IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3327 OF 2007    

COMMISSIONER OF CUSTOMS (IMPORT), MUMBAI            …APPELLANT(S) VERSUS

M/S. DILIP KUMAR AND COMPANY & ORS.                …RESPONDENT(S)

JUDGMENT

N .V . RAMANA , J .

1. This  Constitution  Bench is setup to examine the

correctness of the  ratio  in  Sun Export

Corporation, Bombay v. Collector of Customs,

Bombay, (1997) 6 SCC 564 [hereinafter referred as

‘Sun Export Case’  for brevity], namely the question

is ­  What is the interpretative rule to  be  applied

while interpreting a tax exemption

Reportable

provision/notification when there is an ambiguity as

to its applicability with reference to the entitlement

of the assessee or the rate of tax to be applied?  

2. In  Sun Export Case  (supra), a three­Judge Bench

ruled that an ambiguity in a tax exemption

provision or notification must be interpreted so as to

favour the assessee claiming the benefit of such

exemption.  Such  a rule  was  doubted  when this

appeal  was placed before  a  Bench of two­Judges.

The matter then went before a three­Judge Bench

consisting one of us (Ranjan Gogoi, J.).   The three­

Judge Bench having noticed the unsatisfactory state

of law  as it stands today, opined that the dicta in

Sun Export Case  (supra), requires reconsideration

and that is how the matter has been placed before

this Constitution Bench.  

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3. Few facts necessary, to appreciate the issue involved

are as follows ­ the respondents imported a

consignment of Vitamin – E50 powder (feed grade)

under  Bill of Entry  No. 8207, dated 19.08.1999.

They claimed the benefit of concessional rate of duty

at 5%, instead of standard 30%, as per the Customs

Notification No. 20/1999 and classified the product

under Chapter 2309.90 which admittedly  pertains

to  prawn feed.   They relied on the  ratio  in  Sun

Export Case  (supra) and claimed the benefit of

exemption.  The benefit of Customs Notification No.

20/1999 was, however,  denied to the respondents

on the plea of the department that the goods under

import contained chemical ingredients for animal

feed and not animal feed/prawn feed, as such, the

concessional rate of duty under the extant

notification was not available.   The department

classified the consignment under Chapter 29 which

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attracts standard rate of customs duty. The

adjudicating authority, namely, the Assistant

Commissioner of Customs, distinguished  Sun

Export Case (supra), while accepting the plea of the

department to deny the concessional rate.   The

Commissioner of Customs (Appeals) reversed the

order of the Assistant Commissioner and came to

the conclusion that  Sun Export Case  (supra) was

indeed applicable.   The department then

approached the  Customs,  Excise  and  Service  Tax

Tribunal (CESTAT), which affirmed the order of the

Commissioner of Customs (Appeals).   Aggrieved

thereby, the present appeal is filed.

4. When the appeal was placed, as noticed earlier,

before  a  Bench of two­Judges, the ruling in  Sun

Export Case  (supra) was doubted, observing as

follows­

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“We have serious doubts as to whether

the Bombay High Court judgment

affirmed in Sun Export Corporation's

case is correct. First and foremost, it is

clear that the subsequent exemption

Notification largely expanded the first

Notification which referred only to

animal feeds and nothing else. That

being the case, it would be difficult to

say that a large number of other

categories which have subsequently

been added would be clarificatory and

therefore, retrospective. Further, we

also  feel that  in view of the catena of

judgments of this Court which have

held that an exemption Notification has

to be strictly construed (that  is,  if the

person claiming exemption does not fall

strictly within the letter of the

Notification, he cannot claim

exemption),  have also been ignored by

this Court in Sun Export Corporation's

case in paragraph 13 thereof. Apart

from this, the view of this Court in

paragraph 13 that it is well­settled that

if two views are possible, one favourable

to  the  assessee  in  matters  of taxation

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has to be preferred is unexceptionable.

However, this Court was not concerned

in that case with the charging Section

of a taxation statute. It was concerned

with the interpretation of an Exemption

Notification which, as has been stated

above, would require the exactly

opposite test to be fulfilled.”

Further this Court found that the subsequent judgment

in Collector of Customs and Central Excise, Guntur

and Ors. V. Surendra Cotton Oil Mills and

Fertilizers Co. and Ors., 2001 (1) SCC 578 [hereinafter

referred as  ‘Surendra Cotton Oil Mills Case’  for

brevity], distinguished Sun Export Case  (supra), which

mandated this Court to take a re­look at the proposition

laid down by the earlier cases in the following manner­

“We also find that in the

subsequent judgment of this  Court,

Surendra Cotton Oil Mills's case, this

Court has distinguished the Sun

Export Corporation's case and held

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that it dealt with 'animal feed' which

was large enough to  include  'animal

feed supplements'  whereas the facts

of Surendra  Cotton  Oil  Mills's case

showed that ingredients of animal

feed could not be held to be included

in  'animal feed'. In our opinion, this

Court did not adequately deal  with

why Sun Exports Corporation's case

which is a binding decision of a three

Judges Bench should not be followed,

apart from a specious distinction

between 'ingredients' and

'supplements' which is logically

speaking a distinction without a

difference.

…

This being the unsatisfactory state

of  law  as  it  stands today,  we feel

that this  matter should be placed

before Hon’ble the Chief Justice of

India to constitute an appropriate

Bench to resolve the doubts

pointed out  by us in the  body of

this Order.”

(emphasis supplied)

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5. We feel that the reference to  Surendra Cotton Oil

Mills  Case  (supra),  may not  be  necessary  as the

distinction was drawn on a  factual footing,  which

this Court may not concern  itself  with, as we are

only concerned with the principle of law. With this,

the Division Bench was of the tentative view that the

opinion expressed in  Sun Export Case  (supra)

would require reconsideration, as the proposition

laid down therein was unsatisfactory, and therefore

placed before the Chief Justice of India for

constituting an appropriate Bench.  

6. When the matter was placed before a three Judge Bench

presided over by one of us (Ranjan Gogoi, J.), the Bench

reiterated the view for reconsideration of the  Sun

Export Case  (supra) and again placed the matter,

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before Hon’ble the Chief Justice of India for constitution

of an appropriate Bench, considering the fact that Sun

Export Case  (supra) was decided by a Bench

comprising of three learned judges of this Court.  Hence,

this matter came to be placed before this Bench of Five

Judges with following observations­

“In paragraph 13 of the order of

this  Court in     Sun’s case,     views

have been      expressed with regard

to the interpretation of an

exemption notification to

support the  conclusion  reached.

The same may require a

reconsideration.

That apart, in the referral order it

has  been noticed that  Sun’s  Case

(supra)  has been distinguished in

‘Collector  of  Central  Excise,  Guntur

vs. Surendra Cotton Oil Mills & Fert.

Co.  The basis on  which the said

distinction  has  been  drawn needs

to be further pursued.

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Having considered the matter at

some length, we are of the

tentative view, that the opinion

expressed in Sun’s case (supra)

may require a reconsideration.

Being a co­ordinate Bench, we

believe we ought not to proceed

any further in the matter. Hence,

we direct the Registry to lay the

papers before the Hon’ble the

Chief Justice of India for

appropriate orders.”

(emphasis supplied)

7. The learned Additional Solicitor General, Ms. Pinky

Anand, submits that a tax exemption statute or

notification needs to be strictly interpreted.   According

to her, strict interpretation is literal rule of

interpretation, which means that Court has to apply the

provision reading the language therein and no

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interpretation is required if the language is clear.  In the

event of any ambiguity, according to her, the benefit has

to be given to the revenue and that such ambiguity in

tax exemption provision  must not be interpreted to

benefit the assessee who  fails to demonstrate without

any doubt that such  assessee is covered  by the tax

exemption notification.   She elaborated her arguments

by relying on various judgments and contends that the

ratio in Sun Export Case (supra), which was doubted in

Surendra Cotton Oil Mills Case (supra), is not correct

law.  On  merits  of the case, she  submitted that the

artificial  distinction  created  by  Surendra Cotton  Oil

Mills  Case  (supra),  in distinguishing the ingredients

from supplements is not sound and may not be

accepted by the Court.

8. Per contra, among others, Mr. Somnath Shukla, learned

counsel appearing on behalf of the respondents would

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submit that the  ratio  and observations in  Sun Export

Case  (supra)  has to be considered holistically without

giving  any  narrow meaning to the  conclusion  arrived

therein.   The rule of strict interpretation cannot be

applied in abstract.  It has to be applied keeping in view

the interpretation to  be  used in relation to  Customs

Tariff  Entry.  According to the  learned counsel,  when

the Customs Tariff Entry is interpreted broadly, the

same should be adopted in interpreting exemption

notification.   Indeed, the learned senior counsel would

contend that the rule of strict interpretation should be

limited to the eligibility conditions of an exemption

notification  and while  conferring the  benefits to  such

exemption.  He distinguished all the judgments relied on

by the appellants and submits that “prawn feed

supplements”  would also  be included under the  head

“prawn feed”, and the judgment of the Tribunal

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impugned in these appeals does not warrant any

interference.   

9. Sun Export Case  (supra)  was a case against the

judgment of the High Court of Judicature, Bombay.   It

was concerned with the interpretation of tax exemption

notification, being Notification No. 234/1982 – CE,

dated  01.11.1982, issued by the  Central  Government

under sub­section (1) of Section 25 of the Customs Act.

The High Court considered the issue whether Vitamin

AD­3 mix (feed grade)/animal feed supplement could be

included under the head ‘animal feed, including

compound livestock feed’.   The Bombay High Court

decided, in the affirmative, in favour  of the assessee.

The case then landed in this Court, which was

persuaded to expand the meaning of ‘animal feed’ in the

light of subsequent notification issued in 1984, which

largely  expanded the scope of  exemption to  the effect

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that ‘animal feed, including compound livestock feed,

animal feed supplements and animal feed concentrates’.

This Court indeed countenanced the plea, namely,

whenever there is ambiguity as to whether the subject

matter was included or not, then the benefit of the same

should be conferred on the assessee.   The relevant

portion in Sun Export Case (supra), reads as follows:

“13. We are in agreement with the above

view expressed by the Bombay High

Court. No doubt it was contended on

behalf  of the  Revenue that the contrary

view taken by the Tribunal has been

challenged in this Court which was

rejected in limine at the admission stage.

We do not think that dismissal at the

admission stage can be relied upon as a

binding precedent.  Even assuming that

there are two views possible, it is well

settled that one favourable to the

assessee in matters of taxation has to

be preferred.”

(emphasis supplied)

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10.There cannot be any doubt that the ratio in Sun Export

Case  (supra)  that, if two views are possible in

interpreting the exemption notification, the one

favourable to the assesseee in the matter of taxation has

to be preferred.   This principle created confusion and

resulted in  unsatisfactory state of law.   In spite of

catena of judgments of this Court, which took the contra

view,  holding that  an  exemption  notification  must  be

strictly construed, and if a person claiming exemption

does not fall strictly within the description of the

notification otherwise then he cannot claim exemption.

11.About three years after Sun Export Case (supra), in the

year 2000, this Court in  Surendra Cotton Oil  Mills

Case  (supra), expressed reservations as to the

soundness  of the  dicta in  Sun Export  Case  (supra),

observing that Sun Export Case (supra) ignored catena

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of judgments of this Court expressing contra view.  This

Court prima facie came to the conclusion with regard to

the principle that when two views are possible, one

favourable to the assessee in matters of taxation has to

be preferred, is unexceptionable when interpreting the

charging section of a taxation statute, but the opposite

principle would be applicable in interpretation of

exemption notification.   The three­Judge Bench in the

referral order further observed that the views expressed

in  Sun Export Case  (supra)  with regard to

interpretation of exemption notification to support the

conclusion, required reconsideration.

12.We may, here itself notice that the distinction in

interpreting a taxing provision (charging provision) and

in the matter of interpretation of exemption notification

is too obvious to require any elaboration.  Nonetheless,

in a  nutshell,  we  may  mention that, as observed in

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Surendra Cotton Oil Mills Case (supra), in the matter

of interpretation of charging section of a taxation

statute, strict rule of interpretation is mandatory and if

there are two views possible in the matter of

interpretation of a charging section, the one favourable

to the assessee need to be applied.   There is, however,

confusion in the matter of interpretation of exemption

notification  published  under taxation statutes  and in

this area also, the decisions are galore1.

13.We may  passingly,  albeit,  briefly reiterate the  general

principles of interpretation, which were also adverted to

1  See:  Sun Export Corporation, Bombay v. Collector of Customs, Bombay and Anr.,  (1997) 6 SCC 564; Commissioner of Central Excise, Pune v. Abhi Chemicals and Pharmaceuticals Pvt. Ltd., (2005) 3 SCC 541;  Collector of Central Excise, Bombay­1 and Anr. v. Parle Exports (Pvt.) Ltd., (1989) 1 SCC 345; Commissioner of Customs (Import), Mumbai v. Konkan Synthetic Fibres, (2012) 6 SCC 339;  Collector of Customs,  Bombay v. Swastic  Wollens (Pvt.) Ltd.  And Ors., (1988)  Supp.  SCC 796;  Commissioner of  Customs (Preventive), Gujarat v. Reliance Petroleum Ltd., (2008) 7 SCC 220.

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by both the counsel. In his treatise, ‘Principles of

Statutory  Interpretation’  Justice  G.P.  Singh, lucidly

pointed the importance of construction of statutes in a

modern State as under:

“Legislation in modern State is

actuated with some policy to curb

some public evil or to effectuate some

public benefit.   The legislation is

primarily directed to the problems

before the Legislature based on

information derived from past and

present experience.   It may also be

designed  by  use of general  words to

cover similar problems arising in

future.  But,  from the very nature of

things, it is impossible to anticipate

fully the varied situations arising in

future in which the application of the

legislation in hand may be called for,

and, words chosen to communicate

such indefinite ‘referents’ are bound to

be, in  many cases lacking in clarity

and precision and thus giving rise to

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controversial questions of

construction.”  

14.An Act of Parliament/Legislature cannot foresee all types

of situations and all types of consequences.  It is for the

Court to see whether a particular case falls within the

broad principles of law enacted by the Legislature.

Here, the principles of interpretation of statutes come in

handy.   In spite  of the fact that experts in the field

assist  in drafting the Acts and Rules, there are many

occasions  where the language  used and the phrases

employed in the statute are not perfect.   Therefore,

Judges and Courts need to interpret the words.   

15. In doing so, the principles of  interpretation have been

evolved in common law.  It has also been the practice for

the appropriate legislative body to enact Interpretation

Acts or General Clauses Act.   In all the Acts and

Regulations, made either by the Parliament or

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Legislature, the  words and phrases  as  defined  in the

General Clauses Act and the principles of interpretation

laid down in General Clauses Act are to be necessarily

kept in view.   If while interpreting a Statutory law, any

doubt arises as to the meaning to be assigned to a word

or a phrase or a clause used in an enactment and such

word, phrase or clause is not specifically defined, it is

legitimate and indeed mandatory to fall back on General

Clauses Act.   Notwithstanding this, we should

remember that when there is repugnancy or conflict as

to the subject or context between the General Clauses

Act and a statutory provision which falls for

interpretation, the Court must necessarily refer to the

provisions of statute.

16.The purpose of interpretation is essentially to know the

intention of the  Legislature.  Whether the  Legislature

intended to apply the law in a given case; whether the

20

Legislature intended  to  exclude operation  of law  in  a

given case; whether Legislature intended to give

discretion to enforcing authority or to adjudicating

agency to apply the law, are essentially questions to

which answers can be sought only by knowing the

intention  of the legislation.    Apart from  the general

principles of interpretation of statutes, there are certain

internal aids and external aids which are tools for

interpreting the statutes.

17.The long title, the preamble, the heading, the marginal

note, punctuation, illustrations, definitions or dictionary

clause, a proviso  to a section, explanation, examples, a

schedule to the Act etc., are internal aids to

construction.   The external aids to construction are

Parliamentary debates, history leading to the legislation,

other statutes which have a bearing, dictionaries,

thesaurus.

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18. It is  well accepted that a statute  must  be construed

according to the intention  of the  Legislature  and  the

Courts should act upon the true intention of the

legislation while applying law and while interpreting

law.   If a statutory provision is open to more than one

meaning, the  Court has to choose the interpretation

which represents  the  intention of the Legislature.   In

this connection, the following observations made by this

Court in  District Mining Officer vs.  Tata Iron and

Steel Co., (2001) 7 SCC 358, may be noticed:

“… A statute is an edict of the Legislature

and in construing a statute, it is

necessary, to seek the intention of its

maker.   A statute has to be construed

according to the intent of them that make

it and the duty of the Court is to act upon

the true intention of the Legislature.   If a

22

statutory  provision  is  open  to  more than

one interpretation the Court has to choose

that interpretation which represents the

true intention of the Legislature.  This task

very often raises the difficulties because of

various reasons, inasmuch  as the  words

used may not be scientific symbols having

any  precise or definite  meaning and the

language may be an imperfect medium to

convey one’s thought or that the assembly

of Legislatures consisting of persons of

various shades of opinion purport to

convey a meaning which may be obscure.

It is impossible even for the most

imaginative Legislature to forestall

exhaustively situations and circumstances

that may emerge after  enacting a statute

where its application  may be called for.

Nonetheless, the function of the Courts is

only to expound and not to legislate.

Legislation in a modern State is actuated

with some policy to curb some public evil

or to effectuate some public benefit.   The

legislation is primarily directed to the

problems before the Legislature based on

information derived from past and present

experience.  It may also be designed by use

23

of general words to cover similar problems

arising in future.   But, from the very

nature of things, it is impossible to

anticipate fully the varied situations

arising in future in which the application

of the legislation in hand may be called for,

and,  words chosen to communicate  such

indefinite referents are bound to be in

many cases lacking in clarity and precision

and thus giving rise to controversial

questions of construction.   The process of

construction combines both literal and

purposive approaches.  In other words the

legislative intention  i.e., the true  or legal

meaning of an enactment is derived by

considering the meaning of the words used

in the enactment in the light of any

discernible purpose or object which

comprehends the mischief and its remedy

to which the enactment is directed…”

19.The well settled principle is that when the words in a

statute are clear, plain and unambiguous and only one

meaning can be inferred, the Courts are bound to give

24

effect to the said meaning irrespective of consequences.

If the words in the statute are plain and unambiguous,

it becomes necessary to expound those words in their

natural and ordinary sense.  The words used declare the

intention of the Legislature.   In  Kanai Lal Sur v.

Paramnidhi  Sadhukhan, AIR 1957  SC  907, it  was

held that if the words used are capable of one

construction only then it would not be open to the

Courts to adopt any other hypothetical construction on

the ground that such construction is more consistent

with the alleged object and policy of the Act.

20. In applying rule of plain  meaning any hardship and

inconvenience cannot be the basis to alter the meaning

to the language  employed by the legislation.  This is

especially so in fiscal statutes and penal statutes.

Nevertheless, if the plain language results in absurdity,

the Court  is entitled to determine the meaning of the

25

word in the context in which it is used keeping in view

the legislative purpose.2  Not only that, if the plain

construction leads to anomaly and absurdity, the court

having regard to the hardship and consequences that

flow from such a provision can even explain the true

intention of the legislation. Having observed general

principles applicable to statutory interpretation, it is

now time to consider rules of interpretation with respect

to taxation.

21. In construing penal statutes and taxation statutes, the

Court  has to  apply strict rule  of interpretation.  The

penal statute which tends to deprive a person of right to

life and liberty has to be given strict  interpretation or

else many innocent might become victims of

discretionary decision making.   Insofar as taxation

statutes are concerned, Article 265 of the Constitution3

2 Assistant Commissioner, Gadag Sub­Division, Gadag  v. Mathapathi Basavannewwa, 1995 (6) SCC 355. 3 265. Taxes not to be imposed save by authority of law­ No tax shall be levied or collected except by authority of law.

26

prohibits the State from extracting tax from the citizens

without authority of law.   It is axiomatic that taxation

statute has to be interpreted strictly because State

cannot at their whims and fancies burden the citizens

without authority of law. In other words, when

competent Legislature mandates taxing certain

persons/certain objects in certain circumstances, it

cannot be expanded/interpreted to include those, which

were not intended by the Legislature.

22.At the outset, we  must clarify the position of ‘plain

meaning rule or clear and unambiguous rule’ with

respect  of tax law. ‘The  plain  meaning rule’ suggests

that when the language in the statute is plain and

unambiguous, the Court  has to read and understand

the plain language as such, and there is no scope for

any interpretation.  This salutary maxim flows from the

phrase “cum  inverbis  nulla  ambiguitas est, non  debet

27

admitti voluntatis quaestio”. Following such maxim, the

courts sometimes have made strict interpretation

subordinate to the  plain  meaning rule4, though strict

interpretation is used in the precise sense.  To say that

strict interpretation involves plain reading of the statute

and to say that one has to utilize strict interpretation in

the event of ambiguity is self­contradictory.   

23.Next, we may consider the meaning and scope of ‘strict

interpretation’,  as  evolved  in Indian  law and how the

higher Courts have made a distinction while interpreting

a taxation statute on one hand and tax exemption

notification on the other. In Black’s Law Dictionary (10th

Edn.) ‘strict interpretation’ is described as under:

Strict interpretation. (16c) 1. An

interpretation according to the narrowest,

most literal meaning of the words without

regard for context and other permissible

4 Mangalore Chemicals Case (Infra para 37).

28

meanings. 2. An interpretation according

to what the interpreter narrowly believes

to have been the specific intentions or

understandings of the text’s authors or

ratifiers,  and no  more.­  Also termed  (in

senses 1 & 2) strict construction, literal

interpretation; literal construction;

restricted interpretation; interpretatio

stricta; interpretatio restricta;

interpretatio  verbalis.  3.  The  philosophy

underlying strict interpretation of

statues.­ Also termed as close

interpretation; interpretatio restrictive.

See strict constructionism under

constructionism. Cf.  large interpretation;

liberal interpretation (2).

“Strict construction  of a statute is

that which refuses to expand the law by

implications or  equitable  considerations,

but confines its operation to cases which

are clearly within the letter of the statute,

as well as within its spirit or reason, not

so as  to  defeat the  manifest  purpose  of

the legislature,  but so  as to resolve  all

reasonable doubts against the

applicability of the statute to the

particular case.’ Willam  M. Lile et al.,

29

Brief Making and the use of Law Books

343 (Roger  W. Cooley  & Charles Lesly

Ames eds., 3d ed. 1914).

“Strict interpretation is an equivocal

expression,  for  it  means either  literal or

narrow. When a provision is ambiguous,

one of its meaning may be wider than the

other, and the strict (i.e., narrow) sense is

not necessarily the strict (i.e., literal)

sense.” John Salmond , Jurisprudence

171 n. (t) (Glanville L. Williams ed., 10th

ed. 1947).

24.As contended by Ms. Pinky Anand,  learned Additional

Solicitor General, the principle of literal interpretation

and the principle of strict interpretation are sometimes

used interchangeably.  This principle, however, may not

be sustainable in all contexts and situations.   There is

certainly scope to sustain an argument that all cases of

literal interpretation would involve strict rule of

interpretation, but strict rule may not necessarily

involve the former, especially in the  area  of taxation.

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The decision of this Court in  Punjab Land

Development and Reclamation Corporation Ltd.,

Chandigarh v. Presiding Officer, Labour Court

Chandigarh and Ors.,  (1990)  3 SCC 682,  made  the

said distinction, and explained the literal rule­

“The literal rules of construction require

the wording of the Act to be construed

according to its literal and grammatical

meaning whatever the result may be.

Unless otherwise provided, the same word

must normally be construed throughout

the Act in the same sense, and in the case

of old statutes regard must be had to its

contemporary  meaning if there  has  been

no change with the passage of time.”   

That strict interpretation does not encompass strict­

literalism into its fold.   It may be relevant to note that

simply juxtaposing ‘strict interpretation’ with ‘literal

rule’ would result in ignoring an important aspect that

31

is ‘apparent legislative intent’.   We are alive to the fact

that there may be overlapping in some cases between

the aforesaid two rules.  With certainty, we can observe

that, ‘strict interpretation’ does not encompass such

literalism, which lead to absurdity and go against the

legislative intent.  As noted above, if literalism is at the

far end of the spectrum, wherein it accepts no

implications or inferences, then ‘strict interpretation’

can be implied to accept some form of essential

inferences which literal rule may not accept.  

25.We are not suggesting that literal rule de hors the strict

interpretation  nor  one  should ignore to  ascertain the

interplay between ‘strict interpretation’ and ‘literal

interpretation’.   We may reiterate at the cost of

repetition that strict interpretation of a statute certainly

involves literal or plain meaning test. The other tools of

interpretation, namely contextual or purposive

32

interpretation cannot be applied nor any resort be made

to look to other supporting material, especially in

taxation statutes.   Indeed, it is  well  settled  that in a

taxation statute, there is no room for any intendment;

that  regard must be had to the clear meaning of the

words and that the matter should be governed wholly by

the language of the notification.  Equity has no place in

interpretation of a tax statute. Strictly one has to look to

the language used; there is no room for searching

intendment nor drawing any presumption.

Furthermore,  nothing has to be read  into  nor should

anything be implied other than essential inferences

while considering a taxation statute.

26. Justice G.P. Singh, in his treatise ‘Principles of

Statutory Interpretation’ (14th ed. 2016 p. – 879) after

referring to  Re, Micklethwait, (1885) 11 Ex 452;

Partington v.  A.G., (1869)  LR 4 HL 100;  Rajasthan

33

Rajya Sahakari Spinning & Ginning Mills

Federation Ltd. v. Deputy CIT, Jaipur, (2014) 11 SCC

672,  State Bank of Travancore v. Commissioner of

Income Tax, (1986) 2 SCC 11 and  Cape Brandy

Syndicate v. IRC, (1921) 1 KB 64, summed up the law

in the following manner­

“A taxing statute is to be strictly

construed.  The well­established rule in the

familiar  words of LORD  WENSLEYDALE,

reaffirmed by LORD HALSBURY AND

LORD SIMONDS,  means: ‘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.   In a

classic passage LORD CAIRNS stated the

principle thus: “If the person sought to be

taxed comes within the letter of the law he

must be taxed, however great the hardship

may appear to the judicial mind to be.  On

the other  hand, if the  Crown seeking to

recover  the tax,  cannot bring  the subject

within the letter of the law, the subject is

34

free, however apparently within the spirit

of law the case might otherwise appear to

be.   In other words, if there be admissible

in any statute, what is called an equitable

construction, certainly, such a

construction is not admissible in a taxing

statute where you can simply adhere to the

words of the statute.  VISCOUNT SIMON

quoted with approval a passage from

ROWLATT,  J. expressing the  principle in

the  following words: “In a taxing Act one

has to look merely at what is clearly said.

This is no room for any intendment. There

is no equity about a tax. There is no

presumption as to tax.  Nothing  is  to be

read in, nothing is to be implied.  One can

only look fairly at the language used.”  

It was further observed:

“In all tax matters one has to interpret the

taxation statute strictly.  Simply because

one class of legal entities is given a benefit

which is specifically stated in the Act, does

not mean that the benefit can be extended

to legal entities not referred to in the Act as

there is no equity in matters of taxation….”

35

Yet again, it was observed:

“It may thus be taken as a maxim of

tax law, which although not to be

overstressed ought not to be forgotten

that, “the subject is not to be taxed unless

the words of the taxing statute

unambiguously  impose the tax on him”,

[Russel v. Scott, (1948) 2 All ER 1].   The

proper course in construing revenue Acts

is to give a fair and reasonable

construction to their language without

leaning to one side or the other but

keeping in mind that no tax can be

imposed without words clearly showing

an intention to  lay the burden and that

equitable construction of the words is not

permissible [Ormond Investment Co. v.

Betts, (1928) AC 143].   Considerations of

hardship, injustice or anomalies  do  not

play any useful role in construing taxing

statutes unless there be some real

ambiguity [Mapp v. Oram, (1969) 3 All ER

215]. It has also been said that if taxing

provision is “so wanting in clarity that no

meaning is reasonably clear, the courts

will be unable to regard it as of any effect

36

[IRC v. Ross and Coutler, (1948) 1 All ER

616].”

Further elaborating on this aspect, the learned

author stated as follows:  

“Therefore, if the words used are

ambiguous and reasonable open to two

interpretations benefit  of interpretation  is

given to the subject [Express Mill v.

Municipal  Committee,  Wardha,  AIR  1958

SC 341].  If the Legislature fails to express

itself clearly and the taxpayer escapes by

not being brought within the letter of the

law, no question of unjustness as such

arises [CIT v. Jalgaon Electric Supply Co.,

AIR 1960 SC 1182].   But equitable

considerations are not relevant in

construing a taxing statute,  [CIT, W.B. v.

Central India Industries, AIR 1972 SC

397], and similarly logic or reason cannot

be of  much avail in  interpreting a taxing

statute [Azam Jha v. Expenditure Tax

Officer, Hyderabad, AIR 1972 SC 2319].  It

is well settled that in the field of taxation,

hardship or equity has no role to play in

determining eligibility to tax and it is for

37

the Legislature to determine the same

[Kapil  Mohan v.  Commr. of Income  Tax,

Delhi, AIR 1999 SC 573].   Similarly,

hardship or equity is not relevant in

interpreting provisions imposing stamp

duty, which is a tax, and the court should

not concern itself with the intention of the

Legislature when the language expressing

such intention is plain and unambiguous

[State of Madhya Pradesh v. Rakesh Kohli

& Anr., (2012) 6 SCC 312].  But  just as

reliance upon equity does not avail an

assesse, so it does not avail the Revenue.”

The passages extracted above, were quoted with

approval by this Court in at least two decisions

being  Commissioner of Income Tax vs.  Kasturi

Sons Ltd., (1999) 3 SCC 346 and  State of West

Bengal vs. Kesoram Industries Limited, (2004) 10

SCC 201 [hereinafter referred as  ‘Kesoram

Industries Case’  for brevity].   In the later decision,

a Bench of seven Judges, after citing the above

38

passage from Justice G.P. Singh’s treatise, summed

up the following principles applicable to the

interpretation of a taxing statute:

“(i) In interpreting a taxing statute,

equitable considerations are entirely out of

place.   A taxing statute cannot be

interpreted on any presumption or

assumption.  A taxing statute  has to  be

interpreted  in the  light  of  what  is  clearly

expressed; it cannot imply anything which

is not expressed; it cannot import

provisions  in  the statute so as to supply

any deficiency; (ii) Before taxing any

person, it  must be shown that he falls

within the ambit of the charging section by

clear words used in the section; and (iii) If

the words are ambiguous and open to two

interpretations, the benefit of

interpretation  is given to the subject and

there is nothing unjust in a taxpayer

escaping if the letter of the law fails to

catch him on account of Legislature’s

failure to express itself clearly”.

39

27.Now coming to the other aspect, as we presently

discuss, even with regard to exemption clauses or

exemption notifications issued under a taxing statute,

this Court in some cases has taken the view that the

ambiguity in an exemption notification should be

construed in favour of the subject.   In subsequent

cases, this Court diluted the principle saying that

mandatory requirements of exemption clause should be

interpreted strictly and the directory conditions of such

exemption notification can be condoned if there is

sufficient compliance with the main requirements.  This,

however,  did not in any manner tinker with the view

that an ambiguous exemption clause should be

interpreted favouring the revenue.   Here again this

Court applied different tests when considering the

ambiguity of the exemption notification which requires

strict  construction and after  doing so  at the  stage  of

40

applying the notification, it came to the conclusion that

one has to consider liberally.   

28.With the above understanding the stage is now set to

consider the core issue.  In the event of ambiguity in an

exemption notification, should the benefit of such

ambiguity  go to the  subject/assessee  or should  such

ambiguity should be construed in favour of the revenue,

denying the benefit of exemption to the

subject/assessee?  There are catena of case laws in this

area of interpretation of an exemption notification,

which we need to consider herein.   The case of

Commissioner of Inland Revenue vs. James Forrest,

[(1890)  15  AC 334 (HL)] – is  a case  which  does  not

discuss the interpretative test to be applied to

exemption clauses  in  a  taxation statute  –  however, it

was observed that ‘it would be unreasonable to suppose

that an exemption was wide as practicable to make the

41

tax inoperative, that it cannot be assumed to have been

in the mind of the Legislature’ and that exemption ‘from

taxation  to  some extent increased  the burden on other

members of the community’.  Though this is a dissenting

view of Lord Halsbury, LC, in subsequent decisions this

has been quoted vividly to support the conclusion that

any vagueness in the exemption clauses must go to the

benefit of the revenue.  Be that as it is, in our country,

at least from 1955, there appears to be a consistent view

that if the  words in a taxing statute (not exemption

clause) are ambiguous and open to two interpretations,

the benefit of interpretation is given to the subject and it

does not matter if the taxpayer escapes the tax net on

account of Legislatures’ failure to express itself clearly

(See the passage extracted hereinabove from  Kesoram

Industries Case (supra)).

42

29.The first case with which we need to concern ourselves

is the case in Union of India v. The Commercial Tax

Officer, West Bengal and Ors., AIR 1956 SC 202.   It

may be noted that this case  was dealt  with by five

learned Judges of this Court resulting in two different

opinions; one by the then Chief Justice of India, S.R.

Das for the  majority,  and Justice  B.P.  Sinha  (as  His

Lordship then was) rendering minority view.   The

question before this Court was whether the sale of goods

made by one private mill  to the Government of India,

Ministry of Industries and Supplies were to be deducted

as taxable turnover of the mill for the exemption given

under Section 5 of the Bengal Finance (Sales Tax) Act,

1941  (Bengal  Act  VI  of  1941).  The exemption under

Section 5(2)(a)(iii) of the Bengal Finance (Sales Tax) Act,

1941 provided for exemption ‘to sales to the Indian

Stores Department, the Supply Department of the

Government of India, and any railway or water transport

43

administration’.   The Court was to interpret the

aforesaid  provision in  order to ascertain  whether the

sale to the Government of India, Ministry of Industries

and Supplies would be covered under the Section.  

30.The majority  was of the  view  that the Government of

India, Ministry of Industries and Supplies was not

similar to those mentioned in the exemption

notification.   The majority extensively relied on the

history and origin of Ministry of Industries and Supplies

and concluded that the functions of the aforesaid

Ministry were different from the erstwhile departments

mentioned under the exemption provision.  The majority

reasoned that the exemption being the creation of the

statute itself, it should have to be construed strictly and

the interpretation cannot be extended to sales to other

departments.   We might find some clue as to the

content of a strict construction also.   It was canvassed

44

before the Court that the object of Section 5(2)(a)(iii) of

the relevant statute, was to give exemption not to the

particular departments but to the sale of such goods to

those departments and, therefore,  sale of  those goods

made to any Departments of the Government of India,

which came to be charged with the duty of purchasing

those goods should also come within the purview of the

exemption.   The Court while repelling the aforesaid

interpretation, reasoned as under:

“We are unable to accept this  line of

reasoning.   This interpretation  will  unduly

narrow the scope and ambit of the exemption

by limiting it to sales of only those goods as,

at the  date  of the  Act,  used to  be sold to

those two departments and sales of other

goods even to those two departments,

however necessary for the prosecution of the

war, would not get benefit of the exemption.

Such could not possibly be the intention of

the Legislature as expressed by the language

used by it in framing the Section.”

45

31.The aforesaid placitum is suggestive of the fact that the

Courts utilized the rule of strict interpretation in order

to decipher the intention of the Legislature and

thereafter provide appropriate interpretation for the

exemption provided under the provisions of the Act

which was neither too narrow nor too broad. It may be

noted that the majority did not take a narrow view as to

what  strict interpretation would  literally  mean; rather

they combined legislative intent to ascertain the

meaning of the statute in accordance with the objective

intent of the Legislature.

32.On the contrary, the minority  opinion of  Justice  B.P.

Sinha (as His Lordship then was) provided a purposive

interpretation for Section 5(2)(a)(iii) of the Act, which is

clear from the following passage:

“The judgment under appeal is based

chiefly on the consideration that the

exemption clause in question does not in

46

terms refer to the newly created

department which now goes by the name

of the  Ministry of Industry and Supply.

But this department  in so far as it  deals

with industry, is  not  concerned  with the

main purchasing activities of the

Government of India.   The exemption was

granted in respect of the purchasing

activity of the  Government of India and

that function continues to be assigned to

the Supply Department which has now

become a wing of the newly created

department of the Government.   The

question therefore arises whether in those

circumstances the Government of India

could claim the benefit  of  the exemption.

The High Court in answering that question

in the negative has gone upon mere

nomenclature.   It has emphasized the

change in the name and overlooked the

substance of the matter.”

33.The minority  construed  ‘strict interpretation’ to  be an

interpretation wherein least number of “determinates in

terms of quantity” would fall under the exemption.  The

minority referred to an old English case of

47

Commissioner of Inland Revenue v. James Forrest,

(1890) 15 AC 334.   It may be relevant to note that the

minority could not find the justification to apply strict

interpretation as the exemption notification was broad

enough to include exemptions for commodities

purchased by the Government of India.  The Court was

of the opinion that the strict interpretation provided by

the majority was uncalled for as there was no additional

burden on others by giving such exemptions.   The

relevant observations are as follows­

“The High Court referred to the

observations of Lord Halsbury in the case of

Commissioner of Inland  Revenue v. James

Forrest (1890) 15 AC 334, to the effect that

exemptions from taxation should be strictly

construed because otherwise the burden of

taxation  will fall on other  members of the

community.   Those observations, in my

opinion, have no relevance to the facts and

circumstances of the present controversy,

because  we  know that the exemption  was

granted  to the  Government  of India in the

48

department dealing with purchase of certain

commodities and  articles  without reference

to quantity.   As already pointed out, the

Indian Stores Department was concerned

with purchase of stores for public services on

behalf of all Central Departments of

Government and local Government, etc., and

the Government of Bengal as then

constituted was one of the provinces of India

which have been receiving subsidies and

subventions to make up the deficit  in their

budgets.   As a matter of fact, as stated on

behalf of the Bengal Government the

concession  was  granted in  order to enable

business communities within the province of

Bengal to compete on favourable terms with

others outside Bengal in the matter of

supplying the needs of the Government.

Hence, there is no question of liberal

construction of the exemption resulting in

throwing a greater burden on other citizens.

On the other hand, the larger the sales in the

province of Bengal as it used to be, the

greater the benefit to the business

community doing business within that

province.   It was therefore stated at the Bar

that though the present case involved taxes

49

amounting to less than Rs.10,000, the

question arising for determination in this

case affected much larger amounts because

such sales within the province amounted to

several crores.  I  should have thought that

the business community  in the province of

Bengal having had the advantage of the

transactions of sale, the Government of

Bengal in  all fairness should  have  allowed

the purchasing agency of the Government of

India the benefit of the exemption until that

benefit was in terms withdrawn sometimes in

the beginning of 1949.”

34. In Hansraj Gordhandas v. H.H. Dave, Asst. Collector

of Central Excise & Customs, Surat and Ors.,  AIR

1970 SC 755 = (1969) 2 SCR 253 [hereinafter referred

as  ‘Hansraj  Gordhandas  Case’  for brevity],  wherein

this Court was called upon to  interpret an exemption

notification issued  under the  Central  Excise  Act.   It

would be relevant to understand the factual context

which gave rise to the aforesaid case before the Court.

The appellant was sole proprietor who used to procure

50

cotton  from a co­operative society during the relevant

period.  The society had agreed to carry out the weaving

work for the appellant on payment of fixed  weaving

charges at Re.0.19 np. per yard which included

expenses the society would have to incur in transporting

the aforesaid cotton fabric.  In the years 1959 and 1960,

the Government issued an exemption notification which

exempted cotton fabrics produced by any co­operative

society formed of owners of cotton power looms,

registered on or before 31st March, 1961.  The question

before the Court was whether the appellant who got the

cotton  fabric  produced  from one of the  registered co­

operative society was also covered under the aforesaid

notification.   It  may be  of some significance that the

revenue tried to interpret the  aforesaid  exemption  by

relying  on  the  purposive interpretation  by  contending

that the object of granting the above exemption was to

encourage the formation of co­operative societies which

51

not only produced cotton fabrics but also consisted of

members, not only owning but having actually operated

not more than four power looms during the three years

immediately preceding their  having  joined the society.

The policy was that instead of each such member

operating his looms on his own, he should combine with

others by forming a society to produce clothes.   It was

argued  that the  goods  produced  for  which exemption

could be claimed must be goods produced on his own

and on behalf by the society.   The court did not

countenance such purposive interpretation.  It was held

that a taxing legislation should be interpreted wholly by

the language of the notification.   The relevant

observations are:  

“It is  well­established that in a  taxing

statute there is no room for any intendment

but regard must be had to the clear meaning

of the words.   The entire matter is governed

wholly by the language of the notification.  If

the tax­payer is within the plain terms of the

52

exemption it cannot be denied its benefit by

calling in aid any supposed intention of the

exempting authority.  If  such intention can

be gathered from the construction of the

words of the notification or by necessary

implication therefrom, the matter is different,

but that is not the case here.   In this

connection we may refer to the observations

of  Lord Watson  in Salomon vs.  Salomon &

Co., (1897) AC 22):

‘Intention of the Legislature is a common but

very slippery phrase, which, popularly

understood may signify anything from

intention embodied in positive enactment to

speculative opinion as to what the legislature

probably would have meant, although there

has been an omission to enact it.  In a Court

of Law or Equity, what the Legislature

intended to be done or not to be done can

only be legitimately ascertained from that

which it has chosen to enact, either in

express words or by reasonable and

necessary implication.’

It is  an application of this  principle that  a

statutory notification may not be extended so

as to meet a casus omissus.   As appears in

53

the judgment of the Privy Council in

Crawford v. Spooner.

‘… we cannot aid the Legislature’s defective

phrasing of the Act, we cannot add, and

mend, and, by construction, make up

deficiencies which are left there.’

Learned Counsel for the respondents is

possibly right in his submission that the

object behind the two notifications is to

encourage the actual manufacturers of

handloom cloth to switch over to power

looms by constituting themselves in co­

operative Societies.  But the operation of the

notifications has to be judged not by the

object which the rule making authority had

in mind but by the words which it has

employed to effectuate the legislative intent.”

35. In the judgment of two learned Judges in  Union  of

India v.  Wood Papers Limited, (1990) 4 SCC 256

[hereinafter referred as ‘Wood  Papers Ltd.  Case’  for

brevity], a distinction between stage of finding out the

eligibility to seek exemption and stage of applying the

nature of exemption was made.  Relying on the decision

54

in  Collector of Central Excise vs. Parle Exports (P)

Ltd., (1989) 1 SCC 345, it was held “Do not extend or

widen the ambit at the stage of applicability. But once

that hurdle is crossed, construe it liberally”.   The

reasoning  for  arriving at  such conclusion  is found  in

para 4 of Wood Papers Ltd. Case (supra), which reads­

“… Literally exemption is freedom from

liability, tax or duty.  Fiscally, it may assume

varying shapes, specially, in a growing

economy.  For instance  tax holiday  to new

units, concessional rate  of tax to  goods  or

persons for limited period or with the specific

objective etc.   That is why its construction,

unlike charging provision,  has  to be  tested

on different touchstone.   In fact, an

exemption provision is like an exception and

on normal principle of construction or

interpretation of statutes it is construed

strictly either because of legislative intention

or on economic justification of inequitable

burden or progressive approach of fiscal

provisions intended to augment State

revenue. But once exception or exemption

55

becomes applicable no rule or principles

requires it to  be  construed  strictly.  Truly

speaking liberal and strict construction of

an exemption provision are to be invoked

at different stages of interpreting it.

When the  question  is  whether  a subject

falls in the notification or in the

exemption clause then it being in nature

of exception is to be construed strictly

and against the subject, but once

ambiguity or doubt about applicability is

lifted and the subject falls in the

notification then full play should be given

to it  and it  calls  for  a  wider and  liberal

construction…”

(emphasis supplied)

36. In  Mangalore Chemicals & Fertilizers Ltd.  vs.  Dy.

Commissioner of Commercial Taxes, (1992) Supp. 1

SCC 21 [hereinafter referred as ‘Mangalore Chemicals

Case’  for  brevity], the  facts  of the case were  that the

State  Government issued  a  notification in exercise  of

power  under  Section  8­A of the  Karnataka Sales  Tax

56

Act, 1957, providing certain incentives to entrepreneurs

starting new industries in the State pursuant to State’s

policy for “rapid industrialization”.   The notification

contains a package of  reliefs and  incentives  including

one concerning  relief from payment  of sales tax  with

which the case was concerned.   There was no dispute

that the appellant  was entitled to the benefit of the

Notification dated June 30, 1969.   There was also no

dispute that the refunds  were eligible to  be  adjusted

against sales tax payable for respective years.  The only

controversy was whether the appellant, not having

actually secured the “prior permission” would be

entitled to adjustment having regard to the words of the

Notification of August 11, 1975, that “until permission

of renewal  is granted by the Deputy Commissioner of

Commercial Taxes, the new industry should not be

allowed to adjust the refunds”.   The contention of the

appellants therein was that the permission for the three

57

years had been sought well before the commencement of

the respective years but had been withheld for reasons

which were demonstrably extraneous.   Therefore,

contention was that if, in these circumstances, the

Deputy Commissioner could withold the permission.

37.This Court while accepting the  interpretation provided

by the appellant, observed on the aspect of strict

construction  of  a  provision  concerning  exemptions  as

follows:

“… There is support of judicial opinion to

the view that exemptions from taxation

have a tendency to increase the burden on

the other unexempted class of tax payers

and should be construed against the

subject in case of ambiguity.   It is an

equally well known principle that a person

who claims an exemption has to establish

his case.   

… The choice between a strict and a

liberal construction arises only in case of

58

doubt in regard to the intention of the

legislature manifest on the statutory

language.   Indeed, the  need to resort to

any interpretative process arises only

where the meaning is not manifest on the

plain words of the statute.  If the words are

plain and clear and directly convey the

meaning, there is no need for any

interpretation.   It  appears to us the true

rule  of construction  of a  provision  as to

exemption is the one stated by this Court

in Union of India v. Wood Papers Ltd.

[(1990) 4 SCC 256 = 1990 SCC (Tax) 422 =

JT (1991) SC 151]”

Three important aspects which comes out of the

discussion  are the recognition  of  horizontal equity  by

this court as  a consideration for application  of strict

interpretation, subjugation of strict interpretation to the

plain meaning rule and interpretation in favour of

exclusion in light of ambiguity.  

59

38.We will now consider another Constitution Bench

decision in  Commissioner of Central Excise, New

Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236

[hereinafter referred as  ‘Hari Chand Case’  for brevity].

We need not refer to the facts of the case which gave

rise to the questions for consideration before the

Constitutional Bench. K.S. Radhakrishnan, J., who

wrote the unanimous opinion for the Constitution

Bench, framed the question, viz., whether manufacturer

of a specified final product falling under Schedule to the

Central  Excise Tariff Act, 1985 is eligible to get the

benefit of exemption of remission of excise duty on

specified intermediate goods as per the Central

Government Notification dated 11.08.1994, if  captively

consumed for the manufacture of final product on the

ground that the records kept by it at the recipient end

would indicate its “intended use” and “substantial

compliance” with procedure set out in Chapter 10 of the

60

Central Excise Rules, 1994, for consideration? The

Constitution Bench answering the said question

concluded that a manufacturer qualified to seek

exemption was required to comply with the pre­

conditions for claiming exemption and therefore is not

exempt or absolved from following the statutory

requirements as contained in the Rules.   The

Constitution Bench then considered and reiterated the

settled principles  qua  the test of construction of

exemption clause, the  mandatory requirements to be

complied with and the distinction between the eligibility

criteria with reference to the conditions which need to

be strictly complied with and the conditions which need

to be substantially complied  with.   The  Constitution

Bench followed the ratio in Hansraj Gordhandas Case

(supra), to reiterate the law on the aspect of

interpretation of exemption clause in para 29 as follows­

61

“The law is well settled that a person

who claims exemption or concession has to

establish that he is entitled to that

exemption or concession.   A provision

providing for an exemption, concession or

exception, as the case may be, has to be

construed strictly  with certain exceptions

depending upon the settings on which the

provision  has  been  placed in the  statute

and the object and purpose to be achieved.

If exemption is available on complying with

certain conditions, the conditions have to

be complied with. The mandatory

requirements of those conditions must be

obeyed or fulfilled exactly, thought at

times, some latitude can be shown, if there

is failure to comply with some

requirements which are directory in

nature, the non­compliance of which

would not affect the essence or substance

of the notification granting exemption.”

39.The Constitution Bench then considered the doctrine of

substantial compliance and “intended use”.   The

62

relevant portions of the observations in  paras 31 to 34

are in the following terms –

“31. Of course, some of the provisions of

an exemption notification may be directory in

nature and some are mandatory  in nature.

A distinction between the provisions of a

statute  which are of substantive character

and were built in with certain specific

objectives  of  policy, on the  one  hand,  and

those which are merely procedural and

technical in there nature, on the other, must

be kept clearly distinguished…

Doctrine of substantial compliance and

“intended use”

32. The doctrine of substantial compliance

is  a  judicial invention,  equitable in nature,

designed to avoid hardship in cases where a

party does all that can reasonably be

expected of it, but failed or faulted in some

minor or inconsequent aspects which cannot

be described as the “essence” or the

“substance”  of the requirements.   Like the

concept of “reasonableness”, the acceptance

or otherwise of a plea of “substantial

compliance” depends upon the facts and

circumstances of each case and the purpose

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and object to be achieved and the context of

the prerequisites which are essential to

achieve the object and purpose of the rule or

the regulation.  Such a  defence  cannot  be

pleased if a clear statutory prerequisite

which effectuates the object and the purpose

of the statute has not been met.  Certainly, it

means that the Court should determine

whether the statute has been followed

sufficiently so as to carry out the intent for

which the statute  was enacted and not a

mirror image type of strict compliance.

Substantial compliance means “actual

compliance in respect to the substance

essential to every reasonable objective of the

statute” and the Court should determine

whether the statute has been followed

sufficiently so as to carry out the intent of

the statute  and  accomplish the reasonable

objectives for which it was passed.

33.  A fiscal statute generally seeks to

preserve the need to comply strictly with

regulatory requirements that are important,

especially when a party seeks the benefits of

an exemption clause that are important.

Substantial compliance with an enactment is

insisted, where mandatory and directory

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requirements are lumped together, for in

such a case, if mandatory requirements are

complied with, it will  be proper to say that

the enactment has been substantially

complied with notwithstanding the non­

compliance of directory requirements.   In

cases where substantial compliance has

been found, there has been actual

compliance with the statute, albeit

procedurally faulty.   The doctrine of

substantial compliance seeks to preserve the

need to comply strictly with the conditions or

requirements that are important to invoke a

tax  or  duty  exemption  and to forgive  non­

compliance for either unimportant and

tangential requirements or requirements that

are so confusingly or incorrectly written that

an earnest effort at compliance should be

accepted.

34. The test for determining the

applicability of the substantial compliance

doctrine has been the subject of a myriad of

cases and quite often, the critical question to

be examined is whether the requirements

relate to the “substance” or “essence” of the

statute, if so, strict adherence to those

requirements is a precondition to give effect

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to that doctrine.   On the other hand, if the

requirements are procedural or directory  in

that they are not of the “essence” of the thing

to be done but are given with a view to the

orderly conduct of business, they  may be

fulfilled by substantial, if not strict

compliance.   In other words, a mere

attempted compliance may not be sufficient,

but actual compliance with those factors

which are considered as essential.”

40.After considering the various authorities, some of which

are adverted to above, we are compelled to observe how

true it is to say that there exists unsatisfactory state of

law in relation to  interpretation of  exemption clauses.

Various Benches which decided the question of

interpretation of taxing statute on one hand and

exemption notification on the other, have broadly

assumed (we are justified to say this) that the position is

well settled in the interpretation of a taxing statute:  It is

the law that any ambiguity in a taxing statute should

enure  to  the benefit  of the subject/assessee,  but  any

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ambiguity in the exemption clause of exemption

notification  must  be  conferred  in favour  of revenue –

and such  exemption  should  be  allowed to  be  availed

only to those subjects/assesses who demonstrate that a

case for exemption squarely falls within the parameters

enumerated in the notification and that the claimants

satisfy all the conditions precedent for availing

exemption.   Presumably for this reason the Bench

which decided Surendra Cotton Oil Mills Case (supra)

observed that there exists  unsatisfactory state  of law

and the Bench which referred the matter initially,

seriously doubted the conclusion in  Sun Export Case

(supra) that the ambiguity in an exemption notification

should be interpreted in favour of the assessee.

41.After thoroughly examining the various precedents some

of which were cited before us and after giving our

anxious consideration, we would be more than justified

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to conclude and also compelled to hold that every taxing

statue including, charging, computation and exemption

clause (at the threshold stage) should  be interpreted

strictly. Further, in case of ambiguity in a charging

provisions, the benefit must necessarily go in favour of

subject/assessee, but the same is not true for an

exemption notification wherein the benefit of ambiguity

must be strictly interpreted in favour of the

Revenue/State.   

42. In  Govind Saran Ganga Saran v. Commissioner of

Sales Tax,  1985 Supp (SCC) 205, this Court pointed

out three components of a taxing statute, namely

subject of the tax; person liable to pay tax; and the rate

at which the tax is to be levied.   If there is any

ambiguity in understanding any of the components, no

tax can be levied till the ambiguity or defect is removed

by the legislature [See Mathuram Agrawal v. Sate of

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Madhya Pradesh,  (1999) 8 SCC 667;  Indian Banks’

Association vs. Devkala Consultancy Service, (2004)

4 JT 587 = AIR 2004 SC 2615; and Consumer Online

Foundation vs. Union of India, (2011) 5 SCC 360.]

43.There is abundant jurisprudential justification for this.

In the governance of rule of law by a written

Constitution, there is no implied power of taxation.  The

tax power must be specifically conferred and it should

be strictly in accordance with the power so endowed by

the Constitution itself.   It is for this reason  that the

Courts insist upon strict compliance before a State

demands and extracts money from its citizens towards

various taxes.   Any ambiguity in a taxation provision,

therefore, is interpreted in favour of the

subject/assessee.  The statement of law that ambiguity

in a taxation statute should be interpreted strictly and

in the event of ambiguity the benefit should go to the

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subject/assessee may warrant visualizing different

situations.  For  instance, if there is  ambiguity  in the

subject of tax, that  is to say, who are the persons or

things liable to pay tax, and whether the revenue has

established conditions before raising and justifying a

demand.  Similar is the case in roping all persons within

the  tax  net, in which event the State is to  prove the

liability of the persons, as may arise within the strict

language of the law.   There cannot be any implied

concept either  in  identifying the subject  of the tax or

person liable to pay tax.  That is why it is often said that

subject is not to be taxed, unless the  words of the

statute unambiguously impose a tax on him, that one

has to look merely at the words clearly stated and that

there is no room for any intendment nor presumption as

to tax.  It is only the letter of the law and not the spirit

of the law to guide the interpreter to decide the liability

to tax ignoring any amount of hardship and eschewing

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equity in taxation.  Thus, we may emphatically reiterate

that if in the event of ambiguity in a taxation liability

statute, the benefit should go to the subject/assessee.

But, in a situation where the tax exemption has to be

interpreted, the benefit of doubt should go in favour of

the revenue,  the aforesaid conclusions are expounded

only as a prelude to better understand jurisprudential

basis for our conclusion.  We  may now consider the

decisions which support our view.

44. In  Hansraj Gordhandas Case  (supra), the

Constitutional Bench unanimously pointed out that an

exemption from taxation is to be allowed based wholly

by the language of the notification and exemption

cannot be gathered by necessary implication or by

construction of words; in other words, one has to look to

the language alone and the object and purpose for

granting exemption is irrelevant and immaterial.   

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45. In Parle Exports Case (supra), a bench of two Judges of

this Court considered the question whether non­

alcoholic beverage base like Gold spot base, Limca base

and Thumps Up base, were exempted from payment of

duty under the Central Government notification of

March, 1975.   While considering the issue, this Court

pointed out the Strict interpretation to be  followed  in

interpretation of a  notification for exemption.   These

observations are  made in para 17 of the judgment,

which read as follows:

“How then should the courts proceed?

The expressions in the Schedule and in the

notification for exemption should be

understood by the language employed

therein bearing in mind the context in which

the expressions occur.  The words used  in

the provision, imposing taxes or granting

exemption should be understood in the same

way in which these are understood in

ordinary parlance in the area  in which the

law is in force or by the people who

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ordinarily deal  with them.   It is, however,

necessary to bear in mind certain principles.

The notification in this case was issued

under Rule 8 of the Central Excise Rules and

should be read along with the Act.   The

notification must be read as a whole in the

context of the other relevant provisions.

When a notification is issued in accordance

with power conferred by the statute,  it  has

statutory force and validity and, therefore,

the exemption under the notification is as if

it were contained in the Act itself.  See in this

connection the observations of this Court in

Orient  Weaving  Mills (P) Ltd. v. Union of

India, 1962 Supp 3 SCR 481 = AIR 1963 SC

98.   See also Kailash Nath v. State of U.P.,

AIR 1957 SC 790. The principle is well

settled that when two views of a notification

are possible, it should be construed in favour

of the subject as notification is part of a

fiscal enactment.   But in this connection, it

is well to remember the observations of the

Judicial Committee in Coroline M. Armytage

v. Frederick Wilkinson, (1878) 3 AC 355, that

it is only, however, in the event of there being

a real difficulty in ascertaining the meaning

of a particular enactment that the question

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of  strictness or  of liberality  of  construction

arises.  The Judicial Committee reiterated in

the said decision at page 369 of the report

that  in a taxing Act provisions enacting an

exception to the general rule of taxation are

to  be construed strictly against those  who

invoke its benefit.   While interpreting an

exemption clause, liberal interpretation

should be imparted to the language thereof,

provided no violence is done to the language

employed.   It  must, however, be borne in

mind that absurd results of construction

should be avoided.”

In the above passage, no doubt this Court observed

that “when two views of a notification are possible, it

should be construed in favour of the subject as

notification is part of fiscal document”.   This

observation  may  appear to support the view that

ambiguity in  a notification  for  exemption must  be

interpreted to benefit the subject/assessee.   A

careful reading of the entire para, as extracted

hereinabove would, however, suggest that an

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exception to the general rule of tax has to be

construed strictly against those who invoke for their

benefit.   This was explained in a subsequent

decision in Wood Papers Ltd. Case (supra).  In para

6, it was observed as follows:

“…  In Collector  of  Central  Excise  v.

Parle Exports (P) Ltd., (1989) 1 SCC 345,

this Court while accepting that exemption

clause should be construed liberally

applied rigorous test for determing if

expensive items like Gold Spot base or

Limca base of Thums Up base were

covered in the expression food products

and food preparations used in Item No. 68

of  First  Schedule  of  Central  Excises  and

Salt Act and held ‘that it should not be in

consonance with spirit  and the reason of

law to give exemption for non­alcoholic

beverage basis under the notification in

question’.   Rationale or ratio is same.   Do

not extend or widen the ambit at stage of

applicability.   But once that hurdle is

crossed construe it liberally.   Since the

respondent did not fall in the first clause of

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the  notification  there  was no  question of

giving the clause a liberal construction and

hold that production of goods by

respondent  mentioned in the  notification

were entitled to benefit.”  

46.The  above  decision,  which is also a decision of two­

Judge Bench of this Court, for the first time took a view

that liberal and strict construction of exemption

provisions are to be invoked at different stages of

interpreting it.   The question whether a subject falls in

the notification or in the exemption clause, has to be

strictly construed.  When once the ambiguity or doubt is

resolved by  interpreting the applicability of  exemption

clause strictly, the Court may construe the notification

by giving full play bestowing wider and liberal

construction.   The ratio of  Parle Exports Case  (supra)

deduced as follows:  

“Do not extend or widen the ambit at

stage of applicability.  But once that hurdle

is crossed, construe it liberally”.   

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47.We do not find any strong and compelling reasons to

differ, taking a  contra  view, from this.   We respectfully

record our concurrence to this view  which  has  been

subsequently, elaborated by the Constitution Bench in

Hari Chand Case (supra).

48.The next  authority,  which needs  to be referred  is the

case in  Mangalore  Chemicals  (supra).  As  we  have

already made reference to the same earlier, repetition of

the same is not necessary. From the above decisions,

the following position of law  would, therefore, clear.

Exemptions from taxation have tendency to increase the

burden on the other unexempted class of tax payers.  A

person claiming exemption, therefore, has to establish

that his case squarely falls within the exemption

notification, and while doing so, a notification should be

construed against the subject in case of ambiguity.   

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49.The ratio in  Mangalore  Chemicals  Case  (supra)  was

approved  by  a three­Judge  Bench  in  Novopan  India

Ltd. v. Collector of Central Excise and  Customs,

1994 Supp (3) SCC 606.  In this case, probably for the

first time, the  question  was  posed  as to  whether the

benefit of  an  exemption  notification  should  go to the

subject/assessee when there is ambiguity.   The three­

Judge Bench, in the background of English and Indian

cases, in para 16, unanimously held as follows:  

“We are, however, of the opinion that,

on principle, the decision of this Court in

Mangalore  Chemicals – and in  Union of

India v. Wood Papers, referred to therein –

represents the correct view  of law.   The

principle that in case of ambiguity, a

taxing statute should be construed in

favour of the assessee – assuming that the

said principle is good and sound – does not

apply to the construction of an exception

or an exempting provision, they have to be

construed strictly.  A person  invoking an

exception or an exemption provision to

78

relieve him of the tax liability must

establish clearly that he is covered by the

said provision.   In case of doubt or

ambiguity, benefit of it must go to the

State….”

50. In Tata Iron & Steel Co. Ltd. v. State of Jharkhand,

(2005) 4 SCC 272, which is another two­Judge Bench

decision, this Court laid down that eligibility clause in

relation to exemption notification must be given strict

meaning and in para 44, it was further held –

“The principle that in the event a provision

of fiscal statute is obscure such

construction which favours the assessee

may be adopted, would have no application

to construction of an exemption

notification, as in such a case it is for the

assessee to show that he comes within the

purview of exemption (See Novopan India

Ltd v. CCE and Customs).”

51. In Hari Chand Case  (supra), as already discussed, the

question was whether a person claiming exemption is

required to comply with the procedure strictly to avail

79

the benefit.  The question posed and decided was indeed

different.   The said decision,  which  we  have already

discussed supra, however, indicates that while

construing an exemption notification, the Court has to

distinguish the conditions which require strict

compliance, the non­compliance of which would render

the assessee ineligible to claim exemption and those

which require substantial compliance to be entitled for

exemption.   We are pointing out this aspect to dispel

any doubt about the legal position as explored in this

decision.   As already concluded in para 50 above, we

may reiterate that we are only concerned in this case

with a situation where there is ambiguity in an

exemption  notification  or exemption clause, in  which

event the benefit of such ambiguity cannot be extended

to the subject/assessee by applying the principle that

an obscure and/or ambiguity or doubtful fiscal statute

must receive a construction favouring the assessee.

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Both the situations are different and while considering

an exemption notification, the distinction cannot be

ignored.

52.To sum up, we answer the reference holding as under ­

(1) Exemption notification should be interpreted

strictly; the burden of proving applicability

would be on the assessee to show that his case

comes within the parameters of the exemption

clause or exemption notification.  

(2) When there is ambiguity in exemption

notification which is subject to strict

interpretation, the benefit of such ambiguity

cannot be claimed by the subject/assessee and

it must be interpreted in favour of the revenue.   

(3) The ratio in Sun Export case (supra) is not

correct and all the decisions which took similar

view as in  Sun  Export  Case  (supra) stands

over­ruled.   

53.The instant civil appeal may now be placed before

appropriate  Bench  for  considering the case on merits

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after obtaining orders from the Hon’ble Chief Justice of

India.   

…………………………..J. (Ranjan Gogoi)  

…………………………..J. (N.V. Ramana)  

…………………………..J. (R. Banumathi)  

…………………………………..J. (Mohan M. Shantanagoudar)  

…………………………..J. (S. Abdul Nazeer)

New Delhi July 30, 2018

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