Taxing Statutes, Penal Statutes and Welfare Legislation

Why it matters. It gives the two halves of the modern rule in a single authority, and it is a Constitution Bench, so it is the highest form of the proposition. The reason for the difference is simple and should be given: a charge takes money from the subject, so the subject has the benefit of a doubt; an exemption is a departure from the general liability that everybody else bears, so the person claiming to be outside the general rule must bring themselves clearly within the exception.

Retrospective taxation

A taxing provision that operates retrospectively is doubly disfavoured: it imposes a burden, and it disturbs completed transactions. Commissioner of Income Tax v. Vatika Township Private Limited, decided on 15 September 2014, is the Constitution Bench authority, and it is worked in [Prospective Application and Retrospective Effect].

Note the limit. Article 20(1) does not protect against a retrospective tax. It protects against retrospective offences and punishments only. A retrospective tax is constitutionally possible, and the only protection is the presumption against retrospectivity, which the legislature can displace.

The vocabulary of a tax

Worth four lines, because questions often turn on it. The charging provision creates the liability. The computation provisions say how the amount is worked out. The machinery provisions say how it is assessed and collected. The rule of strict construction applies with most force to the charging provision; machinery provisions are construed so as to make the charge workable, on the principle ut res magis valeat quam pereat, that a thing may rather have effect than be destroyed.

The common parlance rule

In a fiscal statute the words of a tariff or a schedule are read in their commercial sense, not their scientific one. Commissioner of Sales Tax, Madhya Pradesh v. Jaswant Singh Charan Singh, AIR 1967 SC 1454, is the authority and is worked in [External Aids to the Interpretation of a Statute]: resort should be had not to the scientific or technical meaning of the terms used but to their popular meaning, that is, the meaning attached to them by those dealing in them, in their commercial sense.

Penal statutes

The rule

A person is not to be punished unless the words of the penal provision plainly cover them. Where two possible and reasonable constructions are open, the court adopts the one that exempts the subject from penalty.

The authority

Tolaram Relumal v. State of Bombay, AIR 1954 SC 496.

Facts. Tolaram Relumal v. State of Bombay, AIR 1954 SC 496. Section 18(1) of the Bombay Rents, Hotel and Lodging House Rates Control Act 1947 made it an offence for a landlord, himself or through any person acting or purporting to act on his behalf, to receive any fine, premium or other like sum or deposit or any consideration other than the standard rent in respect of the grant, renewal or continuance of a lease. The appellants had received money under an executory contract to grant a lease of premises in a building not yet constructed, and were convicted.

Held. The conviction was set aside. The words "renewal or continuance of a lease" suggest that there must be a renewal or continuance of a subsisting lease and do not cover an executory contract to grant one; and giving the words "in respect of" their widest meaning, the relationship must be predicated of the grant, renewal or continuance of a lease, so that unless a lease comes into existence simultaneously or near about the time the money is received, the receipt is not in respect of one. The Court then stated the governing rule: the provisions of section 18(1) are penal in nature, and it is a well settled rule of construction of penal statutes that if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards the construction which exempts the subject from penalty rather than the one which imposes it, and it is not competent to the court to stretch the meaning of an expression used by the legislature in order to carry out the intention of the legislature.

Why it matters. It is the Indian statement of strict construction of penal statutes in the exact form the examination asks for, and it makes the honest concession that the legislature may well have intended to catch the conduct.

The constitutional support

Article 20(1): no person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. So a penal provision cannot be applied retrospectively at all, whatever the words say.

The limit on strictness

Strict construction does not mean that a penal provision is read so narrowly as to defeat it. Where the words are clear, they are applied. And where a literal meaning would defeat the object of suppressing a mischief, the court may depart from the dictionary or popular meaning even in a penal statute: that is exactly what Kanwar Singh v. Delhi Administration, AIR 1965 SC 871, held about the word "abandoned", and it is worked in [The Mischief Rule, or the Rule in Heydon's Case].

Putting the two together is what makes a complete answer. Strict construction chooses between two reasonable constructions; it does not manufacture a narrow one.

Mens rea

A related presumption belongs here. Every offence is presumed to require a guilty mind unless the statute excludes it expressly or by necessary implication, and the presumption is stronger the more serious the offence and the heavier the penalty. It is weaker in regulatory and welfare legislation, where absolute or strict liability offences are common, because the object is compliance rather than moral blame.

Welfare legislation

The rule

A welfare or beneficial statute is construed liberally in favour of the class it was passed to protect, so as to advance the remedy and suppress the mischief. Where two constructions are open, the one that gives the benefit is preferred.

The authority

State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610, worked in [Interpretation by Subject Matter and Purpose: Restrictive and Beneficial Construction]. The Court read the definition of "industry" in section 2(j) of the Industrial Disputes Act 1947 at its full width, refused to cut it down by noscitur a sociis, held that a profit motive and the investment of capital are not indispensable requisites, and observed that the conventional meaning of trade and business has lost some of its force and can no longer be wholly valid for industrial adjudication in a modern welfare state.

The limits

It cannot rewrite. Where the words plainly exclude the claimant, no liberality brings them in.

It protects the class, not the individual. A construction that helps one claimant and damages the scheme is not beneficial construction.

A penal provision in a welfare Act is still penal. This is the point at which the three classes in this chapter meet, and it is where the marks are: an Act may be welfare legislation and still contain an offence, and the offence is construed strictly.

A worked example

A fictitious Handloom Weavers Welfare Act provides:

5. Every purchaser of handloom cloth shall pay to the Board a cess of two per cent of the purchase price.

6. No cess shall be payable in respect of cloth purchased by a charitable institution for free distribution.

11. Every registered weaver who has worked for one hundred and twenty days in a year shall be entitled to a pension.

17. Any purchaser who fails to pay the cess shall be punishable with imprisonment which may extend to six months.

Four questions, one for each rule.

Is a co-operative society of weavers, buying cloth from its own members, a "purchaser" under section 5? This is a charging provision, so it is construed strictly and the doubt goes to the subject. If it is genuinely doubtful whether a transfer within a co-operative is a purchase, the cess is not payable.

Does a hospital trust that buys cloth and sells it at cost to patients fall within the exemption in section 6? This is an exemption, so Dilip Kumar governs. It is construed strictly, the burden is on the trust to show that its case comes within the parameters of the exemption, and if the words "for free distribution" are ambiguous as applied to a sale at cost, the ambiguity is resolved in favour of the revenue. Notice the reversal: strictness helped the co-operative in the last question and hurts the trust in this one.

Has a weaver who worked one hundred and ten days and was ill for fifteen "worked for one hundred and twenty days"? Section 11 is the welfare provision, and it is construed beneficially. If the expression is capable of including days of certified illness, that construction is preferred, because the object is to give a pension to weavers who depend on the trade.

Is a purchaser who genuinely believed the cess did not apply liable under section 17? This is a penal provision, and Tolaram Relumal governs: if two reasonable constructions are open, the court leans towards the one exempting the subject. The presumption of mens rea also applies, and the penalty being imprisonment it is a strong one, so a construction requiring a wilful failure is preferred.

One Act, four provisions, four different rules. That is the answer.

Distinctions table

What these do NOT mean

Strict construction of a taxing statute does not always help the taxpayer. On an exemption it helps the revenue, and Dilip Kumar says so in terms.

Strict construction of a penal statute does not mean reading it artificially narrowly. It operates where two reasonable constructions are open.

Article 20(1) does not protect against a retrospective tax. It covers offences and punishments only.

Beneficial construction does not make a penal provision in a welfare Act any less penal.

"There is no equity about a tax" is not a statement about fairness. It means that a tax is a creature of the words of the statute and cannot be extended by analogy, however similar an untaxed transaction is to a taxed one.

Limits and criticism

The exemption rule shifts the burden onto the person least able to bear it, since an ambiguity created by the drafter of the notification is resolved against the assessee. The answer given in Dilip Kumar is that an exemption is a concession from a liability that everybody else discharges, and that a person seeking to be outside the general rule must show clearly that they are.

Strict construction of penal statutes and the mischief rule pull in opposite directions, and Kanwar Singh shows a court preferring the mischief rule in a penal setting. The reconciliation is that strictness operates only where two reasonable constructions are open, and a construction that defeats the object of the provision is not one of them.

"Welfare legislation" is not a closed category. Almost every regulatory statute can be described as protecting somebody, and beneficial construction becomes unpredictable if the label is applied loosely.

Quick revision

Taxing: no equity about a tax; nothing implied; article 265, no tax except by authority of law; common parlance rule for tariff words, Jaswant Singh Charan Singh. Exemption: strictly construed, burden on the assessee, ambiguity in favour of the revenue, Dilip Kumar, AIR 2018 SC 3606, Constitution Bench, Sun Export overruled. Machinery provisions read so as to work. Retrospective tax: Vatika Township; article 20(1) does not cover it.

Penal: two reasonable constructions, the court leans to the one exempting the subject; not competent to the court to stretch the words to carry out the legislature's intention, Tolaram Relumal, AIR 1954 SC 496. Article 20(1): no conviction except for violation of a law in force at the time, and no greater penalty. Presumption of mens rea. Limit: Kanwar Singh, a literal meaning that defeats the object of suppressing a mischief may be departed from even in a penal statute.

Welfare: construed liberally in favour of the protected class, Hospital Mazdoor Sabha, AIR 1960 SC 610. Limits: cannot rewrite; protects the class rather than the individual; a penal provision inside a welfare Act is still penal.

Test yourself

1. State the rule for construing a charging provision in a taxing statute.

It is construed strictly. There is no equity about a tax and no room for intendment: nothing is to be read in and nothing implied, and the court looks fairly at the language used. If the subject is not caught by the plain words the tax is not payable, however clear it may be that the legislature intended to catch them. Article 265 supports the rule, since no tax may be levied or collected except by authority of law, so the charge must be found in the words and not in an inference.

2. How is an exemption construed, and which case decides it?

Strictly, and against the person claiming it. In Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company, AIR 2018 SC 3606, a Constitution Bench held that an exemption notification should be interpreted strictly, that the burden of proving applicability lies on the assessee to show that the case comes within the parameters of the exemption, and that where there is an ambiguity in an exemption notification the benefit of the ambiguity cannot be claimed by the assessee and must be interpreted in favour of the revenue. Sun Export and the decisions following it were overruled.

3. Why do the two rules run in opposite directions?

Because the two provisions do different things. A charging provision takes money from the subject, so the risk of the drafter's imprecision lies on the State and the subject has the benefit of the doubt. An exemption is a departure from a liability that every other person in the same position discharges, so a person claiming to stand outside the general rule must bring themselves clearly within the exception, and an ambiguity leaves them where the general rule puts them.

4. State the rule for penal statutes with authority.

If two possible and reasonable constructions can be put upon a penal provision, the court must lean towards the construction which exempts the subject from penalty rather than the one which imposes it, and it is not competent to the court to stretch the meaning of an expression used by the legislature in order to carry out its intention. That is Tolaram Relumal v. State of Bombay, AIR 1954 SC 496, where a conviction under section 18(1) of the Bombay Rents Act was set aside because the words "grant, renewal or continuance of a lease" did not cover an executory agreement to grant a lease of premises not yet built.

5. Is strict construction of a penal statute absolute?

No. It operates only where two reasonable constructions are open; where the words are clear they are applied. And a literal meaning that would defeat the object of the legislature in suppressing a mischief may be departed from even in a penal statute, which is what Kanwar Singh v. Delhi Administration held about the word "abandoned" in section 418(1) of the Delhi Municipal Corporation Act 1957. The two propositions fit together: strictness chooses between reasonable constructions, and a construction that defeats the provision is not a reasonable one.

6. Can one Act attract all three rules?

Yes, and a good answer shows it. A welfare statute may confer a benefit on a class, impose a cess to fund it, exempt certain purchasers from that cess, and create an offence for non-payment. The benefit is construed liberally in favour of the class; the charging provision strictly in favour of the subject; the exemption strictly against the person claiming it, on Dilip Kumar; and the offence strictly in favour of the accused, on Tolaram Relumal. The rule is chosen provision by provision and never once for the whole Act.