Strict Interpretation of Taxation Statutes

Q. What do you understand by strict interpretation of taxing statutes? Explain with the help of leading cases. [20 marks - 2020] 

Q. What do you understand by the strict interpretation of tax laws? Explain with the help of case laws. [20 marks - 2019]

Strict Interpretation of Taxation Statutes

Rule of Strict Interpretation 

Strict rule of interpretation is one of the principles used to interpret financial and penal statutes. According to this rule, plain, clear and direct meaning is given to words which are commonly used by the general public. Court cannot give particular meaning to a word which is not clear by making a presumption that particular meaning is the intention of the legislature. Court cannot under the guise of possible or likely intention of the legislature, give meaning to the words which are not clear and where contextual meaning cannot be made out. 

Rule of Interpretation applicable to Taxation Statute

Taxation statute is a fiscal statute which imposes the pecuniary burden on the taxpayer. So such statutes are construed strictly. Plain, clear and direct grammatical meaning is given. Where there are two possible outcomes then that interpretation is given which is in favour of assessee. 

A tax is imposed for public purpose for raising general revenue of the state. A taxing statute is to be strictly construed. Lord Hasbury and Lord Simonds stated: "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."

Reasons for Applying of Strict Rule on Taxation Statute

1. Creates financial liability: Taxes creates a financial liability on the taxpayer and thus, is considered as penalty on the taxpayer. Thus, unless the imposition of tax is clearly backed by law, no tax can be imposed. 

2. Eradicate loopholes: It is possible that the assessee might use some shortcomings in the law as a loophole and take advantage of it. As tax results in pecuniary burden so the benefit of doubt is given to assessee in case of any contradictions.

3. No scope of presumptions: Strict rule is applicable to taxation statutes, so courts are bound to give clear and plain meaning to the words. There is no presumption of tax or intendment of the legislature to impose tax unless clearly and specifically provided. 

Case References

1. H. H. Lakshmi Bai vs. CIT - [(1994) 206 ITR 688, 691 (SC)].

2. ACIT vs. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC)

3. Associated Cement Co. Ltd. vs. Commercial Tax Officer AIR 1981 SC 1887

4. A. V. Fernandez vs. State of Kerala, [AIR 1957 SC 657]