[2020] 

118 taxmann.com 528 (Article)

Date of Publishing: August 26, 2020

Ramnath & Co: Interpretation of Beneficial Provisions

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DIVESH CHAWLA
Advocate

According to Salmond - "interpretation or construction is meant, the process by which the courts seek
to ascertain the meaning of the legislature through the medium of authoritative forms in which it is
expressed."

It is a persistent rule, that whenever the language of charging provision is ambiguous, resulting in two
views, the one favourable to the assessee ought to be adopted 1. On multiple occasions, the Courts have
applied the rule to 'Beneficial Provision' under tax statute 2

The article analyses the Ramnath & Co, the legal principles in interpreting "Beneficial Provisions", and
way-forward/suggestions.

Tax Statute and Interpretation

Every taxing statute comprises of different provisions, for instances, charging, machinery/procedural,
beneficial/exemption, penal, etc. Each of these provisions has a specific purpose in determining the
liabilities of the assessee. In certain instance, the provision is ambiguous, or their application is
uncertain, the Court applies the rules of interpretation to mitigate the ambiguity or uncertainty. The
principal object of interpretation is to determine the intention of the lawmaker and to make the law
effective. The different principles of interpretation or construction applied by the Court in tax statute,
i.e. strict/literal, contextual/ purposive, harmonious, or beneficial. If there no ambiguity, conflict or
absurdity in the statutory language, resort to any interpretative process to unfold the Legislature intent
become impermissible. However, in Ramnath & Co v. CIT [2020] 116 Taxmann.com 885 (SC), the
Supreme Court held that the 'Beneficial Provision' ought to be interpreted strictly; the burden of
proving the applicability rest on the assessee, and in case of ambiguity the benefits cannot be claimed by
the assessee, rather it would be interpreted in favour of the Revenue. 3

Beneficial provision and interpretation

With the general understanding of different provisions and interpretations, it is crucial to understand
"Beneficial Provision" and the surrounding rules of interpretation. "Beneficial provision" in tax statute,
offers freedom from liability, tax, or duty to encourage or support any particular activity or business. It
may assume varying shapes, for instance, tax holiday to new units, concessional rate of tax to good or
person, exclusions from tax liability or rebate, that ultimately grants immunity from taxation.

The Supreme Court has laid down propositions that assist in interpreting "Beneficial Provision", as
deliberated below:-
 a.   Provisions shall be interpreted liberally, reasonably, and in favour of the assessee. It
shall be constructed to effectuate the object of the Legislature and not to defeat it 4.
b.   A provision intended for promoting economic growth has to be interpreted liberally,
and the restriction on it has to be constructed to advance the objective of the section
and not to frustrate it5.
c.   Words used in the provision should be assigned such meaning, as would enable the
assessee to secure the benefit intended by the Legislature6.
d.   The Courts must interpret the provision by giving full effect and in case of doubt,
favour the taxpayer7.
e.   If Legislature intention is not defeated, the assessee cannot request for liberal
interpretation, that ignores the conditions for exemptions8.
f.   It not permissible for the courts to re-write the section or substitute words of its own
for the actual words used by the Legislature in the name of giving effect to underline
objective. Reasonable interpretation cannot be carried to the extent of harming the
plain and simple language used in the enactment9.
g.   Judicial pronouncement cannot enhance or expand the exemption provided by the
statute10.

On careful consideration of the above propositions, it is apparent that the interpretation of Beneficial
Provisions is a highly complex and complicated exercise. It hinges on the provision that applies to the
given fact and circumstance of each case. However, there are standard elements, for instances, the
advancement of the objective or Legislature intent, and interpreting the provisions liberally without
doing violence to the language of the statute.

Facts, contentions and ruling of Ramnath & Co

The company was engaged in providing services to foreign buyers of frozen seafood products and
received services charges from such foreign enterprises in foreign exchange. Since the commission
received was in foreign exchange, it claimed incentive provision u/s 80-O of the Income Tax Act, 1961
("Act").

Revenue rejected the claim because the services were performed "in India" by the company and not
rendered "from India". Further, the assessee is a procurement agent, and all the intellectual
information envisaged in the agreement are incidental to carrying out of the primary function as an
agent.

Before the Supreme Court, the company contended that incentive provision has to be constructed
purposively, broadly and liberally, keeping in mind the object of the exemption. While the Revenue
referred to Constitution Bench in Commissioner of Customs (Import) v. Dilip Kumar & Co. [2019] 95
taxmann.com 327/69 GST 239 (SC), wherein it was held that the exemption in taxing statute is subject
to strict interpretation, in case of ambiguity, the issue ought to be granted in favour of the Revenue and
against the assessee.

The Supreme Court noted that the exemption provision ought to be strictly interpreted; the burden of
proving its applicability is on the assessee; and in case of ambiguity, the benefit thereof cannot be
claimed by the assessee, rather it would be interpreted in favour of the Revenue. General observation in
CIT v. Baby Marine Export [2007] 160 Taxman 160/290 ITR 323 (SC), that tax incentive provisions
must be constructed purposively, broadly and liberally, to achieve it avowed object to earn foreign
exchanges, is not a sound statement of law. Further, it observed that "incentives" is a generic term,
while terms like deductions, exemptions, rebates et cetera are different species of the incentives
extended in the Act. Finally, it followed the decision of the Constitutional Bench in Dilip Kumar
(supra), wherein it was held that "until the stage of finding out eligibility to claim deduction, the ambit
and scope of the provision for the purpose of its applicability cannot be expanded or widened and
remains subject to strict interpretation but, once eligibility is decided in favour of the person claiming
such deduction, it could be construed liberally in regard to other requirements, which may be formal or
directory in nature."

On merits, the Court held that the company provided services as a procurement agent, and the
information provided was incidental. They rendered the services "in India" and not "from India".
Earning foreign exchange, without complying with the condition in the provisions, will not lead to an
exemption under section 80-0 of the Act.

Factors not considered

The ruling has for reaching consequences and has created anxiety among the taxpayers, that claim any
kind of incentives under tax statutes. Though the finding of the Court in the giving facts would be
appropriate, the principles of interpretation applied to "Beneficial Provisions" is contrary to the earlier
decision of the Supreme Court, that were not cited or considered, as deliberated below:-

A. Legislature intention

An Act of Parliament/Legislature cannot foresee all types of situation and all types of consequences.
Though experts in the field assist in drafting the Act and Rules, there are many occasions where the
language used and the phrases employed in the statute are not perfect. Here the principles of
interpretation of statute come in handy. It is for the Court to see whether a particular case falls with the
broad principles of law enacted by the Legislature.

In Ramnath & Co, the Court referred to the principles of Bajaj Tempo Ltd, wherein it was held that
"legislative intention must be the foundation of the Court's interpretation". However, the Court has not
dealt with the decision or view expressed, if there is ambiguity or doubt, the Legislature intent shall be
kept in mind.

In the author's view, the purpose of interpretation is to know the intention of the Legislature. In a given
case, it is necessary to determine, whether the Legislature intended to apply the law; and where the
Legislature intended to exclude the operation of law. These are essential questions to which answers
can be sought only by knowing the intention of the Legislature. If a statutory provision is open to more
than one meaning, the Court has to choose the interpretation which represents the intention of the
Legislature. In Ramnath& Co, the Court should have considered the previous decisions on Legislature
intent before adjudicating on the principles of interpretation to Beneficial Provision.

B. Species of incentives

The Court has observed that "incentives" are a generic term, while terms like deductions, exemptions,
rebates et cetera are different species of the incentives extended in the Act. With utmost respect, in the
author's view, this observation of the Court is contrary to the earlier decision of the Supreme Court in
Yokogwam India Ltd.11 and Liberty India12

In Yokogwam India Ltd, the Court noted that Section 10A had undergone a change from exemption
provisions to deduction provision and concluded that "the different between the two expression
'exemption' and 'deduction' though broadly may appear to be the same i.e. immunity from taxation, the
practical effect of it in the light of the special provisions contained in different parts of Act would be
wholly different". In Liberty India, the Court has identified two types of incentives, namely, "profit
linked incentives" that are linked to the deductions claimed, and "investment-linked incentives" that are
linked to the capital investment. Considering the earlier decisions of the Supreme Court, it is evident
that the Act provides for two types of tax incentives that are separate and distinct.

C. Facts and ruling in Dilip Kumar & Co and Subsequent decision of Pr. CIT v. Aarham
Softronics [2019] 102 taxmann.com 343/261 Taxman 529/112 ITR 623 (SC).

A notification provided for a concessional rate of duty to 'prawn feed'. In Dilip Kumar & Co, it claimed
that the concessional rate of duty would include the case of 'feed grade/animal feed'. In other words, the
company intended to substitute the words of its own for the actual words used in the statute. The
Revenue denied the concessional rate of duty and applied the stand rate. The Constitution Bench of the
Supreme Court was concerned with the interpretation rule to be applied when there is ambiguity in the
tax exemption notification.

The Constitution Bench held that in case of ambiguity in charging provisions, the benefit must
necessarily go in favour of the assessee. However, the same is not true for exemption notification or
exemption clause, at the threshold stage it will be interpreted strictly, and any ambiguity it will favour
the Revenue. When the ambiguity or doubt is resolved by interpreting the applicability of exemption
clause strictly, the Court must construe the notification by bestowing more extensive and liberal
construction.

It is pertinent to note, that in Dilip Kumar, the Supreme Court was dealing with a notification issued by
a subordinate legislature and not the provisions of the statute. In reaching the above principles in Dilip
Kumar, the Court only considered decision dealing with the tax exemption notification. It is well-
established principles that a judgement must be read as whole and observation in judgements should be
considered in the context in which they are made and in the light of the questions before the Court.
Further, the legislative intention to promote economic growth, that initiated the exemption in the first
place was not placed before the Court nor adjudicated.

In the book, Kanga & Palkhivala's, The Law and Practice of Income Tax (11th edition), specifically
disapproved with the conclusion reached in Dilip Kumar & Co and has provided as under:-

"It is submitted that such a distinction is erroneous and without any basis. It further erroneously
held that one has to look at the language of the notification alone and the object and purpose of
granting the exemption is irrelevant. It is submitted that if there is ambiguity in an exemption
notification, it can be adequately resolved by ascertaining the object and purpose of the
notification. The interpretation which promotes the object and purpose pf the exemption
notification should be followed, irrespective of whether it is in favour of the Revenue or the
Assessee."
In Ramnath& Co, the Court did not consider the subsequent decision of the coordinating bench in
Aarham Softronics, wherein the Court after considering Dilip Kumar & Co, held that simple reliance of
the strict interpretation while interpreting Beneficial Provisions will lead to absurdity and goes against
the Legislature intended.

In the authors' view, in both the decisions Ramnath& Co and Dilip Kumar & Co, there was no ambiguity
in the exemption notification or exemption clause, and the matter oughts to be decided on a plain
reading without amending the principles of interpretation applicable to beneficial provisions.

Conclusion/ Way forward

Unless the Supreme Court reverses the decisions, holding the ambiguity in tax exemption provisions to
be interpreted liberally, the decision would be applicable in all case.However, in the author's view, the
Court has not considered the legislature intention, different species of the incentives and the
subsequent decision of Aarham Softronics. If the factors and decisions were considered, the Court
outcome on principles of interpretation would most like change.

In the author's views, a strict reading of such provision which will have a detrimental consequence to
the very objective of the provisions should be avoided. Until the decision is reversed, it is advisable for
the assessee shall keep in mind the basic principles of interpreting beneficial provisions, as stated
above. Nonetheless, the Courts have not dealt with a situation where there is a lacuna in the provisions
itself, and there is no legislative or judicial clarification, the judgement ought not to apply, and the
decision would favour the assessee.

In situations where the provision has an ambiguity or lacuna, an assessee may interpret the words
keeping in mind the Legislature intent without substituting the language of the provisions. It is
advisable, to consider the notes to clause and memorandum of the Finance Act that may shares light on
the Legislative intention. Further, it can consider the law prior to the introduction, similar provisions
that were in existence and the reasons to introduce such an incentive in the particular activity or
business or judicial precedents.

The author can be reached at diveshchawla72@gmail.com

■■

1. CIT v. Vegetable Product Ltd. [1973] 88 ITR 192(SC)

2. CIT v. South Arcot Society [1989] 43 Taxman 328/176 ITR 117 (SC) and CIT v. U.P. Co-
operative Federation Ltd. [1989] 43 Taxman 20/176 ITR 435 (SC)
3. Keshavji Ravji v. CIT [1990] 49 Taxman 87/183 ITR 1 (SC)
4. South Arcot Society (supra); Co-operative Federation Ltd. (supra) and CIT v. Gwailor
Rayon [1992] 196 ITR 149/62 Taxman 471 (SC)
5. Bajaj Tempo Ltd v. CIT [1992] 62 Taxman 480/192 ITR 188 (SC)
6. Mysore Minerals Ltd v. CIT [1999] 106 Taxman 166/239 ITR 775 (SC)
7. CIT v. Shaan Finance [1998] 97 Taxman 435/231 ITR 308 (SC)
8. Dy. CIT v. Ace Multi Axes Systems Ltd [2017] 88 taxmann.com 69/[2018] 252 Taxman
274/400 ITR 141 (SC)
9. CIT v. N.C Budharaja & Co. [1993] 70 Taxman 312/204 ITR 412 (SC)
10. Oil & Natral Gas Corporation Ltd v. CIT [2015] 59 taxmann.com 5/233 Taxman 79/377 ITR
117 (SC)
11. CIT v. Yokagawam India Ltd [2017] 77 taxmann.com 41/244 Taxman 273/391 ITR 274
(SC)
12. Liberty India v. CIT [2009] 183 Taxman 349/317 ITR 218(SC)