Advocate Harsh M. Kapadia has dealt with the important question whether after the judgement of the Constitutional Bench in Dilip Kumar (2018) 9 SCC 1, the law laid down in Vegetable Products 88 ITR 192 (SC) that where there is ambiguity in a taxing provision, the benefit of the doubt should go to the taxpayer is overruled. The author has made out a convincing case that beneficial exemption provisions are not affected by the judgement and that they continue to deserve a liberal interpretation so as to advance the object of the legislature
“If two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted.” These famous words of Justice K.S. Hegde (as His Lordship then was) in the decision of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd.  88 ITR 192 are probably the first words a professional, stepping into the world of taxation, would have embraced. This legal principle has been around for over decades and is a well-accepted rule of construction.
However, this rule seems to have been overturned by the 5-Judge Constitutional Bench of the Hon’ble Supreme Court in the case of Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Company and Ors. (2018) 9 SCC 1, causing a terrific hue and cry amongst the tax payers and tax professionals. Though delivered under the Customs Act, 1962, the principle laid down has far reaching impact across all taxing statutes, including the Income-tax Act, 1961, and thus, causing apprehension.
In the context of this judgment, an attempt has been made in this article to analyse the nuances of the legal principles contained in interpretation of taxing statutes and to answer the question as to whether the Constitutional Bench has indeed unsettled the law laid down in Vegetable Products Ltd. (supra).
Before beginning this journey, one should bear in mind that a statute is a will of the Legislature and an act of Legislature cannot foresee all types of situations and all types of consequences. Hence, the principles of interpretation of statutes come in handy, so as to bring out the intent of the Legislature. Every taxing statutes comprises different kinds of provisions, having distinct and specific nature and purpose. For example, charging provisions, machinery or computational provisions, exemption provisions, penal provisions, etc. Different rules of interpretation apply for different kinds of provisions, so as to decipher its meaning, scope and extent.
ISSUE BEFORE THE HON’BLE SUPREME COURT
In Dilip Kumar & Company’s case, the Constitutional Bench was setup to examine the correctness of the ratio of the 3-Judge Bench decision in the case of Sun Export Corporation v. CC (1997) 6 SCC 564 (‘Sun Export Case’), namely the rule of construction to be applied while interpreting a tax exemption provision / notification when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied.
The Division Bench in Dilip Kumar & Co’s case was tackling the question as to whether the assessee was eligible for claiming benefit of concessional rate of import duty in respect of a consignment of ‘Vitamin E50 powder’ (‘animal feed supplement’), in terms of a notification. The revenue authorities contended that the notification was applicable only to ‘animal feed’. The assessee, on the other hand, argued that the concessional duty rate had to be extended to ‘animal feed supplement’ as well, in light of the Sun Export Case, wherein it was held that ‘in case of two views possible, it is well-settled, that one favourable to the assessee in matters of taxation has to be preferred’.
It is noteworthy that the Hon’ble Supreme Court has in its judgment used the words exemption notification and exemption provisions interchangeably and their findings apply to both the forms of a statute.
CONCLUSION OF THE HON’BLE SUPREME COURT
After considering a catena of precedents, the Constitutional Bench answered the above question in the following manner:
“(1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.
(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.
(3) The ratio in Sun Export Case (supra) is not correct and all the decisions which took similar view as in Sun Export Case (supra) stands overruled.”
Exemption Notification / Provision – Strict Construction
The Hon’ble Supreme Court based its conclusion on legal as well as economic rationale. According to the Constitutional Bench, in light of Article 265 of the Constitution of India, it is a manifest that taxation statute has to be interpreted strictly because the State cannot, at their whims and fancies, burden the citizens without authority of law. Before coming to this conclusion, the Hon’ble Supreme Court studied a plethora of rulings on the subject. Treatise on ‘Principles of Statutory Interpretation’ by Justice G. P. Singh, (14th ed. 2016) was referred to by the Bench for the principle that 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.
Giving an economic reasoning, the Apex Court also expressed that exemptions from taxation tend to increase the burden on the other unexempted class of tax payers and therefore, a person claiming exemption has to establish that his case squarely falls within the exemption notification, and while doing so, a notification should be construed against the subject in case of ambiguity. A liberal construction of an exemption notification would inequitably shift the burden to the other tax payers, which is undesirable in view of the Hon’ble Supreme Court. Reference was made to an old English case of Commissioner of Inland Revenue v. James Forrest 15 AC 334 (HL) which was rendered as early as the year 1890. The principle laid down in this case has been followed on several occasions while construing the taxing statutes, many of which are referred by the Constitutional Bench.
Stages of Interpretation for Exemption Notification / Provision
Taking the discussion one step forward, the Hon’ble Supreme Court held, in light of various judicial precedents, that the interpretation of an exemption notification might require a combination of strict as well as liberal interpretation, depending on the stage of applicability which is being interpreted. It stated that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption notification can be condoned if there is sufficient compliance with the main requirements. In other words, it reiterated that at the stage when the eligibility of an assessee under an exemption notification is being examined, strict rule of interpretation is to be followed and, once the assessee falls within the ambit of the notification, a liberal construction should be followed.
Charging Provisions vs. Exemption Provisions
One highly significant aspect has been explained by the Hon’ble Supreme Court while concluding the above. The Court has very lucidly brought out the distinction between interpretation of a charging section of a taxing statute and of an exemption notification / clause. It has held that any ambiguity in a taxing statute should enure to the benefit of the subject / assessee. On the contrary, any ambiguity in the exemption clause must be conferred in favour of revenue and such exemption should be allowed to be availed only to those subjects / assesses who demonstrate that a case for exemption squarely falls within the parameters enumerated in the notification and they satisfy all the conditions precedent for availing exemption.
FATE OF CIT v. VEGETABLES PRODUCTS LIMITED
Thus, as one reads the finer text of the judgment of Dilip Kumar and Company’s case, there can hardly be any doubt that this case does not bring about any change in law on issue involved. The Hon’ble Supreme Court has neither unsettled the settled nor laid down something which was not already dealt with by the Apex Court. In fact, the Bench has clearly expressed that the status quo of law in this regard has remained unchanged since the past 63 years:
“28. … Be that as it is, in our country, at least from 1955, there appears to be a consistent view that if the words in a taxing statute (not exemption clause) are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and it does not matter if the taxpayer escapes the tax net on account of Legislatures’ failure to express itself clearly.”
Based on the above, one can say with certainty that the principle laid down by the judgment of Vegetable Products Ltd. (supra) has not been fiddled with by the Constitution Bench. It has merely reiterated the well-established position that charging provisions and exemption notifications should be interpreted strictly and in case of any ambiguity, assessee can take benefit of ambiguity in charging provisions but the benefit of ambiguity must be interpreted in favour of revenue in case of an exemption notification. Principle upheld in Dilip Kumar’s case also do not impact rules of construction of penal provisions, since it a trite that an interpretation, that avoids penalty has be preferred.
When declaring that the Sun Exports Case is “overruled”, the Apex Court has certainly not overturned the principle laid down by that case, but has denied the application of the said principle to the facts of that case, namely interpretation of exemption notification.
WHAT ABOUT BENEFICIAL PROVISIONS?
Apprehensions have also grown amongst the tax payers as to whether the principle upheld by the Hon’ble Supreme Court is applicable to all kinds of exemption provisions / notifications. The answer to this, is perhaps in the negative.
Laying down a solitary test for interpreting all types of exemption notifications / provisions, is certainly detrimental. It will be appreciated that though all exemption provisions provide for exception from levy of tax, but there are some exemption provisions which aim in providing certain incentives to assessees in order to achieve a larger goal for the nation. The entire purpose of such exemption provisions is not to exempt from the levy of tax, but to encourage / provide incentive to assessees, for the betterment of the State.
Exemption Beneficial Provision vs. Exemption Non-Beneficial Provision
Therefore, in view of the author, there are 2 separate species of exemption provisions. One can consider them as ‘Exemption Beneficial Provisions’ and ‘Exemption Non-Beneficial Provisions’. Although, the ultimate goal of both is to give concession to the tax payer, nevertheless, intention for enactment is separate and distinct. Take for example, provisions of section 10(2A) and section 10AA of the Income-tax Act, 1961. The former gives an exemption from tax to the partner on receipt of distributed profits in order to avoid double taxation, as the same profits have already been taxed in the hands of the partnership firm. Here, there is no benefit or incentive given so as to give an exemption. On the other hand, section 10AA encourages assessee to set up units in SEZs for the purpose of growth in exports and with a view to attract foreign and domestic investments. The intention of introducing this exemption provision is to provide incentives to the assessee with a greater aim of development of India. Thus, this section should be considered as an ‘Exemption Beneficial Provision’, while the former be regarded as an ‘Exemption Non-Beneficial Provision’. Under the Income-tax Act, 1961, provisions sections 10(2), 10(2A), 10(34), 10(50), are few illustrations of an ‘Exemption Non-Beneficial Provisions’ whereas provisions of sections 10B, 10AA, 32AD, 54F, 80G, 80-IA, 80-IB, 80-IE, etc. can be considered as ‘Exemption Beneficial Provisions’.
It is a well-established rule of construction that where the object of an exemption provision is to give some incentive or benefit to an assessee, then such provisions are be construed liberally, wherein an interpretation which accomplishes the legislative intent should be adopted. A narrow construction of the exemption provisions which defeats the object cannot be preferred and it has to be given a wider construction which promotes the object. This aspect has been analyzed in great detail by the Hon’ble Supreme Court on numerous occasions. See for example Bajaj Tempo Limited v. CIT  196 ITR 188 (dealing with section 15C of the Indian Income-tax Act, 1922 [corresponding to section 80J of the Income-tax Act, 1961]), CIT v. Shaan Finance (P.) Ltd  231 ITR 308 (dealing with section 32A of the Income-tax Act, 1961), CIT v. Straw-Board Manufacturing Co.  177 ITR 431 (dealing with Section 80E of the Income-tax Act, 1961).
DOES THE JUDGMENT OF DILIP KUMAR’S CASE APPLY TO EXEMPTION BENEFICIAL PROVISIONS?
The question before the Constitutional Bench in Dilip Kumar’s case was the rule of construction to be applied while interpreting Exemption Notification No. 20 of 1999 dated 28-02-1999 issued under section 25(1) of the Customs Act, 1962 for concessional import duty rates. This notification is neither a beneficial provision nor does it incentivize the assessees / the nation.
Now to say that Dilip Kumar’s case applies even to beneficial provisions, will indeed frustrate the whole purpose and intent of such beneficial provisions. Take for example, an assessee is encouraged, by been given benefits under section 80-IE of the Income-tax Act, 1961 for setting up an industrial unit in the North Eastern States for the overall growth and development of those states. If the principle upheld in Dilip Kumar’s case is applied to interpret provisions of section 80-IE as well, then the assessees will naturally be disheartened from setting up a unit in those states and eventually, defeat the entire purpose of enacting provisions of the said section. Reading the judgement in the manner indicated above is therefore, neither called for, nor desirable.
Authoritative text of Justice G. P. Singh
Treatise on ‘Principles of Statutory Interpretation’ by Justice G.P. Singh, (14th ed. 2016) (Page No. 905 – 907) has toojuxtaposedthe rule of interpretation in case of different types of exemption provisions. It expresses that in case of any ambiguity while interpreting an exemption provision / notification which has a beneficent object, then the same should be construed liberally. For example, beneficial provisions / notifications having their purpose as encouragement or promotion of certain activities or to encourage production or investment in new machinery or plant or a new industrial unit or setting up an industry in the backward area in terms of the industrial policy, have to be interpreted liberally.
Therefore, depending on the nature and scope of an ‘exemption provision’ of a taxing statute, rules of construction may vary. As rightly put by the Constitutional Bench, the “purpose of interpretation is essentially to know the intention of the Legislature”. Thus,having a single rule to construe all kinds of exemption provisions is not entirely correct. Exceptions to the levy of tax for providing incentives, have to be given a beneficial construction so as to bring out the “intention of the Legislature” and not to defeat the purpose of such exemption. Laying down that exemption provisions (in totality) are to be construed strictly and the benefit of doubt, if any should go against the assessee, may turn out to be an incorrect principle.
FATE OF BAJAJ TEMPO LIMITED v. CIT & OTHER SIMILAR DECISIONS
Accordingly, it is safe to say that ratio laid down in the case of Bajaj Tempo Ltd. (supra) and other similar decisions cited above, has also not been reversed or overturned (decisions not having been even referred to in the judgment of the Constitutional Bench). In Bajaj Tempo Ltd. (supra), the issue before that bench of the Supreme Court was interpretation of section 15C of the Income-tax Act, 1922 (corresponding to section 80J of the Income-tax Act, 1961). The Bench in that case has categorically held that section15Cwas “intended for promoting economic growth”. Hence, based on the discussion above principle upheld in Dilip Kumar’s case will not apply for such beneficial provisions.
It will also not be out of place to mention here that observations in Dilip Kumar’s case cannot be read divorced from its context, (rule of construction for ‘Exemption Non-Beneficial Provision’) and therefore, cannot be applied universally for all kinds of exemption provisions. The principle of law laid down in CIT v. Sun Engg. Works (P.) Ltd.  198 ITR 297 (SC) is quite apt in this scenario. In that case, it was held:
“37. … It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings.”
Nonetheless, revenue authorities may seek to apply the law laid down in Dilip Kumar’s case to deny all exemption provisions including beneficial deductions / exemptions. Assessee on the other hand, may not accept this and will therefore, knock on the doors of the judicial courts. This will eventually occupy a considerable amount of time of our courts, as the plain reading of the principle upheld by the Hon’ble Supreme Court does indeed invite litigation.
The anxiety caused in the minds of tax payers due to the judgment of the Constitutional Bench is unwarranted, as it does not bring about any change in law laid down by the decision in Vegetable Products Ltd. (supra). The ratio that if two interpretations of a charging provision are possible, then benefit should definitely go to the assessee still holds good. On the other hand, exemption provisions have to be construed strictly and in case of ambiguity, view which favours the revenue must be adopted. There is no fault that can be found in the principle upheld by the Hon’ble Supreme Court. However, what was desirable from the Bench was to clarify that the rule of construction of exemption provisions sustained by it should not apply to beneficial provisions, which otherwise deserve a liberal interpretation so as to advance the object of the provision and fulfill the aims to be achieved thereby. It is only a matter of time that our courts interpret the judgment in Dilip Kumar’s case, but nonetheless, the understanding as explained above is fairly palpable.
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