Direct Taxes

Interpretation of Taxing Statutes

I. INTRODUCTION:

We, the people of India resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC in order to secure to all our citizens: Justice, social, economic and political; Liberty of thought, expression, belief, faith and worship; Equality of status and of opportunity; and to promote among all of us Fraternity, assuring the dignity of the individual and the unity and integrity of the Nation.

THE THREE ORGANS

To govern is the duty of the Executive, headed by the President. To legislate is the duty of the Parliament and State Legislatures. It is for the judiciary to keep a watch, visit and see that the freedom enshrined in the Constitution reach to every citizen and is not jeopardized or tinkered with or obstructed by the executive or any person in authority or otherwise.

THE INDIAN LEGAL SYSTEM

The Indian legal system is the product of history. It is rooted in our soil; nurtured and nourished by our culture, languages and traditions; fostered and sharpened by our genius and quest for social justice; reinforced by history and heritage inspired and strengthened by English Law guided and enriched by concepts and precepts of justice, equity and good conscience which are indeed the hallmarks of the common law.

TAXATION

Article 265 of the Constitution mandates that no tax shall be levied or-collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law.

THE TAX LAWS

Tax laws are highly complex, complicated and beyond understanding of a tax-payer. The words and expressions used are not simple. Many sections contain sub-sections, clauses, sub-clauses. Many deeming provisions have been inserted. Meaning of an expression is extended by way of Explanation and is curtailed by way of proviso, sometimes by more than one provisos and explanations.

Meaning of Interpretation and Construction of Statute

According to Salmond interpretation or construction means "the process by which the courts seek to ascertain the meaning of the legislature through the medium of authoritative forms in which it is expressed.”

Bhatia International vs. Bulk Trading S.A. - [(2002) 4 SCC 105]

There are three bodies which divide government power namely legislature, the executive and the judiciary. It is for the legislature to make laws. It is executive to execute these laws and the function of court is to interpret them. Interpretation of statutes to render justice is primary function of the judiciary. The main body of the law is to be found in statutes, together with the relevant statutory instruments and in case law as enunciated by Judges in the Courts. But the Judges not only have the duty of declaring the law, they are also frequently called upon to settle disputes as to the meaning of words or clauses in a statute. The courts have to interpret the laws and not enact them. The primary function of the courts while interpreting or construing a statute is to see the intention of the legislature. Judiciary is duty bound to act upon the true intention of the legislature. The maxim “Judicis estjus dicere, non dare’’ pithily expounds the duty of the Court. It is to decide what the law is and apply it, not to make. [ACIT vs. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC)]

Statutes are normally drafted by legal experts who are experts in the particular branch of law of which the statute was to be a part. Although such persons are skilled in the law, due to the volume of legislation the statutes are often obscure and cryptic and we find courts and lawyers are busy in unfolding the meaning of ambiguous words and expressions in a statute. The age old process of application of the enacted law has led to formulation of certain rules of interpretation or construction.

The Income tax Act is a self-contained code, and provides machinery for imposing and collecting tax, obtaining reliefs and appeals against improper orders, etc. While tax law is a part of the general law, it has got its own distinct features. There are some special provisions which are attracted while interpreting tax laws.

The need of interpretation arises only when the words used in the statute are on their own term, ambivalent and do not manifest the intention of legislature. [Keshavji Ravji & Co. vs. CIT – [(1990) 183 ITR 1 (SC)].

Similarly rule of interpretation would come into play only if there is doubt with regard to the express language used. [Pandian Chemicals Ltd. vs. CIT – [(2003) 262 ITR 278 (SC)].

II. BASIC PRINCIPLES / RULES OF INTERPRETATION of TAXING STATUTE:

I will deal with the special rules of construction governing a taxing statute.

1. Intention of Legislature

The dominant purpose of construction of any statutory provision is to ascertain the intention of the legislature and the primary role is to ascertain the same by reference to the language used. The Supreme Court in Doypack Systems Pvt. Ltd. vs. UOI [1998 (2) SCC 299] laid down:

"It has to be reiterated that the object of interpretation of a statute is to discover the intention of Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context that intention, and therefore, the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous be applied as they stand". The object of all interpretation is to discover the intention of Parliament, but the intention of Parliament must be deduced from the language used."

A statute is an edict of the legislature and the conventional way of interpreting or construing a statute is to seek the ‘intention' of its maker. A statute is to be construed according "to the intent of them that make it" and "the duty of judicature is to act upon the true intention of the legislature - "the mens or sententia legis". If a statutory provision is open to more than one interpretation the court has to choose that interpretation which represents the true intention of the legislature, which is also referred to as the ‘legal meaning' of the statutory provision.

The intention of the legislature assimilates two aspects

In one aspect it carries the concept of ‘meaning', i.e. what the words mean.
In another aspect, it conveys the concept of ‘purpose and object' or the ‘reason and spirit' pervading through the statute.

Therefore the process of construction combines both literal and functional approaches. In the case of GEM Granites vs. CIT (2004) 271 ITR 322 (SC) the Hon’ble court observed that what one may believe or think to be the intention of Parliament cannot prevail if the language of the statute does not support that view, thus object of the statute has to be gathered from language and not on what one believes or thinks.

2. Harmonious Interpretation

The most common rule of interpretation is that every part of the statute must be understood in a harmonious manner by reading and construing every part of it together. Further, L. J. Denning in Seaford Court Estates vs. Asher [1949] 2 All ER 155 speaks as hereunder:

“A Judge must not alter the material of which the Act is woven but he can and should iron out the creases. When a defect appears, a Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of the Parliament and then he must supplement the written words so as to give force and life to the intention of the Legislature.”

Also referred in Nasiruddin vs. Sita Ram Agarwal – [(2003) 2 SCC 577]

The art of correct interpretation would depend on the ability to read what is stated in plain language, read between the lines, read ‘through’ the provision, examining the intent of the Legislature and call upon case laws and other aids to interpretation.

Rules of interpretation are applied only to resolve the ambiguities. The object and purpose of interpretation is to ascertain the mens legis, i.e., the intention of the law, as evinced in the statute. The key to the opening of every law is the reason and spirit of law. To be literal in meaning is to see the body and miss the soul. The judicial key to interpretation is the composite perception of the Deha (body) and the Dehi (Soul) of the provision.

Wherever it is possible to do so, the provision must be harmoniously constructed by avoiding a conflict. A construction which reduces the statute to a futility has to be avoided. A statute or any enabling provision therein must be so construed as to make it effective and operative on the principle expressed in maxim “UT RES MAGIS VALEAT QUAM PAREAT” i.e. a liberal construction should be put upon written instruments, so as to uphold them, if possible and carry in to effect the intention of the parties. CIT vs. Hindustan Bulk Carrier (2003) 259 ITR 449 (SC)

The provisions of two enactments must be read harmoniously so as not to subject them to any strained construction giving rise to an artificial inconsistency or repugnance. Sankaranarayanan Bhattathirpad vs. ITO – [(1985) 153 ITR 562, 567 – 68 (Ker)]

Every clause of a statute should be construed with reference to the context and other clauses of the statute so as, as far as possible, to make a consistent enactment of the whole statute CIT vs. R. M. Amin – [(1971) 82 ITR 194 (Guj)]

Parliament is normally presumed to legislate in the knowledge of, and having regard to, relevant judicial decisions. If, therefore, Parliament has a subsequent opportunity to alter the effect of a decision on the legal meaning of an enactment, but refrains from doing so, the implication is that Parliament approves of that decision and adopts it. That was amply demonstrated by the amendment of Sec. 36 (1) (viii) made in 1985. CIT vs. West Bengal Industrial Development Corporation Ltd. – [(1993) 203 ITR 422, 430 (Cal)].

3. Literal rule: Language of Statute should be read as it is

The first and the most elementary rule of construction is that it is to be assumed that the words and phrases of legislation are used in their technical meaning if they have acquired one, or otherwise in their ordinary meaning, and the second is that the phrases and sentences are to be construed according to the rules of grammar. Krishi Utpadan Mandi Samiti vs. UOI (2004) 267 ITR 460 (All.).

Pure, simple and grammatical sense of language used by Legislature is best way of understanding as to what Legislature intended. Coal Mines Officers’ Association of India vs. UOI (2004) 266 ITR 429 (Cal.).

A taxing statute should be strictly construed even if the literal interpretation results in hardship or inconvenience, common sense approach equity, logic and morality have no role to play. CIT vs. Calcutta Knitwears (2014) 362 ITR 673 (SC).

If the language of the statute is clear and unambiguous, words must be understood in their plain meaning. The wordings of the Act must be construed according to its literal and grammatical meaning, whatever the result may be.

While interpreting tax statute, the function of the court of law is not to give words in the statute a strained and unnatural meaning to cover and extent its applicability to the areas not intended to be covered under the said statute. Vidarbha Irrigation Devs. Corpn. vs. ACIT [(2005) 278 ITR 521 (Bom)].

It is not permissible to construe any provision of a statute, much less a taxing provision, by reading into it more words than it contains. CIT vs. Vadilal Lallubhai [(1972) 86 ITR 2 (SC)].

Literal construction means that there is no room for any intendment. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

Voltas Ltd. vs. State of Gujarat (2015) 12 STD 658 (SC)

ICAI vs. Price Waterhouse, (1997) 90 Comp. Case 113, 140, 141 (SC)

State of West Bengal vs. Scene Seven P. Ltd. AIR 2000 SC 3089, 3094

Harbajan Singh vs. Press Council of India (2002) 3 SCC 722, 727.

District Registrar and Collector vs. Canara Bank, (2005) 1 SCC 496.

4. The Mischief Rule of Interpretation (Heydon's rule)

A statute is to be construed so as to suppress the mischief in the law and advance the remedy. This was set out in Heydon’s case (1584) 3 Co. Rep. 7a. Under this rule the judge will look at the Act to see what was it’s purpose and what mischief in the common law it was designed to prevent.

Broadly speaking, the rule means that where a statute has been passed to remedy a weakness in the law, the interpretation which will correct that weakness is the one to be adopted. This rule is also one of the cardinal rules of interpretation when the words of a taxing statute are ambiguous and incapable of a literal interpretation and generally takes into account four parameters, namely

What was the Law prior to enactment of the statute in question;
What was the defect or mischief for which the earlier law did not provide;
What remedy had the Legislature intended to remedy the defect;
The true Legislative intent behind the remedy.

This rule would come into play only if the words of the taxing statute were silent or ambiguous on an issue and the General Clauses Act also did not throw light on the interpretation

CIT vs. Shahzada Nand & Sons. (1966 ) 60 ITR 392 (SC)

Classic Builders & Developers vs. UOI (2001) 251 ITR 492, 497 (MP)

Reckitt Colman of India Ltd. vs. ACIT (2001) 252 ITR 550 (Cal.).

5) The Golden Rule: Purposive interpretation

This rule is to some extent an extension of the literal rule and Mischief Rule and under it the words of a statute will as far as possible be construed according to their ordinary, plain, and natural meaning, unless this leads to an absurd result. It is used by the courts where a statutory provision is capable of more than one literal meaning and leads the judge to select the one which avoids absurdity, or where a study of the statute as a whole reveals that the conclusion reached by applying the literal rule is contrary to the intention of Parliament. One of the principle laid down by the courts is that regard should be given to the object and purpose of the introduction of a particular provision in the Income-tax Act. It emerges that this rule of interpretation has been often applied in India.

The object and the rules of Interpretation being what they are it is only natural that the rules of interpretation should not be static but dynamic. Rules of interpretation are not the rules of law and have to evolve constantly to ensure that they lie in sync with the march of the society. It is in this context that the Supreme Court in Kehar Singh vs. State (A.I.R. 1988 Supreme Court 1883) gave a go-by to the golden rule by which statutes were to be interpreted according to the grammatical and ordinary sense of the word.

The Golden rule implies that if a strict interpretation of a statute would lead to an absurd result then the meaning of the words should be so construed so as to lead to the avoidance of such absurdity. A further corollary to this rule is that in case there are multiple constructions to effect the Golden rule the one which favours the assessee should always be taken. This rule is also known as the Rule of Reasonable Construction. However the application of this rule in the interpretation of taxing statutes is rather limited since the literal rule is more often applicable and it is often remarked that equity and taxation are strangers

A construction which would defeat the very object of the legislature should be avoided.

Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1 (SC)

CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC)

Vikrant Tyres Ltd vs. ITO (2001) 247 ITR 821, 826 (SC)

6) Strict construction

A tax is imposed for public purpose for raising general revenue of the state. A taxing statute is to be strictly construed. Lord Hasbury and Lord Simonds stated: "The subject is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words."

It is settled law that a taxation statute in particular has to be strictly construed and there is no equity in a taxing provision. H. H. Lakshmi Bai vs. CIT - [(1994) 206 ITR 688, 691 (SC)].

“The subject is not to be taxed without clear words for that purpose …..”

CIT vs. Provident Invs. Co. Ltd. (1954) 32 ITR 190 (SC)

J.K. Steel Ltd. vs. UOI AIR 1970 SC 1173

CIT vs. Indo Oceanic Shipping Co. Ltd. (2001) 247 ITR 247 (Bom)

Hansraj & Sons vs. State of J & K (2002) 6 SCC 227, 237-39

In A. V. Fernandez vs. State of Kerala, [AIR 1957 SC 657] His Lordship Bhagwati J. has stated the principle of taxing laws as follows:

“ In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter."

In Associated Cement Co. Ltd. vs. Commercial Tax Officer AIR 1981 SC 1887, E. S. Venkataramiah J. of the Supreme Court, speaking for the majority said

"Tax, interest and penalty are three different concepts. Tax becomes payable by an assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has willfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not to be wrong to say that such interest is compensatory in character and not penal."

Remedial statutes are known as welfare, beneficial or social justice oriented legislations. Penal statutes, on the other hand, are those which provide for penalties for contravention of the law and are directed against the offender in relation to the state by making him liable to imprisonment, fine, forfeiture or other penalty.

A remedial statute receives a liberal construction, whereas a penal statute is strictly construed. In case of remedial statutes the doubt is resolved in favour of the class of persons for whose benefit the statute is enacted; whereas in case of penal statutes the doubt is resolved in favour of the alleged offender.

The principle applied in constructing a penal act is that if, in construing the relevant provisions, “there appears any reasonable doubt or ambiguity”, it will be resolved in favour of the person who would be liable to the penalty. If there are two reasonable constructions we must give the more lenient one. The court must always see that the person to be penalised comes fairly and squarely within the plain words of the enactment. It is not enough that what he has done comes substantially within the mischief aimed at by the statute.

A penal provision has to be construed strictly. ACIT vs. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC)

7) Ejusdem generis rule

Under this rule where general words follow particular words the general words are construed as being limited to persons or things within the class outlined by particular words. The words used together should be understood as deriving colour and sense from each other. They should be read together as one.

The true scope of the rule of ‘ejusdem generis’ is that the words of general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. When the particular words pertaining to a class, category or genus are followed by general words, the general words are construed as limited to the things of the same kind as those specified. The phrase “any other person” in Rule 6D(2) of the Income-tax Rules, 1962, would draw its colour from the preceding word, namely, “employee”. Held accordingly, that a trustee was not an employee or not akin to an employee and the amounts paid to trustees by the trust could not be disallowed under Rule 6D(2). CIT vs. Shivalik Drug (Family Trust) (2008) 300 ITR 339 (All.).

The rule of ejusdem generis is to be applied “with caution” and “not pushed too far”. It may not be interpreted too narrowly or unnecessarily if broad based genus could be found so as to avoid cutting down words to dwarf size.

— U.P. State Electricity Board vs. Hari Shanker Jain AIR 1979 SC 65

— Rohit Pulp & Paper Mills Ltd. vs. Collector of Central Excise AIR 1991 SC 754

8) Expressio unius est exclusio alterius

The expression of the thing implies the exclusion of another. It conveys an important rule of interpretation to signify the circumstances where the express mention of one person or thing results in totality the exclusion of another. In other words, in any particular provision where the statutory language is plain or straight and its meaning is apparently clear, there is no scope of applying the rule. However, this maxim could be accepted as a valuable servant but it is definitely a dangerous master in the construction of statutes and documents. It is used when there is imperfect enactment of statutory language.

Coming corollary to this maxim is expressum facit cessare facitum which states that when there is express mention of certain things, then anything not mentioned is excluded.

III. AIDS TO CONSTRUCTION OF STATUTE

A. INTERNAL AID TO CONSTRUCTION OF STATUE

1. Long title

It is now settled that the long title of an Act is a part of the Act and is admissible as an aid to its construction. A long title of a Legislation may not control, circumscribe or widen the scope of the legislation, if the provisions thereof are otherwise clear and unambiguous, but if the terms of the legislation are capable of both a wider and a narrower construction, that construction which would be in tune with the avowed object manifested in the preamble or declared in the long title, ought to be accepted. The title although a part of the Act is in itself not an enacting provision and though useful in case of ambiguity of the enacting provisions is ineffective to control their clear meaning. [Manoharlal vs. State of Punjab AIR 1961 SC 418];[Urmila Bala Dasi vs. Probodh Chandra Ghosh (1990) 184 ITR 604 (Cal)].

2. Marginal notes and headings

The courts have held that ‘Headings’, ‘Marginal Notes’ and ‘Marginal Headings’ can be referred to while interpreting the particular provision of the act. It has been held by Courts that Headings etc. do not decide the construction of the section, but Headings etc. are indicative of the meaning and purpose of the section.

“The marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or to show what the section is dealing with. It cannot control the interpretation of the words of a section, particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section. ”[K.P. Varghese vs. ITO 131 ITR 597 (SC)].

“Marginal notes are not decisive in interpreting a substantive provision of law, but, in case of doubt, they can be relied upon as one of the aids for construction.” R. B. Shreeram Religious & Charitable Trust vs. CIT (1988) 172 ITR 373 (Bom)].

“The marginal note for section 44F reads “Avoidance of tax by sales-cum-dividend”. This marginal note also gives an indication as to what exactly was the mischief that was intended to be remedied. The legislature was evidently trying to circumvent the devices adopted by some of the assessees to convert their revenue receipts into capital receipts. The marginal note also throws light on the intention of the legislature”. CIT vs. Vadilal Lallubhai 86 ITR 2 (SC) 11

3. Punctuation

Punctuation marks cannot control, vary or modify the plain and simple meaning of the language of the statute. At the most they can aid in the construction of ambiguous statutes.

“There are three activities serially set out in that sub-clause, namely, construction, manufacture or production. A comma is, therefore, legitimately and as per the rules of grammar, required after the first activity to separate it from the second activity of manufacture. Since the second activity is followed by the word “or”, no comma is required after the second activity to separate it from the third activity. Therefore, punctuation is put as grammatically required. It does not disclose any intention of providing for a separate kind of business altogether. Punctuation, in any case, is a minor element in the construction of a statute. Only when a statute is carefully punctuated and there is no doubt about its meaning can weight be given to punctuation. It cannot, however, be regarded as a controlling element for determining the meaning of a statute.” [Hindustan Construction vs. CIT (1994) 208 ITR 291 (Bom)].

4. Non-obstante clauses

The expression “non obstante“ means notwithstanding. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

“A non-obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non-obstante clause. In case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over the other clause.” [Parasuramaiah vs. Lakshamma AIR 1965 AP 220].

It is fairly common in different enactments to use the expression ‘notwithstanding anything contained in this Act or other Acts’ in order to make such provision as superseding to the other provisions.’ The Supreme Court in Maharashtra Tubes Ltd. vs. State Industrial and Investment Corporation of Maharashtra Ltd. (1993) 78 Comp Case 803 has held in no uncertain terms that where two statutes contain similar non obstante clauses, it is the latter which is to prevail over the former, for, the Legislature is supposed to be aware of the fact that the statute already in force contains a non obstante clause but still incorporates such non obstante clause in order to obliterate the effect of the non obstante clause contained in the former statute.

5. Definition clause and undefined words

(a) Judicially defined words

“It has long been a well-established principle to be applied in the construction of an Act of Parliament that where a word of doubtful meaning has received a clear judicial interpretation, the subsequent statute which incorporates the same word or the same phrase in a similar context, must be construed so that the word or phrase is interpreted according to the meaning that has previously been assigned to it.”[Barras vs. Aberdeen Steam Trawling and Fishing Co. Ltd. (1933) AC 402 (HL)].

“Interpretation of a provision in a taxing statute rendered years back and accepted and acted upon by the department should not be easily departed from.” [CIT vs. Balkrishna Malhotra (1971) 81 ITR 759 (SC)].

(b) Definitions in other statutes

When a particular expression is clearly defined, the court has no alternative but to give the meaning to expression as defined in the statute.

Shaw Wallace & Co. Ltd. vs. UOI (2004) 267 ITR 248 (Cal.)(High Court)

The word “means” can only have one meaning that is, it is an exclusive definition: P. Kasilingam vs. P. S .G. College of Technology 1995 Supp. 2 SCC 348. In Krishi Utpadan Mandi Samiti vs. Shankar Industries 1993 Supp. 3 SCC 361 (II), question arose for interpretation about the definition of “Agricultural Produce”. The Supreme Court observed at Page 364 as follows:—

“It is a well settled rule of interpretation that where the Legislature uses the words “means” and “includes” such definition is to be given a wider meaning and is not exhaustive or restricted to the items contained or included in such definition. Thus the meaning of “agricultural produce” in the above definition is not restricted to any products of agriculture as specified in the Schedule but also includes such items which come into being a processed form and further includes such items which are called as gur, rab, shakkar, khandsari and jaggery.”

Similarly in CIT vs. Raja Benoy Kumar Sahas Roy 32 ITR 466 (SC) 476 observed as under

“Whether the narrower or the wider sense of the term “agriculture” should be adopted in a particular case depends not only upon the provisions of the various statutes in which the same occurs but also upon the facts and circumstances of each case. The definition of the term in one statute does not afford a guide to the construction of the same term in another statute and the sense in which the term has been understood in the several statutes does not necessarily throw any light on the manner in which the term should be understood generally”.

Similarly decision of a court interpreting Excise Act is not binding in interpreting provision of Income Tax Act – Ambiguity of object. An interpretation placed on a particular enactment cannot be just engrafted to the provisions of another enactment. CIT vs. ECOM Gill Cofee Trading P. Ltd (2014) 362 ITR 204 (Karn).

6. Schedule

The Schedules appended to a statute form part of it. They are generally added to avoid encumbering the statute with matters of excessive details, guidelines to work out the policy of the statute, transitory provisions, rules and forms which need frequent amendment and the like. Much importance is not given to the forms unless they contain requirements of a mandatory nature.

7. Exemptions

An exemption clause in a taxing statute must be, as far as possible, liberally construed and in favour of the assessee, provided no violence is done to the language used. [CIT vs. Dungarmal Tainwala (1991) 191 ITR 445 (Patna)].

“It is true that an exemption provision should be liberally construed, but this does not mean that such liberal construction should be made even by doing violence to the plain meaning of such exemption provision. Liberal construction will be made wherever it is possible to be made without impairing the legislative requirement and the spirit of the provision.” [Petron Engineering Construction Pvt. Ltd. vs. CBDT (1989) 175 ITR 523 (SC)]

8. Proviso

The function of a proviso is generally to provide an exception to the main provision. A proviso cannot be read independently of the section under which it is incorporated and vice –a-versa. Proviso may either carve out an exception to the section or may qualify a part of the section.

Provisions for deduction, exemption and relief should be interpreted liberally, reasonably and in favour of the assessee. CIT vs. South Arcot District Co-operative Marketing Society Ltd. (1989) 176 ITR 117 (SC), CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. – [(1992) 196 ITR 149 (SC)]

Proviso should be read as if providing something by way of addition to main provision CIT vs. Udaipur Distillery Co. [(2004) 274 ITR 429 (Raj)].

Proviso to a particular provision of a statute only embraces the field which is covered by the main provision and it carves out an exception to the main provision to which it has been enacted as a proviso, and to no other. {Mohamad Anwar Khan vs. State of J. & K. & Others AIR 2015 (NOC) 869 (J & K) 323}

In Allied Motors, 224 ITR 677, the Supreme Court has held:

“A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section and is required to be read into the Section to give the Section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the Section as a whole.”

In Shah Bhojraj Kuverji Oil Mills & Ginning Factory vs. Subhash Chandra Jograj Sinha, AIR, 1961 SC 1596, at page 1600, the parameters of a proviso was summed up by the Supreme Court: “The Law with regard to provisos is well-settled and well-understood. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule.”

Proviso to a section would normally be controlled by main section; proviso normally should be construed strictly and more so when it relates to fiscal provisions even inviting penalty consequences, whenever there is default in compliance. Sony India Ltd. vs. CIT (2005) 276 ITR 278 (Delhi)

A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it Bajaj Tempo Ltd. vs. CIT [(1992) 196 ITR 188 (SC)]

9. Explanation

It is understood that an Explanation is incorporated in a particular section to explain a phrase or certain words in that section. An explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduces something new which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonise it with the section and to clear up any ambiguity in the main section. CIT vs. Banque Nationale De Paris – [(1992) 194 ITR 167 (Bom) 168] ; Keshavji Ravji & Co. vs. CIT [ 183 ITR 1 (SC) ].

An Explanation appended to a section or a sub - section becomes an integral part of it and has no independent existence apart from it. CIT vs. Reunion Engg. Co. – [(1993) 203 ITR 274 (Bom)].

Explanation below a particular sub-section or a clause is intended to explain that particular sub-section or a clause only. But when Explanation is at the end of the section it is meant to explain the entire section. (A. Y. 2003-04)

DIT (Exemption) vs. Bagri Foundation (2010) 192 Taxman 309 (Delhi)

An explanation, if it changes the law, is not presumed to be retrospective irrespective of the fact that phrase used is “it is declared” or “for removal of doubts”. Sedco Forex International Drill Inc. & Others vs. CIT (2005) 279 ITR 310 (SC).

10. CASUS OMISSUS

The Court only interprets the law and cannot legislate. To legislate is the prerogative of the Parliament or the State Legislature. A casus omissus should not be readily inferred and for the purpose all the parts of the statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. It is not open to court to add something or read something in statute on basis of some supposed intendment of statute. The maxim “Judicis estjus dicere, non dare’’ pithily expounds the duty of the Court. It is to decide what the law is and apply it, not to make. ACIT vs. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC).

Normally the Court cannot supply any assumed omission in the statute except in case of necessity, within the four corners of the statute. (Union of India vs. Rajiv Kumar (AIR 2003 SC 2917)

The courts have held that a Casus Omissus cannot be supplied by the court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself. However a Casus Omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on the particular provisions makes a consistent enactment to the whole statute.

In CIT vs. National Taj Traders 121 ITR 535 (SC). The court was considering the period of limitation for passing order in Revision by the Commissioner. In that context it was held as under at page 541:

“Two principles of construction – one relating to casus omissus and the other in regard to reading the statute as a whole –appear to be well settled. In regard to the former the following statement of law appears in Maxwell on the Interpretation of Statutes (12^th end.) at page 33:

“Omissions not to be inferred- It is a corollary to the general rule of literal construction that nothing is to be added to or taken from a statute unless there are adequate grounds to justify the inference that the legislature intended something which it omitted to express. Lord Mersey said : ‘It is a strong thing to read into an Act of Parliament words which are not there, and in the absence of clear necessity it is a wrong thing to do’. ‘We are not entitled’, said Lord Loreburn L.C., ‘to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself’. A case not provided for in a statute is not to be dealt with merely because there seems no good reason why it should have been omitted, and the omission appears in consequences to have been unintentional”.

In regard to the latter principle the following statement of law appears in Maxwell at page 47:

“A statute is to be read as a whole. – It was resolved in the case of Lincoln College (1595) 3 Co. Rep. 58b, at p. 59b, that the good expositor of an Act of Parliament should ‘make construction on all the parts together, and not of one part only by itself’. Every clause of a statute is to ‘be construed with reference to the context and other clauses of the Act, so as, as far as possible, to make a consistent enactment of the whole statute'.’ (Per Lord Davey in Canada Sugar Refining Co. Ltd. vs. R (1898) AC 735, 741 (PC)”.

External Aids to construction

1. Legislative history and background

For determining the purpose or object of the legislation, it is permissible to look into the circumstances which prevailed at the time when the law was passed and which necessitated the passing of that law. For the limited purpose of appreciating the background and the antecedent factual matrix leading to the legislation, it is permissible to look into the Statement of Objects and Reasons of the Bill which actuated the step to provide a remedy for the then existing malady.

To sustain the presumption of constitutionality, consideration may be had even to matters of common knowledge, the history of the times and every conceivable state of facts existing at the time of legislation which can be assumed. Even though for the purpose of construing the meaning of the enacted provision, it is not permissible to use these aids, yet it is permissible to look into the historical facts and surrounding circumstances for ascertaining the evil sought to be remedied. [Shashikant Laxman Kale vs. Union of India 185 ITR 104 (SC)].

“The Court may consider the general history of the statute, including its derivation, that is, the various steps leading up to and attending its enactment in its effort to ascertain the intention of the Legislature where it is in doubt”. [S. P. Gupta vs. Union of India and Another (1982) AIR 149 (SC)].

“The dominant purpose in construing a statute is to ascertain the intention of the Legislature as expressed in the statute considering it as a whole and in its context. That intention, would, therefore give the meaning of the statute and is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand.” [(1988) 2 SCC 299 Doypack Systems P. Ltd.].

2. Circulars and interpretation by tax authorities

The circulars issued by the CBDT would be binding on officers and persons employed in the execution of the Income-tax Act and the effect of the circular was taken into account in deciding the constitutionality of a provision contained in the Act. [Navnitlal Zaveri vs. K.K. Sen (1965) 56 ITR 198 (SC)].

Circulars issued by the Central Board of Direct Taxes can bind the Income-tax Officer but will not bind the appellate authority or the Tribunal or the court or even the assessee. [ITO vs. vs.D. Manoharlal Kothari, 236 ITR 357 (Mad.)].

The interpretation placed by the department in the Income-tax Manual has been held not to be a proper guide when the construction of a statute is involved. [CIT vs. vs. K. Srinivasan and K. Gopalan (1953) 23 ITR 87 (SC)].

The officers of the department are bound to follow the circulars issued by the Board. [CIT vs. Sanwarmal Shivkumar (1988) 171 ITR 377 (Raj)]

Whenever there is any instruction which is in favour of the assessee, the income-tax authorities would not be permitted to go back on these instructions or circulars This principle is based on the principle of estoppel. However, a circular or a direction cannot be permitted to curtail the provisions of the Act. They cannot curtail the statute or whittle down its effect. Instructions cannot cut down the scope of a notification prescribing qualifications for a certain exemption. [State of Madhya Pradesh & Anr. vs. G.S. Dall & Flour Mills (1991) 187 ITR 478 (SC)]

In the case of R & B Falcon (A) Pty Ltd. vs. Commissioner of Income Tax (2008) 12 SCC 466 wherein interpretation given by the Central Board of Direct Taxes (CBDT) to a particular provision was held binding on the tax authorities. (Followed in Spentex Industries Ltd vs. CCE (Supreme Court) www.itatonline.org)

3. Speech of a Minister

Except for the limited purpose of ascertaining the mischief which the Act seeks to remedy, the speech of the Minister should not be looked into.

(1991) 190 ITR 418 (Cal) Soorajmal Nagarmal vs. CIT

(1991) 190 ITR 361 (Gauhati) Assam Frontier vs. UOI

(1991) 189 ITR 81 (Delhi) Escorts Ltd. vs. UOI

(1988) 173 ITR 433 (Bom) B.R. Sound N Music vs. Bhardwaj (O.P.)

Finance Minister’s speech before parliament while introducing Bill, can be relied on to throw light on object and purpose of provisions.

Kerala State Industrial Development Corp. Ltd. vs. CIT (2003) 259 ITR 51 (SC)

Speeches by Chief Minister and Finance Minister that such tax would be abolished. Dealers relying upon statements and providing benefit to milk producers State Government is bound by such promise. Not entitled to demand purchase tax on milk till the date of a contrary decision by the cabinet. State of Punjab vs. Nestle India Ltd. & Anr. (2004) 269 ITR 97 (SC).

In Builders Association vs. Union of India (1994) 209 ITR 877 (SC) the court held that the opinion of law minister and reply of minister in Parliament regarding a taxing provision cannot be treated as binding on the Court.

“It is true that the speeches made by the Members of the Legislature on the floor of the House when a bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the bill explaining the reasons for the introduction of the bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and the purpose for which the legislation is enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of intention of the Legislature, everything which is logically relevant should be admissible.” [K.P. Varghese vs. ITO (1981) 131 ITR 597 (SC)].

“The Lok Sabha Debates and the Rajya Sabha Debates are reported in the journals of the two Houses of Parliament which are printed and published by them. The Court has to take judicial notice of the proceedings of both the Houses of Parliament and is expected to treat the proceedings of the two Houses of Parliament as proved on the production of the copies of the journals or the reports containing proceedings of the two Houses of Parliament which are published by them.” [Baburao alias P. S. Samant vs. Union of India and Others (1988) AIR 440 (SC)].

Letter simpliciter written by Finance Minister to a Member of Parliament will not have any statutory force

Vinod Rathore vs. Union of India (2005) 278 ITR 122 (MP)(High Court)

If there is no ambiguity in the language of a particular provision, notes on clauses and memorandum explaining the provision cannot be referred to as aid in interpretation. [CIT vs. Central Bank of India Ltd. (1990) 185 ITR 6 (Bom) (FB)]

4. Statement of objects and reasons

Courts have held that if the language of the statute is unambiguous, it is not required to consider the history of Parliament in making or amending a particular statutory provision. However the Statement of Objects and Reasons has been referred to by the Courts where the words used in statute do not have clarity. In this regard the following decision is relevant.

(i) S.C. Prashar vs. Vasantsen Dwarkadas 49 ITR 1 (SC)

If the language of the statute is clear and admits of no ambiguity, recourse to the statement of objects and reasons for the purpose of construing a statutory provision is not permissible. (1985) 155 ITR 144 (SC) Govind Saran Ganga Saran.

It is well settled that the Objects and Reasons are only an aid to the construction and a statute may undergo a metamorphosis during its passage in the Legislature. Where the language of the statute is clear and categoric, the same cannot be nullified by what might, at the initial stage, have been the views of the proposer of the bill in introducing it in the Legislature.

The Income-tax Act is a consolidating and amending statute. The Courts must, therefore, construe the provisions of the Act as forming a code complete in itself and exhaustive of the matters dealt with therein and ascertain what their true scope is [Rao Bahadur Ravulu Subba Rao & Ors vs. CIT (1956) 30 ITR 163 (SC)].

Reason for using a certain language in a draft Bill and a different expression in the provision ultimately enacted cannot be gathered from mere comparison of the two sets of provisions. There may be variety of reasons as to why the ultimate provision varies from the original draft. Therefore, it would be unsafe to refer to or rely upon the drafts, amendments, debates etc. for interpretation of a statutory provision when the language used is not capable of several meanings. CIT .vs. Sikandarkhan N. Tunvar & Ors (2013) 357 ITR 312 (Guj.)(HC)

5. Reports of Commissions

The Recommendation of Select Committee cannot be admitted for interpreting a statutory provision. However it can be used as an aid to understand the interpretation of Parliament in bringing about the change in the statute. CIT vs. Smt. P. K. Noorjahan 237 ITR 570 (SC) 573.

Similarly it was held in the case of R. S. Nayak vs. A.R. Antulay (1984) AIR 684 (SC)]

“More often an Expert Committee or a Joint Parliamentary Committee examines the provisions of the proposed legislation. But language being an inadequate vehicle of thought comprising intention, the eyes scanning the statute would be presented with varied meanings. If the basic purpose underlying construction of a legislation is to ascertain the real intention of the Parliament, why should the aids which Parliament availed of such as report of a Special Committee preceding the enactment, and the object sought to be achieved, be denied to Court whose function is primarily to give effect to the real intention of the Parliament in enacting the legislation. Such denial would deprive the Court of a substantial and illuminating aid to construction. Therefore, departing from the earlier English decisions we are of the opinion that reports of the Committee which preceded the enactment of the legislation, reports of Joint Parliamentary Committee, report of a Commission set up for collecting information leading to the enactment are permissible external aids to construction.”

6. Integrated scheme of direct taxation and equities

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 is to be implied. One can only look fairly at the language used. [CIT vs. Ajax Products Ltd. (1965) 55 ITR 741 (SC)] [CED vs. Sileshkumar R. Mehta (1990) 181 ITR 10 (Mad.) (FB)].

“Where, however, the provisions are couched in language which is not free from ambiguity and admits of two interpretations a view which is favourable to the subject should be adopted. The fact that such an interpretation is also in consonance with ordinary notions of equity and fairness would further fortify the court in adopting such a course. [CIT vs. Madho Prasad Jatia (1976) 105 ITR 179 (SC)]

7. Dictionary meanings

The dictionary meaning of a word cannot be looked at where the word has been statutorily defined or judicially interpreted. But where there is no such definition or interpretation, the court may take aid of dictionaries to ascertain the meanings of a word in common parlance, bearing in mind that a word is used in different senses according to its context and a dictionary gives all the meanings of a word and the court has, therefore, the context in which it has to interpret that word. [Titaghur Paper Mills Co. Ltd. vs. State of Orissa (1983) 142 ITR 663 (SC)]

“Words in the section of a statute are not to be interpreted by having those words in one hand and the dictionary in the other. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve.” [CGT vs. N.S. Getti Chettiar (1971) 82 ITR 599 (SC)]

The fair rule, therefore, is to adopt a reasonable construction of the words used in the Act without leaning to the one side or the other, i.e., neither as a guardian of the revenue nor as the protector of the subject. The duty of the
Court is colourless. [M.C.T. Bank Ltd. (in liquidation) vs. CIT (1963) 48 ITR 678 at 692 (Mad.)]

IV. SUBSIDIARY RULES:

1. Special Law Overrides General Law

The accepted rule of interpretation is that special provisions will prevail when there is a conflict between the two:

This rule of interpretation has been highlighted in CIT vs. Shahzada Nand & Sons 60 ITR 32 (SC)

However, as the name suggests, it is a general law and will always be overridden or superseded by a special law as per the canons of judicial interpretation. The Latin maxim “Generalia specialibus non derogant” is one of the cardinal maxims of interpretation and means that a general law will always be superseded by a special law. (State of Gujarat vs. Ramjibhai AIR 1979 SC 1098)

Thus, since taxing statutes are always special laws and most often self-contained enactments which even oust the jurisdiction of Courts in many cases, they would most definitely prevail over the General Clauses Act, 1897, when they define the scope of terms or procedures.

However the general rule would apply wherever the special statute does not define the scope or restricts the scope, the general rule would apply as controlled or cut down by the special rule. (South India Corporation Pvt. Ltd. vs. Board of Revenue AIR 1964 SC 207)

2. Charging section should be strictly construed while the procedural sections should be liberally interpreted.

This is also a very practical rule in the interpretation of taxing statutes and the charging section should be liberally construed while the procedure should have the widest possible ambit so as to ensure that no one has a vested right of procedure.

This is a very important and practical rule of interpretation and generally resorted to while interpreting the sections pertaining to incentives, exemptions and deductions where the spirit is to promote exports, increase earnings in foreign convertible exchange, promote industrialisation, infrastructure development etc. A provision for appeal should also be liberally construed.

(a) (CIT vs. Naga Hills Tea Co. Ltd. 89 ITR 236, 240 (SC); CIT vs. Contr ED vs. Kanakasabai 89 ITR 251, 257(SC)

A provision for exemption or relief should be construed liberally and in favour of the assessee even if it results in his obtaining “a double advantage”.

Gursahai Saigal vs. CIT 48 ITR (SC) 1

Those sections which impose the charge or levy should be strictly construed; but those which deal merely with the machinery of assessment and collection should not be subjected to a rigorous construction but should be construed in a way that makes the machinery workable.

Principle for interpretation of exemption notification and exception thereto – Held, an exemption notification under an enactment has to be construed strictly – However, an exemption notification issued for implementing an industrial policy of the State, which had promised tax exemption for setting up new industries in backward area, held, should be construed not strictly but liberally keeping in view the objects of such policy.

State of Jharkhand & Ors vs. Tata Cummins Ltd. & Anr. (2006) 4 SCC 57

3. THE STATUTE MUST BE READ AS A WHOLE

An interpretation clause, which extends the meaning of a word, does not take away its ordinary meaning. It should be borne in mind that an interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable. However it is to enable the word as used in the Act, when there is nothing in the context or the subject-matter to the contrary, to be applied to some things to which it would not ordinarily be applicable.

4. CONJUNCTION DISJUNCTION

The word “or” is generally used disjunctively while “and” is used conjunctively. In certain situations however, these words may be interchanged. In the words of Lord Halsbury these words cannot be interchanged unless the clear intent of the statute requires that to be done. The Supreme Court considered this issue in the leading case of Chamarbaugwala (AIR 1957 S.C. 699) with a view to give effect to the clear intention of the Legislature as evidenced from the statute as a whole. (Followed in Spentex Industries Ltd vs. CCE (Supreme Court) www.itatonline.org).

5. The judgment of Foreign Courts have only persuasive value.

L.G. Electronics India P. Ltd vs. ACIT (2013)140 ITD 41 (SB) (Delhi) (Trib.)

6. AVOIDING ADDITION OR SUBSTITUTION OF WORDS

Normally the courts would avoid addition or substitution of words where the meaning is plain and unambiguous. However if it is felt that some words are missing then it is permissible to implant the missing words.

7. Creative Interpretation

The Act was enacted in the year 1948. Information Technology at that time far from being developed was unknown. Constitution of India is a living organ. Creative interpretation had been resorted to by the Court so as to achieve a balance between the age old and rigid laws on the one hand and the advanced technology, on the other. The Judiciary always responds to the need of the changing scenario in regard to development of technologies. It uses its own interpretative principles to achieve a balance when Parliament has not responded to the need to amend the statute having regard to the developments in the field of science.

An interpretation of a provision which renders certain other provisions redundant or otiose cannot be accepted.

State of Punjab and Others vs. Amritsar Beverages Ltd. & Ors (2006) 7 SCC 607; Sadhu Singh vs. Gurudwara Sahib Narike (2006) 8 SCC 75

8. Retrospective

Every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation.

GEM Granites vs. CIT (2005) (2004) 271 ITR 322 (SC)

It is well settled that all procedural laws are retrospective unless the Legislature expressly states to the contrary. It has been held that the procedural laws in force must be applied at the date when the suit or proceeding comes on for trial or disposal. It has been held that a Court is bound to take notice of the change in the law and is bound to administer the law as it was when the suit came up for hearing. It has been held that if a Court has jurisdiction to try the suit, when it comes on for disposal, it then cannot refuse to assume jurisdiction by reason of the fact that it had no jurisdiction to entertain it at the date when it was instituted.

Sudhir G. Angur & Ors vs. M. Sanjeev & Ors (2006) 1 SCC 141

The test of the length of time covered by the retrospective operation cannot by itself necessary be a decisive test. Account must be taken of the surrounding facts and circumstances relating to the taxation and the legislative back ground of the provision. Retrospective legislation is valid. Concession of the Solicitor General for India before the High Court that amendment would apply only to assessments which were yet to be finalised cannot be relevant consideration in upholding the amendment if it were found to be constitutionally infirm.

National Agricultural Co-operative Marketing Federation of India Ltd. & Anr. vs. UOI & Ors (2003) 260 ITR 548 (SC)

A statute, which impairs vested rights or the legality of past transactions should not prima facie be held to be retrospective.

Sanjay Khetan vs. CIT (2004) 266 ITR 453 (All.)(High Court)

V. DOCTRINE OF NATURAL JUSTICE

Natural justice is an important concept in administrative law. In the words of Megarry, J it is ‘justice that is simple and elementary, as distinct from justice that is complex, sophisticated and technical. Natural justice has meant many things to many writers, lawyers and systems of law. It has many colours and shades and many forms and shapes. It is also known as ‘substantial justice’, ‘fundamental justice’, ‘universal justice’ or ‘fair play in action’. It is not possible to define precisely and scientifically the expression ‘natural justice’.

Wade states that the rules of natural justice operate as implied mandatory requirements, non-observance of which invalidates the exercise of the power. He adds, ‘the presumption is, it (natural justice) will always apply, however silent about it the statute may be.

The doctrine of natural justice seeks not only to secure justice but also to prevent miscarriage of justice’. The norms of natural justice are based on two ideas:

Audi alteram partem-No one should be condemned unheard; the person, who has to be effected by a decision has a right to be heard; and
Nemo judex in re sua –No one should be made a judge in his own cause or the rule against bias; the authority deciding the matter should be free from bias.

Application & scope.

The Doctrine focuses on the rule of fair hearing, which is one of the essential rules of the Natural Justice.

However the applicability of the principles of natural justice depends upon the facts and circumstances of each case. The Supreme Court has reiterated that the principles of natural justice are neither rigid nor they can be put in a straight jacket but are flexible. It is well established that rules of natural justice are not rigid rules, they are flexible and their application depends upon the setting and background of statutory provisions, nature of the right which may be affected and the consequences which may entail, its application depends upon the facts and circumstances of each case. Settled principles of ‘statutory interpretation’ require that a provision in a legislative enactment is to be interpreted in a manner which conforms to rules of natural justice, i.e., which may not be against sense of ‘fairness’ and ‘good conscience’.

It is settled law and there is no dispute that the principles of natural justice are binding on all the courts judicial bodies and quasi-judicial authorities. But the important questions are: Whether these principles are applicable to administrative authorities? Whether those bodies are also bound to observe them? Whether an administrative order passed in violation of these principles is ultra vires on that ground.

It is now well settled that a statutory body, which is entrusted by statute with a discretion, must act fairly. It does not matter whether its functions are described as judicial or quasi-judicial on the one hand, or as administrative on the other hand.

Moreover, the principle of natural justice apply not only to the legislation or State action but also apply where any tribunal, authority or body of persons, not falling within the definition of “State” under Article 12, is charged with the duty of deciding a matter/In such a case, the principles of natural justice require that it must decide such a matter fairly and impartially.

The reason for the flexibility of natural justice is that the concept is applied to a wide spectrum of the decision-making bodies. Principles of Natural Justice apply both to judicial & administrative Acts. Uma Nath Pandey & Ors vs. State of UP AIR 2009 SC 2375.

The assessing officer should observe the principle of natural justice while making the assessment. Dhakeswari Cotton Mills vs. CIT (1954) 26 ITR 775 SC
The right is so fundamental that the failure to observe the principles of natural justice cannot be made good in appeal. Lack of opportunity before the Assessing Officer cannot be rectified by the appellate authority by giving such opportunity.

Tin Box Co. vs. CIT (2001) 249 ITR 216 (SC)

A reassessment completed without furnishing the reasons actually recorded by the AO for reopening of assessment is not sustainable in law. The subsequent supply of the reasons would not make good of the illegality suffered at the stage of reopening of the assessment.

Tata International Ltd. vs. Dy. CIT (2012) 52 SOT 465 (Mum)

CIT vs. Videsh Sanchar Nigam Ltd. (2012) 340 ITR 66 (BOM)

The Commissioner must give an opportunity to the assessee if he desires to use the evidence collected against the assessee through reports of subordinate authorities. On the facts the court held that order passed by Chief Commissioner denying approval under section 10(23C)(vi), relying upon certain adverse material without supplying the same to the petitioner and without allowing an opportunity of rebuttal thereof does not fully meet the requirement of principles of natural justice and therefore, it can be sustained.

Rastra Sahayak Vidyalaya Samiti vs. CCIT (2012) 246 CTR 154 (Raj.)(High Court)

Assessing Officer is awarded cost for not following the direction of Tribunal and for passing the order without following the principle of natural justice.

Sushila Suresh Malge vs. ACIT (Mum.)(Trib) .www.itatonline.org.

NATURAL JUSTICE AND ITS ESSENTIAL ELEMENTES

It is common knowledge that unless the foundation is strong and firm, one cannot raise a tall edifice on it. It is to be noted that though the topic would appeal to be general in nature, its roots are deeply embedded and its forms the basis for administration of Justice which is so essential to preserve social order and security. The principles of natural justice have been developed and followed by the judiciary to protect the right of the public against the arbitrariness of the administrative authorities. Natural Justice implies fairness, reasonableness, equity and equality. The aim of natural justice is to secure justice; to prevent miscarriage of justice and to give protection to the public against the arbitrariness.

Articles 14, 19, 21 of the Indian Constitution lay down the cornerstone of natural justice in India. In the case of E. P. Royappa vs. State of Tamilnadu, AIR 1974 SC 555 the apex court held that a properly expressed and authenticated order can be challenged on the ground that condition precedent to the making of order has not been fulfilled or the principles of natural justice have not been observed. In another landmark case of Maneka Gandhi vs. Union of India (1978) 1 SCC 248, the apex court held that law which allows any administrative authority to take a decision affecting the rights of the people, without assigning the reason for such action, cannot be accepted as a procedure, which is just, fair and reasonable, hence violative of Articles 14 and 21.
Natural justice is a branch of public law. It is a formidable weapon which can be wielded to secure justice to citizens. Rules of natural justice are ‘basic values’ which a man has cherished throughout the ages. Principles of natural justice control all actions of public authorities by applying rules relating to reasonableness, good faith and justice, equity and good conscience. Natural justice are indeed great assurances of justice and fairness. The underlying object of rules of natural justice is to ensure fundamental liberties and rights of subjects. They thus serve public interest. The golden rule which stands firmly established is that the doctrine of natural justice is not only to secure justice but to prevent miscarriage of justice. Justice P.D. Dinakaran vs. Hon’ble Judges Inquiry Committee AIR 2011 SC 3711.

I. Audi alteram partem

The maxim audi alteram partem accentuates the rule of fair hearing. It lays down that No one should be condemned unheard. It is the first principle of the civilised jurisprudence that a person facing the charges must be given an opportunity to be heard, before any decision is taken against him. Hearing means ‘fair hearing’. In Cooper vs. Wandsworth Board of Works, (1861-73) ALL ER 1554 , BYLES J. observed that the laws of God and man both give the party an opportunity to defend himself. Even God did not pass a sentence upon Adam before he was called upon to make his defence.

The norms of reasonableness of opportunity of hearing vary from body to body and even case to case relating to the same body. The courts, in order to look into the reasonableness of the opportunity, must keep in mind the nature of the functions imposed by the statute in context of the right affected. The civil courts, in India, are governed in the matter of proceedings, through the Civil Procedure Code and the criminal courts, by the Criminal Procedure Code as well as the Evidence Act. But the adjudicatory bodies functioning outside the purview of the regular court hierarchy are not subject to a uniform statute governing their proceedings.

In Mineral Development vs. State of Bihar AIR 1960 SC 468, the apex court observed that the concept of fair hearing is elastic and not susceptible of a precise and easy definition. The hearing procedures vary from the tribunal, authority to authority and situation to situation. It is not necessary that the procedures of hearing must be like that of the proceedings followed by the regular courts.

In the 1970 case of A. K. Karaipak vs. Union of India (1969) 2 SCC 262, the Supreme Court made a statement that the fine distinction between the quasi-judicial and administrative function needs to be discarded for giving a hearing to the affected party. Before the Karaipak’s case, the court applied the natural justice to the quasi-judicial functions only. But after the case, the natural justice could be applied to the administrative functions as well.

Right of hearing is basic canons of justice. (Indu Bhushan Divedi vs. State of Jharkhand (2010) 11 SCC 278.)

Features of Audi alteram partem

Right to notice. The term ‘Notice’ originated from the Latin word ‘Notitia’which means ‘being known’. Thus it connotes the sense of information, intelligence or knowledge. Notice embodies the rule of fairness and must precede an adverse order. It should be clear enough to give the party enough information of the case he has to meet. There should be adequate time for the party, so that he can prepare for his defence. It is the sine qua nonof the right of hearing. If the notice is a statutory requirement, then it must be given in a manner provided by law. Thus notice is the starting point in the hearing. Unless a person knows about the subjects and issues involved in the case, he cannot be in the position to defend himself. This unwritten right of hearing is fundamental to a just decision by any authority which decides a controversial issue affecting the rights of the rival contestants. This right has its roots in the notion of fair procedure. It draws the attention for the party concerned to the imperative necessity of not overlooking the other side of the case before coming to its decision, for nothing is more likely to conduce to just and right decision than the practice of giving hearing to the affected parties. Darshanlal Nagpal vs. Govt. (NCT of Delhi) (2012) 2 SCC 327. As per GKN Driveshafts (India) Ltd vs.ITO(2003 )259 ITR 19 (SC) and the rules of natural justice, the AO is bound to furnish reasons within a reasonable time so that the assessee could file objections against the same.

Adequacy of the notice:

Time, place and nature of hearing.
Legal authority under which hearing is to be held.
Statements of specific charges which the person has to meet.

Right to know the evidence against him. Every person before an administrative authority, exercising adjudicatory powers has right to know the evidence to be used against him. The court in case of Dhakeshwari Cotton Mills Ltd. vs. CIT(supra), held that the assessee was not given a fair hearing as the Appellate Income Tax tribunal did not disclose the information supplied to it by the department. A person may be allowed to inspect the file and take notes.

The principle of natural justice is so fundamental that it is not to be construed as a mere formality. Where the material relied upon are not enclosed in a show cause notice, there is no sufficient opportunity.

Appropriate Authority vs. Vijay Kumar Sharma (2001) 249 ITR 554 (SC).

Lack of opportunity before the Assessing Officer cannot be rectified by the appellate authority by giving such opportunity. Tin Box Co. vs. CIT (2001) 249 ITR 216 (SC).

However non-furnishing of “all documents” does not violate principles of natural justice. When the only object in making such demand was to obstruct the proceedings

Kanwar Natwar Singh vs. Directorate of Enforcement (2011) 330 ITR 371 (SC)

Right to present case and evidence. The adjudicatory authority must provide the party a reasonable opportunity to present his case. This can be done either orally or in writing. The requirement of natural justice is not met if the party is not given the opportunity to represent in view of the proposed action.
Right to cross-examination. The right to rebut adverse evidence presupposes that the person has been informed about the evidence against him. Rebuttal can be done either orally or in written, provided that the statute does not provide otherwise. Cross examination is a very important weapon to bring out the truth. Section 33 of the Indian Evidence Act, 1972, provides for the rights of the parties to cross-examine. The cross-examination of the witnesses is not regarded as an obligatory part of natural justice. Whether the opportunity of cross examination is to be given or not depends upon the circumstances of the case and statute under which hearing is held. [(1980) 125 ITR 713 (SC)] – Kishinchand Chellaram vs. CIT; [(2001) 249 ITR 554 (SC)] – Appropriate Authority vs. Vijay Kumar.

Failure to give the assessee the right to cross-examine witnesses whose statements are relied upon, results in breach of principles of natural justice. It is a serious flaw which renders the order a nullity; Andaman Timber Industries vs. CCE (Supreme Court) www.itatonline.org

Reliance on statements of third party without giving the assessee the right of cross-examination results in breach of principles of natural justice. R. W. Promotions P. Ltd vs. ACIT (Bombay High Court) www.itatonline.org

Right to counsel. For some time the thinking had been that the Counsel should be kept away from the administrative adjudication, as it saves time and expense. But the right to be heard would be of little avail if the counsel were not allowed to appear, as everyone is not articulate enough to present his case.
Reasoned decisions or speaking orders: Basic rule of law and natural justice requires recording of reasons in support of the order. The basic rule of law and natural justice require recording of reasons in support of the order. The order has to be self-explanatory and should not keep the higher court guessing for reasons. Reasons provide live link between conclusion and evidence. That vital link is the safeguard against the arbitrariness, passion and prejudice. The reason is a manifestation of mind of the adjudicator. It is a toll for judging the validity of the order under challenge. It gives opportunity to the court to see whether or not the adjudicator has proceeded on the relevant material and evidence. In KEC International Ltd. vs. B.R. Balakrishnan (2001) 251 ITR 158,the importance of reasoned orders being passed on the stay applications was emphasized.
- Rajesh Mahajan vs .CIT (2012) 249 CTR 28/ 204 Taxman 522 (SC.)
- Kum Nirmala Tikana Giripo vs. State of Maharashtra & Ors 2009 Vol. 111(1) Bom L.R. 0113
- ICICI Bank Ltd and Anr. vs. State of Mah. And Anr. 2009 Vol 111 (8)Bom. L.R. 3532
- Detailed guidelines laid down as to how judgements should be written.

Jt. CIT vs. Saheli Leasing & Industries Ltd (2010) 324 ITR 170 (SC).

II. RULE AGAINST BIAS (NEMO JUDEX CAUSA SUA):

Bias means an operative prejudice, whether conscious or unconscious in relation to a party or issue. The rule against bias flows from following two principles: -

No one should be a judge in his own cause;
Justice should not only be done but manifestly and undoubtedly be seem to be done.
Judges, like Caesar’s wife, should be above suspicion.

The principle is not confined merely to the case where the Judge is an actual party to a cause, but applies to a cause in which he has an interest. An “Interest”, has been defined as a legal interest or a pecuniary interest and is to be distinguished from “favour”. Such an interest will disqualify a Judge. The interest (or bias) which disqualifies must be one in the matter to be litigated. Thus a judge should not only be impartial but should be in a position to apply his mind objectively to the dispute before him.

In Hyundai Heavy Industries Ltd vs. UOI (2011) 243 CTR 313 (Uttarakhand) (High Court), the court observed that the jurisdictional Commissioner cannot be nominated as member of DRP.

Same officer cannot decide the appeal against the order passed by him as inferior authority, Mohd. Chand vs. State of UP: Writ C No. 24629 of 2012 dated 22-5-12.

No one shall be judge in his own cause. Principles may be excluded by statute. The question of bias will have to be decided on the facts of each case. If the assessee is able to establish that the Assessing Officer was in fact biased in the sense that he was involved or interested in his personal capacity in the outcome of the assessment or procedure for assessment, no doubt, it would be a good ground for setting aside the assessment order.

UOI & Others vs. Vipan Kumar Jain & Others (2005) 9 SCC 579 / (2003) 260 ITR 1 (SC)

Bias can take many forms: -

Personal Bias
Pecuniary Bias
Subject-matter bias
Departmental bias

CONCLUSION

The natural justice forms the cornerstone of every civilized legal system. It is not found in the codified statutes. But it is inherent in the nature. Being uncodified, the natural justice does not have a uniform definition. However, it lays down the minimum standard that an administrative agency has to follow in its procedure. Even God never denied the natural justice to the human beings. So the human laws also need to be in conformity with the rules of natural justice. Every Administrative order which involves civil consequences must follow the rules of Natural Justice.

The rule of fair hearing must be followed to prevent the miscarriage of justice. If an accused is punished unheard, the purpose of law is defeated. A judgment which is the result of bias or want of impartiality on the part of a Judge will be regarded as a nullity and the trial coram non judice.

Case laws:

Natural Justice

1. Natural Justice – Need to show prejudice caused:

By now it is a well settled principle of law that doctrine of principle of natural justice is not an embodied Rule. It cannot be applied in a straight jacket formula. To sustain the complaint of violation of the principle of natural justice one must establish that he has been prejudiced by non-observance of principle of natural justice. As held by the High Court, the appellant has not been able to show as to how he has been prejudiced by non-furnishing of the copy of the enquiry report. The appellant has filed an appeal before Appellate Authority which was dismissed as noticed above. It is not his case that he has been deprived of making effective appeal for non-furnishing of copy of enquiry report. He has participated in the enquiry proceedings without any demur. It is undisputed that the appellant has been afforded enough opportunity and he has participated throughout the enquiry proceedings, he has been heard and allowed to make submission before the enquiry Committee.

Om Prakash Mann vs. Director of Education (Basic) & Ors (2006) 7 SCC 558 (SC)

2. Natural Justice – Application of principle:

Natural justice is an inseparable ingredient of fairness and reasonableness. It is even said that the principles of natural justice must be read into unoccupied interstices of the statute, unless there is a clear mandate to the contrary.

Suresh Chandra Nanhorya vs. Rajendra Rajak & Ors (2006) 7 SCC 800 (SC)

3. Natural Justice – Award – Writ

The principles of natural justice were also not required to be complied with as the same would have been an empty formality. The Court will not insist on compliance of the principles of natural justice in view of the binding nature of the award. Its application would be limited to a situation where the factual position or legal implication arising there under is disputed and not where it is not in dispute or cannot be disputed. If only one conclusion is possible, a writ would not issue only because there was a violation of the principles of natural justice.

Punjab National Bank & Ors vs. Manjeet Singh & Anr. (2006) 8 SCC 647 (SC)

4. Natural Justice – Judicial Bias – Exclusion by statute

UOI & Others vs. Vipan Kumar Jain & Others (2005) 9 SCC 579 / (2003) 260 ITR 1 (SC)

5. Natural Justice – Fairness – Good conscience

Settled principles of ‘statutory interpretation’ require that a provision in a legislative enactment is to be interpreted in a manner which conforms to rules of natural justice, i.e., which may not be against sense of ‘fairness’ and ‘good conscience’. (A.Ys. 1998-99 to 2000-01)

Mithlesh Kumar Tripathi vs. CIT (2006) 280 ITR 16 (All.) (High Court).

6. No opportunity offered to establish dealers stand. Hence, failure of principles of natural justice: Section 25 of the Kerala VAT Act, 2003.

Dealer regularly effecting purchases from another registered dealer (Orient Timbers) through an agent. AO unearthed 12 purchase transactions from the turnover said to have been from Orient Timbers Dealers stating that those purchases were made by the agent using TIN No. of the dealer. No opportunity offered to establish dealers stand. Hence, failure of principles of natural justice argued out was proper. Authorities ought to have paid attention to the contention raised by the dealer. The dealer had lodged the complaint against the agent alleging ‘Fraud and Cheating’. Therefore, looking to the complaint, conclusion arrived by the AO is defective, and, hence, the order was set aside, directing the AO to decide the matter afresh after giving opportunity to the dealer.

Madeena Timber Industries vs. State Of Kerala (2014) 22 KTR 182 (Ker)

7. Section 147 : Reassessment - Notice - Recorded reasons - After four years - Reasons for reopening not communicated, notice held to be invalid and quashed [Section 148]

The Assessing Officer issued the notice under section 148 after four years without disclosing the reasons and an opportunity to file an objections for reopening of reassessment. The assesse challenged the said notice by filing a writ petition. High Court allowed the writ petition and held that there was a complete violation of applicability of law by the Assessing Officer. He was required to communicate the reasons for reopening the assessment which he had failed to do. As there is violation of the governing principles of natural justice the order was quashed and set aside. (A.Y. 2004-05)

Agarwal Metals and Alloys vs. ACIT (2012) 346 ITR 64 (Bom.)(HC)

8. Section 148: Reassessment - Cost on department - Undesirable haste in passing assessment order results in miscarriage of justice - Awarded cost on department - Reassessment order was quashed

The Assessing Officer issued a reopening notice under section 148 and furnished the recorded reasons pursuant to which the assessee submitted its objections as required by GKN Driveshafts (India) Ltd. vs. ITO (2003) 259 ITR 19 (SC). The objections were filed on 26.10.2010 and were disposed of vide order dated 2.11.2010 by a non-speaking and cryptic order. Thereafter, without issuing any further notice or hearing the assessee, the Assessing Officer passed an assessment order dated 19.11.2010 even though the limitation period for passing the order was to expire on 31.12.2010. The assessee filed a Writ Petition to challenge the reopening. Held by the High Court quashing the reassessment order and passing strictures

Though, pursuant to GKN Driveshaft, the Assessing Officer was under an obligation to dispose of the objections to the reopening by passing a speaking order, he passed a non-speaking and cryptic order.

Further, though the Assessing Officer had sufficient time to complete the assessment, he had proceeded with the reassessment proceedings with undesirable haste and hurry, in violation of principles of natural justice and contrary to the procedure mandated and this had resulted in a miscarriage of justice. The fact that the assessee had an alternative remedy of filing an appeal (which it had exercised) was no bar to the exercise of writ jurisdiction. The concerned CIT should examine the reassessment file in the present case and take appropriate action if warranted. The department to pay cost of Rs 10,000/- to the assessee. (A.Y. 2003-04)

Sak Industries Pvt. Ltd. vs. Dy. CIT (2012) 71 DTR 98 (Delhi)(HC)

9. Section 179: Private company - Liability of directors - Non-executive director - Natural justice - Order passed without giving an opportunity of being heard and without informing about efforts made by the department to recover tax due from company was set aside [S. 264]

The assessee was non-executive director of company. He resigned from the Board on 29 April, 1994. On 27 September, 2006 the assessee was issued notice to recover the tax due of the company for the AY 1986-87 to 1993-94 under section 179 of the income tax Act. The assessee informed to the Assessing Officer that the Company is a partnership form having 80% share hence, the Assessing Officer must proceed against the firm for recovery dues of the Company. The Assessing Officer rejected the application of assessee. Assessee moved petition under section 264 which was rejected by the Commissioner without giving an opportunity of hearing. On writ petition the Court set aside the order of Commissioner and Assessing Officer and directed the Assessing Officer to pass an order after following principle of natural justice and including granting a personal hearing (AY 1986-87 to 1993-94)

Bhupatlal J. Sheth vs. ITO (2012) 210 Taxman 481 / 80DTR 279 (Bom.)(HC)

VI. DOCTRINE OF BINDING PRECEDENT:

The doctrine of binding precedent has merit of promoting certainty and consistency in judicial decisions and enables an organic development of law ‘besides providing assurance to an individual as to the consequence of transaction, forming part of his daily affairs UOI vs. Raghubir Singh 178 ITR 548 (SC)
As per the doctrine of precedent, all lower Courts, Tribunals and authorities exercising judicial or quasi-judicial functions are bound by the decisions of the High Court within whose territorial jurisdiction these Courts, Tribunals & authorities functions.

CIT vs. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom) Consolidated Pneumatic Tool Co. (India) Ltd. vs. CIT (1994) 209 ITR 277 (Bom).

If the revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee then it is not open to the Revenue to challenge its correctness in the case of other assessee without just cause.

UOI vs. Satish Panalal 249 ITR 221 (SC)
UOI vs. Kaumudini N. Dalal 249 ITR 219 (SC)
CIT vs. J. K. Charitable trust (2008) 308 ITR 161 (SC)

BINDING NATURE OF HIGH COURT ORDER:

The theory of precedent ensures that what has been done earlier would be done subsequently on identical facts. To wit, like cases are to be treated alike. Thus, the doctrine of precedent ensures certainty of law, uniformity of law and fairness meeting some of the essentials ingredients of Rule of Law. Although the judgements of High Court is not binding on other High Courts, but all the same , they have persuasive value which should be taken note of and dissented from by recording its own reasons ( Pradip J Mehta vs. CIT (2008) 300 ITR 231 SC)

In fact, the Supreme Court in Union of India vs. Raghuvir Singh 1989 (2) SCC 754 while setting out the objectives of the doctrine of Precedent observes at para 7, 8 and 9 thereof as under:

"7. India is governed by a judicial system identified by a hierarchy of courts, where the doctrine of binding precedent is a cardinal feature of its jurisprudence. …....

Taking note of the hierarchical character of the judicial system in India, it is of paramount importance that the law declared by this Court should be certain, clear and consistent. It is commonly known that most decisions of the courts are of significance not merely because they constitute an adjudication on the rights of the parties and resolve the dispute between them, but also because in doing so they embody a declaration of law operating as a binding principle in future cases. In this latter aspect lies their particular value in developing the jurisprudence of the law.
The doctrine of binding precedent has the merit of promoting a certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transactions forming part of his daily affairs And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a Court.”
Further the Apex Court in the case of Collector of Central Excise vs. Dunlop India Ltd. 154 ITR 172 has observed as under:

“We desire to add and as was said in Cassell and Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that “in the hierarchical system of courts” which exists in our country, “it is necessary for each lower tier”, including the High Court, “to accept loyally the decisions of higher tiers” It is inevitable in a hierarchical system of courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary ….... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted” (See observations of Lord Hailsham and Lord Diplock in Broome vs. Cassell).

The better wisdom of the court below must yield to the higher wisdom of the court above. That is the strength of the hierarchical judicial system. In Cassell vs. Broome (1972) AC 1027, commenting on the Court of Appeal's comment that Rookes vs. Barnard (1964) AC 1129, was rendered per incuriam, Lord Diplock observed (p.1131).

“The Court of Appeal found themselves able to disregard the decision of this House in Rookes vs. Barnard by applying to it the label per incuriam. That label is relevant only to the right of an appellate court to decline to follow one of its own previous decisions, not to its right to disregard a decision of a higher appellate court or to the right of a judge of the High Court to disregard a decision of the Court of Appeal.”

It is needless to add that in India under Article 141 of the Constitution, the law declared by the Supreme Court shall be binding on all Courts within the territory of India and under Art. 144 all authorities, civil and judicial, in the territory of India shall act in aid of the Supreme Court.”

Although both the above decisions are rendered in the context of the decision of the Supreme Court, the same principle with equal force would apply to the decisions of the High Court within the State over which it exercises jurisdiction. This issue is long settled by the Apex Court in East India Commercial Co. Ltd. Calcutta and Anr. vs. Collector of Customs, Calcutta 1962 SC SC 1893 wherein it has been held as under:

“29. …This raises the question whether an administrative tribunal can ignore the law declared by the highest court in the State and initiate proceedings in direct violation of the law so declared. Under Art.215, every High Court shall be a court of record and shall have all the powers of such a court including the power to punish for contempt of itself. Under Art. 226, it has a plenary power to issue orders or writs for the enforcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under Art. 227, it has jurisdiction over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction. It would be anomalous to suggest that a tribunal over which the High Court has superintendence can ignore the law declared by that court and start proceedings in direct violation of it. If a tribunal can do so, all the subordinate courts can equally do so, for there is no specific provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior tribunal that all the tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working: otherwise, there would be confusion in the administration of law and respect for law would irretrievably suffer. We, therefore, hold that the law declared by the highest court in the State is binding on authorities or tribunals under its superintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceedings contrary to the law laid down by the High Court would be invalid and the proceedings themselves would be without jurisdiction.”

Thus, the law declared by the decisions of the High Court will be binding upon all authorities and Tribunals functioning within the State. Consequently, the decisions of this Court would be binding upon all Authorities, Tribunals and Courts subordinate to the High Court within the State of Maharashtra.

Once there is a binding decision of this Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larger bench of this Court takes a view different from the one already taken. (See: HDFC Bank LTD vs. The DY CIT dt. 25/2/2016 www.itatonline.org).

A High Court must not brush aside the binding precedent or the judgement of a coordinate Bench simply because some of the arguments were either not canvased or if canvassed were not considered. Binding precedent can be ignored only if it is per incurium (CIT vs. Impact Containers Pvt Ltd. (2014) 367 ITR 346 (Bom))

BINDING NATURE OF ORDER OF ONE BENCH OF TRIBUNAL ON ANOTHER BENCH

6 For the sake of uniformity, one Bench of the Tribunal is bound to follow the view expressed by another Bench of the Tribunal unless the earlier view is per incurious - CIT vs. L.G. Ramamurthi 110 ITR 453 (Mad); CIT vs. S. Devaraj 73 ITR 1 (Mad).

7 Tribunal should not come to a conclusion totally contradictory to the conclusion reached by the earlier Bench of the Tribunal. Where a Bench differs from an earlier Bench, the matter should be referred to a larger Bench - CIT vs. Goodlass Nerolac Paints Ltd. 188 ITR 1 (Bom). UOI vs. Paras Laminates Pvt. Ltd. (1990) 186 ITR 722 (SC) ; Pradip Chandra Parija vs. Pramod Chandra Patniak (2002) 254 ITR 99 (SC)

8. One bench cannot differ from the view of another Co-ordinate Bench. Mercedes Benz India Pvt. Ltd. vs. UOI (2010) 252 ELT 168 (Bom) ITO vs Baker Technical Services Pvt. Ltd. (2010) 125 ITD 1 (Mum)(TM)

9. Special Bench decision of three members should have precedence over Third Member decision.

Oman International Bank 286 ITR 8 (AT)(SB). Third Member decision is like the decision of Special Bench should be followed in same manner.

10. Similarly despite stay by High Court, Special Bench verdict in Marilyn Shipping is binding on the ITAT due to judicial discipline. CIT .vs. Janapriya Engineers Syndicate (2015) 113 DTR 311(AP) (HC).

BINDING NATURE OF ORDERS OF TRIBUNAL

11. The First Appellate Authority or the Assessing Officer are bound by the orders of the Tribunal. Even where the assessee or the department has pursued the matter in reference proceedings, it does not act as a kind of stay of operation of the order of the Tribunal.

12 The Assessing Officer cannot ignore the decision taken by the Tribunal in favour of the assessee and take a contrary view - ITO vs. Siemens India Ltd. & another 156 ITR 11 (Bom). Bank of Baroda vs. H.C. Shrivastava (2002) 256 ITR 385 (Bom).

13. The Assessing Officer cannot refuse to follow the order passed by the Commissioner against the application under section 132(11) on the ground that the Commissioner had no jurisdiction over the matter - Union of India vs. Pradip Kumar Saraf & Others 207 ITR 679 (Cal), Sree Rajindra Mills Ltd. vs. CIT (1970) 28 STC 483, Union of India vs. Kamlakshi Finance Corpn. Ltd. 1992 AIR SC 711 (712).Sub-Inspector Rooplal & Anr. vs. Ltd. Governor & Ors. (2000) 1 SCC 644. ; Gammon India Ltd vs. Commissioner of Customs (2011) 10 GSTR 134 (SC);Nirma Ltd vs. Commissioner of Central Excise, Ahmedabad 2012 (276) ELT 283 (Trib.) (Ahd.)

14. Precedent – Power of Supreme Court to depart from earlier decisions: Constitution of India Articles141 and 145

If a principle laid down by SC is demonstrably inconsistent with the scheme of the Constitution, it becomes the duty of court to correct the wrong principle laid down. It is also the duty of SC to correct itself as early as possible in the matters of the interpretation of constitution “as perpetuation of mistake will be harmful to public interest”.

Desiya Murpokko Dravida Kazhagam & Anr vs. Election Commission of India (2012) AIR Supreme Court 2191

15. The Hon’ble Bombay High Court in CIT vs. Thana Electricity Supply Ltd. 206 ITR 727 (738-739)after considering various judgements of Supreme Court laid down the following propositions with regard to binding precedent:

The law declared by the Supreme Court being binding on all courts in India, the decisions of the Supreme Court are binding on all courts, except, however, the Supreme Court itself which is free to review the same and depart from its earlier opinion if the situation so warrants. What is binding is, of course, the ratio of the decision and not every expression found therein.
The decisions of the High Court are binding on the subordinate courts and authorities or Tribunals under its superintendence throughout the territories in relation to which it exercises jurisdiction. It does not extend beyond its territorial jurisdiction.
The position in regard to the binding nature of the decision of High court on different Benches of the same court may be summed up as follows:
1. A Single judge of High Court is bound by the decision of another single judge or a Division Bench of the same High Court. It would be judicial impropriety to ignore that decision. Judicial comity demand that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to direct the papers to be placed before the Chief Justice to enable him to constitute a larger bench to examine the question (see, Food Corporation of India vs. Yadav Engineering & Contractor, AIR 1982 SC 1302).
2. A Division Bench of High Court should follow the decision of another Division Bench of equal strength or a Full Bench of the same High Court. If one division bench differs from another division bench of the same High Court, it has to refer and transfer the case to a large Bench.
3. Where there are conflicting decision of courts of coordinate jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decisions.
The decision of the High Court is binding precedent neither for another High Court nor for courts or Tribunal outside its own territorial jurisdiction. It is well settled that the decision of a High Court will have the force of binding precedent only in the State or territories over which the Court has jurisdiction. In other States outside the territorial jurisdiction of that High Court it may, at best, have only persuasive effect. By no amount of stretching of the doctrine of stare decisis, can judgments of one High Court be given the status of a binding precedent so far as other High Courts or Courts or Tribunals within their territorial jurisdiction are concerned. Any such attempt will go counter to the very doctrine of stare decisis and also the various decisions of the Supreme Court which have interpreted the scope and ambit thereof. The fact that there in only one decision of any one High Court on a particular point or that a number of different High Courts have taken identical views in that regard is not at all relevant of that purpose. Whatever may be the conclusion, the decisions cannot have the force of binding precedent on other High Courts or on any subordinate courts or Tribunals within their jurisdiction. That status is reserved only for the decisions of the Supreme Court which are binding on all courts in the country by virtue of article 141 of the Constitution.

[CIT vs. Thana Electricity Supply Ltd., (1994) 206 ITR 727, 7380-39 (Bom). Also see, Consolidated Pneumatic Tool Co. (India) Ltd. vs. CIT. (1994) 209 ITR 277, 282 (Bom)].CIT .vs. Shah Ravindra Derogarh (2014) 367 ITR 223 (Guj.)(HC)

VII. RES JUDICATA

Introduction

Finality to assessment facilitates the assessee to plan his affairs and to decide the business planning for long term strategies. However tax authorities feel that there is no finality to any assessment as the principle of Res Judicata is not applicable to tax proceedings.
The word ‘Res Judicata’ is derived from the Latin language. It means a case or suit already decided. The principles of Res Judicata, in the eye of law, is that if on any facts and/or law, a particular decision is made than subsequently if any matter on similar facts and/or law is to be decided between the same parties, it should be same as made earlier.
As per The Law Lexicon “Res judicata” means “A matter adjudged; a thing judicially acted upon or decided; a thing or matter settled by judgment; a thing definitely settled by judicial decision, the thing adjudged”.
Section 11 of The Code of Civil Procedure, 1908, defines “Res Judicata” as under:-

“No court shall try any suit or issue in which the matter directly and substantially in issue has been directly and substantially in issue in a former suit between the same parties, or between parties under whom they or any of them claim, litigating under the same title, in a court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such court.”

5. The doctrine of Res Judicata is based on three maxims:

Nemo debet lis vaxari pro eadem causa (no man should be vexed twice for the same cause);
Interest republicae ut sit finis litium (it is in the interest of the state that there should be an end to a litigation); and
Re judicata pro veritate occipitur (a judicial decision must be accepted as correct).

6. The Bombay High Court, in H.A. Shah and Co. vs. CIT (1956) 30 ITR 618 (Bom.)has held that "the principle of estoppel or res judicatadoes not strictly apply to the Income Tax authorities" and yet declaring that:-

"An earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision and if the Tribunal giving the earlier decision has taken into consideration all material evidence."

7. The courts have cautioned that the doctrine of Res Judicatashould not be stretched too far under direct tax laws. A Tribunal should extremely be slow to depart from its earlier view.

8. In Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC)the Hon’ble Apex Court observed as under:

“16. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year”.

9. In the case of Municipal Corporation of City of Thane vs. Vidyut Metallics Ltd & Anr. (2007) 8 SCC 688,wherein the facts were that in earlier litigation, the court had considered the evidence of Quality control Manager who was described as “expert” on the point and accepting his evidence, the court held that the goods imported by the company were ferrous in nature and not non-ferrous and the company was right in paying octroi under item 71. It was thus a “fundamental factor” and the nature of goods imported by the company was directly and substantially in issue, on the basis of which the decision was taken. The Hon’ble Supreme Court observed that in taxation matters, the strict rule of res judicataas envisaged by section 11, CPC 1908 has no application. As a general rule, each year’s assessment is final only for that year and does not govern later years, because it determines the tax for a particular period.

The Hon’ble Supreme Court further observed that in facts of present case it was not possible to hold that the earlier decision would not continue to operate in subsequent years unless it is shown that there are changed circumstances or the goods imported by the company in subsequent years was different than the one which was imported earlier and in respect of which decision had been arrived at by the court. Therefore, it was held that the Revisional Court as well as the High Court were right in giving benefit of the decision in the earlier litigation to the respondent company. The Hon’ble Supreme Court upheld the observation of Supreme Court in case of Radhaswami Satsang (Supra).

10. Further principles of res judicatanot applicable in cases where order is passed without jurisdiction. Hence would not be binding on other party even if no appeal filed against the same.

UOI & Anr vs. Association of Unified Telecom Service Providers of India & Ors AIR 2012 SC 1693.

WRONG CONCESSION MADE BY A COUNSEL BEFORE THE COURT CANNOT BIND THE PARTIES.

WOI & Anr vs. S.C. Parashar (2006) 3 SCC 167
P. Nallammal & Anr. vs. State represented by Inspector of Police. (1999) 6 SCC 559

As regards the legal issues are concerned, assuming the assessee agrees for addition, the same is not binding on him - Gauri Sahai Ghisa Ram vs. CIT 120 ITR 338 (All)

-Rani Anand Kunwar vs. CIT 8 ITR 126 (Oudh). This is for the reason that there is no concession on law.

Further concession given by counsel pertaining to question of law is not binding, if question of fact it is binding. (Vimaleshwar Nagappa Shet vs. Noor Ahmed Sheriff AIR 2011 SC 2057).

11. On going through the various judicial pronouncement following principles emerge:-

As a general rule principle of res judicata or estoppel is not applicable to income-tax proceedings. An assessment of particular year is final and binding in relation to the assessment year in which the decision is given.
In income-tax proceedings though the principle of res judicata does not apply, yet rule of consistency does apply i.e., if no fresh facts come to light on investigation, the Assessing Officer is not entitled to reopen the same question on mere ground of suspicion or change of opinion. This is based on principle of natural justice and expediency. The principle of comity lends weight to this preposition.
A finding arrived at in a subsequent year ignoring, without material, the conclusion arrived at earlier would be vitiated in law. There should be no deviation/variation from earlier year’s decision unless there are fresh circumstances to warrant a deviation from such previous decision unless it otherwise emerges that the previous decision is wrong.
Principle of res judicata or estoppel and principle of consistency or expediency apply with equal force to both Income-tax authorities on one hand and the Tribunal/High Courts on the other.
This principle broadly safeguards the interests of the assessees against arbitrary actions arising out of prerogative interpretations and biased actions.