Basics of Reading Income Tax Act, 1961

Every Tax Officials and professionals goes through various laws and are supposed to have a sound knowledge of various kinds of laws (Taxation laws, Commercial and Mercantile Laws, Labor Laws, Security Laws, Economic Laws etc.) to become a successful officers and professionals. There are plenty of reference books that are available in market and which help in understanding of Law. Laws are made based upon the requirements of the environment and society under which it operates. So as society is never static, hence are our laws which keep on changing from time to time. It is never sure that the provisions we study today will remain same when we will be dealing. However, reading a language of a bare act is not at all similar to reading a book in your shelf. It requires special understanding of the language of law and interpretation of statues.

It is important to understand every single word used in a statute which conveys a specific meaning, but it is neither possible nor desirable to define every word in the statute. The words which are not defined in such Acts should be interpreted according to their ordinary and natural meaning. To do so, first one has to find whether any definition has been assigned to that word in the General Clauses Act, 1897, in which case, this definition is used to understand the meaning of that word. If it is not defined in the General Clauses Act, 1897, one has to find whether that word is defined in any other Act, in which case, its meaning in such an Act may be used as a guide to understand the meaning of the word. At times the dictionary meaning or a judicial interpretation helps understand the meaning of a word used in an Act.

The General Clauses Act, 1897, contains definitions, which are applicable to all common laws including tax laws, unless and until any repugnant or different definition is contained in the definition section of the tax laws. It also contains general rules of construction, which are applied on common law as well as tax laws. Here I am trying to figure some points which must be aware of while reading a Law. The list is, however, not exhaustive.

[1]  Act

      An Act is a law that is passed by the legislature. It is also known as a statute.

Basic rules -  

• the Act has to be read as a whole; and

• the Act has to be interpreted in such a way as to give effect to its purpose or object.

Bare Act

Bare Act do not contain description and any commentary, but mere acts.

LITERAL INTERPRETATION

While reading the Bare Act, you should have to read the Bare Act as it is, literal interpretation is the first principle of interpreting a statute. The principle of literal interpretation is widely followed by the judges. Interpret literally simply means the Bare Act should be read as their plan and ordinary meaning, while reading Bare Act do not guess any possible meaning. Read the Bare Act as it is written.

Literal rule : Language of Statute should be read as it is :

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, 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.

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. Corporation v. ACIT (2005) 278 ITR 521 (Bom)]

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)]

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.

Long title

Only Acts have long titles. Subsidiary legislation does not. Long titles of Acts appear on the first page after the contents pages. Long titles begin ‘An Act …’ and explain briefly the Act’s purpose.

Short title

The title, usually called the “short title”, which is the name by which the Act is known. This is likely to be section 1 in the Act. It simply gives the name of the Act (which includes the year in which it was enacted11) in the same way as the title page of a book

[2]  Income Tax Act, 1961 (No. 43 of 1961)

If you have ever picked up any Bare Act, then you would have certainly seen something like No _ of Year _ . For e.g. Income Tax Act, 1961 (No. 43 of 1961). It simply denotes the number of Act passed during that year. In the given example, it says that Income Tax Act, 1961 is the 43rd Act which was passed in the year 1961.

[3]  Schedules to the Act

The Schedules appended to a statute form part of it. They are generally added to avoid encumbering the statute with matters of excessive details, guidelines to work out the policy of the statute, transitory provisions, rules and forms which need frequent amendment and the like. Much importance is not given to the forms unless they contain requirements of a mandatory nature.

Schedules to the Income Tax Act 1961 are various annexures that were added and amended to include topics and scenarios which were not previously covered. Various schedules have been added to the Income Tax Act at different points of time, to make the Income Tax Act more inclusive and comprehensive

[4]  Rule

A Rule is a subsidiary enactment that helps in governing Act. They are secondary in nature, meaning thereby that they do not have an independent existence of their own. They are made to make the parent Act function. The rules provide for the details that have not been provided for in the Act, however, Rules by no means can go beyond the power conferred by the Act, or extend the same.

How to locate the provisions for the Income Tax Rules?

In section 2(33) of the Income Tax Act, 1961, the word 'prescribed' is defined as follows:-"prescribed" means prescribed by rules made under this Act ;

Whenever in any provisions of the Income Tax Act, 1961, the word ‘prescribed’ or group of words ‘as may be prescribed’ or 'prescribed form verified in the prescribed manner' is found, it suggests that there shall be some provisions in a rule or Form in the Income Tax Rules, 1962.

Reference may be made to section 10(5) to find Rule 2B, section 10(13A) to find Rule 2A, and so on.

[5]  Objective of Income Tax Act, 1961

First thing you have to do before reading a Bare Act is you have to understand the purpose and objects of that particular enactment, you have to find why this act was enacted by the legislature. Almost in every Act provides a long tittle in the beginning of that Act which define the object of that Act, for example the long tittle of the Income Tax Act, 1961 is  “An Act to consolidate and amend the law relating to income-tax and super-tax.”

In other words, every act has a preamble which spells out its objectives. Look for it on the very first page of the Act, just above the Section -1. For e.g. Objectives of Income tax Act, according to its preamble, are ‘An Act to consolidate and amend the law relating to income-tax and super-tax.

[6]  Interpretation/definition clause

Every Act provides an interpretation or definition clause in starting of the Act. This interpretation clause or definition clause define or explains some terms which are used in the Act. Most of the Bare Act section 2 contains definitions. For example, the Income Tax Act, 1961 contains the definitions of some terms or words which are used in the Act and these particular terms shall be interpreted as Section 2. Some time there may be some terms or words which has not been defined in the interpretation or definition clause, in that cases we have to go through the General Clauses Act, 1891 to understand these terms.

Generally definitions can be categorized in five types:

(i)  Inclusive definitions’ 

    ‘Inclusive definitions’ can be identified by the presence of the word ‘includes’ in the definition.

v  When a definition uses a word “includes”, it provides an illustrative meaning & not an exhaustive meaning.

v  It is used when an exhaustive definition cannot be given, or the government wants to keep the scope of the definition open.

v  Such a definition does not confine the scope of income but leaves room for more inclusions within the ambit of the term.

v  Such definition can include “what is not specifically stated or mentioned in the definition” if the specified criteria are satisfied.

An inclusive definition allows including, within its ambit, anything which is similar to the term defined. Examples of this category are:

(a)    Sections 2(8) "assessment" includes reassessment.

(b)   Section 2(12A) "books or books of account" includes ledgers, day-books, cash books…”,

(c)    Section 2(13) "business" includes any trade, commerce or manufacture…”,

(d)   Section 2(15) "charitable purpose" includes relief of the poor, education, medical relief…”,

(e)    Section 2(24) "income" includes—(i) profits and gains; (ii) dividend..”

(ii)  ‘Exhaustive definitions’ 

‘Exhaustive definitions’ can be identified by the presence of the word ‘means’ in the definition.

When a definition uses a word “means”, the definition is self-explanatory, restrictive & exhaustive. It implies that the term defined is limited only to the extent specified as & nothing else. There is no scope of assumption in such definition.

An exhaustive definition does not allow including anything from outside to the scope of the definition. It restricts the meaning therefore it may also be called restrictive definitions. Examples of this category are:

(a)       Sections 2(1) “advance tax” means the advance tax payable in accordance with the provisions of Chapter XVII-C.” Therefore anything which is not stated in Chapter XVII-C cannot be interpreted as advance tax.

(b)      Section 2(33) "prescribed" means prescribed by rules made under this Act,

(c)       Section 2(42B) "short-term capital gain" means capital gain arising from the transfer of a short-term capital asset. In this category of definitions anything beyond the scope of definitions is not permitted.

Let us understand the two categories mentioned above with the following example: If the definition is “Colour includes Violet, Indigo, Blue, Green, Yellow, Orange, Red.” then even Magenta (a mixture of Red and Blue), Cyan (a mixture of Blue and Green) and even Black can also be interpreted as colour. Argument that technically Black is absence of all colours hence it cannot be interpreted as a colour is not acceptable as ordinarily Black is understood to be a colour. Ordinary and commonly understood meaning has to be assigned to the term. But if the definition is “Colour means Violet, Indigo, Blue, Green, Yellow, Orange, Red” then Magenta or Cyan or Black cannot be interpreted as a colour.

(iii) ‘Adoptive definition’ 

‘Adoptive definition’ can be identified by the presence of a reference of other Acts in the definition. In this category instead of defining the term afresh, for the purpose of the Act, the definitions from other Acts are adopted in the Act. Examples of this category are :

(a)    Section 2(20)"director", "manager" and "managing agent", in relation to a company, have the meanings respectively assigned to them in the Companies Act, 1956 (1 of 1956)”,

(b)   Section 2(29D) "National Tax Tribunal" means the National Tax Tribunal established under section 3 of the National Tax Tribunal Act, 2005”;

(c)    Section 2(37) “public servant" has the same meaning as in section 21 of the Indian Penal Code (45 of 1860)”.

(iv) Exclusive definitions

‘Exclusive definitions’ can be identified by the presence of the phrase ‘does not include’. In this category something is expressly excluded from the definition. Examples of this category are:  

(a)  Section 2(14) "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include — (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession…”

(b)  Section 32AD(4) For the purposes of this section, "new asset" means any new plant or machinery (other than a ship or aircraft) but does not include -

       (a) any plant or machinery, which before its installation by the assessee, was used either within or outside India by any other person;…..”

(v)  Combined definitions

  ‘Combined definitions’ can be identified by the presence of both the words ‘means’ and ‘includes’ in the definition.

v  When a legislature intends to define a term or expression to mean something & also intends to specify certain items to be included.

v  Such a definition is Exhaustive AND also illustrative in specifying what is intended to be included.

v  Generally used to avoid ambiguity & with a view to provide clarity.

 In this category, on one hand it restricts inclusion, and on the other, it allows inclusion. Examples of this category is Section 2(7) "assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes — (a) every person in respect of whom any proceeding under this Act has been taken…”

[7]  Section

A section refers to a distinct portion or provision of a legal code or set of laws, often establishing a particular legal requirement. A section may have sub-sections, clauses & sub-clauses. A Section may also have Provisos & Explanations.

[8]  Sub-section

A sub-section is a part of a section. When parts of a section are interrelated, or when one whole provision emerges out by putting all the parts of the section together, then those parts are referred to as sub-sections. Whereas, when these parts are independent of each other and are not interrelated then these are referred to as clauses.

For examples of parts being sub-sections may be seen in sections 1, 44AD, 139 and so on as parts of these sections like section 1(1), 1(2), 1(3) and 44AD (1), 44AD (2), 44AD (6), 139 (4) and 139 (9) are interrelated and one whole provision of the respective section emerges out by putting together all the parts of these sections.

clue to locate a ‘sub-section’ in a section

(a)  Where soon after the reference of section without stating anything a reference is made like (1) then that (1) is a sub-section.

(b)  a sub-section starts with a capital letter and ends with a full stop. This is because a sub-section is a complete sentence.

[9]   Clause

 A clause may be a part of either a section or a sub-section. When parts of a section are independent of each other and are not interrelated then these are referred to as clauses.

For example, Section 2 of the Income Tax Act, 1961 (which deals with definitions for purposes of the Act) has all ‘clauses’ and these parts are not ‘sub-section’ as these parts are independent of each other and not co-related

See section 2(1) - defines “advance tax”, section 2(1A) - defines “agricultural income”, section 2(31) - “persons” and so on and these parts are not co-related to project a whole provision.

Similarly section 10(1) - agricultural income, section 10(2A) - share of total income of the firm, section 10(5) - travel concession or assistance and so on are all ‘clauses’. As they are not interrelated (1), (2A), (5) and so on are ‘clause’ of section 10. Similar is the case with sections 6, 43, 47 and so on

clue to locate a ‘clause’ in a section

(a)  Where soon after the reference of section something is stated and thereafter a reference is made like (1) then  that (1) is a ‘clause’

(b)  whereas a clause starts with a small letter and ends with a semicolon. This is because a clause is a part of a sentence.

ILLUSTRATION

Section 62(1)(a)(i)

we will take this provision to understand it clearly

(a)          Section will be  - 62

(b)         Sub section will be - 1

(c)          Clause will be - a

(d)         Sub clause will be - i

The order will be same for each and every provisions.

While writing answer with respect to sub clause you can directly start saying

sub clause (i) of provision states that………….

Same thing applies for section sub-section and clause as well.

[10]   Explanation

Ordinarily, an Explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may possibly arise from the existing provisions.

The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added. The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause.

If the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. The orthodox function of an Explanation is to explain the meaning and effect of the main provision.

Normally, therefore, an Explanation would not expand the scope of the main provision and the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit as held in Katira Construction Ltd. v. Union of India (2013) 352 ITR 513 (Guj).

Explanation below a particular sub-section or a clause is intended to explain that particular sub-section or a clause only. But when Explanation is at the end of the section it is meant to explain the entire section. – [DIT (Exemption) v. Bagri Foundation (2010) 192 Taxman 309 (Del)]

An explanation, if it changes the law, is not presumed to be retrospective irrespective of the fact that phrase used is “it is declared” or “for removal of doubts”. – [Sedco Forex International Drill Inc. & Others v. CIT (2005) 279 ITR 310 (SC)]

An Explanation appended to a section or a sub - section becomes an integral part of it and has no independent existence apart from it. – [CIT v. Reunion Engg. Co. (1993) 203 ITR 274 (Bom)].

It is understood that an Explanation is incorporated in a particular section to explain a phrase or certain words in that section. An explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduces something new which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonise it with the section and to clear up any ambiguity in the main section. – [CIT v. Banque Nationale De Paris (1992) 194 ITR 167 (Bom); Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC)]

[11]   Proviso

A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso.

A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment.

A proviso defeats the operation or conditionality of a ‘rule’ (section/sub- section/clause/sub-clause etc.) below which it is placed. The subject matter of ‘rule’ and the proviso thereof should relate to each other.

Let us say rule relates to ‘fruit’ then the proviso should also relate to ‘fruit’. Say the rule is, ‘In breakfast one should eat sufficient fruits’ the proviso then may be, ‘Provided that more than one banana should not be eaten’ but it cannot be, ‘Provided that more than one piece of bread should not be eaten’. Here ‘banana’ is related with ‘fruit’, whereas ‘bread’ is not.

In the above example if the rule is modified as, ‘In breakfast one should eat sufficient food’ then both the provisos are possible as both ‘banana’ and ‘bread’ relate to food.

Keeping the above example in mind please read second proviso to section 44AB and see the meaning of ‘such person’ used twice in the second proviso. Therefore a company having turnover less than one crore rupees is not required to audit under section 44AB though it may be required to audit under the Companies Act.

How to know the NUMBER of a Proviso?

First proviso begins with the phrase ‘Provided that’, second proviso with ‘Provided further that”, and subsequent provisos with ‘Provided also that’. If the proviso starts with ‘Provided also that’ it has to be manually counted to know whether it is third proviso, fourth proviso, and so on. Reference may be made to section 10(23C) as it has twenty provisos.

 [12]   “Nothing contained in section ….. or section …..  shall operate so as to exclude from…”
When any provision contains this phrase it implies that referred sections are excluded from the applicability of the whole section. [Refer section 13(1), 13 (7), 13 (8)]

[13]   Non-obstante clauses

Non Obstante Clause - These are the over ruling clauses that nullify certain provisions on satisfaction of the given conditions. These are generally included in this way; Notwithstanding anything contained in. These may also be included with, “Subjects to the provisions of.”

‘Non-obstante’ is a Latin word which means ‘notwithstanding anything contained’. That means this clause empowers the legislation or a provision in which it contains, to override the effects of any other legal provisions contrary to this under the same law or any other laws.

When a clause begins with “notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

“Notwithstanding anything contained in…”
It is a ‘non obstante’ (Notwithstanding) clause, and it means ‘in spite of’/ ‘even if’ / ‘although’. The provision containing the word ‘notwithstanding’ shall have an overriding effect on any other provision, even if something contrary is stated in the other provision. The contrary provision may be contained in – sub-section/ section/ clause/ any other provisions of this Act/ the foregoing provisions of this Act/to the contrary in sections …. to ….. [Refer sections 9(2), 12(3), 13(4), 10A (6), 10A (8), 40 respectively].

It means that even if something is written that is opposite in meaning to the provision; the provision will still apply. It is a formal way of saying, that the provision will ALWAYS apply.

It is fairly common in different enactments to use the expression ‘notwithstanding anything contained in this Act or other Acts’ in order to make such provision as superseding to the other provisions.’

“Subject to the provisions of…”
When any provision contains this phrase, it attaches a condition that the provisions of the specified section are also to be complied with. That is, while complying with the provision where this phrase occurs, other provision mentioned therein must also be complied with. Those provisions may be this Act/sub-section/clause/this section/other provisions of this section/sections …. to ….. [Refer sections 5(1)/10(2)/10A (1)/32AB (1)/11 (1) respectively]

In other words, these terms may limit the scope of the statute, or may indicate that a certain part of the statute is controlled or limited by another section or statute.

The Supreme Court in Maharashtra Tubes Ltd. v. State Industrial and Investment Corporation of Maharashtra Ltd. has held in no uncertain terms that where two statutes contain similar non obstante clauses, it is the latter which is to prevail over the former, for, the Legislature is supposed to be aware of the fact that the statute already in force contains a non obstante clause but still incorporates such non obstante clause in order to obliterate the effect of the non obstante clause contained in the former statute. – [Maharashtra Tubes Ltd. v. State Industrial and Investment Corporation of Maharashtra Ltd. (1993) 78 Comp Case 803] 

A non-obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non-obstante clause. In case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over the other clause. - [Parasuramaiah v. Lakshamma AIR 1965 AP 220]

[14]  “Save as otherwise provided in this Act…”
When any provision contains this phrase it implies that the provision of this section has to be applied without affecting any provisions in which something else has been stated. [Refer sections 1(3) and 14]

[15]   “Without prejudice to…”
When any provision contains this phrase it implies that the provision has to be applied without affecting other provision of the Act which may deal with same subject matter. Other provisions may be – the provisions of sub-section/the generality of the provisions of. [Refer sections 12AA (4)/13(2) respectively]

[16]  “AND” or “OR”.

Every Law has many conditions to be satisfied for a provision to be applicable. And such conditions are usually divided with “AND” or “OR”. If there is “AND” between 2 or more conditions, then all of them have to be satisfied. And if there is “OR”, then either or any of them has to be satisfied.

The word “or” is generally used disjunctively while “and” is used conjunctively. In certain situations however, these words may be interchanged. In the words of Lord Halsbury these words cannot be interchanged unless the clear intent of the statute requires that to be done. The Supreme Court considered this issue in the leading case of Chamarbaugwala (AIR 1957 SC 699) with a view to give effect to the clear intention of the Legislature as evidenced from the statute as a whole.

  

[17]  Effective date of an income tax amendment

Usually all amendments are specified to come into force from particular date, as per preamble or with specific amendment. So one should see them.

Meaning of Inserted by the Finance Act, 2020, w.e.f. 01.04.2021 will generally mean (as mentioned in preamble of Finance Act) applicable from assessment year beginning on 01.04.2021 i.e. assessment year 2021-22 (relevant to previous year to end on 31.03.2021 or Previous year 2020-21).

Meaning of Inserted by the Finance Act, 2020, w.e.f. 01.06.2020 or some other date are used for procedural provisions, These come into force from date so specified. So amendment w.e.f. 01.06.2020 will apply from 01.06.2020.