Ambiguity In Tax Exemption

Source: The Hitavada      Date: 06 Aug 2018 12:38:03


 

 

 

 

 

 

 

 

 

 

The Supreme Court has stated that in the governance by a written Constitution, there is no implied power of taxation. The tax power must be specifically conferred and it should be strictly in accordance with the power so endowed by the Constitution itself.

IN THE Judgement of the case – Customs (Import) Mumbai v. M/s Dilip Kumar and Company, delivered on July 30, 2018, a 5-judge bench of the Supreme Court consisting of the Justice Ranjan Gogoi. Justice N. V. Ramana, Justice R. Banumathi, Justice Mohan M. Shantanagouder and Justice Abdul Nazeer has ruled emphatically that, “we would be more than justified to conclude and compelled to hold that every taxing statute including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly. Further, in case of ambiguity in a taxation liability statute, the benefit must necessarily go in favour of subject/assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State”.


The court has stated that for reaching this conclusion, it thoroughly examined all the material placed before it. It has been of the view that the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. The Constitution bench has also held that when there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.


This 5-judge bench was set up to examine the correctness of the ratio of the judgement in the case –Sun Export Corporation, Bombay v. Collector of Customs, Bombay -1997 (6) SCC 564.The question is what is the interpretative Rule to be applied while interpreting a tax exemption provision /notification, when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied.In Sun Export case, a 3-judge bench had ruled that an ambiguity in a tax exemption provision or notification must be interpreted so as to favour the assessee claiming the benefit of such exemption. Such a rule was doubted when this appeal was placed before a 2-judge bench.


Then the case was placed before a 3-judge bench with Justice Gogoi as one of its members, which noticed unsatisfactory state of law, as it stood till this judgement. This judgement ,which has been authored by Justice Ramana,overrules the 3-judge bench judgement in the case of Sun Export Corporation, Bombay v. Collector of Customs-1997(6) SCC 564 with the observation that the said judgement had created confusion and resulted in unsatisfactory state of law.


The question referred before the bench was: What is the interpretative rule to be applied while interpreting a tax exemption Reportable provision/notification when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied? The Constitution bench was set up to examine correctness of the judgement in Sun Export case delivered by a 3-judge bench. In the said judgement, it was held that an ambiguity in a tax exemption provision or notification must be interpreted so as to favour the assessee claiming the benefit of such exemption.


Commenting on Sun Exports Case judgement, the bench has observed: “There cannot be any doubt that the ratio in the Sun Exports Case that, if two views are possible in interpreting the exemption notification, the one favourable to the assessee in the matter of taxation has to be preferred. This principle created confusion and resulted in unsatisfactory state of law. In spite of catena of judgements of this court, which took the contra view, holding that an exemption notification must be strictly construed and if a person claiming exemption does not fall strictly within the description of the notification otherwise then he cannot claim exemption”.


Referring to multitude of case laws on the subject, the court has observed, “after thoroughly examining the various precedents some of which were cited before us and after giving our anxious consideration, we would be more than justified to conclude and opine that how true it is to say that there exists an unsatisfactory state of law in relation to interpretation of exemption clauses. “Various Bench which decided the question of interpretation of taxing statute on one hand and exemption notification on the other, have broadly assumed (we are justified to say this) that the position is well settled in the interpretation of a taxing statute: It is the law that any ambiguity in a taxing statute should enure to the benefit of the subject / assessee, but any ambiguity in the exemption clause of exemption notification must be conferred in favour of revenue- and such exemption should be allowed to be availed only to those subjects/assessees who demonstrate that a case for exemption squarely falls within the parameters enumerated in the notification and that the claimants satisfy all the conditions precedents for availing exemption.


“Presumably for this reason the Bench which decided Surendra Cotton Mills case observed that there exists unsatisfactory state of law and the bench which referred the matter initially, seriously doubted the conclusion in Sun Export case that the ambiguity in an exemption notification should be interpreted in favour of the assessee”.


Summing up the apex court has answered the Reference holding:
1. Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.


2. When there is ambiguity in exemption notification, which is subject to the strict interpretation. The benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.


3. Ratio in the Sun Exports Case is not correct and all the decisions which took similar view in Sun Export case stand overruled. Claiming abundant jurisprudential justification for its views, the Supreme Court has stated that in the governance by a written Constitution, there is no implied power of taxation. The tax power must be specifically conferred and it should be strictly in accordance with the power so endowed by the Constitution itself.
It is for this reason that the courts insist upon strict compliance before a State demands and extracts money from its citizens towards various taxes.
The Constitution Bench has directed the Registry to place the case before the appropriate bench for consideration on merits, after securing permission from the CJI.