In a judgment with far-reaching consequences, the Constitution Bench of the Supreme Court in Civil Appeal No. 3327 of 2007, in the matter of Commissioner of Customs (Import), Mumbai Vs Dilip Kumar & Company & Others, delivered its five judge decision on July 30, 2018. The Bench set up to examine the correctness of the ratio in Sun Export Corporation Mumbai Vs Collector of Customs, Mumbai, as reported in (1997) 6 SCC 564, was mainly concerned with the question as to what should be the interpretive rule to be applied while interpreting a tax exemption provision/notification, especially when there is an ambiguity on its applicability with reference to the entitlement of the assessee or the rate of tax to be applied.
The Bench, after considering the decision in Sun Export’s case (three judge Bench), along with other relevant case laws, concluded that the 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 notification. Also, when there is ambiguity in an 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. It also held that the ratio in Sun Export case (supra) is not correct and all the decisions which took a similar view as in Sun Export case (supra) stand overruled.
The Court, while arriving at the aforesaid decision, examined various judgments that were for and against the proposition that the benefit of ambiguity in a taxing statute must go to the assessee, but held that the principle applicable to the taxing statute may not apply to an exemption notification—as it is in the nature of exception and has to be construed strictly even in the face of ambiguity. The benefit of ambiguity or obscurity in an exemption notification, thus, cannot go to assessee but to the state, as exception operates even in the domain of an exemption notification when it comes to ambiguity.
The judgment, though well-reasoned and properly dissects and analyses various case laws on the subject, presents a devil in its implementation by the Executive. A vital point to consider, and which appears to have been missed out and is raising quite a few eyebrows, is that if the state is negligent or the wrongdoer, and an ambiguity appears/occurs for whatever reasons including improper draftsmanship in an exemption notification—and the assessee interprets it in a particular manner beneficial to him and if there is an ambiguity that is likely to have an alternate interpretation and proceeds on that basis, should he be penalised by demand of duty, interest and even penalty, simply because the government/Department of Revenue issuing an exemption notification left ambiguities in its scope? It has to be remembered that the state has all powers to delete, amend or alter any exemption notification, if ambiguity comes to its notice.
Currently, the state has sufficiently armed itself even with the power to amend exemption notification at any time during the course of the year, while the same was earlier being done mostly at the time of the Budget. The peril inbuilt in the instant interpretation is that an assessee suffers even though he has no hand in the drafting of the notification. For the Revenue, it is “heads I win, tails you lose.”
In the matter of ITC Ltd Vs CCE, New Delhi, reported in 2004 (171) ELT 433 (SC), a judgment that was incidentally not examined by the Constitution Bench in the Dilip Kumar case, the following practical solution was provided by the Lordships while dealing with an ambiguity in the notification: “Presumably the phrase ‘badly drafted’ was used to mean that the language of the Entry was ambiguous.
In case of such ambiguity ‘close reasoning’ will be employed—but without stretching the language to arrive at the only reasonable construction. These decisions exemplify the general rule of statutory construction that words have to be construed strictly according to their ordinary and natural meaning, particularly when the statute is a fiscal one irrespective of the object with which the provision was introduced.
Of course if there is ambiguity in the statutory language, reference may be made to the legislative intent to resolve the ambiguity. But if the statutory language is unambiguous then that must be given effect to. The legislature is deemed to intend and mean what it says. The need for interpretation arises only when the words used in the statute are, on their own terms ambivalent and do not manifest the intention of the legislature.” Therefore, the solution provided was to first look for legislative intent behind the ambiguous notification rather than giving outright benefit to the state.
The result of the Dilip Kumar judgment is that the assessee will end up paying for the ambiguity which is caused/created or is left by the Revenue. The interpretation will not only redefine justice by tilting it in the favour of the Revenue, but may also end up encouraging the Revenue to become callous/casual while drafting exemption notifications. Armed with the Dilip Kumar judgment, it will have nothing to lose but only gain out of loose ends of an exemption notification through demands of duty, interest and penalties, and even extended period demands, which it otherwise makes at the drop of a hat. The assessee in case of doubt may have to either reach out authorities, and wait for their reply, which is often delayed as field authorities, in turn, refer the matter to Board for interpretation and all this may even defeat the purpose for those actually deserving exemption.
It is a cardinal principle of justice that one who does wrong, has to pay for it. But this may not remain the case in the future with tax exemption notifications. With the state allowed to have the cake and eat it too, it will eventually be a premium on casualness. Surely, not the way the justice system may have wanted it to be.
The Author is Advocate (Amicus Rarus) and Former Commissioner of Customs & Excise