The policy is incorporated in the form of legal text; it could be an Act, regulation, rules or statutory notification. At the ground level, the legal text becomes a matter of closer scrutiny in actual administration of the intended policy.

At times, the intended policy is given a go by and the legal text is subjected to hair splitting dissection and even interpreted beyond rationality only to justify some preconceived conclusion.

Nevertheless, the blame for undesirable and unintended interpretation is perceived as shareable by both the sides - the taxpayer and the departmental authorities. No doubt the intention is the key to any legislative provision.

Its neglect causes violence to the purpose, which the legislature or the government may intend to pursue. In a recent case the Supreme Court has affirmed that for a correct interpretation the whole enactment should be considered and not in part. This guiding principle laid down by the apex court should help resolving number of pending disputes.

To understand the background leading to the principle laid down by the apex court, some facts may be mentioned. In 1997, government introduced the capacity-based scheme of excise duty for induction furnaces. The scheme was incorporated as section 3A of the Central Excise Act. This was quite a deviation from the normal practice of excise duty assessment. The objective was to curb evasion of excise duty, as declared by the finance minister in his budget speech.

"It is reported that in some sectors, like induction furnace, steel re-rolling mills etc., evasion of excise duty is substantial and the production is not being reported correctly. I propose to tackle this problem by introducing collection of excise duty on the basis of the production capacity."

The scheme envisaged determination of annual capacity of an induction furnace unit and fixing of duty liability on the basis of capacity. However, a provision was made (sub-section (4) of section 3A) saying that the duty paid on capacity basis would be adjusted at the end of the year if the actual production was found to be less than the capacity of production.

Another provision was also made (sub-section (3) of section 3A) that abatement towards duty liability would be allowed if the factory remained closed for not less than 7 days at any point of time during the year.

Simultaneously, by way of a compounding scheme, induction furnace units were allowed to pay excise duty at lower rate provided the furnace unit did not ask for the benefit that could accrue on account of lower annual production.

This scheme was purely optional and not mandatory. This optional scheme was notified by way of a rule, being rule 96ZO of the Central Excise Rules. What was prohibited in rule 96ZO was described in clear terms. The rule said"(This is) subject to the condition that the manufacturer shall not avail of the benefit, if any, under sub-section (4) of section 3A of the Central Excise Act."

An assessee, however, wanted to eat the cake and have it too. He opted for the benefit of compounding scheme as also claimed abatement on the basis of actual annual production.

The department rejected this as not permissible under the compounding scheme. The assessee chose to contest the matter before the tribunal. The tribunal upheld the contention of the assessee. Not only that, it held that the rule overrides the section.

The ruling of the tribunal was quite emphatic: "The relief or right granted under the section cannot be taken away by rule.

In the instant case rule curtails the right provided in the section".

Obviously, the department knocked at the door of the Supreme Court. But, interestingly, in another case, the high court of Andhra Pradesh held the opposite.

The high court's verdict on the arguments of the assessee was nothing short of condemning a frivolous litigation. The court said : "We are of the view that there is no valid ground to assail the validity of sub-rule (3) of rule 96ZO. Sub-rule (3) has been framed for the facility of the assessees. It is left to the volition and the option of the assessee to avail of the procedure under sub-rule (3). When once the assessee avails of the option provided by sub-rule (3), he takes advantages and disadvantages associated with it. It is not open to the assessee that he will only avail of the beneficial part of the rule leaving the incidental disadvantages."

The court reprimanded the petitioner by observing that "the petitioner opted for the scheme with eyes wide open." In fact, the court refused to show any sympathy.

"It is difficult to believe that he was not aware of the power cuts and other adverse factors which are not unusual." The high court reminded the petitioner of his obligations and conditions once the option was exercised.

The court observed :"The argument advanced on behalf of the petitioner ignores the crucial point that payment of duty as per sub-rule (3) is not compulsive, but is only optional." The court did not see any logic in the argument of the petitioner. The high court's observations are quite categorical on the import of optional scheme for payment of excise duty.

It emphasized upon the sanctity of the compounding scheme as it was intended. As against this, the tribunal, which, incidentally, is a creature of the customs and central excise statute and does not have writ powers, decided to find fault in the validity of the optional rule. None, however, is competent to say the last word.

The last word came from the apex court in Commissioner of Central Excise v Venus Castings (P) Ltd. (2000 (117) ELT 273 (SC)). The apex court ruled, "The claim by the respondents is a hybrid procedure of taking advantage of the payment of lump sum on the basis of total furnace capacity and not on the basis of actual capacity of production."

The court further observed that "such a procedure cannot be adopted at all, for the two procedures are alternative scheme of payment of tax."

As regards the argument that rule 96ZO is ultra vires section 3A, the Supreme Court laid down the guiding principle in these terms: "In holding whether a relevant rule to be ultra vires it becomes necessary to take into consideration the purpose of the enactment as a whole, the starting from the preamble to the last provision thereto. If the entire enactment read as a whole indicates the purpose and that purpose is carried out by the rules the same cannot be stated to be ultra vires of the provisions of enactment." Our tax laws are notorious for their complexities. Much work though has been done in the last decade to simply them and inject sanity into the distortionary rate structures. Still, more effort is needed to bring the reform process to its logical conclusion.

(The author is Joint Secretary, Ministry of Finance)