1. Before we discuss the interpretation of ‘beneficial provisions’, it will be interesting to consider some basic rules of interpretation as laid down by the Supreme Court in its pronouncements viz. :
(1) Legislative intent should be considered, hence statement of objects and reasons can be taken into consideration.
(2) Beneficial provision should be liberally interpreted.
(3) If two reasonable interpretations are possible, interpretation which favours the taxpayer must be adopted.
(4) Unambiguous language of the statute will override legislative intent. District Registrar and Collector v. Canara Bank, (2005) 1 SCC 496.
(5) Dual deduction is normally not permitted unless mandated by law, or not specifically prohibited under chapter VI of the Income-tax Act dealing with deductions.
(6) An exemption is to be granted unless expressly taken away — Adityapur Industrial Area Development Authority v. Union of India, (2006) SCC 321.
(7) Strict interpretation should not lead to an absurd result.
(8) Beneficial provisions can normally be construed to apply retrospectively, especially procedural provisions.
(9) Beneficial Circulars issued by the CBDT are binding on all authorities even if they are not in consonance with the language of the statute.
(10) The authority denying the claim shall pass a speaking order — that is — give reasons, however, briefly, as the reasons indicate application of mind. Absence of reasons render the order unsustainable.
(11) Principle of natural justice must be followed if a deduction or exemption claimed by the assessee is to be denied. In other words, the claimant — assessee must be given an opportunity to justify and/or substantiate its claim.
(12) CBDT Circulars can be challenged by the assessee even though the authorities must abide by the directions.
(13) Ground realities cannot be ignored. Existence of contemporaneous evidence and agreements should also be considered and interpreted having regard to the factual matrices — CIT v. M. Sreedharan, 190 ITR 604 Ker.
2. The cardinal principal before claiming a deduction is that there should exist ‘assessable income’, from which deduction can be claimed and the deduction is limited to ‘assessable income’. However, there are exceptions to this principle, for example :
(1) law may specifically provide for carry forward of a deduction or benefit — S. 80-J or
(2) law may provide for the claiming of deduction to result in loss and the loss to be adjusted against other income and/or to be carried forward — S. 35, and other Sections under chapter IV.
3.1 On the concept of ‘dual deduction’, we have the exemplary case where despite having claimed entire cost of equipment installed for scientific research u/s.35, depreciation u/s.32 was claimed and initially allowed. However, the Supreme Court in Escorts case 199 ITR 43 has held “it is impossible to conceive of the Legislature having envisaged a double deduction in respect of the same expenditure” even though the two heads of deduction do not completely overlap and there is some difference in the rationale of the two deductions. The Supreme Court observed there is a fundamental, though unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing, and, if it is intended, it will be clearly expressed. However, the law was amended with retrospective effect to deny dual deduction, CIT v. Indian Telephone Industries, 187 ITR 181 SC/126 ITR 548 Kar.
3.2 The Madhya Pradesh High Court in CIT v. K. N. Oil Industries in 226 ITR 546, whilst dealing with the deductions u/s.80HH and u/s.80-I noted :
‘The benefits of S. 80HH and S. 80-I are in the nature of incentives in the backward areas. Therefore, a positive approach should be taken in the matter. The assessee is entitled to the full amount of deduction under both the Sections without deducting earlier years’ losses from the current income.”
3.3 It needs to be noted :
— Both deductions run concurrent and deduction is based on ‘gross total’ income — CBDT instruction dated 14 August 2001. J.P. Tobacco Products, 229 ITR 123 M.P.
— The law was amended in 1980 by introducing S. 80AB to clarify that deduction was available from ‘net income’ (after adjusting loss) and not from ‘gross income’. Motilal Pesticides, 243 ITR 26 S.C.
— S. 80HH(9) is an instance where dual deduction is permitted by the statute.
— S. 80-ID(4) is an instance where dual deduction is specifically denied by the statute.
— S. 80-IA(9) is an instance clarifying that deduction shall in no case exceed the profits and gains of the eligible business.
— Benefit of depreciation granted u/s.32 cannot be reduced by reducing ‘actual cost’. [S. 43(1)] by subsidy granted by the Government to develop industry in a particular year — CIT v. P. J. Chemicals, 210 ITR 830 SC. However, the law was amended to efface the impact of this decision.
4. There are two Circulars/Clarifications issued by the CBDT, which merit mention in this write-up; viz. :
— Clarification dated 13 December 1963 that the benefit u/s.84(80-J) is attached to the ‘industrial undertaking’ and not the ‘owner’, enabling the successor to claim the benefit for the remaining period, CIT v P. K. Engineering, 87 Taxman 101; B. S. Bajaj & Sons, 222 ITR 418 P & H. On parity of reasoning, deduction u/s.80- I is also available to the successor. However, by an amendment made by the Finance Act, 2007, the benefit would not be available to the successor in case of amalgamation or demerger. However, currently doubt has been expressed whether the Circular would allow the benefit available u/s.10A and u/s.10B of the Act, as no Clarification attending the benefit has been issued by CBDT.
— Circular No. 14 (XI-35), dated 11th April 1955 clarifies that the assessing officer has a duty to bring to the notice of the assessee the benefit available and allow the same whilst computing assessable income. The Circular concludes by stating :
‘The purpose of this Circular is merely to emphasise that we should not take advantage of an assessee’s ignorance, to collect more tax out of him than is legitimately due from him’.
Chokshi Metal Refinery, 107 ITR 63 Guj.
5.1 The judgement of the Supreme Court in Lohia Machine Tools, 152 ITR 308 is a fine example of where the dissenting judgement is based on ‘liberal construction’ and the majority judgement is based on ‘legislative intent’. The issue involved was : ‘whether the term ‘capital employed’ would include borrowed funds.
Justice A. K. Sen observed :
“On a proper interpretation, S. 80-J in clear language postulates that capital employed includes assessee’s own capital and also borrowed capital and the Section plainly and unequivocally makes the intention of the Parliament manifestly clear. This interpretation not only makes sense, but also clearly promotes the object for which it was incorporated.”
On the other hand, Chief Justice Chandrachud and others have relied on the legislative intent, the speech of the Finance Minister and the history of S. 15C, S. 84 and S. 80-J and held :
“Since the expression capital employed has a variable meaning, which in a given case may or may not include borrowed monies, the Board could, in exercise of its rule making power, exclude borrowed capital and in doing so, it would not in any way be acting contrary to the mandate of the statute.”
5.2 We are all aware that the law was amended in 1980 by incorporating Rule 19A in S. 80-J.
6. The Courts whilst interpreting beneficial provisions have also held that :
(1) claim even if not made in the return of income can be made during assessment proceedings — CIT v. Prabhu Steel Industries, 171 ITR 530 Bom.
(2) where information is available on record, claim for deduction can be made for the first time in proceedings u/s.154 (rectification). Anchor Pressings 161 ITR 159 SC and/or even in appellate proceedings — CIT v. Ganga Engineering Works, 165 ITR 795 M.P.
(3) substantial compliance is enough to justify deduction for a new industrial undertaking, for example, employment of ten or more persons substantially during the year — CIT v. Ormerods, 176 ITR 470.
(4) even if conditions are not satisfied in the first year of operations and complied in the second year, deduction will be available from the second year — CIT v. Gopal Plastics, 85 Taxman 561 Madras.
7. Another beneficial provision which has been the subject matter of considerable litigation, is S. 54 exempting ‘capital gain’ from the sale of a residential house, provided the same is invested in the acquisition of another residential house. The Courts and the Tribunal have interpreted the conditions prescribed therein liberally. One of the issues involved in litigation was : ‘whether the exemption was available only on the acquisition of one house or was available to the acquisition of more than one house even at different locations’. There were conflicting decisions. However, the controversy has been resolved by the decision of the Special Bench of the Tribunal in ITO v. Sushila M. Jhaveri, 292 ITR 1 (A.T.), wherein it has been held that the exemption is available for only one house. The Tribunal drew the distinction between the use of the word ‘any’ in S. 54E, S. 54EA and the use of word ‘a’ in S. 54 and S. 54F of the Act by concluding :
“The Legislature used the word ‘a’ where it intended investment in one residential house only and used the word ‘any’ where it intended investment in one or more assets.”
8. Retrospective amendment :
(1) Valuation rules under the Wealth Tax Act being beneficial were held to be retrospective in operation and applicable to all pending proceedings.
(2) Amendment to S. 43B of the Income-tax Act allowing deduction of payments made before the filing of the return of income was considered procedural and beneficial and hence applicable with retrospective effect and to all pending proceedings, Kwality Milk Foods Ltd. 284 ITR 89 A.T. (SB).
M. K. Chaturvedi (Vice-President) observed that if the language of the statute is plain, obvious meaning is to be applied. Rules of interpretation are applied only to resolve the ambiguities. The object and purpose of interpretation is to ascertain the mens legis, i.e., the intention of the law, as evinced in the statute. The key to the opening of every law is the reason and spirit of law. To be literal in meaning is to see the body and miss the soul. The judicial key to interpretation is the composite perception of the Deha (body) and the Dehi (Soul) of the provision.
(3) In Allied Motors, 224 ITR 677, the Supreme Court has held :
“A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section and is required to be read into the Section to give the Section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the Section as a whole.”
In Shah Bhojraj Kuverji Oil Mills & Ginning Factory v. Subhash Chandra Jograj Sinha, AIR, 1961 SC 1596, at page 1600, the parameters of a proviso was summed up by the Supreme Court : “The Law with regard to provisos is well-settled and well-understood. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule.”
9. The above are a few instances of how the Courts have interpreted ‘beneficial’ provisions of tax laws. I would conclude by stating that both legislative intent and clarity of language are critical in avoiding litigation, an area where the authors of our laws faulter.
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