A society which is registered under Public Societies Registration Act and the object of the society is to serve the public awareness programmes like literacy, AIDs awareness, education development, forest wildlife protection, agricultural production, health, pulse polio, eco-development like important programmes of human environment, out of funds collected through donations from public without any profit motive.
The society is not registered under s. 12A of IT Act. It is now running solely as per bye-laws of the society conducting of supra programmes purely from donations from public. The society has filed income-tax returns since last two years and shown different expenditure for conducting awareness of programmes under the status of AOP. The society has enclosed a copy of certificate of registration of society, copy of bye-laws along with return of income. The society has shown income of Rs. 15,000 and Rs. 20,000 in two years after meeting all the expenditures towards above awareness camps and the income shown in the balance sheet as a capital fund is re-spent parallely towards capital expenditure.
The society has submitted 12A application before the CIT with condonation of delay. The CIT raised some queries and returned the application to answer queries and resubmit within 10 days. But, the assessee has delayed in reply of queries, which lead rejection, by CIT. Again the assessee after fulfilling all replies for queries, recently submitted for registration under 12A and it is in process.
On the other side, the AO meanwhile raised objections and said that as the society is not registered under 12A, hence, whatever donations received shown in income and expenditure account are irrespective of expenditures towards above programmes, are taxable.
My contention is that, whatever income has been shown in income and expenditure account after meeting all the expenses from donations received from public is only liable to be taxed but not on the collection of donations received from the public because the society is not registered under 12A.
Hence, please elicit which is determinable as per IT Act and if the AO’s stand is correct, how to save the society from the impending tax.
Reply At the outset, it will be pertinent to state that the order rejecting application for registration of the charitable society under s. 12AA of the Act is appeallable before the Hon’ble Tribunal under s. 253 of the Act. The assessee should have, therefore, filed an appeal against the order of the CIT rejecting the application. Even now, the society should file an appeal before the Tribunal along with an application for condonation of delay in submission of the said appeal, in addition to an application submitted to the CIT for cancellation of the ex parte order explaining the reasonable and sufficient cause, which prevented the assessee from complying with the query-letter given by the CIT within the stipulated period of 10 days. In case the learned CIT entertains the second application submitted for registration of the society under s. 12A and grants registration after condoning the delay, such registration will be effective from the date of inception. Such a view is fortified by the judgment of the Rajasthan High Court reported in CIT vs. Vasu Puziya Jain Derashar Pedi Undri (1997) 228 ITR 247 (Raj) and CIT vs. Jaipur Stock Exchange Ltd. (1995) 128 CTR (Raj) 47 : (1996) 217 ITR 101 (Raj).
The income of the charitable society, even though not registered under s. 12A, will have to be computed in the normal commercial manner. Such a view is supported by judgment of the Gujarat High Court in the case of CIT vs. Sheth Manilal Ranchhoddas Vishram Bhavan Trust (1992) 105 CTR (Guj) 303 : (1992) 198 ITR 598 (Guj). The observations of the Court are reproduced below :
"The income from the properties held under trust have to be arrived at in the normal commercial manner without classification under the various provisions set out in s. 14 of the IT Act, 1961. The expression "income" has to be understood in the popular or general sense and not in which the income is arrived at for the purpose of assessment to tax by application of some artificial provisions either giving or denying deduction. The computation under the different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purposes of the exemptions under Chapter III. The amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes."
Such a view is supported by the following decisions also :
(a) CIT vs. Shri Plot Swetamber Murti Pujak Jain Mandal (1994) 119 CTR (Guj) 144 : (1995) 211 ITR 293 (Guj).
(b) CIT vs. Sthanakvasi Vardhman Vanik Jain Sangh (2002) 178 CTR (Guj) 95 : (2003) 260 ITR 366 (Guj).
Sunday, December 18, 2016
Thursday, March 24, 2016
Statutes are embodiments of authoritative formulae and the very words which are used constitute part of law. By interpretation or construction is meant the process by which the Courts seek to ascertain the meaning of the Legislature through the medium of the authoritative form in which it is expressed. The law is deemed to be what the Court interprets it to be. As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible.1 The very concept of interpretation connotes the introduction of elements which are necessarily extrinsic to the words in the statute. Though the words ‘interpretation’ and ‘construction’ are used interchangeably, the idea is somewhat different. ‘Construction’ suggests that something more is being got out in the elucidation of the subject-matter than can be got by strict interpretation of the words used. In the very full sense of the word ‘construction’, judges have set themselves in this branch of the law to try to frame the law as they would like to have it.2
A statute is not a divine revelation, and not drafted with divine prescience and perfect clarity - The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few words possess the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be ‘drafted with divine prescience and perfect clarity.’ A statute is neither a literary text nor a divine revelation. Its effect is, therefore, neither an expression laid on immutable emotional overtones nor a permanent creation of infallible wisdom. It is a statement of situation or rather group of possible events within a situation and as such, it is ambiguous.2
Statutory text and intention of the Parliament - The question of interpretation involves determining a text contained in one or more documents. Judges are often criticised for being tied too closely to the statutory words and for failing to give effect to the intention of the Parliament or the law-maker. Such language appears to suggest that there are two units of enquiry in statutory interpretation—
1. Statutory text
2. Intention of the Parliament
and the judge must seek to harmonise the two. This, however, is not correct. According to the tradition of our law, primacy is to be given to the text in which the intention of the law-giver has been expressed. The fairest and the most rational method to interpret the will of the law-maker is by exploring his intentions at the time when the law was made, by signs most natural and probable - and these signs are either the words, the context, the subject-matter, the effects and consequences, or the spirit and the reason of the law.
The reason for a statute is the safest guide to its interpretation. The words of a statute take their colour from the reason for it. How do we discover the reason for a statute? There are external and internal aids. The external aids are statement of object and reasons when the Bill is presented to the Parliament, the reports of the committees which preceded the Bill and the reports of the Parliamentary Committees. Occasional excursions into the debates of Parliaments are permitted. Internal aids are the preamble, the scheme and the provisions of the Act. Having discovered the reason for the statute and so having set the sail, the interpreter may proceed ahead (Utkal Contractors and Joinery (P.) Ltd. v. State of Orissa  3 SCC 279). The discussion under this Division follows this pattern. What Parliament meant by using the language of the statute is ascertained with the assistance of internal and external aids by applying rules of construction as put forward by the Courts.
Statutory construction is regarded as an exercise in legal reasoning - Statutory construction is regarded as an exercise in legal reasoning par excellence. A legislative enactment like any other piece of writing is an attempt at communication. Only it is addressed to no body in particular, but to everybody in general who may be affected by it in one way or the other. Such mass communications are much better understood from the point of view of their meaning rather than from the point of view of their intention. But quite often the meaning is obscure and ambiguous or its literalness leads to absurdity. Intention of the Legislature then dispels obscurity and ambiguity. The supposed intention of the Legislature cannot be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used, it is nowhere else. The need for interpretation arises when words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. Where the statutory word is plain and unambiguous, it is not for the judges to invent fancied ambiguities as an excuse for failing to give effect to its plain meaning because they themselves consider that the consequences for doing so would be inexpedient, or even unjust or immoral. In controversial matters, there is room for differences of opinion as to what is expedient, what is just and what is morally justifiable. Parliament’s opinion on these matters is permanent.
Where the language is clear the intention of the Legislature is to be gathered from the language used. What is to be borne in mind is as to what has been said in the statute as also what has not been said. A construction which requires, for its support, addition or substitution of words or which results in rejection of words, has to be avoided, unless it is covered by the rule of exception, including that of necessity (see Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests, Palghat AIR 1990 SC 1747; Smt. Shyam Kishori Devi v. Patna Municipal Corporation AIR 1966 SC 1678; A.R. Antulay v. Ramdas Sriniwas Nayak  2 SCR 914). Indeed the Court cannot reframe the legislation as it has no power to legislate (State of Kerala v. Mathai Verghese  1 SCR 317; Union of India v. Deoki Nandan Aggarwal AIR 1992 SC 96).
Rules of interpretation are not the rules of law; they are the mere aids to construction and constitute some pointers. Such aids are external or internal. They include :—
- the mischief rule;
- the rule of harmonious construction;
- the rule of reading all the provisions together; and
- the rule of giving effect to a particular part of the statute so as not to render the other part otiose.
In this Division are discussed the above rules of interpretation.
Interpretative Principles - Statutes
Rules of Interpretation - Statutes
6.1 In defining and construing the area and the content of an Act and its provisions, it is necessary to make certain general observations regarding the interpretation of statutes. A statute is best understood if we know the reason for it. The reason for a statute is the safest guide to its interpretation. The words of a statute take their colour from the reason for it. How do we discover the reason for a statute? There are external and internal aids. The external aids are Statement of Objects and Reasons when the Bill is presented to Parliament, the reports of Committees which preceded the Bill and the reports of Parliamentary Committees. Occasional excursions into the debates of Parliament are permitted. Internal aids are the preamble, the scheme and the provisions of the Act. Having discovered the reason for the statute and so having set the sail to the wind, the interpreter may proceed ahead. No provision in the statute and no word of the statute may be construed in isolation. Every provision and every word must be looked at generally before any provision or word is attempted to be construed. The setting and the pattern are important. It is again important to remember that Parliament does not waste its breath unnecessarily. Just as Parliament is not expected to use unnecessary expressions, it is also not expected to express itself unnecessarily. As the Parliament does not use any word without meaning something, it does not legislate where no legislation is called for. Parliament cannot be assumed to legislate for the sake of legislation; nor can it be assumed to make pointless legislation. Parliament does not indulge in legislation merely to state what is unnecessary to state or to do what is already validly done. Parliament may not be assumed to legislate unnecessarily. Again, while the words of an enactment are important, the context is no less important. For instance, “the fact that general words are used in a statute is not in itself a conclusive reason why every case falling literally within them should be governed by that statute, and the content of any Act may well indicate that wide or general words should be given a restrictive meaning”. (See Halsbury, 4th Edn. vol. 44, para 874).
In Attorney General v. H.R.H. Prince Augustus  1 All ER 49, Viscount Simonds said:
“My Lords, the contention of the Attorney General was, in the first place, met by the bald general proposition that, where the enacting part of a statute is clear and unambiguous, it cannot be cut down by the preamble, and a large part of the time which the hearing of this case occupied was spent in discussing authorities which were said to support that proposition. I wish, at the outset, to express my dissent from it, if it means that I cannot obtain assistance from the preamble in ascertaining the meaning of the relevant enacting part. For words, and particularly general words, cannot be read in isolation; their colour and content are derived from their context. So it is that I conceive it to be my right and duty to examine every word of a statute in its context, and I use context in its widest sense which I have already indicated as including not only other enacting provisions of the same statute, but its preamble, the existing state of the law, other statutes in pari materia, and the mischief which I can, by those and other legitimate means, discern that the statute was intended to remedy.”
The Supreme Court in Empress Mills v. Municipal Committee Wardha AIR 1958 SC 341, stated the same proposition:
“It is also a recognised principle of construction that general words and phrases however wide and comprehensive they may be in their literal sense, must usually be construed as being limited to the actual objects of the Act.”
In Maunsell v. Olins  1 All ER 16 (HL), Lord Wilberforce observed:
“. . . I am not, myself, able to solve the problem by a simple resort to plain meaning. Most languages, and particularly all languages used in rent legislation, are opaque: all general words are open to inspection, many general words demand inspection, to see whether they really bear their widest possible meaning.”
But, to rely upon rules of construction, must always be borne in mind Lord Reid’s admonition in Maunsell v. Olins (supra) to the following effect:
“These rules of construction are relied on. They are not rules in the ordinary sense of having some binding force. They are our servants not our masters. They are aids to constructions, presumptions or pointers. Not infrequently one ‘rule’ points in one direction, another in a different direction. In each case we must look at all relevant circumstances and decide as a matter of judgment what weight to attach to any particular ‘rule’.”1
6.1-1 Interpretation - Meaning and three rules for interpretation - In J.P. Bansal v. State of Rajasthan  5 SCC 134, it has been held by the Supreme Court that the elementary principle of interpreting or considering a statute is to gather the mens or sententia legis of the Legislature, and interpretation postulates the search for the true meaning of the words used in the statute as a medium of expression to communicate a particular thought. In Pandian Chemicals Ltd. v. CIT  5 SCC 590 it has been held by the Apex Court that the rule of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing any rule of interpretation. In Bhavnagar University v. Palitana Sugar Mill (P.) Ltd.  2 SCC 111 the Apex Court has held that it is the basic principle of construction of statute that the same should be read as a whole, then chapter by chapter, section by section and words by words, recourse to construction or interpretation of statute is necessary when there is ambiguity, obscurity, or inconsistency therein and not otherwise and an effort must be made to give effect to all parts of the statute and unless absolutely necessary, no part thereof shall be rendered surplusage or redundant.
In High Court of Gujarat v. Gujarat Kisan Mazdoor Panchayat  4 SCC 712 it has been held by the Apex Court that it is a well-settled principle of law that an attempt should be made to give effect to each and every word employed in a statute and such interpretation which would render a particular provision redundant or otiose should be avoided. The dominant purpose in construing a statute is to ascertain the intention of the Legislature which constitutes the law of any statute.
Parliamentary intention is ascertainable from the mischief to be dealt with and the words used. Modern methods of judicial approach how this to be gathered is by and large:—
u LITERAL RULE - One of the well-recognised canons of construction is that the Legislature speaks its mind by use of correct expression.1 If there is no ambiguity, it would mean that the language used speaks the mind of the Parliament and there is no need to look somewhere else to discover the intention or meaning.2
u GOLDEN RULE - Where the grammatical and ordinary sense of the words in the statute leads to some obscurity or inconsistency with the rest of the statute, the words are modified so as to avoid the absurdity and inconsistency, but no further.3
u MISCHIEF RULE - If there is ambiguity in the language used, the real meaning is arrived at by finding out the exact conception of the aim, scope and object of the whole Act, by considering according to Lord Coke.4
1. What was the law before the Act was passed,
2. What was the mischief or defect which the law had not prevented,
3. What remedy Parliament has provided, and
4. The reason of the remedy.
Courts are not able to analyse why one method is adopted in preference to the other in a particular case. However, the opinion is veering round the purposive or functional interpretation. Literal rule is normally followed. It is departed on the ground of absurdity or ambiguity so that the golden rule or the mischief rule is followed. In Mahadeo Oil Mills v. Sub-Divisional Magistrate AIR 1978 Pat. 86, it was held :—
“It was stated in this way by Parke B :
‘It is a very useful rule, in the construction of a statute, to adhere to the ordinary meaning of the words used, and to the grammatical construction, unless that is at variance with the intention of the Legislature, to be collected from the statute, itself, or leads to any manifest absurdity or repugnance, in which case the language may be varied or modified, so as to avoid such inconvenience, but no further. “If” said Brett, L.J. the convenience is not only great, but what I may call an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if you read it in a manner in which it is capable though not its ordinary sense, there would not be any inconvenience at all, there would be reason why you should not read it according to its ordinary grammatical meaning.’ ”
In the case of Vacher v. The London Society of Compositors1, all the three methods were employed. The question was whether under section 4(1) of the Trade Disputes Act, 1906, any tortuous act by trade unions was protected or only such tortuous acts as were committed in contemplation or furtherance of trade dispute. The House of Lords took the former view and in delivering the opinion Lord Macnaghten adopted the golden rule, Lord Atkinson followed the literal rule while Lord Moulton discussed the history of the statute and applied the mischief rule.
6.1-2 Rules of construction are not the rules of law - The said rules are applied to ascertain the intention of the Legislature. How this is done is explained by the Supreme Court in Union of India v. Sankalchand Himatlal Sheth AIR 1977 SC 2328/ 4 SCC 199. The Supreme Court observed :
‘The normal rule of interpretation of a statute is that the words used by the Legislature are greatly a safe guide to its intention. Lord Reid in Westminster Bank Ltd. v. Zang  AC 182/ 37 Comp. Cas. 123 (HL) observed that (page 134) : “no principle of interpretation of statute is more firmly settled than the rule that the court must deduce the intention of Parliament from the words used in the Act”. Applying such a rule, this court observed in S. Narayanaswami v. G. Panneerselvam AIR 1972 SC 2284 (at page 2290) : that “where statute’s meaning is clear and explicit, words cannot be interpreted.” What is true of the interpretation of an ordinary statute is not any the less true in the case of constitutional provision, and the same rule applies equally to both. But if the words of an instrument are ambiguous in the sense that they reasonably bear more than one meaning, that is to say, if the words are semantically ambiguous, or if a provision, if read literally, is patently incompatible with the other provisions of that instrument, the court would be justified in construing the words in the manner which will make the particular provision purposeful. That in essence is the rule of harmonious construction. In M. Pentiah v. Muddala Veeramallappa AIR 1961 SC 1107 (at page 1115) : this court observed “where language of a statute, in its ordinary meaning and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. . .” But if the provision is clear and explicit, it cannot be reduced to a nullity by reading into a meaning which it does not carry and, therefore, courts are very reluctant to substitute words in a statute or to add words to it and it has been said that they will only do so where there is repugnancy to good sense.” In the view which I am disposed to take, it is unnecessary to dwell upon Lord Denning’s edict in Seaford Court Estate Ltd. v. Asher  2 All ER 155 (CA) (at p. 164) : that when a defect appears in a statute, a judge cannot simply fold his hands and blame the draftsman, that he must supplement the written word so as to give force and life to the intention of the Legislature and that he should ask himself the question how, if the makers of the Act had come across the particular ruck in the texture of it, they would have straightened it out. I may only add, though even that does not apply, that Lord Denning wound up saying, may be not by way of recanting, that “a judge must not alter the material of which the Act is woven, but he can and should iron out the creases.” ’
The rules of interpretation are not the rules of law; they are mere aids to construction and constitute some broad pointers. The interpretative criteria apposite in a given situation may, by themselves, be mutually irreconciliable. It is the task of the Court to decide which one in the light of all relevant circumstances, ought to prevail.1 The rules of construction are not rules in the ordinary sense of having some binding force. They are useful servants and not masters. They are aids to constructions, presumptions or pointers. Not infrequently one “rule” points in one direction, another in a different direction. In each case, the Court looks at the relevant circumstances and decides as a matter of judgment what weight to attach to any particular rule.2
Rule can be discarded or ignored, if the facts and the circumstances so require, and some new rules of interpretation are/may be evolved as and when necessary to meet new or unique situations CIT v. Lokmat News Papers (P.) Ltd.  216 ITR 199 (Bom.).
Lord Hoffmann said in Macniven H.M. Inspector of Taxes v. Westmoreland Investments Ltd.  2 WLR 377 (HL)/ 255 ITR 612 : “There is ultimately only one principle of construction, namely, to ascertain what Parliament meant by using the language of the statute. All ‘other principles of construction’ can be no more than guides which past judges have put forward, some more helpful or insightful than others, to assist the task of interpretation.”
6.2 When a question arises as to what interpretation to be placed on an enactment, what the court has to do is to ascertain ‘the intent of them that make it’ and that must be gathered from—
u The words actually used in the statute, in their grammatical and ordinary sense (literal rule)
u The modified words if the ordinary and grammatical use leads to obscurity or inconsistency (Golden Rule)
u The history of the legislation, purpose thereof, the mischief it intended to suppress (Mischief Rule)
u The definitions, exceptions, explanations, fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuations, saving clause, non obstante clause, etc. (Internal aids to Construction)
u Parliamentary debates, reports of the Committees and Commissions, etc. (External aids to Construction)
The above rules are only aids only to ascertain what the Parliament meant by using the language of the statute. There is ultimately only one principle of construction, namely, what Parliament meant.
The duty of the court is, therefore,—
u To give to the statute a purposeful and functional interpretation.1
u To make construction of all parts of the statute together2 - ex viscerbus actus.
u To avoid construction, if possible, which defeats the very object sought to be achieved by the Legislature.3
u To construe as to prevent the mischief and to advance the remedy according to the true maker of the statute.4
u To construe strictly taxing provisions such as charging provisions or a provision imposing penalty,1 as also limitation provisions.2
u Not to strain and stress the language of a section so as to enable the taxpayer to escape the tax, if the phraseology of that section takes within its sweep the transaction which is taxable.3
u To grant the benefit of ambiguity to the assessee, if there is any in the taxing provision.4
u Not to take into consideration hardship that may be caused in a particular case, while construing a statutory provision.5
u Not to interfere in the completion of assessment if done in accordance with the provisions of the Act, notwithstanding anything different and contrary contained in the general law relating to that matter6 - Generalia specialibus non-derogant.
u Not to interpret a provision as to exclude natural justice, unless the language of the statute gives no such option to the Court.7
u To ensure that when statute requires certain thing to be done in a certain manner, it is done in that manner alone, unless contrary indication is to be found in the statute.8
u If there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and bye-law, if not in conformity with the statute, in order to give effect to the statutory provision. The rule or order must be ignored.9
u Not to look upon dictionary meaning of a word where the word has been statutorily defined or judicially interpreted, but where there is no such definition, the court may take aid of dictionaries to ascertain the meaning of the word in common parlance.10
u The primary rule of interpretation which is also known as the literal construction is that where the language is plain and admits of one meaning, the task of interpretation can hardly be said to arise R.M. Donde, ITO v. Mukundrai Kuberdas Katakia  176 ITR 381 (Bom.), Shop and Store Developments Ltd. v. IRC  1 AC 472 (HL).
The primary task of the court is to ascertain (1) the legislative intent, and (2) the object and purpose of the legislation, before the aforesaid rules could be applied.
Construction - Scope and effect of statute
6.2A Judicial precedents and celebrated texts on interpretation gave, therefore, primacy to two facts, which in a sense are synonymous :
(i) the intention of the Legislature,
(ii) the purpose underlying the enactment of the statutes.
The intention of the Legislature constitutes the law of any statutes which should be given effect to, even if it necessitates supplying omissions. All statutes are to be construed by the courts so as to give effect to the intention, which is expressed by the words used in the statute. But that is not to be discovered by considering those words in the abstract, but by inquiring what is the intention expressed by those words used in a statute with reference to the subject-matter and for the object with which the statute is made; it being a question to be determined by the court, and a very important one which was the object for which it appears that the statute was made.1 The meaning of the word is to be found not so much in the strict etymological propriety of the language, or even in popular use, as in the subject or occasion on which it is used and the object that is intended to be achieved. The subject-matter with which the Legislature was legislating, is legitimate topic to consider in ascertaining what was the object and purpose of the Legislature in passing the Act.2 In deciding the true scope and effect of the relevant words in any statutory provision, the context in which the words occur is important. In deciding the true scope and effect of the relevant words in a statutory provision, regard must be paid to.3
u the context in which a word occurs;
u the object of the statute for which the provision is included; and
u the policy underlying the statute.
But the well-settled principle is that the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of Legislature. The language used is the determinative factor of legislative intent. Lord Diplock said in Duport Steels Ltd. v. Sirs  (1) All ER 529, at p. 542 :
“It endangers continued public confidence in the political impartiality of the judiciary, which is essential to the continuance of the rule of law, if Judges, under the guise of interpretation, provide their own preferred amendments to statutes which experience of their operation has shown to have had consequences that members of the court before whom the matter comes consider to be injurious to public interest.”
In the event a statute is not clear, recourse to strict interpretation must be made for construction thereof. In his classic work ‘The Interpretation and Application of Statutes’ Read Dickerson states :
“(1) The Court will not extend the law beyond its meaning to take care of a broader legislative purpose. Here ‘strict’ means merely that the Court will refrain from exercising its creative function to apply the rule announced in the statute to situations not covered by it, even though such an extension would help to advance the manifest ulterior purpose of the statute. Here, strictness relates not to the meaning of the statute but to using the statute as a basic for judicial law making by analogy with it.
(2) The Court will resolve an evenly balanced uncertainty of meaning in favour of a criminal defendant, the common law, the ‘common right’, a taxpayer, or sovereignty.
(3) The Court will so resolve a significant uncertainty of meaning even against the weight of probability.
(4) The Court will adhere closely to the literal meaning of the statute and infer nothing that would extend its reach.
(5) Where the manifest purpose of the statute, as collaterally revealed, is narrower than its express meaning, the Court will restrict application of the statute to its narrower purpose. This differs from the Riggs situation in that the narrow purpose is revealed by sources outside the statute and its proper context.”
The Court exercises its creative function by constructing statute beyond its meaning, if literal and strict meaning is against the manifest purpose or the policy of the statute or leads, to absurdity or ambiguity, or unless the context requires otherwise.
In Mohammad Ali Khan v. CWT  3 SCC 511, it is held :
“It is a cardinal principle of construction that the words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning unless that leads to some absurdity or unless there is something in the context or in the object of the statute to suggest the contrary. It has been often held that the intention of the Legislature is primarily to be gathered from the language used, which means that attention should be paid to what has been said as also to what has not been said. As a consequence, a construction which requires for its support additional support, addition or substitution of words or which results in rejection of words as meaningless has to be avoided. Obviously, the aforesaid rule of construction is subject to exceptions, just as it is not permissible to add words or to fill in a gap or lacuna. Similarly, it is of universal application that effort should be made to give meaning to each and every word used by the Legislature.”
The Supreme Court in J.P. Bansal v. State of Rajasthan  5 SCC 134; AIR 2003 SC 1405;  5 ILD 130 (SC) observed as follows :
‘Where, however, the words were clear, there is no obscurity, there is no ambiguity and the intention of the Legislature is clearly conveyed, there is no scope for the court to innovate or take upon itself the task of amending or altering the statutory provisions. In that situation the Judges should not proclaim that they are playing the role of a law-maker merely for an exhibition of Judicial valour. They have to remember that there is a line, though thin, which separates adjudication from legislation. That line should not be crossed or erased. This can be vouchsafed by “an alert recognition of the necessity not to cross it and instinctive, as well as trained reluctance to do so”. (See Frankfurter, Some Reflections on the Reading of Statutes in “Essays on Jurisprudence”, Columbia Law Review, p. 51)’.
The rules of construction are :
(1) The first and primary rule of construction is that the intention of the Legislature must be found in the words used by the Legislature itself. The question is not what may be supposed and has been intended but what has been said. “Statutes should be construed not as theorems of Euclid”. Judge Hand said, “but words must be construed with some imagination of the purposes which lie behind them” (see Lenigh Valley Coal Co. v. Yensavage 218 FR 547). This view was re-iterated in (Union of India v. Filip Tiago De Gama of Vedem Vasco Dee Gama AIR 1990 SC 981);
(2) The courts must avoid the danger of priori determination of the meaning of a provision based on their pre-determined notions of ideological structure or scheme into which the provision to be interpreted is somewhat fitted; they are not entitled to usurp legislative function under the disguise of interpretation (D.R. Venkatachalam v. Deputy Transport Commissioner AIR 1977 SC 842);
(3) While interpreting a provision, the court only interprets the law and cannot legislate. If a provision of law is misused and subjected to the abuse of the process of the law, it is for the Legislature to amend, modify or repeal it, if deemed necessary (see Rishab Agro Industries Ltd. v. P.N.B. Capital Ltd.  101 Comp. Cas. 284;  5 SCC 515); the legislative casus omissus cannot be supplied by judicial interpretative principle.
These rules are discussed at appropriate places in the book.
6.2B The basic principle of interpretation, as aforesaid, is to ascertain the intention of the Legislature which has to be gathered from the language used which may be clear and explicit and may not be. The court is bound to construe the plain and unambiguous words in their ordinary sense with reference to other clauses of the Act, so far as possible, to make a consistent enactment of the whole statute. Added to this, in construing the statute, the court has to ascertain the intention of the law making authority in the back drop of the dominant purpose and the underlying intendment of the said statute and every statute is to be interpreted without any violence to its language and applied so far as its explicit language admits consistent with established rules of interpretation Mohan Kumar Singhania v. Union of India AIR 1992 SC 1.
If the language of the statute is not clear and there is need to resort to aids of construction, such aids can be either internal or external. Internal aids of constructions are definitions, exceptions, explanations, fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuations, saving clauses, non obstante clauses, etc. The external aids are dictionaries, earlier Acts, history of legislation, parliamentary history, parliamentary proceedings, state of law as it existed when the law was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the Act.1 Blackstone tells us that the fairest and the most rational method to interpret the will of the legislator is by exploring the intentions at the time when the law was made, by signs most natural and probable. And these signs are either the words, the context, the subject-matter, the effects and consequences, or the spirit of reason of the law2. Thus, in order to get its true import, it is necessary to view the enactment, in retrospect, the reasons for enacting it, the evil it was to end and the object it was to subserve.3 A statute is best understood if we know the reason for it. The reason of a statute is the safest guide to its interpretation. The word of a statute takes its colour from the reason for it, and such reason could be gathered with the aid of Statement of Objects and Reasons when the Bill is presented to Parliament, the reports of Committees which preceded the Bill, and the reports of the Parliamentary Committee, debates of Parliament (external aids); preamble, the scheme and the provisions of the Act (internal aid). Having discovered the reason for the statute and so having set the sail to the wind, the interpreter may proceed ahead.4
Construction - Statute read as a whole
6.2B-1 Ex visceribus actus - Within the four corners of the statute - The Supreme Court in Padmasundra Rao v. State of Tamil Nadu  255 ITR 147 observed :
“Two principles of construction - one relating to casus omissus and the other in regard to reading the statute as a whole - appear to be well-settled. Under the first principle a casus omissus cannot be supplied by the court except in case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by Legislature.”
The above observations lay emphasis on two principles of construction (1) the statute is to be read as a whole and (2) casus omissus. The second principle is discussed later.
The most basic rule of interpretation is embodied in the Latin maxim ex visceribus actus.1 Put it simply, this means a statute has to be read as a whole and not piecemeal. Interpretation must not only be close to the statutory language but should also not lead to conflict with the other provisions of the statute. The intention of the Legislature must be found by a reading of the statute as a whole and in its context,2 which is derived from the contextual scheme.3 The idea that the words speak for themselves without interpretation in the light of circumstances under which they were composed or arranged has long been exploded. Where the language used by the Legislature presents a choice of two or more meanings equally tenable, it is admissible within certain limits to have resort to the aid of extraneous considerations and certainly to the context of the statute itself in order to discover which meaning was most probably intended.4
When the court is called upon to construe the terms of any provision found in a statute, the court does not confine its attention only to a particular provision which falls for consideration but it also considers other parts of the statute which throw light on the intention of the Legislature and serves to show that a particular provision ought not to be construed as if it stood alone and apart from the rest of the statute. Every clause of a statute should be construed with reference to the context and other clauses of the statute so as, as far as possible, to make a consistent enactment of the whole statute.1
The Supreme Court held in Unique Butyle Tube Industries (P.) Ltd. v. UP Financial Corporation  2 SCC 455 that every part of a section should be interpreted in terms of its own context and in relation to other part of the section and ultimately the interpretation placed in a particular provision should result in the whole statute remaining a consistent enactment.
The meaning of a sentence may be more than that of the separate words, as a melody is more than the notes and no degree of particularity can ever obviate recourse to the setting in which all appear and which all collectively create.1
Thus, even apart from the compulsion of contextual construction, the rule is settled that to ascertain the meaning of a clause in a statute, the court must look to the whole statute, at what precedes and at what succeeds and not merely at the claim under construction, irrespective of setting of the other relevant provisions in the scheme of the statute.2
Thus, it is settled law that in order to ascertain the intention of the Legislature, the court has to gather from all admissible evidences including legislative history and the language in which the statute is couched, the purpose of the statute, its aim, scope, object and setting of the Act, giving effect to the context of every word, phrase or sentence employed therein by harmonious construction so as, as far as possible, to make a consistent enactment of the whole statute. In that process, the court has to keep in the forefront, what was the state of law before the Act was passed, what was the mischief or defect which the law had not prevented, what remedy the Legislature has provided and the reason for the remedy. The construction would be to suppress the mischief and advance the remedy and to suppress all evasions for the continuance of the mischief which the statute intends to prevent. The statute must be applied to the substance rather than to the mere form of the transaction, thereby defeating any mischief of contraventions which the parties may have devised to wriggle out of the Act, if necessary to brush away the cobwebs and consider the transactions in their true light.3
In Poppatlal Shah v. State of Madras AIR 1953 SC 274; 4 STC 188, 193 (SC), Mukherjea J. (as he then was) held at page 276, para (7), thus :
“It is a settled rule of construction that to ascertain the legislative intent, all the constituent parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself.”
In that case, the question was whether the title in the goods had passed under the Madras Sales Tax Act at the time when the transaction was entered into within the State of Madras or when the title in the goods passed to the buyer who was outside the State, on its receipt for assessment to sales tax of the sales effected outside the State. In that context, the preamble, the purpose and the operation of the Act were considered.
6.2B-2 Understanding of real meaning - By principle of interpretation, it is meant that when you have to give meaning to anything in writing, then you must understand the real meaning. You can only understand the real meaning by understanding the reference, context, the circumstances in which it was stated and the problems or the situations which were intended to be met by what was said and it is only when you take into consideration all this background, circumstances and the problems which have to be tackled that you could really understand the real meaning of the words.
And it is clear that when one has to look to the intention of the Legislature, one has to look to the circumstances under which the law was enacted, the preamble of the law and, the mischief which was intended to be remedied by the enactment of the statute. In this context, Lord Denning, in his book “The Discipline of law” at page No. 10, observed as under :
“At one time the Judges used to limit themselves to the bare reading of the statute itself—to go simply by the words, giving them their grammatical meaning and that was all. That view was prevalent in the 19th century and still has some supporters today. But it is wrong in principle. The statute as it appears to those who have to obey it—and to those who have to advise what to do about it; in short, to lawyers like yourselves. Now the eccentric cut off from all that is happening around them. The statutes come to them as men of affairs—who have their own feeling for the meaning of the words and know the reason why the Act was passed—just as if it had been fully set out in a preamble. So it has been held very rightly that you can enquire into the mischief which gave rise to the statute—to see what was the evil which it was ought to remedy.”
It is now well-settled that in order to interpret a law, one must understand the background and the purpose for which the law was enacted.1
6.2B-3 Statute should be read as a whole even when language is clear and explicit - When the language is clear and explicit and words used are plain and unambiguous, the court is bound to construe them in the ordinary sense with reference to other clauses of the Act, so far as possible, to make a consistent enactment of the whole statute. The intention of the Legislature must therefore be ascertained by reading the statute as a whole.2 It can be done by directing one’s attention not merely to the clauses to be construed, but to the entire statute. One must compare the clause with other parts of the law and the statute in which the clause to be interpreted occurs.3 No provision or word should be read in isolation. Statute should be read as whole V. Jagannadha Rao v. State of AP  10 SCC 401. Every provision and every word must be looked generally before any word or provision is attempted to be construed. The setting and pattern are important; while the words are important, context is not less important [in Utkal Contractors and Joinery (P.) Ltd. v. State of Orissa  3 SCC 279 and Oriental Insurance v. Hansrajbhai  105 Comp. Cas. 743 (SC)]. It might be conceivable that the Legislature while enacting a clause in plain terms might introduce into the same statute, other enactment which to some extent clarifies or neutralises the effect.1 The Act has, therefore, to be viewed as a whole and its intention determined by construing all the constituent parts of the Act together and not by taking detached sections or to take one word here and another there.2 In order to ascertain the meaning of a clause or a statute, it is a settled rule or, in other words, a compelling rule that the entire statute must be read as a whole and thereby the intention of Legislature and the meaning of different provisions can be ascertained and all efforts must be made to make a harmonious interpretation of the different parts of the statute and thereby to reconcile the different parts of the statute even though they apparently appear to be conflicting or contradictory.3
The Supreme Court in Lalit Mohan Pandey v. Pooran Singh AIR 2004 SC 2303;  19 ILD 487) observed as follows :—
“47. Even a construction which would make the provisions more effective and workable must be adopted and to see if it is possible to be done without doing too much violence to the language used.
48. Every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute.” (p. 504, ILD).
6.2B-4 Textual interpretation should match the contextual - Every clause of a statute has, therefore, to be construed with reference to the context.4 The context is to be taken in its widest sense as including not only other enacted provisions of the same statute but its preamble, the existing state of law, other statutes in pari materia and the mischief which was intended to be remedied.5 Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say that if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of the statute and no word of the statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place.6
EXCEPTION - No canon of statutory construction is more firmly established than that the statute must be read as a whole. It is so firmly established that it is styled as ‘elementary rule’. The only exception to this well-settled principle is that it cannot be called in aid to alter the meaning of what is itself clear and explicit.1 No rule of construction can require that when the words of one part of a statute convey a clear meaning, it shall be necessary to introduce another part of a statute for the purpose of controlling or diminishing the efficacy of the first part.2
6.2B-5 Statute be read as a whole - In case of conflict - If there is overlapping or conflict in the statute, then on the settled principles of statutory interpretation of law, the statute must be read as a whole and the real intention of the Legislature is to be judged by reading the entire section as a whole. To ascertain the legislative intention, all the constitutional parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself.3 Every clause of a statute should be construed with reference to the context.4 To ascertain the meaning of a section, it is not permissible to omit any part of it. The whole section should be read together.
Such a construction has a merit of avoiding any inconsistency or repugnancy either within the section or between two different sections or provisions of the same statute, so that head-on-clash between two sections of the same Act is avoided. (see Sultana Begum v. Prem Chand Jain AIR 1997 SC 1006).
In case of inconsistency or conflict between the two provisions, attempt should be made to reconcile them5
if it is reasonably possible to do so and to avoid repugnancy.6 It is the duty of the court to avoid a head-on-clash.7 But if two sections are repugnant, the last must prevail.8
The Supreme Court in CIT v. Hindustan Bulk Carriers  259 ITR 449 observed :
“Whenever it is possible to do so, it must be done to construe the provisions which appear to conflict so that they harmonise. It should not be lightly assumed that Parliament had given with one hand what it took away with the other.
The provisions of one section of the statute cannot be used to defeat those of another unless it is impossible to effect reconciliation between them. Thus a construction that reduces one of the provisions to a ‘useless number’ or ‘dead letter’ is not a harmonised construction. To harmonise is not to destroy.”
Statutes must have some purpose or object, whose imaginative discovery is judicial craftsmanship. Courts need not always cling to literalness, should seek to endeavour to avoid an unjust or absurd result, and should not make a mockery of legislation. To make sense out of an unhappily worded provision, where the purpose is apparent to the judicial eye, ‘some’ violence to language is permissible.1
6.2B-5A Summing up - Rules of interpretation (construction) of statute - The basic rules of interpretation could be summed up as follows :
(1) There is only one principle of construction, namely, to ascertain what Parliament meant by using the language of the statute. All other principles of construction are no more than guides which the past judges have put forward, some more helpful or insightful than others, to assist the task of interpretation (Lord Hoffman in Macniven H.M. Inspector of Taxes v. Westmoreland Investments Ltd.  2 WLR 337 (HL);  255 ITR 612).
(2) In interpreting a particular provision of law to ascertain the meaning and intendment of the Legislature, the court should presume that the provision was designed to effectuate a particular object to meet a particular requirement [Easland Combines v. Collector of Central Excise  1 RC 29 (SC)].
(3) The rule of construction is “to intend the Legislature to have meant what they have actually expressed” and the intention of the Legislature should be deduced from the language used. The golden rule is that words of a statute must prima facie be given their ordinary meaning (Chandavarkar Sita Ratna Rao v. Ashalata S. Guram  4 SCC 447; AIR 1987 SC 117). That, however, does not mean that the decision should rest on the literal interpretation of the words used in disregard to all other materials. The literal construction has in general, prima facie preference; but to arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act, to consider principles laid down by Lord Coke in Heydon’s case (1584) 3 Co. Rep 7a (R.M.D. Chamarbaugwalla v. Union of India AIR 1957 SC 628);
(4) When words of a statute are clear, plain and unambiguous, that is, reasonably susceptible to one meaning, courts are bound to give effect to that meaning irrespective of the consequences (Nelson Motis v. Union of India AIR 1992 SC 1981). Merely because a law causes hardship, it cannot be interpreted in a manner so as to defeat its object. Courts are not concerned with the legislative policy or with the result, whether injurious or otherwise, by giving effect to the language used nor is it the function of the court where the meaning is clear not to give effect to it merely because it would lead to some hardship [Easland Combines v. Collector of Central Excise  1 RC 29 (SC)]. The court cannot demur on the ground that the Legislature must have intended otherwise (M/s Patheja Bros. Forging and Stamping v. ICICI Ltd. AIR 2000 SC 2553). Thus, the intention has always to be gathered by the words used by the Legislature, giving to them their plain, grammatical meaning (Mahadeolal Kanodia v. Administrator General of West Bengal AIR 1960 SC 936).
(5) The courts will have to reject that construction which will defeat the plain intention of the Legislature even though there may be some inexactitude in the language used [see Salmon v. Duncombe (1886) 11 App. Cas. 627, 634 (PC), Curtis v. Stovin (1889) 22 QBD 513 referred to in CIT v. S. Teja Singh  35 ITR 408 (SC)].
(6) The court cannot aid the Legislature’s defective phrasing of the Act. It cannot add or amend and, by construction, make up deficiencies which are left [Crawford v. Spooner  6 Moore PC 1 (PC)].
(7) A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle as expressed in the maxim ut res magis valeat quam pereat, i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties (see Broom’s Legal Maxims (10th edition), page 361, Craies on Statutes (7th edition) page 95, and Maxwell on Statutes (11th edition) page 221).
(8) If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, the court should avoid a construction which would reduce the legislation to futility, and should rather accept the bolder construction, based on the view that Parliament would legislate only for the purpose of bringing about an effective result (see Nokes v. Doncaster Amalgamated Collieries Ltd.  3 All ER 549 (HL)) referred to in Pye v. Minister for Lands for New South Wales  3 All ER 514 (PC). The principles indicated in that case were reiterated by the Supreme Court in Mohan Kumar Singhania v. Union of India AIR 1992 SC 1).
(9) The statute must be read as a whole and one provision of the Act should be construed with reference to the other provisions in the same Act so as to make a consistent enactment of the whole statute. Thus, the court should ascertain the intention of the Legislature by directing its intention not merely to the clauses to be construed but to the entire statute; it must compare the clause with other parts of the law and the setting in which the clause to be interpreted occurs (see R.S. Raghunath v. State of Karnataka AIR 1992 SC 81). Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between two different sections or provisions of the same statute. It is the duty of the court to avoid a head-on-clash between two sections of the same Act (see Sultana Begum v. Prem Chand Jain AIR 1997 SC 1006).
Interpretation of words - Contextual
6.2B-6 Contextual interpretation of words - Words are meant to serve and not to govern - Plain words are delusion. Since the words must have spoken as clearly to legislators as to judges, it may be safely presumed that the Legislature intended what the words plainly say. This is the real basis of the so-called literal rule of construction that where the words of statutes are plain and unambiguous, effect must be given to them. Where words used are unambiguous, interpretative aids such as objects of statute would not be relevant [Kailash Nath Agarwal v. Pradeshiya Indl. & Invt. Corpn. of U.P. Ltd.  114 Comp. Cas. 4 (SC)]. A court should give effect to plain words, not because there is any charm or magic in the plainness of such words, but because plain words may be expected to convey plainly the intention of the Legislature to others as well as judges. Intention of the Legislature and not the words is paramount. Even where the words of statutes appear to be prima facie clear and unambiguous, it may sometimes be possible that the plain meaning of the words does not convey and may even defeat the intention of the Legislature. In such cases, there is no reason why the true intention of the Legislature, if it can be determined clearly, by other means, should not be given effect. Words are meant to serve and not to govern and courts are not to add the tyranny of words to the other tyrannies of the world. As Lord Denning said: “A judge should not be a servant of the words used. He should not be a mere mechanic in the power house of semantics”.1
The plain and unambiguous meaning of words by which the courts so often believe themselves to be governed is really a delusion, since no words are so plain and unambiguous that they do not need interpretation in relation to a context of language or circumstances. Without this process ‘intention’ is always undiscoverable. Words are vehicles of meaning. But what is that meaning which the Legislature wants to convey ?
‘The letter Killeth, the spirit giveth life’ (St. Paul). The very conception of interpretation connotes that the words have to be construed in the context in which they are used. Words derive colour from the context. In Chertsey, U.D.C. v. Mixnam’s Properties  2 All ER 627, Lord Reid said that “General words and phrases, therefore, however wide and comprehensive they may be in their literal sense, must usually be construed as being limited to the actual objects of the Act.”
6.2B-6a MEANING OF WORDS BE DERIVED FROM THE CONTEXT - While it is permissible to refer to dictionaries to find out the meaning in which a word is capable of being used or understood in common parlance, the well-known canon of construction should not even for a minute be overlooked that the meanings of the words and expressions used in a statute ordinarily take their colour from the context in which they appear.1 Words take colour from the context in which they are used (Jasbir Singh v. Vipin Kumar Jaggi  8 SCC 289).
In R. v. Hall 1 B&C 123, it has been said that the meaning of particular words, indeed, in statutes, as well as in other instruments, is to be found not so much in strict etymological propriety of language, nor even in popular use, as in the subject or occasion on which they are used, and the object that is intended to be attained. In Town v. Eisner  245 US 418, Mr. Justice Holmes said that a word may vary greatly in colour and content according to the circumstances and the time in which it is used. Bhagwati J. pointed out in Union of India v. Sanklalchand Himatlal Sheth AIR 1977 SC 2328, that words used in a statute cannot be read in isolation; their colour and content are derived from their context and, therefore, every word in a statute must be examined in its context. The context is of great importance in the interpretation of the words used in a statute.
The same words may mean one thing in one context and another in different context. This is the reason why decisions on the meaning of particular words or collection of words found in other statutes are scarcely of much value (D.N. Banerji v. P.R. Mukherjee AIR 1953 SC 58; Banaras Hindu University v. Indra Pratap Singh AIR 1992 SC 780).
The dictionary meaning and interpretations are indeed quite good at their respective places in the context and relation to other word, phrase or expression used in the concerned section of the particular Act. The same word, phrase or expression connotes altogether a different meaning when used in the context of different words, phrases or expressions. For example, if the meaning of relationship of “A” person is to be correctly interpreted then in order to find out what it is, then “A” remaining the same, if it is used in the context and relationship of person “B” wife, then “A” is husband of “B”, if it is in the context of a person “C” son, the “A” is the father of “C”. If it is in the context of brother “D”, then “A” is the brother of “D” and if it is in the context of “E”, friend, the “A” is friend of “E”, so on and so forth. Thus, what is the meaning, relationship of a particular phrase, word, or expression ultimately depends upon how that particular word or phrase is related to other particular words, phrases or expressions in the context in which it is used [R.A. Varma, ACIT v. Laxmi Induction  216 ITR 555 (Guj.)].
The Supreme Court in Tarlochan Dev Sharma v. State of Punjab AIR 2001 SC 2524 observed as follows :—
“To find the meaning of a word or expression not defined in an enactment the Courts apply the ‘subject and object rule’ which means ascertain carefully the subject of the enactment where the word or expression occurs and have regard to the object which the Legislature has in view. Forego the strict grammatical or etymological propriety of language, even its popular use; let the subject or the context in which they are used and the object which the Legislature seeks to attain be your lenses through which look for the meaning to be ascribed. In selecting one out of the various meanings of a word regard must always be had to the context as it is fundamental rule that the meanings of words and expressions used in an Act must take their colour from the context in which they appear. Therefore, when the context makes the meaning of a word quite clear, it becomes unnecessary to search for and select a particular meaning out of the diverse meanings a word is capable of, according to lexicographers”. (p. 2525)
6.2B-6b SAME WORD IN DIFFERENT ENACTMENT - Same word may mean different things in different enactments and in different contexts. It may mean different things at different places in the same statute. It all depends on the sense of the provision where it occurs. It is not a sound rule of interpretation to seek the meaning of the words used in an Act, in the definition clause of another statute. The definition of an expression in one Act must not be imported into another (Union of India v. R.C. Jain AIR 1981 SC 951).
The words and expressions defined in one statute as judicially interpreted do not afford a guide to the construction of the same words or expression in another statute unless both the statutes are pari materia legislation or it is specifically provided in one statute to give the same meaning to the words as defined in another statute. [Jagatram Ahuja v. CGT  246 ITR 609 (SC)].
In Chief Constable of West Midlands Police v. Billingham  1 WLR 747, Bridge L.J. said :
“There have been many authorities dealing with the meaning of the word ‘accident’ in different statutory and contextual contexts. It is, in my judgment, a word which has a perfectly well-understood meaning in ordinary parlance but that meaning is an elastic one according to the context in which the word is used.”
Reference to dictionaries is hardly of any avail, particularly in the case of words of ordinary parlance with a variety of well-known meanings. Such words take colour from the context.1
Construction of words and the meaning to be given to such words shall normally depend on the nature, scope and purpose of the statute in which it is occurring and to the fitness of the matter to the statute. The meaning given to the same word occurring in a social security measure or a regulating enactment may not be apposite or appropriate when the same word is interpreted with reference to a taxing statute (Saraswati Sugar Mills v. Haryana State Board AIR 1992 SC 224). Thus, the same words may mean one thing in one context and another in different context. This is the reason why decisions on the meaning of particular words or collection of words found in other statutes are scarcely of much value, when the court has to deal with a specific statute; they may be helpful but cannot be taken as guides or precedents (D.N. Banerji v. R.P. Mukherjee AIR 1953 SC 58; Banaras Hindu University v. Dr. Indra Pratap Singh AIR 1992 SC 780).
6.2B-6c SAME WORDS IN DIFFERENT PLACES IN THE SAME SECTION OR STATUTE - While embarking upon the interpretation of words and expressions used in a statute, it is possible to find a situation when the same word or expression may have somewhat different meaning at different places depending on the subject or context. There is however an exception which can be resorted to only in the event of repugnancy in the subject or the context being spelled out. It has been the consistent view of the Supreme Court that when the Legislature used same word or expression in different parts of the same section or statute, there is a presumption that that the word is used in the same sense throughout. The more correct statement of the rule is, as held by House of Lords in Farrell v. Alexander  2 All ER 721, 736, “where the draftsman uses the same word or phrase in similar contexts, he must be presumed to intend it in each place to bear the same meaning”. The court having accepted invitation to embark upon interpretative expedition shall identify on its radar the contextual use of the word or expression and then determine its direction avoiding collision with icebergs of inconsistency and repugnancy [Central Bank of India v. Ravindra  107 Comp. Cas. 416 (SC)]. Because the same word has been used in two different sections, it does not necessarily follow that they must carry the same meaning (CIT v. V. Venkatachalam AIR 1994 SC 1267). Further, the use of qualifying word in one provision and its non-use in the other makes the distinction. The exclusion of such qualifying word must be given some weight in interpreting the words [see Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. Ltd.  114 Comp. Cas. 4 (SC)]. The Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.  59 Comp. Cas. 548 observed :
“The distinction made by Parliament......in the several provisions of the same Act cannot be ignored or strained to be explained away by us. That is not the way to interpret statutes. The proper way is to give due weight to the use as well as the omission to use the qualifying words in different provisions of the Act. The significance of the use of the qualifying word in one provision and its non-use in another provision may not be disregarded.”
As for use by the same statute of two different words, the rule is that these different words carry different meanings. The Supreme Court observed as follows in Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. Ltd.  114 Comp. Cas. 4 :
“While it is true that two different words may be used in the same statute to convey the same meaning, that is exception rather the rule. The general rule is that when two different words are used by the same statute, prima facie one has to construe these different words as carrying different meanings. In Kanhaiyalal Vishindas Gidwani v. Arun Dattatray Mehta  1 SCC 78, this court found that words ‘subscribed’ and ‘signed’ had been used in the Representation of People Act, 1951, interchangeably and, therefore, in that context the court came to the conclusion that when the Legislature used the word ‘subscribed’, it did not intend anything more than ‘signing’. The words ‘suit’ and ‘proceeding’ have not been used interchangeably in the SICA, therefore, the reasons which persuaded this court to give the same meaning to two different words in a statute cannot be applied here.”
6.2B-6d WORDS IN SOCIAL WELFARE LEGISLATION - Words occurring in statutes of liberal import such as social welfare legislation and human rights’ legislation are not to be put in procrustean beds or shrunk to Lilliputian dimensions. In construing these legislations, the imposition of literal construction must be avoided and the prodigality of its misapplication must be recognised and reduced. Judges ought to be more concerned with the ‘colour’, the ‘content’ and the ‘context’ of such statutes.1 Welfare statutes require liberal construction, statutes made for public good should be liberally construed. Beneficial statutes should not be construed too restrictively. Construction of words and the meaning to be given to such words shall normally depend on the nature, scope and purpose of the statute in which it is occurring and to the fitness of the matter to the statute (Saraswati Sugar Mills v. Haryana State Board AIR 1992 SC 2240; Pollisetti Pullamma v. Kalluri Kameswaramma AIR 1991 SC 604).
6.2B-6e WORDS HAVE NOT ONLY MEANING BUT ALSO CONTEXT - Vicissitudes of time and necessitous of history contribute to changes of philosophical attitudes, concepts, ideas and ideals and with them the meanings of words and phrases and the language itself. The philosophy and the language of the law are no exception. Words and phrases take colour and character from the context and the times and speak differently in different context and times. And, it is worthwhile remembering that words and phrases have not only a meaning but also a content, a living content which breathes and so expands and contracts. This is particularly so where words and phrases properly belong to other disciplines.2 A word is not crystal, transparent and unchanged. It is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used.3 It may be that in interpreting the words of the provision of a statute, the setting in which such words are placed may be taken into consideration, but that does not mean that even though the words which are to be interpreted convey a clear meaning, still a different meaning or interpretation be given to them because of the setting. In other words, while setting of the words may sometimes be necessary for the interpretation of the words of the statute, but that has not been ruled by the courts to be the only and the surest method of interpretation.1 The Supreme Court in Board of Revenue v. Arthur Paul Benthall AIR 1956 SC 35 held :
“When two words of different import are used in a statute in two consecutive provisions, it would be difficult to maintain that they are used in the same sense....”
“It is not without significance that the Legislature has used three different words in relation to three sections, ‘transaction’ in section 4, ‘matter’ in section 5 and ‘description’ in section 6”.
In Labour Commissioner v. Burhanpur Tapti Mills Ltd. AIR 1964 SC 1687, the court was concerned with two provisions of the C.P. Berar Industrial Disputes Act as to whether the words describing a strike as ‘rendered illegal’ are the same as ‘held illegal’, and the court held that when different phraseology had been used, the conclusion is irresistible that this was done deliberately.
In Guardians of Parish of Brighton v. Guardians of the Strand Union  2 QB 156, Lord Eshar M.R. observed at page 167 :
“It is a rule of construction that where the same Act of Parliament, and in relation to the same subject-matter, different words are used, the court must see whether the Legislature has not made the alteration intentionally, and with some definite purpose; prima facie such an alteration would be considered intentional”.
6.2B-6f NO WORD HAS ABSOLUTE MEANING AND DEFINED WITHOUT REFERENCE TO CONTEXT - ‘Words’ writes Professor H.A. Smita “are only one form of conduct and the intention which they convey is necessarily conditional by context and circumstances in which they are written or spoken. No word has an absolute meaning, for no word can be defined in vacuum or without reference to some context. The practical work of the Courts is very largely a matter of ascertaining the meaning of words, and their function, therefore, becomes the study of contexts. Since the number and variety of contexts is only limited by the possibilities of human experience, it follows that rules of interpretation cannot be regarded as absolute”.2 Justice Avadh Behari Rohtagi quoted Dryden in P.C. Puri v. CIT3. “As long as words bear a different sense, each may be his own interpreter. Our airy faith with no foundation find : The words a weathercock for every wind”. The same word may mean different things in different enactments and in different contexts. It may mean different things at different places in the same statute. It all depends in the sense of the provision where it occurs.1 Words have no absolute meaning. They derive their colour from that which surrounds them. It is true that meanings generally overlap. Few words have exact synonyms. The overtones are almost always different. Words are the greatest tricksters. They play pranks with human mind. Legislative intention must be discovered. The courts must not be strict constructionists.2 Words and phrases take colour and character from the context and times. And it is, without remembering that words and phrases have not only a meaning but also a content, a living content which breathes, and so, expands and contracts.3
The elementary rule is that the words used in the section must be given their plain grammatical meaning. It is an elementary duty of a court to give effect to the intention of the Legislature as expressed in the words used by it and no outside consideration can be called in aid to find that intention.4 Primarily, the effect of the statutory provision must be judged on a fair and reasonable construction of the words used by the statute itself. The language which is plain and easily understood should be looked to with extensive aid for the meaning intended.5
In determining the meaning of any word or phrase in a statute, the first question to be asked and always is what is the natural or ordinary meaning of that word or phrase in its context in the statute. It is only when that meaning leads to some result which cannot reasonably be ‘supposed to have been the intention of the Legislature that it is proper to look for some other permissible meaning of the word or phrase.6
A statute must be construed in a manner which makes it effective and operative on the principle expressed in the maxim ut res magis valeat quam pereat.7
When a statute has some meaning even though it is obscure, or several meanings even though there is little to choose between them, the Courts have to say what meaning the statute bears, rather than reject it as nullity.8
“The essence of a language is to reflect, express, and perhaps even affect the conceptual matrix of established ideas and values that identifies the culture to which it belongs. For this reason, language has been called a ‘conceptual map of human experience.’ As with any map, it has little or no significance apart from what it mirrors.
It has been said by some one that words are partly known by their backgrounds, their past like men, and like men they do not have their full significance when standing alone, but are known by the company they keep. Full effect of the word is felt only when the context in which it has occurred is not ignored.
While finding meaning of a word, it is necessary that the legislative purpose is taken into consideration. If the purpose is ignored, the legislative intent would get lost in bewilderness.
If the meaning of the word sought to be given stultifies the purpose of the statute, or produces absurdity or contradiction, in that event the Court must take into account the purpose and the context of the provisions of the Act while interpreting the same.1
‘If a statute is to make sense, it must be read in the light of some assumed purpose. A statute merely declaring a rule, with no purpose or objective, is non-sense. The meaning of a statute is never plain unless it fits with some intelligible purpose.”
6.2B-6g WORDS SPEAK FOR THEMSELVES CONCEPT HAS BEEN EXPLODED - The idea that the words speak for themselves without interpretation in the light of the circumstances under which they were composed or arranged, has long been exploded. Where the language used by the Legislature presents a choice of two or more meanings equally tenable, it is admissible within certain limits to have resort to the aid of extraneous considerations, and certainly to the context of the statute itself, in order to discover which meaning is most palpably intended.2 No judge ever carried on literally in the spirit that he must follow the letter of the law absolutely and read the words in their usual meaning and stop where they stop no matter what the result; and he would not be long tolerated if he did. Nobody would in fact condemn the surgeon who bled a man in the street to cure him, because there was a law against drawing blood in the streets. Every one would say that the law was only meant to prevent street fighting and was intended to cover such a case; that is, that the Government which passed that law, although literally it used words which covered the case did not in fact forbid necessary assistance to sick people. The Legislature has the power to decide what the policy of the law shall be, and if it has intimated its will, however, indirectly, that will should be recognized and obeyed.3
6.2B-6h MEANING OF SENTENCE MAY BE MORE THAN OF THE SEPARATE WORDS - One of the surest indices of a mature and developed jurisprudence is not to make a fortress out of the dictionary, but to remember that statutes have always some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.4 The meaning of a sentence may be more than that of the separate words, as melody is more than notes and no degree of particularity can ever obviate recourse to the setting in which all appear and which all collectively create.1
6.2B-6i CONTEXT - WHICH IT MEANS - The general words and phrases, however, wide and comprehensive they may be in their literal sense, must usually be construed as being limited to the actual objects of the Act.2 The fact that general words are used in a statute is not in itself a conclusive reason why every case falling literally within them should be governed by that statute, and the context of any Act may well indicate that wide or general words should be given a restrictive meaning.3 General words cannot be read in insolation; their colour and content are derived from their context. By context is meant as including not only other enacting provisions of the same statute, but its preamble, the existing state of the law, other statutes in pari materia and the mischief the statute is intended to remedy.4 Their meaning is found not so much in a strictly grammatical or etymological propriety of language, nor even in its popular use, as in the subject or on the occasion on which they are used and the object to be obtained.5 The expressions used in a statute should ordinarily be understood in a sense in which they best harmonise with the object of the statute and which effectuate the object of the Legislature.6
We were told by the distinguished tax judge, Rowlett J., that one must look at what is clearly said in the Statute.7 But the difficulty is that in the taxing Act nothing is clearly said.8 “Of the maker of the tax code, as of another inscrutable author”, we ask and ask: ‘Thou smilest and art still, out-topping knowledge’.8 As early as 1916, Lord Wrenbury gave this warning. “In these Acts”, he said, speaking of the English Taxing Acts of 1842 and 1880, “it is not possible to vest any conclusion upon a particular word. The same word in one section is used is one sense and in another in a different sense.”9 For example, the word ‘assessment’ in the Indian Income-tax Act is used as meaning sometimes the computation of income, sometimes determination of the amount of tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the taxpayer.10 ‘Assessment’ is a word which cannot be its own expositor. It takes colour from the context. Context is everything. The proper course in all these cases is to search out and follow the true intent of the Legislature, and to adopt that sense of the words which harmonise best with the context and promotes in the fullest manner the apparent policy and objects of the Legislature.1
Interpretation - Sententia legis
6.2B-7 Sententia legis, i.e., the intention of the Legislative statute is repository of legislative will - There is only one principle of interpretation, i.e., to ascertain what the Parliament intended in using the language. Other principles are only aids to enable to ascertain that intention. The court cannot read anything into a statutory provision which is plain and unambiguous. The language employed is the determinative factor of legislative intent. The first and the primary rule of construction is that the intention of the Legislature may be found in the words used by the Legislature itself, the question is not what may be supposed and has been intended but what has been said. “Statutes should be construed not as theorems of Euclid”. Judge learned Hand said, “but words must be construed with some imagination of the purposes which lie behind them” [See Lenigh Valley Coal Co. v. Yensavage (218 FR 547). The view was reiterated in Union of India v. Filip Tiago De Gama of Vedem Vasco De Gama AIR 1990 SC 981 and Padmasundra Rao v. State of Tamilnadu  255 ITR 147 (SC)]. Interpretation or construction is a process by which the courts seek to ascertain the meaning of the Legislature through the medium of the authoritative form in which it is expressed. A statute is supposed to be an authentic repository of the legislative will and the function of the Court is to interpret it “according to the intent of them that made it”. From that function the court is not to resile. It has to abide by the maxim ut res magis valeat quam pereat, lest the intention of the legislature may go in vain or be left to evaporate into thin air. Where that intention is clearly expressed in the language of the Act, there is little difficulty in giving effect to it.2 In construing an Act, court must, therefore, adhere closely to the language of the Act. If there is ambiguity in the terms of the provision, recourse must naturally be had to the well-established principles of construction but it is not permissible first to create an artificial ambiguity and then try to resolve the ambiguity by resorting to general principle3. If the language of the statute does not admit of the construction sought, wishful thinking is no substitute, and not the court but the Legislature is to blame for enacting a damp squab statute4. The intention can best be found out by giving natural and ordinary meaning used by the Legislature. This rule is to be adhered to, where there is no ambiguity in the language employed by the statute. This principle of interpretation is regarded as “golden rule of interpretation.”1
The Supreme Court in J.P. Bansal v. State of Rajasthan  5 SCC 134; AIR 2003 SC 1405;  5 ILD 130 (SC) observed as follows :—
“16. Where, therefore, the ‘language’ is clear, the intention of the Legislature is to be gathered from the language used. What is to be borne in mind is as to what has been said in the statute as also what has not been said. A construction which requires, for its support, addition or substitution of words or which results in rejection of words, has to be avoided, unless it is covered by the rule of exception, including that of necessity which is not the case here. See Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests, Palghat AIR 1990 SC 1747 at p. 1752; Shyam Kishori Devi v. Patna Municipal Corpn. AIR 1966 SC 1678 at p. 1682; A.R. Antulay v. Ramdas Sriniwas Nayak 1984 (2) SCC 500; at pp. 518, 519. Indeed, the Court cannot reframe the legislation as it has no power to legislate. See State of Kerala v. Mathai Verghese  (4) SCC 746, at p. 749; Union of India v. Deoki Nandan Aggarwal AIR 1992 SC 96 at p. 101”. (pp. 138-139 of ILD)
In section 263 of the Francis Bennion’s Statutory Interpretation it is stated :
“A principle of statutory interpretation embodies the policy of the law, which is in turn based on public policy. The Court presumes, unless the contrary intention appears, that the legislator intended to conform to this legal policy. A principle of statutory interpretation can therefore be described as a principle of legal policy formulated as a guide to legislative intention.”
6.2B-7a INTENTION OF THE LEGISLATION A SLIPPERY PHRASE - It is said that statute is an edict of the Legislature. The elementary principle of interpreting or construing a statute, as aforesaid, is to gather the mens or sententia legis of the Legislature and interpretation postulates the search for the true meaning of the words used in the statute as a medium of expression to communicate a particular thought. But the task is not easy as the “language” is often misunderstood even in ordinary conversation or correspondence. The tragedy is that although in the matter of correspondence or conversation, the person who has spoken the words or used the language can be approached for clarification, the Legislature cannot be approached as the Legislature, after enacting the law or Act, becomes functus officio so far as a particular Act is concerned and it cannot itself interpret it. No doubt, the Legislature retains the power to amend or repeal the law so made and can also declare its meaning, but that can be done only by making another law or statute after undertaking the whole process of law-making. Statute being the edict of the Legislature, it is necessary that it is expressed in clear and unambiguous language. In spite of Courts so saying so innumerable times, the draftsmen have paid little attention and they still boast of the old British jingle “I am a Parliamentary draftsman. I compose the country’s laws. And of half of the litigation, I am undoubtedly the cause”, which was referred to by the Supreme Court in Palace Administration Board v. Rama Varma Bharathan Thampuran, AIR 1980 SC 1187, 1195. In Kirby v. Leather  2 All ER 441, the draftsmen were so severely criticised in regard to section 22(2)(b) of the (UK) Limitation Act, 1939, as it was said that the draftsmen must have been of unsound mind. (See J.P. Bansal v. State of Rajasthan  5 SCC 134; AIR 2003 SC 1405)
In Bangalore Water Supply v. A. Rajappa AIR 1978 SC 548 Chief Justice Beg observed :
“...judges can more frankly step into the shoes of the Legislature where an enactment leaves its own intentions in much too nebulous or uncertain a state”.
When a question arises as to the interpretation to be put on an enactment, what the court has to do is to ascertain the intent of them that make it and that must of course be gathered from the words actually used in the statute, as no one may speak for the Parliament. Parliament is never before the Court. After the Parliament has said what it intends to say, only the court may say what the Parliament meant to say.1 When we say that court is looking for the intention of Parliament, this is not correct. The court is seeking the meaning of the words which the Parliament used, not what Parliament meant but the true meaning what they said. Thus, the intention of the Legislature is a common but a slippery phrase which, properly understood, may signify anything from intention embodied in the positive enactment to speculative opinion as to what Legislature would have probably meant, although there has been omission to enact it. What Legislature intended to be done can only be legitimately ascertained from that which it has chosen to enact, either in express words or by reasonable or necessary implication. Where, however, the words are clear, there is no obscurity, there is no ambiguity and the intention of the Legislature is clearly conveyed, there is no scope for the Court to innovate or take upon itself the task of amending or altering the statutory provisions. In that situation, the judges should not proclaim that they are playing the role of law - maker merely for an exhibition of judicial valour. They have to remember that there is a line though thin, which separates adjudication from legislation. That line should not be crossed.
6.2B-7b ACTUAL AND IMPLIED INTENTION OF PARLIAMENT - ASCERTAINMENT OF - The primary and foremost task of the court in interpreting a statute is to ascertain the intention of the Legislature, actual or imputed. The intent must of course be gathered from the words actually used. That, however, does not mean that the decision should rest on the literal interpretation of the words used in disregard of all other materials. “The literal construction then” says Mexwell on Interpretation of statutes, 10 edition, page 19 “has in general and prima facie preference. To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act;” (see R.M.D. Chamarbaugwalla v. Union of India AIR 1957 SC 628). The words used, even in their literal sense, are primarily and ordinarily the most reliable source of interpreting the meaning of any statute. But in giving the words their ordinary meaning if the court is faced with extraordinary results which cannot have been intended by the Legislature, the court then have to move on to a second stage in which it re-examines the words. In case the court is faced with two possible constructions of legislative language, it has to look to the results of adopting each of the alternatives respectively for the purpose of upholding the true intention of the Legislature.1 Such examination has to be done if (1) the statute leads to absurdity, hardship, or injustice presumably not intended,2 or (2) where the language of the statute in its ordinary and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment3 or, (3) gives rise to some inconsistency4. The construction which promotes the objectives for which the enactment is intended must be adopted. The courts’ interpretation must be in keeping with the purpose for which the legislation was promulgated.5 An application of the golden rule necessarily involves that additions to or modification of words used in statutory provisions is not generally permissible.6 Courts may depart from this rule only to avoid a patent absurdity.7 The court need not always cling to literalness, but it should seek to endeavour to avoid an unjust and absurd result. It should not make a mockery of the legislation. To make sense out of an unhappily worded provision - where the purpose is apparent to the judicial eye, some violence to the language is permissible.8
The court has to examine carefully the object of the statute, the consequences that may follow from insisting on a strict observance of the particular provision and above all the general scheme of other provisions of which it forms a part.9
The rule could be summarised in the following words of the Supreme Court :10
“So we see that the primary and foremost task of a court in interpreting a statute is to ascertain the intention of the Legislature, actual or imputed. Having ascertained the intention, the court must then strive to so interpret the statute as to promote/advance the object and purpose of the enactment. For this purpose, where necessary, the court may even depart from the rule that plain words should be interpreted according to their plain meaning. There need be no meek and mute submission to the plainness of the language. To avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law, the court would be well justified in departing from the so-called golden rule of construction so as to give effect to the object and purpose by supplementing the written word if necessary”.
6.2B-7c INTENTION GATHERED FROM SOCIAL CONDITIONS AND THE MISCHIEF TO BE REMEDIED - In order to arrive at true intendment of a statute, the court should pose to itself the questions1 (1) what was the situation prior to the provision under construction, (2) what was the mischief or defect that was noticed before introducing the provision, (3) whether it was remedial and (4) the reason for the remedy.
Denning L.J. said in Seaford Court Estates Ltd. v. Asher2 that a judge must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it, and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give force and life to the intention of the Legislature. Denning L.J., reiterated the same view in Magor and St. Mellons RDC v. Newport Corporation3 thus: “I have no patience with an ultralegistic interpretation which would deprive them of their rights altogether. I would repeat what I said in Seaford Court Estates Ltd. v. Asher  2 All ER 155. We do not sit here to pull the language of Parliament and of Ministers to pieces and make non-sense of it. That is an easy thing to do, and it is a thing to which lawyers are too often prone. We sit here to find out the intention of Parliament and of Ministers and carry it out, and we do this better by filling in the gaps and making sense of the enactment than by opening it up to destructive analysis.”
Sarkar, J. of the Supreme Court quoted with approval of the observation of Denning L.J. in Seaford Courts’ case in M. Pentiah v. Muddala Veeramallappa.4 The views expressed by Denning L.J. and accepted by the Sarkar J. have received great support by the new approach by Lord Diplock Investments (Torquay) Ltd.5 In this case, Lord Diplock has dealt with what is called “a purposive approach to statutory interpretation”.
According to Lord Diplock, the purposive approach would enjoin a Judge to impute to Parliament an intention not to impose a prohibition inconsistent with the objects which the statute was designed to achieve, though the draftsman has omitted to incorporate in express words any reference to that intention. Lord Simonds, however, criticised the observation of Lord Denning. In Magor and St. Mellons Rural District Council v. New Port Corporation1 Lord Simonds observed thus :
“The duty of the court is to interpret the words that the Legislature has used. Those words may be ambiguous, but, even if they are, the power and duty of the court to travel outside them on a voyage of discovery are strictly limited. It appears to me to be a naked usurpation of the legislative function under the thin disguise of interpretation, and it is less justifiable when it is guess work with what material the Legislature would, if it had discovered the gap, have filled it in. If a gap is disclosed, the remedy lies in an amending Act.”
Denning L.J. was not shaken by the criticism of Lord Simonds for he reapplied the same principle in Eddis v. Chickester Constable.2
6.2B-7d PRIMARY AND SECONDARY STATUTORY INTENTION - The task of the court is to ascertain what is the intention of the Parliament, actual or imputed. But on scrutiny of a statutory provision, it will generally appear that a given situation is within the direct contemplation of the draftsman as the situation calling for statutory regulation: this may be called the primary situation. As to this, Parliament will certainly have manifested an intention - The Primary Statutory Intention. But situation other than the primary situation may present itself for judicial decisions - secondary situation. As regards these secondary situations, it may seem likely in some cases that the draftsman had them in contemplation; in others not. Where it seems likely that a secondary situation is not within the draftsman’s contemplation, it will be necessary for the court to impute an intention to Parliament in the way it has been described, that is, to determine what would have been the statutory intention if the secondary situation had been within the Parliamentary contemplation (a secondary intention).3 It is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguities. A judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of the Parliament and he must do this not only from the language of the statute, but also from a construction of social conditions which gave rise to it and of the mischief it was passed to remedy and then he must supplement the written words, so as to give force and life to the intention of the Legislature.4 Not merely the words of the Act have to be considered, but the intent of the Legislature has to be collected from the (1) the cause and necessity of the Act, (2) from a comparison of its general part, and (3) from foreign (extraneous) circumstances so far as they can justly be considered to throw light upon the subject1. The language of Parliament though not to be extended beyond its fair construction, is not to be interpreted in so slavishly literal a way as to stultify the manifest purpose of the Legislature.2 The Judges have construed statutes quite contrary to the letter in some appearance; and those statutes which comprehend all things in the letter, they have expounded to extend but to something; and those which generally prohibit all people from doing such an act, they have interpreted to permit some people to do it, and words which include every person in the letter, they have adjudged to reach to some persons only; which expositions have always been founded upon the intent of the Legislature which they have collected sometimes by considering the cause and necessity of making the Act, sometimes by comparing one part of the Act with another, and sometimes by foreign circumstances, so that they have ever been guided by the intent of the Legislature, which they have always taken according to the necessity of the matter and according to that which is consonant to reason and good discretion.3
An illustration is found in the decision of the Supreme Court in CBDT v. Aditya V Birla  170 ITR 137 as to how the object and purpose of the Act helped in interpreting an expression, when a question arose before it whether when a technician who had entered into a contract with a foreign company on terms and conditions which, inter alia, provided that the foreign company would pay to him remuneration of $ 12000 per annum in quarterly instalments receivable in Thailand, the latter could be said to be ‘employer’ within the meaning of section 80RRA of the Indian Income-tax Act, 1922 and remuneration received by him could qualify for deduction in respect of such remuneration. The assessee was denied the benefit, as according to the Government, section 80RRA contemplates rendering of service outside India of an ‘employee’ and the assessee’s status is that of a ‘consultant’ and not of an ‘employee’ and, therefore, the remuneration received by him does not qualify for deduction under section 80RRA. It was argued on behalf of the assessee that the object of section 80RRA is to encourage, first, earning of foreign exchange by India, secondly, bringing that currency by Indian nationals from abroad to India and, thirdly, to improve the status of the Indians abroad and increasing the market of Indian technicians. While agreeing with this, the Supreme Court observed :
“It appears to us to be plausible objects in the present socio-economic context. We find that the amplitude of the expressions ‘employee’ and ‘employer’ cover the cases of a consultant or a technician. We find in the scheme of the section nothing to warrant any exception as contended for by the revenue. If we read the section with the object of the section in view as suggested by Mr. Palkhivala, then there is no warrant to restrict the meaning in the manner canvassed by the Revenue before us. . . . We were also referred to the speech of the Hon’ble Minister introducing the Bill before the Parliament. . . . But this does not indicate that any limitation was intended to be confined only to the salaried employee and not extended to any technician or consultant employer abroad for the period stipulated in the section. We find that there is no warrant in the section to restrain the expression ‘remuneration’ received from a foreign employee only to the salary received by an employer. In our opinion, employment as a technician for the purpose indicated by Shri Palkhivala could also be an object of the Act and in such a case, the fee received by a consultant or technician would also come within the purview of the section concerned.”
The Supreme Court further held “It is significant that section 80RRA of the Act uses the expression ‘remuneration’ and not ‘salary’ to be entitled to deductions. In the aforesaid view of the matter, we see no warrant to restrict the meaning of the expression ‘remuneration’ only to ‘salary’ received by the employee abroad. The literal meaning is clear and we need not bother any more about.”
Interpretation - Casus omissus
6.2B-8 Casus omissus - While interpreting a provision, the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of the process of law, it is for the Legislature to amend, modify or repeal it, if deemed necessary - See Rishab Agro Industries Ltd. v. P.N.B. Capital Services Ltd.  101 Comp. Cas. 284/ 5 SCC 515 and Padmasundra Rao v. State of Tamil Nadu  255 ITR 147 (SC). It is one of the fundamental canons of interpretation of statute that omissions in a statute, as a general rule, cannot be supplied by construction. If a particular case is omitted from the terms of a statute, though such a case is within the obvious purpose of the statute and the omission appears to have been due to accident or inadvertence, the court cannot include the omitted case by supplying the omission.1 This is applicable where the language is plain and free from ambiguity. If the statute is ambiguous or its meaning uncertain, it is the duty of the court to ascertain what the Legislature meant. It is its duty to try and harmonise the various provisions of the Act. But it is certainly not the duty of the court to stretch the word used by the legislation to fill in gaps or omissions in the provisions of the Act - P.K. Unni v. Nirmala Industries AIR 1990 SC 933 and Hira Devi v. Distt. Board AIR 1952 SC 362. There may be instances where the words do not clearly bring out the legislative intent. This may be due to the fact that the language used in a particular enactment either exceeds or falls short of expressing the meaning intended. In such circumstances the court is obliged to interpret the statute by discovering the true intention of the Legislature. The discovery of the intention is made with the aid of the subject-matter of the statute, its purpose and object, its effect and consequences, its occasion and necessity and its logic. These aids are not themselves the source of, but may reveal, the intention. Sometimes words are loosely used, or excessively used, or may not communicate what is intended to be enacted or may communicate the unintended. The intention, thus, discovered should be given effect to, even if it necessitates supplying of omissions. It is proper for the court to supply such omissions because they are in fact part of the statute, having been intended to be included in the statute when drafted and enacted. The supply of the omission may stem from the discovery of the legislative intent for inclusion of something, which the language failed to express. If the letter of the law is logically defective, it must be made logically perfect, and it makes no difference in this respect whether the defect does or does not correspond to one in the sententia legis itself. In Dadi Jagannadham v. Jammulu Ramulu AIR 2001 SC 2699/ AIR SCW 3051, it has been held :
“The settled principles of interpretation are that the court must proceed on the assumption that the Legislature did not make a mistake and that it did what it intended to do. The court must, as far as possible, adopt a construction which will carry out the obvious intention of the Legislature. Undoubtedly, if there is a defect or an omission in the words used by the Legislature, the court would not go to its aid to correct or make up the deficiency. The court could not add words to a statute or read words into it which are not there, especially when the literal reading produces an intelligible result. The court cannot aid the Legislature’s defective phrasing of an Act or add and mend, and by construction, make up deficiencies which are there.”
Casus omissus, therefore, cannot be supplied by judicial interpretative process. Since the primary rule of statutory interpretation is that the intention of the Legislation must be found in the words used by the Legislature itself, a casus omissus should be inferred in case of clear necessity and only after construing all parts of a statute or section together - Unique Butyle Tube Industries (P.) Ltd. v. UP Financial Corporation  2 SCC 455.
6.2B-8a CASUS OMISSUS SUPPLIED IN CASE OF NECESSITY - A casus omissus cannot be supplied by the court, except in the case of clear necessity and when reason for it is found in the four corners of the statute itself,1 otherwise the court cannot supply the gap disclosed in the Act or make up the deficiencies.2 If the statute is without meaning, the court cannot supply one as that would involve an encroachment upon the legislative power. The court cannot in the guise of interpreting the provision, supply any casus omissus.3 It is not permissible first to create an artificial ambiguity and then try to resolve the ambiguity to some general principle.1 A Judge must not alter the material of the texture of which the rug is woven, but he can and should iron out the creases.2 Thus, in CIT v. James Anderson3, the Supreme Court held that if the Legislature has failed to set up a procedure to assess an income, courts cannot supply it. The casus omissus should not be readily inferred. It is done when the literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the Legislature.4 It is the duty of the court to address itself to the question what exactly is the true intention of the Legislature. Would the Legislature have omitted to provide for the case if the omission had been called to its mind. If the answer is in the negative, then it is the duty of the court to supplement what the Legislature omitted to expressly say and should not decline to do so by taking refuge in the doctrine of casus omissus.5
Where the Legislature clearly declares its intent in the scheme and language of a statute, it is the duty of the court to give full effect to the same without scanning its wisdom or policy, and without engrafting, adding or implying anything which is congenial to or consistent with such expressed intent of the law-giver; more so, if the statute is a taxing statute.6
Lord Hailsham has said in regard to importation of the principles of natural justice into a statute, which is a clear and complete code by itself.
‘It is true of course that the courts will lean heavily against any construction of a statute which would be manifestly fair. But they have no power to amend or supplement the language of a statute merely because in one view of the matter a subject feels himself entitled to a larger degree of say in the making of a decision than what a statute accords him. Still less is it the function of the courts to form first a judgment on the fairness of an Act of Parliament and then to amend or supplement it with new provisions so as to make it conform to that judgment.7
6.2B-8b JUDGES TO EXPOUND AND NOT LEGISLATE IN PROVIDING CASUS OMISSUS - While examining a particular statute for finding out the legislative intent, it is the attitude of the Judges in arriving at a solution by striking out a balance between the letter and spirit of the statute without acknowledging that they have in any way supplemented the statute would be the proper criteria. The duty of the judges is to expound and not to legislate is a fundamental rule. There is no doubt a marginal area in which courts mould or creatively interpret legislation and they are, thus, furnishers, refiners and polishers of legislation which comes to them in a state requiring varying degree of further processing - see Corocraft Ltd. v. Pan American Airways Inc.  3 WLR 714, 732 and State of Haryana v. Sampuran Singh  2 SCC 810. But by no stretch of imagination, a Judge is entitled to add something more than what is there in the statute by way of supposed intention of the Legislature. It is, therefore, cardinal principle of construction of statute that the true or the legal meaning of an enactment is derived by considering the meaning of the words used in the enactment in the light of the discernible purpose or object which corresponds the mischief and its remedy to which the enactment is directed. Courts are not entitled to usurp legislative functions under the disguise of interpretation. And they must avoid the danger of determining the meaning of a provision based on their own preconceived notions of ideological structure or scheme into which the provision is somehow fitted. Caution is all the more necessary in dealing with a legislation enacted to give effect to policies that are subject to bitter public and parliamentary controversy, for in controversial matter, there is room for differences of opinion as to what is expedient, what is just and what is morally justifiable; it is Parliament’s opinion in these matters that is permanent - see Duport Steels Ltd. v. Sirs  1 All. ER 529, 541. In Union of India v. Deoki Nandan Aggarwal  Suppl. 1 SCC 323, the Supreme Court observed :
“It is not the duty of the court either to enlarge the scope of the legislation or the intention of the Legislature when the language of the provision is plain and unambiguous. The Court cannot rewrite, recast or reframe the legislation for the very good reason that it has no power to legislate.... The Court cannot add words to a statute or read words into it which are not there.... The court shall decide what the law is and not what it should be.”
The provisions of the Act have to be construed in a manner which would promote its object, prevent its subtle evasion and fail the artful circumvention to suppress the mischief - J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers  88 Comp. Cas. 285 (SC).
Interpretation - Purposive
6.2B-9 Purposive Interpretation - In Pepper (Inspector of Taxes) v. Hart  3 WLR 1032/ 210 ITR 156 (HL), Lord Griffith has said that the days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which legislation was enacted. Lord Reid said in Black-Clawson International Ltd. v. Papierwerke Waldhof Aschaffenburg A.G.  AC 591, “We often say that we are looking for the intention of the Parliament but that is not quite accurate. We are seeking not what Parliament meant but the true meaning what they said.”
What the Parliament meant and what it said are, therefore, two concepts. The intention of the Legislature is all important, though what it said may not express what it meant. The intention assimilates two aspects; in one aspect it covers the concept of “meaning”, i.e., what the words mean and in another aspect, it conveys the concept of “purpose and object” or the “reason or spirit” pervading through the statute. While interpreting, both literal and purposive approaches are combined, i.e., true legal meaning of enactment is to be derived by considering the words used in the enactment in the light of any discernible purpose or the object which comprehends the mischief and its remedy to which the enactment is directed. Francis Benion in his Statutory Interpretation describes “purposive construction” in the following manner :
“A purposive construction of an enactment is one which gives effect to the legislative purpose by—
(a) following the literal meaning of the enactment where the meaning is in accordance with the legislative purpose (in the Code called a purposive-and-literal construction) or,
(b) applying a strained meaning where the literal meaning is not in accordance with the legislative purpose (in the Code called a purposive-and-strained construction)”.
In State of Himachal Pradesh v. Kailash Chand Mahajan AIR 1992 SC 1277, it was observed :
“In this connection we will do well to refer to Francis Bennion’s Statutory Interpretation (1984 Edn.) at p. 237. The distinction between legislative intention and the purpose or object of the legislation has been succinctly described as under :
‘The distinction between the purpose or the object of an arrangement and the legislative intention governing it is that the former relates to the mischief to which the enactment is directed and its remedy while the latter relates to the legal meaning of the enactment.’
Thus, there is a great distinction between the two. While the object of legislation is to provide a remedy for the malady; on the contrary, the legislative intention relates to the meaning from the exposition of the remedy as enacted.”
For determining the purpose or the object of legislation, indeed, it is permissible to look into the circumstances which were prevalent at the time when the law was enacted and which necessitated the passing of that enactment, for the limited purpose of appreciating the background and the antecedents factual matrix leading to the legislation, it is open to the court to look into the statement of “Object and Reasons” of the Bill which accentuated the statement to provide a remedy for their existing malady.”
In Lister v. Forth Dry Dock Co. Ltd.  1 AC 546, Lord Oliver said,
“If the legislation (enacted to give effect to the United Kingdom’s obligations under the EEC Treaty) can reasonably be construed so as to conform with those obligations - obligations which are to be ascertained not only from the wording of the relevant directive but from the interpretation placed upon it by the European Court of Justice at Luxembourg - such a purposive construction will be applied even though, perhaps, it may involve some departure from the strict and the literal application of the words which the legislature has elected to use.”
In Deepal Girishbhai Soni v. United India Insurance Co. Ltd.  (3) SCALE 546, the Supreme Court laid emphasis that the object underlying the statute is required to be given effect to by applying the principles of purposive construction holding :
“It is now well settled that for the purpose of interpretation of statute, same is to be read in its entirety. The purport and object of the Act must be given its full effect [see High Court of Gujarat v. Gujarat Kisaan Mazdoor Panchayat JT 2003(3) SC 50; Indian Handicrafts Emporium v. Union of India  7 SCC 589, Ameer Trading Corporation Ltd. v. Shapooriji Data Processing Ltd. JT 2003(9) SC 109;  (9) SCALE 713 and Ashok Leyland v. State of Tamil Nadu  (1) SCALE 224]. The object underlying the statute is required to be given effect to by applying the principles of purposive construction.”
6.2B-10 Purposive interpretation to resolve ambiguity - Parliament never intends to enact ambiguity - Statute law consists of the words that the Parliament has enacted. It is for the courts to construe the words and it is the court’s duty in so doing to give effect to the intention of Parliament in using those words. It is inescapable fact that, despite all the care taken in passing a legislation, some statutory provisions when applied to the circumstances under consideration in any specific case, are found to be ambiguous. One of the reasons for such ambiguity is that members of the Legislature in enacting the statutory provision may have been told what result these words are intended to achieve. Faced with a given set of words which are capable of conveying that meaning, it is not surprising if the words are accepted as having that meaning. Parliament never intends to enact an ambiguity. Absurdity or anomalous results could not have intended by the Legislature [see Lalit Mohan Pandey v. Pooran Singh AIR 2004 SC 2303;  19 ILD 796 (SC)]. “An intention to produce and an unreasonable result”, said Danckwerts, L.J. in Artemion v. Procopiou  1 QB 878 (CA), “is not to be imputed to a statute if there is some other construction is available”. Where to apply words literally would defeat the obvious intention of the legislation and produce a wholly unreasonable result : we must “do some violence to the words”, and so achieve that obvious intention and produce a rational construction. Contrast with that the position of the courts, the courts are faced simply with the set of words which are in fact capable of two meanings. The courts are ignorant of the underlying Parliamentary purpose. Unless something in other parts of the legislation discloses such purpose, the courts are forced to adopt one of the two possible meanings using highly technical rules of construction. The law has to be found in the words in which the Parliament has enacted. It is for the court to interpret those words so as to give effect to that purpose. Given the purposive approach to the construction now adopted by the courts in order to give effect to the intentions of the Legislature, the fine distinction between looking for the mischief and looking for intention in using words to provide remedy is technical and inappropriate - Pepper (Inspector of Taxes) v. Hart  3 WLR 1032/ 210 ITR 156 (HL).
6.2B-11 Purposive interpretation - Essence - The purpose of interpretation is to discover the intention of the Legislation, if such intention is not clear from the language used. The literal method is now completely out of date. Now the tide has swept in favour of a statute to promote the “general legislative purpose” instead of adhering to the “golden rule” of interpreting according to grammatical and ordinary sense of words. The cold, logical and soulless approach defeats not only justice but also the intention of the Parliament. The construction which achieves the legislative intent should be favoured.1 This view has received a great support by the new approach adopted by Lord Diplock in Kammins Ballrooms Co. Ltd. v. Zenith Investments (Torquay) Ltd.2, where he has dealt with what is called “a purposive approach to statutory interpretation”. According to Lord Diplock, the purposive approach would enjoin a Judge to impute to the Parliament an intention not to impose a prohibition inconsistent with the objects which the statute was designed to achieve, though the draftsman has omitted to incorporate in express words, any reference to that intention. The essence of the purposive approach, according to Lord Diplock, is for the Judge to answer a series of questions; what is the subject-matter of the Act (or part of the Act) being interpreted? What objective in relation to that subject-matter, the Parliament intended to achieve by the Act. And lastly what part in the achievement of that object the section under construction was intended to play. The particular section will then be interpreted according to the object which the court deems the legislation is intended to serve. This operates even if the Parliament has failed to incorporate the intention which the Judge believes that the section possesses. The learned Law Lord has re-emphasized the importance of making a purposive approach in Reg. v. National Insurance Commissioner. Ex parte Hudson3 thus :
“Meticulous linguistic analysis of words and phrases used in different contexts in particular sections of the Act should be subordinate to this purposive approach. It should not distract your Lordship from it.”
6.2B-12 Purposive approach means purposive construction of statute - Court adopts purposive construction, where applying the literal meaning of the legislative language used would lead to result which would clearly defeat the purposes of the Act; but in doing so, the task in which a court of justice is engaged remains one of construction, even where this involves reading into the Act words which are not expressly included in it - see Jones v. Wrotham Park Settled States  1 All R 286. Three conditions that must be fulfilled in order to justify this recourse :
- First, it is possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief is that it is the purpose of the Act to remedy;
- Secondly, it is apparent that the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act is to be achieved;
- Thirdly, it is possible to state with certainty what are the additional words that would have been inserted by the draftsman and approved by the Parliament had their attention been drawn to the omission before the Bill was passed into law.
Unless the third condition is fulfilled, any attempt by the court to repair the omission in the Act cannot be justified as an exercise of its jurisdiction to determine what is the meaning of the written law which Parliament has passed. Such an attempt crosses the boundary between construction and legislation. It becomes usurpation of a function which under the Constitution is vested in the Legislature to the exclusion of the courts - see Jones v. Wrotham Park Settled Estates  1 All ER 286.
In Hameedia Hardware Stores v. B. Mohan Lal Sowcar AIR 1988 SC 1060, 1067, the rule of addition of words had been held to be permissible in the following words :
“We are of the view that having regard to the pattern in which clause (a) of sub-section (3) of section 10 of the Act is enacted and also the context, the words “if the landlord required it for his own use or for the use of any member of his family, which are found in sub-clause (ii) of section 10(3)(a) of the Act have to be read also into sub-clause (iii) of section 10(3)(a) of the Act. Sub-clauses (ii) and (iii) both deal with non-residential buildings. They could have been enacted as one sub-clause by adding a conjunction “and” between the said two sub-clauses, in which event the clause would have read thus, “in case it is a non-residential building which is used for the purpose of keeping a vehicle or adopted for such use, if the landlord required it for his own use or for the use of any member of his family and if he or any member of his family not occupying any such building in the city, town or village concerned which is his own; and in case it is any other non-residential building, if the landlord or any member of his family is not occupying for purposes of a business which he or any member of his family is carrying on, a non-residential building in the city, town or village concerned which is his own”. If the two sub-clauses are not so read, it would lead to an absurd result.”
Thus, the new trend is away from the purely literal words and leans towards the purposive construction of statutory provisions.1 The literal method is now completely out of date. It has been replaced by the approach which Lord Diplock described as the “purposive approach”. Such construction is adopted as will promote the general legislative purpose underlying the provision. It is no longer necessary for the judges to wring their hands and say : “there is nothing we can do about it.” Whenever the strict interpretation of a statute gives rise to an absurd and unjust situation, the judges can and should use their good sense to remedy it - by reading words in it, if necessary - so as to do what Parliament would have done, had they had the situation in mind.1
6.2B-13 Purposive interpretation - Undue importance is not given - When Legislature uses an expression, that has to be given effect to and cannot be rendered nugatory by giving undue importance to the object of the Act and of the specific provision in question - Bharathisadan University v. All India Council for Technical Education  8 SCC 676.
6.2B-14 Purposive interpretation - Not applied when the Act has been amended from time to time - Purposive construction need not be applied where relevant Act has been amended from time to time on the basis of the fresh needs and has, thus, not remained static. Literal interpretation has to be resorted to - Dental Council of India v. Hari Prakash  8 SCC 61.
6.2B-15 Purposive interpretation and tax laws - It is the law that the interpretation of statute should be consonant with the purpose of its enactment. Technical considerations, niceties of law, or the legal paraphernalia which inventive genius may construe as a refuge from tax should not obscure the basic issue.2 It is always proper to construe an ambiguous word or phrase in the light of the mischief which the provision is obviously designed to prevent, and in the light of reasonableness of the consequences which follow from giving it a particular construction.3 The taxing laws are not outside the purposive construction. Lord Wilberforce said in W.T. Ramsay Ltd. v. IRC.4 “There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.” Ramsay was an exercise in judicial reinterpretation of the existing laws to suit the changing conditions in the United Kingdom and the recognition of the principle that the laws cannot be construed in vacuum and that they should be construed consistent with the requirements of the society for which they are made. The law Lords who decided Ramsay may have reasonably thought that the earlier views were erroneous. This exercise cannot be equated with judicial legislation as such. It is just a reinterpretation. Lord Wilberforce in Ramsay’s case referred to the emerging principle of law.
Lord Steyn in IRC v. McGuckian  1 WLR 991 said that the Ramsay decision marked a shift away from liberalism to a “broad purposive interpretation” and from “formalistic insistence on examining steps in a composite scheme separately” to “more realistic legal analysis. According to him, this is an exemplification of the established purposive approach to the interpretation of statutes. When searching for the meaning with which Parliament has used the statutory language in question, courts have regard to the underlying purpose that the statutory language is seeking to achieve. Lord Cooke of Thorndon regarded Ramsay case as an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of a particular expression in its context, weight is given to the purpose and spirit of legislation.
6.2B-16 Tax laws - Purposive approach application - The legislative history of the fiscal statute could be traced and considered to understand its scope; for example, this proposition was applied by the Supreme Court to consider the scope of rule 19A of the Income-tax Rules, 1962 and the contents of section 80J of the Income-tax Act, 1961 in Lohia Machines Ltd. v. Union of India  152 ITR 308 (SC). The courts are permitted to travel beyond the words used in a statute, to find out the purpose for which a particular provision is enacted; for this purpose, even the speech of the Finance Minister, while introducing the particular fiscal legislation could be looked into vide K.P. Varghese v. ITO  131 ITR 597 (SC). While stating the principle, the Supreme Court observed :
“This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible.”
The courts, therefore, have started resorting to purposive interpretation; since the decision in the case of Duke of Westminster v. IRC1, (wherein it was held that the subject is not taxable by inference or by analogy but only by the plain words of the statute, and that the question of the taxability or the non-taxability is decided upon the footing of the rights and liabilities of the parties from what in law they are) which was made about 50 years ago, there have been changes in judicial approach to tax laws. When it is said that there is no equity in taxes, it does not mean that the court should shut its eyes to the question of genuineness of the transactions. The maxim ‘equity looks to the intention and not to the form’ is being applied to tax laws, as it is done in the case of many other legal transactions involving property. There has been a change in the judicial attitude to tax avoidance devices. Tax avoidance is no longer condoned or looked upon with sympathy. In 1978 the obstinacy of the English judges in upholding assessee’s right to arrange his affairs as to pay least taxes, was somewhat broken. In Floor v. Davis2, Eveleigh J., in a dissenting judgment, the assessee’s aforesaid right was disagreed with. That was the beginning of the end of the Westminster principle. The court in IRC v. Plummer3 distinctly saw the attractions of the argument of the revenue if it were possible to disregard the legal form of the documents and to look beyond them for an underlying substance. The distinguishability between form and substance became recognised. But the tax-payer’s arrangement was upheld on the ground that there was commercial reality in the arrangement. The shape of things to come in W.T. Ramsay Ltd. v. IRC1 was foreshadowed in the dissenting judgment of Eveleigh J. in Floor v. Davis.
Lord Wilberforce said in Ramsay, that while the techniques of tax avoidance progress are technically improved, the courts are not obliged to stand still. Such immobility must result in loss of tax, to the prejudice of other taxpayer, or to Parliamentary congestion or (most likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting approach would be a denial rather than an affirmation of the true judicial process.
Ramsay’s case marked a significant change in the judicial approach to taxation. Taxing laws were not beyond purposive construction. The court has undoubted power and also a duty to determine the nature in law of sophisticated legal devices to avoid taxes and to relate them to existing legislation. Chinnappa Reddy J. following Ramsay’s case (supra) in McDowell & Co. v. CTO2 held : “We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done”, and also held that 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 literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. Thus purposive concept of interpretation of taxing statute was upheld by the Supreme Court. The courts are not prepared to condone the devices the sole object of which is to avoid liability to tax, as such taxes are vital for the life-blood of the society. The traditional approach that an assessee has the right to arrange his fiscal affairs in a manner that will help him reducing his tax burden has been eroded considerably during the recent years, as the court has now started resorting to purposive interpretation of statutes or transactions and the development of a new principle “fiscal nullity”. The tax consequences of the interlocking, interdependence, and pre-determined transactions are to be judged by reference to their substance. The amount of income which seeks to escape or is shifted elsewhere through such devices can be brought to tax net.
6.2B-17 Interpretation of ongoing Act - In construing an ongoing Act, the interpreter is to presume that the Parliament intended the Act to be applied at any future time in such a way as to give effect to the true original intention. Accordingly, the interpreter is to make allowances for any relevant changes that have occurred, since the Act’s passing, in law, social conditions, technology and the meaning of words, and other matters. Just as the US Constitution is regarded as a “living Constitution”, so an ongoing British Act is regarded as “living Act”. That today’s construction involves the supposition that Parliament was catering long ago for a state of affairs that did not then exist, is no argument against the construction. Parliament, in the wording of an enactment, is expected to anticipate temporal developments. The drafter will try to foresee the future, and allow for it in the wording. An enactment of former days is thus to be read today, in the light of the dynamic processing received over the years, with such modification of the current meaning of its language as will now give effect to the original legislative intention. The reality and effect of dynamic processing provides the gradual adjustment. It is constituted by judicial interpretation, year in and year out. It also comprises processing by executive official, CIT v. Podar Cement Pvt. Ltd.  226 ITR 625 (SC).
The principles of interpreting an ongoing statute have been very succinctly set out by the leading jurist Francis Bennion in his commentaries titled “Statutory Interpretation”, 2nd Edition page 617 :
“It is presumed the Parliament intends the Court to apply to an ongoing Act a construction that continuously updates its wordings to allow for changes since the Act was initially framed. While it remains law, it has to be treated as always speaking. This means that in its application on any day, the language of the Act though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as a current law.
In construing an ongoing Act, the interpreter is to presume that Parliament intended the Act to be applied at any future time in such a way as to give effect to the original intention. Accordingly, the interpreter is to make allowances for any relevant changes that have occurred since the Act’s passing, in law, in social conditions, technology, the meaning of words and other matters.....That today’s construction involves the supposition that Parliament was catering long ago for a state of affairs that did not then exist is no argument against that construction. Parliament, in the wording of an enactment, is expected to anticipate temporal developments. The drafter will foresee the future and allow for it in the wording.
An enactment of former days is thus to be read today, in the light of dynamic processing received over the years, with such modification of the current meaning of its language as will now give effect to the original legislative intention. The reality and effect of dynamic processing provides the gradual adjustment. It is constituted by judicial interpretation, year in and year out. It also comprises processing by executive officials.”
Justice Bhagwati in the case of National Textile Workers’ Union v. P.R. Ramakrishnan  1 SCC 228, said :—
“. . . We cannot allow the dead hand of the past to stifle the growth of the living present. Law cannot stand still; it must change with the changing social concepts and values. If the bark that protects the tree fails to grow and expand along with the tree, it will either choke the tree or if it is a living tree, it will shed that bark and grow a new living bark for itself. Similarly, if the law fails to respond to the needs of changing society, then either it will stifle the growth of the society and choke its progress or if the society is vigorous enough, it will cast away the law which stands in the way of its growth. Law must therefore constantly be on the move adapting itself to the fast changing society and not lag behind. . . .” (p. 285)
The Supreme Court has approved the principle of updating construction as enunciated by Francis Bennion, in a number of decisions. These principles were quoted with approval in the case of CIT v. Podar Cement (P.) Ltd.  5 SCC 482. They were also cited with approval in the case of State v. S.J. Chowdhury  2 SCC 428. In this case it was held that the Evidence Act was an ongoing Act and the word “handwriting” in section 45 of that Act was construed to include “typewriting”. These principles were also applied in the case of SIL, Import USA v. Exim Aides Silk Exporters  4 SCC 567. In this case the words “notice in writing”, in section 138 of the Negotiable Instruments Act, were construed to include a notice by fax. On the same principle Courts have interpreted over a period of time, various terms and phrases. To take only a few examples :—
“Stage carriage” has been interpreted to include “electric tramcar”; “stream tricycle” to include “locomotive”; “telegraph” to include “telephone”; “bankers books” to include “microfilm”; “to take note” to include “use of tape recorder”; “documents” to include “computer database’s”.
These principles have also been applied by the Supreme Court whilst considering an analogous provision of the Criminal Procedure Code. In the case of Basavaraj R. Patil v. State of Karnataka  8 SCC 740 the question was whether an accused needs to be physically present in Court to answer the questions put to him by Court whilst recording his statement under section 313. To be remembered that under section 313 the words are “for the purpose of enabling the accused personally to explain” (emphasis supplied). As the term “personally” if given a strict and restrictive interpretation, it would mean that the accused had to be physically present in Court. In fact the majority judgment in this case so holds. It has however been held by the majority that the section had to be considered in the light of the revolutionary changes in technology of communication and transmission and the marked improvement in facilities for legal aid in the country. It was held by the majority, that it was not necessary that in all cases the accused must answer by personally remaining present in Court.
In Victor Chandler International v. Customs and Excise Commissioners  2 All ER 315, it was stated :
“27. There are of course, some gaps in legislation that cannot be filled by judge made law. But it is now a well-known rule of statutory construction that an “on going” statutory provision should be treated as “always speaking”. The principle is set out in Bennion Statutory Interpretation (3rd edn. 1997). . . .” (p. 686)
In R. v. Westminster City Council Ex PA  Admin LR 504 at 509, Lord Woolf MR described the National Assistance Act, 1948 as a prime example of an Act which is ‘always speaking’ and so should be construed on a construction that continuously updates its wording to allow for changes since the Act was initially framed.
The Supreme Court of India, after referring to the said decisions observed in Union of India v. Naveen Jindal  15 ILD 47 about the Indian Constitution, “Constitution being a living organ, its ongoing interpretation is permissible. The supremacy of the Constitution is essential to bring social changes in the national polity evolved with the passage of time.”
The doctrine of “contemporanea expositio est optima et fortissima in lege” as laid down by Coke is applied in construing ancient statutes but not to interpreting Acts which are comparatively modern—J.K. Cotton Spg. and Wvg. Mills Ltd. v. Union of India AIR 1988 SC 199. It has also no application when interpreting a provision of an ongoing statute/Act like the Code of Criminal Procedure—State of Maharashtra v. Praful B. Desai  4 SCC 601.
In a progressive modern society, it would, therefore, be unreasonable to confine the intention of the Legislature to the meaning attributable to the word used at the time the term was made and, unless a contrary intention appears, an interpretation should be given to the words used to take in new facts and situations, if the words are capable of comprehending them—J.K. Cotton Spg. and Wvg. Mills Ltd. v. Union of India AIR 1988 SC 199.
In John Vallamattom v. Union of India JT 2003 (6) SC 37 while referring to an amendment made in U.K. in relation to a provision which was in pari materia with section 118 of the Indian Succession Act, 1925, the Supreme Court observed :
“. . . The constitutionality of a provision, it is trite, will have to be judged keeping in view the interpretive changes of the statute effected by passage of time.”
Referring to the changing scenario of the law having regard to the declaration on the right to development adopted by the World Conference on Human Rights and Article 18 of the United Nations Covenant on Civil and Political Rights, 1966, it was held :
“It is trite that having regard to article 13(1) of the Constitution, the constitutionality of the impugned legislation is required to be considered on the basis of laws existing on 26-11-1950, but while doing so the court is not precluded from taking into consideration the subsequent events which have taken place thereafter. It is further trite that that the law although may be constitutional when enacted but with passage of time the same may be held to be unconstitutional in view of the changing situation.”
The Supreme Court in State of Punjab v. Devans Modern Brewaries Ltd.  13 ILD 481 observed :—
“250. The interpretative changes in the Constitution must not only be considered from its plain language for the purport and object it seeks to achieve but also having regard to the international treaties and conventions but also principles of interpretation governing the same.
251. The necessity of interpretative changes having regard to the changing scenario has recently been noticed by this Court in its several decisions.” (p. 571)
Willes C.J. once said, “when the nature things changes, the rules of law must change too” [Davies v. Powell  Willes 46 at 51]. The Court should change rules to keep the law abreast of change. It has to approach the modern problem with some amount of flexibility as is now being faced in the modern business trend. Flexibility is the virtue of the law courts as Roscoe Pound puts it.
In Saurabh Choudhary v. Union of India  (9) Scale 272, V.N. Khare, CJI speaking for the majority stated :
“Constitutional interpretation is a difficult task. Its concept varies from statute to statute, fact to fact, situation to situation and subject-matter to subject-matter. . . .”
It was observed :
“. . . The courts shall all along strive hard for maintaining a balance. While interpreting the Constitution, we must notice the following view of Justice Holmes expressed in Missouri v. Holland 252 US 416 (433) :
‘When we are dealing with words that also are a constituent act, like the Constitution of the United States, we must realise that they have called into life a being the development of which could not have been foreseen completely by the most gifted of its begetters. It was enough for them to realise or to hope that they had created an organism, it has taken a century and has cost their successors must sweat and blood to prove that they created a nation. The case before us must be considered in the light of our whole experience and not merely in that of what was said a hundred years ago’.”
6.2B-17a LAW NEVER REACHES CONSISTENCY AS MAN CONCEPT OF STATE CHANGES OVER YEARS - Men’s concept of the State as a policy of a political unit as entity and what the functions of the State are or should be has changed over the years and particularly in the course of this century. A man cannot obstinately cling to the same ideas and concepts all his life. As Emerson said in his essay on ‘Self-Reliance’, “A foolish consistency is the hobgoblin of little minds”. Man is by nature ever restless, ever discontent ever seeking something new, ever dissatisfied with what he has.
This inherent trait in the nature of man is reflected in the society in which he lives, for a society is a conglomerate of men who live in it. Just as man by nature is dissatisfied, so is society. Just as man seeks something new, ever hoping that a change will bring about something better, so does society. Old values, old ideologies and old systems are thus replaced by new ideologies, a new set of values and a new system. The ideas that seem revolutionary become outmoded with the passage of time and the heresies of today become the dogmas of tomorrow. What proves to be adequate and suited to the needs of a society at a given time and in a particular circumstance turns out to be wholly unsuited and inadequate in different times and under different circumstances. Cardozo had once remarked that there are no universal rules of law ; hardly a rule of today that may be matched by its opposite of yesterday. Roscoe Pound observed that law must be stable and yet it cannot stand still. Justice Holmes joined by saying that the truth is that the law is always approaching and never reaching consistency. Lord Delvin once observed that “I am not one of those who believe that the only function of law is to preserve the status quo. Rather, I should say that law is the gate-keeper of the status quo. There is always a host of new ideas galloping around the outskirt of society’s thought. All of them seek admission but each must first win its spurs; the law at first resists, but will submit to a conqueror and become his servant. In a changing society, the law acts as a value. New policies must gather strength before they can force an entry.When they are admitted and absorbed into consensus, the legal system should expand to hold them as also it should contract to squeeze out old policies which have lost consensus they have obtained.”
6.2B-17b LAW EXISTS TO SERVE THE NEEDS OF SOCIETY - The law exists to serve the needs of the society which is governed by it. If the law is to play its allotted role of serving the needs of the society, it must reflect the ideas and ideologies of that society. It must keep time with the heart beats of the society and with the needs and aspirations of the people.
6.2B-17c LAW CANNOT REMAIN IMMUTABLE AS SOCIETY CHANGES - As the society changes, the law cannot remain immutable. The early nineteenth century essayist and wit Syndeny Smit said, ‘when I hear any man talk of an unalterable law, I am convinced that he is unalterable fool. The law must, therefore, in a changing society march in tune with the changed ideas and ideologies. Legislatures are, however, not best fitted for the role of adopting the law to the necessities of the time, for the legislative process is too slow and the Legislature is often divided by policies, slowed down by periodic elections and over-burdened with myriad other legislative activities. A constitutional document is even less suited to this task, for the philosophy and ideologies underlying it must of necessity be expressed in broad and general terms and the process of amending a Constitution is too cumbersome and time consuming to meet the immediate need. This task must, therefore, of necessity fall upon the courts because the courts can by the process of judicial interpretation adopt the law to suit the needs of the society.
Francis Bennion in Statutory Interpretation has stressed the need to interpret a statute by giving “allowances for any relevant changes that have occurred, since the Act’s passing, in law, social conditions, technology, the meaning of the words, and other matters.” For the need to update legislations, the courts have the duty to use interpretative process to the fullest extent permissible by the enactment [SIL Import v. Exim Silk Exporters (1999) 97 Comp. Cas. 575 (SC)]. The following passage at page 167 of the above book has been quoted with approval by a three Judge Bench of the Supreme Court in State v. S.J. Choudhary (1996) 2 SCC 428, 433 :
“It is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that its application on any date, the language of the Act, though embedded in its own time, is nevertheless construed in accordance with the need to treat it as current law.”
In A.G. Abraham v. Annamma Alexander  69 Comp. Cas. 359 (Ker.), the court observed :
“It is not necessary and indeed not permissible to construe the Indian Penal Code at the present day in accordance with the notions of criminal jurisdiction prevailing at the time when the Code was enacted. The notions relating to this matter have very considerably changed between then and now during nearly a century that has elapsed. It is legitimate to construe the Code with reference to the modern needs, wherever this is permissible, unless there is anything in the Code or in any particular section to indicate the contrary.”
6.2B-17d LAWS USED AS AN INSTRUMENT OF DISTRIBUTIVE JUSTICE - India is committed to the concept of ‘distributive justice’. Our Constitution permits and even directs the States to administer what may be termed ‘distributive justice’. The concept of distributive justice in the sphere of law making connotes, inter alia, removal of economic inequalities and ratifying the injustice resulting from dealings or transactions between unequal in society. Law should be used as an instrument of distributive justice to achieve a fair division of wealth among the members of society based upon the principle: “from each according to his capacity, to each according to his needs”.1 Many social welfare laws and the fiscal laws are directed to achieve this object. Justice E.S.Venkataramaih at the Munshi Centenary Lecture on “Precedent and Judicial Legislation in the Application of Taxing Statute”, on the 6th January, 1989 in the Tata Auditorium in Bombay said :
“In the end, I have to add that in taxation the question is not how many angels can stand on the point of a needle, it is the source of sustenance of a community. At any rate after the amendment of the preamble to our Constitution by introducing the concept that India is a Socialist State by the 42nd Constitution Amendment and the retention of that concept even at the time when the Constitution was amended by the 44th Constitution amendment, any construction of a statute should bear the stamp of the concept that we are Socialist State.”
Taxation is one of the most important weapons by which the State can mitigate the two objectionable aspects of unrestricted private property; first, inequalities of wealth and secondly, the power to use property for a private profit, and without regard to community purpose. In popular consciousness, the first aim still predominates. By graded taxation and surtax on high income, gross inequalities of wealth are evened out more easily than by equalisation of income or the abolition of private property. But the second aspect of taxation policy is becoming increasingly more important. On the one hand, taxation is a cheap mean by which the State finances its costly social service schemes. On the other, taxation statutes are intended not only to collect revenue for the State but also the regulation of the distribution of wealth and bringing about social justice. It enables the State to implement social welfare schemes undertaken by it. Taxation is no longer just a way of raising revenues. Since the end of the nineteenth century it has become, in conjunction with social service, an increasingly important way of redistribution of income according to need. Peace time taxation is increasingly directed to social welfare services and countering economic cynical movements or conjectures as distinct from the rudimentary functions of law, order, external defence or serving the king’s pleasure of the seventeenth century. Taxes are the life blood of a Government and as the source of public revenue are the foundation of all political institutions. The law of income-tax in a modern society is, therefore, intended to achieve various social and economic objectives. It is often used as instrument for accelerating economic growth and development.1 Appropriate legislation including various fiscal laws is enacted for this purpose.2
Interpretation - Literal rule
6.3-1 Rule of Construction - The Court seeks to discover the legislative intent and act upon it. It is the letter of the law that makes manifest such intent and the Court, therefore, relies primarily on the letter of the law in the process of interpretation. It is to be noted here that rules or canons of construction are different in scope from rules of law. A rule of construction is not inflexible. It is merely a presumption in favour of a particular meaning in case of ambiguity. As Bowen L.J. puts it:
“These canons do not override the language of a statute where the language is clear; they are only guides to enable us to understand what is inferential. In each case, the Act of Parliament is all powerful, and when its meaning is unequivocally expressed, the necessity for rules of construction disappears and reaches the vanishing point.”3
The Supreme Court held as follows in Gurudevdatta VKSSS Maryadit v. State of Maharashtra AIR 2001 SC 1980 ;  4 SCC 534 :
“It is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary and popular sense and construed according to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are clear, plain and unambiguous, then the courts are bound to give effect to that meaning, irrespective of the consequences. It is said that the words themselves best declare the intention of the law giver. The courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the Legislature and it is not a sound principle of construction to brush aside words in a statute as being inapposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute.”
Thus, a construction may be put upon a statute modifying the meaning of words or even structure of sentences, if the language in its meaning and grammatical construction leads to manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended (see Tirath Singh v. Bachittar Singh AIR 1955 SC 830 and CIT v. Satellite Engg. Ltd.  113 ITR 208 (Guj.). Not unoften, courts do read down the plain language of a provision or give it a restricted meaning, when to do otherwise may be clearly opposed to the object and the scheme of the Act, or may lead to an absurd, illogical or unconstitutional results - State of UP v. Malik Zarid Khalid AIR 1988 SC 132.
The following principles are culled out from the above decisions of the Supreme Court (see also Harshad Mehta v. State of Maharashtra  197 Comp. Cas. 365 (SC) ; Dental Council of India v. Hari Prakash  8 SCC 61 :
- words of a statute must prima facie be given their ordinary meaning ;
- when the words of the statute are clear, plain and ambiguous, then the courts are bound to give effect to that meaning, irrespective of the consequences ;
- words themselves best declare the intention of the law giver ;
- efforts should be made to give meaning to each and every word used by the Legislature ;
- words are not to be set aside as being inapposite surpluses, if they can have a proper application in the circumstances conceivable within the contemplation of the statute ;
- words must be understood in their natural, ordinary and popular sense and construed according to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary.
Literal rule is the principal rule for determining the legislative intent. That, however, does not mean that the decision should rest on literal interpretation of the words used in disregard to all other materials. To arrive at the real meaning it is always necessary to get an exact conception of the aim, scope and object of the whole Act (see R.M.D. Chamarbaugwalla v. Union of India AIR 1957 SC 628). Other rules (golden or mischief) are applicable when literal rule is not applicable because of its limitations.The limitations are :
- when words are not clear, plain or unambiguous; or even otherwise
- when literal construction
(a) leads to a manifest contradiction of the apparent purpose of the enactment, or
(b) leads to some absurdity, hardship or injustice, presumably not intended, or
- when the context or object demands a construction contrary to liberal construction.
The primary rule of construction is to consider the plain meaning and if there is no plain meaning, the mischief rule is more important rule (see Maunsell v. Olins  1 All. ER 16 (HL). These are discussed in the following paragraphs.
6.3-1a LITERAL CONSTRUCTION - WHEN WORDS ARE PLAIN AND UNAMBIGUOUS - When words used are not ambiguous, literal meaning has to be applied (Dental Council of India v. Hari Prakash  8 SCC 61). There is no question of interpretation if the words of the statute are clear. Grammatical construction has been accepted as the golden rule (Raghunandan Saran Ashok Saran v. Pearey Lal AIR 1986 SC 1682). The Supreme Court observed as follows in S.P. Gupta v. President of India AIR 1982 SC 149 :
“But there is one principle on which there is complete unanimity of all the courts in the world and this is that where words or the language used in a statute are clear and cloudless, plain, simple and explicit unclouded, intelligible and pointed so as to admit no ambiguity no room for deriving support from external aids. In such cases, the statute should be interpreted on the face of the language or itself without adding, subtracting or omitting words therefrom”
Plain and obvious means that when argued there can be but one result.
If the words of a statute are precise and unambiguous, they must be accepted as declaring the express intention of the Legislature.1 Meaning and intention of a statute must be collected from the plain and the unambiguous expression used therein rather than from any notions which may be entertained by the courts as what is just and expedient.2 Classical observations of Vivian Bose J. of the Supreme Court in Seksaria Cotton Mills Ltd. v. State of Bombay AIR 1953 SC 278, that “It is not till one is learned in the law that subtlities of thought and bewilderment arise at the meaning of the plain English words which an ordinary man of average intelligence, not versed in the law, would have no difficulty in understanding.”
6.3-1b PLAIN MEANING - JUDICIAL DISAGREEMENT - There could be judicial disagreement even as to the ‘plain meaning’ of a statute. An illustration is found in Ellerman Lines Ltd. v. Murray1. The question was regarding wages to be paid to seaman thrown out of employment by the wreck of their ship. Section 1 of the Merchant Shipping (International Labour Convention) Act, 1925 was held by the House of Lords to be perfectly ‘plain’ but Lord Dunedin,Tomlin and Macmillan disagreed as to what the plain meaning was. In the court of Appeal, Scrutton and Green L.JJ. had considered the section to be unambiguous and refused to call in aid the preamble, but Slesser LJ. dissenting had taken a different view and relied on the mischief of the Act. In the House of Lords, Lord Dunedin thought the Act must be taken as it stood and there was no ambiguity ; Lord Blanebugh relied on the mischief of the Act, while Lords Macmillan thought there was no ambiguity and hence the preamble could not be resorted to.
6.3-1c PLAIN AND UNAMBIGUOUS MEANING - A DELUSION - The ‘plain and unambiguous meaning of words’ by which the Courts so often believe themselves to be governed is really a delusion, since no words are so plain and unambiguous that they do not need interpretation in relation to context of the language or circumstances. Without this process, the ‘intention’ is always undiscoverable. Words are vehicles of meaning. But what is that meaning which the Legislature wants to convey. Much of the case law certainly suggests that ‘the letter killeth, the spirit giveth life’ (St. Paul). The very conception of interpretation connotes that the words have to be construed in the context in which they are used and would derive colour from their context.2
6.3-1d PLAIN AND UNAMBIGUOUS MEANING - NO EXTRINSIC AID FOR CONSTRUCTION - It is a well-settled rule of construction that in the first instance, the grammatical sense of the words is to be adhered to. If that is contrary to or inconsistent with any expressed intention, or declared purpose of the statute, or if it would involve any absurdity, repugnance or inconsistency, the grammatical sense must then be modified or extended or abridged so far as to avoid such inconvenience, but no further. The elementary rule is that the words used in a section must be given their plain grammatical meaning. As held by the Supreme Court in New Piece Goods Bazaar Co. Ltd. v. CIT3, it is an elementary duty of a court to give effect to the intention of the Legislature as expressed in the words used by it as no outside consideration can be called in aid to find that intention. Recourse to extrinsic aid in interpreting a statutory provision would be fortified only within well recognised limits. Primarily, the effect of the statutory provision must be judged on a fair and reasonable construction of the words used by the statute itself. The language which is plain and easily understood should be looked to without external aid for the meaning intended.1
6.3-1e PLAIN AND UNAMBIGUOUS - GIVEN EFFECT IRRESPECTIVE OF INCONVENIENCE OR HARDSHIP - When the language is plain and admits only of one construction, that construction must be adopted—(Harshad S. Mehta v. State of Maharashtra  8 SCC 257. If the precise words used are plain and unambiguous, the Court is bound to construe them in their ordinary sense and give them full effect. Literal construction cannot be avoided only because it may result in hard consequences (Nasiruddin v. Sita Ram Agarwal  2 SCC 577). The argument of inconvenience and hardship is only admissible in construction where the meaning of the statute is obscure and there are alternative methods of construction. Where the language is explicit, its consequences are for Parliament, and not for the Courts, to consider2. “Where the language of an Act is clear and explicit”, said Viscount Simon in Emperor v. Benoari Lal Sarma3, “we must give effect to it whatever may be the consequences for in that case the words of the statute speak the intention of the Legislature”. In Rananjaya Singh v. Baijnath Singh4, S.R. Das J. observed “The spirit of the law may be an elusive and unsafe guide and the supposed spirit can certainly be not given effect to in opposition to the plain language of the sections of the Act”. The rule is that after construing the words if the conclusion is that they can bear only one meaning, the duty is to give effect to that meaning.
6.3-1f LITERAL CONSTRUCTION - COROLLARY TO THE GENERAL RULE - NOTHING ADDED OR TAKEN FROM AND NOTHING SURPLUSAGE - It is a corollary to the general rule of literal construction that nothing is to be added to or taken from a statute unless there are adequate grounds to justify inference that the Legislature intended something which it omitted to express. A construction which would render any part of the statute ineffective will normally be rejected - V. Guruviah Naidu & Sons v. CIT  216 ITR 156 (Mad.). Interpretation which renders word or phrase in a statutory provision redundant or otiose can never be justified - Union of India v. Popular Construction Co.  8 SCC 470. Parliament may be presumed not to make a superfluous legislation. The presumption is not a strong presumption and statutes are full of provisions introduced because abundams cautela non-nacet (there is no harm in being cautious) (see Gokaraju Rangaraju v. State of Andhra Pradesh AIR 1981 SC 1473). It is also settled rule of construction that while on one hand it is not permissible to add words or to fill any gap or lacuna, efforts on the other hand should be made to give meaning to each and every word used by the Legislature.5 Patanjali Shastry, CJ in Aswini Kumar Ghose v. Arbinda Bose1 said : to brush aside words in a statute as being inappropriate surplusage, if they can have appropriate application in circumstances conceivably within the contemplation of the statute (sic). The Legislature is not supposed to waste words or to say anything in vain. A construction which attributes redundancy to Legislature will not be accepted except for compelling reasons.2
It is well-settled that the intention of the Legislature must be gathered from the words of the statute and not from what the Government professes it to be when it has translated its intention into a statute or a rule. It may be that sometimes what is in the mind of the Government has misfired because the appropriate language is not used in the statute or because the situation which it is required to face now is not comprehended by it at the time of the passing of the statute. Nonetheless, what the Government has intended has to be seen from the language of the statute itself.3 Parliament makes the laws, and the judiciary interpret them. The role of judiciary is confined to ascertaining from the words that Parliament has approved as expressing its intention what that intention was, and to giving effect to it.4 It has to be borne in mind, therefore, that the meaning of the expression must be found in the felt necessities of time.5
Statutes are embodiments of authoritative formulae and the very words used constitute part of law. Statutes are edicts of Legislature, couched in carefully selected words and phrases. The language is at best imperfect instrument for the expression of human intention. By interpretation or construction is meant the process by which the courts seek to ascertain the meaning of the Legislature through the medium of the authoritative form in which it is expressed. The law is deemed to be what the court interprets it to be.
6.3-1g LITERAL RULE DEVIATED - IN CASE OF AMBIGUITY, ABSURDITY AND INJUSTICE - If the language of a statute in its ordinary meaning and grammatical construction leads to manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words and even the structure of the sentences (see Tirath Singh v. Bachittar Singh AIR 1955 SC 830 ; CIT v. Gopal Plastics (P.) Ltd.  215 ITR 136 (Mad.).
Plain meaning be given effect to, unless it leads to patent injustice, anomaly, absurdity or invalidation of the law - Bhaiji v. Sub-Divisional Officer, Thandla  1 SCC 692. Grammatical meaning is not adhered to if the purpose or the object or the context so warrants, i.e.,—
- if there is ambiguity in the provision, or
- if the construction leads to absurdity, or
- if the provision is ridiculous or harsh and literal construction results in patent injustice presumably not intended.
6.3-1h AMBIGUITY - MEANING AND SCOPE - Words are but mere vehicles of thought. They are meant to express or convey one’s thoughts. Generally a person’s words and thoughts are coincidental. No problem arises then, but, not infrequently, they are not. It is common experience with most men that occasionally there are no adequate words to express some of their thoughts. Words which very nearly express the thoughts may be found but not words which will express precisely. There is then a great tumbling for words. Long-winded explanations and, in conversation, even gestures are resorted to. Ambiguous words and words which unwittingly convey more than one meaning are used. Where different interpretations are likely to be put on words and a question arises what an individual meant when he used certain words, he may be asked to explain himself and he may do so and say that he meant one thing and not the other. But if it is the Legislature that has expressed itself by making the laws and difficulties arise in interpreting what the Legislature has said, it cannot be asked to sit to resolve those difficulties. The Legislatures, unlike individuals, cannot come forward to explain themselves as often as difficulties of interpretation arise. So the task of interpreting the laws by finding out what the Legislature meant is allotted to the courts. Now, if one person puts into words the thoughts of another (as the draftsman puts into words the thoughts of the Legislature) and a third person (the court) is to find out what they meant, more difficulties are bound to crop up. The draftsman may not have caught the spirit of the legislation at all; the words used by him may not adequately convey what is meant to be conveyed ; the words may be ambiguous; there may be words capable of being differently understood by different persons. Where words are clear and unambiguous, no question of construction may arise. Such words ordinarily speak for themselves. In CIT v. Indian Bank Ltd.1, Sikri, J. stated the ratio thus:
“...In construing the Act, we must adhere closely to the language of the Act. If there is ambiguity in the terms of a provision, recourse must naturally be had to well established principles of construction but it is not permissible first to create an artificial ambiguity and then try to...resort to some general principle.” (pp. 79 and 80)
‘Ambiguity’ has reference to the intention of Parliament and to a word having two meanings. It means that a person even after full consideration and enquiry is left in real doubt about the real intention of the Parliament.
The observations of Lord Reid in Reg. v. Ottewell1 are relevant in this context :
“I would never seek to diminish in any way the importance of that principle within its proper sphere. But it only applies where after full inquiry and consideration one is left in real doubt. It is not enough that the provision is ambiguous in the sense that it is capable of having two meanings. The impression of the English Language (and, so far as I am aware, of any other language) is such that it is extremely difficult to draft any provision which is not ambiguous in that sense: The section is clearly ambiguous in that sense: The Court of Appeal (Criminal Division) attached one meaning to it, and your Lordship are attaching a different meaning to it. But if, after full consideration, your Lordship are satisfied, as I am, that the latter is the meaning which Parliament must have intended the words to convey, then this principle does not prevent us from giving effect to our conclusions.”
The ambiguity need not necessarily be a grammatical ambiguity, but one of appropriateness of the meaning in a particular context - Nyadar Singh v. Union of India  4SCC 170. In Bipinchandra Parshottamdas Patel (Vakil) v. State of Gujarat  4 SCC 642, the Supreme Court considered the provision for suspension on detention in prison during ‘trial’, in Gujarat Municipalities Act, 1963. The court applied the purposive interpretation in place of literal and held that detention in judicial custody during investigation is covered. Plea to give restricted meaning to ‘trial’ so as to include only proceedings subsequent to framing of charges, rejected.
6.3-1i ABSURDITY - MEANING AND SCOPE - The intention is to be found out from the language used by the Legislature and if the strict literal construction leads to an absurd result, i.e., the result not intended to be subserved by the object of the legislation, then if the other construction is possible, that construction should be preferred to the strictly literal construction - CIT v. J.H. Gotla AIR 1985 SC 1698.
In giving the words their ordinary meaning if the Court is faced with extraordinary results which cannot have been intended by the Legislature, then it has to move to the second stage in which the words are re-examined. In case the Court is faced with two possible constructions of legislative language, it has to look to the results of adopting each of the alternatives respectively, for the purpose of upholding the true intention of the Legislature. The construction which provides the objective for which the enactment is intended must be adopted. The interpretation must be in keeping with the purpose for which the legislation is promulgated.
Literal construction was abandoned by the High Court in Gujarat v. Gujarat Kisan Mazdoor Panchayat  4 SCC 712, as it led to absurdity, in favour of purposive - and - strained construction.
6.3-1j RIDICULOUS AND HARSH IS NOT THE LEGISLATIVE PURPOSE - Justice and reason constitute the great general legislative intent in every piece of legislation. A ridiculous or harsh consequence is not normally intended. Some violence to the words is done to achieve the obvious intention of the Legislature and produce a rational construction - Ajit Investment Co. (P.) Ltd. v. K. G. Malvandkar  95 ITR 546 (Bom.). As observed by the Supreme Court in Budhan Singh v. Babi Bux AIR 1970 SC 1880, justice and reason constitute the great general legislative intent in every piece of legislation. Consequently, where the suggested construction operates harshly, ridiculously or in any other manner contrary to prevailing conceptions of justice and reason, in most instances, it would seem that the apparent or suggested meaning of the statute was not the one intended by the law- makers. In the absence of some other indication that the harsh or ridiculous effect was actually intended by the Legislature, there is little reason to believe that it represents the legislative intent. It was, therefore, held in CIT v. Shrishakti Trading Co.  207 ITR 442 (Bom.), that tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. A view which advances the cause of justice should be preferred to one which defeats it - A.A. Haja Muniuddin v. Indian Railways AIR 1993 SC 361.
Whenever strict interpretation of the statute gives rise to unjust situation or results, the judges can ensure their good sense to remedy it by reading words into it, if necessary, so as to do what Parliament would have done if they had the situation in mind - C.E.S.C. Ltd. v. Subhas Chandra Bose AIR 1992 SC 573.
Tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. Literal construction was abandoned in case of Hitech Electrothermics & Hydropower Ltd. v. State of Kerala  2 SCC 716, as it was not equitable. The crucial meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee - CIT v. Gwalior Rayon Silk Mfg. Co. Ltd.  196 ITR 149 (SC)and CIT v. Shrishakti Trading Co.  207 ITR 442 (Bom.).
The Court should not apply the literal meaning to words regardless of consequences. If the words are capable of more than one meaning, the Court must accept that meaning which will be in consonance with the spirit and purpose for which such an enactment has been made.1 The purpose of law provides a good guide to the interpretation of the meaning of the Act.2
6.3-1k LITERAL RULE - SUMMING UP - The object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the Legislature as expressed in the statute, considering it as a whole and in its content. That intention, and, therefore, the meaning of the statute is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stood.1 One often says that one is looking for the intention of the Parliament, but that is not quite accurate. One is seeking the meaning of the words which Parliament used. One is seeking not what Parliament means but the true meaning of what it said.2 In the words of Lord Scarman “we are to be governed not by Parliament’s intentions but by Parliament’s enactments”.
No one may speak for the Parliament and Parliament is never before the Court. After the Parliament has said what it intends to say, only the Court may say what the Parliament meant to say.3 The words in the Statute must, prima facie, be given its ordinary meaning. Where the grammatical construction is clear and manifest and without doubt, that construction ought to prevail unless there are some strong and obvious reasons to the contrary; nothing warrants that literal construction should not be given effect to.4 The literal rule is summed up thus :— Words must be given their ‘literal’ or ‘ordinary’ meaning unless there are compelling reasons, recognised by canons of Constitution, to the contrary.5
6.3-1A Literal interpretation - Not to be followed slavishly as to stultify the manifest purpose - As aforesaid, the primary or rather the foremost task of a court in interpreting a statute is the ascertainment of intention of the Legislature. Having done so, the next step of the court is to so interpret the statute as to promote and advance the object and purpose of the enactment and to achieve this object the court will neither be subdued nor overawed by the plainness of the language employed by the Legislature - United Commercial Bank v. Bhim Sen Makhija AIR 1984 Delhi 181).
Goulding J. said in Comet Radio Vision Services v. Farnell Trand Berg  3 All ER 230:
“... The language of Parliament though not to be extended beyond its fair construction, is not to be interpreted in so slavishly literal a way as to stultify the manifest purpose of the Legislature.”
To quote Lord Denning :
“A judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a construction of the social conditions which gave rise to it and of the mischief which it was passed to remedy and then must supplement the written words so as to give force and life to the intention of the legislation.” (Seaford Court Estates Ltd. v. Asher  2 All ER 155).
The same view was found reverberating in the judgment of the Supreme Court in K.P. Verghese v. ITO AIR 1981 SC 1922; Som Prakiash Rekhi v. Union of India AIR 1981 SC 212 and Babaji Kondaji v. Nasik Merchants Co-op Bank AIR 1984 SC 192.
Interpretation - Terms, expressions and technical Words
6.3-2 Terms and expressions - Rules of interpretation - Literal interpretation - There are two rules as to the way in which terms and expressions are to be construed when used in an Act of Parliament. The first rule is that general statutes will prima facie be presumed to use words in their popular sense. In other words, the words which are not applied to any particular science or art are to be construed as they are understood in common language. The obvious and popular meaning of the language should be followed. If a statute contains language which is capable of being construed in a popular sense, such a statute is not to be construed according to the strict or technical meaning of the language contained in it, but it is to be construed in its popular sense that people conversant with the subject-matter with which the statute is dealing could attribute to it. In Macbeth and Co. v. Chislett, 1910 AC 220, Lord Loreburn L.C. stated that “it would be a new terror in the construction of Acts of Parliament if we were required to limit a word to an unnatural sense because in some Act which is not incorporated or referred to such an interpretation is given to it for the purposes of that Act alone.” In that case the argument was that the meaning given to “seamen” in the repealed Merchant Shipping Act, 1854 was to be imported into the Employers and Workmen Act and the Employers’ Liability Act, 1880. The argument advanced by an advocate that the words “metallurgical industry” should be given the same meaning as it has been used in the Regulation Act was on the same analogy rejected in an Indian case.1
The next rule is with regard to the scientific and technical language in a statute. If the statute is with reference to a particular trade, business or transaction, and the word used therein which everybody conversant with that trade, business or transaction knows and understands to have a particular meaning, then that word should be construed as having that particular meaning which may differ from the ordinary or popular meaning. If the Legislature has used an expression which has acquired a technical meaning and such expression is used ordinarily in the context of a particular branch of law, it must be assumed that because of its constant use the Legislature must have deemed to have used such expression in a particular sense as is understood when used in a similar context. (Thampanoor Ravi v. Charupara Ravi AIR 1999 SC 3309, as per Justice A.S. Anand). In Holt and Company v. Collyer  16 Ch D 718, Fry, J. said “if it is a word which is of a technical or scientific character, then it must be construed according to that which is its primary meaning, namely, its technical or scientific meaning.”
In the case of Holt and Company (supra) the question for consideration was as to what was the meaning of a “Beer House”? The defendant Collyer was a lessee of a shop and he had entered into a covenant to the benefit of which the plaintiffs were entitled, not to use the same as “a public house, tavern, or beerhouse.” The defendant admitted to have opened the shop as a grocer’s shop and had taken out a licence to sell beer there by retail, not to be drunk on the premises. The question which came up at the trial was as to whether such a use of the shop was a breach of the covenant. Fry, J. stated that the principle upon which words are to be construed in instruments is very plain - where there is a popular and common word used in an instrument, that word must be construed prima facie in its popular and common sense. If it is a word of a technical or legal character, it must be construed according to its technical or legal meaning. If it was a word which was of a technical and scientific character, then it must be construed according to that which is its primary meaning, namely, its technical and scientific meaning. Fry, J. further stated that no evidence can be allowed to be given as regards the secondary meaning of the word unless the Court was satisfied from the instrument itself or from the circumstances of the case that word should be construed not in its popular or primary signification but according to its secondary intention. While considering the meaning of the word ‘beerhouse’, he observed that a beerhouse was a place where beer was sold to be consumed on the premises whereas the beershop was a place where the beer was sold to be consumed off the premises. The word “beerhouse” had obtained a technical meaning and, therefore, must be so taken. In ordinary usage and ordinary parlance where beer was sold at a grocer’s shop either by wholesale or retail, it could not be called a beerhouse, when the principal business carried on in that shop was that of a grocer and the business of the trade of beer was merely ancillary to that business of a grocer.
6.3-2a WORDS OF LEGAL IMPORT - If an expression has acquired a special connotation in law, dictionary or general meaning ceases to be helpful in interpreting such word. Such an expression must be given its legal sense and no other (Thampanoor Ravi v. Charupara Ravi AIR 1999 SC 3309). The words of legal import occurring in a statute should be construed in their legal sense. These words have in law acquired a definite and precise sense. The Legislature must be taken to have intended that they should be understood in that sense (State of Madras v. Gannon Dunkerley & Co. (Mad.) Ltd. AIR 1958 SC 560). Lord Macnaghten observed,” In construing an Act of Parliament, it is a general rule that words must be taken in their legal sense unless the contrary intention appears” [Commissioner for Special Purposes of Income Tax v. John Frederick Pemsel 1891-94 All ER Rep 28 (HL)].
6.3-2b WORDS IN A GENERAL STATUTE - POPULAR MEANING - Words used in a statute dealing with matters relating to the general public are presumed to have been used in their popular sense rather than their narrow, legal or technical sense. Loquitur ut vulgus, that is, according to the common understanding and acceptation of the terms, is the doctrine that should be applied in construing the words used in statutes dealing with matters relating to the public in general. In short, if an Act is directed to dealings with matters affecting everybody generally, the words used have the meaning attached to them in the common and ordinary use of the language - Unwin v. Hanson  2 QB 115 (CA), per Lord Esher M.R. at p. 119). The Income-tax Act is of general application (P. Alikunju, M.A. Nazeer Cashew Industries v. CIT  166 ITR 804 (Ker.).
6.3-2c ORDINARY AND NATURAL MEANING OF WORDS - The ordinary and natural meaning of words may be either the literal meaning or it may be an implied or inferred or an indirect meaning: any meaning that does not require the support of extrinsic facts passing beyond general knowledge but a meaning which is capable of being detected in the language used can be a part of this ordinary and natural meaning of the words. The ordinary and natural meaning may, therefore, include any implication or inference which a reasonable reader guided not by any special but only by general knowledge and not fettered by any strict legal rules of construction would draw from the words.1
One must consider, not what the words are, but what conclusion could reasonably be drawn from it, as a man who issues such document is answerable not only for the terms of it but also for the conclusion and meaning which persons will reasonably draw from and put upon the document2. Thus, in deciding the ordinary and natural meaning of the words, one must take into account the ordinary reasonable implications of the words. Holroyd Pearce, LJ in Grubb v. Bristol United Press Ltd.3 illustrated the point thus: “If the defendant’s name is published as John Smith, his name is certainly not George Washington”; then, however, much the defendant may argue that the words were a harmless truism concerned merely with nomenclature, the natural and ordinary implication of the words is that John Smith is untruthful; and presumably the jury would find that to be the ordinary meaning of the words.
The ordinary man does not live in an ivory tower and he is not inhibited by a knowledge of the rules of construction, so he can and does lead between the lives in the light of his general knowledge and experience of worldly affairs. What the ordinary man would infer without special knowledge has generally been called the natural and the ordinary meaning of the words. But that impression is rather misleading in that it conceals the fact that there are two elements in it. Sometimes it is not necessary to go beyond the words themselves, as where a person has been called a thief or a murderer. But more often a sting is not so much in the words themselves as in what the ordinary man will infer from them, and that is also regarded as part of their natural and ordinary meaning.1
Popular sense means “that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it.” (CIT v. Taj Mahal Hotel  82 ITR 44 (SC). It is to be assumed that the words and phrases of technical legislation are used in their technical meaning if they have acquired one, otherwise in their ordinary meaning (V. Guruviah Naidu & Sons v. CIT  216 ITR 156 (Mad.).
One of the elementary rules of the interpretation of statutes is that when where there is a doubt about their meaning, the words of the statute are to be understood in the sense in which they best harmonise with the object of the enactment. In dealing with matter relating to general public, statutes are presumed to use words in their popular rather than the narrowly legal and technical sense. This is particularly so when the narrow interpretation is bound to defeat the object of the Act. General words and phrases are more or less elastic and admit of restriction or extension to suit the legislation in question however wide they may be in the abstract. It is also well-recognised that if there is any ambiguity in the phraseology of a statute, the construction which facilitates the remedying of the potential abuse is to be preferred, and it is the duty of the Court to place each construction as shall suppress the mischief and advance the remedy.2
6.3-2d STANDARD TEST FOR ASCERTAINING MEANING OF WORDS IN COMMON PARLANCE - The standard of test for ascertaining the meaning of words in common parlance is set by the Canadian case in Planters Nut and Chocolate Co. Ltd. v. King.3 “Would a householder when asked to bring fruits or vegetables for the evening meal bring low salted peanuts, cashewnuts or nuts of any sort? The answer is obviously ‘No’. This test has been referred to with approval by the Supreme Court in Ramavtar Budhaiprasad v. Asstt. STO.4
The Court is not entitled to decline to determine the legal meaning of a statute on the principle of ‘non liqust’.
6.3-2e EXPRESSIONS USED IN TRADE AND INDUSTRIES - If there is no meaning attributed to the expressions used in the particular enacted statute, then these should be judged and analysed on the basis of how these expressions are used in the trade or industry or in the market or, in other words, how these are dealt with by the people who deal in them, provided that there is a market for these types of goods. This principle is well-known as classification on the basis of trade parlance. This is an accepted form of construction. It is a well-known principle that if the definition of a particular expression is not given, it must be understood in its popular or common sense, viz., in the sense how that expression is used everyday by those who use or deal with those goods. See, in this connection, the observations of the Court in CIT v. Taj Mahal Hotel  1 SCR 168: (AIR 1972 SC 168). In incorporating items in the statutes like Excise, Customs or Sales-tax whose primary object is to raise revenue and for which to classify diverse products, articles and substance, resort should be had not to the scientific and technical meaning of substances but to their popular meaning, viz., the meaning attached to these expressions by those dealing in them. (See the observation in King v. Planter Nut and Chocolates Co. Ltd.  CLR (Ex) 122 and Two Hundred Chests of Tea  6 Law ed 128). In the former case, Justice Cameron referred to the reason for adopting the test of commercial understanding in respect of the tariff items of an Excise Act and observed that the Legislature did not suppose our merchants to be naturalists, or geologists, or botanists. These principles were adopted by the Court in State of West Bengal v. Washi Ahmed  3 SCR 149: (AIR 149: (AIR 1977 SC 1638). See also Union of India v. Delhi Cloth & Gen. Mills  Suppl. (1) SCR 586: (AIR 1963 SC 791) and Ramavatar Budhaiprasad v. Asstt. STO, Akola  1 SCR 279: (AIR 1961 SC 1325). See also South Bihar Sugar Mills Ltd. v. Union of India  3 SCR 21: (AIR 1968 SC 923). This principle was reiterated by Supreme Court by Bhagwati, J., as the learned Chief Justice then was, in Porritts & Spencer (Asia) Ltd. v. State of Haryana  1 SCC 82: (AIR 1979 SC 300) and United Offset Process Pvt. Ltd. v. Asstt. Collector of Customs AIR 1989 SC 622.
The Madhya Pradesh High Court in Pan Merchants Association, Santra Market, Nagpur v. State of Madhya Pradesh 7 STC 99: (AIR 1956 Nag. 54), held that the word “vegetable” could not be given the comprehensive meaning. This term has to be understood as commonly understood denoting those classes of vegetable matters which are grown in kitchen garden and are used on the table. That was a case dealing with a taxing statute and the Supreme Court in that view of the matter held that Taxing Statute has to be understood as in common parlance.
This meaning of the word ‘vegetable’ was reiterated in Motipur Zamindary Co. (P.) Ltd. v. State of Bihar AIR 1962 SC 660, where the Supreme Court was called upon to consider whether sugarcane could be regarded as vegetable. The Supreme Court held that sugarcane cannot be said to fall within the definition of “vegetable”.
In State of West Bengal v. Washi Ahmed (AIR 1977 SC 1638), the Supreme Court held that green ginger is included within the meaning on the word “vegetable”.
6.3-2f EXPRESSIONS IN POPULAR SENSE AND NOT IN TECHNICAL SENSE - In the absence of any definition, the court has to construe the expression in its popular sense1 and not in any special and technical sense. As has been pointed out by Lord Denning M.R. in Dyson Holdings Ltd. v. Fox2 while interpreting the expression ‘family’, occurring in a statute:—
“The word ‘family’ in the 1968 Act is not used in any technical sense: but in a popular sense. It is not used in the sense in which it would be used by a studious and unworldly lawyer, but in the sense in which it would be used by a man who is ‘base, common and popular’, to use Shakespeare’s words quoted by Evershed M.R. in this context in London v. Horton  1 All ER 60 or in modern words, by the ordinary man in the street.”
Popular meaning of the word should be adopted in preference to the dictionary meaning.3
The cardinal rule of interpretation, therefore, is that words should be read in their ordinary, natural and grammatical meaning subject to the rider that in construing words in a constitutional enactment conferring legislative power, the most liberal construction should be put upon the words so that the same may have effect in their widest amplitude.4
Before the Patna High Court in Tata Engg. and Locomotive Co. Ltd. v. State5, a question arose as to what the expression “metallurgical industry” means. According to the State Government, the petitioner was engaged in the “metallurgical industry” as specified in Schedule 1 of the Water (Prevention and Control of Pollution) Cess Act, 1977, and was, therefore, required to pay cess under the provisions of the Act. The petitioner was engaged in the manufacture of automobiles, hydraulic excavators, long crawlers, shovels, dragline, clamshell and back hoe and is known as an engineering industry.
According to the Government, the petitioner was engaged in metallurgical industry for the purposes of the Cess Act, because metallurgical industry involves processes including metal cutting, metal using, and metal shaping. The use of a foundry and forge is a typical example where metallurgical processes are used in manufacture of a variety of engineering products and the appellant is using the metallurgical processes and has a foundry.
The High Court held that the words ‘metallurgical industry’ have acquired a technical and scientific meaning and everybody connected with trade and industry and service and engineering and even a common man understands the words ‘metallurgical industry’ in a particular sense and gives to them a particular meaning.
If an engineering industry has a foundry where metal is cut and shaped, can it be said that this will make it a metallurgical industry. That foundry or cutting or shaping metal must be construed to be only ancillary to the main industry or producing the end-products, namely, automobiles, etc. While construing these words, the dominant purpose of the industry has to be kept in mind. The dominant purpose of a metallurgical industry in its technical and popular sense appears to be extracting ore, refining it and converting it into the stock of steel and that is where it ends. On the other hand, the dominant purpose of an engineering industry is to manufacture automobiles and the other consumable articles by using and converting that steel into a finished product. This technical and scientific meaning must be given to the words “metallurgical industry”. The meaning given to it by the respondent-Board was not accepted. While identifying the nature of an industry, the totality of its activities and its dominant primary purpose should be the guiding factor and the mere presence of some identical processes of one industry cannot be guiding factor of another industry.
6.3-2g LITERAL OR DICTIONARY MEANING - When any Act does not define a word used in that Act, the Legislature must be taken to have used that word in its dictionary meaning1. The principle of plain dictionary meaning was followed by the courts in a number of cases. The Supreme Court held that betal leaves are not included in the definition of ‘vegetable’,2 ‘tooth powder’ as a toilet requisite.3
In CST v. S.N. Brothers4, a question arose about how the expressions “dyes and colours” and “scents and perfumes” as occurring in U.P. Sales Tax Act, 1948 were to be interpreted. The Court held that these terms were to be interpreted in the sense as ordinarily understood and attributed to these words by people usually conversant with and dealing with such goods. The Supreme Court in CWT v. Officer-in-charge (Court of Wards)5 held that the dictionary meaning cannot be discarded simply because it is given in dictionary. To do that would be to destroy the literal rule of interpretation and this is a basic rule, i.e., relying upon the ordinary dictionary meaning which, in the absence of some overriding or special reasons to justify a departure, must prevail.
The term ‘agriculture’ as occurring in section 2(1) of the Income-tax Act, 1922, came up for interpretation before the Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy.1 The Supreme Court after considering a number of standard dictionaries and law lexcions, held that it denotes the cultivation of the field and is restricted to the primary or basic processes such as tilling of the land, sowing of the seeds, planting and similar operations on the land, requiring the expenditure of human skill and labour upon the land itself. The term ‘agriculture’ could not be extended to denote such activities as breeding and rearing livestock, dairy farming and cheese-making or poultry farming. The term ‘earned income’ was interpreted in its plain dictionary meaning as income ‘immediately derived from personal exertion’. Hence, income from forestry, fisheries, royalty from quarries could not be considered to be earned income.2
As regards the word ‘plant’, the Courts relied upon its general use.
Lindley, LJ., in Yarmouth v. France  19 QBD 647 at 658, observed that plant “in its ordinary sense, includes whatever apparatus is used by a businessman for carrying on his business—not his stock-in-trade which he buys or makes for sale, but all goods and chattels fixed or movable, live or dead, which he keeps for permanent employment in his business.” Rowaltt, J., in Daphne v. Shaw  11 TC 256, interpreted ‘plant’ to mean “apparatus, alive or dead, stationary or movable to achieve the operations which person wants to achieve in his vocation”. In CIT v. Elecon Engg. Co. Ltd.  96 ITR 672, it was observed by the Gujarat High Court (pp. 686-87) that the word ‘plant’ “has come up for interpretation before various courts on numerous occasions in the context of different statutes and the catena of judicial decisions shows that it is a word of wide and varied import, susceptible to diverse meanings depending upon its setting in the scheme of the statute”. Their Lordships, after enumerating an amazing variety of articles, objects or things regarded as plant or not plant, referred to the ratio decidendi of the Supreme Court in CIT v. Taj Mahal Hotel  82 ITR 44, to the effect (i) that the word ‘plant’ must be given a wide meaning having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant; (ii) that its meaning is not confined only to an apparatus used in mechanical or industrial business or manufacture of finished goods from raw goods; and (iii) that the definition of plant given in Yarmouth’s case (supra) as expounded in Jarrold (H.M. Inspector of Taxes) v. John Good & Sons Ltd.  40 TC 681 (CA) furnishes the true apposite test for judging whether a given article is plant. The relevant test to be applied is: does it fulfil the function of plant in the assessee’s trading activity? Is it the tool of the taxpayer’s trade? If it is, then it is plant. Thus, their Lordships held that in the business of an engineering company, drawing and patterns acquired from foreign company as well as know-how forming the basis of the business of the assessee were ‘plants’.
The Madhya Pradesh High Court,1 therefore, when called upon to decide what does the expression “manufacturing process” mean in the context of section 32A of the Indian Income-tax Act, held that in common parlance, the words “make”, “manufacture” and “produce” are all used as synonymous and they refer to the turning out of finished products by shaping or combination of raw materials or parts. “Make” is the most general and informal word and can apply to any process of construction. “Manufacture” is narrower in scope while “produce” approaches the generality of “make” and stresses the neutral aspect of “manufacture”. It emphasises the amount of a product turned out without necessarily implying a process of mass production, as would be the case with manufacture; and thus, operation of cold storage plant does not result in “manufacturing” or “production” of a thing. It also held that the expression “manufacturing process” in the absence of definition in the Act could not be given a meaning as given in the Factories Act, 1948 as it is not a sound principle of construction as held by the Supreme Court2 to interpret expressions with reference to their use in another Act.
6.3-2h COMPOSITE EXPRESSIONS ARE NOT TO BE INTERPRETED WITH THE AID OF DICTIONARY - Where the Legislature or other law-making body uses a composite expression, that expression has got to be construed and applied as all of one piece. Word by word interpretation of a phrase is not permissible (Jasbir Singh v. Vipin Kumar Joggi  8 SCC 289). A proper understanding of the phrase will not be yielded by asundering its components and by looking up for a dictionary meaning for each and everyone of the constituent words. Even on the best occasion, giving to a statutory expression the dictionary meaning would not always be a safe interpretation. The caution against the use of the dictionary must be all the greater where what the Legislature employs is not a single word, but a composite phrase. In such cases, we must attribute to the draftsman an intention to pack the phrase with a meaning all its own. That meaning cannot be derived by taking the phrase into bits and parts and seeking to apply the dictionary meaning to each and every word so dissected.3 In Lee v. Showen’s Guild of Great Britain4, a question arose about a proper meaning to be assigned to the phrase “unfair competition” which was used in the rules of the Tribunal. The argument before the Court of Appeal concentrated on the one or the other of the two words ‘unfair’ and ‘competition’. Somervell, L.J., however, condemned this method of construction, observing as follows:—
“I do not think that, if the words ‘unfair competition’ stood alone, they are apt to describe what happened here. It is often fallacious in considering the meaning of a phrase consisting of two words to find a meaning which each has separately and then infer that the two together cover the combination so arrived at. The two together may, as here, have acquired a special meaning of their own. In any event, the phrase here has to be read in the context of the rule. . . .”
Balasubramanayan, J. in CIT v. Vasan Publications1 said, “I, therefore, derive the principle to the present case, that the classified item in the depreciation schedule with the description ‘newspaper production plant and machinery’ has got to be construed as conveying a single idea. But this is not enough for the purpose of construction. The expression has also got to be viewed in the proper setting under the scheme of depreciation rates set out in the Income-tax Rules.”
To interpret words, phrases and provisions, it may be necessary for the judge to embark into lengthy discussions but discussion is not meant to explain and not to define - Haryana Financial Corporation v. Jagdamba Oil Mills  110 Comp. Cas. 20 (SC).
6.3-2i DICTIONARIES MEANING MAY SOMETIMES BE DIFFUSED - The quest for an outside definition of an inside expression is not called for. Dictionaries are notoriously diffused, some of them only handmaids for crossword puzzles setters. Lexicographers are merely collectors of meanings. Even so, within the limitation of space, they cannot exhaust all the shades of meaning a word might carry. Much less can they truly bring out what is more precious than definition, usage. Ever since the fateful days of Macaulay and the Elbert Bill in 1835, English has become the ruling tongue in India and the language of the Indian Laws. After such a long, long association with this language, Indian judges at least whose court language is English, must be sparing in the use of the dictionaries as aids to understanding. The vocabulary of parliamentary draftsman, not to speak of the style of his composition, is not only commonplace, but extremely limited and circumscribed. For anyone who is measurably familiar with the English language, there are no words in an Act of Parliament so unfamiliar that he or she should go into consultation with a dictionary. What is more, where ordinary words in ordinary usage are used in statutory enactments, carrying no special significance, the dictionary is an instrument of uncertainty, if not downright confusion, especially when it refers, in staccato style, to a variety of meanings. These tones are often resorted to, not to get at the ordinary meaning of words, which needs no dictionaries but to discover some peripheral or distant thought. It is, therefore, essential to take words as we find them in the relevant statutory instrument, without strain, specially when the words are in common speech and there is nothing to indicate that any special meaning is at all intended.1 Common sense is not entirely excluded from income-tax discussions.2
6.3-3 Distributive construction (plurals are broken into component singulars) - A distributive construction is commonly adopted when a plural subject is followed by a plural predicate and plurals are broken down into their component singulars. An example from everyday speech would be to say : “A and B took their children to school.” Prima facie the word “their” means “belonging to both of them.” But this is not its only possible meaning, and if A and B are not married, it is obviously not its meaning. In that case, the word “their” means “of each of them” But this means that A and B took their respective children to school, not each other’s children. The children are distributed to the relevant parent. And it goes further than that. Although the word “school” is in singular, it may conceal a plural. If necessary, the sentence may mean that A and B took the children to their respective schools. This is a well-established principle of construction. It often, and perhaps usually, gives the words their most natural meaning. It parades under a Latin name reddendo singula singulis. This simply means that when plurals are broken down, each singular component must be attributed to its respective singular and not to every other possible singular. It is a broad and general principle which departs from the grammatical meaning and does not depend upon minuteae of language. [AIB Group (UK) Ltd. v. Martin  1 WLR 94 (HL);  110 Comp. Cas. 118 (HL), as per Lord Millet].
Interpretation - Golden rule (Meaning modified)
6.4 Legislative intent is sought in the actual words used which are understood in their natural and ordinary meaning. And this is known as the grammatical interpretation or the “literal interpretation”. But sometimes this rule leads to absurdity and the ‘golden rule’ comes in to remove it. This rule is a departure from the literal rule and asserts that the literal meaning may be modified. This rule is found well-expressed in the following words of Lord Wensleydale.3
“In construing wills and indeed statutes and all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but no further.”
One is entitled and bound to assume that Parliament intends to act reasonably, and, therefore, prefer a reasonable interpretation of a statutory provision.1
6.4-1 Words presumed to be correctly and exactly used and interpreted contextually - The word used in the Act by the Legislature must be considered to have been correctly and exactly used and not loosely or inexactly, in ascertaining the meaning. Mere reference to the ordinary dictionary meaning will be of no use and the construction divorced from the context in which it has been used and the object of the legislation may often lead to injustice, absurdity, contradiction or stultification of the very statutory objective and, consequently, the language must be so modifidely read as to give effect to all provisions of the Act. Further, when the language used is possible of bearing more than one construction, an endeavour to place the correct or true meaning must be made having due regard to the consequences resulting from adopting the alternative constructions and the one which results in hardship, serious inconvenience, injustice or absurdity or anomaly or which leads to inconsistency or uncertainty or friction in the very system, which the State purports to regulate, has to be rejected and the construction, which would avoid such results should always be preferred - H.P. Tourism Development Corpn. v. Union of India  238 ITR 38 (HP).
To apply words literally may defeat the obvious intention of the Legislature and produce a wholly unreasonable result. To achieve the obvious intention and to produce a reasonable result, some violence to the words has to be done.2 Of rules of construction Lord Reid has said, “They are our servants not our masters.”3 The proper course is to adopt the sense of the words which harmonises best with the context and promotes in fullest manner, the apparent policy and objects of the Legislature.4
The ‘Golden rule’ could, thus, be explained as follows :—
1. It is the duty of the Court to give effect to the meaning of an Act when the meaning can be fairly gathered from the words used, that is to say, if one construction would lead to an absurdity while another will give effect to what common sense would show, as obviously intended, the construction which would defeat the ends of the Act must be rejected even if the same words used in the same section, and even the same sentence, have to be construed differently. Indeed, the law goes so far as to require the courts sometimes even to modify the grammatical and ordinary sense of the words, if by doing so absurdity and inconsistency can be avoided.1
2. The Court should not be astute to defeat the provision of the Act whose meaning is, on the face of it, reasonably plain. Of course, this does not mean that an Act or any part of it, can be recast. It must be possible to spell the meaning contended for, out of the words actually used.2
3. Unless the words are without meaning or absurd, it would be safe to give words their natural meaning because the framer is presumed to use the language which conveys the intention3 and it would not be in accord with any sound principle of construction to refuse to give effect to the provisions of a statute on the very elusive ground that to give them their ordinary meaning leads to consequences which are not in accord with the notions of propriety or justice entertained by the Court.4
The following observations in this regard of Venkatarama Ayyar, J. in Tirath Singh v. Bachittar Singh5 clearly underscore the desirability of the above indicated course of action in the given situation of textual inadequacy of a given provision :—
“It is argued that if the language of the enactment is interpreted in its literal and grammatical sense, there could be no escape from the conclusion that parties to the petition are also entitled to the notice under the proviso. But it is a rule of interpretation well-established that ‘where the language of a statute’ in its ordinary meaning and grammatical construction leads to a manifest contraction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon which modifies the meaning of the words, and even the structure of the sentence.”
It is also well-recognised principle of construction that while construing a statute, the courts have to so read the provision of the Act as to steer clear of the vice of unconstitutionality.6
6.4A The court, if necessary, does some “violence to the words” to achieve the obvious intention of the Legislature and produce a rational construction - Ajit Investment Co. Ltd. v. K.G. Malvandkar  95 ITR 546 (Bom.).
In State of Tamil Nadu v. Kodaikanal Motor Union (P.) Ltd. AIR 1986 SC 1973, the Supreme Court observed as under :
“The courts must always seek to find out the intention of the Legislature. Though the courts must find out the intention of the statute from the language used, but language more often than not is an imperfect instrument of expression, of human thought. As Lord Denning said, ‘it would be ideal to expect every statutory provision to be drafted with divine prescience and perfect clarity’. As judge Learned Hand said, ‘we must not make a fortress out of the dictionary but remember that statutes must have some purpose or object, whose imaginative discovery is judicial craftsmanship’. We need not always cling to literalness and should seek to endeavour to avoid an unjust and absurd result. We should not make a mockery of legislation. To make sense out of an unhappily worded provision, where the purpose is apparent to the judicial eye, ‘some’ violence to language is permissible. (See K.P. Varghese v. ITO  131 ITR 597 at pp. 604 to 606; AIR 1981 SC 1922 at p. 1927 and 1928, and Luke v. IRC  54 ITR 682 (HL).”
Wherever strict interpretation of the statute gives rise to unjust situation or results, the judges can ensure their good sense to remedy it by reading words in, if necessary, so as to do what Parliament would have done had they had the situation in mind. The meaning of the same words in a statute may be amended, enlarged or restricted in order to harmonise them with the legislative intention of the entire statute. The spirit of the statute should prevail over the literal meaning (C.E.S.C. Ltd. v. Subhash Chandra Bose AIR 1992 SC 573). The Legislature could not be presumed to have intended an absurd or anomalous result, if literal construction suggests any. “An intention to produce an unreasonable result,” said Dankwerts L.J. in Artemion v. Procopiou  1 QB 878 (CA) (888), “is not to be imputed to a statute if there is some other construction available.” Where to apply words literally would “defeat the obvious intention of the legislation and produce a wholly unreasonable result” “we must do some violence to the words” and so achieve that obvious intention and produce a rational construction (per Lord Reid in Luke v. IRC  54 ITR 692; (1963) AC 557 where at p. 557, he also observed : “this is not a new problem, though our standard of drafting is such that it may emerge).
6.4B In the realm of judicial interpretation, the departure from normal maxim of literal interpretation can be made to effectuate the intention and purpose of the enactment. In the course of vitalising the intent or purpose, the omissions or gaps can be bridged and extended meaning can be given and details can be appended within the contours facilitating full-fledged sway of the provision. The intention of the Legislature must be discovered from the words employed in the statute and the provision should be interpreted in a manner to further the intent and object. In certain situations the modification of the language, or enlarged interpretation to highlight the meaning implicit in the provision is not eluded to square with the intention and advance the purpose.1
It is often said that the function of the Courts is only to expound and not to legislate, a theory which has in the recent past invited dissent in the sense, gaps in the legislation may call for judicial filling up with a view to dealing with situations and circumstances that may emerge after enacting a statute, not within the imagination of the Legislature, when its application may be called for - Shirish Finance and Investment P. Ltd. v. M. Sreenivasulu Reddy  109 Comp.Cas. 913 (Bom.)
6.4C In Wiltshire v. Barret  1 QB 312 the expression “a person committing an offence” was interpreted as a person believed to have committed offence by making arrest and it was held that instead of merely a “person committing an offence”, the extension or addition to the same ‘believed to have committed’ is appropriate in the context. In Director of Public Prosecutions v. Hester 1973 AC 296 the words “some other material evidence” were read as “material evidence admissible” and the House of Lords while interpreting to that effect held that the extension is implicit in the words employed by the statute. In United States v. William Freeman, (1843-46) 44 US 453 : 3 How 556, the Supreme Court in the context of giving an interpretation to an extended meaning held as follows :—
“The meaning of the Legislature may be extended beyond the precise words used in the law, from the reasons or motive upon which the Legislature proceeded, from the end in view, or the purpose which was designed; the limitation of the rule being, that to extend the meaning to any case, not included within the words, the case must be shown to come within the same reason upon which the law maker proceeded and not a like reason.”
The Court while construing a provision should not easily read into it words which have not been expressly enacted but having regard to the context in which a provision appears and the object of the statute in which the provision is enacted, the Court should construe it in a harmonious way to make it meaningful.
6.4D In the modern trend of interpretation of statutes the archaic concepts of interpretation adhering to strict rules of grammar are not absolute and what has become firmly anchored as a proper manner of interpretation is the contextual one, so that the attempt is made to discover elusive words necessary to materialise the purpose of the rule. It is for such reason that whenever it becomes absolutely necessary, and without doing violence to the expressed words of the statute, a creative and innovative approach is to be adopted. In Bangalore Water Supply & Sewerage Board v. A. Rajappa AIR 1978 SC 548, Chief Justice Beg dealing with necessity of such exercise by Court observed :
‘Perhaps, with the passage of time, what may be described as an extension of a method resembling the “arm chair rule” in the construction of wills, Judges can more frankly step into the shoes of Legislature where an enactment leaves its own intentions in much too nebulous or uncertain state.’
Whenever strict interpretation gives rise to unjust situation or results, the Judges ensure their good sense to remedy it by reading words in, if necessary, so as to do what Parliament would have done had they had the situation in mind (C.E.S.C. Ltd. v. Subhas Chandra Bose AIR 1992 SC 573).
The mechanical approach to construction is altogether out of steps with the modern positive approach. The modern positive approach is to have a purposeful construction, that is, to effectuate the object and purpose of the Act (Administrator, Municipal Corporation v. Dattatraya Dahankar AIR 1992 SC 1846) (already discussed).
In Seaford Court Estates Ltd. v. Asher  2 All ER 155 at p. 164, Lord Denning L.J. said :
“When a defect appears a Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament... and then he must supplement the written word so as to give ‘force and life’ to the intention of the Legislature. A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they should have straightened it out? He must then do as they would have done. A judge must not alter the material of which the Act is woven but he can and should iron out the creases.”
This rule of construction is quoted with approval by the Supreme Court in M. Pentiah v. Muddala Veeramallappa AIR 1961 SC 1107 at p. 1115 and it is also referred to by Beg, C.J. in Bangalore Water Supply and Sewerage Board v. R. Rajappa AIR 1978 SC 548. The Court should construe the words of the statute in a reasonable way having regard to the context and not to embark upon any legislative action (See Hameedia Hardware Stores v. B. Mohan Lal Swocar AIR 1988 SC 1060).
6.4E The Legislature often fails to keep pace with the changing needs and values, nor is it realistic to expect that it will have provided to all contingencies and eventualities. It is, therefore, not only necessary but obligatory on the Courts to step in to fill the lacuna. When Courts perform this function, undoubtedly, they legislate judicially. But that is a kind of legislation which stands implicitly delegated to them to further the object of the legislation and to promote the goals of society or to put it negatively, to prevent the frustration of the legislation or perversion of the goals and values of the society. So long as Courts keep themselves tethered to the ethos of the society and do not travel off its course, so long as they attempt to furnish the felt necessities of the time and do not refurbish them, their role in this respect has to be welcomed (Rattan Chand Hira Chand v. Askar Nawaz Jung AIR 1991 SCW 496). Undisputably, the court cannot usurp the power of legislation in the guise of finding defects in draftsmanship and incorporate its views. A casus omissus can in no case be supplied by a Court of law for that would be to make law. But, is there a total prohibition to supply essentials which have been inadvertently omitted so as to make the Act effective and meaningful or whether the Court can add or supplant this omission? Here comes the crux—to go by letter or to give effect to legislative intent.
There is a clash of judicial debate on this aspect - one view is that court cannot usurp the powers of Legislature and other is that it is permissible under certain circumstances to read into the Act something which is not there so as to make it effective and meaningful. Is law static or moderately progressive?
The controversy is discussed in the following paragraph:
6.4E-1 Court’s competence in supplying omissions - According to the former view, the court is not competent to proceed upon the assumption that the Legislature has made a mistake. The Court must proceed on the footing that the Legislature intended what it has said. Even if there is some defect in the phraseology used by the Legislature the court cannot aid the Legislature’s defective phrasing of an Act or add and amend or, by construction make up the deficiencies which are left in the Act. Even where there is casus omissus, it is for the courts to remedy the defect.1 Addition to or modification of words used in statutory provisions is not generally permissible.2 There is no scope for importing into the statute, words which are not there. Such importation would be not to construe, but to amend, the statute. Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation.3
The other view is that the general rule that addition to or modification of words should not be made can be departed from by the court to avoid a patent absurdity. It is well-recognised that if a statute leads to absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words and even the structure of the sentence.4 No doubt it is the duty of the Court to try and harmonise the various provisions of an Act passed by the Legislature but it is certainly not the duty of the Court to stretch the words used by the Legislature to fill in the gaps or omissions in the provisions of an Act.1 A Judge must not alter the material of the texture of which the Act is woven, but he can and should iron out the creases if he comes across the ruck in the texture. He must supplement the written word so as to give force and life to the intention of the Legislature.2
The cold, logical and soulless approach defeats not only justice but also the intention of Parliament. Rigid legal thinking - a temporary aberration of the Middle Ages - seems to be making a come back in spite of equity, Lord Mansfield and all others made efforts to humanise law.3 The court must, therefore, strive to interpret the statute as to promote/advance the object and purpose of the enactment. For this purpose, where necessary, the court may even depart from the rule that plain words should be interpreted according to their plain meaning. There need be no meek or mute submissions to the plainness of the language. To avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law, the Court would be well justified in departing from the so-called golden rule of construction so as to give effect to the object and purpose of the enactment by supplementing the written word if necessary.4 To make sense out of an unhappily worded provision, where the purpose is apparent to the judicial eye, “some” violence to the language is permissible, the courts need not cling to literalness but should seek to endeavour to avoid unjust and absurd result, and not to make a mockery of legislation.5
The ‘literal rule’ has now been discarded. In the past, the Judges and the lawyers spoke of the ‘literal rule’ by which statutes were to be interpreted according to grammatical and ordinary sense of the word. They took the grammatical and literal meaning unmindful of the consequences. Even if such a meaning gave rise to unjust results which Legislature never intended, the grammatical meaning alone was kept to prevail. They said that it would be for the Legislature to amend the Act and not for the court to intervene by its innovation. During the last several years, the ‘literal rule’ has been given a good-bye. The intention of the Legislature or the purpose of the statute is looked for. The words of the statute are first examined.
If the words are precise and cover the situation in hand, there is no need to go further. The Court expounds those words. But, if words are ambiguous, uncertain or any doubt arises as to the terms employed, the court puts upon the language of the Legislature, rational meaning. Every word, section and provision is examined. The Act is examined as a whole. The necessity which gave rise to the Act is examined. The mischief which the Legislature intended to redress is looked at. The whole situation and not just one-to-one relation is looked at. Not any provision but the framework of the whole statute is considered. Provisions are not viewed as abstract principles separated from the motive force behind. Provisions are considered in the circumstances to which they owe their origin. They are considered to ensure coherence and consistency within the law as a whole and to avoid unavoidable circumstances. Such adventure, no doubt, enlarges Court’s discretion as to interpretation. But it does not imply power to Court to substitute its own notions of legislative intention. It implies only a power of choice where differing constructions are possible and different meanings are available.1
The preponderance of opinion is in favour of construction so as to achieve the legislative intendment. Now the opinion has swept in favour of construction of a statute so as to promote “general legislative purpose” instead of adhering to “literal rule” of interpreting a statute according to grammatical and ordinary sense of the words.2
Interpretation - Mischief rule
6.5 Literalism in interpretation may often thwart the purpose of the Legislature. Purpose or object of legislation and legislative intention governing it are two different concepts. Former relates to the mischief to which the enactment is directed and its remedy, while the latter relates to the legal meaning of the enactment. While the object of the legislation is to provide a remedy for the malady, the legislative intention relates to the meaning from the exposition of the remedy as enacted (see State of Himachal Pradesh v. Kailash Chand Mahajan AIR 1992 SC 1277). Justice Frankfurter observed :
“Legislation has an aim, it seeks to obviate some mischief, to supply an inadequacy, to effect a change in policy, to formulate a plan of Government. That aim, that policy is not drawn, like nitrogen, out of air, it is evidenced in the language of statute as read in the light of other external manifestations of purpose (Some Reflections on the Reading of Statutes) 47 Columbia LR 527, at 538 (1947)”.
Scrupulousness to written words had at time so interfered with the intention of the statute makers that the Courts fell under the public suspicion and recourse was had excessively to administrative agencies.3 It is always proper to construe an ambiguous word or phrase in the light of the mischief which the provision is designed to prevent, and in the light of reasonableness of consequences which follow by giving it a particular construction.1 The English theory of interpretation was fully expounded in Heydon’s case,2 where all the Barons of the Exchequer declared :
“That for the sure and true interpretation of all statutes in general. . . four things are to be discerned and considered :
(1) What was the common law before the making of the Act.
(2) What was the mischief and defect for which the common law did not provide.
(3) What remedy Parliament had resolved and appointed to cure the disease of the Commonwealth.
(4) The true reason of the remedy.”
In Maunsell v. Olins  1 All ER 16 (HL), Lord Simon explained that the rule in Heydon’s case is available at two stages, primary and secondary. The primary rule of construction is to consider the plain meaning and if there is no plain meaning, the mischief rule is more important amongst the secondary canons of construction.
The rule in the Heydon’s case, which is well known as “purposive construction” or the “mischief rule” has been adopted verbatim by the Supreme Court in Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661, 674 :
“. . . for sure and true interpretation of all statutes in general (be they penal or beneficial, or restrictive or enlarging of the common law) four things are to be discerned and considered:
1st What was the common law before the making of the Act,
2nd What was the mischief and defect for which, the common law did not provide,
3rd What remedy Parliament had resolved and appointed to cure the disease of the Commonwealth, and
4th The true reason of the remedy;
and then the office of the Judges is always to make such construction as shall suppress the mischief, and advance the remedy, and suppress subtle inventions and evasions for continuance of the mischief, and pro privato comodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico” (extract from Heydon’s case (1584) 3 Co. Rep. 7a, 7b; 76 ER).
The theory that the aim of the Judges should always be to “add force and life to cure and remedy according to the true intent of the makers of the Act” was fully accepted by the old writers. Blackstone (6 Blackstone 1 Comm. 61) said that :
“the most universal and effectual way of discovering the meaning of a law, when the words are dubious, is by considering the reason and spirit of it; or the cause which moved the Legislature to enact it.”
In Bacon’s Abridgement [Bacon’s Abridgement (1759) 647 - ‘Rules to be observed in the Construction of Statutes’], it is laid down that “such construction ought to be put upon a statute as may best answer the intention which the makers had in view.” Plowden (Plowden’s Rep. 465) said that the theory that a statute should be interpreted in the light of the cause which moved the Legislature to enact it must be followed. He said :
“It is not the words of the Law but the internal sense of it that makes the law, and our law (like all others) consists of two parts, viz., body and soul, the letter of the law is the body of the law and the sense and reason of the law is the soul of the law... And it often happens when you know the letter you know not the sense, for sometimes the sense is more confined and contracted than the letter, and sometimes it is more large and extensive.”
In R.M.D. Chamarbaugwalla v. Union of India AIR 1957 SC 628, Venkatarama Ayyar, J, stated the rule of interpretation of a statute thus (p. 631) :
“Now, when a question arises as to the interpretation to be put on an enactment, what the court has to do is to ascertain ‘the intent of them that makes it’, and that must of course be gathered from the words actually used in the statute. That, however, does not mean that the decision should rest on a literal interpretation of the words used in disregard of all other materials. ‘The literal construction then’, says Maxwell on the Interpretation of Statutes, 10th edn., p. 19, ‘has, in general, but prima facie preference. To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider, according to Lord Coke : (1) What was the law before the Act was passed; (2) What was the mischief or defect for which the law had not provided; (3) What remedy Parliament has appointed; and (4) The reason of the remedy. The reference here is to Heydon’s case  3 Co. Rep. 7a; 76 ER 637 (A-1). These are principles well-settled, and were applied by this court in Bengal Immunity Co. Ltd. v. State of Bihar  6 STC 446 (SC);  2 SCR 603 at p. 633; AIR 1955 SC 661 at pp. 674-675. To decide the true scope of the present Act, therefore, we must have regard to all such factors as can legitimately be taken into account in ascertaining the intention of the Legislature, such as the history of the legislation and the purpose thereof, the mischief which it intended to suppress and the other provisions of the statute, and construe the language of section 2(d) of the Prize Competitions Act, 1955, in the light of the indications furnished by them.”
In CIT v. Shahzada Nand & Sons  60 ITR 392 (SC), while construing the provision of section 34 of Income-tax Act, 1922 their Lordships of the Supreme Court, speaking through Subba Rao, J. (as he then was), at para 8 stated that where the words of the section are clear but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in In re Heydon’s case  3 Co. Rep. 7a, was applied thus (p. 400 of 60 ITR) :
“To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider, according to Lord Coke : (1) What was the law before the Act was passed; (2) What was the mischief or defect for which the law had not provided; (3) What remedy Parliament has appointed; and (4) The reason of the remedy.”
The scope of the limitation provided under section 34(1A) of the Amendment Act fell for consideration before the Supreme Court. In that context, the rule of statutory construction of Mischief Rule was applied to a taxing statute.
No rule is more firmly established than the principles enunciated in Heydon’s case (supra) which have been continually cited with approval not only by the English Courts but also by the Privy Council as well as the Supreme Court. These rules are still in full force and effect, with the addition that regard must now be had not only to the existing law but also to the prior legislation and to the judicial interpretation thereof. The Supreme Court applied the rule enunciated in Heydon’s case (supra) and in Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661 in the construction of Article 226 of the Constitution. After referring to the state of law prevailing in the then provinces prior to the Constitution as also to the chaos and confusion that was brought about in inter-State trade and commerce by indiscriminate exercising of taxing powers by the different provincial Legislatures founded on the theory of territorial nexus, S.R. Das, Actg. CJ, speaking for himself and Vivian Bose and Jaffar Imam, JJ., proceeded to say :
“. . . It was to cure this mischief of multiple taxation and to preserve the free flow of inter-State trade or commerce in the Union of India regarded as one economic unit without any provincial barrier that the Constitution makers adopted article 286 in the Constitution...” (p. 675)
An illustration of the application of the rule is also furnished in the construction of section 2(d) of the Prize Competitions Act, 1955. In R.M.D. Chamarbaugwalla v. Union of India AIR 1957 SC 628, Venkatarama Ayyar, J., speaking for the Court, after referring to the previous State of the law, to the mischief that continued under that law and to the resolutions passed by different State Legislatures under article 252(1) of the Constitution authorising Parliament to pass the Act, stated :
“...Having regard to the history of the legislation, the declared object thereof and the wording of the statute, we are of opinion that the competitions which are sought to be controlled and regulated by the Act are only those competitions in which success does not depend on any substantial degree on skill.” (p. 632)
A further example is furnished in the construction of section 16(3) of the Income-tax Act, 1922, which provides : “In computing the total income of any individual for the purpose of assessment, there shall be included - (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly,” corresponding to section 64 of the 1961 Act. The question before the court was whether the word ‘individual’ occurring in section 16(3) meant only a male or also included a female. After finding that the said word in the setting was ambiguous, Bhagwati, J., speaking for himself and J.L. Kapur, J., in CIT v. Sodra Devi  32 ITR 615 (SC) observed :
“...In order to resolve this ambiguity, therefore, we must of necessity have resort to the state of the law before the enactment of the provisions; the mischief and the defect for which the law did not provide, the remedy which the Legislature resolved and appointed to cure the defect; and the true reason of the remedy. . .” (p. 626)
After taking into account these factors, the learned Judge went on to say :
“It is clear... that the evil which was sought to be remedied was the one resulting from the widespread practice of husbands entering into nominal partnership with their wives and fathers admitting their minor children to the benefits of the partnerships of which they were members. This evil was sought to be remedied by the enactment of section 16(3) in the Act. . . .” (p. 629).
The rule in Heydon’s case was again sought to be applied by the Supreme Court in Dr. Baliram Waman Hiray v. Mr. Justice B. Lentin1, when the question arose whether the Commission of Inquiry constituted under section 3 of the Commissions of Inquiry Act, 1952 is a ‘court’ for purposes of section 195(1)(b) of the Code of Criminal Procedure, 1973.
The Court observed :
“Following this rule in Heydon’s case (supra), it appears to us that to construe sub-section (3) of section 195 of the Code, it is not only legitimate but highly convenient to refer both to the former code and the state of uncertainty brought about due to conflict of views between different High Courts, and to the present Code which seeks to provide the remedy. It was to cure this mischief that Parliament brought in sub-section (3) of section 195 of the Code to put an end to the controversy.”
6.5-1 Ironing out the creases - It is a sound rule of interpretation that statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the Statute.2 The Courts in construing the statutory provisions cannot take into consideration the hardship that may be caused in a particular case.3 Equitable consideration, therefore, is not relevant in interpreting provisions of a taxing statute.4 There is no scope for importing into statute words which are not there, as such importation would not construe, but amend the statute. Even if there be ‘casus omissus’, the defect can be remedied only by the legislation and not by the judicial interpretation.1 But the judicial process does not stand helpless with folded hands and engineers its way to discern meaning when a new construction with a view of rationalisation is needed.2
Lord Denning, in his book, Discipline of Law, p. 12 made a seminal observation on ‘Ironing out the creases’ by quoting a passage from Seaford Court Estates Ltd. v. Ashar.3
“Whenever a Statute comes up for consideration, it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and even if it were, it is not possible to provide for them in terms free from ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticised. A Judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the Judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears, a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give ‘force and life’ to the intention of the Legislature. That judges in Heydon’s case (1584) 3 Co. Rep. 7b and it is the safest guide to-day. Good practical advice on the subject was given about the same time by Plowden... Put into harmony metaphor, it is this : A Judge should ask himself the question : If the makers of the Act had themselves come across this ruck in the texture of it, how would they have straightened it out? He must then do as they would have done. A Judge must not alter the material of which it is woven, but he can and should iron out the creases.”
An illustration for ‘ironing out the creases’ is found in the interpretation of the clause ‘the assessee shall not be deemed to have withdrawn the appeal from the Appellate Tribunal’ in section 245M(7) of the Income-tax Act, 1961, by the Supreme Court in CIT v. B.N. Bhattachargee 4.
The question before the Court was whether while the assessee’s appeal gets revived when the Settlement Commission rejects an application, the Income-tax Officer’s appeal also gets resuscitated under section 245M(7). The Supreme Court held that the obvious object of the aforesaid clause of section 245M(7) is to restore the parties to status quo ante, and, in fairness, must apply to the department as to the assessee. This non-discriminatory import can be reasonably read into the clause if the expression ‘the assessee’ is construed in a wider way so as to include all parties affected by the subject-matter of the assessment. In that case, the clause may mean that no one who is aggrieved by the assessment shall ‘be deemed to have withdrawn the appeal from the Appellate Tribunal’. The Supreme Court also held that an equitable and purpose-oriented construction of the clause means that the assessee will be put back in the same position vis-a-vis his appeal. By so interpreting, the Supreme Court departed from strictly grammatical construction but imparted a midly legislative flavour.
An illustration where this principle was not applied is found in the decision of the Supreme Court in Petron Engg. Construction (P.) Ltd. v. CBDT1.
It was contended before the Supreme Court that section 80-O of the Income-tax Act, 1961 should be construed as permitting canalisation, that is to say, income by way of royalty commission, etc., need not be received directly from the Government of a foreign State or a foreign enterprise, but through another Indian company, and the lacuna on the part of the Legislature in not providing for canalisation in the fulfilment of the objectives, i.e., to encourage Indian companies to export their technical know-how and thereby augment the foreign exchange resources of the country, should be provided by the Court. For that matter, the aforesaid observations of Lord Denning in Seaford Court Estates Ltd. v. Asher were quoted.
The Supreme Court rejected the contention and held that the entire observation of Lord Denning is based on a defect appearing in the provision of a Statute. The Supreme Court held that there is no defect in the provision of section 80-O. It may be that the Legislature has not provided for canalisation, but that cannot be said to be a lacuna or a defect in the provision. Whether canalisation should be permitted or not is absolutely a matter for the Legislature. It is not incumbent on the Legislature to provide for canalisation.
In view of the plain language of the section, the Supreme Court did not construe the section as providing canalisation, as such is not the intention of the Legislature.
As held by the Supreme Court in Seventilal Maneklal Sheth v. CIT  68 ITR 503, while interpreting an anti-avoidance provision like section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, it is a sound rule of interpretation that a statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the statute.
Not infrequently, when the Government finds its fundamental fiscal policy being impaired by avoidance (or evasion) with the consequent immunity conferred on social imbalances and tensions, the taxing statute is amended. But often the amendment is in terms of such severity (out of abundant caution) that it catches even the innocent or the reasonable taxpayer. In other words, in seeking to block a loophole, the Legislature often enacts the anti-avoidance provision in such wide language that a tax trap results, which catches unintentionally even persons other than those meant to be caught by the provision. To hold that the innocent or reasonable taxpayer must be exempted from such a provision is not up to to the Courts as they cannot ‘stress and strain the language of the section so as to enable the taxpayer to escape tax’. The remedy can only lie by way of administrative interference. Equitable considerations would not be relevant in interpreting the provisions of a taxing statute. This is well-settled in CIT v. Central India Industries Ltd.  82 ITR 555.
6.5-2 Literal interpretation is not always only interpretation, contextual interpretation is important - Literal interpretation is not always the only interpretation of a provision in a statute and the court has to look at the setting in which the words are used and the circumstances in which the law came to be passed to decide whether there is something implicit behind the words usually used which control the literal meaning of the words used1. The interpretation of the term should be such as to be consistent with the things or objects that are included within it. In other words, the meaning of the expression cannot be different for different objects included in the expression. If an Indian company having a branch, unit or establishment in a foreign country cannot be regarded as a foreign company, then, for the same reason, a branch, unit or establishment of an Indian company situate in a foreign country or doing business in such foreign country cannot be included within the meaning of the expression “foreign enterprise”2. A Judge believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that or have been guilty of some or other ambiguity. It would certainly save the Judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears, a judge cannot simply fold his hands and blame the draftsmen. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy and then, he must supplement the written words so as to give “force and life” to the intention of the Legislature1. Thus, if the defect or lacuna appears in a provision of the statute, the Court should attempt at finding out the intention of the Legislature, or where two interpretations are possible, the one which is favourable to the assessee should be adopted2, or where the exemption provision is involved, liberal construction be placed upon it3. But all these do not mean doing violence to the plain meaning of an expression and a liberal construction is made whenever it is possible to be made without impairing the legislative requirement and spirit of the provision4. If the precise words are plain and unambiguous, they are to be construed in their ordinary sense and given full effect. Where the language is clear and explicit, effect is given to it whatever may be the consequences for in that case, the words of the statute speak the intention of the Legislature5. The argument of inconvenience and hardship is only admissible in construction where the meaning of the statute is obscure and there are alternative methods of construction. Where the language is explicit its consequences are for the Parliament and not for the courts, to consider6.
6.5-2a PURPOSive AND LITERAL APPROACH COMBINED - Legislation in modern State is actuated with some policy to work 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. This intention is to be kept in mind while interpreting a particular statute. The primary purpose of interpretation is to ascertain the intention of the Legislature. That intention assimilates two aspects : it carries the concept of “meaning”, i.e., what words mean; and it conveys the concept of “purpose and object” or the “reason and spirit” pervading through the statute; one relates to literal and the other, purposive approach. While interpreting both, the approaches are combined, i.e., true legal meaning of enactment is to be derived by considering the meaning of the words used in the enactment in the light of any discernible purpose or the object which comprehends the mischief and its remedy to which the enactment is directed. Parliament’s intention is ascertainable from the mischief to be dealt with and the words used - Secretary of State v. Deverell  2 WLR 907 (A);  111 Comp. Cas. 303.
In Smt. Kanta Goel v. B.D. Pathak AIR 1977 SC 1599, the Supreme Court spelt out that interpretative effort “must be illumined by the goal though guided by the words”. In Reserve Bank of India v. Peerless General Finance and Investments Co. Ltd. AIR 1987 SC 1023, it echoed the principle in the following words :
“Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say, if the text is the texture, the context is what gives colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted.”
Text and context of the entire Act must be looked into. The Court must look to the object which the Statute seeks to achieve, while interpreting any of its provisions. A purposive approach is necessary (S. Gopal Reddy v. State of AP  6 JT 268).
6.5-2b READING DOWN MEANING OF WORDS - In interpreting an enactment, the Court should have regard not merely to the literal meaning of the words used, but also should take into consideration the antecedent history of the legislation, its purpose and the mischief it seeks to suppress1. Thus, context is important. Reading down meaning of words with loose lexical amplitude is permissible as part of the judicial process. Court can and must interpret words and read their meanings so that public good is promoted and power to misuse is interdicted2. Gywer, J. in Central Provinces and Berar Act3 held :
“A grant of the power in general terms, standing by itself, would no doubt be construed in the wider sense, but it may be qualified by the other express provisions in the same enactment, by the implication of the context, and even by the considerations arising of what appears to be the general scheme of that Act.”
There are situations in which Courts are compelled to subordinate the plain meaning of statutory language. Not unoften, Courts do read down the plain language or give it a restricted meaning, where to do otherwise may be clearly opposed to the object and the scheme of the Act or may lead to an absurd, illogical and unconstitutional result4.
The High Court of Andhra Pradesh in A. Sanyasi Rao v. Govt. of Andhra Pradesh5 read the non obstante clause in section 44AC(1) of the Indian Income-tax Act, 1961 in the context of its setting and the other provisions of the Act. While in some sections preceding section 44AC, the non obstante clause reads ‘notwithstanding anything contained in any other provision of this Act” (See sections 43A and 43B). The non obstante clause in section 44AC(i) and certain other sections (see sections 44B, 44BB, 44BBA and 44C) reads ‘notwithstanding anything to the contrary contained in sections 28 to 43C”. In one set of sections, other provisions of the Act are excluded. In the context of section 44AC, the expression ‘notwithstanding anything to the contrary contained in sections 28 to 43C’ does not dispense with sections 28 to 43C absolutely. It is confined to the limited purpose of sustaining the deductions provided for in section 206C. The level of profits and gains would be relevant only in explaining and justifying the level of deductions provided in section 206C. Collections would be made at the rates specified in section 206C and then a regular assessment will be made like in the case of any other assessee. Section 44AC has, therefore, to be read as adjunct to, and as an explanatory to section 206C.
6.5-2c SHORN OF CONTEXT - WORDS ARE SLIPPERY CUSTOMERS - Even to ascertain the literal meaning, it is necessary first to ascertain the juxtaposition in which the provision is placed, the purpose for which it is enacted and the object which it is required to subserve1. The words have, therefore, to be read in the context of the enactment. Shorn of context, the words by themselves are “slippery customers”. The meaning to be given to a particular statutory language depends on the valuation of a number of interpretative criteria. The general presumption is that these criteria do not detract or stand apart from, but are to be harmonised with, the well-accepted legal principles. In a difficult case, the number of relevant interpretative criteria may be so high that the task of the Court in assessing their effect is, correspondingly, difficult. Even the statutory language apparently free from the sins of semantic ambiguity might not, in the context of the purpose, or cannot convey its lexicographic thrust : but would acquire a different shade or colour imparted to it by the variations of the interpretative criteria. The ambiguity need not necessarily be a grammatical ambiguity, but one of appropriateness of the meaning in a particular context. Francis Bennion in his “Statutory Interpretation” refers to the nature of the task in weighing the factors :
“It is necessary for the interpreter to assess the respective weights of the relevant interpretative factors and determine which of the opposing constructions they favour on balance.”
‘We may speak of the factors tending in a certain directions as a bundle of factors. This is figurative, but then so is the idea of factors being “weighed”. The court is unlikely even to consider the factors one by one, and certainly will not proceed in any mechanistic way..........’
“We find that one bundle of factors favours enactment, while the other bundle favours the other construction (As to constructive see section 84 of this Code). There may be factors drawn from a single interpretive - Criterion in both bundles..........”
(See “Statutory Interpretation” by Francis Bennion, 1984 Edn. page 390).
It is true that where statutory language be given its most obvious meaning—‘to accord with how a man in the street might answer the problems posed by the words’—the statute must be taken as one finds it. Considerations relevant to the interpretation are not whether a differently conceived or worded statute would have yielded results more consonant with fairness and reasonableness. Consequences do not alter the statutory language but may not help to fix its meaning1.
Interpretation - Noscitur a sociis
6.5-3 Noscitur a sociis - Meaning of doubtful word may be ascertained by reference to word associated with it - A word, like a man, is very often known by the company it keeps and, accordingly, a word is very often to be understood in the context and collocation it is used. This rule of interpretation is known as noscitur a sociis which is much wider than the rule of ejusdem generis, and in fact the latter rule is only an illustration or application of the former2. The rule is, that when two or more words which are susceptible to analogous meaning are coupled together noscitur a sociis, they are understood to be used in their cognate sense and they take, as it were, their colour from each other, that is, the more general is restricted to a sense analogous to the less general. As observed by Gajendragadkar J., (as his Lordship then was), in the Supreme Court decision in State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610 at pp. 613, 614, “associated words take their meaning from one another under the doctrine of noscitur a sociis, the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it; such doctrine is broader than the maxim ejusdem generis” and that “in fact the latter maxim is only an illustration or specific application of the broader maxim noscitur a sociis”. As has been pointed out further, “it must be borne in mind that noscitur a sociis is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It is only where the intention of the Legislature, in associating wider words with words of narrower significance is doubtful or otherwise not clear, that the present rule of construction can be usefully applied. It can also be applied where the meaning of the words’ wider import is doubtful. . . .” The Supreme Court in Rohit Pulp and Papers Mills Ltd. v. Collector of Central Excise AIR 1991 SC 754 observed as follows :
“The principle of statutory interpretation by which a generic word receives a limited interpretation by reason of its context is well established. In the context with which we are concerned, we can legitimately draw up the noscitur a sociis principle. This expression simply means that the meaning of the word is to be judged by the company it keeps.”
In Rainbow Steels Ltd. v. CST  47 STC 298/AIR 1981 SC 2101, the court had to understand the meaning of the word “old” in the context of an entry in a taxing tariff which read thus :
“Old, discarded, unserviceable or obsolete machinery, stores or vehicles including waste product..........”
Though the tariff item started with the use of the wide word “old”, the court came to the conclusion, that “in order to fall within the expression ‘old machinery’ occurring in the entry, the machinery must be old machinery in the sense that it has become non-functional or non-usable”. In other words, not the mere age of the machinery, which would be relevant in the wider sense, but the condition of the machinery analogous to that indicated by the words following it, was considered relevant for the purpose of the statute.
Interpretation - Ejusdem generis
6.5-4 Ejusdem generis - The expression ‘ejusdem generis’ of the same kind or nature signifies a principle of construction whereby words in a statute which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. If a list or string or family of genus describing terms are followed by wider or residuary or sweeping up words, then the verbal context and the linguistic implications of the preceding words limit the scope of such words1. This rule reflects an attempt to reconcile incompatability between the specific and general words, in view of the other rule of interpretation, that a statute is to be construed as a whole and that no words in a statute are presumed to be superfluous2. The true scope of the rule of ejusdem generis is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. But the rule is one which has to be applied with caution and not pushed too far3. For the ejusdem generis principle to apply, there must be a sufficient indication of a category that can properly be described as a class or genus, even though not specified as such in the enactment. If no class can be found, ejusdem generis rule is not attracted and such broad construction as the subsequent words may admit will be framed. If a class can be found, but the specific words exhaust the class, then rejection of the rule may be favoured because its adoption would make the general words unnecessary. If, however, the specific words do not exhaust the class, then, adoption of the rule may be favoured because its rejection would make the specific words unnecessary.
In Jage Ram v. State of Haryana AIR 1971 SC 1033, the Supreme Court quoted with approval, a statement of law from Sutherland’s Statutory Construction (3rd edition) Vol. II at page 395, as follows :
“For the application of the doctrine of ejusdem generis, the following conditions must exist :
(i) the statement contains enumeration by specific words;
(ii) the members of the enumeration constitute a class;
(iii) a class is not exhausted by the enumeration;
(iv) a general term follows the enumeration; and
(v) there is not clearly manifested an intent that the general term be given a broader meaning than the doctrine requires.”
The same principles were reiterated by the Supreme Court in Amar Chandra Chakraborty v. Collector of Excise AIR 1972 SC 1863.
6.5-4a GENUS - NARROWER THAN THE WORDS IT REGULATES - The genus must be narrower than the words it is said to regulate. The nature of the genus is gathered by implication from the express words which suggest it. It is necessary to be able to formulate the genus. If it cannot be formulated, it does not exist. Unless a category is found, there is no room for the application of the ejusdem generis principle1. Specified things must possess some common and dominant feature. The preceding words, which control and limit the meaning of the subsequent words, must represent a genus or family which admits of a number of species or members. If there is only one species, it cannot supply the idea of a genus2.
The Supreme Court in Siddeshwari Cotton Mills (P.) Ltd. v. Union of India3, interpreted the expression ‘any other process’ appearing along with the words ‘bleaching, mercerising, dyeing, printing, water-proofing, rubberizing, shrink-proofing, organdie processing in section 2(f)(v) of the Central Excise and Salt Act, 1944 [as stood prior to its substitution by Central Excise Tariff Act, 1985], read with notification Nos. 230/77 and 231/77 dated 15th July, 1977 with the aid of the principle of ejusdem generis. The Supreme Court held that the expressions ‘bleaching, mercerising, dyeing, printing, water-proofing, rubberizing, shrink-proofing, organdie processing’ which precede the expression ‘or any other process’ contemplate processes which import a change of a lasting character of the fabric or otherwise. “Any other process” in the section must share one or the other of these incidents. It is used in the context of what constitutes manufacture in its extended meaning. It has, therefore, to be construed under the principle of ejusdem generis in the light of the expressions immediately preceding.
6.5-4b EJUSDEM GENERIS - AID TO CONSTrucTION - The doctrine of ejusdem generis affords an aid to the Court in construing statutes, and it cannot be employed to restrict operation within narrower limits than is intended by the law makers. This rule is subject to fundamental principle, namely, that the words used in a statute which are of general import should receive their full and unrestricted meaning unless there are indications intrinsic in the statute to the contrary. This rule is a deviation from the normal rule of giving the words used in the statute their plain and natural meaning. Apart from the fact that the rule must be confined within narrow limit the general and comprehensive words should receive their full and natural meaning unless they are clearly restrictive in their intendment. It is requisite that there must be a distinct genus, which must comprise more than one species, before the rule can be applied1.
Restricted meaning to the words of general import following specific words of the same nature can be given only where the context of the whole scheme of legislation requires it, but where the context and the object of the enactment do not require such a restricted meaning to be attached to the words of general import, it becomes the duty of the Court to give those words their plain and unrestricted meaning2.
The Allahabad High Court applied the aforesaid principle in CWT v. S.N. Kacker3 when called upon to answer a question whether books owned by an advocate are exempt from wealth-tax under section 5(1)(xii) of the Wealth-tax Act. That section exempts “works of art, archaeological, scientific or art collections, or both or manuscripts belonging to the assessee and not intended for sale. . . .” The revenue’s contention was that according to the rule of ejusdem generis, the ‘books and manuscripts’ must be interpreted to mean only those books or manuscripts which relate to art, archaeology or science. Negativing this, the High Court held that the books and manuscripts constitute a distinct class being the primary source of learning, and that neither the language of the statute, nor the scheme of the enactment nor even the legislative intendment qualify cutting down the scope of the words ‘books and manuscripts’. The High Court did not find a distinct genus or category in three classes of assets exempted under clause (xii), namely, works of art, collections of archaeology, science or art, so as to justify giving a restricted meaning to the words ‘books and manuscripts’.
6.5-4c EJUSDEM GENERIS APPLICATIONs - CONDITIONS - The rule of ejusdem generis applies when4 :
(i) the statute contains an emuneration of specific words;
(ii) the subjects of enumeration constitute a class or category;
(iii) that class or category is not exhausted by the enumeration;
(iv) the general terms follow the enumeration; and
(v) there is no indication of a different legislative intent.
A word like a man, is very often known by the company it keeps and, accordingly, a word is very often to be understood in the context and collocation it is used. This rule of interpretation is known as noscitur a sociis which is much wider than the rule of ejusdem generis, and in fact the latter rule is only an illustration or application of the former1.
6.5-4d EJUSDEM GENERIS - NON-APPLICATION IF DEFEATS THE INTENTION OF LEGISLATURE - It is well-known that the rule of ejusdem generis calls for very careful application and is not an inviolable rule of law. In a case where the context of the enactment and the object and the mischief of the enactment do not require any restricted meaning, it is the duty of the court to give the words their plain and ordinary meaning (See Smt. Lita Vati Bai v. State of Bombay AIR 1957 SC 521 and Hamdard Dawakhana v. Union of India AIR 1965 SC 1167) Lord Scarman in Quazi v. Quazi  3 All ER 897 (HL), said that legislative intent is not in favour of complying with this rule, and application of the rule in such a case would defeat the intention of Parliament. This rule has been declared by the learned judge as “useful servant but a bad master” [see C. Mackertich Ltd. v. Custodian  108 Comp. Cas. 811 (Cal.)].
Interpretation - Taxing statute
6.6 Taxing Statutes are not to be interpreted differently from other Acts of Parliament, viz., to give effect to the intention of the Legislature as that intention is to be gathered from the language employed, having regard to the context in connection with which it is employed. The Court must no doubt ascertain the subject-matter to which the particular tax is by the Statute intended to be applied, but when once that is ascertained, it is not open to the Court to narrow or whittle down the operation of the Act by considerations of hardship or business convenience, or the like2.
Once a liability is fixed, it is antecedently rightly improbable that the Statute should not go on to make that liability effective. A statute is designed to be workable and the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear directions makes that end unattainable. Now, there are three stages in the imposition of tax : there is the declaration of liability, that is the part of the Statute which determines what persons in respect of what property are liable. Next there is the assessment. Liability does not depend upon assessment. That ex-hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, comes the method of recovery, if the person taxed does not voluntarily pay1. The first stage is to be construed strictly, and the other two stages, to make the machinery workable.
The principle to be followed in the construction of fiscal statute is expressed by Rowlatt in Cape Brandy Syndicate v. IRC2, as follows :—
“In a taxing statute, one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used.”
In the case of V.V.S. Sugars v. Government of AP  114 STC 47/4 SCC 192, the Supreme Court held (headnote of  4 SCC) :—
“The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtraction, on the ground of legislative intendment or otherwise.”
In Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, the law is stated thus :—
“. . . 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 statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute, then there is no tax in law. Then it is for the Legislature to do the needful in the matter.” (p. 673)
Plain and unambiguous language conveys legislative intent. In ascertaining the subject-matter or the scope or purpose of the legislation, the Court is entitled to give due regard to its economic effect (see State of West Bengal v. Kesoram Industries Ltd.  (1) Scale 425).
While construing the revenue Acts :
- Courts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject
- Courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible
- Courts construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and apply that meaning to the facts of the case and in that process, if the taxpayer is brought within the net, he is caught, otherwise, he has to go free.
[Vikrant Tyres Ltd. v. First ITO  247 ITR 821 (SC) and SMS Schloemann Seimag v. Dy. CIT  250 ITR 97 (AP) (FB)].
The principle thus stated has hardly ever been doubted but it is necessary in the application of that principle to remember that though the benefit of ambiguity in a taxing provision must go to the subject and the taxing provision must receive a strict construction, that is not the same thing as saying that a taxing provision should not receive a reasonable construction1.
Strict interpretation means that the court will refrain from exercising its creative function to apply the rule announced in the statute to situations not covered by it, even though such an extension would help to advance the manifest ulterior purpose of the statute (T.E.C.H. Society Ltd. v. S.C.S.T.M.T. & Backward Classes Improvement Center  1 LR 1990 Kar. 3320). Strictness relates not to the meaning of the statute but to using the statute as the basis for judicial law-making by analogy with it. The principle of strict construction is not to be confused with the literal construction nor, for that matter, can one play with the words in these situations. The interpretation and application of law is required to be done by the Courts in consonance with achieving the end result that the law is required to achieve and towards this objective, the Courts are required to grasp the basic essence of the provision and give effect to it without being fettered by difficulties which words or expressions may seemingly create [Smt. Abhilash Vinodkumar Jain v. Cox & Kings (India) Ltd.  84 Comp. Cas. 1 (Bom.)].
6.6-1 Interpretation of provisions - Principle - For interpretation of the taxing provision, the following principles are well-settled2.
(1) The intention of a taxing statute, if it professes to impose a charge, must be expressed in clear, unequivocal and unambiguous language. The Court has to look at the language couched to hunt into intention to find that a charge is impermissible. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in and nothing is to be implied. No equitable construction of a charging section is to be applied. The charging section is to be construed strictly regardless of its consequences that may appear to the judicial mind to be. The burden is on the State to show that the subject is within the provisions of the Act.
(2) But in construing the machinery provisions for assessment and collection of the tax to make the machinery workable ut res valeat potius quam pereat, the Court would avoid that construction which would fail to relieve the manifest purpose of the legislation of the presumption that the Legislature would enact only for the purpose of bringing about an effective result. It is not the function of the Court to hunt out ambiguities by strained and unnatural meaning; close reasoning is to be adopted; harmonious construction is to be adhered to; all the relevant provisions are to be read together to gather the intention of the language employed, its context so as to give effect to the intention of the Legislature; ingenious attempt to avoid tax is to be thwarted.
6.7 In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in; nothing is to be implied. One can only look fairly at the language used1. Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation2. It is the duty of the court to give effect to the words used without scanning the wisdom or policy of the Legislature and without engrafting, adding or implying anything which is not congenial to or inconsistent with such express intent of the law-giver3. If the statute is a taxing statute, it has to be assumed that the law-making authority does not commit a mistake or make an omission4.
It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax, one must have regard to the strict letter of the law and not to the spirit of the statute or the substance of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter5.
This principle is variously expressed by saying that in fiscal statutes, one must have regard to the letter of the law and not to the spirit of the law, that the subject cannot be taxed by inference or analogy, that in a taxing Act, there is no governing principle to look at and one has simply to go into the Act itself to see whether the tax claimed is that which the statute imposes, that while construing taxing Acts, it is not the function of the Court to give to the words used a strained and unnatural meaning and that the subject can be taxed only if the revenue satisfies the Court that the case falls strictly within the provisions of the law1.
While construing a fiscal statute, the function of the court as aforesaid is not to give a strained and unnatural meaning to the provisions. One cannot strain the scope of the provisions by analogy or place upon it what is called a beneficial or equitable construction in order to prevent an anomaly or a supposed anomaly. There is no scope for repairs or reconstruction of a provision. The intention of the Legislature manifested in plain words must be accepted. The question as to what is covered must be found out according to its natural meaning fairly and squarely read2. If a provision of a taxing statute is doubtful or ambiguous, it is not possible to remove the ambiguity and create a new and added obligation not cast upon it by the Legislature. One can at best iron out the creases but cannot alter the materials of which the provision is woven. Lord Denning in Seaford Court Estates Ltd. v. Asher3 said that ‘a Judge must not alter the material of which the Act is woven, but he can and should iron out the creases’. In the jungle of fiscal law, common sense is a frail guide. Certainly, common sense cannot be the master, for then it would usurp the function of the statute book. To this effect said Megarry, J. in Simpson v. Jones (H.M. Inspector of Taxes)4 : ‘A subject cannot be taxed unless he comes within the strict letter of the law. He cannot be charged even if he falls within the spirit of law. A subject cannot be charged unless the language of the statute clearly imposes the obligation5 and if once the person sought to be taxed comes within the letters of the law, he must be taxed, however, great the hardship may appear to the judicial mind6.
Tax and equity are strangers and an equitable construction has no room in a taxing statute. If the interpretation of a fiscal enactment is open to doubt, the construction beneficial to the subject should be adopted, even if it results in granting a double advantage. A provision for exemption or relief should be construed liberally and in favour of the assessee, but the court must disregard any assumption or presumption as the construction on the basis of belief and assumptions will amount to making of a new law.
6.7-1 Taxing statutes - Doctrine of equity - It is well-settled that there is no equity about tax and equitable considerations are not relevant in interpreting the provisions of a taxing statute. But the tax laws are to be interpreted reasonably and in consonance with justice7.
All the principles of construction of taxing statutes were considered by the Supreme Court in Murarilal Mahabir Prasad v. B.R. Vad1 and the rule of construction has been laid succinctly by Chandrachud, J. The rule stated by Rowlatt, J., in Cape Brandy Syndicate2 which had been approved and adopted by the Supreme Court in a number of cases, has been accepted as the correct principle which is applicable in interpreting our taxing statutes. The relevant observations are extracted :
“. . . .In that famous passage marked by a happy turn of phase, Rowlatt, J., said ‘there is no equity about a tax. There is no presumption as to a tax’. There is no equity about a tax in the sense that a provision by which a tax is imposed has to be construed strictly, regardless of the hardship that such a construction may cause either to the treasury or to the taxpayer. If the subject falls squarely within the letter of law, he must be taxed, howsoever inequitable the consequences may appear to the judicial mind, if the revenue seeking to tax cannot bring the subject within the letter of law, the subject is free no matter that such a construction may cause serious prejudice to the revenue. In other words, though what is called equitable construction may be admissible in relation to other statutes or other provisions of a taxing statute, such a construction is not admissible in the interpretation of a charging or a taxing provision of a taxing statute. . . .” (p. 111)
It was also observed by the Supreme Court that though the benefit of ambiguity in a taxing statute must go to the subject and the taxing statute must receive a strict interpretation, that is not the same thing as saying that a taxing provision should not receive a reasonable construction.
6.7-1a STRICT INTERPRETATION DOES NOT RULE OUT REASONABLE CONSTRUCTION - Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if construction results in equity rather than in injustice, then such construction should be preferred to the literal construction3. The Courts should, whenever possible, unless prevented by the express language of any section or compelling circumstances of any particular case, make benevolent and justice-oriented inference; and facts must be viewed in the social milieu of a country. Too hypertechnical and legalistic approach should be avoided in looking at a provision, which must be equitably interpreted and just administered4. The Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT5 observed that it is well to remember that in the scheme of the administration of justice, tax law like any other laws will have to be interpreted reasonably and whenever possible, in consonance with equity and justice. The principle that a fiscal statute should be construed strictly does not rule out the application of reasonable construction1 so as to give effect to the intention of the Legislature2.
Thus, the traditional approach in interpreting a tax statute has been that a person sought to be taxed must come within the letter of the law, however great the hardship appears to the judicial mind to be (see Partington v. Attorney General, Per Lord Cairns (1869) LR 4 E&I App HL 100, 122), a “clear words” principle is now somewhat outdated.
That principle has given way to non-literal and purposive approach. It cannot apply where there are decisive legal reasons for preferring one construction rather than the other (Leedale v. Lewis (1982) STC 835, 844, as per Lord Wilberforce). In W.T. Ramsay Ltd. v. IRC (1982) AC 300, Lord Wilberforce after having said that “a subject is only to be taxed upon clear words, not upon ‘intendment’, or upon the ‘equity’ of an Act”, explained “What are ‘clear words’ is to be ascertained upon normal principles : These do not confine the Courts to literal interpretation. There may, indeed should, be considered the context and Scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.”
This is founded on a broad purposive interpretation, giving effect to the intention of the Parliament and bringing the construction of tax statute into line with the construction of statutes generally.”
In Mangin v. IRC (1971) AC 739, at 746, Lord Donovan, after acknowledging the “clear words” principle, went on to say that :—
‘the object of the construction being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended. If, therefore, a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted”. In addition, “the history of an enactment and the reasons which led to its being passed may be used as an aid to its construction’.
Thus, there is a shift from “clear words” principle to “purposive principle”, which is no longer the primary principle.
The principle of strict interpretation is applied to—
- taxing provisions,
- tax avoidance provisions,
- penal provisions,
- provisions relating to limitations, and
- provisions relating to exceptions
In case of tax avoidance provision, strict interpretation is displaced by an interpretation on the basis of doctrine of “substance of the transaction” or the doctrine of “fiscal nullity”, if the latter leads to prevention of tax avoidance. That interpretation is not to be applied for achieving a financial result, there are at least two methods and the assessee has chosen the one according to which tax is not payable rather than the other according to which tax is payable. Lord Hoffman observed as follows in case of Inland Revenue v. McGukian  1 WLR 991 :
‘59. Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones. . . .
60. Likewise the use of business concepts like “income” and “capital” may give the tax payer a choice of structuring a commercial transaction so as to come within one concept or the other. As Lord Greene MR said in a celebrated passage in Inland Revenue Comr. v. Westyan & General Assurance Society  2 All ER 749, 751; ‘In dealing with income-tax questions, it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable. It is sufficient to refer to the common case where property is sold for £ 1000 and the purchase price is to be paid in ten instalments of £ 100 each, no tax is payable. If, on the other hand, the property is sold in consideration of an annuity of £ 100 a year for ten years, tax is payable. The net result, from the financial point of view, is precisely the same in each case, but one method of achieving it attracts tax and the other method does not.’
These are discussed in the following paragraphs.
6.7-1b STRICT interpretation of CHARGING SECTION OF INCOME-TAX ACT - The charging section has to be construed strictly. Section 4 of the Income-tax Act states “Tax . . . . . shall be charged . . . . . in accordance with, and subject to the provisions of this Act in respect of the total income.” It only talks of charging the income of certain persons and does not talk of income-tax being charged on persons. This implies that the charge is to be levied on an income only once. Whether it is to be charged in the hands of one person or another can certainly be determined under section 4 and other relevant provisions of the Act. Section 4 is clear enough to indicate that the same income cannot be charged repeatedly in the hands of different persons or in the hands of the same person.1
Further, the section does not provide that the entire total income shall be chargeable to tax. It says that the chargeability of an income to tax has to be in accordance with and subject to the provisions of the Act. The income has, therefore, to be brought under one of the heads in section 14 of this Act and can be charged to tax only if it is so chargeable under the computing section of that head. If an income falls under one head and it is not chargeable under the corresponding computing section, it cannot be put under the different head. Whether an income falls under one head or another has to be decided according to the common notions of practical man, for the Act does not provide any guidance in the matter. Income which falls under one head can be brought to tax only if it can be so done under the rules of computation laid down under that head. If it cannot be so brought to tax, it will escape taxation even if it could be included in the total income under section 5.1 That all income included in the total income is not chargeable to tax may be illustrated by referring to income under the head “Income from house property”. The corresponding computing section is 22, which stated that tax shall be payable on income under the head in respect of annual value of the property (before the amendment w.e.f. 1-4-1976). What was subject to tax was the ‘annual value’ which was held to be the standard rent determined under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant.2 Thus, in case the income received from the property in a year exceeded the annual value (prior to amendment with effect from 1-4-1976), the excess would have certainly been liable to be included in the total income under section 5, but could not have been brought to tax as income under the head “Other sources”3, only because the amount cannot be taxed as property income. Another illustration could be found in regard to capital gains. Thus, when a partner brings his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive right in the asset to the shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with fullness of the right which he enjoyed in the asset before it entered the partnership capital. Therefore, when the assessee brings his asset into the partnership firm as his contribution to its capital, there is a transfer of capital asset within the meaning of section 45. But the capital gain was not held chargeable to tax because no consideration had been received by the partner and the computation provision was not applicable.4
6.7-1c TAX NOT TO BE CHARGED BY INFERENCE OR ANALOGY - Subject is not taxable by inference and analogy.
The well-known observation of Lord Russell in IRC v. Duke of Westminster1 may be usefully quoted here :
“I confess that I view with disfavour the doctrine that in taxation cases, the subject is to be taxed if, in accordance with the Court’s view of what it considers the substance of the transaction, the Court thinks that the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case.”
Lord Cairns in Partington v. Attorney General  LR 4 E & I App. HL 100 (122) observed :
“As I understand the principle of all fiscal legislation, it is 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 free, however apparently within the spirit of the law the case might otherwise appear to be.”
All statutes including the fiscal statutes should be equitably interpreted. There is no place for equity as such in taxation laws.2 A question arose before the Supreme Court3 about the interpretation of the expression ‘belonging to’ appearing in section 2(m) of the Wealth-tax Act, 1957, in the context whether the properties in respect of which registered sale deeds had not been executed but consideration had been received, could be said to belonging to the assessee for the purpose of inclusion in his net wealth within the meaning of section 2(m). The Supreme Court held that the concept of reality in implementing a fiscal provision is relevant and the Legislature has not significantly used the expression “owner” but used the expression “belonging to”. Though the properties could be said belonging to the vendee, legally, the vendee was in rightful possession only against the vendor. Sabyasachi Mukharji, J., observed—
‘Speaking for myself, I have deliberated long on the question whether in interpretating the expression “belonging to” in the Act, we should not import the maxim that ‘equity looks upon a thing as done which ought to have been done”, and though conveyance had not been executed in favour of the vendee, and the legal title vested with the vendor, the property should be treated as belonging to the vendee and not to the assessee. I had the occasion to discuss thoroughly this aspect of the matter with my learned brother and since in view of the position that the legal title still vests with the assessee and the authorities, we have noted, are preponderantly in favour of the view that the property should be treated as belonging to the assessee in such circumstances, I shall not permit my doubts to prevail upon me to take the view that the property belongs to the vendee and not to the assessee. I am conscious that it will work some amount of injustice in such a situation because the assessees would be made liable to bear the tax burden in such situations without having the enjoyment of the property in question. But times perhaps are not yet ripe to transmute equity on this aspect in the interpretation of law - much as I would have personally liked to do that. As Benjamin Cardozo has said ‘The Judge, even when he be free, is not wholly free’. The Judge cannot innovate at pleasure.”
6.7-2 Taxing provision - Construction in favour of the subject in case of ambiguity - The doctrine is that there is no equity about a tax, there is no presumption as to a tax having a rider. In case of a reasonable doubt, the construction most beneficial to the subject is to be adopted.1 If there are two interpretations possible, then effect is to be given to the one that favours the citizen and not the one that imposes a burden on him.2 In Cemento Corporation Ltd. v. Collector, Central Excise  8 SCC 139, the Supreme Court held, “. . . when two constructions can be equally drawn, the one favourable to the taxpayer should be adopted. . .”. The same principle was enunciated in Mysore Minerals Ltd. v. CIT  239 ITR 775 (SC)and Birla Cement Works Ltd. v. CBDT  248 ITR 216 (SC). In CIT v. Vegetable Products Ltd.  88 ITR 192, the Supreme Court held that where the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee, more particularly so when the provisions relate to imposition of penalty.
6.7A Moral precepts are not applicable to the interpretation of revenue statute. Where tax avoidance schemes are under consideration, the courts tend to place strict interpretation to the statute if such an interpretation conforms to the intention of the Legislature. The judgment of Lord Simon of Glaisdale in Ransom v. Higgs3 suggests that the correct approach to the construction of the taxing statute is to interpret it strictly.
The inevitable result of this and of other matters is a fiscal code of such complexity that many ordinary citizens, particularly those engaged in commerce and industry, seek the aid of experts in handling the tax matters of themselves and of the corporations for which they have responsibility and since the burden of taxation is heavy (in some circumstances punitive) and since there is generally some delay before tax avoidance schemes come to light during which time a rich windfall may be garnered, there is a strong incentive for such experts to devote their talents to devising tax avoidance schemes for clients, actual or potential, and for such clients to adopt the schemes devised. It may seem hard that a cunningly advised taxpayer should be able to avoid what appears to be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens. But for the courts to try to stretch the law to meet hard cases (whether the hardship appears to bear on the individual taxpayer or on the general body of taxpayers as represented by department) is not merely to make bad law but to run the risk of subverting the rule of law itself. Disagreeable as it may seem that some taxpayers should escape what might appear to be their share of the general burden of national expenditure, it would be far more disagreeable to substitute the rule of caprice for that of law.
Though it is generally believed and rightly so that in the case of ambiguity, the benefit of interpretation of a statute should favour the subject, yet there is no authority for the view that the law has to be interpreted in favour of a person who is a tax evader.1
Some of the judicial rules directed against tax avoidance have been incorporated in the statute. But most of them remain as they originate - judicial safeguards devised to protect the underlying statutory policy. Nor is the role of the judiciary confined to enforcing rules previously announced. The latest illustration is found in the decision of the Supreme Court in McDowell’s case, wherein the departure was made from the observation of its earlier decision in CIT v. A. Raman & Co.2, that every man is entitled if he can so order his affairs so that tax attaching under the appropriate Acts is less than it would otherwise be, when in the opinion of the court such a dictum could lead to avoidance/evasion of tax. Any one applying for passage through the corridors of tax avoidance runs the risk of judicial policeman inventing a new rule on the spot if he thinks such an action is demanded. Any effort to prescribe statutory rules, in the name of certainty, covering all of the everyday transactions of the business world is bound to fail unless courts and administrators are able to cope with transactions that would otherwise involve a distorted application of those rules. Similar could be said about the rules of evidence. In relation to income-tax matters, the Income-tax Officer may not follow the set principles as laid down in the Evidence Act in collecting, evaluating evidence and then proceeding to make assessment. He may invent some other rules if he thinks necessary. How it works in revenue proceedings is exemplified in Hill v. Baxter.3 In tax matters, the onus of proving a fact, which is exclusively in the knowledge of the party, applies to the negative fact that such and such a profit was not made; the negative is pregnant with the affirmative that a different figure of profit known to the assessee was made. When nearly all the facts are within the exclusive knowledge of the assessee, it would make little sense to expect the revenue to assume the burden of justifying every component figure of assessment. It does not work perfectly. Though the genuine miscreant has to be caught and the weapon at the disposal of the revenue is antiquated and blunt, a certain amount of suffering to the innocent appears inevitable.
Though aggressive tax avoidance is difficult to defend, the court in its attempt at frustrating what it perceives to be a tax avoidance transaction, may not identify correctly the intention of the Legislature, particularly in those jurisdictions where tax legislation frequently involves economic incentives, tax benefits and weighted deductions. Confronting only the facts of a particular case and obligation to render a decision, the court very likely may become oblivious of the practical and administrative problems that its decision entails and how it fits into the purpose of the tax system enacted by the Legislature.
Perhaps the best approach would be this : construction should be preferred which is either strict or liberal with reference to the purposes and objects of the statute. This makes the soundest analysis of the problem of liberal and strict construction. Whereas a statute is liberally construed when the letter of the statute is extended to include matters within the spirit or purpose of the statute, the statute is strictly construed when the letter of the statute is narrowed to exclude matters which if included would defeat the policy of the legislation and lead itself to absurdity.
The matter is discussed in details, later.
6.7A-1 Penal provisions - Strict interpretation - When it is said that the penal statutes be construed strictly, what is meant is that the court must see that the thing charged is an offence within the plain meaning of the words used and it must not strain words. To put it in other words, the rule of strict construction requires that the language of the statute be so construed that no case be held to fall within it which does not come within the reasonable interpretation of the statute and that in case of doubt the construction favourable to the subject should be preferred. By ‘strict’ interpretation means that the Court will refrain from exercising its creative function to apply the rule announced in the statute, to situations not covered by it, even though such an extension would help to advance the manifest ulterior purpose of the statute. The Court will not extend the law beyond its meaning to take care of the broader legislative purpose.
Maxwell in The Interpretation of Statutes (12th Edn.) says :
“The strict construction of penal statutes seems to manifest itself in four ways : in the requirement of express language for the creation of an offence; in interpreting strictly words setting out the elements of an offence; in requiring the fulfilment to the letter of statutory conditions precedent to the infliction of punishment; and in insisting on the strict observance of technical provisions concerning criminal procedure and jurisdiction.”
In Craies on Statute Law (7th Edn., at p. 529), it is said that penal statutes must be construed strictly. In Tuck v. Priester (1887) 19 QBD 629 which is followed in London & County Commercial Properties Investments v. Attn. Gen.  1 WLR 312 it is stated :
“We must be very careful in construing that section, because it imposes a penalty. If there is a reasonable interpretation, which will avoid the penalty in any particular case, we must adopt that construction. Unless penalties are imposed in clear terms they are not enforceable. Also where various interpretations of a section are admissible it is a strong reason against adopting a particular interpretation if it shall appear that the result would be unreasonable or oppressive.” [Emphasis supplied]
Blackburn, J. in Wills v. Thorp (1875) LR 10 QB 383 :
“When the Legislature imposes a penalty, the words imposing it must be clear and distinct.”
In Craies on Statute Law (7th Edn. at p. 530) referring to U.S. v. Wilberger (1820) 2 Wheat (US) 76, it is observed thus :
“The distinction between a strict construction and a more free one has, no doubt, in modern times almost disappeared, and the question now is, what is the true construction of the statute ? I should say that in a criminal statute you must be quite sure that the offence charged is within the letter of the law. This rule is said to be founded on the tenderness of the law for the rights of individuals, and on the plain principle that the power of punishment is vested in the Legislature, and not in the judicial department for it is the Legislature, not the Court, which is to define a crime and ordain its punishment.”
Francis Bennion’s Statutory Interpretation states that the principle of legal policy known as the principle against doubtful penalization, requires strict construction of penal enactments. Although often referred to as though limited to criminal statutes, the principle in fact extends to any form of detriment.
It is opined at section 265 of the said treatise : It is a principle of legal policy that a person should not be penalized except under clear law. The Court, when considering, in relation to the facts of a case, which of the opposing constructions of the enactment would give effect to the legislative intention, should presume that the legislator intended to observe this principle. It should therefore strive to avoid adopting a construction which penalizes a person where the legislator’s intention to do so is doubtful, or penalizes him in a way which was not made clear. [See Bipinchandra Parshottamdas Patel (Vakil) v. State of Gujarat  4 SCC 642; AIR 2003 SC 2256;  5 ILD 588 (SC)].
But the rule of strict interpretation of penal statutes in any way does not affect the fundamental principle of interpretation, that the primary test which can safely be applied is the language used in the Act and, therefore, when the words are clear and plain the court must accept the express intention of the Legislature.1
The principle that a statute enacting an offence or imposing a penalty is strictly construed is not of universal application which must necessarily be observed in every case (Lalita Jalan v. Bombay Gas Co. Ltd. AIR 2003 SC 3157).
In Murlidhar Meghraj Loya v. State of Maharashtra AIR 1976 SC 1929, Krishna Iyer J., held that any narrow and pedantic, literal and lexical construction of Food Laws is likely to leave loopholes for the offender to sneak out of the meshes of law and should be discouraged and criminal jurisprudence must depart from old canons defeating criminal statutes calculated to protect the public health and the nation’s wealth. The same view was taken in another case under the Prevention of Food Adulteration Act in Kisan Trimbak Kothula v. State of Maharashtra AIR 1977 SC 435. In Superintendent & Remembrancer of Legal Affairs to Government of West Bengal v. Abani Maity AIR 1979 SC 1029, the words may occurring in section 64 of Bengal Excise Act were interpreted to mean ‘must’ and it was held that the Magistrate was bound to order confiscation of the conveyance used in commission of the offence. Similarly, in State of Maharashtra v. Natwarlal Damodardas Soni AIR 1980 SC 593, with reference to section 135 of the Customs Act and rule 126H(2)(d) of Defence of India Rules, the narrow construction given by the High Court was rejected on the ground that they will emasculate these provisions and render them ineffective as a weapon for combating gold smuggling. It was further held that the provisions have to be specially construed in a manner which will suppress the mischief and advance the object which the Legislature had in view.
The principle that a taxing statute must be construed strictly is often mis-understood and unjustifiably extended beyond the legitimate field of its operation. In a taxing statute one has to look merely at what has been clearly stated. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.2 The same dictum could be applied to ‘penalty’. It is true that penalty proceedings are penal in nature and character in the sense that it follows harsh consequences. The true construction of a charging provision including a provision for charging penalty must receive the construction ruled by Rowlatt, J. If a statute intends to impose a penalty or a charge, it must be expressed in clear and unambiguous language. If the provision is reasonably clear, the courts have no jurisdiction to mitigate the harshness. However, if the provision is capable of alternative meanings, the courts will lean in favour of the subject. The sound general rule is that a penalty shall not be considered to be imposed without a plain declaration of the Legislature. One is simply to go on to the Act itself to see that the penalty claimed is that which the Legislature has enacted. No penalty can be levied on any doctrine of ‘substance of the matter’ and a subject is not liable to penalty on ‘supposed spirit of law or by inference or by analogy’. The Government does not tax by analogy but by statute.1
In view of the nature and character of a penal provision, it must be construed strictly regardless of the hardship that such a construction may cause either to the treasury or to the taxpayer. If the subject falls squarely within the letter of the law, he must be penalised, however, inequitable the consequence may appear. If not, the revenue cannot penalise the subject, no matter that such a construction may cause grave prejudice to the revenue. Equitable construction is out of place in respect of penal provision, as such a construction is not permissible in interpreting a charging provision of a taxing statute. The golden rule is that if the provision is capable of two alternative meanings, the court should lean in favour of the subject; if the provision lacks in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect and naturally the subject cannot be penalised.2
Penal provisions have to be construed strictly and not liberally. The court will not extend the law beyond its meaning to take care of the broader legislative purpose. Strictness means merely that court will refrain from exercising its creative functions to apply the rule announced in the statute to situations not covered by it even though such an extension would help advance the manifest ulterior purpose of the statute. Here strictness relates not to the meaning of the statute but to using the statute as a basis of law-making by analogy with it G.M. Mittal Stainless Steels Ltd. v. Nagarjuna Investment Trust Ltd.  90 Comp. Cas. 106 (AP). In Tuck and Sons v. Priester  19 QB 629, Lindley L.J. said (page 645)
“The well-settled rule that the court will not hold that the penalty has been incurred unless the language of the clause which is said to impose it is so clear that the case must necessarily be within it.”
The principle was applied by the House of Lords in London and North Eastern Railway Co. v. Berriman  1 All ER 255, Lord Macmillan, in his opinion said (p. 260) :
“Where penalties for infringement are imposed, it is not legitimate to stretch the language of a rule, however beneficient its intention, beyond the fair and ordinary meaning of its language.”
The same view was expressed by Lord Porter when he opined :
“A man is not to be put in peril upon ambiguity however much or little the purpose of the Act appeals to the predilection of the court.”
The Supreme Court in Tolaram Relumal v. State of Bombay AIR 1954 SC 496, approved the opinion of Lord Macmillan and held (498) :
“It is not competent to the Court to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature.”
The principle of strict interpretation is to be applied in case the provision is quasi-criminal in character. It is not so applicable if it is civil in nature. In Gujarat Travancore Agency v. CIT  177 ITR 455, the Supreme Court had held that a penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in nature, is far different from a penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws. Quoting from Corpus Juris Secundum, volume 85, at page 580, in paragraph 1023, the Supreme Court had held that the element of mens rea was not required to be proved in the proceeding taken by the Income-tax Officer under section 271(1)(a) of the Income-tax Act. Therefore, the nature of the proceeding has to be examined having regard to the context under which the liability is created. If the liability reveals the civil liability only to ensure compliance through a coercive manner, then it is definitely a civil liability without any criminal implication. But as soon as criminal liability is imposed by reason of default in compliance of a particular provision and there is some element of criminality involved in the default, the proceeding can be said to be a quasi-criminal. The presence of the element of criminality is one of the factors that determines the question - CIT v. Capital Electronics (Gariahat)  261 ITR 4 (Cal.). In India Carbon Ltd. v. State of Assam  106 STC 460,  6 SCC 479, the Supreme Court held : “Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf.” This position was re-iterated by a Constitution Bench of the Supreme Court in the case of V.V.S. Sugars v. Government of AP  114 STC 47;  4 SCC 192, in the following words :
“The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no addition and no subtraction, on the ground of the legislative intendment or otherwise.”
Thus, for the purpose of imposition of penal interest, express provision in that regard in a statute must exist CIT v. Anjum M.H. Ghaswala  252 ITR 1 (SC).
6.7A-2 Limitation provisions - Strict interpretation - The law of limitation is not one of substance but one of procedure. The object of prescribing limitation is to put an end to litigation, or to state it in other words, the litigation may attain a finality. No person has got a vested right as to limitation. It may vary from case to case and Act to Act.1
If the Legislature in a special statement prescribes a certain period of limitation for filing a particular application thereunder and provides in clear terms that such period, on sufficient cause being shown, may be extended, in the maximum, only up to a specified time-limit and no further, then the Tribunal concerned has no jurisdiction to treat as within limitation an application filed before it beyond such maximum time.
A perusal of the various sections of the Income-tax Act which contains provisions about limitation shows that these provisions have really touched upon the question of delay in the filing of appeal or application and provide for the situation in different ways at different places. In some cases no provision for condonation of delay has been enacted; in some provisions for condonation on the same line, section 5 of the Limitation Act has been introduced and yet in some others, provision for condonation of delay exists but the period of delay in respect of which condonation can be granted is limited in some way or the other. Thus, under the scheme of the Income-tax Act, the question of condonation of delay has to be decided in the light of the express provisions contained in the section itself and not on general principle incorporated in the provisions of the Limitation Act.1 Whenever a time limit is provided for the making of an application or the preferment of an appeal and the Legislature intends that any delay in the making of such an application or preferment of an appeal may be condoned, it says so expressly. In some situation as in sections 154 and 146 (since deleted) the Legislature does not presumably intend any delay being condoned at all. In other situations, such as in sections 249, 253, 264, a very wide discretion to condone the delay is given to the appropriate Tribunal. In yet other situation, such as in section 256(1), there is a provision for condonation of delay but only up to a specific extent.
Right of appeal is not an inherent right but is one that is conferred by the statute and has to be exercised strictly in conformity with the statutory provisions which create it. If the statute limits the time within which an appeal can be filed, it has to be filed within the period so limited. Any power for condonation of delay in doing so has to be traced either to the provisions of the special statute under consideration or the provisions of the Limitation Act, 1963, but under the Income-tax Act, the delay in making of an application or filing of an appeal for which the period of limitation is prescribed under the Act can be condoned only if there is a specific provision in the Act itself enabling such condonation and that, in the absence of such a specific provision, the general provisions of the Limitation Act cannot be relied upon to seek such condonation. An extreme example of this is found in CIT v. Gupta & Sons (P.) Ltd.2 wherein it was held that an application for setting aside an ex parte assessment filed beyond the period of one month mentioned in section 146 cannot be entertained. Similarly, an application for seeking reference to the High Court has to be preferred before the Tribunal within sixty days of the date of service of the appellate order and there is no provision for condonation of delay. Neither the Tribunal nor has the High Court any power to condone any delay in making such application on any ground whatsoever. Thus, the provisions of section 5 of the Limitation Act cannot be invoked in relation to appeals before the Tribunal.1 Section 29(2) of the Limitation Act cannot have the effect of extending the application of Limitation Act to the Tribunal. The Tribunal is not a court, in terms of the meaning of that expression in section 5 of the Limitation Act.2 However, where the Act provides for condonation of delay, the prayer for condonation of delay has to be treated in a liberal manner so that the appellant is not deprived of having its case adjudicated upon merits, essential for the rendition of justice between the parties. The following principles3 have been laid down for the guidance of the courts and Tribunals—
u Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
u Refusing to condone delay may result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties.
u “Every day’s delay must be explained” does not mean that a pedantic approach should be made. Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational, common sense and pragmatic manner.
u When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay.
u There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk.
u It must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
What emerges out is that a liberal approach should be adopted in condoning the delay so that cause of substantial justice does not suffer. A court or the Tribunal cannot proceed on the presumption that the delay is occasioned deliberately or on account of culpable negligence or on account of mala fides. It would obviously in turn mean that if a delay is caused either deliberately or on account of culpable negligence or on account of mala fides, the litigant will not be entitled to the judicial indulgence.
6.7A-2a LIMITATION BARS THE REMEDY BUT DOES NOT EXTINGUISH THE DEBT - The statute of limitation only bars the remedy but does not extinguish the debt. Section 28 of the Limitation Act provides that when the period limited to a person for instituting a suit for possession of any property has expired, his right to such property is extinguished. But when the property is incapable of possession, as for example, a debt, the section has no application, and lapse of time does not extinguish the right of a person thereto. Under section 25(3) of the Contract Act, a barred debt is a good consideration for a fresh promise to pay the amount. When a debtor makes a payment without any direction as to how it is to be appropriated, the creditor has the right to appropriate it towards a barred debt (vide section 60 of the Contract Act). The creditor is entitled to recover the debt from the surety, even though a suit on it is barred against the principal debtor. And when a creditor has a lien over goods by way of security for a loan, he can enforce the lien for obtaining satisfaction of the debt, even though an action thereon would be time barred.1 The statute of limitation as distinguished from a statute which prescribes conditions precedent to right of action, does not go into the substance of a right, but only into the remedy. It does not extinguish the debt or preclude its enforcement, unless the debtor chooses to avail himself the defence and specially pleads it. An indebtedness does not lose its character as such purely because it is barred. It still affords sufficient consideration to support a promise, and gives a creditor an insurable interest.2 The general rule, at least with respect to debts or money demands, is that a statute of limitation bars, or runs against, the remedy and does not discharge the debt or extinguish or impair the right, obligation or cause of action. A debt subsists, notwithstanding its recovery is barred by limitation. Lapse of time does not affect contractual rights. Such a right is of permanent and indestructible character, unless either from the nature of the contract, or from its terms, it be limited in point of duration. Though the right possesses this permanent character, the remedy arising from its violation is withdrawn after a certain lapse of time, interest reipublicae ut si finis litium. The remedies are barred, though the right is not extinguished. And if the law requires that a debtor should get a discharge before he be compelled to pay, that requirement is not satisfied if he is merely told that in the normal course he is not likely to be exposed to action by the creditor. Thus, if a debt subsists even after it is barred by limitation, the debtor does not get, in law, a discharge therefrom. The modes in which an obligation under a contract becomes discharged are well-defined, and the bar of limitation is not one of them.
In Bombay Dyeing and Mfg. Co. Ltd.’s case3 the Supreme Court held that the Bombay Labour Welfare Fund Act, 1953 did not discharge the employer from his liability to pay the employees unclaimed wages even though the employer makes over the unclaimed wages to the fund constituted under the Act. In Kohinoor Mills Co. Ltd. v. CIT1 the Bombay High Court held that the trading liability in respect of wages which had become due to the labourers and workmen but which were not claimed by them, had not ceased to be trading liability of the assessee by reason of the expiry of the period of three years. In J.K. Chemicals Ltd. v. CIT2, it was held that the employer had the liability to pay the time-barred claims of the employees in respect of wages and there could be no cessation of liability.
In CIT v. Sugauli Sugar Works (P.) Ltd.3 it was held that recovery may have been barred but the liability still exists.
Whether a trading liability that was once incurred ceases to exist has to be decided in the light of the provisions of the statute governing such liability.
6.7A-2b LIMITATION CESSATION OR REMISSION OF STATUTORY LIABILITY - The principle that a statute of limitation bars only the remedy but does not extinguish the debt may not strictly apply in income-tax proceedings in deciding whether there has been cessation or remission of a statutory liability. When the assessee claims a statutory liability as a deduction on “due basis”, such deduction is allowed in computing its total income, even though such liability is not actually paid. This benefit is given to the assessee only because of the provisions of the Income-tax Act. Therefore, when the unclaimed bonus, or wages, or salaries, etc. is no longer shown as liability and the amount representing such unclaimed amount is transferred to the profit and loss account, it cannot be said that there has been no remission or cessation of liability of the assessee under the provisions of the Income-tax Act. If unclaimed amount has been allowed deduction in computing the income of an assessee, and is carried forward from year to year and thereafter written back in the account and no tax is levied thereon, the assessee would be getting a benefit which it was not entitled to. This amount is taxable as remission or cessation of liability. Once it is so taxed and afterwards a dispute is raised or a claim is made regarding unclaimed amount, the assessee would be entitled to get deduction in the year when such dispute would be settled or the payment is made on the ground that a fresh liability has accrued to the assessee.4 In the case of Pioneer Consolidated Co. of India v. CIT5, the Allahabad High Court held that money due by the assessee to its constituents, but not claimed by them and transferred to profit and loss account of the company was the income of the assessee in the accounting year in which it was so transferred. The same view was taken subsequently in Pioneer Consolidated Co. of India Ltd. v. CIT.6 In CIT v. Hides and Leather Products Pvt. Ltd.1, the Gujarat High Court held that omission to take any legal steps against the debtor by the creditor for the recovery of the amount due for a period of nearly five years would lead to the inference that there was cessation of liability.
Thus, the statute under which the effect of liability is determined controls such determination. For any liability on account of wages, salaries or bonus under the Industrial Disputes Act, no bar of limitation comes in the way of the employees as per section 33C(2) of that Act.2
6.7A-2c Proceedings barred by limitation not revived by amending provisions - A fiscal statute more particularly regulating period of limitation must receive strict interpretation. The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to litigants for an indefinite period on future unforeseen events. Proceedings which have attained finality under existing law due to bar of limitation cannot be held to be open for revival unless the amended provision is clearly given retrospective operation so as to upset proceedings, which had been concluded and attained finality - K.M. Sharma v. ITO  254 ITR 772 (SC).
6.7A-3 Exception clause - Strict interpretation - An exception clause must be construed strictly and cannot be interpreted so as to nullify or destroy the main provision.3 An exception has to be confined within its own limits and must be restricted to the matter embraced within it and it is not permissible to extend the meaning of the exception by analogy or by reference to the meaning of the same or similar word in other cases, so as to include cases which cannot be reasonably brought within the purview of the language employed.4 Requirements in fiscal statutes are required to be strictly complied with Excise Superintendent, Warangal District v. Deluxe Bar, Kazipet, Warangal  9 SCC 497.
Truly speaking, liberal and strict construction of an exemption provision is to be invoked at different stages of interpreting it. When the question is whether a subject falls in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject, but once the ambiguity or doubt about the applicability is lifted and the subject falls in the exemption clause, that clause will then have full play and it calls for a wider and liberal construction (see Union of India v. M/s. Wood Papers Ltd. AIR 1991 SC 2049). The choice between a strict and liberal construction arises only in case of a 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 in the plain words of the statute. If the words are plain and directly convey the meaning, there is no need for interpretation - Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes AIR 1992 SC 152. 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 the absurd results of construction should be avoided Collector of Central Excise v. Parle Exports (P.) Ltd. AIR 1989 SC 644.
The administrative authority or the court should not whittle down the plenitude of the exemption or relief granted by the legislation by laying stress on any ambiguity here or there CIT v. Laxmi Metal Industries  236 ITR 130 (All.). A provision for exemption or relief in a fiscal statute should be construed liberally and in favour of the assessee Moolamattom Electricity Board Employee Co-operative Bank Ltd., In re  238 ITR 630 (Ker.), P. Alikunju, M.A. Nazeer Cashew Industries v. CIT  166 ITR 804 (Ker.).
The question of strictness or of liberality of construction arises, where there is real difficulty in ascertaining the meaning of a particular enactment. In a taxing statute, provision establishing an exception to the general rule of taxation is 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.1 It must, however, be borne in mind that absurd result of construction should be avoided.
Provisions relating to exception may be construed strictly against the persons who makes claim for exception. The reasons are :
u The obligation to pay taxes is co-extensive with the protection received. An exception from taxation is a release from this obligation. It is receiving the protection without contributing to the support of the authority which protects.
u The exception laws are in derogation of equal rights and this is an equally important reason for construing them strictly.
u As in Bank of Commerce v. Tennessee2, no implication will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly express intention of taxing power.3
In a case where the assessee claims an exemption, the burden is upon him to establish the case. He cannot be said to have discharged his burden by merely relying upon some rule of presumption for which there is no warrant in law.4
Truly speaking, liberal and strict construction of an exemption provision is 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 the nature of exception is to be construed strictly and against the subject, but once the ambiguity or doubt about the 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 Union of India v. M/s. Wood Papers Ltd. AIR 1991 SC 2049.
6.7A-4 Form or substance of a transaction - Strict interpretation - Literal rule was of crucial importance when statutes were not enacted in such wide and general language as they are done today. Taxation now-a-days is no longer a way for raising only revenues. Since the end of the nineteenth century it has become in conjunction with the social services an increasingly important way of redistribution of income according to need. Peacetime taxation is increasingly directed to social welfare and services and countering economic cynical movements or conjectures as distinct from rudimentary functions of law and order, external defence or serving the King’s pleasure of the seventeenth century.
Taxes are levied by the State in the public interest. No tax is levied for merely enriching the State or for the private use of some private individual. The State represents the common will and is devoted to common good and all powers conferred on the State are for achieving common good. That is equally true of police powers of the State. For carrying out all the activities expected of a welfare State, the State must have funds and to get them, it has to levy taxes. It would, therefore, be indisputable that taxes are levied for the common good and that would indisputably be in the public interest. If such be the philosophy behind the taxing power of the State, could it be said that when by device resorted to, in which success can be achieved with the aid of the court, a subject seeks to defeat tax, such action could ever be in the public interest.1 Justice Chinnappa Reddy in McDowell &Co. Ltd. v. Commercial Tax Officer2 observed that 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 literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.
It was law that a subject is entitled to avoid paying tax if legally he can do so. Even that canon is looked askance in the context of times that we are living in. In construing special legislation, the courts must not countenance anything which would defeat the provisions of a social legislation and the court must even, if necessary, strain the language of the Income-tax Act in order to achieve the purpose which the Legislature had in placing the legislation on the statute book and that the courts not only must disapprove all subterfuges to defeat a social legislation but must act actively to prevent such subterfuges succeeding their object. The trend is set up to place taxation laws at par with welfare legislation. The financial needs of a welfare State, if backed by law, have to be respected and met. It must be recognised that there is behind taxation law as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. The decision of the Supreme Court in McDowell &Co.’s case (supra) is the starting point of the trend that the canon of construing a social legislation would be equally applicable for construing taxation laws and the courts should not encourage subterfuges which aimed at defeating them.
The Indian judiciary has been favouring a literal interpretation of the tax laws closely resembling its attitude to its interpretation of criminal laws. It has been accepted as an established rule that statutes levying taxes be not interpreted as to extend their provisions by implication beyond the clear import of the language used or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt, they are construed in favour of the assessee, and against the revenue. But this does not reflect current approach. Reliance on Legislature history, on the doctrine of the substance, or on the ‘business purpose doctrine’, has now been laid by the judiciary in digging out the intention of the Legislature, rather than for that matter, on the true import of the words and expressions used therein.
And, the Courts have been reading in the rule that in case of ambiguity the benefit of interpretation of statute should favour the subject; no suggestion that law has to be interpreted in favour of a person who is a tax evader.1
In McDowell & Co. Ltd. v. Commercial Tax Officer2, while agreeing with the majority, Chinnappa Reddy, J., has held that : “Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization. But surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster (IRC v. Duke of Westminster 1936 AC 1) and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. . . It is for the Court to take stock to determine the nature of the new and sophisticated legal 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....” It is the duty of the Court to get behind the smoke screen and discover the true state of affairs. The Court is not satisfied with the form and leave alone the substances of the transaction. This view was followed and applied in A.S. Sailaja v. Principal, Kurnool Medical College AIR 1986 AP 209, in considering the law relating to adoption and the constitutional mandate under article 15(a) of the Constitution.
6.7A-4a DOCTRINE OF SUBSTANCE OF THE TRANSACTION - MEANING AND SCOPE - The basic concepts “form” and “substance” require some initial discussion, to understand the ‘doctrine of substance’ overriding form.
“Form” (or legal form) refers to concepts described by terms used in tax statutes, first and foremost terms used to describe the legal conditions of a tax provision. Often these terms are also used in private law statutes to describe private law concepts (Sale, lease, gift, employee, company). Private law means contract law, family law, company law, partnership law, etc. A core question is whether and if so, to what extent such terms used in tax statutes should be understood to mean the same as in private law relations. The issue is how to draw the dividing line between private law concepts and tax law (commercial or economic) concepts. “Form” also refers to transactions carried out in accordance with the legal conditions set in the tax provision in question. This is most obvious in step transactions; for instance, according to the form, there is a sale from A to B and then a sale of the same asset from B to A.
‘Substance’ refers to the economic content of the transaction or legal relation (often referred to as economic substance). A tension between the legal form and the substance of a transaction, gives rise to the concept of “form and substance” of the transaction or legal relation. Such tension may occur when two or more transactions are combined; circular step transactions where transactions bring the taxpayer back approximately where he started (for instance, by sale and immediately buy-back the same object. The economic substance in such a case is negligible or zero); linear step transactions, different from the legal form of transactions, as a sale through an intermediate subject.
Economic content of a transaction may be considered as equivalent to another transaction (for instance sale of shares instead of sale of assets of the company), the transactions, may have different legal (private law) implications.
Concept of legal substance (legal reality) is to be distinguished from the concept of economic substance. The concept of legal substance refers to characterisation which emerges from a close study of rights and obligations in a legal relation. For instance, whether a transaction should be characterised as sale or a lease. The main function of the legal substance is to point out that sham or simulation transactions and wrong legal characterisations by the taxpayer will be disregarded for tax purposes. The “private law terms” (form of the transaction) used in tax laws are interpreted as to their economic meaning which sometimes entail a different scope to them than envisaged by private law. The doctrine of the ‘substance of the transaction’ means that the true legal position is disregarded and a different legal right and liability substituted in the place of the legal right and liability which the parties have created. All that is meant by the doctrine is that having once ascertained the legal rights of the parties, one may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights. It may also mean that one may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties and decide question of taxability and non-taxability upon the footing of rights and liabilities of the parties being different from what in law they are, on the ground that such deeds conceal what the true relation between parties is intended to be.
The Supreme Court in Life Insurance Corpn. of India v. Escorts Ltd.1 observed that merely the form cannot control the Act, the Rules or the directions. As one learned Judge of the Madras High Court was fond of saying “it is the dog that wags the tail and not the tail that wags the dog”. It may be added what the Supreme Court had occasion to say in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thaker2 that the subservience of substance of a transaction to some rigidly prescribed form requires to be meticulously observed, savours of archaic and outmoded jurisprudence. The authorities must give importance to both form and substance (depending on the facts of each and individual case) while administering tax laws. One cannot place over-reliance on the form which the parties have given to their agreement or on the label which they attach to the payment due from one to another. One must have regard to the substance of the matter and, if necessary, tear the veil in order to see whether the true character of a payment is something other than what by a clear device of drafting it is made to appear.3 But if the doctrine of substance means that one can brush aside and disregard the legal rights and liabilities arising under the contract between the parties and decide the question of taxability or otherwise on the fact that the rights and liabilities of the parties are different from what in law they are, then the courts must dissent from such a doctrine.4
When one moves from a single transaction to a series of interdependent transactions designed to produce a given result, it is perfectly legitimate to draw a distinction between the substance and the form of the composite transaction without in any way suggesting that any of the single transactions which make up the whole is other than genuine. The distinction between form and substance is one which can usefully be drawn in determining the tax consequences of composite transaction. The tax consequences of predetermined transactions are to be judged by reference to the substance and not the form of the composite transaction. A pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable, seems to be the language expressing with perfect precision the concepts of steps which are formal rather than substantial.1 Once a basic doctrine of form and substance is accepted, the drawing of precise boundaries will need to be worked out on a case to case basis. The boundaries appear to have been laid generally by the Supreme Court in CWT-II v. Arvind Narottam2 when R.S. Pathak C.J. observed that the decision of McDowell & Co. Ltd. v. CTO3 cannot advance the case of the revenue because the language of the deeds of settlement is plain and admits of no ambiguity, and when Sabyasachi Mukherji, J. said that where the true effect of the construction of the deeds is clear, the appeal to discourage tax avoidance is not a relevant consideration. The transaction is, therefore, not to be looked at from its tax effectiveness, but from the angle whether it conforms to the intent of the enactment. Tax motivation or saving is an irrelevant consideration. This has been substantially clarified in Canada by the recent unanimous Supreme Court’s decision in the case of Stubart Investment Ltd. v. Queen (June 1984)4.
The case deals with the transfer of the profitable business of one company to a related company for the admitted purpose of utilising the latter’s accumulated carry forward loss. The court refused to follow the lead taken by the English courts in W.T. Ramsay Ltd. v. IRC  All. ER 865 (HL), IRC v. Burmah Oil Co. Ltd.  STC 30 (HL) and Furniss v. Dawson  1 All. ER 530 (HL), by rejecting an-across-the-board “business purpose test” as a judicial tool for combating tax avoidance; in Canada, a transaction will be assessed firstly on the basis of its legal substance, i.e., whether it constitutes a sham within the classic legal definition set out in Snook v. London and West Riding Investments Ltd.  1 All. ER 518.
If this test is met, the transaction will be subjected to the relevant statutory anti-avoidance provisions and, finally, the provisions relied on by the taxpayer will be construed in the light of the scope and intent of the Act in order to determine whether the transaction falls within them. Provided it does, however, the transaction will stand, and this is regardless of whether it was solely or principally tax motivated. Although the judicial guidelines laid down by the Supreme Court leave some chinks in the armour of the Duke of Westminster doctrine, they clearly place Canada on a different track from the U.K. and are widely thought to restore a level of certainty to transactions founded on technically sound tax planning.
This view conforms to the views expressed by the Supreme Court of India in CIT v. B.M. Kharwar (discussed below). The Supreme Court in that case had held that the taxing authority is entitled and is indeed bound to determine the legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the ‘substance of the transaction’.
6.7A-4b FORM OR LEGALITY OF THE TRANSACTION - In the past, the courts had been taking legalistic view in deciding cases relating to tax avoidance. The ‘substance or the real motive which led to the culmination of the transaction was altogether ignored and rather its legal basis was preferred irrespective of its social, normal and economic consequences. Wherever the doctrine of substance was preferred, it was done so as to assist the tax-dodgers to avoid payment of taxes, rather than checking tax avoidance, and in that context the view of the courts had been that in revenue cases regard must be had to the substance of the transaction rather than its mere form.1 To define boundary of the Ramsay principle, it is necessary to find out whether the taxpayer’s action constituted tax mitigation or tax avoidance ; the former is acceptable and the latter, unacceptable. Whether steps taken for avoidance of tax are acceptable or unacceptable, depends upon statutory language and its application to the facts of the case. In Norglen Ltd. v. Reeds Rains Prudential Ltd.  2 AC 1, it was observed (p. 13-14)
“If the question is whether a given transaction is such as to attract a statutory benefit, such as grant or assistance like legal aid, or a statutory burden, such as income-tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either Work-Inland Revenue Commrs. v. Duke of Westminster  AC 1 or they do not Furniss v. Dawson  AC 474. If they do not work, the reason, as my noble and learned friend, Lord Steyn, pointed out in Inland Revenue Commrs. v. McGuckim  1 WLR 991, 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax, actually comes within it. It is not that the statute has a penumbral spirit, which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes.”
Unacceptable tax avoidance typically involves the creation of complex artificial structures by which as though by wave of the magic wand, the taxpayer conjures out of the air a loss, or gain, or expenditure or whatever it may be, which otherwise would never have existed. Lord Tampleman said in Ensign Tankers Leasing Ltd. v. Stokes (Inspector of Taxes)  1 AC 655, 676D : “the taxpayer is entitled to any reduction in tax which Parliament has attached to each transaction”, but not where, as in IRC v. McGuckim  1 WLR 991, a taxpayer was on the point of incurring a tax liability and took an artificial step to avoid the liability.
There is limit up to which the ‘doctrine of substance’ could go. It is not clear where its peripheral limits may be. It is elusive and may sometimes encompass situations where tax planning within the framework of law could be defined. There is a constitutional limit on the extent to which the doctrine of substance over the form may be applied. Article 265 of the Constitution declares that no taxes can be levied and collected except by authority of law. Application of the doctrine of substance indiscriminately, without limit, may be violative of the Constitution. The taxpayer may take advantage of the provision of law, the formulation of which is obscure or incomplete or very complex, so that a person can reduce the liability while remaining within the limits of law. When law permits payment of tax at a lower amount than the amount calculated according to revenue’s interpretation of the law, asking the assessee to pay the higher amount on the basis of the doctrine of substance would be unconstitutional. Although there have been conflicting decisions of the court, the majority takes the view that the principle that the tax can only be imposed by statute, places severe limitation on the use of the judicial doctrines or techniques to override the form of a transaction and impose tax. Article 265 impliedly requires that acts undertaken to avoid taxation may not be ignored in the absence of a statutory provision authorising this to be done. On this view of law, it is possible that the doctrine of substance over form may be accepted as an interpretative principle which falls within the constitutional limitations, but the complete denial of efficacy to a transaction, for whatsoever reason, exceeds constitutional limits. Trend of recent decisions reflects a unique situation of limiting a taxpayer’s right to arrange and manage his affairs. The Courts have been upholding the revenue’s right to disregard the consequences of transaction even in respect of those which are genuinely undertaken if their purpose is to avoid tax that would otherwise be applicable, by applying the anti-avoidance tools, whether they are legislatively provided or judicially developed. About the form or legality of the transaction, discussion is contained in CIT v. B.M. Kharwar  72 ITR 603 (SC). The facts are that the assessee was a firm which carried on business of manufacturing, purchasing and selling cloth. The assessee-firm closed its manufacturing side of the business and transferred its machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the partnership. In the assessment year 1959-60, the ITO brought to tax under section 10(2)(vii), proviso (ii) of the Indian Income-tax Act, 1922, being equivalent to section 41(2) of the 1961 Act, the sum of Rs. 40,743 being the excess realized over the written down value of the machinery. But the Income-tax Appellate Tribunal held, relying upon the decisions in CIT v. Sir Homi Mehta’s Executors  28 ITR 928 (Bom.), Rogers & Co. v. CIT  34 ITR 336 (Bom.)and CIT v. Mugneeram Bangur & Co.  47 ITR 565 (Cal.), that the firm transferred the machinery only with a view to carry on the business as a company rather than as a firm, and by that transfer no profit in a business sense could be deemed to have resulted to the firm. On these facts, the Supreme Court held that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and proceed on what they regard as ‘the substance of the matter’. The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the ‘substance of the transaction’. That principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence—oral and documentary—and the conduct of the parties to the transaction. The Supreme Court held that the observations in Kikabhai Premchand v. CIT  24 ITR 506 (SC), to the effect that in revenue cases regard must be had to the substance of the transaction rather than its mere form could not be read as throwing any doubt on the principle that the true legal relations arising from a transaction alone determine the taxability of a receipt arising from the transaction. The observation was casual and it was not necessary for the purpose of the case. As regards the liability to tax of the transaction, it was held that where machinery of a factory belonging to a firm was transferred to a private limited company, assuming that thereby re-adjustment of the business relationship was intended, the liability to be taxed under the second proviso to section 10(2)(vii) of the 1922 Act, in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law, the transfer of the machinery was by the firm to the company, and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. If the transaction resulted in excess realization over the written down value of the machinery to the firm, the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by the interest in the shares of the company which owned the machinery. It was also held that by virtue of the amendment made in the second proviso to section 10(2)(vii), even under a realization sale, the excess over the written down value, not exceeding the difference between the original cost and the written down value, was liable to be brought to tax. The Supreme Court in CIT v. B.M. Kharwar1, held that it is now well-settled that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as ‘substance of the matter’. The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the ‘substance of the transaction’. This principle was held to apply alike to cases in which the legal relation is recorded in a formal document and to cases where it has to be gathered from evidence - oral or documentary - and conduct of the parties to the transaction. The principle was followed by the Supreme Court in CIT v. Gillanders Arbuthnot &Co.1 The Supreme Court exercised the right of unravelling a colourable device for tax evasion in the case of Juggilal Kamlapat v. CIT2.
The Courts have upheld the revenue’s right to disregard transaction and look upon its substance, if it is undertaken as an anti-avoidance tool. It is, therefore, the duty of a court while administering any tax law to give importance both to the form and substance of a transaction. It is quite possible that when a transaction is entered into in one form known to law, the amount received under that transaction may attract liability under the Act and if it is entered into in another form, which is equally lawful, it may not attract such liability. But when the assessee has adopted the latter one, it would not be open to the court to hold him liable for tax on the ground that in substance the transaction is one which resulted in gain subject to tax. In matters of this kind the court cannot ignore the form altogether as also the legal effect of the proceedings in Court.3
6.7A-4c DOCTRINE OF ‘FISCAL NULLITY’ - The literal approach of interpretation of a tax statute saw its hey-day in IRC v. Duke of Westminster4. Rejecting the substance approach, it was held that every taxpayer is entitled to arrange his affairs so that tax attaching under the statute is less than it otherwise would be. The blow to this doctrine was struck by Ramsay’s case5 and Furniss v. Dawson6, when another principle known as ‘fiscal nullity’ was propounded. The principle allows the revenue authorities to look at the substance of the taxpayer’s situation in determining the liability to tax. In a series of transactions with legitimate commercial objective if another transaction is introduced with the sole objective of tax avoidance, the inserted steps are disregarded for fiscal purposes taxing the avoider on the basis of the end result. This is what is known as ‘fiscal nullity’.
The ‘fiscal nullity’ doctrine can be invoked in addition to general anti-avoidance provisions. The upshot of this is that, if a transaction is not a sham for masking general arguments of attack on the taxpayers’ rights to rearrange his affairs in a way that he pays the least amount of tax, the revenue can invoke the doctrine of ‘fiscal nullity’.
The Courts, till recently, have been adopting approach of approving an assessee’s right to transact his business or to enter into a series of transactions in such a manner so as to save taxes. Lord Atkin in IRC v. Duke of Westminster1 said that though it is not denied, at any rate it is incontrovertible, that the deeds were brought into existence as a device by which the taxpayer might avoid some of the burden of tax. The word ‘device’ is not used in any sinister sense, for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right to dispose of his capital and income so as to attract upon himself the least amount of tax. Though the courts favoured the doctrine that in taxation cases the subject was to be taxed in accordance with the substance of the transaction, as also the doctrine that the transaction be read to conform to the spirit of the statute, they had been holding that the subject is not taxable by inference or by analogy to the facts and circumstances of his case. The Judges have been sounding, from time-to-time, cautionary notes more reflective of their personal dislike of tax avoidance scheme than the legal ineffectiveness of the techniques. Viscount Simon in Latilla v. IRC2 said that there is, of course, no doubt that they were within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship.
However, in 1978, the obstinacy of the English Judges in upholding an assessee’s right to arrange his affairs as to pay least taxes or his right to claim expenses on the basis of the doctrine of ‘business purposes test’, yielded to interpretation of transactions as not to encourage tax avoidance. In Floor v. Davis3, Eveleigh, J. held, in a dissenting judgment, that where a series of transactions were carried out for the purpose of avoiding what would otherwise have been the tax applicable to a single transaction, the fact that each step was genuine in the series of the transactions did not prevent the court from regarding the series to be a single transaction and to impose tax on that basis. This approach was a departure from the traditional approach of English courts. The majority of the Judges in that case did not favour the view of Eveleigh, J., but were subsequently overruled in Ramsay v. CIR4 and Furniss v. Dawson5 (which are discussed in the following paras).
The doctrine “that every man is entitled if he can to order his affairs so that the tax attracting under the appropriate Acts is less than it otherwise would be” as propounded by Lord Tomlin in IRC v. Duke of Westminster  AC 1, and followed in India in CIT v. A. Raman and Co.  67 ITR 11 (SC), has thus been given a deserving and befitting burial in W.T. Ramsay Ltd. v. IRC  1 All ER 865, IRC v. Burmah Oil Co. Ltd.  STC 30. The Duke of Westminster doctrine was, however, resurrected. The Supreme Court in Union of India v. Azadi Bachao Andolan  263 ITR 706 observed : “With respect, therefore, we are unable to agree with the view that Duke of Westminster’s case (1936) AC 1 (HL), 19 TC 490 is dead, or that its ghost has been exercised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster’s case (1936) AC 1 (HL), 19 TC 490 is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah J. in CIT v. Raman  67 ITR 11 (SC) are very much relevant even today.” In India Desai J. of the Gujarat High Court in Wood Polymer Ltd. In re/Bengal Hotels (P) Ltd., In re  47 Comp. Cas. 597 refused to accord sanction to the amalgamation of companies as that would lead to avoidance of tax. The departure was completed by the Supreme Court in the case of McDowell &Co. Ltd. v. CTO  154 ITR 148 (SC)wherein it was observed that “we think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done”. The Gujarat High Court in CIT v. Smt. Minal Rameshchandra  30 Taxman 282, stressed that in the context of developing economy of fast changing socio-economic conditions of people even the words occurring in a statute are required to be interpreted differently. And the Kerala High Court declares in Neroth Oil Mills Co. Ltd. v. CIT  33 Taxman 249 that the traditional rules governing the construction of taxing statutes and their application to the affairs of the taxpayers may still be applicable but not to the cases involving tax avoidance or tax deferment schemes. This trend of judicial approach seems to be in line with the very purpose of the law as declared by the Supreme Court in S.P. Gupta v. President of India AIR 1982 SC 149 ; that the law is intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate. However, the Supreme Court in Azadi Bachao Andolan’s case observed that despite the hiccups of the McDowell’s case  154 ITR 148 (SC), this law has remained the same as before, that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests.
6.7A-4d RAMSAY PRINCIPLE - A PRINCIPLE OF CONSTRUCTION - Ramsay principle has reference to the decision in WT Ramsay Ltd. v. Inland Revenue Commrs.  AC 300. The House of Lords highlighted the court’s duty to determine the legal nature of the transactions and then relate them to the fiscal legislation, when confronted with new and sophisticated tax avoidance devices.
The Ramsay case was concerned with a tax avoidance scheme designed to manufacture a capital loss to set off against a capital gain. The question before the House was whether a transaction by which the taxpayer company acquired certain shares for £ 185,034 and almost immediately sold for £ 9.387, gave rise to a “loss accruing on disposal of an asset”. Both the acquisition and sale of shares formed part of the pre-planned series of transactions by which the alleged loss was exactly balanced by a gain which was alleged to fall within an exemption from the charge. The aggregate effect was that the taxpayer suffered no loss except the payment of a fee to the promoters of the scheme. It was not disputed that the transaction included a genuine purchase and sale. The taxpayer said that that was the end of the matter. To look at the transaction as a whole would be to commit the heresy condemned by Lord Tomlin in Inland Revenue Commrs. v. Duke of Westminster  AC 1 as the “doctrine that the court may ignore the legal position and regard what is called ‘the substance of the matter’. “At first, the revenue agreed. In the House of Lords, it was, however, argued that no loss within the meaning of the Act had accrued at all. The House accepted the argument. Lord Wilbeforce said, at page 323, that while Tomlin statement was a “cardinal principle”, it did not require a court to “look at a document or a transaction in blinkers”. At page 326, he said :
“To say that a loss (or gain) which appears to arise at one stage in an indivisible process and which is intended to be and is cancelled out by a later stage, so that at the end of what was brought as, and planned as, a single continuous operation, there is no such loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function.”
Lord Wliberforce was construing the words “disposal” and “loss” to refer to commercial concepts and was giving the statutory concepts of “disposal” and “loss” a commercial meaning. The new principle of construction was a recognition that the statutory language was intended to refer to commercial concepts, so that in the case of such a “disposal”, the court was required to take a view of the facts which transcended the juristic individuality of the various parts of a pre-planned series of transactions. The dictum that the courts cannot ignore “the legal position” and have regard to “the substance of the matter” as propounded by Lord Tomlin in Duke of Westminster’s case can be reconciled with Ramsay’s if we regard that the statutory words may refer to (1) legally defined concept or (2) commercial concept. If the legal position is that tax is imposed by reference to legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to business “substance” of the matter is not to ignore the legal position but to give effect to it. In case of commercial concept, the steps may be real but their effect could be that they are not what the statute means (see Halvering v. Gregory  69 F 2d 809). In Ramsay, what the House of Lord did was to highlight that, when confronted with a new and sophisticated tax avoidance scheme, the court’s duty is to determine the legal nature of the transaction and then relate to the fiscal legislation.
The Ramsay case brought out three points in particular - see Macniven H.M. Inspector of Taxes v. Westmoreland Investments Ltd.  2 WLR 337 (HL);  255 ITR 612, Lord Nicholls :
- First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. If that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. Courts are entitled to look at the pre-arranged tax avoidance scheme as a whole. It matters not whether the parties’ intention to proceed with a scheme through all the stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force.
- Second, this is not to treat a transaction, or any step in a transaction, as though it were a “sham”, meaning thereby, that it was intended to give the appearance of having a legal effect different from the actual legal effect intended by the parties : see the classic definition of Diplock LJ in Snook v. London and West Riding Investments Ltd.  2 QB 786, 802. Nor is this to go behind a transaction for some supposed underlying substance. What this does is to enable the court to look at a document or transaction in the context to which it properly belongs.
- Third, having identified the legal nature of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating loss without the taxpayer suffering any financial detriment, is this artificial loss within the meaning of the relevant statutory provision ?
What the Ramsay case decided was that a loss which comes and goes as part of pre-planned, single continuous operation “is not a loss (or gain) as the legislation is dealing with”. This is the ratio of the decision as per Lord Fraser in Inland Revenue Commrs. v. Burmah Oil Co. Ltd.  STC 30. Ramsay is a principle of construction IRC v. McGuckian  1 WLR 991. It could be formulated as follows :
When a court is asked—
(i) to apply a statutory provision on which a taxpayer relies for the sake of establishing some tax advantage in circumstances
(ii) where the transaction said to give rise to the tax advantage is, or forms part of, some pre-ordained, circular, self-cancelling transaction
(iii) which transaction though accepted as perfectly genuine (i.e., not impeached as sham) was undertaken for no commercial purpose other than the obtaining of the tax advantage in question, then (unless there is something in the statutory provisions concerned to indicate that this rule should not be applied) there is a rule of construction that the condition laid down in the statute for obtaining the tax advantage has not been satisfied.
Lord Hoffmann, however, said in Macniven v. Westmoreland (supra), that this is not a principle of construction as there is only one principle, namely, to ascertain what Parliament meant by using a language of the statute and all “other principles” can be no more than guides which the past judges have put forward, some more helpful or insightful than others, to assist the task of interpretation. According to him, the above formulation cannot be called a principle of construction except in the sense some paramount provision subject to which everything else must be read, like section 2(2) of European Communities Act, 1972.
Ramsay principle brought out commercial concepts and legally defined concepts. By the use of such expressions as “disposal”, “loss”, “profits and gains”, the statute refers to “commercial concept”. In Sun Insurance Office v. Clark  AC 443, 455, Viscount Haldane said: “It is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the tests applied in ordinary business.”
6.7A-4da Ramsay principle - Purposive construction - In Macniven H.M. Inspector of Taxes v. Westmoreland Investments Ltd.  2 WLR 337;  255 ITR 612 (HL), it was held:
- that statutory construction involved ascertaining what Parliament had meant by using the language of the statute, and all other principles of construction were no more than guides to assist in that task;
- that first step in the process was the identification of the concept to which the statute referred;
- that if the statutory language was construed as referring to commercial concept and steps which had no commercial purpose had been artificially inserted for tax purposes into a composite transaction, they should be disregarded for the purposes of applying the relevant concept;
- that, however, a transaction within the statutory language, construed in the correct legal or commercial sense, could not be disregarded merely because entered into solely for tax purposes.
In IRC v. John Lewis Properties PLC  1 WLR 35 (Ch. D) ;  261 ITR 313; it was observed:
“In Macniven v. Westmoreland Investments Ltd.  2 WLR 337 Lord Hoffman held that the principle laid down in WT Ramsay Ltd. v. Inland Revenue Commrs.  AC 300 and succeeding cases requires the court as the first step in a purposive construction of the statute in question to identify the concept to which the statute refers and to determine whether the concept is a legally defined concept or a commercial concept, i.e., “a concept which Parliament intended to be given a commercial meaning” : see  2 WLR 377, 393. If the concept is a legally defined concept (e.g., “payment” of interest), the concept cannot (in the absence of expression of some statutory policy to the contrary) be given a wider or narrower meaning so as to disregard or cancel the effect of transactions answering that description because they have no commercial purpose other than to avoid tax. But, if the concept is commercial concept (e.g., “disposal” or “loss”) and, accordingly, the statute applies the test of ordinary business, the court is required to look beyond the juristic individuality of component parts of a transaction: steps which have no commercial purpose but have been artificially inserted for tax purposes into composite transaction will not affect the answer to the question of statutory construction (e.g., whether there has been profit or loss).”
The Supreme Court in Union of India v. Azadi Bachao Andolan  263 ITR 706 observed that if the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it is not permissible for the court to treat the intervening legal step as non est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests.
6.7A-4db Ramsay principle - Artificiality is essential element - The essential element of a transaction to which the Ramsay principle is applicable is that it should be artificial. The requirement that there must be artificiality, and the importance of distinguishment between the real world and the world of make-belief; between a real gain (or loss) and a contrived and unrealistic gain (or loss) have been stressed in a number of judgments where the application of the Ramsay principle has been considered—
- “The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd. v. IRC  AC 885, it is a tax gain (or I might have added gains less losses), it is not a tax on arithmetical differences” Lord Wilberforce in W.T. Ramsay v. IRC  AC 300;
- “If the argument of Burmah is right, this would be one more case in which the taxpayer had achieved the apparently magic result of creating a tax loss that was not a real loss. In my opinion, they have not achieved that result because, in the same way as in Ramsay’s case, when the scheme was carried through to completion, there was no real loss and no loss in the sense contemplated by the legislation” Lord Fraser in IRC v. Burmah Oil Co. Ltd.  STC 30;
- “What the courts have established, however, is that certain tax avoidance schemes, although not sham in the sense of not being what they purport to be, are nevertheless unacceptable because they embrace transactions which are not ‘real’ disposals or do not generate ‘real’ losses (or gains) and so are held not to attract certain fiscal consequences which would normally be attracted to disposals or losses (or gains) under the relevant statute.” Lord Goff in Craven v. White (Stephen)  AC 398 ;  183 ITR 216 (HL);
- “Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed. These structures are designed to achieve an adventitious tax benefit for the taxpayer, and in truth are no more than raids on the public funds at the expense of the general body of taxpayers, and such are unacceptable” Lord Goff in Ensign Tankers (Leasing) Ltd. v. Stokes  1 AC 655 ;  209 ITR 231 (HL);
- “The statutory provisions are to be applied to the substance of the transaction, disregarding artificial steps in the composite transactions or series of transactions inserted only for the purpose of seeking to obtain a tax advantage. The question is not what was the effect of the insertion of the artificial steps but what was its purpose. Having identified the artificial steps inserted with that purpose and disregarded them, then what is left is to apply the statutory language of the taxing Act to the transaction carried through stripped of its artificial steps.” Lord Browe - Wilkinson in IRC v. McGuckian  1 WLR 991;
- “41. Thus in saying that the transactions in the Ramsay case were not sham transactions, one is accepting the juristic categorisation of the transactions as individual and discrete and saying that each of them involved no pretence. They were intended to do precisely what they purported to do. They had a legal reality. But in saying that they did not constitute a “real” disposal giving rise to a “real” loss, one is rejecting the juristic categorisation as not being necessarily determinative for the purposes of the statutory concepts of “disposals” and “loss” as properly interpreted. The contrast here is with a commercial meaning of these concepts. And in saying that the income-tax legislation was intended to operate “in the real world”, one is again referring to the commercial context which should influence the construction of the concepts used by Parliament.” Lord Hoffmann in Macniven v. Westmoreland Investments  2 WLR 377 ;  255 ITR 612 (HL).
6.7A-4dc Ramsay Principle - two types of cases - Ramsay principle requires three features: one, pre-ordained series of transactions ; two, steps inserted into that series of transactions; three, the inserted steps have no commercial purpose apart from the avoidance of a liability to tax, which in the absence of particular steps would have been payable. Ramsay principle has been applied in two types of cases of—
(1) self cancelling transactions (circular transactions);
(2) transaction - division (linear transactions).
In the first type of scheme, the inserted steps involve payments of money in the course of the scheme which are self cancelling. The courts in such cases have considered the tax avoidance scheme as a whole in which the device of self-cancelling or circulating payments has been held to be ineffective for the purposes of tax sought to be avoided. W.T. Ramsay v. IRC  AC 300 is the leading example (discussed above). It was followed in IRC v. Burmah Oil Co. Ltd.  54 STC 200; Moodie v. IRC  1 WLR 266.
In the second type, a single transaction is carried to effect by two or more transactions for no business purpose other than the avoidance or postponement of a liability to tax which otherwise would have been payable. The courts have considered the tax avoidance scheme as a whole in which the device of dividing one transaction into two or more transactions was held to be ineffective for the purpose of tax sought to be avoided. Furniss v. Dawson  AC 474 is an illustrative example (discussed below). It was followed in Ensign Tankers (Leasing) Ltd. v. Stokes (Inspector of Taxes)  AC 655 ;  209 ITR 231 (HL).
6.7A-4e FURNISS v. DAWSON - INSERTED STEPS DISREGARDED FOR FISCAL PURPOSES - In Furniss v. Dawson  AC 474, the Ramsay construction (which in the Ramsay case itself and in the Burmah case had been used to interpret the concept of a disposal giving rise to a loss) was deployed for a different purpose. The difference is occasionally described by saying that whereas Ramsay was a circular transaction, Furniss was a linear transaction. In that case, the Dawsons wanted to sell their shares in the family business to a company called Wood Bestow Holdings Ltd. But they wanted to postpone the payment of capital gains tax. So they formed an Isle of Man company (“Greenjacket”) and exchanged their shares in the company owning the business of an allotment of its shares in Greenjacket. The advantage of this transaction was that by paragraph 6 of Schedule to the Finance Act, 1965, a disposal of shares to Greenjacket for an allotment of shares of its shares was treated as reorganisation of share capital and by paragraph 4 of the same Schedule, a disposal of shares forming part of reorganisation was not treated as a disposal for the purposes of capital gains tax. By a preplanned transaction, Greenjacket then sold the shares to Wood Bestow for cash. But the revenue claimed that there had been no “real” disposal to Greenjacket. It was merely a preplanned stage in a disposal from the Dawsons to Wood Bestow and fell outside the exception for a reorganisation of share capital.
The question in the Ramsay case had been whether there was a disposal giving rise to a loss, the question in the Furniss case was whether the disposal had been to one person rather than another. But the Ramsay construction (i.e., a commercial characterisation of the relevant concept) could be equally applied to latter question. Greenjacket was merely an artificially introduced intermediate party which was never intended to own the shares for more than the instant. Commercially, therefore, the transaction was a transfer by the Dawsons to West Bestow in exchange for payment to Greenjacket. In answering the statutory question : “To whom was the disposal made?”, the fact that the shares were routed through Greenjacket was irrelevant. The consequence of adopting this construction was spelt out by Lord Brightman. The conditions under which the commercial nature of the transaction as a whole would transcend the juristic individuality of its parts were stated to be as follows:
- First, there must be pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e., business) and;
- Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax, not “no business effect”.
If these two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.
In the Furniss case, both ingredients existed; first, the composite transaction achieved by a sale of shares in the operating companies by the Dawsons to Wood Bestow; it did not in Ramsay. The second, disposal of shares to Greenjacket was a step inserted for the purpose of avoidance of tax liability and no other.
6.7A-4f RAMSAY PRINCIPLE - LIMITATIONS - The limitations of Ramsay principle arises out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely, to identify the concept to which the statute refers. Many expressions used in legislation can be construed as referring to commercial concepts. Taxing statutes often refer to purely legal concepts. They use expressions which commercial man if asked what they meant, would say “You had better ask a lawyer”. If a transaction falls within a legal description as defined in the statute, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept. One cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Thus, in two of the cases considered in Craven v. White Stephen  AC 398;  183 ITR 216 (HL), the House of Lords was unanimously of the view that although there had been an initial disposal with no commercial purpose, except to lay the ground for an avoidance of tax if and when there should a further disposal of a third party, the transactions were so separate in fact as well as in law as to make it impossible to treat them, even in a commercial sense, as a single disposal to the third party. The lapse of time between the two transactions, the lack of contemplation of any specific later disposal at the time of the first transaction, were commercial realities. The division of opinion in the House over how the third transaction should be categorised did not detract from the agreement that it had to fall within the statutory language.
Likewise, the use of business concepts like “income” and “capital” may give the taxpayer a choice of structuring a commercial transaction so as to come within one concept or the other. As Lord Greene MR said in IRC v. Wesleyan and General Assurance Society  2 All ER 749 :
“In dealing with income-tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other is method adopted, tax will not be payable. It is sufficient to refer to the common case where property is sold for a lump sum payable in instalments. If a piece of property is sold for $ 1,000 and the purchase price is to be paid in ten instalments of $ 100 each, no tax is payable. If, on the other hand, the property is sold in consideration of an annuity of $100 a year for ten years, tax is payable. The net result, from the financial point of view, is precisely the same in each case, but one method of achieving it attracts tax and the other method does not.”
Lord Hoffmann held as follows, in Macniven v. Westmoreland Investments (supra) :
“49. For present purposes, however, the point I wish to emphasise is that Lord Brightman’s formulation in the Furniss case, like Lord Diplock’s formulation in the Burmah’s case, is not a principle of construction. It is a statement of the consequences of giving commercial construction to a fiscal concept. Before one can apply Lord Brightman’s words, it is first necessary to construe the statutory language and decide it refers to a concept which Parliament intended to be given a commercial meaning capable of transcending the juristic individuality of its component part. But there are many terms in the tax legislation which cannot be construed in this way. They refer to purely legal concepts which have no broader commercial meaning. In such cases, the Ramsay principle can have no application......”
The Gauhati High Court held in CIT v. George Williamson (Assam) Ltd.  136 Taxman 52, following Supreme Court in Union of India v. Azadi Bachao Andolan  263 ITR 706, that the principles laid down in IRC v. Duke of Westminster  AC 1 (HL) are still applicable and it is open for the assessees to arrange their affairs in such a manner that it would not attract this tax liability, so far, it can be managed within the permissible limits of law. The assessees can very well manage their tax affairs so that the tax attracted in the transaction is less and would not fall outside the four corners of the law applicable at the relevant time. The tax management is permissible, if the law authorises so.
6.7A-4g DOCTRINE OF BUSINESS PURPOSE TEST AND TAX AVOIDANCE - The traditional approach of maintaining an assessee’s right to arrange his fiscal affairs in a manner as to enable him to reduce tax burden as also his entitlement to claim expenditure as deduction for the computation of his income, on the basis of the doctrine of ‘business purpose test’ has been eroded considerably during recent years. The application of the doctrines of the form of the transaction and the ‘business purpose test’ may border on tax evasion and may justify imposition of penalty, and in egregious cases, criminal prosecution. The ‘business purpose test’ is so important that it could be described as a technique of statutory interpretation, difficult to apply but essential to Indian tax system as it now operates.
The paramountcy of business expediency and of the expenditure being incidental to assessee’s business/trades should prevail over all considerations, is a concept no longer acceptable to the courts. Expenditure incurred against public policy is not allowed deduction irrespective of how much such spending could be justified on the doctrine of ‘business purpose test’. A contention was raised before the Andhra Pradesh High Court in CIT v. Kodandarama & Co.1 that where an assessee incurs an expenditure in order to promote and advance the interest of the business and shares his prosperity with the society, the court should give up doctrinaire approach and take liberal attitude in directing deduction. The learned Judges rejected the contention by observing that if “‘doctrinaire approach’ means adherence to law, we are happy to be doctrinaire; and if the expression ‘liberal attitude’ means ignoring the law and public interest, we would rather shun such a misguided ‘liberal approach’.”
6.7A-5 Avoidance is regarded as evasion of taxes - Since the interpretation of the fiscal laws has to conform with the social purpose as Justice Chinnappa Reddy in McDowell case has held that the tax laws are social laws, the question arises what could be taken to mean avoidance of tax; whether it means non-payment of taxes through the use of a device, which could have fallen upon a person or whether lessening the burden of tax because the provision in the Act so provides. The shortest definition of tax avoidance is: the art of dodging tax without breaking the law. The dividing line between evasion and avoidance is tenuous and even this line has almost become indistinct. Nowadays what is avoided is regarded under certain circumstances as evaded. There has been a change in the judicial attitude to tax avoidance devices. The tax avoidance is no longer condoned or looked upon with sympathy.
6.7A-5a CIRCUMSTANCES WHERE EVASION COULD BE SAID TO HAVE TAKEN PLACE - In determining whether the transactions are genuine, the courts have to consider all surrounding circumstances, including the economic purpose of the transaction and the question whether or not there is a tax avoidance motive behind it. The acts which dissimulate the true nature of a contract or of an agreement under the appearance of provisions giving rise to or disguising either a realization of a transfer of profits or income permitting the avoidance, either wholly or partly of payment of taxes, are not valid against the tax authorities. In order to set aside the acts of an assessee as being ineffective, such acts should have a fictitious character, or, if not, they should have no other motive than to avoid or alleviate the tax burden which the assessee, if he had not carried out these acts, would normally have had to pay having regard to his actual situation and activity. The concept of economic approach to the fact is a rule of interpretation available to be used by the taxing authorities as a means to counteract tax avoidance. The circumstances which could lead to inference of tax avoidance in a transaction are :
u There is no economic or other significant reason which could justify the transaction
u The existence of the intent to avoid taxes can be clearly established
u The transaction or the acts leading to an occurrence are unusual or artificial and give rise to a situation where the letter of the tax regulation does not apply but differs so little from a situation provided for under the regulations that the purpose and the spirit of the regulations would be frustrated if it were to be declared inapplicable.
u Grounds exist for holding that the choice has been improperly made with the sole object of saving taxes which would have been done had the legal relation been arranged in an appropriate manner; and the procedure chosen would effectively result in significant saving of tax insofar as it was allowed by the revenue authorities.
The proposition cannot be accepted in its entirety that a transaction may be disregarded for tax purposes solely on the basis that it is entered into without any bona fide business purposes. Strict business purpose test in certain circumstances would run counter to the apparent legislative intent which in the modern taxing statutes, may have a dual aspect. Income-tax legislation is no longer a simple device to raise revenue to meet the cost of governing the community. It is also employed to attain selective economic policy objectives. The statute is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to a taxpayer to undertake or redirect a specific activity. Without the inducement offered by the statute, the activity may not be undertaken by the taxpayer for whom the induced action would otherwise have no bona fide business purpose. Thus, by imposing a positive requirement that there be such a bona fide business purpose, the taxpayer might be barred from undertaking the very activity Legislature wishes to encourage. At minimum, a business purpose requirement might inhibit the taxpayer from undertaking a specified activity which the Parliament has invited in order to attain economic and perhaps social policy goals. Indeed, where the Parliament is successful, a taxpayer is induced to act in a certain manner by virtue of incentives prescribed by the legislation. It is at least arguable that the taxpayer is attracted to those incentives for the valid business purpose of reducing his cash outlay for taxes to conserve his resources for other business activities.
6.7A-5b EVASION OF TAX - GUIDELINES FOR FINDING out - The broad guidelines, gathered from various pronouncements of the courts to determine whether the transaction could be taken as attempt at evasion of tax are :
u Where facts reveal no bona fide purpose for the transaction
u The transaction is legally ineffective or incomplete
u The transaction is benami or sham
u Any attempt made retroactively to revise or alter the characterization of income or other rights and obligations after they have already been created
u Blatant transactions designed to create the appearance of offsetting the advantages and benefits conferred under the Act. The ‘object and spirit’ of the allowance or benefit provision is defeated by procedures blatantly adopted to synthesize a loss, a delay or other tax saving devices, though such actions may not attain the height of artificiality.
u The form of law chosen by the parties appears unusual, inappropriate or strange, and in any case unadopted to the economic circumstances
u Grounds exist for holding that this choice has been improperly made with the sole object of saving taxes which would have been due had the legal relations been arranged in any appropriate manner
u The procedure chosen would effectively result in notable saving of tax insofar as it is allowed by the taxation authorities.
The tax authorities may presume that tax avoidance is intended if the taxpayer chooses to carry out a transaction which may be regarded unusual. Legitimate avoidance occurs when the taxpayer takes advantages of a provision of the law, the formulation of which is obscure or incomplete or very complex, so that he can reduce or avoid his liability while remaining within the limits of the law. If, however, the taxpayer is acting against the will of the Legislature, even if he remains within the literal interpretation of the law, he could be said to be evading the tax.
6.7A-5c PRE-ORDAINED SERIES OF TRANSACTIONS - The revenue has been relying heavily upon the decision of the Supreme Court in McDowell and of the House of Lords in Furniss v. Dawson in rejecting an assessee’s all attempts at saving the tax if he is entitled to do so legitimately on the basis that the transactions were pre-ordained or were inserted with a view of avoiding tax, without making a serious attempt to understand the implication of the expression “pre-ordained series of transaction”. While interpreting this expression, they tempt to take it as if they are words of an Act. Recently this expression has been subject-matter of discussion in three English cases Baylis v. Gregory  STC 297 (CA), IRC v. Bowater Property Developments Ltd.  STC 297 (CA) and Graven v. White  STC 297 (CA). Slade LJ summarised the reasoning in striking contrast to the decision in Dawson, as follows :
“...I conclude that two successive transactions, each of which has legal effects, are not properly to be regarded as a pre-ordained series or as a single composite transaction within the meaning of the first Ramsay condition as stated by the House of Lords unless, at the time when the first transaction was effected, all essential features (not merely the general nature) of the second transaction had already been determined by a person or persons who had the firm intention and for practical purposes the ability to procure the implementation of the second transaction.”
Thus, the expression “preordained series of transaction” contemplates that the assessee has in contemplation the sequence of transactions when he takes the first step to follow that step with the intention of saving tax. If there is no planning without the next step being arranged or the next step was expected but did not in fact materialize or the next step was one and probably more likely of the two possible outcomes, that subsequent step cannot be said to be pre-ordained series of transactions. If there is an intention to carry out the next step, that intention of the taxpayer alone should not be the test of whether there was pre-ordained series of transactions. What is required to be proved is that at the time of the first transaction, it was intended by the taxpayer that the first transaction is used as conveyancing machinery in order to achieve the final object of saving the tax. One cannot have a composite transaction unless the second part has been pre-arranged or pre-ordained at the time of the first. In Ramsay and Dawson the reasoning had been that there is no difference between series of steps which are followed through as part of an arrangement which falls short of a contract and a series of steps which are carried out under the contract. By the same reasoning a quasi-contract in the absence of one of the parties being identified cannot be said to be an arrangement through a contract. If there is an uncertainty and difficulty in practice about the next step, it is very difficult to tax the income at the first stage on the basis that second stage is bound to happen. The Court of Appeal in the aforesaid decisions, therefore, pointed out that pre-ordained series of transactions or a single composite transaction cannot be taken to be the one where the next step has not been arranged or has not in fact materialised or the next step is one and probably the more likely of the two possible outcomes.
The revenue authorities cannot brush aside any and every attempt of an assessee at saving the tax if that attempt is sanctioned by the law or hold the assessee guilty of avoidance when the saving is the result of series of steps which at the time of taking the first step could not be in contemplation of or devised by the assessee. R.S. Pathak CJ. of Supreme Court in CWT v. Arvind Narottam  173 ITR 479 observed that the decision of McDowell & Co. Ltd. v. CTO cannot advance the case of the revenue because the language of the deeds of settlement is plain and admits no ambiguity, and when Sabyasachi Mukharji said that where the true effect of the construction of the deed is clear, the appeal to discourage tax avoidance is not a relevant consideration. The transaction is, therefore, not to be looked at from its tax effectiveness, but from the angle whether it conforms to the intent of the enactment. Tax motivation or saving is an irrelevant consideration. Thus, if the acts of a taxpayer contradict the intention of the Legislature which result in saving the tax, the assessee could be said to have avoided the payment of tax and the case of McDowell clearly applies. But where the act conforms to the intents of enactment, such act should not be looked at from the point of view of its tax effectiveness. Tax planning may be legitimate provided it is within the framework of law. The Supreme Court further explained McDowell in Union of India v. Azadi Bachao Andolan  263 ITR 706 and held that an act which is valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest. Following it, the Gauhati High Court observed in CIT v. George Williamson (Assam) Ltd.  136 Taxman 52 (Gauhati) that it is open for the assessees to arrange their affairs in such a manner that it would not attract the tax liabilities, so far, it can be managed within the permissible limit of law. McDowell case cannot be applied under all circumstances where tax effectiveness is the consequence of the act of taxpayer. Only where the transactions have no commercial purpose or are pre-ordained in the manner as aforesaid but are undertaken to avoid tax or where such transactions contradict the intent of the enactment tax, avoidance could be presumed and the substance of the transaction be looked at rather than its form.
6.7A-5d Lifting the corporate veil - Unravelling a colourable device for tax evasion is not only confined to the transactions, or the inserted steps which have no economic content or pre-ordained series of transactions, but also to relationships between the two legal entities. It is the duty of the court in every case where ingenuity is expended to avoid taxing the welfare legislations, to get behind the smokescreen and discover the true state of affairs. The court is not to be satisfied with the form and leave well alone the substance of transaction.1
The independent character of a company is ignored, if it results in perpetration of fraud; or evasion of tax or any other obligation, defeating public finances, justifying wrongs, defending crimes. If a court is satisfied that the subsidiary is a ‘simulacrum’ or a ‘mere cloak’ or ‘a hut’ or ‘a channel’ or a ‘smoke screen’ for the principal, it can lift the veil. It is always a question of fact.
It is an admitted legal fact as held by the Supreme Court2 that a company registered under the Companies Act is a legal person, separate and distinct from its individual members; property of the company is not the property of shareholders. But where the character of a company, or the nature of the persons who control it, is a relevant feature, the court will go behind the mere status of the company as an entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of the company which is incapable of doing anything without human assistance.3
The corporate veil should be lifted where the associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting of the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions; the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected.4
So the court has been stepping in to pierce the corporate veil when fiscal or legal obligations are sought to be bypassed by a corporate entity. The Supreme Court has upheld the right of the tax authorities to go behind the corporate facade to look at the economic realities of transactions, if the shell of the corporate entity is used for tax evasion or to circumvent tax obligations.1
The courts have been upholding the revenue’s right to disregard the consequences of the transactions even in respect of those which are genuinely undertaken if their purpose is to avoid tax that would otherwise be payable. The taxing authority is entitled and is indeed bound to determine the true legal relations resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship. The Supreme Court exercised the right of unravelling a colourable device for tax evasion in the case of Juggilal Kamlapat v. CIT2. In that case, the assessee-firm was a managing agent of a company. Three brothers held majority of shares in the company as well as in the firm. The company asked the assessee to arrange for finance to pay off a loan taken from a sister-company and when the assessee regretted its inability to arrange the finance, the company decided to terminate the managing agency, by paying a compensation of Rs. 2 lakhs. The managing agency was entrusted to another sister-company which was newly-floated, in which also the aforesaid three brothers held majority of the shares.
The Tribunal held that the reason for terminating the managing agency was not a true reason but was merely a fake one and the whole transaction was a hoax for the purpose of evading income-tax. In other words, it was a collusive device practised by the company and the assessee-firm for the purpose of evading income-tax both in the hands of the payer and the payee. The Tribunal also found that there was only a change of personnel in the managing agency and not a change in office and that the assessee had no right of compensation for any loss of office. The question for consideration was whether the compensation received by the assessee could be treated as a capital receipt on the ground that it arose out of the destruction of the capital asset, viz., the managing agency. The Supreme Court held that the managing agency business carried on by the assessee-firm was not destroyed or lost to the four individual partners who constituted the assessee-firm. What happened was that the individuals who constituted the assessee-firm became the directors of the newly-formed company and in this new capacity, they undertook the conduct of the managing agency business and as shareholders continued to benefit from the profits of that business flowing to them in the shape of dividend instead of a share of profits from the assessee-firm.
In other words the managing-agency asset was enjoyed by four individual partners in a different capacity with the same object of profit-making. There was, therefore, no destruction of the apparatus of the profit-making asset, i.e., the managing agency contract. It was obvious that there was an intimate connection in this case between the managing agency business of the assessee-firm and the payment of a sum of Rs. 2 lakhs and, therefore, this amount represented a revenue receipt. While so upholding, the Supreme Court laid a proposition that the court is entitled to lift the mask of corporate entity if the corporation is used for tax evasion or to circumvent tax obligations or to perpetrate fraud.
Renusagar’s case - Lifting of the corporate veil has been confined to where the tax evasion is intended or tax obligation is avoided or a fraud is perpetrated and also where public interest is involved. The Supreme Court in the State of UP v. Renusagar Power Co.1 has, however, held that horizon or modern jurisprudence of the doctrine of lifting of corporate veil is expanding. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The Supreme Court held :
“. . . Here, indubitably, we are of the opinion that it is correct that Renusagar was brought into existence by Hindalco in order to fulfil the condition of industrial licence of Hindalco through production of aluminium. It is also manifest from the facts that the model of the setting up power station through the agency of Renusagar was adopted by Hindalco to avoid complications in case of take-over of the power station by the State or the electricity board. As the facts make it abundantly clear that all the steps for establishing and expanding the power station were taken by Hindalco, Renusagar is wholly-owned subsidiary of Hindalco and is completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are controlled by Hindalco. Renusagar has at no point of time indicated an independent volition. Whenever felt necessary, the State or the board have themselves lifted the corporate veil and have treated Renusagar and Hindalco as one concern and the generation in Renusagar as the own source of generation of Hindalco. In the impugned order, the profits of Renusagar have been treated as the profits of Hindalco.
In the aforesaid view of the matter we are of the opinion that the corporate veil should be lifted and Renusagar be treated as one concern and Renusagar’s power plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. . .”
The question before the Supreme Court was whether Renusagar was “own” source of power for Hindalco. Renusagar was incorporated as a wholly-owned subsidiary of Hindalco for generation of electricity to be consumed by Hindalco. It had claimed for exemption or liberal treatment in respect of electric duty as Renusagar and Hindalco be treated as one concern and Renusagar’s plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. The State Government was, however, of the view that there was no ground for lifting the corporate veil to treat Renusagar’s plant as Hindalco’s own source of power. The Supreme Court held that the State Government was in error in not treating Renusagar’s power plant as the power plant of Hindalco and not treating as its own source of energy.
This decision of the Supreme Court is a landmark in regard to the doctrine of lifting of corporate veil. The applicability of this doctrine is sought not only where fiscal or legal obligations are intended to be bypassed under the facade of corporate entity, but also where company’s own interests are suffered by the treatment of its wholly-owned subsidiary as a different entity. The duty of the court to get behind the smoke-screen and discover true state of affairs and not to be satisfied with form and leave well alone the substance of the transaction is not only limited to where (in the words of J. Chinnappa Reddy in McDowell & Co. Ltd. v. CTO  154 ITR 148 (SC)“ingenuity is expended to avoid taxation and welfare legislation”, but is extended to matters which assist the assessee’s own interest. The doctrine is intended to do justice to all the parties, and so its horizon is expanding. It is a changing concept. The veil on corporate personality even though not lifted is becoming sometimes more and more apparent in modern company jurisprudence. The ghost of Salomon’s case  AC 22 still visits frequently the bounds of company law but the veil has been pierced in many cases irrespective of whether it has been for the benefit or interest of the Government or the holding company.
intErpretation - liberal
6.8 Strict interpretation would not apply to machinery provisions. Fiscal statutes should be construed strictly as applicable only to taxing provisions, such as charging provisions or a provision imposing penalty and not to those parts of the statute which contain machinery provisions.1
The rule laid down by Rowlatt, J. in Cape Brandy Syndicate v. IRC  1 KB 64, that in a taxing statute one has to merely look at what is clearly said, was accepted by the Supreme Court in A.V. Fernandez v. State of Kerala  8 STC 561 where it was laid down that “if...the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intention of the Legislature and by considering what was the substance of the matter.” The object of this rule is to prevent a taxing statute being construed ‘according to its intent, though not according to its words’. But it is well recognised that this rule of construction applies only to a taxing provision and has no application to all provisions in a taxing statute. It does not, for example, apply to a provision not creating a charge for the tax but laying down the machinery for its calculation or procedure for its collection. The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the Legislature which is to make a charge levied effective. In the latter case, the rule is that that construction should be preferred which makes the machinery workable1 and not in any way to make it unworkable.2
In CIT v. Natu Hansraj3 the Gujarat High Court observed as follows :
“It is well-settled that words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view. Their meaning is found not so much in a strictly grammatical or etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be attained (see Workmen of Dimakuchi Tea Estate v. Management of Dimakuchi Tea State AIR 1958 SC 353). The expressions used in a statute should ordinarily be understood in a sense in which they best harmonise with the object of the statute and which effectuate the object of the Legislature (see New India Sugar Mills Ltd. v. Commissioner of Sales Tax AIR 1963 SC 1207). It is necessary, therefore, to read section 54 in the context of the object-matter and its setting in the scheme of capital gains and the object of exemption and then to ascertain the true import of the relevant part thereof.”
The rule of strict construction applies primarily to charging provisions in a taxing statute and has no application to a provision not creating a charge for the tax but laying down the machinery for its calculation or procedure for its collection and such machinery provisions have to be construed by the ordinary rules of the construction.4 One important consideration in construing a machinery section is that it should be so construed as to effectuate the liability imposed by the charging section and to make the machinery workable.5 Thus, the rule that fiscal statute should be interpreted strictly and in cases of doubt the benefit of construction must be given in favour of the assessee, applies only to the charging sections and not to the machinery sections.6
6.8A The Courts strongly lean against any construction which tends to reduce a statute to a futility. The provision of a statute must be so construed as to make it effective and operative, on the principle “ut res magis valeat quam pereat”. It is, no doubt true that if a statute is absolutely vague and its language wholly intractable and absolutely meaningless, the statute could be declared void for vagueness.7 This is not in judicial review by testing the law for arbitrariness or unreasonabless under article 14; but what a Court of construction, dealing with the language of a statute, does in order to ascertain from, and accord to the statute the meaning and purpose which the Legislature intended for it. In Manchester Ship Canal Co. v. Manchester Racecourse Co.  2 Ch. 352, Farwell J. said :
“Unless the words were so absolutely senseless that I could do nothing at all with them, I should be bound to find some meaning and not to declare them void for uncertainty.” [See pages 360 and 361].
In Fawcett Properties v. Buckingham County Council  3 All ER 503 Lord Denning approving the dictum of Farwell, J. said :
“But when a statute has some meaning, even though it is obscure, or several meanings, even though it is little to choose between them, the Courts have to say what meaning the Statute is to bear rather than reject it as a nullity.” [vide page 516]
It is, therefore, the Court’s duty to make what it can of the statute, knowing that the statutes are meant to be operative and not inept and that nothing short of impossibility should allow a Court to declare a statute unworkable. In Whitney v. IRC  AC 37 Lord Dunedin said :
“A statute is designed to be workable, and the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear direction makes that end unattainable.” [vide p. 52]
The principle of liberal interpretation which advances the purpose and object underlying the provision cannot, however, be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the court to re-write the section employed by the Legislature in the name of giving effect to supposed underlying object. After all, the underlying object of any provision has to be gathered on a reasonable interpretation of the language employed by the Legislature (CIT v. N.C. Budharaja & Co. AIR 1993 SC 2529/  204 ITR 412).
6.8B Welfare statutes require liberal construction. Statutes made for public good should be liberally construed. Beneficial statutes should not be construed too restrictively. (Saraswati Sugar Mills v. Haryana State Board AIR 1992 SC 224; Pollisetti Pullamma v. Kalluri Kameswaramma AIR 1991 SC 604). In construing a social welfare legislation, the court should adopt a beneficent rule of construction; and if a section is capable of two constructions, that construction should be preferred which fulfils the policy of the Act, and is more beneficial to the persons in whose interest the Act has been passed. When, however, the language is plain and unambiguous, the Courts give effect to it whatever may be the consequence, for, in that case, the words of the statute speak the intention of the Legislature. When the language is explicit, its consequences are for the Legislature and not for the courts to consider. The argument of inconvenience and hardship is a dangerous one and is only admissible in construction where meaning of the statute is obscure and there are two methods of construction. In their anxiety to advance beneficent purpose of legislation, the courts must not yield to the temptation of seeking ambiguity where there is none.1 In Bharat Singh v. Management of New Delhi Tuberculosis Centre, New Delhi,2 the abovesaid policy was emphasized in the following words :
“Now it is trite to say that Acts aimed at social amelioration giving benefits for the have-nots should receive liberal construction. It is always the duty of the court to give such a construction to a statute as would promote the purpose or object of the Act. A construction that promotes the purpose of the legislation should be preferred to a literal construction. A construction which would defeat the rights of the have-not and the underdog and which would lead to injustice should always be avoided.”
6.8C Beneficial enactments should be given a liberal and purposive interpretation so as to fulfil the object of the legislation and comply with the legislative intent.3 In the case of beneficial legislation when the legislation is extending special protection to the named category, the court has to give a liberal construction to the protective mechanism which would work out the protection and enable the sphere of protection to be effective (Pandey Orson v. Ram Chander Sahu AIR 1992 SC 195).
A beneficial piece of legislation has to be construed in its correct perspective so as to fructify the legislative intention underlying its enactment (Transport Corpn. of India v. Employees’ State Insurance Corpn. AIR 2000 SC 238). In New India Assurance Co. Ltd. v. Savita Sen  20 ILD 185, the Madhya Pradesh High Court observed :—
“9. Thus, the provisions of a beneficial legislation are to be interpreted in a manner which helps in achieving the object sought to be achieved by the Legislature by enacting the said law and also advances the cause of justice.”
The Supreme Court, while laying down guidelines for interpretation of the provisions of a beneficial legislation, in Chairman, Board of Mining Examination and Chief Inspector of Mines v. Ramjee AIR 1977 SC 965, observed :
“9. . . . To be literal in meaning is to see the skin and miss the soul of the Regulation. The judicial key to construction is the composite perception of the deha and dehi of the provisions. . . .”
The court should adopt a construction which advances the policy of the legislation to extend the benefit rather than one which curtails benefit (Union of India v. Pradeep Kumari  2 SCC 736). But that which is not provided in statute should not be read into it only because it is a beneficial legislation. Rule of beneficial construction is not applied :
(i) where result would be relegislation of a provision by addition, subtraction or alteration of words and violence would be done to the spirit of the provision;
(ii) where words of a provision are capable of being given one meaning;
(iii) where there is no ambiguity in a provision.
Where there is a doubt, however, court may apply the rule of beneficial construction in order to advance the object of the Act (Shyam Sunder v. Raj Kumar  8 SCC 24).