The Supreme Court recently pronounced a landmark judgment(1) on the question of a taxpayer's eligibility to receive a tax exemption when more than one interpretation is possible – namely, one in favour of taxpayer and the other in favour of the tax authority.
Historically, the courts have constantly held that tax exemption notifications must be strictly interpreted. Unless the taxpayer in question meets all of the necessary requirements, they cannot avail of any tax exemption. In Sun Exports,(2) the Supreme Court also took the view that when two interpretations are possible while interpreting an exemption notification, the one that favours the taxpayer must be applied.
However, on review of another case,(3) a division bench of the Supreme Court reviewed the rationale contained in Sun Export and opined that the earlier dicta required reconsideration.
In the latest decision from the Constitution Bench of the Supreme Court, the court held that a strict interpretation of the charging section within a tax statute is necessary. Where two interpretations are possible, the one favouring the taxpayer must be applied. While addressing this issue, the court observed that, as regards tax statutes, Article 265 of the Constitution prohibits the state from collecting taxes from citizens without the authority of law. Equity has no place when interpreting a tax statute. If the legislation is unclear and the taxpayer is therefore able to avoid liability, no question of unjustness will arise.
However, if there is any ambiguity in the exemption clause within a notification, the benefit can be considered in favour of revenue. In such cases, the exemption will be allowed only if the taxpayer can prove that said exemption falls within the parameters enumerated in the notification and that it satisfies all of the conditions precedent.
The Constitutional Bench thus concluded that where a tax exemption must be interpreted, the tax authority will be given the benefit of the doubt, unlike in the case of ambiguity in the charging section of a particular statute. This judgment has completely unsettled the earlier dicta, whereby taxpayers always had the benefit of the doubt and will significantly affect tax exemptions set out under a statute.
For further information on this topic please contact Amit Kumar Sarkar at BDO in India by telephone (+91 22 3332 1600) or email ([email protected]). The BDO in India website can be accessed at www.bdo.in.
Endnotes
(1) Commissioner of Customs (import), Mumbaiv M/s Dilip Kumar and Company (Civil Appeal 3327/2007), 30 July 2018.
(2) Sun Export Corporation v Collector of Customs, Bombay (1997 (93) ELT 641 SC).
(3) Surendra Cotton Oil Mills & Fertiliser Co Ltd (2001 (1) SCC 578).
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