As a general rule, taxing provisions, as opposed to exemption provisions, are to be construed liberally in favor of the taxpayer, and strictly against the government. Doubts as to their interpretation and application are to be resolved against the government and in favor of the taxpayer. On the other hand, it has been declared that provisions in aid of the collection of revenues are to be liberally construed and applied, within reason, so as to favor the government.
- Principle of avoidance of double taxation
The principle applied to income tax Legislations is that if the words of the Act on one construction result in double taxation of the same income that result will be avoided by adopting another construction which may reasonably be open.
Viscount Radcilffe explains the principle: “ Double Taxation in itself, however which is not beyond the power of the Legislature to provide for, when constructing a tax scheme. It is rather that given that a situation would really involve double taxation, it is so unlikely that there would have been an intention to penalize particular forms of income in this way that the law approaches the interpretation of the complicated structure of the code with a strong bias against achieving such a result.”
The rule of avoidance of double taxation is merely a rule of interpretation and the rule ceased to have any effect if the legislature expressly enacts a statute in which it provides for double taxation.
There is no general principle that there can be no double taxation in the levy of excise duty but the court may lean in favour of a construction if that be open which will avoid double taxation.
- The charging section and the computation section together constitute an integrated code
In the Income Tax Act the charging section and the computation section are considered as a code and therefore when there is a provision in which the computation code cannot be applied at all, it can be concluded that such a case was not intended to be brought within the charging section.
- A penalty provision in a taxing Act distinguished from a provision creating an offence does not attract the rule of mensrea
- Autonomy of tax law
Meaning thereby that tax laws pursue aims that are different from other laws. The tax claim is a claim under public law. Principles applicable to relationships under private law such as law of contracts, therefore, cannot be invoked to interpret provisions of tax law.
-Chapter 03-
Evasion of Statutes:
It is permissible to evade an act of the Parliament in the sense that a person may not do that which the Act prohibits but he is free to do anything which though equally advantageous to him as that which is prohibited is nevertheless outside the prohibition, penalty or burden imposed by the Act.
However this principle has no application where what is done is really the thing prohibited although under cloak or colour of a different transaction not prohibited by the statute.
Tax planning is legitimate provided it is within the framework of the law; but colourable tax devices cannot be a part of the tax planning.
The taxing laws have always been the subject of evasion in the sense of avoiding something disagreeable and there are many dicta to the effect that a citizen is entitled to so arrange his affairs that the tax burden does not fall on him and there is nothing illegal or immoral in adopting such a course.
There is a fundamental difference between acceptable tax mitigation and unacceptable tax avoidance. The former are the cases where the tax payer takes advantage of law to plan his affairs so as to minimize the incidence of tax. Unacceptable tax avoidance involves the creation of artificial structures by which the tax payer conjures a loss or a gain or whatever there may be which never existed. These are designed to achieve an advantageous tax benefit and it is a raid on the public funds at the expense of the general body of the tax payer.
The courts have now gone to the extent of not recognizing tax avoidance schemes or devices even if they are not strictly genuine.
This approach has been accepted in India. Chinappa Reddy J. has held “We now live in a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pertinence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed liberally or literally, nor whether the transaction is unreal and not prohibited by the statute, but where the transaction is a device to avoid the tax, and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to consider whether the situation created by the devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging techniques of interpretation to expose the devices for what they really are and refuse to give judicial benediction.
It makes the principle laid down in IRC v. Duke of Westminister that one has to see only the legal nature of the transaction and not substance the matter inapplicable to a tax avoidance scheme consisting of a series of transactions or a composite transaction when the conditions necessary for the application of the new approach are satisfied. In the words of Lord Keith “The court must first construe the relevant enactment in order to ascertain its meaning; it must then analyse the series of transactions and finally it must apply the enactment so construed to the true effect of the series of transactions and so decide whether the or not the enactment was intended to cover it. The most important feature of the principle is that the series of transaction should be considered as a whole. In ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps in it were contractually agreed in advance or had been determined on in advance by a guiding will which was in a position, for all practical purposes, to secure that all of them were carried through to completion. It is also relevant to take into account, if it be the case, that one or more of the steps was introduced into the series with no business purpose other than the avoidance of tax.
-Chapter 04-
Landmark Cases:
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IRC v. Duke of Westminister
The Duke executed a series of deeds in favour of his employees in which is covenanted to pay certain weekly sums for a period of seven years in consideration of past services during the joint lives of himself and the employee concerned. It was provided in the deeds that the payments were ‘without prejudice to such remuneration as the annuinant will become entitled to in respect of such services as the annuinant may hereafter render’ to the Duke. The recipients in all the cases continued in the employment and continued to receive such sums as with the sums payable by the deed made up the amount of the wages or salary payable before the deed and no more.
The Dukes contention was that the payment was annual payment and which he was entitled to deduct as surtax, whereas the contention of the Revenue department was that it was payment in consideration of services and as such could not be deducted. The House of Lords rejected the contention of the Revenue and held that when a deed is not challenges as non genuine or a mere cloak to conceal a different transaction the substance of the matter cannot be distinguished from the legal rights and obligations arising under the deed.
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Pott’s Executor’s v. IRC
By a settlement the assessee settled a large sum on his infant grandchildren and the trustees of the settlement purchased from the settlement moneys almost the entire share capital of a company which was held by the settler who was the governing director. The settler had an account with the company which made, on his behalf and at his request numerous payments to third parties and debited his account with those sums. The question before the house of lords was whether these payments made by the company to the third partied and not to the settler himself were “any sum paid by way of loan’ ‘directly or indirectly’ by a corporate body connected with the settlement ‘to the settler’ and constituted his income within section 40 of the Finance Act, 1938.
The contentions of the revenue was that payments by the company to third parties who could retain the money and were not accountable to the settler although made at the request or on behalf of the settler were not payments by way of a loan to the settler. Lord Salmond said “I am not, in the construction of a statute entitled to say that because the legal or the business result is the same whether on one hand I borrow money from the company and with it make certain payments on my implied promise to repay, therefore it is immaterial what words are in the statute of that result is attained. Lord Normand similarly observed that “
This is a taxing statute and its terms are not to be enlarged by reasoning that the same final result is achieved as by a loan made to the settler followed by a payment made by him to a third party. The court is not entitled to say that for the purposes of taxation the actual transaction is to be disregarded as ‘machinery’ and that the substance or equivalent financial results are the relevant considerations. It may indeed be said that if these loose principles of construction had been liberally applied that would in many instances have been adequate to deal with tax evasion and there would have been less frequent cause for the intervention of parliament.
These cases illustrate the principle that doctrine of substance of matter has no application to a taxing statute.
Legal position in case of tax avoidance should be taken as altered in the light of three judgments of the House of Lords (i) Ramsay vs I R (54 T C 101) (ii) I R vs. Burmah Oil (54 T C 200) (iii) Furniss vs Dawon (55 T C 324).
-Chapter 05-
Judicial Trend in India with regard to Interpretation of Taxing Statutes
It is a recognized principle of law which was laid down by the British courts known as the westminister principle that tax planning is the prerogative of the tax payer and he can resort to legal measures in order to avoid tax.
However this principle was overruled by the Indian Supreme Court in the case of Mc Dowell and Company v. CTO. In this case the Supreme court blurred the distinction between tax avoidance and tax evasion. It interpreted the power of the government to collect and levy taxes in a broad way and held that any avoidance or planning by a person to avoid tax is incorrect and should not be allowed. They based their decision on the fact that the English courts had departed from the westminister principle.
However the court laid down in the case of Union of India & Anr.Vs. Azadi Bachao Andolan & Anr. That the presumption made in the Mc Dowel case was wrong. It criticized the judgment given in the case. It held that the decision in the Mc Dowell case was an exception and not the norm.
Banyan and Berry v. CIT where referring to McDowell (supra), the court observed :
"The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case (1985) 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell’s decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity."
Mathuram Agrawal v. State of Madhya Pradesh another Constitution Bench had occasion to consider the issue. The Bench observed :
"The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature."
The Constitution Bench reiterated the observations in Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC), quoting with approval the observations of Lord Russell of Killowen in IRC v. Duke of Westminster (supra) and the observations of Lord Simonds in Russell v. Scott (1948) 2 All ER 15.
The situation in the United State is reflected in the following passage from American Jurisprudence American Jurisprudence :
"The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted. A tax-saving motivation does not justify the taxing authorities or the courts in nullifying or disregarding a taxpayers otherwise proper and bona fide choice among courses of action, and the state cannot complain, when a taxpayer resorts to a legal method available to him to compute his tax liability, that the result is more beneficial to the taxpayer than was intended. It has even been said that it is common knowledge that not infrequently changes in the basic facts affecting liability to taxation are made for the purpose of avoiding taxation, but that where such changes are actual and not merely simulated, although made for the purpose of avoiding taxation, they do not constitute evasion of taxation. Thus, a man may change his residence to avoid taxation, or change the form of his property by putting his money into non-taxable securities, or in the form of property which would be taxed less, and not be guilty of fraud. On the other hand, if a taxpayer at assessment time converts taxable property into non-taxable property for the purpose of avoiding taxation, without intending a permanent change, and shortly after the time for assessment has passed, reconverts the property to its original form, it is a discreditable evasion of the taxing laws, a fraud, and will not be sustained."
US Courts were cited in respect of the proposition that motive of tax avoidance is irrelevant in consideration of the legal efficacy of a transactional situation.
Thus the position in India as it stands now is the same as earlier and the temporary havoc created by the McDowell case has been avoided.
In the recent case of State of W.Bengal vs. Kesoram Industries Ltd. has held as follows.“The judicial opinion of binding authority flowing from several pronouncements of this court has settled these principles: (i) in interpreting a taxing statute, equitable considerations are entirely out of place. Taxing statutes 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.
Conclusion
Thus as can be seen that there are rules for interpretation of a taxation statute are different from that of an ordinary statute. The reason being that tax is a compulsory levy by the state to the citizens of the country. The state has to perform its duty of welfare and development of the state as well as ensuring that there is equitable distribution of wealth. Tax is levied by the state. This tax is always resisted by the factions it is imposed upon. Taxes it can be said are unfair on the privileged faction in order to promote the needs of those who are not so privileged. One faction will always complain that they are unjust and unequitable.
This is one reason that the courts are required to construe the statute strictly and there are no grounds of equity or unjustness while construing a taxing statute.
Secondly in our constitution the sepration doctrine though not strictly followed is recognized. The power of each body is recognized. Thus there should not be any interference of one body to another body, That is why the courts have to strictly construe the statute. They cannot go into the intent or the purpose for which the tax is levied or the rate of tax which is levied etc. This aspect clearly falls within the legislative area. The legislature is elected by the people and has been given the power by the Constitution of our country to impose tax and thus it depends on the policy that the legislature deems fit for the levy and collection of tax and thus the court if meddles with this would enter the field of legislation rather than construction.
Thirdly where there is any ambiguity in relation to a tax the benefit of the doubt should be given to the assessee. This is because it is the tax payer who has to suffer and making him liable unnecessarily would be clearly unfair.
Thus the interpretation of taxing statutes is somewhat different from that of ordinary statutes due to the nature of the statutes.
Taxing statutes are mostly complex and require calculations and many deductions.
The Income tax Act is very complex and has been amended several number of times. Thus due to the ever changing and flexibility of the statutes there is a different interpretation given to them.
Due to the various amendments in the statute and the changing policies of the government it becomes difficult of not impossible for the court to understand the legislative intent. Thus this can also be one of the reasons as to why these statutes are to be construed strictly.
It can also be concluded that the judicial trend in the last 75 years has been to make an essential difference in tax evasion and tax avoidance. Tax planning whereby tax is avoided while staying within the legal realm has been held valid. Thus if a person is careful enough to avoid tax, the legislature cannot hold him liable since he comes within the spirit of law. This principle has also been recognized and it respects the creativity and the intelligence of the tax payer vis a vis that of the tax imposing authority.
Bibliography
ACTS
Income Tax Act, 1961
General Clauses Act, 1897
BOOKS
- Maxwell on Interpretation of Statutes, Ed. 2003 (Lexus Nexus, Butterworths, New Delhi Ch 2)
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Kanga, Palikiwala and Vyas, The Law and Practise of Income Tax, (9th edn, 2005, Vol.I & II, Lexis Nexis Butterworths)
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Justice G.P Singh, Principles of Statutory Interpretation ( 9th edn, Wadhwa and Company, Nagpur)
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Vepa Sarathi, Interpretation of Statutes, 4th ed 2003, Eastern Book Co. Nagpur, Ch I
WEBSITES
- http://www.itatonline.org/interpretation/interpretation22.php
- http://www.thehindubusinessline.com
- http://www.thehindubusinessline.com
- http://www.nls.ac.in/distanceeducationnotes
- http://www.manulawbooks.in/OnlineBook
- http://www.itatonline.org/interpretation/interpretation
- www.manupatra.com
- www.westlaw.com
Kalwa dewdattam v. Union of India AIR 1964 SC 880
Rallaram v. Province of Punjab AIR 1949 FC 81
Partington v. A.G (1869) LR 4 HL 100
A.V Fernandez v. State of Kerela.
Sales tax Commissoner v. Modi Sugar Mills AIR 1961 SC 1047
Martand Dairy and Farm v. Union of India AIR 1975 SC 1492
IRC v. F.S Securities (1964) 2 All ER 691 (HL)
Premier Tyres Limited v. Collector of Central Excise (1987) 1 SCC 697
CIT v. B.C Srinivasa Setty AIR 1981 SC 972
Yorkshire Railway Wagon Company v. Maclure (1882) 21 Ch D 309
Union of India v. Play Worlds Electronics Pvt Ltd. AIR 1990 SC 202
W.T Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All ER 865 (HL)
Mc Dowell and Company Ltd.
[2003] 132 TAXMAN 373 (SC)
Helvering v. St. Louis Trust Company 296 US 48, 56 S. Ct. 78, 80L