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Tax laws occupy a special position in the domain of Interpretation of Statutes. Unlike welfare legislation, consumer protection laws, or criminal statutes, tax statutes operate on the principle that no tax can be levied or collected unless it is clearly authorised by law. This makes strict interpretation the core principle when dealing with taxing provisions. Courts in India have consistently held that ambiguity in a tax statute must favour the taxpayer, not the State.

This blog explains the meaning of strict interpretation, how courts interpret charging provisions, exemption provisions, and the landmark case laws that define this area of law.

1. Why Strict Construction Applies to Tax Statutes

The foundation of this principle is based on Article 265 of the Constitution of India, which states:

“No tax shall be levied or collected except by authority of law.”

This constitutional command makes it mandatory that tax liability can only arise from clear, precise statutory language. Courts cannot:

• imply a tax,
• extend the meaning of words,
• supply any deficiency,
• rely on equity, fairness or intent when the words themselves are clear.

Strict construction means reading the words as they are, without adding or subtracting anything.

2. Charging Provisions: Interpretation Must Be Literal and Strict

A charging provision creates the liability to pay tax. If the charging section fails, the entire tax fails. Therefore, courts insist that the charge must be expressed in clear and unambiguous language.

Key Principles for Charging Sections

1. Tax cannot be levied by implication.
2. If two meanings are possible, the one favourable to the taxpayer must be adopted.
3. The burden is on the Revenue to show that the taxpayer falls within the charging section.
4. If the State wants to tax something, the statute must say so clearly.

This distinction between charging and machinery provisions was later reinforced in Gursahai Saigal v. CIT (1963), where the Court held that machinery provisions must be interpreted to make the charge workable, not to defeat it.

Landmark Case Laws

(a) A.V. Fernandez v. State of Kerala (1957)

Held: In a taxing statute, one must look merely at what is clearly stated. There is no room for equity or logic. Words cannot be extended to cover a situation not explicitly mentioned.

This is the earliest and most authoritative statement confirming the strict rule.

(b) CIT v. Shahzada Nand & Sons (1966)

Held: The charging section must be strictly construed. Any ambiguity must favour the assessee.

The Supreme Court emphasised that the State must establish liability beyond doubt.

(c) Mathuram Agrawal v. State of M.P. (1999)

A modern restatement of the strict rule, the Court held:

“The statute should clearly and unambiguously convey the meaning. If it fails to do so, the Court has no power to stretch the language to cover the gap.”

This case is regularly cited in tax litigation even today.

(d) Commissioner of Customs v. Dilip Kumar & Co. (2018 – Constitution Bench)

The Court observed:

• In charging sections, ambiguity goes to the assessee’s benefit.
• But in exemption notifications, ambiguity goes in favour of the Revenue.

This Constitution Bench ruling settled conflicting earlier views, overruling liberal interpretations of exemptions seen in some High Court decisions.

3. Strict Construction of Exemption Provisions

Exemptions allow taxpayers to reduce or avoid tax. Because they are exceptions to the general rule, courts adopt a strict approach in interpreting them.

Principles Governing Exemption Provisions

1. The assessee must prove clearly that he falls within the exemption.
2. Ambiguity in exemption notifications is not interpreted in favour of the assessee.
3. If the conditions for exemption are not satisfied in full, the exemption must be denied.
4. The exemption must be read in the exact language used.

Landmark Case Laws

(a) Dilip Kumar & Co. (2018 – 5-Judge Bench)

Position of law laid down:

• Charging provisions → ambiguity favours taxpayer.
• Exemption provisions → ambiguity favours Revenue.
  This case is the most important authority for exam answers and tax interpretation.

(b) Novopan India Ltd. v. CCE (1994)

The Supreme Court held that exemptions must be interpreted strictly, and the burden is on the assessee to show that they fall within the exemption clause.

This case is often cited alongside Hansraj Gordhandas to show that while exemptions are strictly construed, once eligibility is established, benefit cannot be denied.

(c) State of Gujarat v. Reliance Industries Ltd. (2017)

The Court reiterated that exemptions are in the nature of exceptions and must not be interpreted liberally.

(d) Hansraj Gordhandas v. CCE (1969)

This case held that exemption notifications must be construed strictly, but once the assessee demonstrates that they squarely fall within the exemption, the benefit cannot be denied. It is important to note that this case did not dilute the strict rule; it only clarified that strictness applies at the stage of determining eligibility, not after eligibility is proven.

This is a subtle but important distinction:
Strict → to determine eligibility.
Liberal → once eligibility is established.

4. Difference Between Interpretation of Charging and Exemption Provisions

Aspect	Charging Provision	Exemption Provision
Nature	Creates tax liability	Removes tax liability
Interpretation	Strict, literal	Strict at the entry stage
Ambiguity	Favour taxpayer	Favour Revenue
Burden of proof	On Revenue	On Assessee

This difference was conclusively affirmed in Dilip Kumar & Co. (2018), making it the most important case to cite in any examination or article.

5. No Equity in Taxation

Courts consistently repeat that taxation is not governed by equity. Even if a taxpayer gains an unintended benefit due to a drafting error, courts cannot correct it. Similarly, if a taxpayer suffers harsh consequences, the remedy lies only in legislative amendment. The ruling was specifically about capital gains on goodwill, where the absence of a computation mechanism meant the charge itself failed.

Key Case Law

CIT v. B.C. Srinivasa Setty (1981)
The Court refused to tax an item because there was no workable computation mechanism, reaffirming the principle that tax must be clearly provided in both charge and machinery.

6. Machinery Provisions: Interpretation Should Make the Charge Effective

Although charging provisions are strictly construed, machinery provisions—procedures for assessment, valuation, etc.—are interpreted so as to make the charge workable.

Case Law

Gursahai Saigal v. CIT (1963)
Machinery sections should not defeat the charging section; they must implement it.

• Charging section → strict
• Machinery section → functional interpretation

Thus, while charging sections demand strict construction, machinery sections are purposively interpreted to ensure the tax can be effectively levied.

7. Key Takeaways

1. Strict interpretation is the rule, not the exception, in tax matters.
2. Charging provisions must clearly impose the tax — ambiguity favours the assessee.
3. Exemption provisions must be strictly proved by the taxpayer — ambiguity favours the Revenue.
4. Tax legislation cannot be expanded by inference or equity.
5. Courts only interpret; they cannot fill gaps in tax statutes.
6. Always cite Mathuram Agrawal, A.V. Fernandez, Dilip Kumar & Co., and B.C. Srinivasa Setty for full marks in exams..

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References

1. A.V. Fernandez v. State of Kerala, AIR 1957 SC 657
2. CIT v. Shahzada Nand & Sons, AIR 1966 SC 1342
3. Mathuram Agrawal v. State of Madhya Pradesh, (1999) 8 SCC 667
4. Commissioner of Customs v. Dilip Kumar & Co., (2018) 9 SCC 1 (5-Judge Bench)
5. Novopan India Ltd. v. CCE, 1994 Supp (3) SCC 606
6. Hansraj Gordhandas v. CCE, AIR 1970 SC 755
7. State of Gujarat v. Reliance Industries Ltd., (2017) 16 SCC 28
8. CIT v. B.C. Srinivasa Setty, (1981) 2 SCC 460
9. Gursahai Saigal v. CIT, AIR 1963 SC 1062

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Also Read:

Internal Aids to Interpretation of Statutes

External Aids to Interpretation of Statutes

Strict Interpretation of Penal Statutes

Strict Construction of Taxing Statutes

Doctrine of Eclipse in Indian Law