In this article, We’ll discuss some of the important principles and rules of interpretation of taxation laws. The law of taxation is not static and it keeps on evolving with time. Hence, rules of interpretations are required to understand the meaning of laws and legislation.
Rule of Literal Interpretation
Judges do not legislate the law, they only interpret it. The rule of literal interpretation says that intention of legislation must be found in the words used by the legislature itself. Nothing should be added or subtracted from it. If the provision is unambiguous and if from that provision the legislative intent is clear, the other rules of construction of statutes need not be called into aid .
Case Law: CIT V. Rajendra Prasad Moody  115 ITR 519
In this case it was observed that plain natural construction of the language of section 57(iii) of the Income-tax Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. Section 57(iii) requires that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned.
Where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies: Held, accordingly, that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under section 57(iii) of the Income-tax Act, 1961, in computing its income from dividend under the head “Income from other sources”.
The mischief rule originated in 16th century in the Heydon’s case in the United Kingdom. It is commonly known as the Heydon’s Rule or Purposive construction. Under this rule, the position before an amendment or enactment of an Act is examined to find out the mischief sought to be remedied to determine the rationale for the remedy. In order to do so, the following aspects are looked at: - What was law before the provision was introduced or amended?
– What was the mischief or the defect for which the earlier provision of law did not provide a remedy?
– What remedy has the Parliament effected in the provisions of law to cure the mischief or defect?
– What is the intended effect of such remedy?
Courts then have to make a construction that suppresses the mischief and advances the remedy.
Case Law: Commissioner of Income-Tax V. A.N. Naik Associates
The Bombay High Court made a landmark judgment in Commissioner of Income-tax v. A.N. Naik Associates (2004) 136 Taxman 107. The Court applied the “mischief rule” on interpretation of statutes and pointed out that the idea behind the introduction of sub-section (4) in section 45 was to plug in a loophole and block the escape route through the medium of the firm.
The High Court observed that the expression ‘otherwise’ has not to be read ejusdem generis with the expression ‘dissolution of a firm or body of individuals or association of persons’. The expression ‘otherwise’ has to be read with the words ‘transfer of capital assets by way of distribution of capital assets’. If so read, it becomes clear that even when a firm is inexistence and there is a transfer of capital asset, it comes within the expression ‘otherwise’ since the object of the amendment was to remove the loophole which existed, whereby capital gains tax was not chargeable. Therefore, the word ‘otherwise’ takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of retiring partners.
Section 45(4)– “The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of Section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.”
The Golden Rule
The Golden rule allows a judge to depart from a word’s normal meaning in order to avoid an absurd result. It is a compromise between the literal rule and the mischief rule. Like the literal rule, it gives the words of a statute their plain, ordinary meaning. However, if this leads to an irrational result which is unlikely to be the legislature’s intention, the court can depart from this meaning.
In such a case, the Court would also look at the context in which a provision appears. The same words may mean one thing in one context and another in a different context. While ascertaining the true intention of the Legislature, the court must not only look at the words used by the Legislature but also have regard to the context and the setting in which they occur. The meaning of words in an enactment is not to be ascertained by reading them in isolation.
Issues with the Golden Rule- whether the Assessing Officer can make an assessment on the basis of an issue which came to his notice during the course of assessment, where the issues, which originally formed the basis of issue of notice under section 148, were dropped in its entirety ?
The Delhi High Court, in Ranbaxy Laboratories Ltd. v. CIT (2011) 336 ITR 136, applied the Rule of Literal Interpretation whereas the Karnataka High Court, in N. Govindaraju v. ITO (2015) 377 ITR 243, applied the Golden Rule while deciding this issue.
Section 147 – As per section 147, the Assessing Officer may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice in the course of proceedings under this section.
Rule of Literal Interpretation in Delhi High-court’s Judgment
- The Delhi High Court observed that the words “and also” used in section 147 are of wide amplitude. The correct interpretation of the Parliament would be to regard the words ‘and also’ as being “conjunctive and cumulative with” and not “in alternative to” the first part of the sentence, namely, “the Assessing Officer may assess and reassess such income”.
- Hence, the language used by the Parliament is indicative of the position that the assessment or reassessment must be in respect of the income, in respect of which the Assessing Officer has formed a reason to believe that the same has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment.
- The Delhi High Court, applying the rule of literal interpretation, held that if the income, the escapement of which was the basis of the formation of the “reason to believe” is not assessed or reassessed, it would not be open to the Assessing Officer to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If he intends to do so, a fresh notice under section 148 would be necessary.
Golden Rule in the Karnataka High-court Judgment
Applying the Golden Rule, the Karnataka High Court held that, in effect, once satisfaction of reasons for the notice is found sufficient i.e. if the notice under section 148 is found to be valid, then, the Assessing Officer may do reassessment in respect of any other item of income which may have escaped assessment, even though the original reason for issue of notice under section 148 does not survive.
Rule of Harmonious Construction
Under this rule, the entire statute must be read as a whole. all parts of a section should be read harmoniously. Construction should be such that it provides meaning to all parts of a statute. A construction which creates inconsistency or repugnancy between the various sections or parts of the statute should be avoided.
Principle of Beneficial Construction
It means that If the court finds that two views are possible, construction which is most beneficial to the taxpayer should be adopted. This principle is also widely used in case of interpretation of fiscal laws.
Rule of Ejusdem Generis
It is used when particular words pertaining to a class, category or genus are followed by general words. In that case general words are construed as limited to things of the same kind.
Principle of Nocitur a Sociius
The principle of nocitur a sociius implies that meaning of a word may be ascertained by reference to words associated with it. Words derive colour from the surrounding words. A law required that explosives must be held within a “case or canister.”
Principle of Stare Decisis
The principle of stare decisis stipulates that a view which is operating for long and is accepted and acted upon should not be easily departed from.
Here are a few other tax notes that you might be interested in-
- Taxation notes : Direct & Indirect taxes
- Taxation notes: Canons of taxation
- An introduction to taxation laws