Benefit of ambiguity in tax exemption will be in favour of State: SC

Overruling its 21-year-old verdict, the Supreme Court today said that when there is ambiguity in tax exemption notification, the benefit of such uncertainty must be interpreted in favour of the State.

It, however, reiterated that if in the event of ambiguity in a taxation liability statute, the benefit should go to the subject/assessee.

A five-judge Constitution bench said that benefit of ambiguity in exemption notification of the government, which is subject to strict interpretation, cannot be claimed by the assessee.

The bench headed by Justice Ranjan Gogoi said the burden of proving applicability of benefit would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

The bench, also comprising justices N V Ramana, R Banumathi, M M Shantanagoudar and S Abdul Nazeer over-ruled a three-judge bench verdict given in 1997 in a case of Sun Export Corporation versus Collector of Customs, Bombay in which it was held that in case of an ambiguity in a tax exemption provision or notification, it must be interpreted so as to favour the assessee claiming the benefit of such exemption.

"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," the bench said today.

It held that the ratio in Sun Export case is not correct and all the decisions which took similar view as in Sun Export Case stand overruled.

It said, "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".

The court said there is abundant jurisprudential justification for this reasoning as 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," it said.

Justice Ramana, who penned down the 82-page verdict for the bench, said
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 subject/assessee may warrant visualizing different situations
The court said, the purpose of interpretation is essentially to know the intention of the legislature and whether the Legislature intended to apply the law in a given case; whether the 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