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Synopsis

I. Introduction

II. Prospective Operation:

III. Construction of taxing statute

1. Strict Construction:

2. Construction: Liberal and literal

3. ‘Substance of the matter’ doctrine

4. Hardship, equity and ambiguity

5. Absurdity to be avoided:

6. Meaning of words: Commercial, dictionary, trade, etc.

IV. Interpretation of various taxing provisions:

1. Machinery Provisions

2. Charging section:

3. Procedural Provisions:

4. Incentives:

5. Exemption provision:

6. Exception Clause:

7. Penalty provision:

8. Provisions on limitation:

V. Double Taxation

.

VI. Validation Act

VII. Evasion of tax

I. Introduction

A compulsory contribution by a person to the support of the government which is levied on income, commodities, transactions, etc. is called a tax.

Every taxing statute has a charging section and provisions laying down the procedure for assessment of the tax and penalties and for collection and recovery of tax, it may also contain provision for preventing the evasion of tax.(Tripura Goods Transport Assn. v. Commr. of Taxes [1999])

II. Prospective Operation:

Taxing statute should normally be read as prospective. [CIT v. Gwalior Rayon Silk Mfg. Co. Ltd]

III. Construction of taxing statute

1. Strict Construction:

A taxing statute is to be strictly construed.[M. Narsimhaiah v. Commr. For Transport]

In Vikrant tyres Ltd. V ITO, the SC held a taxing statute must be interpreted in the light of what is clearly stated; nothing can be implied what is not stated; and nothing can be imported to supply any assumed deficiency.

2. Construction: Liberal and literal

Literal construction does not mean that even if it leads to a discriminatory or incongruous result, it should be adopted.

Liberal construction cannot be applied to an expression expressly defined in the statute[CIT v. Kotagiri Industrial Co.op. Tea Factory Ltd.]

3. ‘Substance of the matter’ doctrine

A transaction cannot be taxed on any doctrine of "substance of the matter" distinguished from its legal signification. A person is not liable to be taxed on "spirit of the law" or by "inference" or "analogy". (Mathuram Agrawal v. State of M.P. [1999]) Plain meaning should be given effect to without going into the logic and common sense. (CIT v. Gwalior Rayon SIlk Mfg. Co. Ltd. [1992])

The doctrine of ‘Substance of the matter’ has been refuted in IRC v Duke of Westminster.

4. Hardship, equity and ambiguity

A person must be taxed howsoever great the hardship may appear to the judicial mind to be.

Equitable considerations are not relevant in construing a taxing statute nor logic or reason are of much help. (State of Punjab v. Jullundur Vegetables Syndicate [1966])

5. Absurdity to be avoided:

When intention to tax is clear it cannot be defeated by a mere defect in phraseology.

It was held in S.R Batra v Taruna Batra, an interpretation which leads to absurdity and chaos in society should be avoided.

6. Meaning of words: Commercial, dictionary, trade, etc.

In a taxing statute the trade meaning is always to be given preference.

IV. Interpretation of various taxing provisions:

1. Machinery Provisions

Machinery Provisions should be strictly construed applying normal rule of interpretation.

2. Charging section:

It was held in CWT v. Karan Singh that charging section has to be strictly construed with help of other relevant provisions for finding out the true nature and character of the taxing statute.

3. Procedural Provisions:

It was held in Fertilizer Corpn.of India Ltd v. St. of Bihar, so long as the substantive provision is satisfied the procedural one can be liberally construed.

4. Incentives:

A provision granting incentives for promoting economic growth and development should be literally construed. (Bajaj Tempo Ltd. v. CIT [1992])

5. Exemption provision:

Though the exemption provisions are to be strictly construed benefit of doubt if any must be given to the assessee. (Union of India v. Kanunga Industries [1992])

6. Exception Clause:

Exception provision must be strictly construed.

7. Penalty provision:

Penalty provision in a taxing statute does not attract the rule of presumption of mens rea. Same rule is applicable to offences against revenue and economic offences.(Gujarat Tranvancore Agency v. CIT [1989])

8. Provisions on limitation:

Provisions regulating limitation period should be given strict construction. (K.M. Sharma v. ITO [2002])

V. Double Taxation

Jain Bros v. UOI, SC held, an express provision cannot be held invalid on the ground that it resulted in double taxation.

VI. Validation Act

If a tax is declared by a court to have been illegally levied under invalid provisions of an act, a validating act can remove the defects in the principal act, so as to validate the tax.

VII. Evasion of tax

Tax evaders take steps which are prohibited by the statute under the colour or cloak of a transaction which is not prohibited by the statute. In such circumstances the court can go behind the form of the sham transaction and enforce the prohibition.

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