Revisiting The Rules Of Interpretation Of A Beneficial Provision – Ramnath & Co. Vs. CIT (Supreme Court)

In Ramnath & Co. vs. CIT, the Supreme Court has taken the view that a beneficial provision has to be interpreted ‘strictly’ and the benefit of an ambiguity in its interpretation should go to the Revenue. Advocates Harsh M. Kapadia and Ravi Sawana have argued that this view is erroneous and runs counter to the law laid down by the Supreme Court itself in several earlier judgements. The ld. authors have backed up their submission with a detailed discussion and given persuasive reasoning

I. Introduction

Under tax laws, the ever persistent rule of interpretation relating to a beneficial provision has been that in case of ambiguity, always favour the taxpayer by reading the provision ‘liberally’, so as to further the objective of incentive beneficial provision. This rule has recently been revisited and, to an extent, digressed by a division bench of the Hon’ble Supreme Court in Ramnath & Co. v. CIT (2020) 116 taxmann.com 885. The Hon’ble Court held that the ‘principles of liberalism’for interpreting an ‘incentive based deduction provision’ is not a ‘sound statement of law’, rather, such a provision must be interpreted ‘strictly’ and any ambiguity in interpretation of such a provision would be tipped in favour of the Revenue. The burning question that now arises is whether the Hon’ble Supreme Court has departed from the well-established principle of interpretation and unsettled the law? Do incentive based deduction provisions no longer require a ‘liberal’ reading?

In this article, an attempt has been made to analyse this ruling of the Hon’ble Supreme Court, the legal principles involved in interpretation of taxing statutes in so far as exemption and beneficial provisions are concerned, the implications of the said decision, the suggestions and way forward.

II. Tax Statutes

A statute is a will of the Legislature and an act cannot foresee all types of situations 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.

III. Issue before the Hon’ble Supreme Court

In Ramnath’s case, the assessee had provided certain services to foreign entities for purchase of Indian marine products and the assessee in turn received service charges in foreign currency. A deduction under section 80-Oof the Income-tax Act, 1961 (‘Act’) in respect of such charges was claimed. The Revenue authorities denied such claim on the ground that the services were rendered ‘in India’ and not ‘from India’, thereby not qualifying for deduction, in view of Explanation (iii) to section 80-O.The issue before the Hon’ble Supreme Court was whether the assessee, on facts,was entitled for a deduction under the said provision?

The assessee inter-alia contended that it was entitled for the deduction, as an incentive provision, like section 80-O, must be construed purposively, broadly and liberally and for such a provision, whose basic object is to earn foreign exchange, the benefit ought to be granted if such object is achieved. This contention was reinforced by relying on, amongst others, CIT v. Baby Marine Exports (2007) 290 ITR 323 (SC). The Revenue argued that the assessee was merely a ‘procuring agent’ for the foreign entities in India and its services fell outside the scope of Explanation (iii) to Section 80-O.Reliance was placed on the decision of the 5-Judge Constitution Bench in CC v. Dilip Kumar & Co. (2018) 9 SCC 1 to maintain that exemption provisions have to be interpreted strictly, and in case of any ambiguity in such interpretation, the benefit must go in favour of the Revenue.

IV. Conclusion of the Hon’ble Supreme Court

A. Principles of Interpretation – Incentive Provisions

(i) While accepting that section 80-O was an incentive provision, with an objective of earning foreign exchange by imparting technical know-how or furnishing the information concerning industrial, commercial, scientific knowledge, or rendering of technical or professional services to foreign countries, the Hon’ble Supreme Court, nevertheless, held that this deduction provision ought to be interpreted strictly; the burden of proving its applicability was on the assessee and in case of ambiguity, the benefit thereof cannot be claimed by the assessee, rather it would be interpreted in favour of the revenue.

(ii) For the above conclusion, it relied heavily on Dilip Kumar & Co.

(iii) Referring to Para 24 of its decision in Liberty India v. CIT as reported in(2009) 9 SCC 328, the Hon’ble Supreme Court did not accept the distinction between an incentive deduction and a non-incentive exemption provision by observing that ‘incentive’ was a generic term and ‘deductions’, ‘exemptions’, ‘rebates’, etc. were different species of incentives.

(iv) Accordingly, it held that Dilip Kumar & Co.would equally apply proprio vigorefor interpretation and application of ‘any akin proposition in the taxing statues for exemption, deduction, rebate’.

(v) The Hon’ble Supreme Court observed that in Baby Marine Exports, which held that an incentive or beneficial provision ‘must receive a liberal interpretation’, the assessee was granted the benefit not by way of any liberal or extended meaning to the provision, but only on its plain construction. Therefore, the Supreme Court refused to follow Baby Marine Exports on the ground that those were mere ‘generalised observations’ and not ‘sound statement of law’. It preferred the principles enunciated in UOI v. Wood Papers Limited [1990] 4 SCC 256 and approved in Dilip Kumar & Co, which laid down that at the stage when the eligibility of an assessee under an exemption provision is being examined, strict rule of interpretation is to be followed and, once the assessee falls within the ambit of the provision, a liberal construction should be followed. Accordingly, to claim deduction under section 80-O, the assessee must strictly conform to the requirement of the section and a liberal approach could not be followed.

B. Whether Assessee entitled to claim deduction under section 80-O of the Act?

(i) After analysing the provision thoroughly, including its history, it held that to bring a particular foreign exchange receipt within ambit of the deduction, it must be attributable to ‘information and service’ contemplated by section 80-O and that merely having a contract with a foreign enterprise and earning foreign exchange did not ipso facto lead to application of section 80-O.

(ii) On the facts of the case, it remarked that the assessee was merely a ‘procuring agent’ and the information provided to the foreign entities were not in the nature of ‘professional services’ or ‘information’ or ‘technical guidance’ so as to fall within the scope of section 80-O.The services were rendered ‘in India’ and not ‘from India’ so as to justify the claim of deduction. Thus, the assessee, in view of the Supreme Court, did not qualify for deduction under section 80-O of the Act.

V. Overlooked facets

The above decision has far reaching consequences and has created a sense of discomfort in minds of taxpayers. The otherwise well-established principle of law seems to have been unsettled. However, as one reads the finer text of the ruling, certain aspects do not seem to have been brought to the notice of the Hon’ble Supreme Court. Had that been the case then, the authors believe that a different conclusion could have been made by the Hon’ble Court. Deliberated below are few of the premises in this regard:

1. Position prior to Ramnath & Co.

The rule of interpretation for an exemption provision with a beneficial objective, prior to Ramnath’s case was well established by a plethora of judicial precedents including judgements of the Hon’ble Supreme Court. The consistent opinion was that if the interpretation of a beneficial exemption provision is open for doubt, a liberal reading must be adopted so as to advance the objective of the said provision and not to frustrate it. However, the question of liberal interpretation arises only when there is a ‘doubt’. In other words, any provision has to first be read plainly. It is only when on a plain reading of that provision two views are possible, a liberal construction favouring the object and intent of the section should be adopted. When espousing such a liberal interpretation, courts cannot violate the plain language of the provision or go to the extent of reading something that is not stated in the provision. Where the words are unequivocal, they cannot be stretched, so as to confer the benefit in the garb of liberal interpretation. See authoritative text of ‘Kanga & Palkhivala’s The Law and Practice of Income Tax’ (11th Ed.),p. 33 – 34 and ‘Sampath Iyenger’s Law of Income Tax (12th Ed.)’Volume 1 – p. 190 – 193.

2. Are all tax immunities the same?

According to Ramnath, Yes. Solely on the basis of Liberty India, it is held that the ‘deductions, exemptions, rebates et cetera are the different species of incentives extended by the Act’. it is submitted, with utmost respect, that the reliance on this decision is misplaced. Liberty India, in context of section 80-IB of the Act, merely juxtaposed two types of incentives schemes under the Act, namely ‘investment-linked incentives’ and ‘profit-linked incentives’ and accordingly held that Chapter VI-A of the Act, provides for incentives in the form of tax deductions belonging to the second category, namely ‘profit linked incentives’. It held that what attracts the incentives under section 80-IB is the generation of profits of the eligible business and not the ownership of that business which attracts the incentives. It is in this context that the Supreme Court in that case stated that there are two types of tax incentives. It is submitted that this conclusion does not lead to the inference that there are no other types of tax immunities under the Act. In view of the authors, there are two 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.

In fact, in CIT v. Yokogawa India Ltd. (2017) 391 ITR 274, the dispute between the assessee and the Revenue was precisely this, i.e. whether section 10A of the Act was a ‘deduction provision’ or an ‘exemption provision’. In Para 14 of its judgment, the Supreme Court observed that “the difference between ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e. immunity from taxation, but the practical effect of it, in the light of the specific provisions contained in different parts of the Act, would be wholly different”. The Hon’ble Supreme Court in that case noted that post amendment by the Finance Act, 2000, section 10A changed its colour from being an ‘exemption provision’ to a ‘deduction provision’. This clearly shows that there exists a difference between an exemption provision and a deduction provision. However, unfortunately, in Ramnath, these two provisions have been considered as ‘akin’ and forming part of the same family.

Take for example provisions of section 10(2A) and section 10AA. 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 the State. 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’.

Therefore, it is the humble submission of the authors that the Hon’ble Supreme Court (with respect)ought not to have tossed exemption provisions and deduction provisions in the same basket. Both are distinct in their nature and object. A statute is an edict of the Legislature and the conventional way of interpreting or construing a statute is to seek the ‘intention’ of its maker. It is to be construed according ‘to the intent of them that make it’ and ‘the duty of judicature is to act upon the true intention of the Legislature’ (See Principles of Statutory Interpretation by G.P. Singh, 13th Edition, Page 3 – Intention of the Legislature).

3. Dilip Kumar – Whether correctly applied?

Having seen the difference between an ‘exemption beneficial provision’ and an ‘exemption non-beneficial provision’, let us examine if Dilip Kumar was correctly applied in Ramnath. To do so, it is imperative that one understands the facts surrounding that case and the context in which the law was laid down by the Constitution Bench.

The question before the Hon’ble Supreme Court was the correct 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 was neither ‘beneficial’ nor did it promote growth of economy or nation nor did it incentivize the assessees seeking to claim the benefit. In these specific circumstances, the Constitutional bench held that the eligibility requirement to claim an exemption should be interpreted strictly and in case of any ambiguity in interpreting such an exemption provision, the view must go in favour of the revenue.

In Para 19 of Ramnath, the Hon’ble Supreme Court held that Dilip Kumar has rejected a liberal interpretation for exemption provisions as well as ‘akin proposition in the taxing statutes for exemption, deduction, rebate et al., which all are essentially the form of tax incentives given by the Government to incite or encourage or support any particular activity’. In other words, according to Ramnath, Dilip Kumar has not accepted a liberal reading for all kinds of exemption provisions including beneficial deduction provisions. This ipse dixit conclusion is (with respect) divorced from the context. As seen above, Dilip Kumar does not deal with an exemption provision with a benevolent objective and therefore, it is submitted that the said decision cannot apply to such a beneficial provision.

It is well established that a judgment must be wholly read and the observations from the judgment must be considered in the light of the questions which were before the Court. The Courts must carefully try to ascertain the true principle laid down by the decision 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. See, CIT v. Sun Engineering Works (P.) Ltd. (1992) 198 ITR 297 (SC). In fact, before coming to its conclusion in Dilip Kumar, the Hon’ble Supreme Court studied a plethora of rulings on the subject. However, none of the decisions referred by the bench dealt with beneficial provisions. On the contrary, they were all dealing with exemption non-beneficial provision. Therefore, it is submitted Dilip Kumarcannot apply to all types of tax exemption provisions.

In fact, in PCIT v. Aarham Softronics (2019) 412 ITR 623, a Three-Judge bench of the Hon’ble Supreme Court, after referring to Dilip Kumar, granted deduction under section 80-IC of the Act (a beneficial exemption provision akin to section80-O) to the assessee after giving a purposive interpretation to the provision. This higher strength decision has not been brought to the notice of the Hon’ble Supreme Court in Ramnath.

4. Baby Marine Exports v. Dilip Kumar

In Ramnath, the Hon’ble Supreme Court pitted only Baby Marine Exports against Dilip Kumar to decide if the beneficial exemption provision ought to be read liberally or strictly. Though the presence of other precedents of the Hon’ble Supreme Court favouring a liberal interpretation were acknowledged (See para 16.2 of the judgment – Sea Pearl Industries (2001) 127 ELT 649, IPCA Laboratory Ltd. (2004) 266 ITR 521 and Bajaj Tempo Ltd. (1992) 196 ITR 188referred), the Hon’ble Supreme Court considered Baby Marine Exportsas the lead decision on the subject. Baby Marine Exports was then distinguished in Ramnath by stating that the observations in that decision were merely ‘generalised’ and thus, not ‘sound statement of law’.

Clearly this is not the case. There are a large number of precedents on the subject. These are not only of the same strength as Ramnath (i.e. division bench), but even of a higher number. All of these are unanimously and consistently held that an incentive based deduction provisions with a beneficent object has to be construed liberally. Below are few such instances:

• In Aarham Softronics, as seen above, the Three-Judge bench of the Hon’ble Supreme Court, after considering Dilip Kumar, preferred to grant the deduction to the assessee keeping in mind the objective of the provision of section 80-IC of the Act.
• In Pappu Sweets And Biscuits And Another v. Commissioner of Trade Tax [1998] 7 SCC 228, a Three-Judge bench of the Hon’ble Supreme Court was dealing with an exemption notification issued by the Revenue under the U. P. Sales Tax Act, 1948. For construing that exemption notification, the Hon’ble Court in para 10 observed that “the objectof declaring exemption from payment of sales tax was to increase industrial activity within the State by encouraging setting up of new industrial units andexpansion, diversification or modernization of the existing industrial units” and to determine the scope and ambit of the exclusionary part of the notification, “only that meaning should be given to it which would achieve rather than frustrate the object of granting exemption and which does not lead to uncertainty hardship or unintended results”.
• In Kerala State Cooperative Marketing Federation Ltd. And Others v. CIT [1998] 5 SCC 48 while interpreting the eligibility of deduction under section 80P of the Act, a Three-Judge bench of the Hon’ble Supreme Court took observed that the section was enacted for “encouraging and promoting growth of co-operative sector in the economic life of the country” and in light thereof, preferred to read the exemption provision in a wider sense rather than cutting down its scope.
• In Bajaj Tempo, the division bench of the Hon’ble Supreme Court held that “a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally” and “since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it.”
• In CIT v. Straw Board Mfg. Co. Ltd. (1989) 177 ITR 431, a division bench of the Hon’ble Court, while interpreting section 80-E of the Act, held “it is necessary to remember that when a provision is made in the context of a law providing for concessional rates of tax for the purpose of encouraging an industrial activity a liberal construction should be put upon the language of the statute.”
• In CIT v. South Arcot District Co-Operative Marketing Society Ltd. (1989) 176 ITR 117, while construing section 14 of the Indian Income Tax Act, 1922 (corresponding to section 80-P), the Supreme Court laid down that the provision was “intended to encourage co-operative societies to construct warehouses for the development of rural economy” and thus, “a liberal construction should be given to the language of the provision”.

Without testing whether or not the findings in Baby Marine Exports were mere ‘generalised observations’, nonetheless, the above discussed decisions and several others on the subject certainly did not ‘generally observe’ that beneficial exemption provision ought to be construed liberally, when in doubt. It is submitted that none of these rulings have been considered in Ramnath and therefore, it was (with respect) improper to only put the so called obiter dictum of Baby Marine Exports against Dilip Kumar, instead of ratio decendiof several other rulings, especially when the Baby Marine Exports was distinguished on the ground that its findings were ‘generalised’.

5. 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), which was greatly relied uponin Dilip Kumar, has too juxtaposed the rule of interpretation in case of different types of exemption provisions, viz. strict v. liberal interpretation. 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. The Hon’ble Supreme Court preferred a strict reading over a liberal reading as, in that case, the bench were not dealing with a beneficial provision. Unfortunately, thisnot brought to the notice of the Hon’ble Bench in Ramnath’s case.

6. Kanga & Palkhivala’s The Law and Practice of Income Tax

The 11th Edition of the well-respected book on Income Tax law has disapproved the decision of Dilip Kumar in the following manner:

“A five-judge bench of the Supreme Court held that if there are two views possible in the interpretation of a charging section, the view in favour of the taxpayer or the assessee should be preferred. However, if there is an ambiguity in an exemption notification, the benefit of such ambiguity cannot be claimed by the assessee but must be interpreted in favour of the Revenue. It is submitted that such a distinction is erroneous and without any basis. It further erroneously held that one has to look at the language of the notification alone and the object and purpose of granting the exemption is irrelevant. It is submitted that if there is ambiguity in an exemption notification, it can be adequately resolved by ascertaining the object and purpose of the notification. The interpretation which promotes the object and purpose of the exemption notification should be followed, irrespective of whether it is in favour of the Revenue or the assessee.”

VI. Conclusion

The Hon’ble Supreme Court, with respect, has erroneously adopted a strict rule of interpretation for construing a beneficial exemption provision like section 80-O of the Act, which otherwise, in case of doubt, deserves a liberal interpretation, so as to achieve the objective of the provision rather than to frustrate it. For decades, this has been an indisputable and consistent opinion taken by our judiciary. With great respect, reliance on Liberty India and Dilip Kumar (the two core pillars and support in Ramnath) is misplaced, as the present decision proceeds on the ipse dixit discussed above. Hence, the present ruling can be regarded per incuriam and requires reconsideration by the Hon’ble Supreme Court.

Going forward, it would be an interesting battle to witness between the taxpayers and the Revenue on the rule of interpretation of an incentive based provision. However, one should be mindful of the fact that a strict reading of such a provision will have detrimental consequences as it would discourage taxpayers and frustrate the very objective of the provision. The present decision of the Hon’ble Supreme Court, which denied a liberal reading of the beneficial provision will have to be seen only the light of the facts of that case. However, as seen above, the Hon’ble Supreme Court, when in doubt, has on many occasions, interpreted the beneficial provisions in light of the purpose and objective of such provisions. A larger bench in Aarham Softronics has already interpreted a beneficial exemption provision purposively after considering the Five-Judge decision in Dilip Kumar. It is desirable that benevolent provisions continue to be construed in that manner, in case of any ambiguity. Nevertheless, litigation on this rule of construction is imminent.

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