Ambiguous Exemption Notifications to be interpreted in favor of Revenue: 5-Judge

Constitution Bench of the Supreme Court

- By Bhagyashree & Shrikant Gupta

(reviewed by Mukesh Butani)

Abstract

Authors have analyzed the recent judgment of the Constitution Bench of the Supreme Court in
relation to principles of Statutory Interpretation in general and in particular interpretation of an
exemption notification, analyzing a catena of judgments rendered by the Supreme court and
foreign court decisions. In this regard, the authors have also analyzed the impact of the said
judgment on other taxing statutes namely, Income-tax Act , Goods & Services Tax Act and
Foreign Exchange Management Act, 1999.

Introduction

A 21-year-old settled position of law that ‘in case of ambiguity, a tax exemption provision or
notification should be construed in favor of the taxpayer’ does not hold good in light of the
recent supreme court ruling1, overruling Sun Exports case2 and catena of judgments3 holding a
similar view. The ruling, however, reiterates an established principle that in the event of
ambiguity with respect to interpretation of taxing statute, the benefit should go to the taxpayer.

Brief facts of the case are that the respondents imported a consignment of Vitamin-E50 powder
(feed grade) under Bill of Entry No. 8207, dated 19.08.1999. Classifying the product under
Chapter 2309.90 (which admittedly pertains to prawn feed), they claimed benefit of concessional
rate of duty at 5%, instead of standard 30%, as per the Customs Notification No. 20/1999, by

1
Commissioner of Customs (Import), Mumbai v. M/s. Dilip Kumar & Company & Ors., (2018) SCC Online 747.
2
Sun Export Corporation, Bombay v. Collector of Customs, Bombay & Anr., (1997) 6 SCC 564.
3
Commissioner of Central Excise, Pune v. Abhi Chemicals and Pharmaceuticals Pvt. Ltd, (2005) 3 SCC 541;
Commissioner of Customs (Import), Mumbai v. Konkan Synthetic Fibres, (2012) 6 SCC 339; Commissioner of
Customs (Preventive), Gujarat v. Reliance Petroleum Ltd, (2008) 7 SCC 220; Orient Weaving Mills (P) Ltd. v.
Union of India, AIR 1963 SC 98; Kailash Nath v. State of UP, AIR 1957 SC 790.

1
placing reliance upon the ratio in Sun Exports4 case to support the claim. The adjudicating
authority (Commissioner of Customs) distinguished Sun Exports case and accepted the plea of
the department to deny the concessional rate of duty on the ground that the imported goods
contained chemical ingredients for animal feed and not animal feed/prawn, as such, the
concessional rate of duty under the extant notification was not available. The Commissioner of
Customs (Appeals) reversed the order and concluded that the Sun Exports case would be
applicable which was also upheld by the Customs, Excise and Service Tax Appellate Tribunal
(CESTAT). Aggrieved by the decision of the CESTAT, the revenue filed the present appeal.

Against this background, the Constitution Bench while dealing with the issue of interpretive rule
to be applied for interpreting tax exemption notification in the event of any ambiguity, believed
that the unsatisfactory state of law existing necessitated reconsideration. The Apex Court held
that every taxing statue including, charging, computation and exemption clause (at the threshold
stage) should be interpreted strictly. Further, in case of ambiguity in an exemption provision,
benefit must go to the Revenue. Thus, the ‘burden of proof’ is upon the taxpayer claiming the
benefit of exemption or exception clause to prove the applicability of such exemption. Once the
assessee has successfully discharged its ‘burden of proof’, the ‘onus of proof’ shifts to the
department to prove assessee’s disentitlement to the benefit.5

The Apex Court Constitution Bench has drawn references to its several pronouncements and
international court decisions, which are summarized below:

4
supra note 2, at 1.
5
Customs, Excise and Gold (Control) Appellate Tribunal, Bangalore Bench v. Fabricon (P.) Ltd. [2003] 161
ELT 459 (CEGAT-Bangalore); Bordubi Engineering Works v. Union of India [2016] 42 STR 803 (Gauhati);
Commissioner of Sales Tax v. New Standard Engineering Co. Ltd [2015] 82 VST 446 (Bombay).

2
S.No. Name of the Case
I. General Principles applicable to Statutory Interpretation
1. District Mining Officer v.
Tata Iron and Steel Co6
(Purposive Interpretation)
2. Kanai Lal Sur v.
Paramnidhi Sadhukhan.7
(Natural and Ordinary
Meaning)
3. Assistant Commissioner,
Gadag Sub-Division,
Gadag v. Mathapathi
Basavannewwa.8(Plain
Meaning rule or clear and
unambiguous rule)
4. Punjab Land Development
and Reclamation
Corporation Ltd.,
Chandigarh v. Presiding
Officer, Labour Court
Chandigarh and Ors.9
(literal and Strict
Interpretation-Distinction)
II. Interpretation of Exemption Notification
5. Commissioner of Central
Excise, Pune v. Abhi
Chemicals and
6
(2001) 7 SCC 358.
7
(2001) 1 SCC 578.
8
(1995) 6 SCC 355.
9
(1990) 3 SCC 682.
Ratio of Judgment Remarks
Process of interpretation involves both literal and Followed
purposive approaches. In case, the provision is
capable of more than one meaning, the Court has
to choose the interpretation which represents the
true intention of the Legislature. The intention of
the legislature can be derived by giving regards to
the literal meaning of the words used in the
statute in the light of any intended object or
purpose which it seeks to achieve.
If the words used in the enactment are open to Followed
more than one construction, only then Courts are
expected to adopt any other hypothetical
interpretation on the ground that such approach
will be more consistent with the intended object
and policy of the statute.
For interpretation of taxing and penal statutes, if Followed
the plain meaning rule is applied, any hardship
and inconvenience caused cannot be the basis to
alter the meaning to the language employed by
the legislation. However, if the adoption of the
plain meaning rule results in absurdity, the Court
may determine the meaning of the word giving
regard to the legislative purpose and the context
in which it is used.
The literal rule of interpretation requires the Followed
wording of the statute to be construed according
to its literal and grammatical meaning whatever
consequences may be. Unless otherwise
provided, the same word must normally be
construed throughout the Act in the same sense,
and in the case of old statutes regard must be
given to its contemporary meaning if there has
been no change with the passage of time.
Recovit are animal feed supplements and that the Overruled
animal feed supplements were rightly included in
Tariff Item 23.02 being preparation of a kind
3
 Pharmaceuticals Pvt.
Ltd.10 (in favour of
assessee)
6. Sun Export Corporation,
Bombay v. Collector of
Customs, Bombay11(in
favour of assessee)
7. Collector of Central
Excise, Bombay-I and Anr.
v. Parle Exports (Pvt.)
Ltd.12
8. Commissioner of Customs
(Import), Mumbai v.
Konkan Synthetic Fibres13
(in favour of assessee)
9. Collector of Customs
(Import), Bombay v.
Swastic Wollens (Pvt.) Ltd.
and Ors14.
(in favour of assessee)
10
(2005) 3 SCC 541.
11
(1997) 6 SCC 564.
12
(1989) 1 SCC 345.
13
(2012) 6 SCC 339.
14
(1988) Supp. SCC 796.
used in animal feeding including dogs and cats
food.
If two views are possible in interpreting an Distinguished
exemption notification, the one favourable to the
assessee in the matter of taxation has to be
preferred.
Though in a taxing Act, provision enacting an View concurred
exception to the general rule of taxation has to be
construed strictly against those who invoke its
benefit, but while interpreting an exemption
clause, liberal interpretation should be imparted
to the language thereof, provided no violence is
done to the language employed.
Principle 1: In a fiscal or taxation law, while Not dealt
ascertaining scope or expressions used in a
particular entry, opinion of expert in field of
trade, who deals in those goods, should be given
due importance.
Principle 2: Beneficial notification providing for Overruled
levy of duty at a concessional rate should be
given liberal interpretation.
When no statutory definition is provided in Not dealt
respect of an item in the Customs Act or the
Central Excises Act, the trade understanding i.e.
opinion of those who deal with the goods in
question, is the safest guide.
Determination of question relating to rate of duty Distinguished
or value of goods for purpose of assessment is a
question of fact and falls within tribunal’s
jurisdiction. If the tribunal has made such
decision honestly and bonafide having regard to
the material and relevant facts and correct legal
principles, then such finding is undisputable. The
fact that another competent authority of law
(SC/HC) may have an alternate view is no ground
for interfering with such finding in an appeal
from such finding.
4
10. Commissioner of Customs An exemption notification should be read as a Overruled
(Preventive), Gujarat v. whole. For its interpretation, regard must be
Reliance Petroleum Ltd15. given to the nature and extent thereof and the
purpose and object for which such exemption is
(in favour of assessee) granted. The terminologies used in the
notification have to be given its natural meaning.

11. Commissioner of Inland Principle 1: It would be unreasonable to suppose Followed

Revenue v. James Forrest16 that an exemption was wide as practicable to
make the tax inoperative, that it cannot be
assumed to have been in the mind of the
Legislature.

Principle 2: Exemption from taxation to some

extent increases the burden on other members of
the community.

12. Union of India v. The The exemption clause [S.5 of the Bengal Finance Distinguished
Commercial Tax Officer, (sales Tax) Act, 1941] being the creation of the
West Bengal and Ors.17 statute has to be construed strictly having regard
to the legislative intent to ascertain the meaning
of the statute in accordance with the objective
intent of the legislature.

13. Orient Weaving Mills (P) Principle 1: When a notification is issued in Followed
Ltd. v. Union of India18; accordance with power conferred by the statute, it
Kailash Nath v. State of has statutory force and validity and, therefore, the
UP19 exemption under the notification is as if it were
contained in the Act itself.

Principle 2: The principle is well settled that

when two views of a notification are possible, it
should be construed in favour of the subject as
notification is part of a fiscal enactment.

15
(2008) 7 SCC 220.
16
(1890) 15 AC 334 (HL).
17
AIR 1956 SC 202.
18
1962 Supp 3 SCR 481.
19
AIR 1957 SC 790.

5
14. Coroline M. Armytage v. Principle 1: The question of strict or liberal Followed
Frederick Wilkinson20 construction arises only in the where it is difficult
to ascertain the meaning of a particular provision
of an enactment.

Principle 2: In a taxing Act, provisions enacting

an exception to the general rule of taxation are to
be construed strictly against those who invoke its
benefit. While interpreting an exemption clause,
liberal interpretation should be imparted to the
language thereof, provided no violence is done to
the language employed. It must, however, be
borne in mind that absurd results of construction
should be avoided.

15. Mangalore Chemicals & Principle 1: Interpretation of statutory language is Followed

Fertilizers Ltd. v. Dy. not required when words are clear and convey the
Commissioner of meaning.
Commercial Taxes21

(Strict Interpretation Principle 2: Benefit granted under earlier Distinguished

subordinate to Plain notification cannot be taken away by a
meaning rule) subsequent notification.

Principle 3: A distinction between provisions of Followed

statute which are of substantive nature and those
of which are technical/procedural in nature must
be drawn. Non-compliance with the statute would
ensue if substantive conditions in an exemption
notification are not satisfied.

16. Union of India v. Wood The interpretation of exemption notification, Followed

Papers Limited22 unlike charging provision, has to be tested on
different touchstone considering its varied
meaning in different contexts. An exemption
provision is like an exception and on normal
principle interpretation of statutes, it is construed
strictly because of legislative intention or on
economic justification of inequitable burden or
progressive approach of fiscal provisions
intended to augment State revenue. But once its
applicability is proved, it need not be construed
strictly.

20
(1878) 3 AC 355.
21
(1992) Supp. 1 SCC 21.
22
(1990) 4 SCC 256.

6
 Distinguished
liberal and strict construction of an exemption
provision are to be invoked at different stages of
interpreting it. When the question is its
applicability on the subject then it being in nature
of exception is to be construed strictly and against
the subject, but once ambiguity or doubt about
applicability is lifted and the subject falls in the
notification then full play should be given to it
and it calls for a wider and liberal construction.

17. Hansraj Gordhandas v. The operation of the notifications has to be Followed

H.H. Dave, Asst. Collector judged not by the object and the purpose which
of Central Excise & the rule making authority had in mind, but by the
Customs, Surat and Ors.23 words which it has employed to effectuate the
legislative intent.

18. Novopan India Ltd. v.
Collector of Central Excise
and Customs24
The principle that in case of ambiguity, a taxing Followed
statute should be construed in favour of the
assessee does not apply to the construction of an
exemption provision. They have to be construed
strictly.
A person invoking an exception or an exemption
provision to relieve him of the tax liability must
establish clearly that he is covered by the said
provision. In case of doubt or ambiguity, benefit
of it must go to the State.

19. Tata Iron & Steel Co. Ltd.
v. State of Jharkhand25
The principle that in the event of ambiguity with Followed
respect to interpretation of provision of fiscal,
such construction which favours the assessee may
be adopted, would have no application to
construction of an exemption notification, as in
such a case the burden is upon the assessee to
show that he falls within the parameters of
exemption notification.

20. Commissioner of Central While construing an exemption notification, the Distinguished

Excise, New Delhi v. Hari court has to distinguish the conditions which
Chand Shri Gopal26 require strict compliance, the non-compliance of
which would render the assessee ineligible to

23
AIR 1970 SC 755.
24
1994 Supp (3) SCC 606.
25
(2005) 4 SCC 272.
26
(2011) 1 SCC 236.

7
 claim exemption and those which require
substantial compliance to be entitled for
exemption.

II. Rules of Interpretation with respect to Taxation

21. Collector of Customs and
Central excise, Guntur and
Ors. v. Surendra Cotton
Oil Mills and Fertilizers
Co. and Ors.27
22. Re, Micklethwait28;
Partington v. A.G.29;
Rajasthan Rajya Sahakari
Spinning & Ginning Mills
Federation Ltd. v. Deputy
CIT, Jaipur30; State Bank
of Travancore v.
Commissioner of Income
Tax31; Cape Brandy
Syndicate v. IRC32
In the matter of interpretation of charging section Followed
of a tax statute, strict rule of interpretation is
mandatory and if there are two views possible in
the matter of interpretation of a charging section,
the one favourable to the assessee need to be
applied.
Principle 1: A taxing statute is to be strictly Followed
construed. Equity does not play any role in
matters of taxation. If the person sought to be
taxed comes within the letter of the law he must
be taxed, however great the hardship be. If the
subject does not fall within the letter of the law,
the subject is free, however apparently within the
spirit of law, the case might otherwise appear to
be.
Principle 2: In a taxing statute, one has to merely
look at what is clearly said. There is no room for
any intendment. Simply because one class of
legal entities is given a benefit which is
specifically stated in the Act, does not mean that
benefit can be extended to legal entities not
referred to in the Act There is no presumption as
to tax.

23. Russel v. Scott33 Subject is not to be taxed unless the words of the Followed
taxing statute unambiguously impose the tax on
him.

24. Ormond Investment Co. v. The proper course in constructing revenue Acts is Followed
Betts34 to give a fair and reasonable construction to the
language employed by the statute but keeping in
mind that no tax can be imposed without words

27
(2001) 1 SCC 578.
28
(1885) 11 Ex 452
29
(1869) LR 4 HL 100
30
(2014) 11 SCC 672.
31
(1986) 2 SCC 11
32
(1921) 1 KB 64.
33
(1948) 2 All ER 1.
34
(1928) AC 143.

8
 clearly showing an intention to lay the burden and
that equitable construction of the words is not
permissible.
25. Mapp v. Oram35 Considerations of hardship, injustice or anomalies Followed
do not play any role in construing taxing statutes
unless there be some real ambiguity.

26. IRC v. Ross Coutler36 If taxing provision is so wanting in clarity that no Followed
meaning is reasonably clear, the courts will be
unable to regard it as of any effect.

27. Express Mill v. Municipal If the words used are ambiguous and open to two Followed
Committee, Wardha37 interpretations, benefit of doubt is to be given to
the subject.

28. CIT v. Jalgaon Electric If the Legislature fails to express itself clearly and Followed
Supply Co.38 the taxpayer escapes by not being brought within
the letter of the law, no question of unjustness as
such arises.

29. CIT, W.B. v. Central India Equitable considerations are not relevant in Followed
Industries39 construing a taxing statute.

30. Azam jha v. Expenditure Logic or reason cannot be of much avail in Followed
Tax Officer, Hyderabad40 interpreting a taxing statute.

31. Kapil Mohan v. In the field of taxation, hardship or equity has no Followed
Commissioner of Income role to play in determining eligibility to tax and it
Tax, Delhi41 is for the Legislature to determine the same.

32. State of Madhya Pradesh Hardship or equity is not relevant in interpreting Followed
v. Rakesh Kohli and Anr.42 provisions imposing stamp duty, which is a tax,
and the court should not concern itself with the
intention of the Legislature when the language
expressing such intention is plain and
unambiguous.

35
(1969) 3 All ER 215.
36
(1948) 1 All ER 616.
37
AIR 1958 SC 341.
38
AIR 1960 SC 1182.
39
AIR 1972 SC 397.
40
AIR 1972 SC 2319.
41
AIR 1999 SC 573.
42
(2012) 6 SCC 312.

9
33. Commissioner of Income
Tax v. Kasturi Sons Ltd.43;
State of West Bengal v.
Kesoram Industries
Limited44
Principle 1: In interpreting a taxing statute, Followed
equitable considerations are entirely out of place.
It has to be interpreted in the light of what is
clearly expressed; it cannot imply anything which
is not expressed; it cannot import provisions in
the statute so as to supply any deficiency.

Principle 2: Before taxing any person, it must be

shown that he falls within the ambit of the
charging section by clear words used in the
section.

Principle 3: If the words are ambiguous and open

to two interpretations, the benefit of interpretation
is given to the subject and it does not matter if the
taxpayer escapes the tax net on account of
legislature’s failure to express itself clearly.

34. Saloman v. Saloman & Intention of the Legislature may signify anything Followed
Co.45 from intention embodied in positive enactment to
speculative opinion as to what the legislature
probably would have meant, although there has
been an omission to enact it. In a Court of Law or
Equity, what the Legislature intended to be done
or not to be done can only be legitimately
ascertained from that which it has chosen to
enact, either in express words or by reasonable
and necessary implication. It is an application of
this principle that a statutory notification may not
be extended so as to meet a casus omissus.

35. Crawford v. Spooner46 We cannot aid the Legislature’s defective Followed

phrasing of the Act, we cannot add, and mend,
and, by construction, make up deficiencies which
are left there.

43
(1999) 3 SCC 346.
44
(2004) 10 SCC 201.
45
(1897) AC 22.
46
1846 4 MIA 179.

10
36. Govind Saran Ganga Saran
v. Commissioner of Sales
Tax47; Mathuram Agrawal v.
State of Madhya Pradesh48;
Indian Banks’ Association v.
Devkala Consultancy
Service49; Consumer Online
Foundation v. Union of
India50
If there is any ambiguity in relation to three Followed
components of a taxing statute, namely subject of
the tax; person liable to pay tax; and the rate at
which the tax is to be levied, no tax can be levied
till the ambiguity or defect is removed by the
legislature.

37. Orient Weaving Mills (P)
Ltd. v. Union of India51;
Kailash Nath v. State of
UP52
Principle 1: When a notification is issued in Distinguished &
accordance with power conferred by the statute, it Overruled
has statutory force and validity and, therefore, an
exemption notification is as if it were contained in
the Act itself.

Principle 2: When two views of a notification are

possible, it should be construed in favour of the
subject as notification is part of a fiscal enactment.

38. Coroline M. Armytage v. It is only in the event of there being a real Followed
Frederick Wilkinson53 difficulty in ascertaining the meaning of a
particular enactment that the question of strictness
or of liberality of construction arises.

Fig1: Table of cases referred by the Bench

47
1985 Supp (SCC) 205.
48
(1999) 8 SCC 667.
49
(2004) 4 JT 587.
50
(2011) 5 SCC 360.
51
1962 Supp 3 SCR 481.
52
AIR 1957 SC 790.
53
(1878) 3 AC 355.

11
Interpretation of Taxing Statutes v. Interpretation of Exemption Notification

The ruling marks a distinction in interpreting a taxing provision (charging provision) and in the
matter of interpretation of an exemption notification. It reiterates and concurs with the general
principles of interpretation that when two views are principle, one favorable to the assessee in
matters of taxation has to be preferred when interpreting the charging section of the statute, but
opposite principle would be applicable in interpretation of an exemption notification.

General principles of interpretation applicable to taxing statutes

In construing taxation statutes, ‘strict rule of interpretation’ will be adhered. The jurisprudential
support for this rule is derived from Article 265 of the Constitution which prohibits the State
from extracting tax from citizens without an authority of law. In a taxation statute, State cannot
at their whims and fancies burden the citizens without authority of law. In other words, when
competent Legislature mandates taxing certain persons/certain objects in certain circumstances,
it cannot be expanded/interpreted to include those, which were not intended by the Legislature.
The bench has placed reliance on certain observations made in the cases of Novopan India Ltd.54,
Mangalore Chemicals & Fertilisers Ltd55, Parle Exports (P) Ltd.56, etc. to support its strict
interpretation rule concerning exemption. There has been congruity in some of the judicial
opinions that ‘an exemption notification has to be interpreted in the light of the words employed
by it and not on any other basis, in the context of the principle that in a taxing statute and there is
no room for intendment, and regard must be given to the clear meaning of the words’57. This is
for the reason that exemptions from taxation have a tendency to increase the burden on other
unexempted class of tax payers and hence should be construed against the subject in case of
ambiguity58.

54
Novopan India Ltd. v. Collector of Central Excise and Customs, 1994 Supp (3) SCC 606.
55
Mangalore Chemicals & Fertilisers Ltd. v Deputy Commissioner of Commercial Taxes, 1992 Supp (1) SCC 21.
56
CCE v. Parle Exports (P) Ltd, (1989) 1 SCC 345.
57
Hansraj Gordhandas v. CCE and Customs, AIR 1970 SC 755.
58
Commissioner of Inland Revenue v. James Forest [(1890) 15 AC 334]; Liberty Oil Millls (P) Ltd., Bombay v.
Collector of Central Excise, Bombay (1995) 1 SCC 451.

12
The ‘plain meaning rule’, with respect to tax laws, suggests that when the language of the statute
is plain and unambiguous, courts have to read and understand the plain language as such, and
there is no scope for any interpretation. This principle flows from the maxim “cum inverbis nulla
ambiguitas est, non debet admitti voluntatis quaestio59”. Following this maxim, court has often
made strict interpretation subordinate to plain meaning rule,60 wherein courts resort to any
interpretative process (i.e. strict interpretation) only when the meaning of the statute is
ambiguous or not manifest on the plain words of the statute.

The Constitution bench has reiterated that strict interpretation of a statute certainly involves
‘literal or plain meaning’ test. However, other tools of interpretation, namely ‘contextual or
purposive’ interpretation cannot be applied, nor any resort can be sought to look to other
supporting material, especially in taxation statute.

Meaning and scope of strict interpretation

To say that strict interpretation involves plain reading of the statute in general circumstances and
to say that one has to utilize strict interpretation in the event of ambiguity is self-contradictory.
For this, one has to consider the ‘meaning and scope’ of strict interpretation while interpreting
tax statute on the one hand and tax exemption notification on the other. Black’s Law Dictionary
describes ‘Strict Interpretation’ as “an interpretation according to the narrowest, most literal
meaning of the words without regard for context and other permissible meanings. This rule of
construction refuses to expand the law by implications or equitable considerations, but confines
its operation to cases which are clearly within the letter of the statute, as well as within its spirit
or reason, not as to defeat the manifest purpose of the legislature, but so as to resolve all
reasonable doubts against the applicability of the statute to a particular case”.61 Strict
interpretation is an equivocal expression, for it means either literal or narrow. When a provision

59
Roman Law Maxim used for interpretation of contracts. If words of a plain legal meaning are used, and especially
in the dispositive clause of a charter, you cannot deny effect to them, unless there is plain declaration in the
instrument itself, that the maker of the deed used them in a different sense. In other words, intention of the author of
the text was irrelevant if the words were not ambiguous.
60
Mangalore Chemicals & Fertilizers Ltd. v. Dy. Commissioner of Commercial Taxes, (1992) Supp. 1 SCC 21.
61
William M. Lile et al., Brief Making and the use of Law Books 343 (Roger W. Cooley & Charley Lesly Ames
eds., 3d ed. 1914).

13
is ambiguous, one of its meaning may be wider than the other, and the strict (i.e., narrow) sense
is not necessarily the strict (i.e., literal) sense.62

Interplay between strict interpretation and literal interpretation

The court has dealt with the principles of literal interpretation and the principle of strict
interpretation and remarked that they are sometimes used interchangeably. However, this
principle may not be sustainable in all contexts and situations. It would not be wrong to say that
‘all cases of literal interpretation would involve strict rule of interpretation, but strict rule may
not necessarily involve the former, especially in the area of taxation’. Strict interpretation does
not encompass strict-literalism into its fold, which leads to absurdity and go against the
legislative intent. If literalism is at the far end of the spectrum, wherein it accepts no implications
or inferences, then strict interpretation can be implied to accept some form of essential inferences
which literal rule may not accept.

Interpretation of exemption notification

Flexibility in operation of a taxing statute is required with the change in circumstances. This
gives competent authorities scope to provide for some form of relief to the taxpayers by issuing
an exemption notification in the interest of general public. As per Section 11 of CGST and S.6 of
IGST Act, Competent authorities is empowered to issue exemption notification upon the
recommendation of GST Council. The exemption can be either absolute or subject to conditions,
as specified in the notification. Identical provision can be found in section 5A of Central Excise
Act in respect of excise duty and section 25 of the Customs Act in respect of customs duty.

With regard to interpretation of exemption clauses or notifications issued under a taxing statute,
historically courts have in many cases taken a view that the ambiguity in an exemption
notification should be construed in favour of the taxpayer. Subsequently, the principle was
diluted with Hari Chand’s63 case holding that mandatory requirements of exemption notification
should be interpreted strictly and failure to comply with the directory conditions is justifiable, if
there is sufficient compliance with the main requirements. The court here applied different tests

62
John Salmond, Jurisprudence 171 n. (t) (Glanville L. Williams ed., 10 th ed. 1947).
63
Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236.

14
when considering the ambiguity of an exemption notification which requires strict construction
and after doing so at the stage of applying the notification, one has to consider liberal rule of
interpretation. The distinction between ‘stage of finding out’ the eligibility to seek exemption
and ‘stage of applying’ the nature of exemption was made in the case of Wood Papers Ltd64 Case
wherein the rule of construction of exemption notification is well-explained in the following
words:

“Unlike charging provision, construction of exemption notification has to be tested on a different

touchstone as the term ‘exemption’ may have varied meanings depending upon the context in
which it is used. Literally, exemption is freedom from liability, tax or duty. Fiscally, it may
assume varying shapes in the form of tax holiday to new units, concessional rate of tax to goods
or persons for limited period or with the specific objective etc. Moreover, Liberal and strict
construction of an exemption provision are to be invoked at different stages of interpreting it. In
order to determine whether a subject fall within the parameters of the exemption notification then
it being in nature of exception, strict interpretation rule is to be followed against the subject but
once the ambiguity regarding applicability is lifted and subject falls in the notification then full
play should be given to it and it calls for wider and liberal interpretation”.

Doctrine of Substantial Compliance and intended use

While dealing with the issue whether a person claiming exemption is required to comply with the
procedure strictly to avail the benefit, the Supreme Court in Hari Chand case65 enunciated the
‘doctrine of substantial compliance’ which implies that the principle of strict construction cannot
be applied in all circumstances and is subject to exceptions depending upon the settings on which
the provision has been placed in the statute and the object and purpose to be achieved. The
doctrine advocates that if mandatory requirements are complied with, it will be proper to say that
the enactment has been substantially complied with notwithstanding the non-compliance of
directory requirements or mere technical provisions.

64
Union of India v. Wood Papers Ltd, (1990) 4 SCC 256.
65
Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236.

15
To invoke such doctrine, a mere attempted compliance is not sufficient but actual compliance
with essential factors is required. On similar principles of reasonableness, the doctrine provides
remedy to a person who takes all reasonable steps expected but has faulted in some minor or
inconsequential aspects, which cannot be described as the ‘essence’ or the ‘substance’ of the
requirement. The acceptance or otherwise of a plea of “substantial compliance” depends upon
facts and circumstances of each case and the ‘purpose and object’ to be achieved and the context
of prerequisites essential to achieve the object and purpose of the rule.

After the Dilip Kumar case66, the theory of substantial compliance cannot be used as a defence to
rule out the strict compliance rule with respect to exemption notifications contingent upon
fulfillment of certain conditions.

Wide Impact of Ruling

The ruling is likely to entrust wider authority to tax administration to ensure that tax exemptions
are granted in circumstances where strict eligibility criteria is established by the taxpayer. If the
judgment is given retrospective effect, revenue department may seek backdated taxes from past
cases pending assessment or adjudicating. The burden of proof will be on the assessee to show to
the Revenue Department that they are eligible for availing a tax exemption. The impact of the
judgment (which is relating to an exemption from custom duty) on other taxing statutes including
Income Tax Act and GST will have to be examined with tooth-comb.

i. Under Income-tax Act

The framework of the Income-Tax Act is different from indirect tax statutes. The charging,
deeming, exemption provision and the method of computation of income are ingrained in the
Statute, since no charge can be brought unless statute permits. Even the rate of Income-Tax
forms integral part of law. The rates are not changed on a regular basis. Unlike indirect taxes,
exemption notifications, if any, are not routine as the administrative circulars focus more in
alleviating difficulties for taxpayers instead of granting exemption on a daily basis under the
Income-Tax Act. Further, the provisions of the Income-Tax Act are amended through the
Finance Act every year.

66
Supra note 1, at 1

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The approach of the court has been that the beneficial provision should be given liberal
interpretation as held in several cases. For instance, Delhi High Court in its decisions of
Amadeus India Pvt. Ltd. and Inter Globe Technology Quotient Pvt. Ltd.67 reiterated the principle
that a beneficial provision has to be construed beneficially holding that Section 10A and 10AA
forms part of an integrated policy of the Government of India for export promotion and have to
be interpreted in a manner to make the scheme workable. The benefit of the said provisions
should not ordinarily be denied on hyper procedural and minor grounds.

It is equally important to consider the effect of the ruling on circulars issued by the Central
Board of Direct Taxes (CBDT) under section 119 of the Income-tax Act, in light of Hindustan
Aeronautics Ltd. v. CIT68 verdict, wherein the court observed that “Circulars or instructions
given by the board are binding in law on the authorities under the Act but when the Supreme
Court or the High Court has declared the law on the question arising for consideration, it will not
be open to a Court to direct that a circular should be given effect to and not the view expressed in
a decision of the Supreme Court or the High Court.” Section 119 empowers the CBDT to issue
orders/circulars setting forth directions or instructions to be followed by subordinate officers in
their role relating to assessment or collection of revenue or the initiation of proceedings for the
imposition of penalties. However, such directions and instructions should not be prejudicial to
the assessee, as stated in sub-section 2(a). Following the principle laid down in Hindustan
Aeronautics case, tax authority may use this judgement as a precedent to disallow the claims of
taxpayers regarding benefit of exemption granted in accordance with the order/directions issued
in the circular. This may cause hardship to taxpayers.

Take for instance, the SEZ Act, 2005, which has brought in some changes in the Income-tax Act
as well. Section 10A and 10AA have been inserted to give income-tax concession to newly
established units in Free Trade Zone and Special Economic Zone. There are various decisions
wherein it was held that section 10A is an exemption provision. However, the Supreme Court in
the case of Yokogawa India Ltd69 held that section 10A is a provision for deduction and would be

67
Principal Commissioner of Income Tax v. Amadeus India Pvt. Ltd & Principle Commissioner of Income Tax v.
Inter Globe Technology Quotient Pvt. Ltd. TS-197-HC-2017 (Delhi H.C.).
68
[2000] 342 ITR 808 (SC); CCE, Bolpur v. Ratan Melting & Wire Industries [2008] 231 ELT 22 (SC).
69
[2017] 391 ITR 274 (SC).

17
considered while computing the gross total income under Chapter VI of the Income-Tax Act.
The Court observed that the amendment of section 10A of the Act, by Finance Act, 2000,
specifically uses expression ‘deduction of profits and gains derived by an eligible unit…’. There
were several Circulars that were placed on record by taxpayers to explain the ‘purpose and
object’ of the amendment. Having looked at the aforesaid Circulars, issued from time to time,
there was a fair bit of ambiguity as to the true nature and effect of the amendment particularly,
Circular No. 7 dated 16-7-2013 and Circular No. 1/2013 dated 17-1-2013 as they appeared to be
conflicting and contradictory to each other. In the former Circular section 10A was referred to as
providing deductions whereas the later Circular uses the expression ‘exemption’, while referring
to the provisions of sections 10A and 10B. As it is held in a catena of judgements and is in
practice, tax provisions are to be literally construed, it was further observed that the true and
correct purport of the amended section will have to be construed from the language used. The
introduction of the word ‘deduction’, in the absence of any contrary material, has to be
understood as a clear enunciation of the legislative decision to alter its nature from exemption to
one providing for deductions.

This judgment could also have a bearing on principle against retrospectivity as upheld in the
case of Vatika Township (P.) Ltd.70 wherein the Supreme Court while holding that insertion of
proviso to Section 113 not being declaratory/clarificatory/curative in nature to operate
prospectively, elaborated upon general principles concerning retrospectivity in the following
words:

“A retrospective legislation is contrary to the general principle that legislation by which the
conduct of mankind is to be regulated when introduced for the first time to deal with future acts
need not change the character of past transactions carried upon the faith of the then existing
law.71 The obvious basis of the principle against retrospectivity is the principle of fairness.

The fundamental rule is that a legislation is not presumed to be intended to have a retrospective
operation unless such a construction appears very clearly in terms of the Act or arises by

70
Commissioner of Income-tax (Central)-I, New Delhi v. Vatika Township (P.) Ltd. [2014] 367 ITR 466 (SC).
71
Ibid, ¶ 31.

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necessary implication. The rule is based on the maxim lex prospicit non respicit meaning the
‘law looks forward and not backward.’

In determining whether a provision is to operate retrospectively or prospectively, one needs to

consider the following factors: language of the amending statute, the legislative intent, the
memorandum to the relevant Finance Act, and the hardship the amendment would cause to the
taxpayer. When Legislation confers any benefit72 or modifies accrued rights or impose
obligations or attach a new disability “Prospective effect” rule applies. However, where
Legislation intends to supply for an obvious omission in the former legislation or explain a
former legislation or imposes burden or liability, “Retrospective Rule” is to be given effect to. 73

Further, the court recognizes that any amendment to a taxing statute is intended to remove any
hardship caused to taxpayers, and not to the tax department and imposing a retrospective levy on
the taxpayer would have caused great hardship. In the instant case, the proviso added to section
113 was not beneficial to the taxpayer rather the provision was onerous to the taxpayer.
Therefore, under the normal rule of presumption, the proviso did not have a retrospective
operation.74”

ii. Foreign Exchange Management Act, 1999

The impact of the judgment on interpretation of RBI circulars also needs to be analyzed. As the
Supreme Court while dealing with the issue as to whether willful default of payment/repayment
obligations to a bank/Financial Institution under derivative transactions would be covered under
RBI Master Circulars on Wilful defaulters dated 1-.7-2008/1-7-2009/1-7-2010 in Kotak
Mahindra Bank case75 , it held:

“The Master Circular by itself does not have penal consequences, whereas sections 403 and 415
of IPC have penal consequences under which criminal action can be initiated against willful
defaulters depending upon the facts and circumstances of the case. Hence, Provisions of RBI

72
Ibid, ¶ 33.
73
Ibid, ¶ 32.
74
Ibid, ¶ 34.
75
Kotak Mahindra Bank Limited v. Hindustan National Glass & Industries limited & Others, (2013) 1 SCC 369.

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Master Circulars need not be strictly construed, and regard must be given to the context or
subject matter in which it is used, if the attribution of natural or ordinary meaning to words used
in a statute or a document leads to a result not reflective of the legislative intent. The context, in
the construction of statutes, means the statute as a whole, the previous state of law, other statutes
in pari materia, the general scope of the statute and the mischief that it intended to remedy76.

Upon reading the Master Circular together with Reserve Bank of India Act, 1934 and Banking
Regulation Act, 1949 and after considering the purpose for which Master circular was issued and
the mischief that it intends to remedy, the Supreme Court concluded that Master circulars covers
not only wilful default of dues by a borrower to the bank but also covers willful defaults of dues
by a client of the bank under other banking transactions such as bank guarantees and derivative
transactions.”

iii. Under GST

Since this judgment has now set a new precedent for examining applicability of exemption
notification, wide repercussions will follow in GST regime. As categorically stated by the
Constitution Bench, all the decisions which followed the principles adopted in Sun Export Case
stand overruled, it is conceivable that the court will now take a different approach while dealing
with the pending cases of taxpayers or department’s appeal against the decisions favoring the
assessee and limitation period for filing appeal, if favorable order was given after applying
liberal interpretation rule with respect to interpretation of exemption notification. How the
Department is going to utilize this judgment to deny benefit of exemption to the person claiming
the benefit unless parameters of the exemption notification are strictly complied by the assessee
and whether condonation for non-compliance with the conditions of the exemption notification
would be given on the ground of procedural or technical error, only time will test. Going
forward, assessees will now have to be more cautious while claiming benefit of exemption
notification. Being a new code, which is yet to settle several interpretational aspects on
exemption and characterization (for rate purposes) will arise and this will accentuate litigation,
unless specific administrative guidance is issued by the administration as to how the Constitution

76
Ibid, ¶¶ 49, 61.

20
bench decision will be interpreted, which now assumes the status of law under Article 141 of the
Constitution.

Mukesh Butani is Managing Partner at BMR legal. Bhagyashree is an Associate and Shrikant
Gupta is interning with the firm.

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