Overruling its 21-year-old verdict, the Supreme Court today said that when there is ambiguity in tax exemption notification, the benefit of such uncertainty must be interpreted in favour of the State. It, however, reiterated that if in the event of ambiguity in a taxation liability statute, the benefit should go to the subject/assessee. A five-judge Constitution bench said that benefit of ambiguity in exemption notification of the government, which is subject to strict interpretation, cannot be claimed by the assessee.
The bench headed by Justice Ranjan Gogoi said the burden of proving applicability of benefit would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. The bench, also comprising justices N V Ramana, R Banumathi, M M Shantanagoudar and S Abdul Nazeer over-ruled a three-judge bench verdict given in 1997 in a case of Sun Export Corporation versus Collector of Customs, Bombay in which it was held that in case of an ambiguity in a tax exemption provision or notification, it must be interpreted so as to favour the assessee claiming the benefit of such exemption.
“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,” the bench said today. It held that the ratio in Sun Export case is not correct and all the decisions which took similar view as in Sun Export Case stand overruled.
It said, “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”. The court said there is abundant jurisprudential justification for this reasoning as in the governance of rule of law by a written Constitution, there is no implied power of taxation.
“The tax power must be specifically conferred and it should be strictly in accordance with the power so endowed by the Constitution itself. It is for this reason that the courts insist upon strict compliance before a State demands and extracts money from its citizens towards various taxes,” it said. Justice Ramana, who penned down the 82-page verdict for the bench, said the statement of law that ambiguity in a taxation statute should be interpreted strictly and in the event of ambiguity the benefit should go to the subject/assessee may warrant visualizing different situations It said there cannot be any implied concept either in identifying the subject of the tax or person liable to pay tax.
“Thus, we may emphatically reiterate that if in the event of ambiguity in a taxation liability statute, the benefit should go to the subject/assessee. But, in a situation where the tax exemption has to be interpreted, the benefit of doubt should go in favour of the revenue,” the bench said. It said that after thoroughly examining the various precedents some of which were cited and after giving anxious consideration, “we would be more than justified to conclude and also compelled to hold that every taxing statue including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly”.
“Further, in case of ambiguity in a charging provisions, the benefit must necessarily go in favour of subject/assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State,” the court said. Justifying its reasoning and interpretation, the bench said, an Act of Parliament/legislature cannot foresee all types of situations and all types of consequences.
“It is for the court to see whether a particular case falls within the broad principles of law enacted by the legislature. Here, the principles of interpretation of statutes come in handy. In spite of the fact that experts in the field assist in drafting the Acts and Rules, there are many occasions where the language used and the phrases employed in the statute are not perfect. Therefore, Judges and Courts need to interpret the words,” the bench said.
The court said, the purpose of interpretation is essentially to know the intention of the legislature and whether the Legislature intended to apply the law in a given case; whether the legislature intended to exclude operation of law in a given case; whether legislature intended to give discretion to enforcing authority or to adjudicating agency to apply the law, are essentially questions to which answers can be sought only by knowing the intention of legislation.
The bench said that the ratio in Sun Export Case that if two views are possible in interpreting the tax exemption notification, the one favourable to the assessee in the matter of taxation has to be preferred. “This principle created confusion and resulted in unsatisfactory state of law,” it said. A firm called, M/s Dilip Kumar and Company had imported a consignment of Vitamin– E50 powder (feed grade) and claimed the benefit of concessional rate of duty at 5 per cent, instead of standard 30 per cent. The relief was, however, denied by the customs department, which led to the litigation.