Taxing statutes are laws that impose financial obligations—such as taxes, duties, or levies—on individuals or entities. The interpretation of such statutes follows strict principles because taxes are not imposed by implication. The general rule is that a taxing statute must be construed strictly in favor of the taxpayer and against the Revenue (tax authorities), unless the law clearly imposes the tax.
The rationale behind this rule is that taxation is a coercive power and any demand for money by the state must be authorised explicitly by law. Therefore, no one can be taxed without clear words in the statute that apply to their situation. If there is any ambiguity in the language of a taxing provision, the benefit goes to the subject (taxpayer), not to the authorities.
However, once it is clearly established that a tax applies, then evasion or avoidance is not permitted, and interpretation may not be liberal in such cases. Also, exemptions in taxing statutes must also be interpreted strictly, but in this case against the taxpayer, because the person claiming the exemption must bring themselves clearly within the terms of that exemption.
Key Principles:
- A tax can be levied only if the statute clearly imposes it.
- No tax can be imposed by inference, analogy, or intent alone.
- In case of doubt or ambiguity, the interpretation favors the taxpayer.
- Exemptions or deductions must be interpreted narrowly, and the taxpayer must clearly prove eligibility.
- Courts are not to supply omissions or correct defects in taxing statutes.
Example:
If a tax statute states that “income from profession is taxable,” and there is doubt about whether a freelancer qualifies as a professional under that definition, the statute must be read strictly. If the freelancer’s activities do not clearly fall within the scope, they cannot be taxed simply because it seems reasonable—they can only be taxed if the law clearly includes them.
Similarly, if a company claims a tax exemption under a specific clause, it must clearly and strictly comply with all the conditions mentioned in that clause. The exemption cannot be extended by inference.
Judicial Interpretation:
In Commissioner of Income Tax v. Shahzada Nand & Sons (1966), the Supreme Court of India held that taxing provisions must be strictly construed, and no one can be taxed by inference or analogy.
Likewise, in Ajmera Housing Corporation v. CIT (2010), it was reaffirmed that exemption clauses must be interpreted strictly, and the burden is on the assessee to prove qualification for exemption.
Code to Remember the Answer: “STRICT”
| Letter | Stands For | Explanation |
|---|---|---|
| S | Statute must be clear | Tax must be imposed through explicit statutory language. |
| T | Tax by Words, Not Intent | No tax by implication, intent, or analogy. |
| R | Revenue Cannot Assume | If language is unclear, benefit goes to the taxpayer—not the Revenue. |
| I | Interpretation Against Evasion | Once tax applies, evasion is not permitted. |
| C | Claimed Exemptions Strict | Exemptions must be clearly proved by the taxpayer. |
| T | Text Controls, Not Logic | Law must be interpreted by its text, not based on what seems logical. |