Interpretation of Taxing

Statutes
 Introduction
• Taxing Statutes
• Article 265 of the Constitution provides:
• No tax shall be levied or collected except by authority of law.
• Article 366 of the Constitution which defines Taxation and Tax reads:
• Taxation includes the imposition of any tax or impost, whether general or
local or special, and ‘tax’ shall be construed accordingly.
• Any compulsory exaction of money by Government amounts to imposition
of tax which is not permissible except by or under the authority of a
statutory provision. In a broad sense a fee being compulsory imposition of
money is also a tax.
• The constitution, however, makes a distinction between tax and fee which
are both impositions made by a State for raising revenue. A tax is imposed
for public purpose for raising general revenue of the State. A fee in contrast
is imposed for rendering services and bears a broad correlationship
with the services rendered.
 Introduction
• For instance, the levy of cess on the cost of construction incurred
by the employers on building and other construction works under
the Building and Other Construction Workers’ Welfare Cess Act,
1996, was held to be a “fee” and not a “tax”, as the cess was imposed
for ensuring sufficient funds for the Welfare Boards to undertake
social security schemes and welfare measures for building and
other construction workers, as provided under the Building and
Other Construction Workers’ (Regulation of Employment and
Conditions of Service) Act, 1996, and was set apart for that specific
purpose and not merged with public revenues for the benefit of the
general public. Dewan Chand Builders and Contractors v UOI,
(2012) 1 SCC 101, p 111.
 Introduction
• A power to tax cannot be inferred from a general entry for taxes are
specifically named and distributed between the Union and States by
various entries in List I and List II of the Constitution. A tax not so
mentioned can be levied by the Union under Parliament’s residuary
power in Entry 97 of List I. Service tax which is levied by Parliament
under its residuary power.
• A scrutiny of Lists I and II would show that there is no overlapping
anywhere in the taxing power and the Constitution gives independent
sources of taxation to the Union and the States. The taxing entries
have to be construed with clarity and precision so as to maintain this
exclusivity. On this principle, a tax on “Luxuries” in Entry 62 of List
II was construed to mean a tax on “the activity of enjoyment of or
indulgence in that which is costly or which is generally recognised as
being beyond the necessary requirements of an average member of
society” and not a tax on articles of luxury.
 Introduction
• Every taxing statute has a charging section and provisions laying
down the procedure to assess the tax and penalties and method of their
collection and may also contain provisions to prevent pilferage of
revenue. A penalty provision in a taxing Act has to be specifically
provided and cannot be inferred. The nature of the tax imposed by a
statute has to be determined by examining the pith and substance of
the statute and by paying more attention to the charging section than to
the basis or machinery adopted for assessment and collection of tax
for, the nature of tax is different from the measure of tax.
• There are three components of a taxing statute, viz., subject of the tax,
person liable to pay the tax and the rate at which the tax is levied. If
there be any real ambiguity in respect of any of these components
which is not removable by reasonable construction, there would be no
tax in law till the defect is removed by the Legislature.
 Introduction
• In terms of Article 265 all acts relating to the imposition of tax providing,
inter alia, for the point at which the tax is to be collected, the rate of tax as
also the recovery must be carried out in accordance with law. If a tax has
been paid in excess of the tax specified, save and except the cases involving
the principle of “unjust enrichment”, the excess tax realised must be
refunded.
• In Article 265 and also in taxing statutes the words “levy” and “collect” are
not used as synonymous terms. Though the term “levy” may include
“imposition” and “assessment”, it does not include “collection”.
“Exemption” from tax comes later to levy for “exemption” can only operate
when there is a valid levy; if there was no levy at all, there would be nothing
to exempt.
• There are three stages in the imposition of a tax, viz. (1) declaration of
liability in respect of persons or property; (2) assessment of tax that
quantifies the sum which the person liable has to pay; and (3) methods of
recovery if the person taxed does not voluntarily pay. The expression “tax
due” usually refers to an ascertained liability on assessment but its meaning
may vary according to context.
 Introduction
• General restrictions of taxing power contained in the Constitution, eg, in Articles
276, 285 and 286 even if not expressly stated in the relevant taxation Act have to be
read in it. These restrictions cannot be given a go by either directly or indirectly. But it
appears that this principle was not properly appreciated in a recent case relating to Article
276 of the Constitution. Article 276(2) of the Constitution provides that:
• The total amount payable in respect of any one person to the State or to any one
municipality, district board, local board or other local authority in the State by way of
taxes on professions, trades, callings and employments shall not exceed two thousand
and five hundred rupees per annum.
• Article 286 of the Constitution provides that no law of a State shall impose, or
authorise the imposition of, a tax on the sale or purchase of goods where such sale
or purchase takes place (a) outside the State; or (b) in the course of the import of
the goods into, or export of the goods out of, the territory of India. Therefore, the
requirement of tax deduction at source from value of works contract involving supply of
goods in course of inter-state trade which makes no provision for deduction and
ascertainment of value of goods supplied in the course of inter-state trade during
execution of works contract will be held invalid and unconstitutional violating
Article 286 of the Constitution. State of Chhattisgarh v VTP Construction, AIR 2008
SC 714
 General Principles
• General Principles of Strict Construction
• A taxing statute is 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.
 Cases
• An illustration of the principle that in order to tax any person, he must clearly fall
within the ambit of the charging section.
• In Tata Sky Ltd v State of Madhya Pradesh, (2013) 4 SCC 656, pp 666–668.
where the issue before the Supreme Court was whether DTH (direct to home)
broadcasters could be taxed under the Madhya Pradesh Entertainments Duty and
Advertisements Tax Act, 1936. On an examination of the Act as a whole,
particularly a conjoint reading of sections 2(a) (admission to an entertainment),
2(b) (definition of entertainment), 2(d) (payment of admission), 3 (entertainment
duty payable by the proprietor of an entertainment) and 4 (method of levy), the
court held that the charge of tax under the Act would be attracted only if an
entertainment takes place in a specified physical location to which persons are
admitted on payment of some charge to the proprietor of the entertainment. Since
DTH operation is not a place-related entertainment, it is not covered under the
charging provision i.e. section 3, and therefore, the State cannot impose any tax on
DTH operators under the said Act.
 Cases
• In C.I.T. v. Karamchand Premchand Ltd., AIR 1960 SC 1175 the assessee carried
on business both within and outside taxable territories in India. He sustained
losses in relation to business carried on outside taxable territories, and contended
that those losses could be set-off against profits in taxable territories for
computation of his taxable income. The question depended on construction of the
third proviso to section 5 of the Business Profit Tax Act, 1947, which provided
that the Act was not to apply to any income, profits or gains of business accruing
or arising within any part of India to which the Act did not extend, unless such
income, profits or gains were received in or brought into the taxable territories.
The Supreme Court felt that the matter was not free from difficulty and gave the
benefit of construction to the assessee by holding that the language of the proviso
did not exclude the outside business from consideration but only exempted the
income thereof, unless received or deemed to be received in taxable territories.
 Cases
• Qualifications of the rule of strict construction
• The principle of strict construction applicable to taxing statutes does not, however,
mean that where the subject falls clearly within the letter of the law, the court can
avoid the tax by putting a restricted construction on some supposed hardship, or
on the ground that the tax, or penalty imposed, is heavy or oppressive.
• The rule that where a literal interpretation leads to absurd or unintended
results, the language of the statute can be modified to accord with the
legislative intention and to avoid absurdity also applies in interpreting a
taxing statute.
• In State of Gujarat v Essar Oil Ltd, (2012) 3 SCC 522, p 547. it has been held that
the principle that in case of ambiguity, a taxing statute should be construed in
favour of the assessee, does not apply to the construction of an exception or
an exempting provision, which must be construed strictly, and in case of any
doubt or ambiguity, the benefit must go to the State. The general rule is strict
interpretation of exemptions.
 Cases
• An exemption notification must be interpreted in light of the words employed by
it and not on any other basis and there cannot be any addition or subtraction from
the words used in the exemption notification as it requires strict interpretation by
the courts. The wordings of the exemption notification have to be given its natural
meaning when the wordings are simple, clear and unambiguous. Notification
exempting certain imported goods from duty will not apply to illegally imported
goods.
 Cases
• Panzy Fernandes v. M.F. Queors (AIR 1963 ALL 15):
• The Court should bear in mind three well-known canons of interpretation of fiscal
statutes, namely,
• First, such statutes are to be construed strictly;
• Secondly, the subject not to be made liable for payment unless such a step is warranted
by the clear provisions of the statute;
• Thirdly, where there is doubt in the matter, an interpretation favourable to the subject
should be preferred.
• In Chairman, Municipality of Balasore v Mahammad Abdul Sattar Khan, (AIR 1954 Ori
224) the respondent contended that the assessment of personal tax under section 82 of
the Bihar and Orissa Municipal Act, 1922, was ultra vires, as the tax had been fixed
on a consideration of his income from properties outside the jurisdiction of the
Balasore Municipality. The appellant argued that as soon as the income came in the
hands of the assessee, who was a resident within the municipal jurisdiction, it would
come within the jurisdiction of the municipality even though the property was
situated outside.
• The Court agreed with the respondent, and held that the Balasore Municipality had
no jurisdiction to levy personal tax.
 Cases
• In George Banerji v Emperor, (1916) 36 Ind Cas 877, in the Allahabad High Court
was considering whether a bicycle with a motor wheel attachment would be taxed.
The Court held that the vehicle was a bicycle, irrespective of the attachment, and
if the Municipal authorities wanted to impose a fiscal burden on him, they ought to
issue a notification which would explicitly and clearly bring ‘bicycles’ within the
definition of ‘motor vehicles’ to impose an additional liability by way of tax. The
Court observed:
• The question is one of taxation, and, as the sessions judge rightly says in his order
of reference, enactments which render the public liable to pay taxes or charges or
this nature must be construed strictly; or in other words, unless the language under
which they are sought to be charged is perfectly clear, the charging authorities
strictly; or in other words, unless the language under which they are sought to be
charged is perfectly clear, the charging authorities are not entitled to assess a
charge inasmuch as the public have a right to know what exactly are the charges
imposed upon them.
 Cases
• In Commissioner of Central Excise v Connaught Plaza Restaurant, (2012) 13 SCC
639, the question before the Court was whether ‘soft serve’ served at the
McDonalds was classifiable under Heading 21.05 (‘ice-cream’) or under Heading
04.04 or 2108.91 (‘Edible preparations, not elsewhere specified or included’) of
the Central Excise and Tariff Act, 1985. The latter category did not carry any
excise duty as there was no process of manufacture. The revenue appealed to the
Supreme Court against decisions of the Customs, Excise and Gold Tribunal (now
the Custom Excise and Service Tax Appellate Tribunal–CESTAT) that classified
soft-serve into the latter category. The appellant argued that ‘soft serve’ was
understood as ‘ice-cream’ in common parlance i.e. in the comprehension of the
common man and hence, it ought to be classified in the category of ‘ice-cream’
under Heading 21.05 of the Act.
 Cases
• Per contra, the respondent argued that ‘soft serve’ was distinct from ‘ice-cream’
since ice-cream was meant to have milk fat content above 8% whereas ‘soft serve’
contained around 5% of milk fat. Furthermore, even on an invocation of the
common parlance test, ‘soft-serve’ ought to be distinct from ice-cream as it was
marketed as soft-serve all over the world. The court invoked the common parlance
test i.e. in the absence of a statutory definition, entries in taxing statutes ought to
be construed in terms of their commercial or trade understanding, or according to
their popular meaning. Apart from rejecting the technical submissions of the
assessee (Milk fat content), the Court placed reliance on the common parlance test
to hold that the common person would not differentiate between ‘ice-cream’ and
‘soft-serve’. For the common person, both terms were interchangeable while
consuming the product at McDonalds and due to the restaurant being a brand
name, it could not claim the exemption awarded to small scale enterprises. Hence,
the Court held that for purposes of the 1985 Act, ‘soft-serve’ was tantamount to
‘ice-cream’, and liable to excise duty as such.
 Cases
• A penalty provision in a taxing Act is not to be equated to a criminal statute
requiring impliedly the element of mens rea and unless there is something in the
language of the Act indicating the need to establish mens rea, it is generally
sufficient to prove that a default in complying with the provisions of the Act for
which the penalty is provided has occurred.
• But a statutory provision may require mens rea before penalty can be imposed and
in such a case mens rea must be first established before imposition of penalty, eg,
the words “falsely represents” as used in section 10(b) of the Central Sales Tax
Act, 1956 clearly bring in the requirement of mens rea. Commr of Sales Tax, Uttar
Pradesh v Sanjiv Fabrics, (2010) 9 SCC 630.
• A provision of exemption from tax in a fiscal statute is to be strictly construed.
There is ample authority for the view that this principle applies to exemptions
granted in taxing law as well.
 Cases
• There are two opinions regarding construction of exemptions:
• one view says that an exemption in case of ambiguity should be liberally
construed in favour of the subject confining the operation of the duty;
• second view says that exemptions from taxation have a tendency to increase the
burden on the other members of society and should, therefore, be deprecated and
construed in case of doubt against the subject.
• Exemptions which are made with beneficent object should be liberally construed,
for example, exemption given for the purpose of developing urban or rural areas
for public good, exemption to give incentive to co-operative movement,
permitting concessional rates of tax for encouraging an industrial activity,
exemptions for encouraging investment in new machinery or plant etc. The correct
rule in construction of words of exemptions is to find out the sense of the words in
their context by reading the statute as a whole and by bearing in mind the purposes
of the statute and the consequences flowing from rival interpretations.
 Cases
• Exemptions, provisions and notifications issued under a taxing statute are to be
read along with other relevant provisions of the Act and construed consistently
with them. Exemptions may be either absolute or conditional. A conditional
exemption may make the tax eligibility at a later stage in a different form or
method. UOI v Jalyan Udyog, AIR 1994 SC 88
 CHARGING AND MACHINERY PROVISION
• Charging and Machinery Provision: The rule of construction of a charging section
is that before taxing any person, it must be shown that he falls within the ambit of
the charging section by clear words used in the section. No one can be taxed by
implication. A charging section has to be construed strictly. If a person has not
been brought within the ambit of the charging section by clear words, he cannot be
taxed at all. The Supreme Court in CWT vs. Ellis Bridge Gymkhana and Others
(1998) 229 ITR 1 held:
• “The Legislature deliberately excluded a firm or an association of persons from
the charge of wealth-tax and the word “individual” in the charging section cannot
be stretched to include entities which had been deliberately left out of the charge.
 CHARGING AND MACHINERY PROVISION
• The second and third stages in any tax laws are assessments of the liability
and recovery of dues, respectively. These provisions are machinery provisions
that provide for technicalities and procedures to be followed under the act to
make it functional. These provisions are to be interpreted liberally to
promote the intention of the legislature.
• The charging section which fixes the liability is strictly construed but that
rule of strict construction is not extended to the machinery provisions which
are construed like any other statute. The machinery provisions must, no doubt,
be so construed as would effectuate the object and purpose of the statute and not
defeat the same. (See Whitney vs. Commissioner of Inland Revenue (1926) AC
37, Commissioner of Income-tax vs. Mahaliram Ramjidas (1940) 8-ITR-442 (PC),
India United Mills Ltd. vs. Commissioner of Excess Profits Tax, Bombay (1955)
27-ITR-20 (SC); and Gursahai Saigal vs. Commissioner of Income-tax, Punjab
(1963) 48-ITR-1 (SC).
 CHARGING AND MACHINERY PROVISION
• In cases of contradiction whereby two meanings are possible, then one that is
reasonable and will assist in fulfilling the intention of the legislature and solving
the purpose for which the law was enacted is preferred. They are to be interpreted
in such a way so as to enforce and apply charging provisions smoothly.
• In Commissioner of Wealth Tax, Meerut vs. Sharavan Kumar Swarup and Sons
(1994), the Supreme Court, to clear the distinction amidst machinery provisions
and charging of tax provisions of tax statutes, cited the decision of Dixon, CJ, in
Maxwell v Murphy (1957). In this case, it was stated that “no suitor has nay vested
interest in the case of procedure, nor any right to complain, if the during the
litigation the procedure is changed, provided, of course, that no injustice is done”.
• In accordance with Halsbury’s Law of England, machinery provisions neither
impose charges nor extend or restrict a charge impose elsewhere.
 CHARGING AND MACHINERY PROVISION
• In the case of Associated Cement Company Ltd vs Commercial Tax officer, kota
and ors (1981), some of the provisions of Rajasthan Sales Tax Act, 1954 and
Central Sales Tax Act 1956 were in issue.
• The Court laid down that while interpreting the charging provisions or machinery
provisions, the court should keep in mind the distinction amidst them. Charging
provisions impose the charge on the tax, whereas machinery provisions provide
machinery for the quantification of the tax. It also provides machinery for levying
and collecting tax that are imposed.
• In Commissioner of Income Tax III vs Calcutta Knitwears Ludhiana (2014), the
court pronounced that, while interpreting the machinery provisions of a taxing
statues, the court must give effect to its purpose manifested in the statue.
Machinery provisions should not be interpreted in such a way that they defeat the
purpose and object of the statue. The court further said that if the intention to
impose liability is clear, it must apply a commonsense interpretation of machinery
provision so that the charge does not fail.
 Prospective and Retrospective
• Prospective or retrospective aspects of machinery provisions of tax statues
Any statue or laws generally have a prospective effect unless expressly mentioned about
their retrospective application or effect.
• The word retrospective comes from two latin terms, “retro” “specere”. Retro means
backwards, and specere means to look at. Here, the retrospective effect of taxing
provisions means the provision that is applied to subjects that have occurred in the past.
Whereas the word prospective comes from latin maxim, ‘Lex prospicit non respicit’ that
means the binding effect of any taxing provision is from present point in time.
• In Commissioner of Income Tax vs. Vatika Township Private Ltd. (2014), the Supreme
Court tried to clear out the confusion regarding prospective or retrospective application
of tax amendments.
• The Court quoted the paragraph from its own judgement delivered in Govind Das vs.
Income Tax officer (1975) that an established rule of interpretation is that a piece of
legislation, unless expressly or explicitly provided, has not to be intended to have
retrospective effects.
 Prospective and Retrospective
• This principles is based on the maxim ‘Lex prospicit non respicit’ which means
the law looks forward, not backwards.
• In the case of Commissioner of Income Tax, Mumbai vs M/s Essar Technologies
Ltd through its Manger (2018), the court observed similarly on the prospective or
retrospective effect of amendments as observed in supra judgements.
• The court held that the legislature has the power to legislate on prospective law
and retrospective law equally. The Court further observed that the fiscal statues or
remedial statues imposing liabilities are generally presumed to be interpreted as
having prospective effects. Since they may be impose new liability or obligation,
attract new disability or take away vested rights.
 Prospective and Retrospective
• It is a well-settled rule of interpretation hallowed by time and sanctified by judicial
decisions that, unless the terms of a statute expressly so provide or necessarily
require it, retrospective operation should not be given to a statute, so as to take
away or impair an existing right, or create a new obligation or impose a new
liability otherwise than as regards matters of procedure. The general rule as stated
by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in
several decisions of the Supreme Court as well as English courts is that “all
statutes other than those which are merely declaratory or which relate only to
matters of procedure or of evidence are prima facie prospective" and retrospective
operation should not be given to a statute so as to effect, alter or destroy an
existing right or create a new liability or obligation unless that effect cannot be
avoided without doing violence to the language of the enactment. If the enactment
is expressed in language which is fairly capable of either interpretation, it ought to
be construed as prospective only.
 Prospective and Retrospective
• In Hitendra Vishnu Thakur vs. State of Maharashtra, AIR 1994 S.C. 2623, the
Supreme Court held: (i) A statute which affects substantive rights is presumed to
be prospective in operation, unless made retrospective, either expressly or by
necessary intendment, whereas a statute which merely affects procedure, unless
such a construction is textually impossible is presumed to be retrospective in its
application, should not be given an extended meaning, and should be strictly
confined to its clearly defined limits. (ii) Law relating to forum and limitation is
procedural in nature, whereas law relating to right of action and right of appeal,
even though remedial, is substantive in nature; (iii) Every litigant has a vested
right in substantive law, but no such right exists in procedural law. (iv) A
procedural statute should not generally speaking be applied retrospectively, where
the result would be to create new disabilities or obligations, or to impose new
duties in respect of transactions already accomplished. (v) A statute which not
only changes the procedure but also creates new rights and liabilities shall be
construed to be prospective in operation, unless otherwise provided, either
expressly or by necessary implication. This principle stands approved by the
Constitution Bench in the case of Shyam Sunder vs. Ram Kumar AIR 2001 S.C.
2472.
 Prospective and Retrospective
• It has been consistently held by the Supreme Court in CIT vs. Varas International
P. Ltd. (2006) 283-ITR-484 (SC) and recently, that for an amendment of a statute
to be construed as being retrospective, the amended provision itself should
indicate either in terms or by necessary implication that it is to operate
retrospectively. Of the various rules providing guidance as to how a legislation has
to be interpreted, one established rule is that unless a contrary intention appears, a
legislation is presumed not to be intended to have a retrospective operation. The
idea behind the rule is that a current law should govern current activities. Law
passed today cannot apply to the events of the past. If we do something today, we
do it keeping in view the law of today and in force and not tomorrow’s backward
adjustment of it. Our belief in the nature of the law is founded on the bedrock, that
every human being is entitled to arrange his affairs by relying on the existing law
and should not find that his plans have been retrospectively upset. This principle
of law is known as lex prospicit non respicit : law looks forward not backward. As
was observed in Phillips vs. Eyre, a retrospective legislation is contrary to the
general principle that legislation by which the conduct of mankind is to be
regulated, when introduced for the first time to deal with future acts, ought not to
change the character of past transactions carried on upon the faith of the then
existing laws as observed in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 486.
 Prospective and Retrospective
• If a legislation confers a benefit on some persons, but without inflicting a
corresponding detriment on some other person or on the public generally, and
where to confer such benefit appears to have been the legislators' object, then the
presumption would be that such a legislation, giving it a purposive construction,
would warrant it to be given a retrospective effect. This exactly is the justification
to treat procedural provisions as retrospective. In the Government of India & Ors.
vs. Indian Tobacco Association, (2005) 7-SCC-396, the doctrine of fairness was
held to be a relevant factor to construe a statute conferring a benefit, in the context
of it to be given a retrospective operation. The same doctrine of fairness, to hold
that a statute was retrospective in nature, was applied in the case of Vijay vs. State
of Maharashtra (2006) 6-SCC-289. It was held that where a law is enacted for the
benefit of community as a whole, even in the absence of a provision the statute
may be held to be retrospective in nature. Refer CIT vs. Township P. Ltd. (2014)
367-ITR-466 at 487. In my view, in such circumstances, it would have a
retroactive effect.
• In the case of CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42-ITR-589
(SC), the court held that as the liability to pay tax is computed according to the
law in force at the beginning of the assessment year, i.e., the first day of April, any
change in law affecting tax liability after that date though made during the
currency of the assessment year, unless specifically made retrospective, does not
apply to the assessment for that year.
 Prospective and Retrospective
• Tax laws are clearly in derogation of personal rights and property interests and
are, therefore, subject to strict construction, and any ambiguity must be resolved
against imposition of the tax. There are three concepts: (i) prospective amendment
with effect from a fixed date; (ii) retrospective amendment with effect from a
fixed anterior date; (iii) clarificatory amendments which are retrospective in
nature; and (iv) an amendment made to a taxing statute can be said to be intended
to remove “hardships” only of the assessee, not of the Department. In ultimate
analysis in CIT vs. Township P. Ltd. (2014) 367- ITR-466 at 496-497 (SC),
surcharge was held to be prospective and not retrospective.
• The presumption against retrospective operation is not applicable to declaratory
statutes. In determining, the nature of the Act, regard must be had to the substance
rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be
without object unless construed retrospectively. An explanatory Act is generally
passed to supply an obvious omission or to clear up doubt as the meaning of the
previous Act.
• It is well settled that if a statute is curative or merely declaratory of the previous
law, retrospective operation is generally intended. An amending Act may be
purely declaratory to clear a meaning of a provision of the principal Act, which
was already implicit. A clarificatory amendment of this nature will have
retrospective effect. It is called as retroactive.
 INTERPRETATION OF DOUBLE TAXATION
AVOIDANCE
AGREEMENTS
• The principles set out in Vienna Convention as agreed on 23rd May, 1969 are
recognised as applicable to tax treaties. Rules embodied in Articles 31, 32 and 33 of
the Convention are often referred to in interpretation of tax treaties. Some aspects of
those Articles are good faith; objects and purpose and intent to enter into the treaty.
These basic principles need to be kept in mind while construing DTAA.
• Maxwell on the Interpretation of Statutes mentions the following rule, under the title
‘presumption against violation of international law’: “Under the general presumption
that the legislature does not intend to exceed its jurisdiction, every statute is
interpreted, so far as its language permits, so as not to be inconsistent with the
comity of nations or the established rules of international law, and the court will
avoid a construction which would give rise to such inconsistency, unless compelled
to adopt it by plain and unambiguous language. But if the language of the statute is
clear, it must be followed notwithstanding the conflict between municipal and
international law which results”.
 INTERPRETATION OF DOUBLE TAXATION
AVOIDANCE
AGREEMENTS
• In John N. Gladden vs. Her Majesty the Queen, the Federal Court
observed:"Contrary to an ordinary taxing statute, a tax treaty or convention
must be given a liberal interpretation with a view to implementing the true
intentions of the parties. A literal or legalistic interpretation must be avoided
when the basic object of the treaty might be defeated or frustrated insofar as
the particular item under consideration is concerned." The Federal Court in N.
Gladden vs. Her Majesty the Queen 85 D.T.C. 5188 said: “"The non-resident
can benefit from the exemption regardless of whether or not he is taxable on
that capital gain in his own country.
• If Canada or the U.S. were to abolish capital gains completely, while the other
country did not, a resident of the country which had abolished capital gains
would still be exempt from capital gains in the other country."
 INTERPRETATION OF DOUBLE TAXATION
AVOIDANCE
AGREEMENTS
• An important principle which needs to be kept in mind in the interpretation of the
provisions of an international treaty, including one for double taxation relief, is
that treaties are negotiated and entered into at a political level and have several
considerations as their bases. Commenting on this aspect of the matter, David R.
Davis in Principles of International Double Taxation Relief, points out that the
main function of a Double Taxation Avoidance Treaty should be seen in the
context of aiding commercial relations between treaty partners and as being
essentially a bargain between two treaty countries as to the division of tax
revenues between them in respect of income falling to be taxed in both
jurisdictions.
• The benefits and detriments of a double tax treaty will probably only be truly
reciprocal where the flow of trade and investment between treaty partners is
generally in balance.
 INTERPRETATION OF DOUBLE TAXATION
AVOIDANCE
AGREEMENTS
• Where this is not the case, the benefits of the treaty may be weighted more in
favour of one treaty partner than the other, even though the provisions of the treaty
are expressed in reciprocal terms. This has been identified as occurring in relation
to tax treaties between developed and developing countries, where the flow of
trade and investment is largely one way. Because treaty negotiations are largely a
bargaining process with each side seeking concessions from the other, the final
agreement will often represent a number of compromises, and it may be uncertain
as to whether a full and sufficient quid pro quo is obtained by both sides." And,
finally, "Apart from the allocation of tax between the treaty partners, tax treaties
can also help to resolve problems and can obtain benefits which cannot be
achieved unilaterally.
 INTERPRETATION OF DOUBLE TAXATION
AVOIDANCE
AGREEMENTS
• The Supreme Court in Vodafone International Holdings B.V. vs. Union of India
(2012) 341-ITR-1 (SC) observed: “The court has to give effect to the language of
the section when it is unambiguous and admits of no doubt regarding its
interpretation, particularly when a legal fiction is embedded in that section. A
legal fiction has a limited scope and cannot be expanded by giving purposive
interpretation particularly if the result of such interpretation is to transform the
concept of chargeability. It also reiterated and declared “All tax planning is not
illegal or illegitimate or impermissible”. McDowell‘s case has been explained and
watered down.
• Tax treaties are intended to grant tax relief and not to put residents of a contracting
country at a disadvantage vis-a-vis other taxpayers. Section 90(2) of the
Income-tax Act lays down that in relation to the assessee to whom an agreement
u/s. 90(1) applies, the provisions of the Act shall apply to the extent they are more
beneficial to that assessee.
 INTERPRETATION OF DOUBLE TAXATION
AVOIDANCE
AGREEMENTS
• Circular No. 789 dated April 13, 2000 (2000) 243-ITR-(St.) 57 has been declared as
valid in Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 ) SC) at 101.
The Supreme Court in C.I.T. vs. P.V.A.L. Lulandagan Chettiar (2004) 267- ITR-657
(SC) has held : “In the case of a conflict between the provisions of this Act and an
Agreement for Avoidance of Double Taxation between the Government and a foreign
State, the provisions of the Agreement would prevail over those of the Act.
• The Jaipur Bench of I.T.A.T. (TM) in Modern Threads Case 69-ITD-115 (TM) relying
on the Circular dated 2.4.1982 held that the terms of DTAA prevail. It also observed:
“The tax benefits are provided in the DTAA as an incentive for mutual benefits.
The provisions of the DTAA are, therefore, required to be construed so as to
advance its objectives and not to frustrate them. This view finds ample support from
the decision of the Hon’ble Supreme Court in the case Bajaj Tempo Ltd. vs. CIT
196-ITR-188 and CIT vs. Shan Finance Pvt. Ltd. 231-ITR-308”. The Bangalore Bench in
IBM World Trade Corp. vs. DIT (2012) 148 TTJ 496 held that the provisions of the Act
or treaty whichever is beneficial are applicable to the assessee.
 Evasion of Statutes
• In the words of Lindley LJ:
• It is permissible to evade an Act of Parliament in the sense that a person may
not do that which the Act prohibits, but he is free to do anything which though
equally advantageous to him as that which is prohibited is nevertheless outside
the prohibition, penalty or burden imposed by the Act.
• If a statute prohibits the doing of A, the courts are powerless to extend the
prohibition to cover B when the legal significance of A and B are different and
distinct even if both A & B in substance produce similar results.
• It is not permissible to evade an act of parliament by resorting to a fraudulent
device or by covering the reality by a non-genuine transaction, for example, if
a person does an Act which is really A, but covers the reality by giving to it the
colour B, the courts will go behind the form and enforce the prohibition.
 Evasion of Statutes
• When a genuine transaction not prohibited by law reduces tax liability, it is not an
attempt to evade tax but only a legal device to reduce tax liability to which every tax
payer is entitled. When a method or device is adopted to reduce tax liability, its
effectiveness depends not upon considerations of morality but on the operation of the
taxing Act. CIT v Sivakasi Match Exporting Co, AIR 1964 SC 1813, p 1817 (para 7).
• In McDowell & Co Ltd v Commercial Tax Officer, ((1985) 3 SCC 230.) Chinnappa
Reddy J observed:
• …In our view, the proper way to construe a taxing statute, while considering a
device to avoid tax, is not to ask whether the provisions should be construed literally
or liberally, nor whether the transaction is not unreal and not prohibited by the
statute, but whether the transaction is a device to avoid tax, and whether the
transaction is such that the judicial process may accord its approval to it—. It is
neither fair nor desirable to expect the legislature to intervene and take care of every
device and scheme to avoid taxation. It is up to the Court to take stock to determine the
nature of the new and sophisticated legal device to avoid tax and consider whether the
situations created by the devices could be related to the existing legislation with the aid
of emerging techniques of interpretation.
 Evasion of Statutes
• In Furniss (Inspector of Taxes) v Dawson, [1984] 1 All ER 530, p 543 (HL)
(Lord Brightman), the conditions for the application of the new approach were laid
down:
• (i)There must be a preordained series of transactions or one single composite
transaction, and
• (ii)There must be steps inserted which have no commercial (business) purpose
apart from the avoidance or deferment of a liability to tax.
• The view of Lord Keith regarding the nature of the principle of new
approach is pertinent here. In his words:
• The court must first construe the relevant enactment in order to ascertain its
meaning; it must then analyse the series of transactions in question, regarded
as a whole, so as to ascertain its true effect in law; and finally it must apply the
enactment as construed to the true effect of the series of transactions and so
decide whether or not the enactment was intended to cover it.
 Evasion of Statutes
• The most important feature of the principle is that the series of transaction is
to be regarded as a whole. In ascertaining the true legal effect of the series it is
relevant to take into account, if it be the case, that all the steps in it were
contractually agreed in advance or had been determined on in advance by a
guiding will which was in a position, for all practical purposes, to secure that all
of them were carried through to completion. It is also relevant to take into account,
if it is the case, that one or more of the steps were introduced into the series
with no business purpose other than the avoidance of the tax. Craven
(Inspector of Taxes) v White, [1988] 3 All ER 495 (HL).
 Evasion of Statutes
• Tax evasion refers to the illegal act of deliberately avoiding tax payments through
fraudulent means. This includes underreporting income, inflating deductions,
concealing assets, or falsifying financial records. Tax evasion constitutes a criminal
offence and carries severe legal penalties such as fines, imprisonment, and reputational
damage.
• Key Characteristics of Tax Evasion
• Illegality: Tax evasion is a direct violation of tax laws and is considered a criminal
offence. Authorities actively pursue tax evaders to ensure compliance and uphold the
integrity of the tax system.
• Intent: Tax evasion involves a deliberate effort by taxpayers to mislead tax authorities
and avoid paying their rightful dues. It requires conscious and intentional deceit, where
taxpayers knowingly engage in fraudulent practices to reduce their tax liabilities.
• Common Methods: Some of the common methods used in tax evasion include:
• Underreporting income to lower taxable earnings.
• Falsifying financial documents or inflating deductions to reduce tax obligations.
• Concealing assets in offshore accounts to evade tax liabilities.
 Evasion of Statutes
• Consequences of Tax Evasion
• The consequences of tax evasion are severe and can include:
• Civil Penalties: Under the IT Act, individuals found to have concealed income or
furnished inaccurate particulars of income may face civil penalties. These
penalties can be a percentage of the tax sought to be evaded and are specified
under Sections 270A, 270AA, and 271 of the IT Act.
• Underreporting and Misreporting of Income: Section 270A (1) of the IT Act
addresses underreporting and misreporting of income. Individuals who underreport
their income may face a penalty equal to 50% of the tax payable on the
underreported income. If the underreported income is due to misreporting, the
penalty can be as high as 200% of the tax payable on the underreported income.
• Failure to Keep Records: Section 271A deals with the failure to maintain proper
records. Taxpayers who fail to keep the necessary records as required by law may be
subject to penalties to the extent of INR 25,000
 Evasion of Statutes
• Consequences of Tax Evasion
• Prosecution and Criminal Penalties:
• Tax Evasion can lead to criminal prosecution if tax authorities believe there has
been a wilful attempt to evade taxes. Criminal proceedings under Section 276C of
the IT Act can result in imprisonment ranging from three months to seven years,
along with fines. In serious cases where the amount of tax evaded exceeds a certain
threshold, the punishment can be enhanced, leading to higher terms of imprisonment.
• Asset Attachment: Provisional attachment of property in India is given in Section
281 of the Income Tax Act, 1961. Asset attachment is a significant penalty for Tax
Evasion in India, allowing tax authorities to seize and sell the assets of individuals
who have evaded taxes to recover outstanding dues. The Income Tax Act, 1961,
empowers tax authorities to attach various types of properties, both movable and
immovable, including bank deposits, shares, securities, insurance policies, and
immovable properties. Before attaching any property, tax authorities must serve
a notice to the taxpayer, specifying the amount owed and the reasons for
attachment. Once the property is attached, it can be auctioned, and the proceeds are
used to settle the tax liabilities.
 Evasion of Statutes
• However, if the taxpayer pays the taxes along with penalties and interest, the attached
property will be released from attachment. Asset attachment is a crucial tool used by tax
authorities to ensure compliance with tax laws and to recover unpaid taxes from individuals
who engage in Tax Evasion.
• Black Money Act: The Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015, provides for stringent penalties and prosecution for
undisclosed foreign income and assets.
• Tax Liability: The Black Money Act prescribes a flat rate of 30% as tax liability on
undisclosed incomes and assets held in foreign countries. Taxpayers with undisclosed
foreign income are subject to this tax rate.
• Penalties: Individuals found to have undisclosed foreign income or assets can face
penalties under the Black Money Act. Section 41 of the Act provides for a penalty
equivalent to three times the black money tax. This means that in cases where undisclosed
amounts are identified, a total of 120% of the undisclosed amount becomes payable
(30% tax plus a penalty equivalent to three times the tax).
• Criminal Prosecution: The Black Money Act allows for criminal prosecution in cases of
non-disclosure of foreign assets in income tax returns or evasion of black money tax.
Section 50 of the Act provides for criminal prosecution for non-disclosure of foreign
assets, while Section 51 covers prosecution for evading black money tax. These criminal
proceedings can lead to imprisonment ranging from three years to ten years, along with
fines.
 Evasion of Statutes
• Other Liabilities
• Failure to file income tax returns on time can result in penalties, with late fees
ranging from Rs. 5,000 to Rs. 10,000. Non-compliance with Tax Deducted at Source
(TDS) regulations can lead to fines ranging from Rs. 10,000 to Rs. 1,000,000,
depending on the violation. Additionally, failure to pay tax as per self-assessment or
not complying with TDS regulations can result in penalties up to the total amount of
tax owed to the government.
 Evasion of Statutes
• Landmark Case Laws on Tax Evasion
• Commissioner of Income Tax vs. Ramkanth Mohanlal Gandhi (1978)
• In Commissioner of Income Tax vs. Ramkanth Mohanlal Gandhi case, the Supreme
Court of India established that tax evasion requires “wilful” intent, meaning that the
taxpayer must have knowingly committed fraudulent actions. The court ruled that
ignorance of tax laws or inadvertent errors do not qualify as tax evasion. This
judgment set a crucial precedent in distinguishing between honest mistakes and
deliberate fraud in tax matters.
 Evasion of Statutes
• State of Gujarat vs. Rameshchandra Ramniklal Shah (1983)
• State of Gujarat vs. Rameshchandra Ramniklal Shah clarified the concept of “gross
negligence” in tax evasion. The court defined gross negligence as a conscious and
deliberate disregard for tax laws, thereby setting a high threshold for the imposition
of penalties. The ruling emphasised that penalties should only be applied when there
is clear and deliberate intent to evade taxes, protecting taxpayers from unjust
punitive actions for minor or unintentional errors.
• Balaji vs Income-Tax Officer (1961),
• This case emphasized the importance of preventing tax evasion through legislation
aimed at the prevention of tax evasion. The court upheld the validity of laws designed
to prevent tax evasion, ensuring that the classification for such laws is rational and
related to the objective of preventing tax evasion.
 Evasion of Statutes
• What is Tax Avoidance?
• Tax avoidance, on the other hand, is the practice of legally minimising tax liabilities
by exploiting existing tax laws and loopholes. Unlike evasion, tax avoidance operates
within the legal framework but can sometimes be seen as ethically questionable.
• Key Characteristics of Tax Avoidance
• Legality: Tax avoidance is a legal practice as long as it adheres to existing tax
regulations. It involves strategic financial planning to reduce tax liabilities by making
use of available deductions, exemptions, and incentives allowed by the law. As
taxpayers operate within the legal framework, they can structure their financial affairs
in a way that minimises tax obligations without violating any regulations.
 Evasion of Statutes
• Intent: Tax avoidance is characterised by the use of legal provisions to minimise tax
obligations. While it is a lawful strategy, it can sometimes be perceived as aggressive,
as it exploits gaps and loopholes within tax laws. Despite staying within the
boundaries of legality, the ethical considerations of tax avoidance often come under
scrutiny, with critics arguing that it deprives governments of much-needed revenue
for public services.
• Common Methods:
• Taxpayers employ various strategies to legally minimise their tax burdens, including:
• Utilising tax deductions and credits: Making the most of available tax benefits, such
as claiming deductions for business expenses, home loans, or charitable donations.
• Structuring transactions: Arranging financial transactions in ways that take advantage
of lower tax rates or benefits in specific jurisdictions.
• Income shifting: Moving income to lower-tax jurisdictions or entities to reduce
overall tax liabilities. This is commonly used by multinational corporations to
optimise their global tax obligations.
 Evasion of Statutes
1. McDowell & Co. Ltd. v. Commercial Tax Officer (1985)
This case is a significant ruling in Indian tax law that addressed the distinction between
TE and TA. In this case, McDowell & Company, a liquor manufacturer, paid sales tax
under the Andhra Pradesh General Sales Tax Act, 1957, based on turnover that
excluded excise duty. However, the Sales Tax Authorities contested this position,
leading to a legal battle that reached the Supreme Court.
The Supreme Court determined that excise duty, as defined in section 2(10) of the A.P.
Excise Act, 1968, is applicable to the manufacture of liquor, and the duty must be paid
before the liquor can be removed from the distillery. Buyers of Indian liquor from
McDowell's distillery obtained distillery passes for liquor release after payment.
McDowell's accounting records did not reflect excise duty paid by purchasers.
Consequently, McDowell paid sales tax under the Andhra Pradesh General Sales Tax
Act, 1957, based on turnover excluding excise duty.
 Evasion of Statutes
The court revisited its earlier decision in McDowell's case [1977] 1 SCR 914 and
concluded that excise duty is directly linked to manufacturing and constitutes part of
turnover under the Sales Tax Act. It emphasized that tax planning within legal
bounds cannot constitute TA. Additionally, the court reiterated that a colourable
device within legal confines cannot be considered part of tax planning. Moreover, the
court clarified that the Supreme Court cannot entertain pleas not raised in the High
Court.
Subsequent rulings have analysed the McDowell case concerning double TA
agreements (DTAAs). The court emphasized that if the DTAA intended to exclude
nationals of third states, it should have explicitly stated so. Furthermore, the court
asserted that the judiciary is responsible for assessing such transactions' legitimacy. It
referred to the US-India Double TA Convention, which expressly prohibits third-state
nationals from benefiting from the agreement. The court noted that such transactions
were envisaged by the legislature, and the India-Mauritius DTAA's failure to address
them explicitly suggests legislative acceptance of non-residents exploiting the
agreement to their advantage.
 Evasion of Statutes
MakeMyTrip (India) Pvt Ltd vs Union of India (W.P.(C) 525/2016)
The MakeMyTrip (India) Pvt. Ltd. case of TE involved the Directorate General of
Centra Excise Intelligence (DGCEI) alleging that the company had evaded service tax
by no depositing the tax collected from customers for hotel bookings. The DGCEI had
initiate coercive measures, including the arrest of the Vice President (Finance) of
MakeMyTrip, Mr M.K. Pallai, on 8th January 2016, and searches of the premises of
other online travel providers. The Company challenged the DGCEI's actions, claiming
that they had been cooperating with the investigation and that the DGCEI was aware of
their activities and service tax position since 2006. The company also argued that there
was no need for the arrest of Mr. Pallai, as they were cooperating with the investigation
and providing the required information. The ruling by the court was as follows:
• Suspicion of TE: The judgment mentions that arrests were made by the Directorate
General of Central Excise Intelligence (DGCEI) based on suspicions of TE or failure to
deposit service tax collected. However, the court emphasized that such arrests should
not be made without following due maneuver and without proper determination of
liability.
 Evasion of Statutes
• Procedure for TE Cases: The court outlined the procedural requirements for
addressing cases of TE. It stressed the need for issuing show-cause notices,
conducting inquiries, and adhering to the provisions of the Finance Act, 1994 (FA)
before taking coercive measures like arrests.
• Misuse of Arrest Powers: The judgment criticizes the DGCEI for acting hastily and
recklessly without following the prescribed procedure, suggesting that such actions
were based on suspicions rather than concrete evidence of tax evasion.
Relevance: It addresses the procedural aspects and safeguards to be followed when
dealing with cases involving suspected tax evasion.