Presentation on theme: "INTERPRETATION OF TAXING STATUTES By CA. Sunil H. Talati"— Presentation transcript:
1INTERPRETATIONOF TAXING STATUTESBy CA. Sunil H. TalatiM.com., LL.B., FCAPast President of ICAI
2GENERAL PRINCIPLES OF INTERPRETATION INTRODUCTION We, the people of India resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC in order to secure to all our citizens: Justice, social, economic and political; Liberty of thought, expression, belief, faith and worship; Equality of status and of opportunity; and to promote among all of us Fraternity, assuring the dignity of the individual and the unity and integrity of the Nation.
3THE THREE ORGANSTo govern is the duty of the Executive, headed by the President. To legislate is the duty of the Parliament and State Legislatures. It is for the judiciary to keep a watch, visit and see that the freedom enshrined in the Constitution reach to every citizen and is not jeopardized or tinkered with or obstructed by the executive or any person in authority or otherwise.
4THE INDIAN LEGAL SYSTEM The Indian legal system is the product of history. It is rooted in our soil; nurtured and nourished by our culture, languages and traditions; fostered and sharpened by our genius and quest for social justice; reinforced by history and heritage inspired and strengthened by English Law guided and enriched by concepts and precepts of justice, equity and good conscience which are indeed the hallmarks of the common law.
5TAXATIONArticle 265 of the constitution mandates that no tax shall be levied or-collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law.
6THE TAX LAWSTax laws are highly complex, complicated and beyond understanding of a tax-payer. The words and expressions used are not simple. Many sections contain sub-sections, clauses, sub-clauses. Many deeming provisions have been inserted. Meaning of an expression is extended by way of Explanation and is curtailed by way of proviso, sometimes more than one provisos and explanations meaning differently.
7CHARGING 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.
8DIFFERENT CONSIDERATIONS It is the basic principle of construction of statute that the same should be ready as a whole, then chapter by chapter, section by section and words by words. Recourse to construction or interpretation of statute is necessary when there is ambiguity, obscurity or inconsistency therein and not otherwise.
9DEEMING PROVISIONIt is well-settled that in interpreting a provision creating a legal fiction, the court must ascertain the purpose for which the fiction is created and having done so, to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect to the fiction.
10EXPLANATIONThe normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added. The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause.
11PROVISOA proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso.
12RETROSPECTIVE OR PROSPECTIVE Now, 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 provided 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.
13MANDATORY OR DIRECTORY The question as to whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The meaning and intention of the Legislature must govern, and these are to be ascertained not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other.
14STARE DECISISIt is a sound principle of law to follow a view which is operating for long interpretation of a provision rendered years back and accepted and acted upon should not be easily departed from. While reconsidering decisions rendered a long time back, the courts cannot ignore the harm that is likely to happen by un-settling law that has once being settled.
15NON OBSTANTE CLAUSEThe principles governing any non obstante clause are well established. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “notwithstanding anything contained in the Act or in some particular provision/ provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause.
16CASUS OMISSUSThe Court only interprets the law and cannot legislate. To legislate is the prerogative of the Parliament or the State Legislature. A casus omissus should not be readily inferred and for the purpose all the parts of the statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute.
17RATIO DECIDENDI AND THE WORDS It is well settled principles of law that the decision on an interpretation of one statute can be followed while interpreting another provided both the statutes are in parimateria and they deal with identical scheme. However, the definition of an expression in one statute cannot be automatically applied to another statute whose object and purpose are entirely different.
18EJUSDEM GENERISA person is known by the company he keeps’ Birds of same feather flock together. Similarly a word is to be interpreted after considering the other words used and in its context. The principle of ejusdem generis is applicable when particular words pertaining to a class, category or genus are followed by general words.
19FINANCE MINISTER’S SPEECH It is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted.
20DISCRETIONMany provisions confer discretion on the Court or the Authority. Discretion should be exercised judiciously as a judicial authority well versed in law.
21SUBSIDIARY RULES AND SPECIAL MAXIMS AIDING INTERPRETATION Liberal ConstructionHarmonious ConstructionsBeneficial ConstructionsSpecial maximsRule of Ejusdem GenerisReddendo Singula SingulisContemporanea ExpositioCasus OmissusAutrefois Acquit/Autrefois Convict
22SUBSIDIARY RULESLiberal constructionsThe rule of liberal construction does not give a freehand to the Court to stretch and strain the statutory language to accord with abstract notions of justice and fair play (Prem Raj vs. Ram Charan (1974) 2 SCC 1). If the statutory language is susceptible to two constructions the rule of liberal construction should incline the Court to prefer the one, which accomplishes the legislative purpose.
23Harmonious Constructions. It is a cardinal rule of construction that when there are in a statute two provisions which are in conflict with each other, such that, both of them cannot stand, they should if possible, be so interpreted, that effect can be given to both and that construction which renders either of them inoperative and useless should not be adopted except in the last resort [Bengal immunity Co. vs. State of Bihar (1955) 6 STC 446 (SC).] This is what is known as the rule of harmonious construction.
24Beneficial Constructions The construction of a statute must not so strain the words as to include cases plainly omitted from the natural meaning of the language. However, where the usual meaning of the words falls short of the object of the legislature, a more extended meaning may be attributed to them, if they are fairly susceptible to it. This relaxation of strictly literal principles of interpretation is called as Beneficial Construction.
25SPECIAL MAXIMSRule of Ejusdem Generis(“of the same kind and nature”)Also known as Lord Tenderan’s rule, this rule provides that where words of specific meaning are followed by general words, the general words will be construed as being limited to persons or things of the same general kind or class as those enumerated by the specific words.
26Words of rankAs an outcome of the rule of Ejusdem Generis, there is another rule that statutes which deal with persons or things of inferior rank are not extended to those of superior degree by introduction of general words and the general words following particular words will not cover anything of a class superior to those to which the particular words relate.
27Reddendo Singula Singulis (Giving each to each)This high sounding phrase only means that words should be read distributively, the sense produced by using the English word “respectively” whenever necessary, or “a” applicable.
28Contemporanea Exposito Contemporanea exposition est optima et fortissinia in lega: meaning Contemporaneous exposition is the best and strongest in lawIt is said that the best exposition of a statute or any other document is that which it has received from contemporary authority.
30Autrefois AcquitThe principle of the doctrine of Autrefois Acquit is codified in section 300 of the Code of Criminal Procedure. As per this doctrine a person cannot be prosecuted twice for the same offence.
31RULES FOR TAX LAWSTax laws being part of statutory law, the general rules governing interpretation of statutes also govern interpretation of taxing statutes. However, due to certain peculiar characteristics of taxing statutes, there are certain particular rules which govern interpretation of a taxing statute. I will deal with only special rules of construction governing a tax statute
32(a) Rule of strict construction As tax laws impose liability on the subject they have to the strictly construed. The subject is not to be taxed, unless the words of the taxing statute unambiguously impose the tax. The subject is not to be taxed without clear words for that purpose. 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.
33Golden rule of strict construction The Courts have disregarded the rule of strict and literal construction, if such construction leads to an absurd result of defeats the very purpose of the Act. In such cases, the Courts have adopted what is known as “Golden rule of Construction.”
34Mischief ruleIn case of ambiguity in the matter of construction the literal rule of construction will also give way to mischief rule of construction, which is better known as Hyden’s rule of construction. As per this rule while construing a provision of a statute, one has to consider the law before coming into force of the Act, what was the mischief and defect for which the law did not provide, what remedy had the legislature resolved and appointed to cure the disease and the true reason of the remedy.
35Statutes dealing with procedure In contrast to statutes dealing with substantive rights, statutes dealing with merely matters of procedure are presumed to be retrospective, unless such a construction is inadmissible. No person has a vested right in any course of procedure. He has only the right of prosecution or defense in the manner prescribed for the time being by or for the Court in which the case is pending and if, by an Act of Parliament the mode of procedure is altered, there is no other right than to proceed according to the altered mode.
36(e) Theory of form and substance The assesses under the Income-tax Act have legal right to plan the affairs in appropriate manner so as to attract least amount of tax. Tax planning is permissible and only tax avoidance/tax evasion is punishable under the Act.
37(f) Construction in favour of the subject If two constructions of a provision of a statute are possible, the construction in favour of the assessee has to be accepted. If a section in a taxing statute is of doubtful and ambiguous meaning, it must be resolved in favour of the assessee.
38Res judicataRes judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by the judicial decision. The principle of res judicata is to bring finality to litigation; that a time should come when litigation shall cease, in order that the decree of the Court may be carried out.
39EstoppelFor similar reasons the principle of estoppel strictly does not apply to income tax proceedings. The question would arise how far the promise given by the tax authorities would fall within doctrine of promissory estoppel.
40Construction against double taxation There is always presumption against double taxation. Broadly stated the principle of a taxing statute is to charge income or wealth only once in one hand. Accordingly such construction is preferred which avoids double taxation.
41Integrated schemeWhere there are different statutes in pari material though made at different times, they will be taken and construed together as one system and explanatory to one another.
42Circulars of the Department Section 119 of the Income-tax Act, 1061 specifically empower the Central Board of Direct Taxes to issue general instructions for the general administration of the Act and such instructions issued are binding on the subordinate officers.
43Penal statutesPenal statutes which create offences or which have the effect of increasing penalties for existing offence will only be prospective by reason of the constitutional restriction imposed by Article 20 of the Constitution.
44Mens reaWhen a statute creates an offence a normal question that arises is as to whether `mens rea’ is a necessary element of such offence. The question is whether the statute dispenses with mens rea and creates a strict liability. Answer to this question depends on the proper interpretation of the provision in question.
45Interpretation of rules Under the direct tax laws, the Central Board of Direct Taxes has been empowered to make proper rules for the purpose of administration of the various direct tax laws. Accordingly, the Board is delegated with legislative power to make rules.
46Doctrine of waiverA waiver is an intentional relinquishment of a known right. The generally accepted connotation is that to constitute “waiver”, there must be an intentional relinquishment of a known right or voluntary relinquishment or abandonment of a known existing legal right, or conduct such as warrants an inference of the relinquishment of a known right or privilege.
47Rule of audi alteram partem Both parties should be heard before any decision. The right to fair hearing has been used by the Court as the base on which to build a kind of code for administrative procedure comparable with due process of law. A proper hearing must always include a fair and adequate opportunity to those who are parties in the controversy for correcting and contradicting anything prejudicial to their view.
48AIDS TO INTERPRETATION (a) PreambleThe preamble of a statute is a prefatory statement at its beginning, following the title and preceding the enacting clause, explaining or declaring the policy and purpose, the reasons and motives for, and the objects sought to be accomplished by the enactment of the statute. The preamble is that part of a statute which contains the recital showing the reason for the Act.
49HeadingsThe headings prefixed to a section or sets of section in some modern statutes are regarded as preamble to those sections. They cannot control the plain words or statutes, but they may explain ambiguous words. If there is any doubt in the interpretation of the words of the section, the headings certainly help the Court to resolve that doubt.
50Marginal notesAlthough a marginal note cannot afford any legitimate aid to the construction of a section, it can however be relied upon as indicating the drift of the section. Marginal notes to the sections are, however not to be referred to for the purpose of construction, unless they have been inserted with the assent of the legislature.
51IllustrationsIllustrations in enactments provided by the legislature are valuable aids in understanding the real scope of the text thereof. They are part of the statute. The illustrations, however, do not make law. They only exhibit the law in full action. An illustration does not exhaust the full content of the section which it illustrates and equally it can neither curtail nor expand its ambit.
52Definition sectionsIt is quite common to find in a statute definitions of certain words and expressions used elsewhere in the body of the statute. The object of such a definition is to avoid the necessity of frequent repetitions in describing all the subject-matter to which the word or expression so defined is intended to aid. The definition of a word in the definition section may either be restrictive of its ordinary meaning or it may be extensive of the same.
53(f) ProvisoA proviso merely craves our something from the section itself; a proviso never destroys the section as a whole. The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out, as it were, from the main enactment a portion which, but for the proviso, would fall within the main enactment.
54ExplanationAn Explanation is at times appended to a section to explain the meaning of words contained in the section. It becomes a part and parcel of the enactment. The meaning to be given to an Explanation must depend upon its terms, and no theory of its purpose can be entertained, unless it is to be inferred from the language used.
55SchedulesSchedules appended to statutes form part of the statute. They are added towards the end and their use is made to avoid encumbering the section in the statute with matters of excessive detail. They often contain details and forms for working out the policy underlying the sections of the statute.
56ContextIn interpreting a legislation which is ambiguous the context has to be taken into account to deal with dubiousness. The context includes not only other enacting provisions of the same statute, but its preamble, the existing state of the law, other statutes in pari materia and the mischief which the statute, discerned from those and other legitimate means, was intended to remedy.
57Other provisions of the same statute The rule of `ex visceribus actus’ (i.e., `within the four corners of the Act’), lays down that a statute must be read as a whole, and every provision in the statute must be construed with reference to the context and other clauses in the statute so as, as far as possible, to make a consistent enactment of the whole statue.
58(k) AmendmentsAn amendment is a legislative act designed to change some prior and existing law by adding or taking from it some particular provision. Where the amendment alters the language of a provision the presumption is that it was deliberately done to change the law. Sometimes amendments are made to clarify the law and not to change it. For instance, if the amendment only deletes some superfluous words it does not mean that the law has been altered.
59Non obstante clauseThe expression “non obstante” means “notwithstanding”. Sometimes a section commences with the clause stating that “notwithstanding anything contained in this Act or any law for the time being in force” and, in case of conflict, the idea is to give the enacting or operative part of the section an overriding effect over the provisions of the Act found in the non obstante clause.
60(m) Reference to other statutes (statues in pari materia)Statute must be read as a whole as words are to be understood in their context. Extension of this rule of context permits reference to other statutes in pari materia, i.e. statutes dealing with the same subject-matter of forming part of the same system. Where there are different statutes in pari materia though made at different times, or even expired, and not referring to each other, they shall be taken and construed together, as one system and as explanatory of each other. Acts are regarded to be in pari materia when they deal with the same person or thing or class.
61Judicial decisionsQuestions of law settled by a long course of decisions should not ordinarily be disturbed. Also an interpretation of a provision in a taxing Act rendered years ago and accepted and acted upon by the Department should not be easily departed from.
62Usage and practiceUsage and practice developed under a statute is indicative of the meaning ascribed to its words by contemporary opinion and in case of an ancient statute is an admissible external aid to its construction. The rule of contemporanea expositio is that the interpretation that a provision has received from contemporary authorities who are charged with executing the Act should be clearly wrong before it is overturned.
63Construction put by executive As a general rule a construction placed by the executive cannot bind a judicial or quasi-judicial authority, except where the statute itself so directs (e.g. in the case of circulars of the Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, which are binding even if they deviate from the Act).
64Dictionaries and text-books When a word is not defined in the statute a dictionary is often useful in ascertaining its meaning. Courts usually rely on standard dictionaries, such as Webster’s or Oxford Dictionary.
65BINDING PRECEDENTS(a) Supreme Court decisions – Article 141As mentioned earlier the Article 141 embodies the doctrine of precedent as law. The Article 141 of the Constitution of India provides that the law declared by the Supreme Court shall be binding on all the Courts in India. The law as interpreted by the Supreme Court is binding on all Courts and Tribunals in India.
66Obiter dictumIt is an expression of opinion by a Judge on a question immaterial to the ratio decidendi, and unnecessary for the decision of the particular case. It is in no-way binding on any Court but may receive attention as being an opinion of higher authority. Thus, the observations made in a judgement which are not relevant to the ratio decidendi DO NOT HAVE ANY BINDING FORCE. However, obiter dicta of the Supreme Court are binding or are entitled to the highest respect.
67(c) High Court’s judgement The doctrine of precedent is applicable to the decisions delivered by the High Court. The law declared by the High Court is binding on all the Courts subordinate to it within its territorial jurisdiction. Where there are two decisions of the same High Court holding two different views, the latter decision should be followed.
68CONCLUSIONGeneral principles of interpretation of Law including the Tax Laws are to protect a citizen against the excesses of the Executive, Administration, Corrupt authority, erring individuals and the Legislature. It is an aid to protect and uphold `enduring values’ enshrined in the Constitution and Laws enacted by the Parliament/ Legislatures.