) 6 SCC 477 [reiterating Standard Chartered Bank (2005) 4 SCC 530]
The distinction between a strict construction and a more free one has disappeared in modern times and now mostly
the question is ‘what is true construction of the statute?’ A passage in Craies on Statute Law, 7th Edn. reads to the
following effect:
‘The distinction between a strict and a liberal construction has almost disappeared with regard to all classes of
statutes, so that all statutes, whether penal or not, are now construed by substantially the same rules. “All modern
Acts are framed with regard to equitable as well as legal principles.” “A hundred years ago”, said the court in Lyons
case [R. v. Lyons, 1858 Bell CC 38 : 169 ER 1158] , “statutes were required to be perfectly precise and resort was not
had to a reasonable construction of the Act, and thereby criminals were often allowed to escape. This is not the
present mode of construing Acts of Parliament. They are construed now with reference to the true meaning and
real intention of the legislature.’
At p. 532 of the same book, observations of Sedgwick are quoted as under:
‘The more correct version of the doctrine appears to be that statutes of this class are to be fairly construed and
faithfully applied according to the intent of the legislature, without unwarrantable severity on the one hand or
unjustifiable lenity on the other, in cases of doubt the courts inclining to mercy.’

Meaning should be given to every word
• Bansal Wire Industries Ltd. 2011 (269) E.L.T. 145 (S.C.)
“34. It is a settled principle of law that the words used in the section, rule or notification should not be rendered
redundant and should be given effect to. It is also one of the cardinal principles of interpretation of any statue that
some meaning must be given to the words used in the section. Expression “Wire rods and wires” which is mentioned in
item no. (xv) would not and cannot cover the expression “tools, alloy and special steels” of entry no. (ix) nor it would
refer to the expression “Iron and Steel” as each item used in entry nos. (ix) and (xv) are independent items not
depending on each other at all as has been held in the case of Pyare Lal Mehrotra (supra).”
• Gujarat State Fertilizers Co. 1997 (91) E.L.T. 3 (S.C.)
“If the express language of the notification does not indicate a contrary intention conveyed by the wide words employed
by the notification, full effect has to be given to the wide terminology employed by the notification otherwise the result
would be that in trying to search for the supposed intention underlying the notification, the intention flowing from the
express language of the notification would get stultified or truncated.”

Doctrine of ‘reading down’
• Making provision consistent with Constitutional norms
• Arun Kumar v. UOI [2006] 155 Taxman 659 (SC)
“ doctrine of 'reading down' is well-known in the field of Constitutional Law. Colin Howard in his well- known work
"Australian Federal Constitutional Law" states;
Reading down puts into operation the principle that so far as it is reasonably possible to do so, legislation should be
construed as being within power. It has the practical effect that where an Act is expressed in language of a generality
which makes it capable, if read literally, of applying to matters beyond the relevant legislative power, the Court will
construe it in a more limited sense so as to keep it within power”
• Commissioner of Sales Tax v. Radhakrishnan [1979] 118 ITR 534 (SC)
“In considering the validity of a statute the presumption is in favour of its constitutionality and the burden is upon
him who attacks it to show that there has been a clear transgression of constitutional principles. For sustaining the
presumption of constitutionality the Court may take into consideration matters of common knowledge, matters of
common report, the history of the times and may assume every state of facts which can be conceived it must always be
presumed that the Legislature understands and correctly appreciates the need of its own people and that
discrimination, if any, is based on adequate grounds. It is well settled that courts will be justified in giving a liberal
interpretation to the section in order to avoid constitutional invalidity. These principles have given rise to rule of
reading down the section if it becomes necessary to uphold the validity of the sections.”

Doctrine of Ejusdem Generis
• General word contain in the statute may be construed with reference to the antecedent matter and
the construction may be narrowed down by treating them as applying to the things of the same kind
as those previously mentioned.
• CCE v. Maharashtra Fur Fabric Ltd. 2002 (145) E.L.T. 287 (S.C.)
A careful reading of the proviso to the notification would show that by resorting not only to the
process of bleaching, dyeing, printing, shrink proofing, tentering, heat-setting, crease-resistant
processing, but also to “any other process or any two or more of these processes”, the respondent
would lose the benefit of the exemption. It is a well established principle that general terms
following particular expressions take their colour and meaning as that of the preceding expressions,
applying the principle of ejusdem generis rule, therefore, in construing the words “or any other
process”, the import of the specific expressions will have to be kept in mind. It follows that the
words “or any other process” would have to be understood in the same sense in which the process,
including tentering, would be understood. Thus understood, a process akin to stentering/tentering
would fall within the meaning of the proviso and, consequently, the benefit of the notification
cannot be availed by the respondent.

Doctrine of Noscitur a Socitus
• Word should be known from its accompanying words
• Oswal Agro 1993 (66) E.L.T. 37 (S.C.)
There is no quarrel with the proposition that in ascertaining the meaning of the word or a clause or sentence in the
statute in its interpretation, everything which is logically relevant should be admissible. It is no doubt true that the
doctrine of Noscitur A Sociis, meaning thereby, that it is a legitimate rule of construction to construe words in an Act
of Parliament with reference to words found in immediate connection with them i.e. when two or more words which
are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense.
They take, as it were, their colour from each other, the meaning of the more general is restricted to a sense
analogous to a less general. The philosophy behind it is that the meaning of the doubtful words may be ascertained
by reference to the meaning of words associated with it. This doctrine is broader than the doctrine of ejusdem
generis. This doctrine was accepted by this Court in catena of cases but its application is to be made to the context
and the setting in which the words came to be used or associated in the statute or the statutory rule.
• Kartos International 2011 (268) E.L.T. 289 (S.C.)
Nositur a Sociis means that when two words are capable of being analogously defined, then they take colour from
each other. The term ejusdem generis is a facet of Nositur a Sociis. The aforesaid principle means that the general words
following certain specific words would take colour from the specific words.

Expressio Unis Est Exclusio Alterius
• Express mention of one thing implies exclusion of other
• GVK Industries Ltd. (2011 (4) SCC 36)
“in this case it is the territory of India that is specified by the phrase ‘for the whole or any part of
the territory of India’. Expressio unius est exclusio alterius - the express mention of one thing
implies the exclusion of another. In this case Parliament has been granted powers to make laws
‘for’ a specific territory - and that is India or any part thereof, by implication, one may not read
that Parliament has been granted powers to make laws ‘for’ territories beyond India.”

Internal Aids for interpretation
• Long Title
• E.g. - Income Tax Act – “An Act to consolidate and amend the law relating to income-tax and super-tax”
• Preamble
• “The Preamble of a statute like the Long Title is a part of the Act and is an admissible aid to
construction. Although not an enacting part, the Preamble is expected to express the scope,
object and purpose of the Act more comprehensibly than the Long Title. It may recite the
ground and cause of making the statute, the evils sought to be remedied or the doubts which
may be intended to be settled.” [G.P. Singh, 14th ed., pg. 174]
• Headings
• Marginal Notes https://t.me/LawCollegeNotes_Stuffs

Internal Aids for interpretation (Cont.)
• Punctuation
• “a minor element in the construction of a statute” [Ashwini Ghose AIR 1952 SC 369 (5 judges)]
• Illustrations
• “part of the statute and although forming no part of the section, are of relevance and value in the
construction of the text of the section”. [G.P. Singh, 14th ed., pg. 192]
• Definitions / Interpretation provisions
• Means [restrictive and exhaustive definitions]
• Includes [expansive definitions] [Ramala Sahkari 2016 (334) ELT 3 (SC)]
• Excludes
• “unless the context otherwise requires” [Srinivasa Setty 128 ITR 294][definition of ‘capital asset’
rejected in context of ‘goodwill’ as contextually repugnant]

Internal Aids for interpretation (Cont.)
• Proviso – generally exception to the main provision
• Explanation – generally to explain the meaning of the provision
• Explanation in fiscal legislations;
• Can be clarificatory [Sedco Forex (2005) 12 SCC 717]
• Can be substantive charge [Martin Lottery (2009) 12 SCC 209
• Schedule – part of the enactment (generally to avoid encumbering the provisions in
statute with excessive details)
• Non-obstante clauses / ‘Subject to’ clauses – conferring overriding effect to another
part / statute.

External aids for Interpretation
• Legislative history [Abhiram Singh v. C.D. Commachen (2017 – SC) 7 judges]
• In pari materia statutes [statutes dealing with the same subject-matter or forming part
of the same statute]
• Prior-enacted statutes
• “when a particular form of legislative enactment, which has received authoritative interpretation
whether by judicial decision or by a long course of practice, is adopted in the framing of a later
statute, it is a sound rule of construction to hold that the words so adopted were intended by the
Legislature to bear the meaning which has been so put upon them.” [GP Singh, 14th ed., pg. 335]
• Subsequently-enacted statutes
• Normally not a useful tool for interpretation of earlier statute.
• However may be used to ascertain legislative intent, clarifications, etc.

External aids for Interpretation (Cont.)
• Legislation by incorporation and by reference
• Legislative devices to avoid verbatim reproduction of the provisions of an earlier statute into the later.
• Incorporation – implies the referred provisions becoming part and parcel of the subsequent legislation.
However the two statutes remain different and distinct.
• Reference – refers to a situation of constant interaction between the two statutes. Any changes in the former
statute (even subsequent to enactment of later statute) extend to construction of later statute.
• Reference versus Incorporation –
• “in the former case a modification, repeal or re-enactment of the statute that is referred will also have effect fro the statute in
which it is referred; but in the latter case any changes in incorporated statute by way of amendment or repeal has no
repercussions on the incorporating statute.” [GP Singh, 14th ed., pg. 359]
• “The distinction is one of difference in degree and is often blurred. The fact that no clear-cut guidelines or distinguishing
features have been spelt out is ascertain whether it belongs to one or the other category makes the task of identification difficult.
… Ultimately, it is a matter of probe into legislative intention and / or taking an insight into the working of the enactment if one
or the other view is adopted.” [MSRTC v. State of Maharashtra (2003) 4 SCC 200]
• Western Coal Fields Ltd. v. Sp. Area Dev. Authority (1982) 1 SCC 125.

External aids for Interpretation (Cont.)
• Relevance of usage and practice for interpretation
• Usage and practice are relevant guides but do not stop the court in giving to the Act its true
construction. [Punjab Traders (1991) 1 SCC 86]
• Non-implementation of statutory mandate does not imply repeal or non-application. Statutory
enactments “cannot fall into desuetude or become inoperative through obsolescence or by lapse of
time” [Monnet Ispat and Energy Ltd. (2012) 11 SCC 1]
• Dictionaries
• Meaning considered but limits on application. [CGT v. N.S. Getty Chettiar (1971) 82 ITR 599 (SC)]
• How far dictionaries can be used for interpretations construction of statutes [Dy. Chief Controller of
Exports & Imports, New Delhi v. K.T. Kosalram (AIR 1971 SC 1283) Krishna Iyer J.]
• Foreign decisions
• Relevant from perspective of Judicial comity and appreciation of international standards
• Subject to constitutional and legal limitations. https://t.me/LawCollegeNotes_Stuffs

Significance of ‘General Clauses Act, 1897’
• Interpretation standard across all statutes [S.3 – “In this Act, and in all Central Acts
and regulations made after the commencement of this Act, unless there is anything
repugnant in the subject or context- …”]
• Postulates specific and crucial rules relating to operation of statutes;
• S.5 – “Where any Central Act is not expressed to come into operation on particular day, then it
shall come into operation on the day on which it receives the assent …”
• S. 6 - “effect of repeal”
• S.9 – “commencement and termination of time” specified under statutes
• S.10 - “computation of time” prescribed under statutes

Significance of ‘General Clauses Act, 1897’ (Cont.)
• S. 11 – “Measurement of distances” (“in a straight line on a horizontal plane”)
• S. 12 – Pro-rata duty – “Where, by any enactment now in force or hereafter to be in force, any
duty of customs or excise, or excise, or in the nature thereof, is leviable on any given quantity, by
weight, measure or value of any goods or merchandise, then a like duty is leviable according to
the same rate on any greater or less quantity.”
• S. 13 – “Gender and Number” – “In all Central Acts or Regulations, unless there is anything
repugnant in the subject or context- (1) words importing the masculine gender shall be taken to
include females; and (2) words in the singular shall include the plural, and vice versa.”
• S. 16 – “Power to appoint to include power to suspend or dismiss”.

Significance of ‘General Clauses Act, 1897’ (Cont.)
• S. 20 – Expressions employed in rules / bye-laws etc. to be attributed same meaning as in the Act
• S. 21 – “Power to issue, to include power to add to, amend, vary or rescind notifications, orders,
rules or bye-laws”.
• S. 24 – “Continuation of orders, etc. issued under enactments repealed and re-enacted”.
• S. 27 – “Meaning of service by post”

Part – B
Special considerations in interpretation of fiscal
legislations

Deconstructing Fiscal Statutes
• Four components;
“The components which enter into the concept of a tax are well known. The first
is the character of the imposition known by its nature which prescribes the
taxable event attracting the levy, the second is a clear indication of the person on
whom the levy is imposed and who is obliged to pay the tax, the third is the rate
at which the tax is imposed, and the fourth is the measure or value to which the
rate will be applied for computing the tax liability. If those components are not
clearly and definitely ascertainable, it is difficult to say that the levy exists in point
of law. Any uncertainty or vagueness in the legislative scheme defining any
of those components of the levy will be fatal to its validity.”
[Govind Saran Ganga Saran 1985 Supp SCC 205]

Linkage between ‘charging’ and ‘computation’ provisions
• “While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act dehors the machinery
sections. The Act is to be read as an integrated code.” [GE India Technology Centre (2010) 327 ITR 456 (SC)]
• “The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section
and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions
cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to
conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The
legislative pattern discernible in the Act is against such a conclusion.” [B.C. Srinivasa Setty (1981) 128 ITR 294 (SC)]
• “Section 9 is not the beginning and end of the levy of royalty. The royalty has to be quantified for purpose of levy and that cannot be
done unless the provisions of the Second Schedule are taken into consideration. For the purpose of levying any charge, not only has the
charge to be authorised by law, it has also to be computed. The charging provision and the computation provision may be found
at one place or at two different places depending on the draftsman's art of drafting and methodology employed. In the latter
case, the charging provision and the computation provision, though placed in two parts of the enactment, shall have to be read together
as constituting one integrated provision. The charging provision and the computation provision do differ qualitatively. In case of
conflict, the computation provision shall give way to the charging provision. In case of doubt or ambiguity the computing provision
shall be so interpreted as to act in aid of charging provision. If the two can be read together homogeneously then both shall be given
effect to, more so, when it is clear from the computation provision that it is meant to supplement the charging provision and is, on its
own, a substantive provision in the sense that but for the computation provision the charging provision alone would not work.
The computing provision cannot be treated as mere surplusage or of no significance; what necessarily flows therefrom shall also have
to be given effect to.” [National Mineral Development Corporation (2004) 6 SCC 281]
• The levy under one statute can be sustained, however, if it adopts machinery provisions under other statute. [Mahim Patram (2007) 3
SCC 668]

Interpretative Standard
• Strict Construction is the norm;
“It is no doubt, true that in construing fiscal statutes and in determining the liability
of a subject to tax one must have regard to the strict letter of the law and not
merely to the spirit of the statute or the substance of the law. 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 is not covered 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.”
[A.V. Fernandez AIR 1957 SC 657]

Interpretative Standard (Cont.):
No levy by implication
• The person should be covered under the charging section clearly.
• Bank of Chettinad v. Income-tax Commr. - AIR 1940 PC 183
“It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one
must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of
the law. If the Revenue satisfies the Court that the case falls strictly within the provision of the law, the
subject can be taxed. If, on the other hand, the case is not covered 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.”
• Modi Sugar Mills Ltd. AIR 1961 SC 1047 (CB)
• Kasturi and Sons Ltd. AIR 1999 SC 1275
• Ellis Bridge Gymkhana AIR 1998 SC 120

Constitutional sanctions
• Article 265, Constitution of India
265. Taxes not to be imposed save by authority of law.
No tax shall be levied or collected except by authority of law.
Rule against ‘discrimination’: Extending Article 14
• UOI v. N.S. Rathnam 2015 (322) ELT 353 (SC)
• Exemption Notification artificially distinguishing between importers struck down to the extent of discrimination
• Shree Bhagwati Steel Rolling Mills v. CCE 2015 (326) ELT 209 (SC)
• Penalty provision treating bonafide defaults and evaders alike struck down
• Extending Article 14 to tax disputes
• Jai Vijay Metal Udyog Pvt. Ltd. 2010 (253) ELT 161 (SC)
• Corporation Bank 2009 (233) ELT 3 (SC)
• MRF Ltd. 2006 (206) ELT 6 (SC)
• Pepsi Foods Pvt. Ltd. v. Assistant Commissioner (2015) 376 ITR 87 (Del)
[GAAR and ‘Rule of Law’: Mutually Incompatible? Chartered Accountant Practice Journal, Vol. 43 (August 2013)(pp. 424-444)]

Legal Stipulations: No role of ‘Equity’
• Cape Brandy Syndicate v. Commissioner of Inland Revenue, (1921) 1 KB 64, per Rowlett J.
“in a taxing Act 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 only look fairly at the language used".
• Kapil Mohan (1999) 235 ITR 278 (SC)
“As to the argument based on equity, it has long been recognised that tax and equity are strangers.
Just as reliance upon equity does not avail an assessee, so it does not avail the Revenue. The
legal representative of a deceased depositor cannot be made to pay income tax upon the annuity
only because the original depositor had not been required to pay income tax on the amount of the
annuity deposit, on the basis that what the Revenue had lost out on then should be recouped to it
now. The original depositor did not voluntarily make the annuity deposit; he was required by the
Act and the Scheme to do so. Insofar as he was concerned, the Act provided that the annuity he
received would be taxable as income. Whether advisedly or otherwise, the Act did not provide that
the annuity would be taxed as income in the hands of his legal representative, and there it must
remain.”

Legal Stipulations: No role of ‘Morality’
“In our opinion, the High Court has adopted an emotional and moral approach rather than
a legal approach. We fully agree with the High Court that the assessee was committing a
highly immoral act in illegally manufacturing and selling heroin. However, cases are to be
decided by the court on legal principles and not on one's own moral views. Law is different
from morality, as the positivist jurists Bentham and Austin pointed out.
The Explanation to Section 37 has really nothing to do with the present case as it is not a
case of a business expenditure, but of business loss. Business losses are allowable on
ordinary commercial principles in computing profits. Once it is found that the heroin
seized formed part of the stock-in-trade of the assessee, it follows that the seizure and
confiscation of such stock-in-trade has to be allowed as a business loss. Loss of stock-in-
trade has to be considered as a trading loss vide CIT v. S.N.A.S.A. Annamalai
Chettiar (1973) 3 SCC 339”
T.A. Quereshi (Dr.) v. CIT, (2006) 287 ITR 547 (SC).

Legal Stipulations: ‘Hardship’ does not dilute rigours !!!
• No fundamental right to be immune from taxation
• Article 19(1)(g) generally not available as a defence.
• No legal prescription against intended double taxation
• “A feeble plea that the tax is bad because of the vice of double taxation and is unreasonable because there are heavy prior levies was also
voiced. Some of these contentions hardly merit consideration, but have been mentioned out of courtesy to counsel. The last one, for
instance, deserves the least attention. There is nothing in Article 265 of the Constitution from which one can spin out the constitutional
vice called double taxation. (Bad economics may be good law and vice versa). Dealing with a somewhat similar argument, the Bombay
High Court gave short shrift to it in Western India Theatres [Cantonment Board Poona v. Western India Theatres Ltd., AIR 1954 Bom 261] . Some
undeserving contentions die hard, rather survive after death. The only epitaph we may inscribe is: Rest in peace and don't be re-born ! If
on the same subject-matter the legislature chooses to levy tax twice over there is no inherent invalidity in the fiscal adventure save where
other prohibitions exist.” Avinder Singh (1979) 1 SCC 137].
• Prohibition against Double Taxation: A wavering principle in Indian Tax Jurisprudence ITR's Taxation Tribunal Reports, (2014) 36 ITR(T) (Journal)
21-37.
• Hardship not a basis to give respite against application of fiscal provisions
“In taxing statutes, even if the literal interpretation results in hardship or inconvenience, it has to be followed. This
Court in CIT (Ag) v. Keshab Chandra Mandal [AIR 1950 SC 265], has held that hardship or inconvenience cannot alter
the meaning of the language employed by the legislature if such meaning is clear and apparent. Hence departure from
the literal rule should only be done in very rare cases, and ordinarily there should be judicial restraint to do so.”
[Calcutta Knitwears (2014) 362 ITR 673 (SC)]

Rule of beneficial construction
• Where two interpretations are possible, the one which is beneficial to the assessee should be
preferred.
• CCE v. Lotus Links 1996 (87) E.L.T. 580 (S.C.)
“Even if two views were possible the one in favour of the assessee would guide our decision”
• CCE v. Velliappa Textiles 2003 (157) E.L.T. 369 (S.C.)
“42. The observations in Tolaram Relumal v. State of Bombay [AIR 1954 SC 496], Bijaya Kumar
Agarwala v. State of Orissa 1996 (5) SCC 1, Sanjay Dutt v. State 1994 (5) SCC 410, Niranjan Singh v.
Jitendra Bhimraj Bijjaya 1990 (4) SCC 76, make it clear that while interpreting a penal statute, if more
than one view is possible, the court is obliged to lean in favour of the construction which exempts a
citizen from penalty than the one which imposes the penalty. The observations of Lord Esher, MR
in formulating, “the settled rule of construction of penal Sections”, that “if there is a reasonable
interpretation which will avoid the penalty in any particular case, we must adopt that construction. If
there are two reasonable constructions, we must give the more lenient one”.

Retrospectivity
• Provision creating new liability is generally not retrospective (unlike procedural
amendments)
• Martin Lottery 2009 (14) STR 593 (SC)
• V. Damodaran (1980) 1 SCC 173
• Clarificatory rules are retrospective in operation
• WPIL Ltd. 2005 (181) ELT 359 (SC)
• Shivganga Paper Converters 2014 TIOL 16 SC-CT
• Sedco Forex International Drilling Inc. (2005) 12 SCC 717
• Patel Brothers & Co. Ltd. (1995) 4 SCC 485
• Podar Cements Pvt. Ltd. (1997) 5 SCC 482

Retrospectivity (cont.)
• Substituted provisions do not have retrospective effect
• Maharaja Chintamani Saran Nath Shahdeo (1999) 8 SCC 16
• Thirumangal Mills Ltd. (1972) 1 SCC 176
• Kanak Exports 2015 (326) ELT 26 (SC)
• Subordinate legislation cannot have retrospective effect unless specific power vested with
Government to make such rules
• Hukam Chand v. Union of India (1972) 2 SCC 601
• Vasu Knitware (2010) 254 ELT 214 (PH)
• Beneficial circular applies retrospectively. Oppressive circular applies prospectively
• Suchitra Operations Ltd 2007 (208) ELT 321 (SC)
• Mysore Electricals Industries Ltd (2006) 204 ELT 517 (SC)
[Monetary limits of Appeals: Retrospectivity of Departmental Instructions Income Tax Reports, (2018) 400 ITR (Journal) 44-
59]

Principle of Fairness !!!
• CIT v. Vatika Township (2014) 367 ITR 466 (SC) (5-judges)
“If the concerned provision of the taxing statute is ambiguous and vague and is susceptible to
two interpretations, the interpretation which favours the subjects, as against there the revenue, has
to be preferred. This is a well established principle of statutory interpretation, to help finding out
as to whether particular category of assessee are to pay a particular tax or not. No doubt, with the
application of this principle, Courts make endeavour to find out the intention of the legislature.
At the same time, this very principle is based on “fairness” doctrine as it lays down that if it is not
very clear from the provisions of the Act as to whether the particular tax is to be levied to a
particular class of persons or not, the subject should not be fastened with any liability to pay tax.
This principle also acts as a balancing factor between the two jurisprudential theories of
justice – Libertarian theory on the one hand and Kantian theory along with Egalitarian
theory propounded by John Rawls on the other hand.”

Principle of Fairness (cont.)
• Limitations
• Not a general rule as per the decisions in Vatika Township.
• Principally acts as a bar against retrospective operation of fiscal legislations.
• Not of unequivocal application as subsequent decisions reveals;
• Jayam and Co. (2016) 96 VST 1 (SC)
• Eurotex Industries (2017) 104 VST 1 (SC)
Doctrine of ‘Fairness’: Countering ‘Implied Retrospectivity’ of Fiscal Enactments, (2017) 397 ITR (Journal) 21-35.
• Nonetheless, a substantive movement in fiscal jurisprudence.

Contemporanea expositio
• Meaning of words in an enactment will be understood in the sense which they bore when
the enactment was passed.
• Recognizes role of subordinate authorities in statutory interpretation;
• Circulars
• Instructions
• Trade Notices
• Azadi Bachao Andolan (SC)
“The Rule of contemporanea expositio is that administrative construction (i.e.
contemporaneous construction placed by administrative or executive officers) generally
should be clearly wrong before it is overturned; such a construction commonly referred to
as practical construction, although non- controlling, is nevertheless entitled to considerable
weight, it is highly persuasive.”

Relevance of ‘comma’ in fiscal legislations
• Crucial for interpretation
• Sree Durga Distributors (2007) 4 SCC 476
• Indian Petrochemicals Corp (2015) 15 SCC 783
• Gujarat Composite Ltd. (1999) 8 SCC 675
• Bharat Nidhi Ltd. (1982) ILR (Del) 197
• Minor / negligible role in interpretation
• Hindustan Construction Co. Ltd. (1994) 208 ITR 291 (Bom)
• Cine Super & Pvt. Ltd. (1994) 72 ELT 20 (Bom)

Penalty provisions under fiscal statutes
• Contradistinguish from penal statutes
• Not ‘criminal act’ but ‘civil wrong’
• Essentially infractions and not ‘offence’
• Leading to differential interpretation standards;
• Civil disputes (burden of proof on ‘preponderance of probability’) versus Criminal cases (burden
of proof ‘beyond reasonable doubt’)
• Mens rea not an essential condition [Gujarat Travancore Agency (1989) 177 ITR 455 (SC) – S. 271(1)(a)
versus S. 276-C]
• Appreciation of conduct in quasi-judicial proceedings without rigous of standards under Evidence
Law.

Additional considerations for subordinate legislation
• Low position in ‘hierarchy of norms’.
• Their interpretation must conform to the statutory enactments.
• Interpretation must be such which furthers legislative intent and effectuates the
provision rather than rendering it otiose.
• While statute (with validation provisions) can deviate from law declared by courts,
subordinate legislation do not carry force of law when decisions hold otherwise.
[Ratan Melting & Wire Industries (2008) 13 SCC 1]

Exemptions (under subordinate legislation)
• Stages: (1) Strict construction on eligibility and (2) Liberal construction on amenability of benefit
• Wood Papers Ltd. (1990) 4 SCC 256
“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 provision intended to augment State
revenue. But once exception or exemption becomes applicable no rule or principle 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.”
• IVRCL Infrastructure and Projects 2015 (319) E.L.T. 194 (S.C.)
“Eligibility criteria in exemption notification has to be construed strictly, once that is satisfied, it has to be
construed liberally”
• Hari Chand Shri Gopal 2010 (260) ELT 3 (SC) (5 judges)
• Novopan India Ltd. 1994 (73) ELT 769 (SC)

Treaty Interpretation
• Vienna Convention on the Law of Treaties (1969)
• Not ratified by India.
• Still relevant in view of its apparent status as customary international law.
• VCLT principles
• Pacta Sunt Servanda
• Latin: “agreements must be kept”
• VCLT - Every treaty in force is binding upon the parties to it and must be performed by them in
good faith. [Art. 26]
• Non-retroactivity of treaties [Art. 28]
• Application of successive treaties relating to the same subject-matter [Art. 30]

Treaty Interpretation (cont.)
VCLT – Art. 31 - General Rules of Interpretation
• “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be
given to the terms of the treaty in their context and in the light of its object and purpose.”
[1]
• “The context for the purpose of the interpretation of a treaty shall comprise, in addition to
the text, including its preamble and annexes: …” [2]
• “There shall be taken into account, together with the context: (a) Any subsequent
agreement between the parties regarding the interpretation of the treaty or the application
of its provisions; (b) Any subsequent practice in the application of the treaty which
establishes the agreement of the parties regarding its interpretation; (c) Any relevant rules
of international law applicable in the relations between the parties.” [3]
• “A special meaning shall be given to a term if it is established that the parties so
intended.” [4].

Treaty Interpretation (cont.)
VCLT – Art. 32 – Supplementary Means of Interpretation
• Recourse may be had to supplementary means of interpretation, including the
preparatory work of the treaty and the circumstances of its conclusion, in order to
confirm the meaning resulting from the application of article 31, or to determine the
meaning when the interpretation according to article 31 :
(a) Leaves the meaning ambiguous or obscure; or
(b) Leads to a result which is manifestly absurd or unreasonable.

Leading Indian decisions on Treaty Interpretation
• Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey (1984) 2 SCC 534 – Indian legal process
to execute / ratify treaties and their constitutional status.
• Abu Salem Abdul Qayoom Ansari (2011) 11 SCC 214 – relevance of political imputations and
other ancillary factors in treaty interpretation.
• Azadi Bachao Andolan (2003) 263 ITR 706 (SC) – special considerations of DTAA and their
status under IT Act.
• Sanofi Pasteur (2013) 354 ITR 316 (AP) – giving fullest effect to DTAA
• New Skies Satellite BV (2016) 382 ITR 114 (Del) – unilateral amendments to DTAA
• Relevance of treaties in domestic law interpretation
• Sakshi (2004) 5 SCC 518 – Criminal Law
• Meghmani Organics Ltd. (2016) 10 SCC 28 – applying WTO rules to interpret Indian statutory provisions
• Karan Dileep Nevatia 2010 SCC Online Bom 23 – enforcing WTO obligations before Indian courts

Part – C
Case Studies

Case Study – A
CIT v. Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC)
• 5 judges
• Powers of Settlement Commission to waive / reduce ‘interest’ by way of settlement
terms.

Provision and issue under consideration
Section 245-D.
(4) After examination of the records and the report of the Commissioner, received under sub-section (1), and the report,
if any, of the Commissioner received under sub-section (3), and after giving an opportunity to the applicant and to the
Commissioner to be heard, either in person or through a representative duly authorised in this behalf, and after
examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in
accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application
and any other matter relating to the case not covered by the application, but referred to in the report of the
Commissioner under sub-section (1) or sub-section (3).
(6) Every order passed under sub-section (4) shall provide for the terms of settlement including any demand by
way of tax, penalty or interest, the manner in which any sum due under the settlement shall be paid and all other
matters to make the settlement effective and shall also provide that the settlement shall be void if it is subsequently
found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts.”
(Issue) “The moot question, therefore, for our consideration is: does sub-section (6) which contemplates providing for the
terms of settlement of tax, penalty or interest empower the Commission, in any manner, either to waive or reduce interest
payable under Section 234-A, 234-B or 234-C in any case that arises for settlement before the Commission? If so, would this
waiver of interest be in accordance with the provisions of the Act as mandated in sub-section (4) of the Act?”

Relevant extract of SC judgment
“The Commission in the impugned order placed strong reliance on the wording of Section 245-
D(6) the language of which, according to the Commission, empowers it to waive or reduce
statutory interest because of the reintroduction of the expression “interest” in that sub-section.
According to the findings of the Commission, the inclusion of the expression “interest”
clearly indicates that the statute has permitted it to pass such orders as it deems fit in
regard to payment of interest when an order under sub-section (4) of Section 245-D is
made by it. This assumption of the Commission proceeds on the hypothesis that sub-section
(6) of Section 245-D is a substantive provision. We are unable to agree with this view of the
Commission. The substantive provision in regard to settlement in Chapter XIX-A, in our
opinion, is sub-section (4) of Section 245-D. It is under this provision of the Act that the
Commission will have to pass orders as it thinks fit on the matters covered by the application.
In our opinion, sub-section (6) of Section 245-D is only procedural in nature. It provides
for fixing the terms by which the amount settled in sub-section (4) will have to be paid. It is not
a section which empowers the Commission either to waive or reduce the interest.”

Relevant extract of SC judgment (cont.)
“If this position in law is presumed to be correct then the very purpose of the settlement
contemplated in Chapter XIX-A would defeat the object of the principal Act itself. As held by the
Commission itself, Chapter XIX-A was included for the purpose of quick settlement of the cases before
it so that the tax due to the Revenue is collected at the earliest. The object of Chapter XIX-A is not to
give amnesty to a tax-evader from paying the tax due. Hence, it would be preposterous to hold that
the Commission has been conferred with the power of either reducing or waiving the tax due. We are
aware that the Commission in the impugned order has not gone to the extent of holding that it has the
power of either waiving or reducing the tax payable but then that would be the logical conclusion if we
accept the interpretation given by the Commission in regard to the expression “interest” in Section 245-
D(6) of the Act. … The expression “terms” used in that sub-section does not refer to the power
of the Commission to waive or reduce tax, penalty or interest because quantification of amount
payable under each of those expressions is dealt with under separate provisions of the Act like the
payment of the tax is governed by various provisions of the Act as defined in Section 2(43) of the Act
while penalty is covered by Section 245-H and interest under Sections 234-A, 234-B and 234-C of the
Act. Therefore, all that the expression “term” in Section 245-D(6) means is that the Commission
can stipulate the conditions of payment like instalments, last date for payment etc. Beyond that,
in our opinion, sub-section (6) does not authorise the waiver or reduction of tax, penalty or interest
settled under sub-section (4) of Section 245-D.”

Key learnings
• Designating provisions as Substantive versus Procedural
• The statute does not provide any guide to delineate provision as substantive or procedural.
• Larger scheme of the Act, underlying mandate, nature of powers being exercised, etc. constitute
relevant consideration to distinguish.
• Such distinction presupposes and results in differential positioning and effect to provisions within the
same statute.
• Object of Settlement Scheme pressed upon
• Objective underlying the provision is a relevant guide, albeit a larger one.
• An interpretation which leads to defeating the objective, even if arrived at by literal interpretation, can
be rejected towards larger goal of realigning the provisions in context of the objective.
• Consequence led interpretation
• Regard must be had to consequences of the interpretation being adopted.
• Current interpretative exercise must not provide a window for unacceptable interpretative results by
analogy.

Case Study – B
State of Gujarat v. Reliance Industries Ltd.
Civil Appeal No. 13047/2017 (22.9.2017)
• Interpreting exclusionary provisions
• Determining quantum of credit available under Value Added Scheme

• Gujarat Value Added Tax Act [Section 11(3)(b)
(b) Notwithstanding anything contained in this section, the amount of tax credit in respect of a dealer shall be reduced by the amount
of tax calculated at the rate of four per cent on the taxable turnover of purchases within the State
(i) of taxable goods consigned or dispatched for batch transfer or to his agent outside the State, or
(ii) of taxable goods which are used as raw materials in the manufacture, or in the packing of goods which are dispatched
outside the State in the course of branch transfer or consignment or to his agent outside the State.
(iii) of fuels used for the manufacture of goods”
• “[a]fter the final product is produced, the assessee transfers these goods to its various branch offices,
many of which are located outside the State and, therefore, those goods which are so transferred
would be covered by this sub-clause and in respect of such goods which are transferred outside the
State and are taxable under the VAT Act, the tax credit is to be reduced by 4%. Since the raw material
in the instant goods is in the nature of fuels used for the manufacture of goods, it gets covered by
sub-clause (iii) as well. The issue that needs to be decided is as to whether the tax credit is to
be reduced at the rate of 4% under sub-clause (ii) and again at the same rate under sub-
clause (iii) as well or deduction permissible is only once.

Finding of lower forums
• AO – Deduction twice over
• JC(A) - Deduction twice over
• VAT Tri. – No double deduction
• HC – No double deduction
“After clause (i), the Legislature has used the word “or”. We are conscious that at end of clause (ii)
and beginning of clause (iii), the Legislature has not once again used the word “or”, but has
also not added the expression “and”. Plain reading of the said provisions thus makes it clear that
the reduction of tax credit had to be applied to any case which satisfy the description contained in
sub-clauses (i) to (iii) not every time such description is satisfied. Further, reduction of amount of
tax at the rate of 4 per cent is to be done for the taxable goods which fall in any of the three
categories contained in sub-clauses (i) to (iii) and not every time a particular class of goods
specified fall in more than one categories.”

Relevant extract of SC judgment
• SC – Deduction twice over
• “…when the final product is sold and the VAT paid, component of raw material would be included again. Keeping in view this
objective, the Legislature has intended to give tax credit to some extent. However, how much tax credit is to be given and under
what circumstances, is the domain of the Legislature and the courts are not to tinker with the same”
• “taxing statutes are to be given strict interpretation”
• “Insofar as sub-clause (i) is concerned, it pertains to trading activity and there is no question of any overlap between sub-clause
(i) on the one hand and sub-clauses (ii) and (iii) on the other. Further, insofar as sub-clauses (i) and (ii) are concerned, same are
disjunctive as the word ‘or’ is inserted between these two clauses. However, when we come to clauses (ii) and (iii), where there
is a possibility of overlap (as it has happened in the instant case as well), there is no word ‘or’ used between clauses (ii) and (iii).
Sub-clause (ii) finishes with the punctuation mark full stop and then sub-clause (iii) starts. This depicts the intention
of the Legislature, namely, reduction is not confined to one of the aforesaid two sub-clauses and it can occur under both these
provisions. It is rightly pointed out by the appellant State that these are event based sub-clauses and two events are totally
different. Sub-clause (ii) is attracted in those cases where taxable goods are used as raw material (which may not necessarily be
fuel but all raw materials are included) and also the other condition which is to be fulfilled is that these goods are dispatched
outside the State in the course of branch transfer etc. Therefore, even if the taxable goods are used as raw material in the
manufacture or in the packing of goods but they are consumed or sold within the State, sub-clause (ii) would not apply. On the
other hand, sub-clause (iii) is referable to only fuels which are used for manufacture of goods. It is, thus, a totally separate
category and the moment fuel is used in the manufacture of goods, this sub-clause gets attracted and it would be immaterial
whether the goods are sold within the State or outside the Sate.”

Case Study – C
Commissioner of Commercial Taxes v. Bajaj Auto Ltd.
(2016) 16 SCC 83
• Rejecting other considerations when provision is a ‘complete code’

Provisions under consideration
• Orissa Sales Tax Act
“5-A.Surcharge.—(1) Every dealer whose gross turnover during any year exceeds Rupees ten lakhs shall, in addition to the tax payable by him
under this Act, also pay a surcharge at the rate of ten per centum of the total amount of tax payable by him”
• Orissa Entry Tax Act
“4.Reduction in tax liability.—(1) Where an importer of motor vehicle liable to pay tax under sub-section (3) of Section 3 being a dealer in
motor vehicles becomes liable to pay tax under the Sales Tax Act by virtue of sale of such motor vehicles then his liability under the Sales
Tax Act shall be reduced to the extent of tax paid under this Act.
Explanation.—For the purpose of this sub-section the chassis and the vehicle with body built on the chassis shall be treated as one and the
same goods.
(2) When an importer or manufacturer of goods specified in Part III of the Schedule except motor vehicles pays tax under sub-section (1)
of Section 3 or Section 26 of this Act, being a dealer under the Sales Tax Act becomes liable to pay tax under the said Act by virtue of sale
of such goods, then his liability under the Sales Tax Act shall be reduced to the extent of tax paid under this Act.
(3) The reduction in tax liability of an importer as provided in sub-section (1) or of an importer or manufacturer as provided in sub-section
(2) shall not be allowed, unless the entry tax paid and tax payable under the Sales Tax Act are shown separately in the cash memo or the bill
or invoice issued by him for the sale by virtue of which such liability accrues.”
• Orissa Entry Tax Rules
“18.Set off of entry tax against sales tax.—(1) When the importer of a motor vehicle liable to pay tax under sub-section (2) of Section 3 of this
Act being a dealer in motor vehicles becomes liable to pay tax under the Sales Tax Act by virtue of sale of such motor vehicle, his tax
liability under the Sales Tax Act shall be reduced to the extent of the tax paid under these Rules.

Issue before Court and contentions of parties
• [Issue] “The sole question for consideration is whether the “surcharge” under
Section 5-A of the OST Act is to be computed on the gross amount of sales tax or
on the net amount of sales tax after setting off or deducting the amount of entry
tax?”
• Tax Department – “surcharge under the OST Act shall be calculated on the payable
amount of tax due on the taxable turnover (Sections 5 and 5-A) instead of on the
reduced sales tax amount after setting off of entry tax.”
• Tax Payers – “surcharge [is to be paid] on the balance amount after deduction of the
entry tax paid on the motor vehicles.”

Conclusion and Reasons of Supreme Court
Conclusion
• “on a conjoint reading of Section 5 of the OST Act, Section 4 of the OET Act and Rule 18 of the Rules, we are of the considered
opinion that the amount of surcharge under Section 5-A of the OST Act is to be levied before deducting the amount of entry tax paid by
a dealer.”
Reasons
• Section 5-A of the OST Act is a self-contained provision and the surcharge, as already seen above, is leviable at the specified per
centum of tax payable under the OST Act. Tax payable under the OST Act is independent of the provisions of the OET Act. The
assessment or quantification or computation of surcharge shall have to be made in accordance with the provisions of the OST Act.”
• “On a plain reading of the provisions of the OST Act as well as the OET Act and the Rules, it can be seen that Section 5-A of the OST
Act creates a charge and imposes liability on every dealer under the OST Act to pay surcharge @ 10% on the amount of tax payable by
him under the OST Act. Section 4(1) of the OET Act, in the same way, prescribes for reduction of the tax amount payable by the dealer
to the extent of entry tax already paid for the same article for which sales tax is payable. The section does not specifically contemplate
anything, which would indicate that the provisions of the OET Act or the Rules have to be taken into consideration while
assessing the sales tax or surcharge. In essence, the provisions made in the Rules lay down the modality of “set-off”. It is important to
mention here that the OST Act was enacted in the year 1947 whereas the OET Act was enacted in 1999. The provision of set-off has
been made in the OET Act and the Rules framed thereunder and not in the OST Act. The heading of Section 4 of the OET Act gives a
broad idea regarding the provision of set-off by way of “reduction in tax liability”. Sub-sections (1) and (2) of Section 4 of the OET Act
provide for reduction of liability under the OST Act.”

Case Study – D
Sony India Pvt. Ltd. v. Commissioner of Trade and Taxes
(2015) 224 DLT 625 (DB)
• Ignoring literal meaning; giving impetus to legislative intent
• Employing external aids to decipher legislative intent

Issue – Whether “digital still image video cameras” are covered under Entry 41A (clause 15).
Extract from Third Schedule of Delhi Value Added Tax Act
Entry 41A. Information Technology products as per the description in column (2) below, as covered under
the headings or sub-headings mentioned in column(3), as the case may be, of the Central Excise Tariff Act,
1985 (5 of 1986)
S.No. Description Central Excise
Tariff Heading
15. Transmission apparatus (other than apparatus for radio broadcasting,
transmission apparatus incorporating reception apparatus, digital still
image video cameras)
8525

External Aids relied upon by High Court
1. White Paper of state level value added tax prepared by the Empowered Committee of State Finance Ministers.
“85.25 Transmission apparatus other than apparatus for radio broadcasting or TV broadcasting,
transmission apparatus incorporating reception apparatus, digital still image video cameras.”
[HC] The above entry three types of IT products i.e. (i) transmission apparatus other than apparatus for radio
broadcasting or TV broadcasting; (ii) transmission apparatus incorporating reception apparatus; (iii) digital still
image video cameras.
2. Corresponding entries of other state legislations
[HC] “This Court has been shown VAT legislations of the States and in particular, the legislations of Andhra
Pradesh, Assam, Bihar, Gujarat, Karnataka, Maharashtra, Mizoram and Orissa. The above basic entry in the
list finalised by the Empowered Committee has been more or less reproduced in the same manner in many of
the said state legislations.”
[HC] “The above narration is useful in understanding that there is a uniform adoption by several states of the
entries as recommended by the Empowered Committee particularly with reference to IT products. Secondly, it
shows that ‘digital still image video camera’ was not understood as a sub-species of ‘transmission apparatus’
but as a separate equipment in itself.”

External Aids relied upon by High Court (Cont.)
3. Original file of draft legislation, etc.
“The above narration is useful in understanding that there is a uniform adoption by several states of the entries as
recommended by the Empowered Committee particularly with reference to IT products. Secondly, it shows that ‘digital still
image video camera’ was not understood as a sub-species of ‘transmission apparatus’ but as a separate equipment in itself.”
…
“The note then proposes: “In order to avoid confusion in I.T. sector, it is proposed to adopt the same description of I.T.
products as adopted by Maharashtra and provide HSN codes along with the items describing I.T. products”. In other
words the proposal was that the description as adopted by Maharashtra and the corresponding HSN codes should be
adopted for Delhi as well.” …
“To recapitulate as far as Entry 15 to the notification issued under the Maharashtra VAT Act 2002, Entry 85.25 is a replica
of the corresponding entry as proposed by the Empowered Committee. That being the factual position the inescapable
conclusion is that the addition of bracket in Item 15 of Entry 41-A was, apart from being totally uncalled for and
unintended, without any particular rationale. It appears that the insertion of the brackets before the words ‘other than’ and
after the words ‘… video cameras’ was not as a result of a conscious decision.
However, as a result of the addition of the brackets an entirely new and unintended meaning has been sought to be given
to Item 15 of Entry 41 A. In other words, the entry is sought to be read by the Department as essentially containing only
one item, viz., ‘transmission apparatus’ with all other items contained in the brackets that immediately follow the said words
as being excluded from the entry.”

Conclusion of HC
• “The brackets, if at all should have been closed immediately after the expression ‘radio broadcasting’ or after the words ‘reception
apparatus’. This is because the first two items described in entry, viz., ‘transmission apparatus other than apparatus for radio broadcasting
or TV broadcasting’ and ‘transmission apparatus incorporating reception apparatus’ can be said to belong the same species, i.e.
transmission apparatus ‘digital still image video cameras’, cannot by any stretch of imagination can be construed to be a sub-species of
‘transmission apparatus’. Therefore the exclusion of such item from ‘transmission apparatus’ makes no sense at all. A ‘transmission
apparatus’ refers to something which is capable of receiving the transmission signals. For e.g., a walkie talkie set or a cellular phone. A DSC
does neither. It falls outside the category of transmission apparatus. This explains why in some state legislations, following the description
in the list prepared by the Empowered Committee, these items have been separated by commas or a semi-colon.”
• “In the present case, the brackets really do not serve any particular purpose at all other than to bring out an anomaly which was
unintended. To accept the brackets as they are and to try to make some sense out of it would result in acknowledging that
DSCs belong to the species of transmission apparatus which it obviously is not.”
• “In the present case the Court is persuaded to adopt the above approach in order to achieve the “obvious intention and produce a
rational construction”. The Court is therefore of the view that the correct way to read Article 15 in Entry 41A of the Third
Schedule to the DVAT Act is to read it without the two brackets and to read it in a manner that the item ‘digital still image
video cameras’ is not excluded from the ambit of Entry 15. The interpretation suggested by the Respondent would have the
anomalous result of totally excluding the said item from the entry and that clearly was not the intended result. The Cabinet Note itself was
triggered by the representation of the industry regarding exclusion of certain kinds of IT products. Also the intention was to adopt the
Maharashtra pattern which did not exclude DSCs. The uniform pattern adopted by several states to bring the statutes in line with the
nomenclature as suggested by the Empowered Committee meant that DSCs were not to be excluded from the list of items ”

Interpretation of Statues PPT.pdf

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