Cardinal principles of interpretation of taxing statutes

Revenue law is entirely a creature of statute. Article 265 of the Constitution mandates that no tax shall be levied or-collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law.

Interpretation of statutes is a specialized branch of legal studies. In this branch, the set of rules that regulate the interpretation of taxing enactments has been gradually acquiring practical importance. Legislature, precedent and custom are the three principal sources of law in our legal system. Of these, legislation, is the most potent, because it can create new law.

Interpretation of statute means that the court has to ascertain the facts and then interpret the law to apply to such facts. ... The most common rule of interpretation is that every part of the statute must be understood in a harmonious manner by reading and construing every part of it together.

The Tax Laws

Tax laws are highly complex, complicated and beyond understanding of a tax-payer. The words and expressions used are not simple. Many sections contain sub-sections, clauses, sub-clauses. Many deeming provisions have been inserted. Meaning of an expression is extended by way of Explanation and is curtailed by way of proviso, sometimes more than one provisos and explanations meaning differently.

Meaning of Interpretation and Construction of Statute

The basic principles of interpretation of taxing statutes as laid down by Hon’ble Supreme court in the case of CIT v. Yokogawa India Ltd. as follows:

“The cardinal principles of interpretation of taxing statutes centres around the opinion of Rowlatt, J. in Cape Brandy Syndicate v. Inland Revenue Commissioners which has virtually become the locus classicus. The above would dispense with the necessity of any further elaboration of the subject notwithstanding the numerous precedents available inasmuch as the evolution of all such principles are within the four corners of the following opinion of Rowlatt, J.: (Cape Brandy case, KB p. 71)

“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 used.” – [CIT v. Yokogawa India Ltd.: (2017) 391 ITR 274 (SC)]

In Principles of Statutory Interpretation by Justice G.P. Singh (14th edn.at p. 91) this elementary rule of literal construction has been stated with reference to scores of decisions, including that in Crawford v. Spooner: (1846) 4 MIA 179 as follows:

“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.”

According to Salmond interpretation or construction means “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.”

There are three bodies which divide government power namely legislature, the executive and the judiciary. It is for the legislature to make laws. It is executive to execute these laws and the function of court is to interpret them. Interpretation of statutes to render justice is primary function of the judiciary. The main body of the law is to be found in statutes, together with the relevant statutory instruments and in case law as enunciated by Judges in the Courts. But the Judges not only have the duty of declaring the law, they are also frequently called upon to settle disputes as to the meaning of words or clauses in a statute. The courts have to interpret the laws and not enact them. The primary function of the courts while interpreting or construing a statute is to see the intention of the legislature. Judiciary is duty bound to act upon the true intention of the legislature. The maxim “Judicis estjus dicere, non dare’’ pithily expounds the duty of the Court. It is to decide what the law is and apply it, not to make. [ACIT v. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC)]

The Income tax Act is a self contained code, and provides machinery for imposing and collecting tax, obtaining reliefs and appeals against improper orders etc. While tax law is a part of the general law, it has got its own distinct features. There are some special provisions which are attracted while interpreting tax laws.

Similarly rule of interpretation would come into play only if there is doubt with regard to the express language used. - [Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC)]

The need of interpretation arises only when the words used in the statute are on their own term, ambivalent and do not manifest the intention of legislature. - [Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC)]

Basic principles / rules of interpretation of taxing statute

The art of correct interpretation would depend on the ability to read what is stated in plain language, read between the lines, read ‘through’ the provision, examining the intent of the Legislature and call upon case laws and other aids to interpretation.

Rules of interpretation are applied only to resolve the ambiguities. The object and purpose of interpretation is to ascertain the mens legis, i.e., the intention of the law, as evinced in the statute. The key to the opening of every law is the reason and spirit of law. To be literal in meaning is to see the body and miss the soul. The judicial key to interpretation is the composite perception of the Deha (body) and the Dehi (Soul) of the provision.

Intention of Legislature

The intention of the legislature assimilates two aspects :

(a) In one aspect it carries the concept of meaning', i.e. what the words mean.

(b) In another aspect, it conveys the concept of purpose and object' or the ₹reason and spirit' pervading through the statute.

The dominant purpose of construction of any statutory provision is to ascertain the intention of the legislature and the primary role is to ascertain the same by reference to the language used. The Supreme Court in Doypack Systems (P) Ltd. v. UOI (1998) (2) SCC 299 laid down:

"It has to be reiterated that the object of interpretation of a statute is to discover the intention of 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 context 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 stand". The object of all interpretation is to discover the intention of Parliament, but the intention of Parliament must be deduced from the language used."

Therefore the process of construction combines both literal and functional approaches. In the case of GEM Granites v. CIT, the Hon’ble Court observed that what one may believe or think to be the intention of Parliament cannot prevail if the language of the statute does not support that view, thus object of the statute has to be gathered from language and not on what one believes or thinks. – [GEM Granites v. CIT (2004) 271 ITR 322 (SC)] 

[1] Literal rule of interpretation : Language of Statute should be read as it is 

Literal rule of interpretation is the primary rule. Under this rule of interpretation the Courts interpret the statutes in a literal and ordinary sense. They interpret the words of the statute in a way that is used commonly by all. It is incumbent on the court to use the grammatical meaning.

Literal construction means that there is no room for any intendment. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

If the language of the statute is clear and unambiguous, words must be understood in their plain meaning. The wordings of the Act must be construed according to its literal and grammatical meaning, whatever the result may be.

Literal rule lays emphasis upon the ‘letter’ or the text of the statues. If the words of the statue are clear, the Court must give effect to them. Lord Reid said: We often say that we are looking for the intention of Parliament, but that is not quite accurate. We are seeking the meaning of the words which Parliament has used, not what Parliament meant, but the true, meaning of what they said.

In a classic passage Lord Cairns stated the principle 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 law the case might otherwise appear to be. In other words, if there be admissible in any statute, what is called an equitable construction, certainly, such a construction is not admissible in a taxing statute where you can simply adhere to the words of the statute.

While interpreting tax statute, the function of the court of law is not to give words in the statute a strained and unnatural meaning to cover and extent its applicability to the areas not intended to be covered under the said statute. – [Vidarbha Irrigation Dev. Corpn. v. ACIT (2005) 278 ITR 521 (Bom)]

Rule of Literal Interpretation : Language of Statute should be read as it is 

This is the most widely used Rule of Interpretation in taxing statutes. The first and the most elementary rule of construction is that it is to be assumed that the words and phrases of legislation are used in their technical meaning if they have acquired one, or otherwise in their ordinary meaning, and the second is that the phrases and sentences are to be construed according to the rules of grammar. – [Krishi Utpadan Mandi Samiti v. UOI (2004) 267 ITR 460 (All.)]

Pure, simple and grammatical sense of language used by Legislature is best way of understanding as to what Legislature intended. – [Coal Mines Officers’ Association of India v. UOI (2004) 266 ITR 429 (Cal.)]

If the language of the statute is clear and unambiguous, the Court cannot discard the plain meaning, even if it leads to an injustice. – [CIT v. T.V. Sundaram Iyyengar (1975) 101 ITR 764 (SC)]

It is not permissible to construe any provision of a statute, much less a taxing provision, by reading into it more words than its contains. – [CIT v. Vadilal Lallubhai (1972) 86 ITR 2 (SC)]

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 a casus omissus, the defect can be remedied only by Legislation and not by judicial interpretation. – [Smt. Tarulata Shyam v. CIT (1971) 108 ITR 345 (SC)]

When the words of a taxing statute fail, so must the tax

No tax can be imposed on the subject without words in the Act clearly showing an intention to lay 

a burden upon him. - [CIT v. Elphinstone Spinning & Weaving Mills Co Ltd. (1960) 40 ITR 142 (SC)]

Rowlatt J. in Cape Brandy Syndicate v. IRC (1921) 1 KB 64 approved in CIT v. Ajax Products Ltd. 

(1965) 55 ITR 741 (SC)

“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 to be implied. One can only look at the language used.” (p. 747)

Thus, when the language of a taxing statute is clear, if an assessee falls within the four corners of the statute, he is to be taxed; if not, no tax is to be levied.

[2]  Strict rule of Interpretation - Words to be construed strictly

Strict rule of interpretation is one of the principles used to interpret fiscal and penal statutes. According to this rule, plain, clear and direct meaning is given to words which are used in common parlance by the general public to which such law is applicable. There can be no presumption by court with respect to particular meaning. Court cannot give particular meaning to a word which is not clear by making a presumption that particular meaning is the intention of the legislature. Court cannot under the guise of possible or likely intention of the legislature, give meaning to the words which are not clear and where contextual meaning cannot be made out. 

The adjudicating authority should always to follow the accepted and settled principles of interpretation of tax statutes and should not interprete the provisions to suit the revenue. Consideration of equity is wholly out of place in a taxing statute and only principle of strict interpretation applies to taxing statutes.

The principle of strict interpretation of taxing statutes was best enunciated by Rowlatt J. in his classic statement: “In a taxing statute 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 used, (vide Cape Brady Syndicate v. IRC (1921) 1 KB 64 [cited with approval in AIR 1968 SC 623)”.

A tax is imposed for public purpose for raising general revenue of the state. A taxing statute is to be strictly construed. Lord Hasbury and Lord Simonds stated : “The subject is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words.”

Remedial statutes are known as welfare, beneficial or social justice oriented legislations. Penal statutes, on the other hand, are those which provide for penalties for contravention of the law and are directed against the offender in relation to the state by making him liable to imprisonment, fine, forfeiture or other penalty.

A remedial statute receives a liberal construction, whereas a penal statute is strictly construed. In case of remedial statutes the doubt is resolved in favour of the class of persons for whose benefit the statute is enacted; whereas in case of penal statutes the doubt is resolved in favour of the alleged offender.

The principle applied in constructing a penal act is that if, in construing the relevant provisions, “there appears any reasonable doubt or ambiguity”, it will be resolved in favour of the person who would be liable to the penalty. If there are two reasonable constructions we must give the more lenient one. The court must always see that the person to be penalised comes fairly and squarely within the plain words of the enactment. It is not enough that what he has done comes substantially within the mischief aimed at by the statute.

A penal provision has to be construed strictly.  – [ACIT v. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC)]

It is settled law that a taxation statute in particular has to be strictly construed and there is no equity in a taxing provision. – [H. H. Lakshmi Bai v. CIT (1994) 206 ITR 688 (SC)]

In Associated Cement Co. Ltd. v. Commercial Tax Officer AIR 1981 SC 1887, E.S. Venkataramiah J. of the Supreme Court, speaking for the majority said:

“Tax, interest and penalty are three different concepts. Tax becomes payable by an assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not to be wrong to say that such interest is compensatory in character and not penal.” – [Associated Cement Co. Ltd. v. Commercial Tax Officer AIR 1981 SC 1887 (SC)]

It was held that no tax can be imposed by inference or analogy and while imposing tax one must have strict regard to the letter of the law. But once the charge is clearly laid, considerations of equity and hardship have no place. – [ITO v. K.P. Varghese (1981) 131 ITR 597 (SC)]

In A.V. Fernandez v. State of Kerala AIR 1957 SC 657, His Lordship Bhagwati J. has stated the principle of taxing laws as follows :

“ In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of 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 matter.” – [A.V. Fernandez v. State of Kerala AIR 1957 SC 657 (SC)]

[3] The Golden Rule : Purposive interpretation

The golden rule – Words should be given their ordinary sense unless that would lead to some absurdity or inconsistency with the rest of the instrument. No hypothetical considerations though.

This rule is to some extent an extension of the literal rule and Mischief Rule and under it the words of a statute will as far as possible be construed according to their ordinary, plain, and natural meaning, unless this leads to an absurd result. It is used by the courts where a statutory provision is capable of more than one literal meaning and leads the judge to select the one which avoids absurdity, or where a study of the statute as a whole reveals that the conclusion reached by applying the literal rule is contrary to the intention of Parliament. One of the principle laid down by the courts is that regard should be given to the object and purpose of the introduction of a particular provision in the Income-tax Act. It emerges that this rule of interpretation has been often applied in India.

The Golden rule implies that if a strict interpretation of a statute would lead to an absurd result then the meaning of the words should be so construed so as to lead to the avoidance of such absurdity. A further corollary to this rule is that in case there are multiple constructions to effect the Golden rule the one which favours the assessee should always be taken. This rule is also known as the Rule of Reasonable Construction. However the application of this rule in the interpretation of taxing statutes is rather limited since the literal rule is more often applicable and it is oft remarked that equity and taxation are strangers.

The object and the rules of Interpretation being what they are it is only natural that the rules of interpretation should not be static but dynamic. Rules of interpretation are not the rules of law and have to evolve constantly to ensure that they lie in sync with the march of the society. It is in this context that the Supreme Court in Kehar Singh v. State (A.I.R. 1988 Supreme Court 1883) gave a go-by to the golden rule by which statutes were to be interpreted according to the grammatical and ordinary sense of the word.

A construction which would defeat the very object of the legislature should be avoided

The Income-tax Act has to be read and  understood according  to  its  language. If the plain  reading  of the language  compels the court to adopt an  approach  different from  that dictated by any rule of logic the court may have to adopt it. – [CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. (1992) 196 ITR 149 (SC)]

In Keshavji Ravji and Co. v. CIT, a Bench of three judges has taken the view that circulars beneficial to the assessee which tone down the rigiour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. – [Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC)]

A golden rule which has been adopted by the courts in India, starting from the Supreme Court judgment in CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 and CIT v. Naga Hills Tea Co Ltd. (1973) 89 ITR 236 is that if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. But more than one interpretation of the provision must be reasonably possible and one should not attempt to introduce into the provision some artificial or non-existent ambiguity and then proceed to decide in favour of the assessee. Thus the golden rule must be applied with proper caution and control.

If the strict interpretation of the taxing statute is likely to lead to a manifest absurdity, then the golden rule of construction implies that the meaning of the words should be so effected that such an absurdity is avoided. The application of this rule is rather limited in the realm of construction of taxing statutes, since the literal rule would gain precedence over the golden rule and it is often remarked that equity and taxation are strangers – [Grey v. Pearson (1857) 6 HL Cas. 61]

[4]  Harmonious Interpretation

Harmonious construction – When the different provisions of the Act are harmonised or reconciled in light of the object and purpose of the enactment in question.

Harmonious construction is a principle of statutory interpretation used in the Indian legal system. It holds that when two provisions of a legal text seem to conflict, they should be interpreted so that each has a separate effect and neither is redundant or nullified.

Rule of Harmonious Construction - When there is a conflict between two or more statues or two or more parts of a statute then the rule of harmonious construction needs to be adopted. The rule follows a very simple premise that every statute has a purpose and intent as per law and should be read as a whole.

Wherever it is possible to do so, the provision must be harmoniously constructed by avoiding a conflict. A construction which reduces the statute to a futility has to be avoided. A statute or any enabling provision therein must be so construed as to make it effective and operative on the principle expressed in maxim “UT RES MAGIS VALEAT QUAM PAREAT” i.e. a liberal construction should be put upon written instruments, so as to uphold them, if possible and carry in to effect the intention of the parties. – [CIT v. Hindustan Bulk Carrier (2003) 259 ITR 449 (SC)]

Parliament is normally presumed to legislate in the knowledge of, and having regard to, relevant judicial decisions. If, therefore, Parliament has a subsequent opportunity to alter the effect of a decision on the legal meaning of an enactment, but refrains from doing so, the implication is that Parliament approves of that decision and adopts it. That was amply demonstrated by the amendment of Section 36(1)(viii) made in 1985. – [CIT v. West Bengal Industrial Development Corporation Ltd. (1993) 203 ITR 422 (Cal)]

The provisions of two enactments must be read harmoniously so as not to subject them to any strained construction giving rise to an artificial inconsistency or repugnance. – [Sankaranarayanan Bhattathirpad v. ITO (1985) 153 ITR 562 (Ker)]

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. – [CIT v. R. M. Amin (1971) 82 ITR 194 (Guj)]

The most common rule of interpretation is that every part of the statute must be understood in a harmonious manner by reading and construing every part of it together. Further, L.J. Denning in Seaford Court Estates v. Asher speaks as hereunder:

“A Judge must not alter the material of which the Act is woven but he can and should iron out the creases. 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 the Parliament and then he must supplement the written words so as to give force and life to the intention of the Legislature.” – [Seaford Court Estates v. Asher (1949) 2 All ER 155]

[5]  Rule of beneficial construction

In cases where there are two interpretations possible, the one which is beneficial to the assessee would be preferred. This principle was laid down in a landmark Judgment in IRC v. Duke of Westminister 1936 AC 1 wherein Tomlin LJ. stated that an assessee may arrange his affairs within the bounds of the law so as to minimize the incidence of tax.

In case of doubt or ambiguity, construction favourable to assessee to be adopted

An authority to impose a tax or to levy fees cannot be deduced from provisions of doubtful import and when the words used in a statute are capable of two interpretations, one in favour of the taxing authority and the other in favour of the subject, the latter interpretation must hold the field. The reason for these rules is that it is opposed to the well recognised conceptions governing a progressive state of society to permit statutory bodies to assume by inference from the words of an enactment the authority to impose taxes or to levy fees, as nothing is more liable to abuse than such supposed authority.

It was held, if there is any doubt in the construction of any provision of a taxing statute, that doubt must be resolved in favour of the assessee. – [STP Ltd. v. Collector of Central Excise JT 1997 (9) SC 631]

According to Mahalakshmi Polyplast (P) v. State of UP. (1992) 86 STC 523 (All) in interpreting fiscal statutes there is a well-accepted principle, that where a provision is capable of two constructions, one that favours the subject should be preferred. – [Mahalakshmi Polyplast (P) v. State of UP. (1992) 86 STC 523 (All)]

If a provision of a Taxing Statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee, has got to be accepted. This is a well accepted view of law. - [CIT v. Naga Hills Tea Co. Ltd. (1973) 89 ITR 236 (SC)] 

In CIT v. Shahzadanand and in CIT v. Punjab Kulu Valley Transport AIR 1970 SC 1734, it is observed that if there be any doubt or if there be two alternative interpretations possible, taxing statute must be interpreted in favour of the assessee and against the Revenue Authority. – [CIT v. Shahzadanand, AIR 1966 SC 1342, CIT v. Punjab Kulu Valley Transport AIR 1970 SC 1734]

Charging sections to be strictly construed while benevolent and procedural sections should be liberally construed

This is a very important and practical rule of interpretation and generally resorted to while interpreting the sections pertaining to incentives, exemptions and deductions where the spirit is to promote exports, increase earnings in foreign convertible exchange, promote industrialisation, infrastructure development etc. A provision for appeal should also be liberally construed.

It was held that in interpreting a fiscal statute, the Court cannot proceed to make good the deficiencies if there be any. The Court must interpret the statute as it stands and in case of doubt, in a manner favourable to the taxpayer. – [CIT v. Shaan Finance (P) Ltd. (1998) 231 ITR 308 (SC)]

Where there are two possible interpretations of a particular section which is akin to a charging section, the interpretation which is favourable to the assessee should be preferred while construing that particular provision. – [CIT v. Poddar Cement (P) Ltd. (1997) 226 ITR 625 (SC)]

A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally, and since as provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. While interpreting the various provisions, the Court must not adopt a hyper technical approach and apply cut and dry formula. A pragmatic approach should be adopted so that the object of the introduction/insertion of a particular provision could be achieved. – [Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 : 104 CTR 116 : 62 TAXMAN 480 (SC)]

In CIT v. Strawboard Manufacturing Co. Ltd., wherein it was observed that, when a provision is made in the context of a law providing for concessional rates of tax for the purpose of encouraging an industrial activity, a liberal construction should be put upon the language of the statute. It is also stated that the interpretation has to be taken in favour of the assessee if there is any ambiguity. – [CIT v. Strawboard Manufacturing Co. Ltd. (1989) 177 ITR 431 : 44 Taxman 189 (SC)]

As the provision of Section 80P is intended to encourage and promote the growth of co-operative societies, a liberal construction should be placed on the language employed in the provision. -  [CIT v South Arcot District Co-op. Marketing Society Ltd. (1989) 176 ITR 117 (SC)]

The object of section 80-O is to encourage the export of Indian Technical Know how and augmentation of foreign exchange resources of the country and hence a superficial and narrow interpretation can only defeat the benevolent purpose behind the provision of section 80-O. – [Gannon Dunkerly & Co. Ltd. v. CBDT (1986) 159 ITR 162 (Bom.)]

It was held that if the Court finds that the language of taxing provision is ambiguous or capable of more meaning than one, then the Court has to adopt the interpretation which favours the assessee. – [CIT v. Vegetable Products Ltd (1973) 88 ITR 192 (SC)]

Those sections which impose the charge or levy should be strictly construed; but those which deal merely with the machinery of assessment and collection should not be subjected to a rigorous construction but should be construed in a way that makes the machinery workable. – [Gursahai Saigal v. CIT (1963) 48 ITR 1 (SC)]

[6] Rule of Ejusdem generis or noscitur a sociis

     The Rule is that the meaning of a general word is restricted by the special words appearing   along with it. 

Ejusdem generis. (eh-youse-dem generous) adj. Latin for "of the same kind," used to interpret loosely written statutes. Where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed.

Under this rule where general words follow particular words the general words are construed as being limited to persons or things within the class outlined by particular words. The words used together should be understood as deriving colour and sense from each other. They should be read together as one.

The true scope of the rule of ‘ejusdem generis’ is that the words of general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. When the particular words pertaining to a class, category or genus are followed by general words, the general words are construed as limited to the things of the same kind as those specified. The phrase “any other person” in rule 6D(2) of the Income-tax Rules, 1962, would draw its colour from the preceding word, namely, “employee”. Held accordingly, that a trustee was not an employee or not akin to an employee and the amounts paid to trustees by the trust could not be disallowed under rule 6D(2). CIT v. Shivalik Drug (Family Trust) (2008) 300 ITR 339 (All.)

[7] The Mischief Rule of Interpretation (Heyden’s rule)

The application of the mischief rule would generally be done very rarely in taxing statutes, since a Court would have to exhaust all the other modes and aids to interpretation before applying the ‘mischief rule’.

A statute is to be construed so as to suppress the mischief in the law and advance the remedy. This was set out in Heydon’s case (1584) 3 Co. Rep. 7a. Under this rule the judge will look at the Act to see what was its purpose and what mischief in the common law it was designed to prevent.

Broadly speaking, the rule means that where a statute has been passed to remedy a weakness in the law, the interpretation which will correct that weakness is the one to be adopted. This rule is also one of the cardinal rules of interpretation when the words of a taxing statute are ambiguous and incapable of a literal interpretation and generally takes into account four parameters, namely

    

    This rule is one of the canons of statutory interpretation and its basis lies in the four aspects outlined  below :

     (i)    What was the common Law prior to enactment of the statute in question;

     (ii)   What was the defect or mischief for which the earlier law did not provide (defect or mischief which the common law failed to rectify)

     (iii)  What remedy did the Legislature (Parliament) provide by way of the  statute enacted;

     (iv)  The true Legislative intent behind the remedy [Legislature (Parliament)  intent behind such remedy].

This rule would come into play only if the words of the taxing statute were silent or ambiguous on an issue and the General Clauses Act also did not throw light on the interpretation.

Subsidiary rules

Special law overrides general law

The accepted rule of interpretation is that special provisions will prevail when there is a conflict between the two :

This rule of interpretation has been highlighted in CIT v. Shahzada Nand & Sons (1966) 60 ITR 32 (SC).

However, as the name suggests, it is a general law and will always be overridden or superseded by a special law as per the canons of judicial interpretation. The Latin maxim “Generalia specialibus non derogant” is one of the cardinal maxims of interpretation and means that a general law will always be superseded by a special law. – [State of Gujarat vs. Ramjibhai AIR 1979 SC 1098]

Thus since taxing statutes are always special laws and most often self contained enactments which even oust the jurisdiction of Courts in many cases, they would most definitely prevail over the General Clauses Act, 1897, when they define the scope of terms or procedures.

However the general rule would apply wherever the special statute does not define the scope or restricts the scope, the general rule would apply as controlled or cut down by the special rule. – [South India Corporation (P) Ltd. v. Board of Revenue AIR 1964 SC 207]

Charging Section should be strictly construed while the Procedural Sections should be liberally interpreted

This is also a very practical rule in the interpretation of taxing statutes and the charging section should be liberally construed while the procedure should have the widest possible ambit so as to ensure that no one has a vested right of procedure.

This is a very important and practical rule of interpretation and generally resorted to while interpreting the sections pertaining to incentives, exemptions and deductions where the spirit is to promote exports, increase earnings in foreign convertible exchange, promote industrialisation, infrastructure development etc. A provision for appeal should also be liberally construed.

Those sections which impose the charge or levy should be strictly construed; but those which deal merely with the machinery of assessment and collection should not be subjected to a rigorous construction but should be construed in a way that makes the machinery workable.

Statute must be read as a whole 

An interpretation clause, which extends the meaning of a word, does not take away its ordinary meaning. It should be borne in mind that an interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable. However it is to enable the word as used in the Act, when there is nothing in the context or the subject-matter to the contrary, to be applied to some things to which it would not ordinarily be applicable.

Judgment of foreign courts have only persuasive value

A domestic court's citation of a foreign precedent may result in an approval or distinction from the fact situation before it. In any case, a foreign precedent should only be assigned persuasive value and cannot be relied on when it clearly runs contrary to existing domestic law.

Where there is a conflict between two statutes

The general rule to be followed in case of a conflict between two statutes is that a later statute abrogates the earlier (‘leges posteriors priores contrarias abrogant’) and the well-known exception is that general legislations do not derogate special legislations.

Claim as Donation under section 80G or Business Expenses under section 37(1)

It was held that the provisions of section 37 are general in nature and the provisions of section 80G are specific. Applying the maxim generalia specialibus non derogant if an amount is liable for deduction under section 80G it cannot be claimed under the general provisions of section 37(1). – [Jaswant Trading Co. v. CIT (1995) 212 ITR 24 : 128 CTR 306: (1996) 85 Taxman 639 (Raj.)]

Partnership Act vs. Income Tax Act

The above maxim was applied when the questions relating to assessments of a firm and its partners arose under the Income-tax Act, 1961 where the dissolution of the firm and its succession was held to be governed by the Special Act viz., the Income-tax Act and not the Partnership Act.

that when the Legislature has deliberately made a specific provision to cover a particular situation, for the purpose of making an assessment of a firm under the Income-tax Act, there is no scope for importing the concept and the provisions of the Partnership Act. The legal position of a firm under the income-tax law is different from that under the general law of partnership in several respects. – [CIT v. Shambulal Nathalal & Co. (1984) 145 ITR 329 (Karn.)]