JAMIA MILLIA ISLAMIA

FACULTY OF LAW

INTERPRETATION OF TAX STATUTE & EXEMPTION

NOTIFICATION

INTERPRETATION OF STATUTES ASSIGNMENT

SUBMITTED BY-

MOHD KAMRAN ANSARI

STUDENT ID: 202004054

CLASS ROLL No.: 40

EXAMINATION ROLL No.: 20BLW039

B.A.LLB. (Hons.) (REGULAR) VI Sem.

BATCH- 2020- 2025

SUBMITTED TO-

Prof. Dr. SOHAIL NAZIM

FACULTY OF LAW, JAMIA MILLIA ISLAMIA

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TABLE OF CONTENTS

INTRODUCTION......................................................................................................................3

CONTEXT OF STUDY...............................................................................................................4

STATEMENT OF PROBLEM.......................................................................................................4

RESEARCH QUESTIONS...........................................................................................................4

SCOPE OF RESEARCH.............................................................................................................4

SIGNIFICANCE OF THE RESEARCH..........................................................................................5

HYPOTHESIS............................................................................................................................5

OBJECTIVES OF THE RESEARCH ASSIGNMENT.......................................................................5

RESEARCH METHODOLOGY....................................................................................................5

LITERATURE REVIEW..............................................................................................................6

STRICT RULE OF INTERPRETATION..................................................................................6

JUSTIFICATION OF THE STRICT RULE..............................................................................7

LIMITATIONS OF STRICT INTERPRETATION....................................................................8

THE PURPOSIVE CONSTRUCTION: DILUTION OF THE STRICT RULE.......................9

JUSTIFICATION OF PURPOSIVE INTERPRETATION......................................................11

LIMITATIONS OF PURPOSIVE INTERPRETATION..........................................................12

INTERPRETATION OF EXEMPTION NOTIFICATION......................................................13

CONCLUSION & SUGGESTIONS........................................................................................15

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INTRODUCTION

In India, tax as a liability upon an individual citizen was imposed in 1860. Various
amendments were made in the tax legislation from time to time and at present the Income Tax
Act of 1961 is applicable in the country. Article 265 1 states that “no tax shall be levied or
collected except according to the procedure established by law.” Also, the tax should be
levied and collected according to law. The validity of the tax is determined by referring to the
competence of the Legislature while enacting it. The taxing statute must also not be colorable
and must not violate any provisions of the constitution.

The taxing statutes are very complex in nature and are beyond the understanding of a typical
tax payer. The classical rule regarding the construction of tax statute states they must be
strictly construed. According to this rule, a person shall not be liable to tax unless and until
there are unambiguous words indicating that purpose. All enactments must be read
“according to the natural construction of its words.”2 In a tax statute, the principle states that
only that should be looked at which is clear. Considerations guiding interpretation of tax
statute can’t include assumptions or presumptions. In simple words, no word can be read as
implied. In the interpretation of tax statute, the language of the enactment is the only fair
consideration.3 This classical approach towards interpretating of taxing statutes has been
widely followed in England and India.

Rule of the interpretation of tax statute can be found in the opinion of Rowlat J. in the case of
Cape Brandy v. IRC:4

“In a taxing Act, clear words are necessary to tax the subject. But it is often
endeavored to give to this maxim a wide and fanciful construction. It does not
mean that words are to be unduly restricted against the Crown or that there is to
be any discrimination against the Crown in such acts. It means this, I think, it
means that in taxation you have to look simply at what is clearly said. There is no
room for any intendment, there is no equity about tax, you read nothing in; you
imply nothing, but you look fairly at what is said and at what is said clearly and
that is tax.”

1
The Constitution of India, art. 265.
2
In re Mickelthwait, (1885) 111 Ex 452; Tennant v. Smith, (1892) AC 150.
3
Cape Brandy Syndicate v. Inland Revenue Commissioner, (1921) 1 KB 64.
4
(1921) 12 Tax Cases 357.

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The above rule has also been widely followed by the Indian courts. 5 The philosophy for
strict construction lies in the fact that it imposes fiscal burdens. Thus, in some sense,
they functon as penalties. It is because of this that unambiguous language is required to
make out a charge of tax.

CONTEXT OF STUDY

Tax is a monetary obligation upon a taxpayer imposed as decided by the authority.

Interpretation of tax statute involves interpretation of clauses that are unclear and ambiguous.
The judiciary interprets these provisions according to certain rules one of which is the strict
or literal rule whch has been followed from a long time in common law jurisdiction.
However, in the later half of the 20 th Century a shift was seen towards the dilution of the strict
rule and emphasis was laid towards the purpose for which the tax was levied under certain
circumstances. This research process deals with the analytical study of the strict and
purposive rule in relation to the interpretation of tax statute and their role in the interpretation
of exemption notification.

STATEMENT OF PROBLEM

The age-old Strict rule of interpretation has been diluted by the courts throughout the
common law jurisdiction and a new rule of interpretation has been developed. This rule is
focused on the purpose of the statute and is thus called the ‘Purposive Rule of Interpretation’.
The problem arises in determining how relevant is the purposive rule in the quest of finding
an alternative to the literal rule of interpretation. Also, which of the two rules is best suited
for the interpretation of exemption notification.

RESEARCH QUESTIONS

 Whether the shift to the purposive rule of interpretation from the literal or strict rule
of interpretation is justifiable and reasonable?
 Which of the two rules is best suited for the interpretation of exemption notification?

SCOPE OF RESEARCH

The main objectives of the study are:

 To understand the reasons why strict approach is preferred in the interpretation of

fiscal statutes.
5
M/s Hiralal Ratanlal v. STO , AIR 1973 SC 1034; CIT v. Keshab Chandra Mandal, AIR 1950 SC 265.; Jinia
Keotin v. Manjhini, 2003 (1) SCC 730.

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  To study why the purposive rule is now being preferred over strict rule in common
law jurisdictions.
 To study the application of these rules on exemption notification.

SIGNIFICANCE OF THE RESEARCH

The significance of this research is that it studies the justification of the two rules of
interpretation of tax statutes i.e., the strict rule and the purposive rule, along with highlighting
the limitations of each rule. This research project further analyses that which of the two
methods is better suited for the interpretation of exemption notification.

HYPOTHESIS

 Tax statutes have been construed strictly throughout modern history.

 This approach has now become obsolete and a move towards more purposive
approach is being made.
 Purposive approach provides a better solution for the interpretation of tax statutes.

OBJECTIVES OF THE RESEARCH ASSIGNMENT

 To analyse how much the strict or literal rule of interpretation is relevant in present
context.
 To analyse whether the use of purposive interpretation solves the problems un-
answered by the literal rule of interpretation.
 To analyse which of the two rules is better suited for exemption notification.

RESEARCH METHODOLOGY

Analytical research methodology has been used in this paper. The age-old strict rule of
interpretation has been studied along with its justification and limitations. Along with this, the
diluted concept of purposive interpretation has been analysed in the light of the interpretation
of tax statutes and especially the exemption notification. A comprehensive search was
conducted across academic databases to gather scholarly articles and studies related to the
interpretation of tax statutes. The search included keywords such as “tax statutes,”
“interpretation,” “tax legislation,” and “legal analysis.”

LITERATURE REVIEW

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For the purpose of research for this research assignment, the researcher reffered to various
books some of which are “Master Guide to Income Tax” by T.G. Suresh and “Taxmann’s
Direct Tax” by Dr. Vinod K. Singhania. Several other research papers and online journals
were also referred, however, after analysing the existing literature it was concluded that none
of the existing literature directly deals with the issues that are highlighted in this research
assignment.

On close and comprehensive study of various unpublished articles and judgements of Indian
Courts along with the Courts in other common law jurisdictions, the gaps in the area of
interpretation of tax statutes were highlighted. On the basis of this study the research work
was completed by comparing the various judicial precedents and doctrines set forth by the
Courts. The researcher has tried to reconcile the research gap that exists in this area of law
which has not been thoroughly mentioned in other books.

STRICT RULE OF INTERPRETATION

The “Strict Construction” rule is also called the “Duke of Westminster Principle.” It was
evolved after the case of IRC v. The Duke of Westminster.6 In the present case, the respondent
i.e. “Duke of Westminster,” contracted to pay his garden worker an annual payment for 7
years without regard to the payment received by such worker for his services as gardener. The
Duke, then sought out to deduct such payments to the gardener to ascertain his total tax
liability. The Revenue Commissioner i.e. the Appellant, however, opined to show those
payments as payments of wages and impose tax thereupon. The court rejected the contention
that in the interpretation of tax statute, it shall ignore the legal position and insted focus on
“the substance of the matter.” The House of Lords moreover observed that each individual is
entitled to arrange his/her affairs in a manner that the burden of tax liability falls the least
upon him/her.

According to Court the doctrine of “substance of the matter” can’t be used to impose a
greater liability on a person. The obligation imposed by law is the substance in such matters.
The appeal was dismissed by the House of Lords.

This reasoning of the house of Lords has been accepted in Indian jurisprudence too. The SC
has reiterated the postion that it is a maxim of law that tax is not to be imposd upon an

6
IRC v. The Duke of Westminster, (1936) AC 1.

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individual unless the text of the statute is unambiguous. 7 The SC further observed that the
literal letter of the law is to be taken under consideration in determining tax liability without
giving regard to the “spirit of the statute” and/or the “substance of the law”. What is material
is the satisfaction of the Court regarding the imposition of the provision. But if circumstances
do not fall within the “4 corners of the provisions of the taxing statute,” no tax liability
arises.8

A tax statute comprises of:

 subject of tax.
 individual liable to pay tax.
 the rate of tax imposition and payment.

According to Strict Rule or literal rule of interpretation, in case of any ambiguity with regards
to any of the above, there is no tax in law.

Thus, time and again that the judiciary has laid stress on the requirement of a clear and
unambiguous text in ordr to impose tax on an individual. The Rule of Strict Interpretation has
been governing the interpretation of tax statute since a long time. However, a shift from this
rule was seen in the 20th Century where this rule was diluted.

JUSTIFICATION OF THE STRICT RULE

Outside the scope of taxing statutes the courts have adopted as principle that statutes should
be interpreted purposively. But the question arises that what then is the difficulty in
employing this method when in relation to interpretation of tax statutes? The primary reason
is that tax is seen as encompassing “imposition of a burden” on an individual. This expresses
the traditionl hostile attitude of the Judges towards statutes seen as trespassing on a citizens
property and liberty.

The tax statute constitutes liabilities imposed by the sovereign which impinge a citizen's
liberty. Provided that there is no existence of a legal doctrine in the courts of law to maintain
the notion of a duty to contribute to the maintenance of the state by tax, and further provided
that there exists a right to avoid but not a duty to pay taxes, It appears most suitable that the
government clearly explains the reasons for depriving taxpayers of their freedom before
7
Mathuram Agarwal v. State of Madhya Pradesh, AIR 2000 SC 109.
8
A.V. Fernandez v. State of Kerala, AIR 1957 SC 657.

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taking such action. This is why tax legislation should be interpreted using precise and
technical language, without considering the intentions behind its creation.

Another reason for this approach is the belief that it is important to ensure certainty in fiscal
and tax affairs. By interpreting the law based on the ordinary meaning of its literal words and
resolving any ambiguity or lack of clarity in favor of the taxpayer, the literal or strict rule of
interpretation establishes a consistent and measurable standard. This allows taxpayers to
reliably determine how tax laws will apply to specific transactions.

LIMITATIONS OF STRICT INTERPRETATION

The courts rely on the literal or the strict rule of interpretation, assuming that the text used in
the statute is the best indication of Parliament's intention. 9 However, this approach overlooks
the challenges involved in legislative drafting. It disregards the limitations of language,
assuming that drafters can always choose words that precisely describe the situation without
any room for ambiguity. The literal rule also fails to account for the difficulty of anticipating
and addressing all possible scenarios that may affect a provision. In this sense, the literal rule
is unrealistic as it assumes unachievable perfection in drafting. In fact, drafters often use
broad terms in the enctments, trusting that the courts will determine the situations covered by
them.

Another significant criticism of the literal rule is that it prevents judges from considering the
primary purpose of a statute, placing an irrational constraint on their potential to understand
the intention of the Legislature. This is paradoxical as if the goal of interpretation is to
determine meaning, then anything logically relevant should be considered. Disregarding the
fundamental purposes of a statute increases the risk of judges interpreting tax provisions in a
manner that goes against the apparent legislative intent. This was illustrated in the case of
IRC v Duke of Westminster.10 Lord Tomlin said that:

“…this so called doctrine of ‘the substance’ seems to me to be nothing more than

an attempt to make a man pay notwithstanding that he has so ordered his affairs
that the amount of tax sought from him is not legally claimable…”11

9
Regina v. Secretary of State for Health, (203) UKHL 13.
10
(1953) AC 1.
11
Ibid.

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As demonstrated in this case, the strict rule of interpretation can clear the way for tax
avoidance by allowing taxpayers to constitute transactions that fit in the terms of tax relief.
Consequently, the strict rule of interpretation has resulted in substantial revenue losses in
countries like India and other common-law jurisdictions.

THE PURPOSIVE CONSTRUCTION: DILUTION OF THE STRICT

RULE

The strict rule of interpretation of tax statutes had experienced dilution in the better part of
the 20th Century. In the case of CCE v. ACER India Ltd.12 the India SC addressed if the value
of “operational software” can be subtracted from the total value of computer machines
supplied to the clients for calculating the total amount of the Central Excise Duty as payable
by the assessee company. In this case, an entire part of the judgement was dedicated to the
rules guiding the interpretation of tax statute. The Court held that the infliction of tax is a
mandate of the constitutiona guaranteed by the Constitution u/a 265. 13 The Court further
observed that the “Doctrine of Substance of the Matter” has been rejected and referred to the
strict construction to be given to tax statute. However, the Court also held that there are many
considrations to be made in the construction of tax statute that fall outside the 4 corners of the
language of the statute.14

Thus, accordingly, the abovementioned case signifies the departure from the strict or literal
rule of interpretation. The SC at several other instances also began diluting the rule of strict
interpretation. The Court at one instance observed that existing market practise must be
considered before interpreting the tax statute. The Court also observed that public policy can
serve as a guiding factor in the interpretation and application of taxing statute.15

The highest court also expressed the view that the law should not be interpreted in a way that
encourages widespread duty evasion. Applying an interpretation influenced by this passing
remark can result in significantly different outcomes in practice compared to those previously
determined using the “strict rule of interpretation.” Although in this particular case, the
incidental remarks were driven by the intention to spare computer product consumers from
bearing the burden of excessive duty imposed on the defendant, the implications of this
12
CCE v. ACER India Ltd. (2004) 8 SCC 173.
13
The Constitution of India, a. 265.
14
Ibid.
15
Ibid.

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finding can be severe in other types of cases. In my view, this Court decision would
significantly “shift the balance of power in favor of the Revenue.”

The Supreme Court made observations clearly providing for the seldom application of the
rule of strict construction in the interpretation of tax statutes. It notd that “the principle of
strict construction may not be adhered to in a case where the statutory construction can
reasonably have only one meaning.” The court went on to substantiate this by stating that
“the principle of purposive construction will be adhered to in case the literal meaning results
in absurdity.”16 The Supreme Court clearly stated that when faced with absurdity, the
principle of purposive construction can take priority over literal meaning, and this principle
applies even in the context of tax statutes.

This finding of the Court is reflective of the fact that the Court is shifting towards purposive
construction in the interpretation of taxin statute. This holds great importance as it grants the
courts the ability to look beyond the explicit language of the statute and ascertain the
"legislative purpose" in a way that was not previously permitted. However, this change is
highly debated and carries significant implications, leading to various questions and
conclusions regarding the interpretation of tax statutes. It could be claimed, at this point, that
purposive construction should only be invoked when the literal or strict interpretation leads to
absurd outcomes.

Further, in CWS India Ltd. v. CIT,17 the Supreme Court dived into the provisions of Income
Tax Act, 1961. The question revolved around imposing tax on CWS India Ltd. with regards
to the expense on the appellant company’s assets that were being used by its employees
wholly or in part for their own benefit. By employing the Strict Interpretation Rule no
liability could be imposed upon the appellant company. However, the Supreme Court upheld
the assessment of revenue done by the Commissioner of Income Tax on the basis of reading
of the statute in the light of the legislative intent of the provision. The Court compared the
said provision with the previous provisions of the Income Tax Act and came to the conclusion
that the appellant company must be held liable.

The Court further stated that the non-imposition of tax in the present case would result in
incongruity, discrimination and absurdity. It opined that though strict construction is the rule,
it cannot be adhered to when there are chances that it may lead to incongruity, discrimination,
and absurdity. “Interpretation of statutes cannot be a mechanical exercise. The object of all
16
Ibid.
17
CWS India Ltd. v. CIT, AIR 1994 SC 116,

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interpretation was to give effect to the object of the enactment regarding the language
used.”18

However, it is important to note that while such decisions may appear to be the correct
approach to achieve justice in a specific case, they also introduce a significant opportunity for
undue judicial flexibility that could have a negative impact on the interpretation of statutes
when these decisions serve as precedents. The problem lies not in ascertaining the existance
of absurdity but it lies in ascertaining the legislative intent and legislative purpose. Thus, in
my view the availability of such capacity of interpretation in the hands of the judicial
institutions can lead to significant strengthening of the stance of the revenue as againt the
assessee and has serious implications on the interests of the assessee.

JUSTIFICATION OF PURPOSIVE INTERPRETATION

By embracing a purposive approach, judges acknowledge the imperfections of draftsmanship

and the constraints of the English language in accurately capturing legislative intent through
explicit wording. They recognize their constitutional duty to assist Parliament by rectifying
legislation when it fails to effectively convey Legislature’s genuine intention. Lord Denning
opined in the case of Seaford Court Estate Ltd v Asher:19

“Wherever a statute comes up for consideration it must be remembered that it is

not within human powers to foresee the manifold sets of facts which may arise,
and, even if it were, it is not possible to provide for them in terms free from all
ambiguity. The English Language is not an instrument of mathematical precision.
Our literature would be much poorer if it were. This is where the draftsmen of
Acts of Parliament have often been unfairly criticized. A judge, believing himself
to be fettered by the supposed rule that he must look to the language and nothing
else, laments that the draftsmen have not provided for this or that, or have been
guilty of some or other ambiguity. It would certainly save the judges trouble if
Acts of Parliament were drafted with define prescience and perfect clarity. In the
absence of it, when a defect appears a judge cannot simply hold his hands and
blame the draftsman. He must set to work on the constructive task of finding the
intention of Parliament, and he must do this not only from the language of the

18
Ibid.
19
(1949) KB 481.

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 statute, but also from a consideration of the social conditions which gave rise to
it, and the mischief which it was passed to remedy, and then he must supplement
the written word so as to give force to it and the intention of the legislature.”20

Therefore, the purposive approach empowers courts to adjust or even rephrase the wording of
the enactment to align with intent and purpose behind it, even if it involves some alteration of
the statutory wording. In this context, judges are allowed to consider external sources as an
aid in interpreting statutory provisions, such as white papers and parliamentary statements, as
demonstrated in the case of Pepper (Inspector of Taxes) v. Hart,21 when such substance sheds
light on the genuine intent of Parliament.

LIMITATIONS OF PURPOSIVE INTERPRETATION

One of the main criticisms of purposive interpretation is that it blurs the concept of separation
of powers by allowing judges to fill in gaps or amend legislation, potentially pursuing their
own objectives and intentions under the guise of interpretation. 22 These criticisms reflect a
strict understanding of the doctrine of separation of powers. However, present day
applications of the doctrine recognize that the functioning of present day government requires
some overlap of functions among the three branches. Consequently, outside the context of
taxation, courts have accepted the legitimacy of creative interpretation to ensure that the law
meets contemporary needs, even going so far as to read words into statutory provisions.

Nevertheless, it is important to acknowledge the limits of what can be done through statutory
construction.23 Parliament's intention is communicated through the words of a legislation,
which sets the perimeter for “judicial creativity.” Firstly, in order for a specific intention or
purpose to be attributed to Parliament, it should be clearly discernible from the wording of
the legislation itself. Secondly, any reinterpretation or restatement of statutory language based
on the assumed intention of Parliament should align with the language employed in the

20
Ibid.
21
(1992) UKHL 3. Lord Griffith stated as: “The Courts now adopt a purposive approach which seeks to give
effect to the true purposes of the legislation and are prepared to look at as much extraneous material that bears
upon the background against which the legislation was enacted.”
22
Carrington v. Therm-a-Star Ltd., (1983) 1 WLR 138. Sir John Donaldson MR said: “If the regard is held
solely to the apparent mischief and the need for a remedy, it is only too easy for a judge to persuade himself that
the Parliament must have intended to provide the remedy which he himself would have decreed if he had
legislative power.”
23
Franklin c. IRC, (2006) CHANF96/07/47B.

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statute. Judges crossing the boundary between construction and legislation by inserting words
inconsistent with the express wording of a statutory provision would be inappropriate.

It is argued that judges should have the ability to read words into tax legislation whenever
parliamentary intent is discernible, regardless of whether the legislation is designed to
address a specific problem. Additionally, judges should be able to reframe tax legislation not
only in cases where Parliament has unintentionally overlooked certain scenarios but also
when it is understood that Parliament has left it to the courts to ascertain the meaning of
"open textured" words in borderline cases.24

In the tax field, judges are more likely to embrace the purposive approach if tax statutes
explicitly outline the economic or other underlying objectives they seek to achieve. However,
considering the prevailing adherence to the literal rule by our judges in tax matters, it is
unlikely. In such scenario, the PParliament has the option to adopt a similar approach to other
Commonwealth countries by enacting a universal rule of interpretation that would require
judges to apply purposive interpretation to tax statutes..25

INTERPRETATION OF EXEMPTION NOTIFICATION

An exemption refers to an exception from the universal mandate to pay taxes. 26 The
construction and interpretation of exemptions in taxing statutes has been a subject of
significant disagreement. There are two opposing views regarding the construction of
exemptions in cases of ambiguity. According to first perspective, exemptions should be
liberally interpreted to benefit the taxpayer by relieving them from the duty to pay taxes. The
opposing view argues that exemptions further tend to burden the taxpayers and should,
therefore, be construed strictly and literally against the taxpayer.27

There is no prsumption regarding the exercise of exemptions. An individual claiming

exemption must demonstrate their entitlement to it based on the language of the tax law. A

24
H.A. Hart, The Concept of Law, Oxford Clarendon Press, (1961).
25
For instance see, Canada (Interpretation Act RSC 1985, c 1-21, s 11), Ghana (Interpretation Act 1960, s 19)
and Hong Kong (s. 9 Interpretation and General Clauses Ordinance (Cap. 1). Judges are directed by statute to
give: “Every enactment such fair, large and liberal construction and interpretation as best ensures the attainment
of its objectives.” In Australia s. 15 AA of the Acts of Interpretation Act as amended and enacted by the Federal
legislation provides that: “In interpreting a provision of an Act the interpretation that would best achieve
purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be
preferred to reach other interpretation.”
26
A.B. Kafaltiya, Interpretation of Statutes, Lexis Nexis, 2nd edn., (2017).
27
G.P. Singh, Principles of Statutory Interpretation, Lexis Nexis, 14th edn., (2016).

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notable example of a liberal interpretation of exemptions is the case of Commissioner of
Central Excise v. North Eastern Tobacco Company.28 The question brfore the Court was
whether a unit set up by the Tobacco Company can be called a “new industrial unit” in order
to avail an exemption. The Supreme Court held that an exemption notification should be
generously construed in favor of the taxpayer, leading to the dismissal of the appeal.
However, it is important to mention that there are various authorities that oppose this view,
including other judgments of the Supreme Court.

Another case, Orissa State Warehousing Corporation v. CIT, exemplifies the literal approach
to the construction of exemptions. In the present case, the appelant sought a benefit from
exemption on the basis of Sec. 10(29) of the Income Tax Act, 1961. 29 The Supreme Court
observed that exemptions are exceptions to the general rule of construing taxing statutes in
favor of the taxpayer in cases of ambiguity. The Court dismissed the appeal, stating that claim
to exemptions should not be given a broader interpretation or latitude to the taxpayer.30

Consequently, it can be concluded that there are authorities supporting both liberal and literal
interpretations of exemption provisions in statutes. However, exemptions related to beneficial
objectives, such as promoting increased production or incentivizing cooperatives, should be
liberally and strictly construed. In the case of CIT v. Straw Board Manufacturing,31 the Apex
Court used a liberal interpretation to include the term “paper & pulp” within the exemption
provisions, allowing the respondent to benefit from concessions in furtherance of industrial
activity.

In the case of Innamuri Gopalam and Maddala Nagendrudu v. State of A. P,32 the Supreme
Court declined an exemption to the assesee on the grounds that intention of the notification
was to circumvent double taxation, which was not applicable in that case. The Court held that
“based on the plain language of the notification”, the assessee was entitled to the exemption,
and the intention behind the provision could not be taken into consideration since it was not
reflected in clear words.

As stated by the Apex Court, the primary rule of construction is to interpret a statutory
provision based on its plain language. If the provision is unambiguous and the legislative

28
CIT v. Ramakrishna Deo, AIR 1959 SC 239.
29
Income Tax Act, 1961, s. 10(29).
30
Orissa State Warehousing Corporation v. CIT, AIR 1999 SC 1388.
31
AIR 1989 SC 1490.
32
1964 2 SCR 888.

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intent is clear, there is no need to rely on other rules of construction. Other rules come into
play only when the legislative intent is not evident.

In Hansraj Gordhandas v. H.H. Dave,33 the Court emphasized that an exemption notification
should be interpreted based solely on the words used in it, without any other basis. This
principle is applicable in context of the understanding that in a tax statute, there is no room
for presumptions, and the clear meaning of the words should prevail. Some provisions within
an exemption notification may be of a directory or mandatory nature.

In light of the conflicting approaches to interpreting exemptions, the observations of the Apex
Court in Union of India v. Wood Papers 34 provide some guidance. The Court noted that the
“applicability of an exemption should be strictly assessed, taking into account legislative
intent, the equitable burden on taxpayers, and revenue augmentation.” However, once doubts
about the applicability are resolved and it is determined that the assessee was intended to be
entitled, a liberal interpretation becomes appropriate. Thus, strict and liberal interpretations
should be applied at different stages of interpreting an exemption provision. I agree with this
interpretation by the Supreme Court.

CONCLUSION & SUGGESTIONS

In my perspective, the many relaxations to the rule of strict construction reflect the judiciary's
acknowledgment of the legislature's potential oversight in keeping up with rapidly evolving
economic developments, particularly in relation to tax evasion. The growth rate of the entities
and activities subject to taxation far surpasses the growth of the Revenue's nature and
functions. The strict rule of construction aimed to balance individual rights against the power
of the State and prevent unnecessary penalization by the State. However, economic changes
have shifted the balance in favor of companies, which possess significant resources and tax
expertise. As a result, most modifications to the interpretation of tax laws, such as purposive
construction and evasion, tend to be advantageous for the Revenue authority. Conversely, the
few interpretations that benefit the taxpayer, such as a more expansive understanding of
exemptions, often also serve economic objectives like fostering industrialization.

Nevertheless, I believe that the judiciary has invited certain challenges by introducing
relaxations to the rule of strict construction. These relaxations have unlocked the door for
33
AIR 1970 SC 755.
34
Union of India v. M/s Wood Papers Ltd., AIR 1991 SC 2049.

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argumentations based on legislative intent and the “real nature” of transactions in tax-related
cases. The researcher anticipates that, more often than not, the judiciary will resolve this
conflict in favor of the Revenue, aligning with the reasons behind the creation of such
relaxations.

Unfortunately, the burden of these changes will primarily fall on the weaker taxpayers. They
lack the resources and expertise to present intricate arguments to reduce their tax burden, and
the judicial approach does not seem to be in their favor.

In order to safeguard the interests of these vulnerable groups, I express my desire for careful
consideration when making modifications to the rule of strict construction. From a theoretical
perspective as well, I believe that these modifications compromise the clarity and consistency
of statutory interpretation, posing various challenges. While the rule of strict construction
continues to hold a prominent role in interpreting taxing statutes, it is evident that deviations
from this rule have considerably diminished its effectiveness, resulting in significant
implications.

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