Speech of Hon’ble Dr. Justice Arijit Pasayat, Judge, Supreme Court of India delivered at the National Convetion 2007, held on 30th June & 1st July, 2007 under the auspices of AIFTP

Taxes are levied by the legislature of a country to meet the expenditure which the Government has to incur to run the administration. In a police State whose functions are very few, the governmental spending would be the least unless the Government has embarked upon any war or there is an internal disturbance. But in a welfare State, particularly in a largely populated developing country, like ours, the government expenditure is enormous and it becomes necessary for the legislature to harness every available avenue to collect the amount needed every year. Very often the Government which is unable to control its expenditure but at the same time unable to raise all the funds needed by taxation may have even to resort to deficit financing, the consequences of which may sometimes be quite disastrous if the amount spent is not able to produce the desired effect. Hence it is necessary that the Government should as far as possible try to balance its budget by raising sufficient revenue to meet its demands. The budget is always based on estimates and the estimates are based on several assumptions, one of them being that everybody who is liable to pay taxes pays it honestly and does not resort to subterfuges just for the sake of reducing the liability. It is no doubt true that whenever the legislature finds that people try to evade taxes by resorting to such contrivances in a large scale, it amends the law suitably so that even those who had resorted to such contivances come within the net of taxation.

The tax evaders just do not bother about any increase in the taxes that are levied since they have just not to pay anything. The developmental activities of the State also suffer a setback on account of constant financial stringency felt by the Exchequer. Any appeal based on morality is just brushed aside by tax advisers who cling to the old quoted dictum of Rowlatt, J. that there is no equity in a tax and argue that unless a transaction squarely falls in its form within the measure of taxation, it is out of the net of taxation, irrespective of what it is in reality or in other words its substance. They argue that the Court which has to decide the tax cases should look to the form and never to the substances of a transaction and any attempt to deviate from that rule and to look at the substance of the transaction to decide upon the tax liability of an assessee would amount to judicial legislation not warranted by law. There is however a moderate school of lawyers who say that there is a difference between tax avoidance and tax evasion. According to them those assessees who try to arrange their affairs in a manner as would expose them to lesser liability of tax by entering into genuine tax planning measures should not be penalized by ignoring such transactions. What they do is termed as just tax avoidance but not tax evasion which is the result of non-disclosure of transactions, suppression of accounts, etc. Experience has shown that the difference between tax avoidance and tax evasion is very thin.

According to the Smritis the King could not levy taxes at his pleasure and sweet will. The rates of taxes varied according to the commodities and also according to the times if they were normal or there was danger of invasion or some calamity impending. In Udyoga Parva of Mahabharata we have the following shlokas :

Udyoga Parva 34, 17-18

Just as the bee draws honey but at the same time leaves the flowers uninjured, so the king should take wealth from men without harming them. One (a bee) may search each flower (for honey) but should not cut the very root, just like a garland-maker but not like a coal maker.

Our ancient texts insisted that the king should not be moved by greed in levying taxes lest the very source should dry up in due course. They laid down rules in detail regarding the mode of taxation, rates of taxation and exemptions from taxation. We have only to see those texts to understand how equitable those rules were.

Two major considerations appear in this struggle for recognition. During the last two world wars and subsequently the era of heavy and unconventional taxation began. The laws of taxation grew up in a haphazard manner. Expediency appears to be the rule. In the first place the legal theory grew up that equity and taxation were strangers. In the second place the other theory grew up that there is no necessary co-relation between logic and taxation. Both equity and logic lost ground in the laws of taxation. Even interpretation and construction of fiscal statutes and some important judicial decisions on the subject went so far as to say that neither equity nor logic, nor presumption, nor intendment had a place in taxation. See the observation of Viscount Simon L.C. in Canadian Eagle Oil Co. Ltd. vs. King (1946) A.C. 119 at p. 140 and Latilla vs. Income Revenue 25 T.C. 107 at p. 117 (H.L.) See also Partington vs. Attorney General (1869) L.R. 4 H.L. 100 at p. 122. Recently the heavy burden of taxation and the abuse of revenue collected by the taxation have made the two considerations of both logic and equity predominant in this field of jurisprudence. This was helped by another growing doctrine that there is nothing immoral in the attempt of a citizen to avoid taxation if he can by appropriate interpretation and construction of the statute itself. If a taxing statute shows that the legislation closes only one of two doors, it is then no evasion to use the other, which may have been left open. Lord Atkin in Duke of Westminster vs. Inland Revenue 19 T.C. 490 said in the Houses of Lords, “it has to be recognized that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax”, Lord Summer in Levene vs. Inland Revenue, 13 T.C. 486 said more forcefully in the earlier decision of the House of Lords “It is trite law that His Majesty’s subjects are free, if they can, to make their own arrangements so that their cases may fall outside the scope of the taxing Acts. This incurs no legal penalties, and, strictly speaking, no moral censure, if having considered the lines drawn by the legislature for the imposition of taxes, they make it their business to walk outside them”, Viscount Simon in Latilla vs. Inland Revenue 25 T.C. 107 at p. 117 however criticized this attitude by saying that while it was ‘legal’ it was not a sign of “good citizenship”.

On the issue of equity vis-à-vis taxation familiar principles which in Cape Brandy Syndicate vs. Commissioner of Inland Revenue [(1921) 12 TC 358)] were expressed thus by Rowlatt, J.

“In a taxing statute one has to look 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 is to be implied. One can only look fairly at the language used.”

Some illuminating views were expressed which seem to have lost track in the maze of unending amendments, hordes of judicial pronouncements and varying concepts of tax evasion and tax avoidance. In M/s. Murarilal Mahabir Prasad & Others vs. Shri B.R. Vad and Others (1975) 2 SCC 736, it was noted that the principle was approved and adopted by this Court in several decisions. The principle is variously expressed by saying that in fiscal statutes one must have regard to the letter of the law and not to the spirit of the law, that the subject cannot be taxed by inference or analogy, that in a taxing Act there is no governing principle to look at and one has simply to go on the Act itself to see whether the tax claimed is that which the statute imposes, that which construing taxing Acts it is not the function of the court to give to the words used a strained and unnatural meaning and that the subject can be taxed only if the Revenue satisfies the court that the case falls strictly within the provisions of the law.

The principle thus stated has hardly ever been doubted but it is necessary in the application of that principle to remember that though the benefit of an ambiguity in a taxing provision must go to the subject and the taxing provision must receive a strict construction, “that is not the same thing as saying that a taxing provision should not receive a reasonable construction [Wealth Tax Commissioner vs. Kirpashankar (1971) 2 SCC 570] If the statute contains a lacuna or a loophole, it is not the function of the court to plug it by strained construction in reference to the supposed intention of the Legislature. The Legislature must then step in to resolve the ambiguity and so long as it does not do so, the tax-payer will get the benefit of that ambiguity. But, equally courts ought not to be statute to hunt out ambiguities by an unnatural construction of a taxing section. Whether the statute, even a taxing statute, contains an ambiguity has to be determined by applying normal rules of construction for interpretation of statutes. As observed by Lord Cairns in Pryce vs. Monmouthshire Canal and Railway Companies [(1879) 4 AC 197] cases which have decided that taxing Acts are to be construed with strictness, and that no payment is to be exacted from the subject which is not clearly and unequivocally required by Act of Parliament to be made, probably meant little more than this, that inasmuch as there was not any a priory liability in a subject to pay particular tax, nor any antecedent relationship between the tax-payer and the taxing authority, no reasoning founded upon any supposed relationship of the tax-payer and the taxing authority could be brought to bear upon the construction of the Act and therefore, the tax-payer had a right to stand upon a literal construction of the words used, whatever might be the consequences.

The true implication of the principle that a taxing statute must be construed strictly is often misunderstood and the principle is unjustifiably extended beyond the legitimate field of its operation. Indeed the more well-expressed the principle as in the Cape Brandy case (supra), greater the reluctance to see its limitations. In that famous passage marked by a happy turn of phrase, Rowlatt, J, said, “there is no equity about a tax. There is no presumption as to a tax.” There is no equity about a tax in the sense that a provision by which a tax is imposed has to be construed strictly, regardless of the hardship that such a construction may cause either to the treasury or to the tax-payer. If the subject falls squarely within the letter of law he must be taxed, howsoever inequitable the consequences may appear to be judicial mind. If the subject is free no matter that such a construction may cause serious prejudice to the Revenue. In other words, though what is called equitable construction may be admissible in relation to other statutes or other provisions of a taxing statue, such a construction is not admissible in the interpretation of a charging or taxing provision of a taxing statute. Speaking for the Court in C.I.T. Madras vs. Aiax Products Ltd. [(1965 (1) SCR 700)] Subba Rao J., after citing the passage from the judgment of Rowlatt J. in the Cape Brandy case said : “To put it in other words the subject is not to be taxed unless the charging provision clearly imposes the obligation”.

This Court approved the ratio of the Privy Council in Mahaliram Ramieedas’s case (supra) and held that it was well recognised that the rule of construction on which the assessee relied applied only to a taxing statute. The Court observed that the rule did not apply to a provision not creating the charge of the tax but laying down the machinery for its calculation or procedure for its collection. Sarkar J ., speaking for the Court said :
“The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the Legislature which is to make a charge levied effective (p. 889)”

In. Supdt. of Taxes, Dhubri and Others vs. M/s. On karmal Nathmal Trust [(1976) 1 SCC 766] both sides referred to what Rowlatt, J., an outstanding authority on law relating to taxation, said in Cape Brandy Syndicate vs. IRC. [(1921) 1 KB 64]

“…. In a taxing Act one has to look 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 is to be implied. One can only look fairly at the language used.”

In Saroi Aggarwal vs. Commissioner of Income Tax [(1985) 156 ITR 497] it was said that facts should be viewed in natural perpective, having regard to the compulsion of the circumstances of a case. Where it is possible to draw two inferences from the facts and where there is no evidence of any dishonest or improper motive on the part of the assessee, it would be just and equitable to draw such inference in such a manner that would lead to equity and justice. Too hypertechnical or legalistic approach should be avoided in looking at a provision which must be equitable interpreted and justly administered.

In the end I have to add that in taxation the question is not how many angles can stand on the point of a needle. It is the source of sustenance of a commodity.