A lecture delivered at Jamnagar Branch of WIRC of ICAI

1. Cut Copied & Pasted by
CA. Bhavik H. Dholakia
FCA, DISA (ICAI), B.Com.
Interpretation
of Taxing
Statutes

2. Whydo we Need to Learn Rules
of Interpretation?

3. Need to Know…
 Although we are not Lawyers, We
essentially practice Law…
 In the practice of law, knowledge to
apply the “Correct Interpretation” is an
essential pre-requisite
 Even in Taxing Statutes, the Courts and
Tribunals follow certain bedrock
principles on which interpretation or
construction is based

4. Why Rules….
 Words spoken or written are the means of
communication.
 NO problem - one and only one meaning possible
 Problem arises - two meanings reasonably possible
the real intention needs to be found out.
 Mr. A is talking to Mr. B
 Mr. B is confused about the meaning and
intention of Mr. A revealed by his language.
 Mr. B has an option to ask Mr. A as to
 What did he mean?; and
 What was his intention?

5. Similarly,
 The legislature writes the law; and
 The judiciary has to interpret the law
 Can judiciary ask the legislature
 What did he mean?; and
 What was his intention?
 The legislature after enacting the statutes
becomes “functus officio” as far as these
enacted statutes are concerned.
The situation has been instrumental in the
judiciary to evolve the rules of
interpretation, which enable them to find
out the intention of the legislature.

6. Whatare these
Rules of Interpretation?

7. Broad Classification…
Cardinal Rules of
Interpretation
 Literal
Interpretation
 Interpretation of
Income Tax
 Golden Rule
(Purposive
Construction)
 Harmonious
Construction
 Beneficial
Construction
 Mischief Rule
(Heydon’s Case)
 Cases governed by
more than One
Provision
 Principles of Natural
Justice
 Provision whether
mandatory or
directory
Interpretation of
certain specific
Provisions
 Charging & Related
Provisions
 Machinery or
Procedural
Provisions
 Limitation
Provisions
 Penal Provisions
 Deeming Provisions
& Legal Fictions
 Legal Presumption
 Appeal and Refund
Provisions
 Provision creating
right
 Provisions for
Deduction,
Exemption,
Incentives, Benefits
or Relief
Internal Aids to
Interpretation..
 Provisos
 Explanations
 Non obstante
Clauses
 Marginal Notes and
Headings
 Punctuations
 Definition clause
and undefined
Words
 Judicially Defined
Words
 Rule of Ejusdem
generis
 Rule of Noscitur a
Sociis
External Aids to
Interpretation..
 Legislative History
and Background
 Circulars, Forms &
Interpretation by IT
Authorities
 Speech of Minister
or other
Parliamentary
Material
 Statement of
Objects and
Reasons,
Explanatory
Memorandum and
Notes, Drafts of
Bills and Reports of
Commissions

8. Whenone can resort to Rules of
Interpretation?

9. Apply Rules – But Not Always…
Language used is not -
 Ambiguous or Conflicting
 Real doubt about a meaning thereof
 Leads to absurd result
 Capable of second meaning
Resort to an interpretative process
to unfold the legislative intent is
impermissible
These Rules are not Rules of Law.
They are not masters.

10. Rule of Literal Interpretation

11. Literal Rule
 First and Primary rule of construction is that
the intention of the legislature must be
found in the words used by the legislature
 The language – Determinative Factor –
legislative intention. Even if there is a defect
or omission, the court can not correct the
deficiency, especially when literal reading
is capable of producing intelligible result
and any departure from the literal rule
would be amending the law in the garb of
interpretation which is not permissible and
which would be destructive of judicial
discipline.

12. Literal Rule
Language is very Important: Every
word of a statute has to be
assumed to have been
 Deliberately; and
 Consciously
incorporated in the statute by
the legislature
 If the language of the statute is clear
and explicit, effect must be given to
each word.

13. Literal Rule – Departure, when permissible
 Departure – When permissible: Language
producing absurd results, the courts should
endeavour to interpret in a manner that will
 Achieve the object of the provision;
 Avoid mischief;
 Advance the cause of justice;
 Provide the remedy intended by the statute;
 Make the law enforceable and workable instead of reducing it
to redundant and dead letter; and
 Best harmonize to effectuate the object of the legislation
 If two interpretations possible, the one
which –
 Upholds the constitutionality; or
 Advances the object of the enactment should be favoured.

14. Interpretation of Income Tax

15. Income Tax – Specific Considerations
 What should prevail – Letter of Law or Spirit
of Law, while deciding whether a subject is
taxable or not?
 Vodafone – Look at – Look through
 Law and Equity are strangers and equitable
construction can not be put upon the
words of a taxing statute
 “what is clearly said” must prevail over
“intendment”
 Act should be read as the whole scheme

16. Rule of Harmonious
Construction

17. Harmonious Construction
 No provision to defeat another
 The entire statute to be read as a whole –
Chapter by Chapter, Section by section
and then word by word…
 Even different limbs of a section to be read
harmoniously
 Apparent inconsistencies with another
related statute should be harmonized and
reconciled in the light of object and
purpose of legislation in question

18. Rule of Beneficial
Construction

19. Beneficial Construction
 If interpretation of a Fiscal enactment is
open to doubt and two views are
reasonably possible
 Most beneficial or favorable to the assessee should be adopted
 Even if it results in his obtaining ‘a double advantage’
 If respective (Revenue Vs. Assessee)
hardships or inconveniences are in
consideration, courts must lean in favor of
assessee

20. Beneficial Construction
 When there is a choice between
 An interpretation to extend the benefit intended by the
legislature; or
 To deny the benefit
The former is preferable by resorting to
technical interpretation.

21. Case governed by more
than one Provision

22. Case governed by more than
one provision
 Assessee’s clear right to be with the one
which leaves him with “lighter burden”
 If income falling in two exempting sections,
Assessee can choose to fall in both unless
they are made mutually exclusive by
 Express provisions; or
 Necessary implication

23. Principles of Natural Justice

24. Principles of Natural Justice..
 Must be read into the unoccupied
interstices of the statute, UNLESS there is a
clear mandate to the contrary;
 If statute excludes Principles of Natural
Justice by
 Express provisions; or
 Inevitable implication
Then, the court can not ignore the
mandate..

25. Provision – Whether
Directory or Mandatory ?

26. Directory Vs. Mandatory
 Intent of the legislature is the determinative
factor governing the decision
 Intent of the legislature should be judged
not only from the phraseology of the
provision but also from
 Nature
 Design; and
 Consequences (Very severe penalties - Mandatory)
 “Shall” generally reveals mandate but not
always – context necessarily to be seen
 “May” generally reveals direction but not
always – context necessarily to be seen

27. Interpretation of certain
specific Provisions..

28. Charging and Related
Provisions..

29. Charging Provisions..
 Provisions creating Charge or Levy should
be strictly construed
 No person can be taxed UNLESS
 It is shown that the clear language is capable of taxing
 No-One can be taxed by implication
 Construction of charging section leading to
double taxation should be avoided in the
absence of..
 Express provisions; or
 Inevitable implication

30. Machinery or Procedural
Provisions

31. Machinery or Procedural….
 Provisions relating to machinery of
 Assessment or
 Collection
Should be construed to make it workable
and
 Effectuate the levy; and
 Advance the object of provisions
 Construction of Machinery provisions that
 Disables the Taxing Machinery; and
 Enables the person to escape taxation
be avoided.

32. Penal Provisions
 To be strictly construed
 In case of “Legislative Ambiguity”, the
Assessee should get the benefit of doubt.
Appeal and Refund Provisions..
 Right to appeal
 Is not an inherent right, it’s the creature of law
 In not a right by implication
 Liberal Construction is required for
 Provision of appeal
 Provisions giving refund to the assessee and in favour of
the assessee

33. Provisions creating Right..
 Courts must lean in favour of construction
 That saves the right; and
 Rather than the one that defeats it..
Provisions relating to Deductions,
Exemptions, Incentives, Benefits
& Reliefs
 Plethora of judgments supporting the
construction, which is
 Liberal, Reasonable and In favour of the assessee
 To effectuate the object of legislature and not to defeat
it

34. External Aids to
Interpretation

35. Legislative History & Background
 Can not be looked at for construing per se
the provisions of a statute
 Courts can look at Historical Facts and
Surrounding Circumstances..
 To understand the Scope & Evil sought to be
remedied
 To understand the purpose or object of legislation
 To sustain the presumption of
constitutionality, the courts may look at
 Matters of common knowledge;
 The history of the times; and
 Every conceivable state of facts.
Existing at the time of legislation..

36. Circulars, Forms and
Interpretation by IT Authorities..
 Interpretation of Law is exclusive domain of
Judiciary as per Constitution..
 Circulars are interpretation by CBDT, so
 Can not be enforced against the assessee;
 But can also not be ignored totally
in construing the provisions of statute
 Circulars by CBDT are binding on all
authorities subordinate thereto but not on
 The Appellate Authority
 The Tribunal
 The Courts; and
 The Assessee.

37. Circulars, Forms and
Interpretation by IT Authorities..
 Forms can not override/have any effect on
 Interpretation; or
 Operation
Of the parent statute..
 Executive Instructions, Clarificatory Notes,
Press Releases…
 Can not run contrary to; or
 Whittle down effect of
The statutory provisions

38. Speech of Minister or other
Parliamentary Material..
 Speech to move the bill can be referred to
 Find out legislative intent; or
 Ascertain object or purpose of legislation
Only if there is apparent ambiguity, Otherwise
 It can not be used as an aid to interpretation
 Similarly,
 Opinion given by Law Minister; or
 Answer to question raised in parliament
Can not bind court

39. Statement of objects and reasons,
Explanatory Memo and Notes
 Reference permissible for limited purpose of
 Appreciating background; and
 Antecedent factual matrix
Leading to the legislation
 Only if the there is ambiguity, doubt or difficulty
Draft of Bill & Commission Report
 Reference permissible for limited purpose of
 Ascertaining the conditions prevailing at the time; and
 Extent and Urgency of evil sought to be remedied.
But, can not be used as aid to
interpretation otherwise..

40. Internal Aids to
Interpretation
Provisos,
Explanations,
Non-obstante Clauses,
Marginal Notes,
Headings,
Punctuations,
Definition Clause,
Undefined Words,
Ejusdem Generis,
Nosciture a Sociis….

41. Provisos..
Provided that…
Further provided that..
 It carves out the exception
 Proviso may serve different purposes.. Viz.
 Qualify or except certain provisions from main enactment
 Prescribe certain conditions to be fulfilled to make main
enactment workable
 However, it can not be held to..
 Control the substantive enactment; or
 Withdraw merely by implication what main provision has
given;
 Set to naught the object of main enactment.

42. Explanations..
Explanation – 1 “For the removal of doubts”, It is
clarified that…
 Fulfills the purpose of
 Clearing up an ambiguity in the main provision
 It can add to and widen the scope of the main
section
 Is the Explanation retrospective in nature?
 Yes…If it is clarificatory or curative, it is retrospective
 No….If it changes the law, it can not be presumed to be
retrospective in spite of the fact that it uses phrases viz.
 “It is declared” or
 “for the removal of doubts”
 Example Section 40(a)(ia) r.w.s. 201(1)

43. Non obstante clauses..
(Notwithstanding anything to the contrary contained in
any other…)
 It’s a legislative device to give overriding
effect over
 Other provisions (Chapters, Sections) of the same
enactment
 Other enactments
 The scope and purport of non obstante
clause should be read
 In the context of the provisions; and
 To be consistent with the scheme of the enactment

44. Marginal Notes and Headings..
 Can not control the construction of statute
 Can be used to ascertain intent of
legislature
Punctuations..
 Can not control the clear meaning
 Can help to arrive at correct construction
 Due weight should be given to punctuation, only
 If a statute is carefully punctuated (Throughout the statute);
and
 There is a doubt about its meaning.

45. Definition Clause & Undefined
Words.
 A defined word..
 Be construed in the same manner
 Unless the context otherwise requires
 Same word occurring twice..
 Be given the same meaning
 Unless the context otherwise required
 Same word occurring twice in two different
sections..
Can Be given the different meaning
 If objects of section are different
 And they operate in different fields

46. Definition Clause & Undefined
Words.
 Context is always important because..
 One cannot give an expression a meaning,
which would make the provision superfluous.
 Words not defined, must be taken in their
 Legal Sense; or
 Dictionary Meaning;
 Popular or Common Sense;
As distinct from their scientific or technical
meaning.

47. Rule of Ejusdem Generis..
 The rule of Ejusdem Generis is intended to
 Be applied where general words have been used
 Following particular & specific words of the same
nature
(Loans or Deposits – 269SS & T)
 To restrict the meaning of the general
words
 to things or matters of the same genus as the
preceding particular words

48. Rule of Ejusdem Generis..
 The rule applies only when:
 Subject of enumeration construes a
class/category/genus/specie
 Class is not exhausted by enumeration
 General terms following enumeration
 No indication of different legislative intent
 Statute contains enumeration of specific words.

49. Rule of Noscitur a Sociis
 Sometimes the words used have many
meanings befitting the context..
 The rule is to
 Construe the words
 Or a phrase in enactment
In the light of Surrounding Text
 Supreme court has laid down broad
Principles:
 Does a word/expression has more than one meaning?
 Based on the context, one could apply narrow/wide
meaning.
 Are words used found in group totally “dissimilar” or there
is “common thread”.
 Purpose behind insertion of the term.

50. Precedents

51. Binding force of Supreme Court
 Article – 141 of Constitution provides that
SC Rulings are
 Binding on all courts, tribunals and other authorities
 Within the territory of India
 Any judgment to the contrary by any
authority
 Be held to be erroneous; and
 Error necessarily being considered as “apparent from the
records”
 Only the “Principle laid down in the
judgment is binding
 And not “Every word appearing therein”.

52. Binding force of Supreme Court
 If SC holds a levy valid or invalid, it binds
 Not only those parties who were before the court;
 But also other parties
 If two SC decisions are in conflict
 Larger bench decision will prevail; and
If both the benches were of equal
strength (Co-ordinate Bench)
 Later decision will prevail
Provided earlier decision is considered.

53. Binding force of Supreme Court
 Smaller Bench to follow Larger Bench
 Single member bench to follow
 Division Bench (Two) to follow
 Three Members (Three) Bench to follow
 Constitution Bench (Highest Number)
Decisions
 Regardless of doubt about the correctness of decision.
 Supreme Court decision cannot be
assailed on the ground
 That certain aspects were not considered; or
 Relevant provisions were not looked into.

54. Binding force of Supreme Court
 High court which refuses
 The decision and directions of supreme court; or
 Seeks to revive a decision of the high court which had
been set aside by the supreme court
Is Null and Void.
 A larger bench of the supreme court
 May Re-consider and Overrule
 A decision of smaller bench
Only if it is clearly erroneous.

55. Binding force of Supreme Court
 Refusal to grant special leave to appeal
against judgment by SC
 Does not imply that it accepts the judgment as correct
 And mere filing of petition of leave against
high court
 does not denude that judgment of its binding effect.

56. Binding force of High Court
 A decision of a High Court would have
binding force
 In the state in which the court has jurisdiction,
 But not outside that state
 It will be just and proper for Tribunal to
follow decision of
 Non-jurisdictional High Court
If there is no contrary decision of another
High Court

57. Binding force of High Court
 To sum up the binding nature of
 Single Judge Bench can not decide contrary to
 Earlier Single Bench or a Larger Bench decision
Of the same High Court
 Division Bench can not decide contrary to
 Earlier Division Bench or a Full Bench decision
Of the same High Court

58. Reliance on Decisions.
 A precedent is an authority
 Only for what it actually decides
 Not for what may remotely or even logically follow
from it.
 Judgments must be read
 As a whole
 Observations in judgments should be considered in
the context in which they are made.
 Reliance should not be placed on a
decision
 Without discussing how the factual situation fits in with
the factual decision on which reliance is placed

59. Circumstances that Weaken the
binding force of a Precedent.
 If it is reversed or overruled by a higher court.
 When it is affirmed/reversed on different
grounds.
 when the legislature enacts a statute
inconsistent with the precedent.
 When it is inconsistent with the earlier decisions
of higher courts.
 If it is a precedent sub silentio or not fully argued
 When it is rendered per incuriam, i.e. in
ignorance of a statutory provision/binding
precedent
 When it is erroneous decision

60. Tribunal Orders
 The orders of Tribunals are binding to all
authorities functioning under the
jurisdiction of the tribunal.
 The Principles of Judicial Discipline
require that
 The orders of the higher appellate authorities:
 Should be followed unreservedly by the subordinate
authorities
 If this rule is not followed, the results are -
 Undue harassment to the assessee
 Chaos in administration of tax laws.

61. Thanks for your patience.
I appreciate your tolerance.
bhavik@dholakias.in