Tax exemptions must be strictly interpreted

EXPERT EYE

The Supreme Court in its two recent judgements added new dimensions to the otherwise well-settled principle that an exemption notification was to be strictly interpreted.

In the Commissioner of Central Excise vs RP Traders case, 2004 (165)ELT 481 (SC), the apex court held that an exemption notification could not be interpreted with the aid of another notification.

The court held that not only an exemption notification had to be strictly construed, but each notification had to be interpreted on its own wording. Wordings of some other notifications were of no benefit in construing a particular notification, it added.

In the Commissioner of Central Excise vs Mahan Dairies case, 2004 (166) ELT 23 (SC), the Supreme Court said the conditions of a exemption notification must be strictly complied with and there should not be any stretching of the words or adding words to it while extending the benefit of exemption.

These judgements added further strength to the previously settled cases. If an exemption was given for cloth, it could not be extended to clothes, held the Supreme Court in the Sharafji Rao vs Commissioner of Sales Tax case, 1953 (4) STC 6 (AP).

Similarly, an exemption for the India Stores Department could not be extended to the supply ministry, held the Supreme Court in the Union of India vs Commercial Tax Officer case (West Bengal), AIR 1956 SC 202.

According to the court, an exemption for vegetable oil cannot be extended to vanaspati (the Tungabhadra Industries Ltd vs Commercial Tax Officer case, 956(6) STC 259), an exemption for firm not to partners of the firm (the Commissioner of Income Tax vs Janardan Subudhi case, 1981(131) ITR 287-Orissa) and an exemption for cash not to frozen foreign account (the Commissioner of Wealth Tax vs Sadiqali Samsuddin, 1985 (152) ITR 190-Gujarat).

Similarly, an exemption for food could not be extended to beverages, said the court in the Commissioner of Central Excise vs Parle Products (Pvt) Ltd case, 1988 (38) ELT 741 (SC).

In this case, under the Central Excise Tariff, the exemption under Notification No 5/75, dated March 1, 1975, meant for food and food products was claimed by the licensees in favour of non-alcoholic beverages such as Gold Sport base, Limca base and Thums Up base.

The court said the Tariff itself dealt with food and food products in Items 1 to 1C while the tariff item 1D dealt with beverages separately.

It also observed that to a common man in India such drinks were not known as food or food products. In market parlance, they are not known as food and food products. So, the Supreme Court did not extend the benefit of this exemption to the non-alcoholic beverages.

"In a taxing law the provisions establishing an exemption to the general rule of taxation are to be construed strictly against those who invoke its benefit," the court said.

But the Supreme Court cautioned that the strictness should not amount to unreasonableness. In the Collector of Customs vs Lekhraj Jessumal case, 1996 (101) STC 480 (SC), the court said the interpretation should not be over- rigid but reasonable.

When the exemption was for "switches miniaturised", the Customs could not refuse to exempt reed switches which were new innovations for use in hearing aids, it said. The court observed that interpretation could not ignore the rapid march of technology.

smukher2000@yahoo.com