PROJECT FOR THE SUBJECT

INTERPRETATION OF STATUTES

COGITATION PILOTING THE INTERPREATION OF TAX

STATUTE

SUBMITTED BY
Yash Gupta

Semester – VIII

B.A.LL.B. (Hons)

UNDER THE GUIDANCE OF

Mr. Abhishek Mishra

Submitted to

Jindal Global Law School

Sonipat, Haryana

ACADEMIC YEAR (2019-20)

Contents Page Number
Declaration 3

Chapter 1- Introduction and Research Methedology 4

Synopsis 4

Research methodology 6

Aims and objectives 6

Scope and limitations 5

Hypothesis 6

Statement of problem 7

Mode of writing 7

Mode of citiation 7

Chapter 2- Interpretation of tax statues.A shift?

The classical rule : Strict construction of taxing statutes

Dilution to the principle of strict construction

A shift to purposive construction?

Legal Form or Real Form- Vodafone case

Conclusion
 DECLARATION

I Yash Gupta declare the work entitled COGITATION PILOTING THE

INTERPREATION OF TAX STATUTE ,being submitted to Jindal Global University
for the project in the subject of Interpretation of statutes is original and where
the text is taken from the authenticated books, articles or web articles,
appropriate reference is given. It is true in my best of knowledge.

Date : 25th October 2019

Yash Gupta

Roll No- 20151290

VIII Semester

JGLS

Jindal Global University

 Introduction and Research Methodology

Synopsis-:
The researcher in this paper identifies the ancient maxim that is associated
with tax statutes of India i.e. that taxing statues have to be strictly construed1.
The researcher identifies various cases which talk about taxation laws being
generally complete code themselves because of the three components of a
taxing statute; subject of the tax, person liable to pay the tax and the rate at
which the same tax has to be levied on that person.2 Thus this enables the
ancient maxim that the researcher will try and identify i.e. Statutes imposing
taxes or monetary burdens are to be strictly construed.
The researcher will begin with a discussion on what interpretation means and
what are the rules of interpretation with their objectives3. Then the researcher
will move on to the General principles of interpretation4. That will begin with a
discussion of the classical rule and how it was applied into the judicial
interpretation of taxing statutes , the researcher will then move on to how this
strict construction with various cases is being diluted and will comment on the
same. The dilution from strict interpretation to purposive construction will
include the shift to external aids, machinery provisions, exemptions and
evasion.5The same will be discussed using various case laws on how the
principle of strict construction is applicable only to charging provisions or a
provision imposing penalty and is not applicable to parts of the taxing statute
which contain machinery provisions6 The perseverance behind this is to gather
knowledge about what could be driving these decisions by the judiciary, that is
diluting the rule of strict construction.
The researcher will be giving utmost importance to the landmark case of
Vodafone to look at tax avoidance through artificial devices like holding
companies and subsidiaries and how India has suffered because of their

1
G.P. Singh, PRINCIPLES OF STATUTORY INTERPRETATION, 815 (12th edn., 2010).
2
Tiwari SK, “ RULES FOR INTERPRETATION OF TAXING STATUTES: A CRITICAL APPRAISAL OF NEW TRENDS AND
APPROACHES.” International Journal of Law and Legal Jurisprudence Studies :ISSN:2348-8212:Volume 2 Issue 5
3 ANSAR ABIDHUSSAIN, “INTERPRETATION OF TAX STATUTE”
4
Ranka N.M, “RULES OF INTERPRETATION OF TAX STATUTES ”Bombay Chartered Accountants’ Society
5
Supra note 2
6 Commissioner of Income tax , Calcutta v National Tag Traders (1980) AIR 485
legality . The researcher will show how the purposive construction can help
with these tax avoidance transactions. McDowell’s case given by a five judge
bench of the supreme court settles a very important question about tax
avoidance schemes which embellish in the name of tax planning.

“In that very country where the phrase ‘tax avoidance' originated, the judicial
attitude towards [it] has changed and the smile, cynical or even affectionate
though it might have been at one time, has now frozen into a deep frown. The
courts are now concerning themselves not merely with the genuineness of a
transaction, but with [its] intended effect for fiscal purposes. No one can now
get away with a tax avoidance project with the mere statement that there is
nothing illegal about it. In our view, the proper way to construe a taxing
statute, while considering a device to avoid tax is … to ask … whether the
transaction is a device to avoid tax, and whether the transaction is such that
the judicial process may accord its approval to it.”7

“It is neither fair not desirable to expect the legislature to … take care of
every device and scheme to avoid taxation,” the ruling added. “It is up to the
Court … to determine the nature of the new and sophisticated legal devices
to avoid tax ... expose [them] for what they really are and refuse to give
judicial benediction.”8

Despite this clear pronouncement by the supreme court , certain smaller

benches of the same court have again gone back to the classical rule of strict
interpretation, by calling these artificial tax avoidance devices as “legitimate
tax planning”

How does this legitimate tax planning work?

In India even non -residents have to pay taxes on the incomes that they have
earned in India avoided , through the obligation of the Income Tax act but
because of the Double taxation treaty with Mauritius numerous foreign
institutional investors evaded paying taxes by citing the same treaty.

7
Mc Dowell & Company Limited vs The Commercial Tax Officer (1985) AIR 649
8
ibid
The treaty states that a company will be taxed only in the country it is
domiciled in by this the treaty benefits all these FII’s and even according to tax
authorities the beneficial ownership in these companies was outside Mauritius
and the foremost reason of these companies was tax avoidance9. These
companies registered themselves under the Mauritius Offshore Business
Activities Act so that they can claim the domicile of Mauritius. Consideration
should be put on MOBA itself as it did not allow companies registered under it
to acquire property, invest or conduct business in Mauritius.10
The phrase Mauritius Route would always tingle the sense of these ‘post box
companies’ because the Indian income tax department let them get away with
this scheme of tax evasion for many years as there was no capital gains tax or,
virtually, any tax at all for these companies and that is why then investment
was so high in India.
This ended only when a tax officer used the principle of lifting the corporate
viel to determine their effective place of management and their actual
residence and now because of that these treaties provide for capital gains
Since the gains accrued in India, the FIIS were taxed in India

9
Desai N and Sanghavi D, “The Travails of the Indian Mauritius Tax Treaty & The Road Ahead ”
10
THE MAURITIUS OFFSHORE BUSINESS ACTIVITIES ACT 1992
 Research Methodology
Aims and objectives-:
o Understanding Tax avoidance
o The strict interpretation of taxing statutes
o Impact of Tax havens
o Impact of Vodafone Judgment

Scope and limitations

The Paper will begin by the discussion of the classical rule, then the researcher
will moves on to focus on some dilutions to the rule of strict construction.
These will include a shift to purposive construction, external aids, machinery
provisions, exemptions and evasions. The purpose is to gather a sense of what
could be driving the judiciary to dilute the rule of strict construction and the
implications of the same.
Also, the paper will be studying of the Vodafone judgement by the Honorable
Supreme Court. It even observes the tax laws under Income tax Act 1961.
The researcher will also examine foreign jurisdictions and their interpretation
of their tax statutes
The researcher’s study was even limited by his understanding as there could
be some basic observations which he might have failed to put forward in the
project due to limited understanding of the subject.

Hypothesis:
1. Taxing statutes have to be construed strictly.
2. Accruing to the view that if a non-resident sells share of a foreign
company to another non-resident , the transaction is said total place outside
India and hence there can be no tax on the same.
3. In Vodafone case, clearly a series of tax havens and SPVs (Special
Purpose Vehicle) have been used to avoid Indian Taxes.
Statement of Problem:
In the Vodafone case the company located at Cayman’s Island known as CGP is
a nullity, a sham entity. The transfer of such shares by CGP were of no
interest. The Real transfer is: The transfer of substantial interest (67% stake) in
HEL. This controlling shareholding has its situs in India. Since the transferred
asset is situated in India, the capital gains arising on the same is liable to tax in
India. VIH was therefore required to deduct tax at source.11

Honorable Supreme Court gave a ruling on that. Only the legal transaction that
is the sale of CGP share is to be considered. By selling CGP share, the seller
may have transferred its interests in HEL. However, Indian interest arises due
to sale of CGP share. It does not arise out of the SPA (which recorded the real
facts). All the arguments of the revenue were rejected.12

Heart of the matter: Should one simply consider the legal form of the
transaction (i.e., sale of one share in CGP) as Justice Scalia described
originalism "The Constitution that I interpret and apply is not living but dead, or
as I prefer to call it, enduring. It means today not what current society, much
less the court, thinks it ought to mean, but what it meant when it was
adopted."13, ; or should one consider real form like Justice Breyer proposes
that judges focus on this right to participate when they interpret the
Constitution.14 This democratic theme implicates a constitutional and statutory
interpretive tradition that views legal texts, including the Constitution, as
"driven by purposes."15 Corresponding to the entire set of facts as stated by
the parties themselves in the SPA and various other correspondences? Is the
case fit for considering “Substance over Form”?
Mode of Writing
A descriptive and analytical method of writing has been followed.
Mode of Citation
A uniform mode of Citation has been followed.

11
Hariani and Co. ‘Analysis of the Vodafone Supreme Court Order’(2012)<
http://hariani.co.in/newsletters/32679_newsletter_january_12.pdf >
12
Vodafone International Holdings vs Union Of India & Anr[2012] 6 SCC 613
13
ichael D. Ramsey, Beyond the Text: Justice Scalia's Originalism in Practice, 92 Notre Dame L. Rev. 1945
(2017)
14
STEPHEN BREYER, ACTIVE LIBERTY: INTERPRETING OUR DEMOCRATIC CONSTITUTION 7 (2005)
15
ibid at 17
 Interpretation of tax statues. A shift?

I. What is interpretation?
Words are necessary for means of communication whether they are spoken or
written. When a word or a sentence has only one meaning there arises no
problem of interpreting it but when there is another meaning that can be
derived out of the sentence or the word, the problem then arises.
Interpretation is the art of finding out what the true sense of the enactment is.
In legal term It is the method of determining the true meaning of the words
used in a statute. The question then arises, In Law what is the true sense of the
enactment and how is that true sense determined. In a normal daily scenario If
two persons communicating with each other are sitting together; they can find
the true sense of the sentence other person is trying to convey by subsequent
conversation to make things clear but in Law The Judges and the Lawyers
whose duty it is to interpret statutes have no opportunity to converse with the
Legislature which had enacted a particular statute. The Legislature, after
enacting statutes becomes functus officio so far as those statutes are
concerned.16 It is not their function to interpret the statutes. Thus two
functions are clearly demarcated. Legislature enacts and the Judges interpret.

According to Maxwell, "The object of all interpretation is to determine what

intention is conveyed, either expressly or impliedly by the language used in the
statue."17.The courts are not expected to interpret arbitrarily and thus certain
principles have evolved and these principles are called, ‘rules of
interpretation’. Most of these rules of statutory construction are general in
nature, applicable to statutes of all types. However there also are rules
particular to subject areas and specialties like the taxing statutes.

16
Justice A.K. Srivastava, Interpretation of Statutes, J.T.R.I. JOURNAL, vol. 3, 1995, p. 1.
17
N.S Bindra ,Intrepretion of statute, 8th edition, The Law Book Company Pvt. Ltd., pg no 4.
 II. The Classical rule : Strict construction of taxing statutes

In this section of the paper the researcher studies the principle that taxing
statues have to be construed strictly. Fiscal Statutes such as the taxing
statute comprise of charging statues and very machinery provisions, these
provisions lay down procedures to assess tax and it’s penalties and though
this the researcher tends to provide the legal parlance that Taxation laws
are generally complete codes in themselves. There are three mechanisms of
a taxing statute, viz, subject of the tax, person liable to pay the tax and the
rate at which the tax is levied. If there is any ambiguity in respect of these
factors, which is not removable by reasonable construction, there would be
no tax in law till the defect is removed by the legislature.

‘In interpreting a taxing statute the court must interpret the statute as it
stands and in case of doubt the court must lean towards the tax payer. The
words of fiscal statute are to be neither elaborated nor restricted.’18 This
means that a person should only be taxed when the words are clearly
indicating towards that. Especially for taxing statues the proper way of
construing them is to adhere to its words strictly. The rationale behind this
as stated above is taxing statues impose penalties which are pecuniary
burdens , it is on the basis of this that Cogitation piloting the taxing statues
should not and cannot include equity or presumptions19 and have to be
clear and unambiguous to make out a charge of tax. The Language of the
statue is the only thing that can be fairly looked at.20

This classical approach of interpreting the tax statue is also followed in

England as well as in India. In England This rule of strict construction is also
know as the Duke of Westminster principle21 .The core argument in this
case was rejected which was to focus on the substance of the matter and
disregard the legal position. The court held its position in construction of
tax statutes and to the question regarding, considering the substance of the

18
Madhavi (n 3), p 160.
19
Tarulata Syam v. Commissioner of Income Tax (West-Bengal), AIR, 1977, p 305.
20
Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 (King’s Bench Division).
21
The Commissioners of Inland Revenue v. The Duke of Westminster, [1936] A.C. 1 (House of Lords).
 matter, answered that it is the true nature of the legal obligation and
nothing else that is the substance.22

The reasoning stated above constructs the hypothesis of the Westminster

principle, the core reasoning underlying this hypothesis is also resonating
in Indian courts . The researcher from this point onwards will show various
case laws In which Courts of India has reiterated the maxim behind the tax
statutes which is that tax is not to be imposed on a person unless the words
of the taxing statute are unambiguous.23The courts In India in all the cases
that will be stated have observed a strict letter of the law when it comes to
the determination of tax liability and things like common law before making
the act or legislative intent, context of the statute and purpose of
legislation were not regarded.

In case of CIT v. T.V. Sundaram Iyyengar ,24it was held that if the language of
the statute is clear and unambiguous, the Court cannot discard the plain
meaning, even if it leads to an injustice.
In case of CIT v. Elphinstone Spg & Wvg Mills Co Ltd.25 , and CIT v. Motors &
General Stores Ltd.26 , it was held by the court of law that No tax can be
imposed on the subject without words in the Act clearly showing an
intention to lay a burden upon him. In other words, the subject cannot be
taxed unless he comes within the letter of the law. The argument that he
falls within the spirit of the law cannot be availed by the Department.
Rowlatt J. in case of Cape Brandy Syndicate v. IRC27 ,approved in case of CIT
v. Ajax Products Ltd.28,
“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.”

22
ibid
23
Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
24
[1975] 101 ITR 764 (SC)
25
40 ITR 142 (SC)
26
66 ITR 692, 699-700 (SC)
27
[1921] 1 KB 64
28
[1965] 55 ITR 741 (SC), (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.
In case of Smt. Tarulata Shyam v.CIT29 , it was held by the court that 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
In case of Keshavji Ravji & Co. v. CIT30 , As long as there is no ambiguity in
the statutory language, resort to any interpretative process to unfold the
legislative intent becomes impermissible.

The researcher finds a certain rationale for the courts using this strict
construction. Legislation particularly in economic matters is essentially
empiric and these legislations because of being empirical in nature are
based on experimentation or what one may call trial and error method and,
therefore it cannot provide for all possible situations or anticipate all
possible abuses. Therefore in such economic matters the court should only
adjudge the constitutionality of the legislation by the generality of its
provisions and not by its rusticities or inequities or by the possibilities of
abuse of any of its provision. If any such crudities appear in the provision or
the statute itself the legislation can then step in and enact an amendment
to that provision. “That is the essence of the pragmatic approach which
must guide and in spite the legislature in dealing with complex economic
issues”31

If there is some absurdity in the legislation it is not upon the judiciary to

remove that absurdity, if the language of the legislation is plain and the
consequence of it is creating some absurdity it is for the legislature to step
in and remove that absurdity

29
[1971] 108 ITR 345 (SC)
30
[1990] 49 Taxman 87 (SC)
31
Dr T Padma and KPC Rao, The principle of Interpretation of statutes, Alt publication, Hyderbad, 2011, p. 108.
 Lord Simons also gave his view on the statement above and which is
essential to the paper when we see a shift from the strict construction to a
more purposive one , according to him in interpreting a section in a taxing
statute the question is not what transaction the section is aiming but what
transaction its language according to its natural meaning fairly and strictly
hits. It is therefore not the function of a court of law to give to words a
strained and unnatural meaning to cover loopholes through which the
evasive tax payer may find a way to escape or to tax transactions which, if
the legislature had thought of them, would have been covered by
appropriate words32. We will see how this statement is changed through
various cases but especially through the Vodafone judgment where tax
evasion was a major issue.

32
St. Aubyn v. A.G, 2 All ER 473, 1951, p. 485.
III. Dilution to the principle of strict construction.
Vinelott J in his interpretation of fiscal statutes has contended that,
there is no need for certain specific rules of construction for fiscal
legislation33, In certain cases it was realized that the proper course in
construing these fiscal statues is to give a fair and reasonable
construction to it , that tax cannot be levied without the words showing
clear intention of it. This hypothesis was derived because of the legal
loopholes and artificial devices that had become very lucrative for big
companies and the strict construction that have been aiding these
companies by the way of tax evasion by making it seem like tax
avoidance and because of this the strict rule of construction has been
subject to some dilution around the world.

Lord Denning in Nothman v Barnet Council condemned the classical rule

as he said it is a voice from the past the voice of those who go by the
letter ... who adopt the strict literal and grammatical construction of the
words, heedless of the consequences. In his view, Strict Constructionism
was completely out of date, having been replaced by the Purposive
Approach.

What is purposive rule?

Purposive rule is used by the courts to determine the intention of the
legislator. The courts while applying the principle tries to find out the
real intention behind the enactment. Various thoughts, like a text should
not be construed strictly, and it should not be construed leniently; it
should be construed reasonably, to contain all that it fairly means34 has
been put forward.

An example of the dilution of the classical rule and the shift towards the
purposive paradigm was seen by the decision of the Supreme court in
CCE v. ACER India Ltd. In this case an entire section of the judgment was
directed towards the cogitation piloting the tax statues .The doctrine of
‘substance of the matter’ was discussed but rejected although the court

33
Vinelott J, ‘Interpretation of Fiscal Statutes’, Statute Law Review, 1982, p. 78.
34
Scalia, A Matter of Interpretation, Princeton University Press, 1998.
 did open its horizon to several other considerations towards interpreting
the tax statues other than the strict construction.

The researcher opines that the court established that strict construction
was not to be always applied in the case of taxing statutes . The
judgment provides for initial steps that signify the departure from the
strict construction i.e. the court observed existing market practices,
public policy and how these conditions could also pilot the way for
taxing statutes. The court also understood that wide scale evasion of
duty should not happen because of the strict construction. The court
also went on to substantiate that the principle of purposive construction
will be adhered to in case the literal meaning results in absurdity. This
initial step was very substantial as it allowed the courts shift away from
the corners of strict construction and to go towards the legislative
purpose following these statutes.

The case of CWS v CIT35 is to be looked at with great importance as it

changed the principle that that purposive construction should ‘only’
come in function when strict construction will lead to absurd
conclusions. In this case where a legislative interpretation of the
provision would give the result that there is a liability to pay tax but a
plain reading would do no justice do that liability. The court disregarding
the classical rule of interpreting taxing statues went ahead to uphold the
liability by reading that statute along with its legislative intent to tax. The
court also considered the impugned provision with analogous provisions
in previous and successive versions of the Income Tax Act. The court
stated its reasons for taxing it opined that non-taxation would lead to
incongruous, discriminatory and most importantly, absurd result.

The following sections also highlight this shift from a strict construction
to a purposive one .

35
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).
 a) Usage of External aids
In the case of Nawn Estates v. CIT , The Court considered the legislative
history of the Income Tax Act 1922, right from its amendment in 1955. It
also considered the legislative history of the Income Tax Act, 1961.36 The
Supreme Court also sought to substantiate its position on the
understanding of ‘investment’ in common business parlance.
Significantly, the Court even went on to recognize that English
authorities can be useful guides in the interpretation of analogous
provisions, fundamental concepts and general principles “unaffected by
the specialties of the English Income Tax Statutes”.37

b) Exemptions
In UoI v Wood Papers the courts noted that the applicability of an
exemption needs to be strictly viewed keeping in mind legislative intent,
inequitable burden on taxpayers and augmentation of revenue.
However, once doubt about applicability is removed, and it is
ascertained that the assessee was meant to be entitled, and then a
liberal construction is appropriate. Therefore, strict and liberal
constructions are to be invoked at different stages of interpretation of
an exemption provision.38

c) Evasion of tax and the Vodafone judgment

The word evasion itself has two meanings attached to it , it may mean
evasion of the specific act by doing something which evades the act
while being within the purview of the act or it may mean evading the act
by doing something which isn’t in the purview of the act. The first
method is more of an underhand dealing and the second is just merely
doing something with intentional avoidance of something that is with
law disagreeable.

36
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).

37
Ibid
38
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
 In context of tax avoidance schemes Mcdowell & Co v Commercial tax
officer39 is to be observed with a keen eye , The subject of tax evasion
was deal with in great detail and the Supreme court observed the
definition of tax avoidance as ‘the art of dodging tax without breaking
the law’. Through this tax avoidance seems legal and tax evasion illegal.
The court gave the powers to the courts to use new and sophisticated
legal devices to avoid tax an d consider whether the situation created by
the device could be related to the existing legislation with the aid of
‘emerging techniques of interpretation’ the court justifies this use of
external aid as they saw the ill effects of tax avoidance i.e. ‘loss of
revenue, piling up of black money, burden on remaining taxpayers,
inequity of advice available to the Revenue and the skillful avoider’40.The
court also substantiated that tax avoidance was unethical in a welfare
state “The court held that the construction of a scheme of tax avoidance
was neither liberal nor literal. Rather, the question is whether a
transaction is a device to avoid tax and whether the judiciary can accord
approval to it”41.

The subject of tax avoidance was bought under discourse in the very
famous Vodafone Judgment42. The crux of the matter in that was ,
should one just apply the legal form or should one also consider the
Real form i.e. the entire set of facts as stated by the parties themselves
in the SPA and various other correspondences.
This case saw a new far reaching judiciary which did not restrict itself to
strict construction but looked at new areas and aids to furnish the
judgment The doctrine of form over substance, the source rule, the law
relating to direct and indirect transfers, the concept of business assets,
and the anti-abuse rules were all gone into in the 276-page judgment.
The Vodafone judgment also talked about the Westminster principle
“Westminster did not compel the court to look at a document or a
transaction, isolated from the context to which it properly belonged. It is
the task of the Court to ascertain the legal nature of the transaction and

39
AIR 1986 SC 649
40
ibid
41
ibid
42
[2012] 1 S.C.R. 573
 while doing so it has to look at the entire transaction as a whole and not
to adopt a dissecting approach.”43 A very important doctrine that is the
Ramsay doctrine was read carefully in the view of the judgment and it
provided “that if business purpose as opposed to effect is to artificially
avoid tax then that step should be ignored and the courts should adopt a
purposive construction on the SPA.”44

43
Ibid
44
ibid