COMMNR. OF CUSTOMS (IMPORT), MUMBAI vs. M/S. DILIP KUMAR AND COMPANY

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3327 OF 2007

COMMISSIONER OF CUSTOMS (IMPORT), MUMBAI            …APPELLANT(S) VERSUS M/S. DILIP KUMAR AND COMPANY & ORS.                …RESPONDENT(S) J U D G M E N T N . V .   R A M A N A ,   J . 1. This   Constitution   Bench   is   setup   to   examine   the correctness   of   the ratio in Sun   Export Corporation,   Bombay   v.   Collector   of   Customs, Bombay, (1997) 6 SCC 564 [hereinafter referred as ‘Sun Export Case’ for brevity], namely the question is ­ What is the interpretative rule to be applied while

interpreting

tax

exemption Reportable Digitally signed by VINOD LAKHINA Date: 2018.07.30 11:00:29 IST Reason: Signature Not Verified

provision/notification when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied? 2. In  Sun Export Case  (supra), a three­Judge Bench ruled   that   an   ambiguity   in   a   tax   exemption provision or notification must be interpreted so as to favour   the   assessee   claiming   the   benefit   of   such exemption.   Such   a  rule  was  doubted  when   this appeal was placed before a Bench of two­Judges. The matter then went before a three­Judge Bench consisting one of us (Ranjan Gogoi, J.).  The three­ Judge Bench having noticed the unsatisfactory state of law  as it stands today, opined that the dicta in Sun Export Case (supra), requires reconsideration and that is how the matter has been placed before this Constitution Bench. 2

attracts   standard   rate   of   customs   duty.   The adjudicating   authority,   namely,   the   Assistant Commissioner   of   Customs,   distinguished  Sun Export Case (supra), while accepting the plea of the department   to   deny   the   concessional   rate.     The Commissioner   of   Customs   (Appeals)   reversed   the order of the Assistant Commissioner and came to the conclusion that  Sun Export Case  (supra) was indeed   applicable. The   department   then approached the Customs, Excise and Service Tax Tribunal (CESTAT), which affirmed the order of the Commissioner   of   Customs   (Appeals).     Aggrieved thereby, the present appeal is filed. 4. When   the   appeal   was   placed,   as   noticed   earlier, before a Bench of two­Judges, the ruling in  Sun Export   Case  (supra)   was   doubted,   observing   as follows­ 4

“We have serious doubts as to whether the   Bombay   High   Court   judgment affirmed   in   Sun   Export   Corporation's case is correct. First and foremost, it is clear   that   the   subsequent   exemption Notification   largely   expanded   the   first Notification   which   referred   only   to animal   feeds   and   nothing   else.   That being the case, it would be difficult to say   that   a   large   number   of   other categories   which   have   subsequently been added would be clarificatory and therefore,   retrospective.   Further,   we also feel that in view of the catena of judgments   of   this   Court   which   have held that an exemption Notification has to be strictly construed (that is, if the person claiming exemption does not fall strictly   within   the   letter   of   the Notification,

cannot

claim exemption), have also been ignored by this Court in Sun Export Corporation's case   in   paragraph   13   thereof.   Apart from   this,   the   view   of   this   Court   in paragraph 13 that it is well­settled that if two views are possible, one favourable to the assessee in matters of taxation 5

has to be preferred is unexceptionable. However, this Court was not concerned in that case with the charging Section of a taxation statute. It was concerned with the interpretation of an Exemption Notification which, as has been stated above,   would   require   the   exactly opposite test to be fulfilled.” Further this Court found that the subsequent judgment in Collector of Customs and Central Excise, Guntur and   Ors.   V.   Surendra   Cotton   Oil   Mills   and Fertilizers Co. and Ors., 2001 (1) SCC 578 [hereinafter referred   as  ‘Surendra   Cotton   Oil   Mills   Case’  for brevity], distinguished Sun Export Case (supra), which mandated this Court to take a re­look at the proposition laid down by the earlier cases in the following manner­ “We   also   find   that   in   the subsequent   judgment   of   this   Court, Surendra Cotton Oil Mills's case, this Court   has   distinguished   the   Sun Export   Corporation's   case   and   held 6

that it dealt with 'animal feed' which was large enough to include 'animal feed supplements' whereas the facts of   Surendra   Cotton   Oil   Mills's   case showed   that   ingredients   of   animal feed could not be held to be included in 'animal feed'. In our opinion, this Court   did   not   adequately   deal   with why Sun Exports Corporation's case which is a binding decision of a three Judges Bench should not be followed, apart   from   a   specious   distinction between

'ingredients'

and 'supplements'   which   is   logically speaking   a   distinction   without   a difference. … This being the unsatisfactory state of law  as it stands today, we feel that this matter should be placed before Hon’ble the Chief Justice of India to constitute an appropriate Bench   to   resolve   the   doubts pointed out by us in the body of this Order.” (emphasis supplied) 7

before Hon’ble the Chief Justice of India for constitution of an appropriate Bench, considering the fact that Sun Export   Case  (supra)   was   decided   by   a   Bench comprising of three learned judges of this Court.  Hence, this matter came to be placed before this Bench of Five Judges with following observations­ “In paragraph 13 of the order of this   Court   in

Sun’s   case,

views have been

expressed with regard to   the   interpretation   of   an exemption

notification

to support the conclusion reached. The   same   may   require   a reconsideration. That apart, in the referral order it has been noticed that  Sun’s Case (supra)  has   been   distinguished   in ‘Collector of Central Excise, Guntur vs. Surendra Cotton Oil Mills & Fert. Co.  The   basis   on   which   the   said distinction  has  been  drawn  needs to be further pursued. 9

Having considered the matter at some   length,   we   are   of   the tentative view, that the opinion expressed   in   Sun’s   case   (supra) may   require   a   reconsideration. Being   a   co­ordinate   Bench,   we believe we ought not to proceed any further in the matter. Hence, we direct the Registry to lay the papers   before   the   Hon’ble   the Chief   Justice   of   India   for appropriate orders.” (emphasis supplied) 7. The   learned   Additional   Solicitor   General,   Ms.   Pinky Anand,   submits   that   a   tax   exemption   statute   or notification needs to be strictly interpreted.   According to   her,   strict   interpretation   is   literal   rule   of interpretation, which means that Court has to apply the provision   reading   the   language   therein   and   no 10

interpretation is required if the language is clear.  In the event of any ambiguity, according to her, the benefit has to be given to the revenue and that such ambiguity in tax   exemption   provision   must   not   be   interpreted   to benefit the assessee who fails to demonstrate without any   doubt   that   such   assessee   is   covered   by   the   tax exemption notification.   She elaborated her arguments by relying on various judgments and contends that the ratio in Sun Export Case (supra), which was doubted in Surendra Cotton Oil Mills Case (supra), is not correct law.   On merits of the case, she submitted that the artificial distinction created by  Surendra Cotton Oil Mills   Case  (supra),  in   distinguishing   the   ingredients from   supplements   is   not   sound   and   may   not   be accepted by the Court. 8. Per contra, among others, Mr. Somnath Shukla, learned counsel appearing on behalf of the respondents would 11

submit that the  ratio  and observations in  Sun Export Case  (supra)  has to be considered holistically without giving any narrow meaning to the conclusion arrived therein.     The   rule   of   strict   interpretation   cannot   be applied in abstract.  It has to be applied keeping in view the  interpretation   to  be   used  in   relation   to   Customs Tariff Entry.   According to the learned counsel, when the   Customs   Tariff   Entry   is   interpreted   broadly,   the same   should   be   adopted   in   interpreting   exemption notification.   Indeed, the learned senior counsel would contend that the rule of strict interpretation should be limited   to   the   eligibility   conditions   of   an   exemption notification and while conferring the benefits to such exemption.  He distinguished all the judgments relied on by   the   appellants   and   submits   that   “prawn   feed supplements” would also be included under the head “prawn   feed”,   and   the   judgment   of   the   Tribunal 12

impugned   in   these   appeals   does   not   warrant   any interference. 9. Sun   Export   Case  (supra)  was   a   case   against   the judgment of the High Court of Judicature, Bombay.  It was concerned with the interpretation of tax exemption notification,   being   Notification   No.   234/1982   –   CE, dated 01.11.1982, issued by the Central Government under sub­section (1) of Section 25 of the Customs Act. The High Court considered the issue whether Vitamin AD­3 mix (feed grade)/animal feed supplement could be included   under   the   head   ‘animal   feed,   including compound   livestock   feed’.     The   Bombay   High   Court decided, in the affirmative, in favour of the assessee. The   case   then   landed   in   this   Court,   which   was persuaded to expand the meaning of ‘animal feed’ in the light of subsequent notification issued in 1984, which largely expanded the scope of exemption to the effect 13

that   ‘animal   feed,   including   compound   livestock   feed, animal feed supplements and animal feed concentrates’. This   Court   indeed   countenanced   the   plea,   namely, whenever there is ambiguity as to whether the subject matter was included or not, then the benefit of the same should   be   conferred   on   the   assessee.     The   relevant portion in Sun Export Case (supra), reads as follows: “13. We are in agreement with the above view   expressed   by   the   Bombay   High Court.   No   doubt   it   was   contended   on behalf of the Revenue that the contrary view   taken   by   the   Tribunal   has   been challenged   in   this   Court   which   was rejected in limine at the admission stage. We   do   not   think   that   dismissal   at   the admission stage can be relied upon as a binding precedent.  Even assuming that there are two views possible, it is well settled   that   one   favourable   to   the assessee in matters of taxation has to be preferred.” (emphasis supplied) 14

10.There cannot be any doubt that the ratio in Sun Export Case  (supra)  that,   if   two   views   are   possible   in interpreting   the   exemption   notification,   the   one favourable to the assesseee in the matter of taxation has to be preferred.   This principle created confusion and resulted   in  unsatisfactory   state   of   law.     In   spite   of catena of judgments of this Court, which took the contra view, holding that an exemption notification must be strictly construed, and if a person claiming exemption does   not   fall   strictly   within   the   description   of   the notification otherwise then he cannot claim exemption. 11.About three years after Sun Export Case (supra), in the year 2000, this Court in  Surendra Cotton Oil Mills Case (supra),   expressed   reservations   as   to   the soundness of the dicta in  Sun Export Case  (supra), observing that Sun Export Case (supra) ignored catena 15

of judgments of this Court expressing contra view.  This Court prima facie came to the conclusion with regard to the   principle   that   when   two   views   are   possible,   one favourable to the assessee in matters of taxation has to be preferred, is unexceptionable when interpreting the charging section of a taxation statute, but the opposite principle   would   be   applicable   in   interpretation   of exemption notification.   The three­Judge Bench in the referral order further observed that the views expressed in Sun   Export   Case (supra) with   regard   to interpretation of exemption notification to support the conclusion, required reconsideration. 12.We   may,   here   itself   notice   that   the   distinction   in interpreting a taxing provision (charging provision) and in the matter of interpretation of exemption notification is too obvious to require any elaboration.  Nonetheless, in   a   nutshell,   we   may   mention   that,   as   observed   in 16

Surendra Cotton Oil Mills Case (supra), in the matter of   interpretation   of   charging   section   of   a   taxation statute, strict rule of interpretation is mandatory and if there   are   two   views   possible   in   the   matter   of interpretation of a charging section, the one favourable to the assessee need to be applied.  There is, however, confusion in the matter of interpretation of exemption notification published under taxation statutes and in this area also, the decisions are galore1. 13.We may passingly, albeit, briefly reiterate the general principles of interpretation, which were also adverted to 1  See:  Sun Export Corporation, Bombay v. Collector of Customs,   Bombay   and   Anr., (1997)   6   SCC   564; Commissioner   of   Central   Excise,   Pune   v.   Abhi Chemicals and Pharmaceuticals Pvt. Ltd., (2005) 3 SCC 541; Collector of Central Excise, Bombay­1 and Anr. v. Parle   Exports   (Pvt.)   Ltd.,   (1989)   1   SCC   345; Commissioner of Customs (Import), Mumbai v. Konkan Synthetic   Fibres,   (2012)   6   SCC   339;  Collector   of Customs,   Bombay   v.   Swastic   Wollens   (Pvt.)   Ltd.   And Ors., (1988) Supp. SCC 796;  Commissioner of Customs (Preventive), Gujarat v. Reliance Petroleum Ltd., (2008) 7 SCC 220. 17

by   both   the   counsel.   In   his   treatise,   ‘Principles   of Statutory Interpretation’ Justice G.P. Singh, lucidly pointed the importance of construction of statutes in a modern State as under: “Legislation   in   modern   State   is actuated   with   some   policy   to   curb some public evil or to effectuate some public   benefit.     The   legislation   is primarily   directed   to   the   problems before   the   Legislature   based   on information   derived   from   past   and present   experience.     It   may   also   be designed   by   use   of   general  words   to cover   similar   problems   arising   in future.   But, from the very nature of things,   it   is   impossible   to   anticipate fully   the   varied   situations   arising   in future in which the application of the legislation in hand may be called for, and,   words   chosen   to   communicate such indefinite ‘referents’ are bound to be,   in   many   cases   lacking   in   clarity and precision and thus giving rise to 18

controversial

questions

of construction.” 14.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. 15.In doing so, the principles of interpretation have been evolved in common law.  It has also been the practice for the appropriate legislative body to enact Interpretation Acts   or   General   Clauses   Act.     In   all   the   Acts   and Regulations,   made   either   by   the   Parliament   or 19

Legislature, the words and phrases as defined in the General Clauses Act and the principles of interpretation laid down in General Clauses Act are to be necessarily kept in view.  If while interpreting a Statutory law, any doubt arises as to the meaning to be assigned to a word or a phrase or a clause used in an enactment and such word, phrase or clause is not specifically defined, it is legitimate and indeed mandatory to fall back on General Clauses   Act. Notwithstanding   this,   we   should remember that when there is repugnancy or conflict as to the subject or context between the General Clauses Act   and   a   statutory   provision   which   falls   for interpretation, the Court must necessarily refer to the provisions of statute. 16.The purpose of interpretation is essentially to know the intention of the Legislature.   Whether the Legislature intended to apply the law in a given case; whether the 20

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 the legislation.     Apart from the general principles of interpretation of statutes, there are certain internal   aids   and   external   aids   which   are   tools   for interpreting the statutes. 17.The long title, the preamble, the heading, the marginal note, punctuation, illustrations, definitions or dictionary clause, a proviso to a section, explanation, examples, a schedule   to   the   Act   etc.,   are   internal   aids   to construction.     The   external   aids   to   construction   are Parliamentary debates, history leading to the legislation, other   statutes   which   have   a   bearing,   dictionaries, thesaurus. 21

statutory provision is open to more than one interpretation the Court has to choose that   interpretation   which   represents   the true intention of the Legislature.  This task very often raises the difficulties because of various   reasons,   inasmuch  as   the   words used may not be scientific symbols having any   precise   or   definite   meaning   and   the language may be an imperfect medium to convey one’s thought or that the assembly of   Legislatures   consisting   of   persons   of various   shades   of   opinion   purport   to convey a meaning which may be obscure. It   is   impossible   even   for   the   most imaginative   Legislature   to   forestall exhaustively situations and circumstances that may emerge after enacting a statute where   its   application   may   be   called   for. Nonetheless, the function of the Courts is only   to   expound   and   not   to   legislate. Legislation in a modern State is actuated with some policy to curb some public evil or to effectuate some public benefit.   The legislation   is   primarily   directed   to   the problems before the Legislature based on information derived from past and present experience.  It may also be designed by use 23

of general words to cover similar problems arising   in   future.     But,   from   the   very nature   of   things,   it   is   impossible   to anticipate   fully   the   varied   situations arising in future in which the application of the legislation in hand may be called for, and, words chosen to communicate such indefinite   referents   are   bound   to   be   in many cases lacking in clarity and precision and   thus   giving   rise   to   controversial questions of construction.  The process of construction   combines   both   literal   and purposive approaches.  In other words the legislative intention i.e., the true or legal meaning   of   an   enactment   is   derived   by considering the meaning of the words used in   the   enactment   in   the   light   of   any discernible   purpose   or   object   which comprehends the mischief and its remedy to which the enactment is directed…” 19.The well settled principle is that when the words in a statute are clear, plain and unambiguous and only one meaning can be inferred, the Courts are bound to give 24

effect to the said meaning irrespective of consequences. If the words in the statute are plain and unambiguous, it becomes necessary to expound those words in their natural and ordinary sense.  The words used declare the intention   of   the   Legislature.     In  Kanai   Lal   Sur   v. Paramnidhi   Sadhukhan,   AIR   1957   SC   907,   it   was held   that   if   the   words   used   are   capable   of   one construction   only   then   it   would   not   be   open   to   the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act. 20.In   applying   rule   of   plain   meaning   any   hardship   and inconvenience cannot be the basis to alter the meaning to the language employed by the legislation.   This is especially   so   in   fiscal   statutes   and   penal   statutes. Nevertheless, if the plain language results in absurdity, the Court is entitled to determine the meaning of the 25

word in the context in which it is used keeping in view the   legislative   purpose.2    Not   only   that,   if   the   plain construction leads to anomaly and absurdity, the court having regard to the hardship and consequences that flow from such a provision can even explain the true intention   of   the   legislation.   Having   observed   general principles   applicable   to   statutory   interpretation,   it   is now time to consider rules of interpretation with respect to taxation. 21.In construing penal statutes and taxation statutes, the Court has to apply strict rule of interpretation.   The penal statute which tends to deprive a person of right to life and liberty has to be given strict interpretation or else   many   innocent   might   become   victims   of discretionary   decision   making.     Insofar   as   taxation statutes are concerned, Article 265 of the Constitution3 2 Assistant Commissioner, Gadag Sub­Division, Gadag v. Mathapathi Basavannewwa, 1995 (6) SCC 355. 3 265. Taxes not to be imposed save by authority of law­ No tax shall be levied or collected except by authority of law. 26

prohibits the State from extracting tax from the citizens without authority of law.   It is axiomatic that taxation statute   has   to   be   interpreted   strictly   because   State cannot at their whims and fancies burden the citizens without   authority   of   law.   In   other   words,   when competent   Legislature   mandates   taxing   certain persons/certain   objects   in   certain   circumstances,   it cannot be expanded/interpreted to include those, which were not intended by the Legislature. 22.At   the   outset,   we   must   clarify   the   position   of   ‘plain meaning   rule   or   clear   and   unambiguous   rule’   with respect of tax law. ‘The plain meaning rule’ suggests that   when   the   language   in   the   statute   is   plain   and unambiguous, the Court has to read and understand the plain language as such, and there is no scope for any interpretation.  This salutary maxim flows from the phrase “cum inverbis nulla ambiguitas est, non debet 27

admitti voluntatis quaestio”. Following such maxim, the courts   sometimes   have   made   strict   interpretation subordinate to the plain meaning rule4, though strict interpretation is used in the precise sense.  To say that strict interpretation involves plain reading of the statute and to say that one has to utilize strict interpretation in the event of ambiguity is self­contradictory. 23.Next, we may consider the meaning and scope of ‘strict interpretation’, as evolved in Indian law and how the higher Courts have made a distinction while interpreting a   taxation   statute   on   one   hand   and   tax   exemption notification on the other. In Black’s Law Dictionary (10th Edn.) ‘strict interpretation’ is described as under: Strict   interpretation.   (16c)   1.   An interpretation according to the narrowest, most literal meaning of the words without regard for context and other permissible 4 Mangalore Chemicals Case (Infra para 37). 28

meanings. 2. An interpretation according to what the interpreter narrowly believes to   have   been   the   specific   intentions   or understandings   of  the   text’s   authors   or ratifiers, and no more.­ Also termed (in senses 1 & 2) strict construction, literal interpretation;

literal

construction; restricted   interpretation;   interpretatio stricta;

interpretatio

restricta; interpretatio verbalis. 3. The philosophy underlying   strict   interpretation   of statues.­   Also   termed   as   close interpretation; interpretatio restrictive. See   strict   constructionism   under constructionism. Cf. large interpretation; liberal interpretation (2). “Strict  construction of   a statute  is that which refuses to expand the law by implications or equitable considerations, but confines its operation to cases which are clearly within the letter of the statute, as well as within its spirit or reason, not so as to defeat the manifest purpose of the   legislature,  but  so as   to  resolve  all reasonable

doubts

against

the applicability   of   the   statute   to   the particular   case.’   Willam   M.   Lile   et   al., 29

Brief Making and the use of Law Books 343   (Roger   W.   Cooley   &   Charles   Lesly Ames eds., 3d ed. 1914). “Strict   interpretation   is   an   equivocal expression, for it means either literal or narrow. When a provision is ambiguous, one of its meaning may be wider than the other, and the strict (i.e., narrow) sense is not   necessarily   the   strict   (i.e.,   literal) sense.”   John   Salmond   ,   Jurisprudence 171 n. (t) (Glanville L. Williams ed., 10th ed. 1947). 24.As contended by Ms. Pinky Anand, learned Additional Solicitor General, the principle of literal interpretation and the principle of strict interpretation are sometimes used interchangeably.  This principle, however, may not be sustainable in all contexts and situations.  There is certainly scope to sustain an argument that all cases of literal   interpretation   would   involve   strict   rule   of interpretation,   but   strict   rule   may   not   necessarily involve the former, especially in the area of taxation. 30

The   decision   of   this   Court   in Punjab   Land Development   and   Reclamation   Corporation   Ltd., Chandigarh   v.   Presiding   Officer,   Labour   Court Chandigarh and Ors.,  (1990) 3 SCC 682, made the said distinction, and explained the literal rule­ “The   literal   rules   of   construction   require the   wording   of   the   Act   to   be   construed according   to   its   literal   and   grammatical meaning   whatever   the   result   may   be. Unless otherwise provided, the same word must   normally   be   construed   throughout the Act in the same sense, and in the case of old statutes regard must be had to its contemporary  meaning  if   there   has  been no change with the passage of time.” That   strict   interpretation   does   not   encompass   strict­ literalism into its fold.  It may be relevant to note that simply   juxtaposing   ‘strict   interpretation’   with   ‘literal rule’ would result in ignoring an important aspect that 31

is ‘apparent legislative intent’.  We are alive to the fact that there may be overlapping in some cases between the aforesaid two rules.  With certainty, we can observe that,   ‘strict   interpretation’   does   not   encompass   such literalism, which lead to absurdity and go against the legislative intent. As noted above, if literalism is at the far   end   of   the   spectrum,   wherein   it   accepts   no implications   or   inferences,   then   ‘strict   interpretation’ can   be   implied   to   accept   some   form   of   essential inferences which literal rule may not accept. 25.We are not suggesting that literal rule de hors the strict interpretation nor one should ignore to ascertain the interplay   between   ‘strict   interpretation’   and   ‘literal interpretation’.     We   may   reiterate   at   the   cost   of repetition that strict interpretation of a statute certainly involves literal or plain meaning test. The other tools of interpretation,   namely   contextual   or   purposive 32

interpretation cannot be applied nor any resort be made to   look   to   other   supporting   material,   especially   in taxation statutes.   Indeed, it is well settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification.  Equity has no place in interpretation of a tax statute. Strictly one has to look to the   language   used;   there   is   no   room   for   searching intendment

nor

drawing

any

presumption. Furthermore, nothing has to be read into nor should anything   be   implied   other   than   essential   inferences while considering a taxation statute. 26. Justice   G.P.   Singh,   in   his   treatise   ‘Principles   of Statutory Interpretation’ (14th ed. 2016 p. – 879) after referring   to  Re,   Micklethwait,   (1885)   11   Ex   452; Partington v. A.G., (1869) LR 4 HL 100;  Rajasthan 33

Rajya   Sahakari   Spinning   &   Ginning   Mills Federation Ltd. v. Deputy CIT, Jaipur, (2014) 11 SCC 672,  State Bank of Travancore v. Commissioner of Income   Tax,   (1986)   2   SCC   11   and  Cape   Brandy Syndicate v. IRC, (1921) 1 KB 64, summed up the law in the following manner­ “A   taxing   statute   is   to   be   strictly construed.  The well­established rule in the familiar   words   of   LORD   WENSLEYDALE, reaffirmed   by   LORD   HALSBURY   AND LORD   SIMONDS,   means:   ‘The   subject   is not to be taxed without clear words for that purpose;   and   also   that   every   Act   of Parliament must be read according to the natural   construction   of   its   words.     In   a classic passage LORD CAIRNS stated the principle thus: “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 to be.  On the   other   hand,   if  the   Crown  seeking  to recover the tax, cannot bring the subject within the letter of the law, the subject is 34

free, however apparently within the spirit of law the case might otherwise appear to be.  In other words, if there be admissible in any statute, what is called an equitable construction,

certainly,

such

a construction is not admissible in a taxing statute where you can simply adhere to the words of the statute.   VISCOUNT SIMON quoted   with   approval   a   passage   from ROWLATT, J. expressing the principle in the following words: “In a taxing Act one has to look merely at what is clearly said. This is no room for any intendment. There is   no   equity   about   a   tax.   There   is   no presumption as to tax.   Nothing is to be read in, nothing is to be implied.  One can only look fairly at the language used.” It was further observed: “In all tax matters one has to interpret the taxation statute strictly.   Simply because one class of legal entities is given a benefit which is specifically stated in the Act, does not mean that the benefit can be extended to legal entities not referred to in the Act as there is no equity in matters of taxation….” 35

Yet again, it was observed: “It may thus be taken as a maxim of tax   law,   which   although   not   to   be overstressed   ought   not   to   be   forgotten that, “the subject is not to be taxed unless the   words   of   the   taxing   statute unambiguously impose the tax on him”, [Russel v. Scott, (1948) 2 All ER 1].  The proper course in construing revenue Acts is   to   give   a   fair   and   reasonable construction   to   their   language   without leaning   to   one   side   or   the   other   but keeping   in   mind   that   no   tax   can   be imposed   without   words   clearly   showing an intention to lay the burden and that equitable construction of the words is not permissible   [Ormond   Investment   Co.   v. Betts, (1928) AC 143].  Considerations of hardship,   injustice   or   anomalies   do  not play any useful role in construing taxing statutes   unless   there   be   some   real ambiguity [Mapp v. Oram, (1969) 3 All ER 215]. It has also been said that if taxing provision is “so wanting in clarity that no meaning  is  reasonably clear,  the  courts will be unable to regard it as of any effect 36

[IRC v. Ross and Coutler, (1948) 1 All ER 616].” Further   elaborating   on   this   aspect,   the   learned author stated as follows: “Therefore,   if   the   words   used   are ambiguous   and   reasonable   open   to   two interpretations benefit of interpretation is given   to   the   subject   [Express   Mill   v. Municipal Committee, Wardha, AIR 1958 SC 341].  If the Legislature fails to express itself clearly and the taxpayer escapes by not being brought within the letter of the law,   no   question   of   unjustness   as   such arises [CIT v. Jalgaon Electric Supply Co., AIR   1960   SC   1182].     But   equitable considerations   are   not   relevant   in construing a taxing statute, [CIT, W.B. v. Central   India   Industries,   AIR   1972   SC 397], and similarly logic or reason cannot be of much avail in interpreting a taxing statute   [Azam   Jha   v.   Expenditure   Tax Officer, Hyderabad, AIR 1972 SC 2319].  It is well settled that in the field of taxation, hardship or equity has no role to play in determining eligibility to tax and it is for 37

the   Legislature   to   determine   the   same [Kapil   Mohan   v.   Commr.   of   Income   Tax, Delhi,   AIR   1999   SC   573].     Similarly, hardship   or   equity   is   not   relevant   in interpreting   provisions   imposing   stamp duty, which is a tax, and the court should not concern itself with the intention of the Legislature when the language expressing such intention is plain and unambiguous [State of Madhya Pradesh v. Rakesh Kohli & Anr., (2012) 6 SCC 312].   But just as reliance   upon   equity   does   not   avail   an assesse, so it does not avail the Revenue.” The   passages   extracted   above,   were   quoted   with approval   by   this   Court   in   at   least   two   decisions being  Commissioner of Income Tax vs. Kasturi Sons Ltd., (1999) 3 SCC 346 and  State of West Bengal vs. Kesoram Industries Limited, (2004) 10 SCC   201   [hereinafter   referred   as ‘Kesoram Industries Case’ for brevity].   In the later decision, a   Bench   of   seven   Judges,   after   citing   the   above 38

passage from Justice G.P. Singh’s treatise, summed up   the   following   principles   applicable   to   the interpretation of a taxing statute: “(i)   In   interpreting   a   taxing   statute, equitable considerations are entirely out of place. A   taxing   statute   cannot   be interpreted   on   any   presumption   or assumption.   A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is   not   expressed;   it   cannot   import provisions in the statute so as to supply any   deficiency;   (ii)   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; and (iii) If the words are ambiguous and open to two interpretations,

the

benefit

of interpretation is given to the subject and there   is   nothing   unjust   in   a   taxpayer escaping   if   the   letter   of   the   law   fails   to catch   him   on   account   of   Legislature’s failure to express itself clearly”.

27.Now   coming   to   the   other   aspect,   as   we   presently discuss,   even   with   regard   to   exemption   clauses   or exemption notifications issued under a taxing statute, this Court in some cases has taken the view that the ambiguity   in   an   exemption   notification   should   be construed   in   favour   of   the   subject.     In   subsequent cases,   this   Court   diluted   the   principle   saying   that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption   notification   can   be   condoned   if   there   is sufficient compliance with the main requirements.  This, however, did not in any manner tinker with the view that   an   ambiguous   exemption   clause   should   be interpreted   favouring   the   revenue.     Here   again   this Court   applied   different   tests   when   considering   the ambiguity of the exemption notification which requires strict construction and after doing so at the stage of 40

applying the notification, it came to the conclusion that one has to consider liberally. 28.With the above understanding the stage is now set to consider the core issue.  In the event of ambiguity in an exemption   notification,   should   the   benefit   of   such ambiguity go to the subject/assessee or should such ambiguity should be construed in favour of the revenue, denying   the   benefit   of   exemption   to   the subject/assessee?  There are catena of case laws in this area   of   interpretation   of   an   exemption   notification, which   we   need   to   consider   herein.     The   case   of Commissioner of Inland Revenue vs. James Forrest, [(1890) 15 AC 334 (HL)] – is a case which  does not discuss   the   interpretative   test   to   be   applied   to exemption clauses in a taxation statute – however, it was observed that ‘it would be unreasonable to suppose that an exemption was wide as practicable to make the 41

tax inoperative, that it cannot be assumed to have been in the mind of the Legislature’ and that exemption ‘from taxation to some extent increased the burden on other members of the community’.  Though this is a dissenting view of Lord Halsbury, LC, in subsequent decisions this has been quoted vividly to support the conclusion that any vagueness in the exemption clauses must go to the benefit of the revenue.  Be that as it is, in our country, at least from 1955, there appears to be a consistent view that   if   the   words   in   a   taxing  statute   (not  exemption clause) are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and it does not matter if the taxpayer escapes the tax net on account of Legislatures’ failure to express itself clearly (See the passage extracted hereinabove from  Kesoram Industries Case (supra)). 42

29.The first case with which we need to concern ourselves is the case in Union of India v. The Commercial Tax Officer, West Bengal and Ors., AIR 1956 SC 202.  It may   be   noted   that   this   case   was   dealt   with   by   five learned Judges of this Court resulting in two different opinions; one by the then Chief Justice of India, S.R. Das for the majority, and Justice B.P. Sinha (as His Lordship   then   was)   rendering   minority   view.     The question before this Court was whether the sale of goods made by one private mill to the Government of India, Ministry of Industries and Supplies were to be deducted as taxable turnover of the mill for the exemption given under Section 5 of the Bengal Finance (Sales Tax) Act, 1941 (Bengal Act VI of 1941).   The exemption under Section 5(2)(a)(iii) of the Bengal Finance (Sales Tax) Act, 1941   provided   for   exemption   ‘to   sales   to   the   Indian Stores   Department,   the   Supply   Department   of   the Government of India, and any railway or water transport 43

administration’.     The   Court   was   to   interpret   the aforesaid provision  in  order to ascertain whether the sale to the Government of India, Ministry of Industries and Supplies would be covered under the Section. 30.The majority was of the view that the Government of India,   Ministry   of   Industries   and   Supplies   was   not similar   to   those   mentioned   in   the   exemption notification.     The   majority   extensively   relied   on   the history and origin of Ministry of Industries and Supplies and   concluded   that   the   functions   of   the   aforesaid Ministry were different from the erstwhile departments mentioned under the exemption provision.  The majority reasoned that the exemption being the creation of the statute itself, it should have to be construed strictly and the interpretation cannot be extended to sales to other departments.     We   might   find   some   clue   as   to   the content of a strict construction also.  It was canvassed 44

before the Court that the object of Section 5(2)(a)(iii) of the relevant statute, was to give exemption not to the particular departments but to the sale of such goods to those departments and, therefore, sale of those goods made to any Departments of the Government of India, which came to be charged with the duty of purchasing those goods should also come within the purview of the exemption.     The   Court   while   repelling   the   aforesaid interpretation, reasoned as under: “We are unable to accept this line of reasoning.     This   interpretation   will   unduly narrow the scope and ambit of the exemption by limiting it to sales of only those goods as, at the date of the Act, used to be sold to those   two   departments   and   sales   of   other goods   even   to   those   two   departments, however necessary for the prosecution of the war, would not get benefit of the exemption. Such could not possibly be the intention of the Legislature as expressed by the language used by it in framing the Section.” 45

31.The aforesaid placitum is suggestive of the fact that the Courts utilized the rule of strict interpretation in order to   decipher   the   intention   of   the   Legislature   and thereafter   provide   appropriate   interpretation   for   the exemption   provided   under   the   provisions   of   the   Act which was neither too narrow nor too broad. It may be noted that the majority did not take a narrow view as to what strict interpretation would literally mean; rather they   combined   legislative   intent   to   ascertain   the meaning of the statute in accordance with the objective intent of the Legislature. 32. On the contrary, the minority opinion of Justice B.P. Sinha (as His Lordship then was) provided a purposive interpretation for Section 5(2)(a)(iii) of the Act, which is clear from the following passage: “The judgment under appeal is based chiefly   on   the   consideration   that   the exemption clause in question does not in 46

terms   refer   to   the   newly   created department which now goes by the name of   the   Ministry   of   Industry   and   Supply. But this department in so far as it deals with industry, is not concerned with the main   purchasing   activities   of   the Government of India.  The exemption was granted   in   respect   of   the   purchasing activity   of   the   Government   of   India   and that function continues to be assigned to the   Supply   Department   which   has   now become   a   wing   of   the   newly   created department   of   the   Government.     The question therefore arises whether in those circumstances   the   Government   of   India could claim the benefit of the exemption. The High Court in answering that question in   the   negative   has   gone   upon   mere nomenclature.     It   has   emphasized   the change   in   the   name   and   overlooked   the substance of the matter.” 33.The minority construed ‘strict interpretation’ to be an interpretation wherein least number of “determinates in terms of quantity” would fall under the exemption.  The minority   referred   to   an   old   English   case   of 47

Commissioner of Inland Revenue v. James Forrest, (1890) 15 AC 334.  It may be relevant to note that the minority could not find the justification to apply strict interpretation as the exemption notification was broad enough   to   include   exemptions   for   commodities purchased by the Government of India.  The Court was of the opinion that the strict interpretation provided by the majority was uncalled for as there was no additional burden   on   others   by   giving   such   exemptions.     The relevant observations are as follows­ “The   High   Court   referred   to   the observations of Lord Halsbury in the case of Commissioner   of  Inland   Revenue   v.  James Forrest (1890) 15 AC 334, to the effect that exemptions from taxation should be strictly construed because otherwise the burden of taxation  will  fall  on  other   members   of   the community.     Those   observations,   in   my opinion, have no relevance to the facts and circumstances   of   the   present   controversy, because   we   know   that   the   exemption   was granted to the Government of India in the 48

department dealing with purchase of certain commodities   and   articles   without  reference to   quantity.     As   already   pointed   out,   the Indian   Stores   Department   was   concerned with purchase of stores for public services on behalf   of   all   Central   Departments   of Government and local Government, etc., and the   Government   of   Bengal   as   then constituted was one of the provinces of India which   have   been   receiving   subsidies   and subventions to make up the deficit in their budgets.   As a matter of fact, as stated on behalf   of   the   Bengal   Government   the concession was granted  in order to enable business communities within the province of Bengal to compete on favourable terms with others   outside   Bengal   in   the   matter   of supplying   the   needs   of   the   Government. Hence,   there   is   no   question   of   liberal construction   of   the   exemption   resulting   in throwing a greater burden on other citizens. On the other hand, the larger the sales in the province   of   Bengal   as   it   used   to   be,   the greater   the   benefit   to   the   business community   doing   business   within   that province.  It was therefore stated at the Bar that though the present case involved taxes 49

amounting   to   less   than   Rs.10,000,   the question   arising   for   determination   in   this case affected much larger amounts because such sales within the province amounted to several crores.   I should have thought that the business community in the province of Bengal   having   had   the   advantage   of   the transactions   of   sale,   the   Government   of Bengal in all fairness should have  allowed the purchasing agency of the Government of India the benefit of the exemption until that benefit was in terms withdrawn sometimes in the beginning of 1949.” 34.In Hansraj Gordhandas v. H.H. Dave, Asst. Collector of Central Excise & Customs, Surat and Ors., AIR 1970 SC 755 = (1969) 2 SCR 253 [hereinafter referred as  ‘Hansraj   Gordhandas   Case’  for   brevity],   wherein this Court was called upon to interpret an exemption notification   issued   under   the   Central   Excise   Act.     It would   be   relevant   to   understand   the   factual   context which gave rise to the aforesaid case before the Court. The appellant was sole proprietor who used to procure 50

cotton from a co­operative society during the relevant period.  The society had agreed to carry out the weaving work   for   the   appellant   on   payment   of   fixed   weaving charges   at   Re.0.19   np.   per   yard   which   included expenses the society would have to incur in transporting the aforesaid cotton fabric.  In the years 1959 and 1960, the Government issued an exemption notification which exempted cotton fabrics produced by any co­operative society   formed   of   owners   of   cotton   power   looms, registered on or before 31st March, 1961.  The question before the Court was whether the appellant who got the cotton fabric produced from one of the registered co­ operative society was also covered under the aforesaid notification.   It may be of some significance that the revenue tried to interpret the aforesaid exemption by relying on the purposive interpretation by contending that the object of granting the above exemption was to encourage the formation of co­operative societies which 51

not only produced cotton fabrics but also consisted of members, not only owning but having actually operated not more than four power looms during the three years immediately preceding their having joined the society. The   policy   was   that   instead   of   each   such   member operating his looms on his own, he should combine with others by forming a society to produce clothes.  It was argued that the goods produced for which exemption could be claimed must be goods produced on his own and   on   behalf   by   the   society.     The   court   did   not countenance such purposive interpretation.  It was held that a taxing legislation should be interpreted wholly by the   language   of   the   notification.     The   relevant observations are: “It is well­established that in a taxing statute there is no room for any intendment but regard must be had to the clear meaning of the words.  The entire matter is governed wholly by the language of the notification.  If the tax­payer is within the plain terms of the 52

exemption it cannot be denied its benefit by calling in aid any supposed intention of the exempting authority.   If such intention can be   gathered   from   the   construction   of   the words   of   the   notification   or   by   necessary implication therefrom, the matter is different, but   that   is   not   the   case   here.     In   this connection we may refer to the observations of Lord Watson in Salomon vs. Salomon & Co., (1897) AC 22): ‘Intention of the Legislature is a common but very   slippery   phrase,   which,   popularly understood   may   signify   anything   from intention embodied in positive enactment to speculative opinion as to what the legislature probably would have meant, although there has been an omission to enact it.  In a Court of   Law   or   Equity,   what   the   Legislature intended to be done or not to be done can only   be   legitimately   ascertained   from   that which   it   has   chosen   to   enact,   either   in express   words   or   by   reasonable   and necessary implication.’ It is an application of this principle that a statutory notification may not be extended so as to meet a casus omissus.  As appears in 53

the   judgment   of   the   Privy   Council   in Crawford v. Spooner. ‘… we cannot aid the Legislature’s defective phrasing   of   the   Act,   we   cannot   add,   and mend,   and,   by   construction,   make   up deficiencies which are left there.’ Learned Counsel for the respondents is possibly   right   in   his   submission   that   the object   behind   the   two   notifications   is   to encourage   the   actual   manufacturers   of handloom   cloth   to   switch   over   to   power looms   by   constituting   themselves   in   co­ operative Societies.  But the operation of the notifications   has   to   be   judged   not   by   the object which the rule making authority had in   mind   but   by   the   words   which   it   has employed to effectuate the legislative intent.” 35.In   the   judgment   of   two   learned   Judges   in  Union   of India   v.   Wood   Papers   Limited,   (1990)   4   SCC   256 [hereinafter   referred   as   ‘Wood   Papers   Ltd.   Case’  for brevity], a distinction between stage of finding out the eligibility to seek exemption and stage of applying the nature of exemption was made.  Relying on the decision 54

in  Collector of Central Excise vs. Parle Exports (P) Ltd., (1989) 1 SCC 345, it was held “Do not extend or widen the ambit at the stage of applicability. But once that   hurdle   is   crossed,   construe   it   liberally”.     The reasoning for arriving at such conclusion is found in para 4 of Wood Papers Ltd. Case (supra), which reads­ “…   Literally   exemption   is   freedom   from liability, tax or duty.  Fiscally, it may assume varying   shapes,   specially,   in   a   growing economy.   For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective etc.   That is why its construction, unlike charging provision, has to be tested on   different   touchstone. In   fact,   an exemption provision is like an exception and on   normal   principle   of   construction   or interpretation   of   statutes   it   is   construed strictly either because of legislative intention or   on   economic   justification   of   inequitable burden   or   progressive   approach   of   fiscal provisions   intended   to   augment   State revenue.   But   once   exception   or   exemption 55

becomes   applicable   no   rule   or   principles requires it to be construed strictly.   Truly speaking liberal and strict construction of an exemption provision are to be invoked at   different   stages   of   interpreting   it. When the question is whether a subject falls   in   the   notification   or   in   the exemption clause then it being in nature of   exception   is   to   be   construed   strictly and   against   the   subject,   but   once ambiguity or doubt about applicability is lifted   and   the   subject   falls   in   the notification then full play should be given to it and it calls for a wider and liberal construction…” (emphasis supplied) 36.In  Mangalore Chemicals & Fertilizers Ltd. vs. Dy. Commissioner of Commercial Taxes, (1992) Supp. 1 SCC 21 [hereinafter referred as ‘Mangalore Chemicals Case’  for brevity], the facts of the case were that the State Government issued a notification in exercise of power under Section 8­A of the Karnataka Sales Tax 56

Act, 1957, providing certain incentives to entrepreneurs starting new industries in the State pursuant to State’s policy   for   “rapid   industrialization”.     The   notification contains a package of reliefs and incentives including one concerning relief from payment of sales tax with which the case was concerned.   There was no dispute that   the   appellant   was   entitled   to   the   benefit   of   the Notification dated June 30, 1969.   There was also no dispute that the refunds were eligible to be adjusted against sales tax payable for respective years.  The only controversy   was   whether   the   appellant,   not   having actually   secured   the   “prior   permission”   would   be entitled to adjustment having regard to the words of the Notification of August 11, 1975, that “until permission of renewal is granted by the Deputy Commissioner of Commercial   Taxes,   the   new   industry   should   not   be allowed to adjust the refunds”.   The contention of the appellants therein was that the permission for the three 57

years had been sought well before the commencement of the respective years but had been withheld for reasons which   were   demonstrably   extraneous.     Therefore, contention   was   that   if,   in   these   circumstances,   the Deputy Commissioner could withold the permission. 37.This Court while accepting the interpretation provided by   the   appellant,   observed   on   the   aspect   of   strict construction of a provision concerning exemptions as follows: “… There is support of judicial opinion to the   view   that   exemptions   from   taxation have a tendency to increase the burden on the other unexempted class of tax payers and   should   be   construed   against   the subject   in   case   of   ambiguity.     It   is   an equally well known principle that a person who claims an exemption has to establish his case. … The choice between a strict and a liberal construction arises only in case of 58

doubt   in   regard   to   the   intention   of   the legislature   manifest   on   the   statutory language.     Indeed,  the   need  to  resort  to any   interpretative   process   arises   only where the meaning is not manifest on the plain words of the statute.  If the words are plain   and   clear   and   directly   convey   the meaning,   there   is   no   need   for   any interpretation.   It appears to us the true rule of  construction of  a provision as to exemption is the one stated by this Court in   Union   of   India   v.   Wood   Papers   Ltd. [(1990) 4 SCC 256 = 1990 SCC (Tax) 422 = JT (1991) SC 151]” Three   important   aspects   which   comes   out   of   the discussion are the recognition of horizontal equity by this court as a consideration  for  application  of strict interpretation, subjugation of strict interpretation to the plain   meaning   rule   and   interpretation   in   favour   of exclusion in light of ambiguity. 59

38.We   will   now   consider   another   Constitution   Bench decision   in  Commissioner   of   Central   Excise,   New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236 [hereinafter referred as  ‘Hari Chand Case’  for brevity]. We need not refer to the facts of the case which gave rise   to   the   questions   for   consideration   before   the Constitutional   Bench.   K.S.   Radhakrishnan,   J.,   who wrote   the   unanimous   opinion   for   the   Constitution Bench, framed the question, viz., whether manufacturer of a specified final product falling under Schedule to the Central   Excise   Tariff   Act,   1985   is   eligible   to   get   the benefit   of   exemption   of   remission   of   excise   duty   on specified   intermediate   goods   as   per   the   Central Government Notification dated 11.08.1994, if captively consumed for the manufacture of final product on the ground that the records kept by it at the recipient end would   indicate   its   “intended   use”   and   “substantial compliance” with procedure set out in Chapter 10 of the 60

Central   Excise   Rules,   1994,   for   consideration?   The Constitution   Bench   answering   the   said   question concluded   that   a   manufacturer   qualified   to   seek exemption   was   required   to   comply   with   the   pre­ conditions for claiming exemption and therefore is not exempt   or   absolved   from   following   the   statutory requirements   as   contained   in   the   Rules.       The Constitution Bench then considered and reiterated the settled   principles  qua  the   test   of   construction   of exemption   clause,   the   mandatory   requirements   to   be complied with and the distinction between the eligibility criteria with reference to the conditions which need to be strictly complied with and the conditions which need to   be   substantially   complied   with.     The   Constitution Bench followed the ratio in Hansraj Gordhandas Case (supra),   to   reiterate   the   law   on   the   aspect   of interpretation of exemption clause in para 29 as follows­ 61

“The law is well settled that a person who claims exemption or concession has to establish   that   he   is   entitled   to   that exemption   or   concession.     A   provision providing for an exemption, concession or exception, as the case may be, has to be construed strictly with certain exceptions depending upon the settings on which the provision has been placed in the statute and the object and purpose to be achieved. If exemption is available on complying with certain conditions, the conditions have to be   complied   with.   The   mandatory requirements of those conditions must be obeyed   or   fulfilled   exactly,   thought   at times, some latitude can be shown, if there is   failure   to   comply   with   some requirements   which   are   directory   in nature,   the   non­compliance   of   which would not affect the essence or substance of the notification granting exemption.” 39.The Constitution Bench then considered the doctrine of substantial   compliance   and   “intended   use”.     The 62

relevant portions of the observations in paras 31 to 34 are in the following terms – “31. Of course, some of the provisions of an exemption notification may be directory in nature and some are mandatory in nature. A   distinction   between   the   provisions   of   a statute   which   are   of   substantive   character and   were   built   in   with   certain   specific objectives of policy, on the one  hand, and those   which   are   merely   procedural   and technical in there nature, on the other, must be kept clearly distinguished… Doctrine   of   substantial   compliance   and “intended use” 32. The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party   does   all   that   can   reasonably   be expected of it, but failed or faulted in some minor or inconsequent aspects which cannot be   described   as   the   “essence”   or   the “substance” of the requirements.   Like the concept of “reasonableness”, the acceptance or   otherwise   of   a   plea   of   “substantial compliance”   depends   upon   the   facts   and circumstances of each case and the purpose 63

and object to be achieved and the context of the   prerequisites   which   are   essential   to achieve the object and purpose of the rule or the regulation.   Such a defence cannot be pleased   if   a   clear   statutory   prerequisite which effectuates the object and the purpose of the statute has not been met.  Certainly, it means   that   the   Court   should   determine whether   the   statute   has   been   followed sufficiently so as to carry out the intent for which   the   statute   was   enacted   and   not   a mirror   image   type   of   strict   compliance. Substantial   compliance   means   “actual compliance   in   respect   to   the   substance essential to every reasonable objective of the statute”   and   the   Court   should   determine whether   the   statute   has   been   followed sufficiently so as to carry out the intent of the  statute and accomplish the reasonable objectives for which it was passed. 33. A   fiscal   statute   generally   seeks   to preserve   the   need   to   comply   strictly   with regulatory requirements that are important, especially when a party seeks the benefits of an   exemption   clause   that   are   important. Substantial compliance with an enactment is insisted,   where   mandatory   and   directory 64

requirements   are   lumped   together,   for   in such a case, if mandatory requirements are complied with, it will be proper to say that the   enactment   has   been   substantially complied   with   notwithstanding   the   non­ compliance   of   directory   requirements.     In cases   where   substantial   compliance   has been   found,   there   has   been   actual compliance   with   the   statute,   albeit procedurally   faulty. The   doctrine   of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and to forgive non­ compliance   for   either   unimportant   and tangential requirements or requirements that are so confusingly or incorrectly written that an   earnest   effort   at   compliance   should   be accepted. 34.   The   test   for   determining   the applicability   of   the   substantial   compliance doctrine has been the subject of a myriad of cases and quite often, the critical question to be   examined   is   whether   the   requirements relate to the “substance” or “essence” of the statute,   if   so,   strict   adherence   to   those requirements is a precondition to give effect 65

to that doctrine.   On the other hand, if the requirements are procedural or directory in that they are not of the “essence” of the thing to be done but are given with a view to the orderly   conduct   of   business,   they   may   be fulfilled   by   substantial,   if   not   strict compliance.     In   other   words,   a   mere attempted compliance may not be sufficient, but   actual   compliance   with   those   factors which are considered as essential.” 40.After considering the various authorities, some of which are adverted to above, we are compelled to observe how true it is to say that there exists unsatisfactory state of law in relation to interpretation of exemption clauses. Various   Benches   which   decided   the   question   of interpretation   of   taxing   statute   on   one   hand   and exemption   notification   on   the   other,   have   broadly assumed (we are justified to say this) that the position is well settled in the interpretation of a taxing statute:  It is the law that any ambiguity in a taxing statute should enure to the benefit of the subject/assessee, but any 66

ambiguity   in   the   exemption   clause   of   exemption notification must be conferred in favour of revenue – and such exemption should be allowed to be availed only to those subjects/assesses who demonstrate that a case for exemption squarely falls within the parameters enumerated in the notification and that the claimants satisfy   all   the   conditions   precedent   for   availing exemption.     Presumably   for   this   reason   the   Bench which decided Surendra Cotton Oil Mills Case (supra) observed that there exists unsatisfactory state of law and   the   Bench   which   referred   the   matter   initially, seriously doubted the conclusion in  Sun Export Case (supra) that the ambiguity in an exemption notification should be interpreted in favour of the assessee. 41.After thoroughly examining the various precedents some of   which   were   cited   before   us   and   after   giving   our anxious consideration, we would be more than justified 67

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. 42.In  Govind Saran Ganga Saran v. Commissioner of Sales Tax, 1985 Supp (SCC) 205, this Court pointed out   three   components   of   a   taxing   statute,   namely subject of the tax; person liable to pay tax; and the rate at   which   the   tax   is   to   be   levied.     If   there   is   any ambiguity in understanding any of the components, no tax can be levied till the ambiguity or defect is removed by the legislature [See Mathuram Agrawal v. Sate of 68

Madhya Pradesh, (1999) 8 SCC 667;  Indian Banks’ Association vs. Devkala Consultancy Service, (2004) 4 JT 587 = AIR 2004 SC 2615; and Consumer Online Foundation vs. Union of India, (2011) 5 SCC 360.] 43.There is abundant jurisprudential justification for this. 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.   Any ambiguity in a taxation provision, therefore,   is   interpreted   in   favour   of   the subject/assessee.  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 69

subject/assessee   may   warrant   visualizing   different situations.   For instance, if there is ambiguity in the subject of tax, that is to say, who are the persons or things liable to pay tax, and whether the revenue has established   conditions   before   raising   and   justifying   a demand.  Similar is the case in roping all persons within the tax net, in which event the State is to prove the liability of the persons, as may arise within the strict language   of   the   law.     There   cannot   be   any   implied concept either in identifying the subject of the tax or person liable to pay tax.  That is why it is often said that subject   is   not   to   be   taxed,   unless   the   words   of   the statute unambiguously impose a tax on him, that one has to look merely at the words clearly stated and that there is no room for any intendment nor presumption as to tax.  It is only the letter of the law and not the spirit of the law to guide the interpreter to decide the liability to tax ignoring any amount of hardship and eschewing 70

equity in taxation.  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 aforesaid conclusions are expounded only as a prelude to better understand jurisprudential basis   for   our   conclusion.   We   may   now   consider   the decisions which support our view. 44. In Hansraj   Gordhandas   Case (supra),   the Constitutional Bench unanimously pointed out that an exemption from taxation is to be allowed based wholly by   the   language   of   the   notification   and   exemption cannot   be   gathered   by   necessary   implication   or   by construction of words; in other words, one has to look to the   language   alone   and   the   object   and   purpose   for granting exemption is irrelevant and immaterial. 71

45.In Parle Exports Case (supra), a bench of two Judges of this   Court   considered   the   question   whether   non­ alcoholic beverage base like Gold spot base, Limca base and Thumps Up base, were exempted from payment of duty   under   the   Central   Government   notification   of March, 1975.   While considering the issue, this Court pointed out the Strict interpretation to be followed in interpretation   of   a   notification   for   exemption.     These observations   are   made   in   para   17   of   the   judgment, which read as follows: “How then should the courts proceed? The expressions in the Schedule and in the notification   for   exemption   should   be understood   by   the   language   employed therein bearing in mind the context in which the expressions occur.   The words used in the   provision,   imposing   taxes   or   granting exemption should be understood in the same way   in   which   these   are   understood   in ordinary parlance in the area in which the law   is   in   force   or   by   the   people   who 72

ordinarily   deal   with   them.     It   is,   however, necessary to bear in mind certain principles. The   notification   in   this   case   was   issued under Rule 8 of the Central Excise Rules and should   be   read   along   with   the   Act.     The notification must be read as a whole in the context   of   the   other   relevant   provisions. When a notification is issued in accordance with power conferred by the statute, it has statutory   force   and   validity   and,   therefore, the exemption under the notification is as if it were contained in the Act itself.  See in this connection the observations of this Court in Orient   Weaving   Mills   (P)   Ltd.   v.   Union   of India, 1962 Supp 3 SCR 481 = AIR 1963 SC 98.   See also Kailash Nath v. State of U.P., AIR   1957   SC   790.   The   principle   is   well settled that when two views of a notification are possible, it should be construed in favour of   the   subject   as   notification   is   part   of   a fiscal enactment.  But in this connection, it is well to remember the observations of the Judicial Committee in Coroline M. Armytage v. Frederick Wilkinson, (1878) 3 AC 355, that it is only, however, in the event of there being a real difficulty in ascertaining the meaning of a particular enactment that the question 73

of strictness or of liberality of construction arises.  The Judicial Committee reiterated in the said decision at page 369 of the report that in a taxing Act provisions enacting an exception to the general rule of taxation are to  be  construed   strictly  against  those   who invoke   its   benefit.     While   interpreting   an exemption   clause,   liberal   interpretation should be imparted to the language thereof, provided no violence is done to the language employed.     It   must,   however,   be   borne   in mind   that   absurd   results   of   construction should be avoided.” In the above passage, no doubt this Court observed that “when two views of a notification are possible, it should   be   construed   in   favour   of   the   subject   as notification   is   part   of   fiscal   document”.     This observation   may   appear   to   support   the   view   that ambiguity in a notification for exemption must be interpreted   to   benefit   the   subject/assessee.     A careful   reading   of   the   entire   para,   as   extracted hereinabove   would,   however,   suggest   that   an 74

exception   to   the   general   rule   of   tax   has   to   be construed strictly against those who invoke for their benefit.     This   was   explained   in   a   subsequent decision in Wood Papers Ltd. Case (supra).  In para 6, it was observed as follows: “… In Collector of Central Excise v. Parle Exports (P) Ltd., (1989) 1 SCC 345, this Court while accepting that exemption clause   should   be   construed   liberally applied   rigorous   test   for   determing   if expensive   items   like   Gold   Spot   base   or Limca   base   of   Thums   Up   base   were covered   in   the   expression   food   products and food preparations used in Item No. 68 of First Schedule of Central Excises and Salt Act and held ‘that it should not be in consonance with spirit and the reason of law   to   give   exemption   for   non­alcoholic beverage   basis   under   the   notification   in question’.  Rationale or ratio is same.  Do not extend or widen the ambit at stage of applicability.     But   once   that   hurdle   is crossed   construe   it   liberally.     Since   the respondent did not fall in the first clause of 75

the notification there was no question of giving the clause a liberal construction and hold   that   production   of   goods   by respondent   mentioned   in   the   notification were entitled to benefit.” 46.The   above   decision,   which   is   also   a  decision   of  two­ Judge Bench of this Court, for the first time took a view that   liberal   and   strict   construction   of   exemption provisions   are   to   be   invoked   at   different   stages   of interpreting it.  The question whether a subject falls in the notification or in the exemption clause, has to be strictly construed.  When once the ambiguity or doubt is resolved by interpreting the applicability of exemption clause strictly, the Court may construe the notification by   giving   full   play   bestowing   wider   and   liberal construction.  The ratio of Parle Exports Case (supra) deduced as follows: “Do not extend or widen the ambit at stage of applicability.  But once that hurdle is crossed, construe it liberally”. 76

47.We do not find any strong and compelling reasons to differ, taking a contra view, from this.  We respectfully record  our  concurrence  to  this  view which  has  been subsequently, elaborated by the Constitution Bench in Hari Chand Case (supra). 48.The next authority, which needs to be referred is the case  in  Mangalore   Chemicals  (supra).    As we have already made reference to the same earlier, repetition of the same is not necessary. From the above decisions, the   following   position   of   law   would,   therefore,   clear. Exemptions from taxation have tendency to increase the burden on the other unexempted class of tax payers.  A person claiming exemption, therefore, has to establish that   his   case   squarely   falls   within   the   exemption notification, and while doing so, a notification should be construed against the subject in case of ambiguity. 77

49.The ratio in  Mangalore Chemicals  Case  (supra) was approved by a three­Judge Bench in  Novopan India Ltd.   v.   Collector   of   Central   Excise   and   Customs, 1994 Supp (3) SCC 606.  In this case, probably for the first time, the question was posed as to whether the benefit of an exemption notification should go to the subject/assessee when there is ambiguity.   The three­ Judge Bench, in the background of English and Indian cases, in para 16, unanimously held as follows: “We are, however, of the opinion that, on principle, the decision of this Court in Mangalore   Chemicals   –   and   in   Union   of India v. Wood Papers, referred to therein – represents   the   correct   view   of   law.     The principle   that   in   case   of   ambiguity,   a taxing   statute   should   be   construed   in favour of the assessee – assuming that the said principle is good and sound – does not apply to the construction of an exception or an exempting provision, they have to be construed strictly.   A person invoking an exception   or   an   exemption   provision   to 78

relieve   him   of   the   tax   liability   must establish clearly that he is covered by the said   provision.     In   case   of   doubt   or ambiguity,   benefit   of   it   must   go   to   the State….” 50.In Tata Iron & Steel Co. Ltd. v. State of Jharkhand, (2005) 4 SCC 272, which is another two­Judge Bench decision, this Court laid down that eligibility clause in relation to exemption notification must be given strict meaning and in para 44, it was further held – “The principle that in the event a provision of   fiscal   statute   is   obscure   such construction   which   favours   the   assessee may be adopted, would have no application to   construction   of   an   exemption notification, as in such a case it is for the assessee to show that he comes within the purview of exemption (See Novopan India Ltd v. CCE and Customs).” 51.In Hari Chand Case (supra), as already discussed, the question was whether a person claiming exemption is required to comply with the procedure strictly to avail 79

the benefit.  The question posed and decided was indeed different.     The   said   decision,   which   we   have   already discussed   supra,   however,   indicates   that   while construing an exemption notification, the Court has to distinguish   the   conditions   which   require   strict compliance, the non­compliance of which would render the   assessee   ineligible   to   claim   exemption   and   those which require substantial compliance to be entitled for exemption.   We are pointing out this aspect to dispel any doubt about the legal position as explored in this decision.   As already concluded in para 50 above, we may reiterate that we are only concerned in this case with   a   situation   where   there   is   ambiguity   in   an exemption   notification  or  exemption   clause,   in  which event the benefit of such ambiguity cannot be extended to the subject/assessee by applying the principle that an obscure and/or ambiguity or doubtful fiscal statute must   receive   a   construction   favouring   the   assessee. 80

Both the situations are different and while considering an   exemption   notification,   the   distinction   cannot   be ignored. 52.To sum up, we answer the reference holding as under ­ (1) 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. (2)   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. (3) The ratio in Sun Export case (supra) is not correct and all the decisions which took similar view   as   in  Sun   Export  Case  (supra)   stands over­ruled. 53.The   instant   civil   appeal   may   now   be   placed   before appropriate Bench for considering the case on merits 81

after obtaining orders from the Hon’ble Chief Justice of India. …………………………..J. (Ranjan Gogoi) …………………………..J. (N.V. Ramana) …………………………..J. (R. Banumathi) …………………………………..J. (Mohan M. Shantanagoudar) …………………………..J. (S. Abdul Nazeer) New Delhi July 30, 2018 82