Author: Ipkshita Singh,
3rd Year B.B.A. LL.B,
School of Law, CHRIST (Deemed to be University),

The thumb rule for interpretation of tax statutes is strict interpretation because it is believed that tax statutes are penal in nature and there exists no scope for intention or equity. However, the courts in India in several judicial pronouncements have created scope for equitable interpretation of tax statutes.  In Sun Export Corporation, Bombay v. Collector of Customs[1], the Bombay High Court was posed with the question- What is the interpretative rule to be applied while interpreting a tax exemption provision/notification when there is an ambiguity as to its applicability with reference to the entitlement of the Assessee or the rate of tax to be applied? In Sun Export Case, a three-Judge Bench ruled that an ambiguity in a tax exemption provision or notification must be interpreted so as to favour the Assessee claiming the benefit of such exemption.

The ratio of the Sun Export case was re-examined in Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar and Company and Ors. [2], where the Court held that Every taxing statue including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly. Further, in case of ambiguity in a charging provisions, the benefit must necessarily go in favour of subject or assessee, but the same was not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State. The Court also reconsidered the case of Collector of Customs and Central Excise, Guntur and Ors. v. Surendra Cotton Oil Mills and Fertilizers Co. and Ors.[3] Further, the Court found that in the subsequent judgment in Surendra Cotton Oil Mills’s case, the Court had distinguished the Sun Export Corporation’s case and held that it dealt with ‘animal feed’ which was large enough to include ‘animal feed supplements’ whereas the facts of Surendra Cotton Oil Mills’s case showed that ingredients of animal feed could not be held to be included in ‘animal feed’.  It was held that the Court did not adequately deal with the question: why Sun Exports Corporation’s case which is a binding decision of a three Judges Bench should not be followed, apart from a specious distinction between ‘ingredients’ and ‘supplements’ which is logically speaking a distinction without a difference.

In all these afore-mentioned cases, the Apex Court has reasoned why the courts must be bound to interpret tax statutes strictly. However, this position of law existed differently in 1985 when in the case of Commissioner of Income Tax, Bangalore v.  J.H. Gotla[4] the court held that “We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result i.e. result not intended to be subserved by the object of the legislation found out in the manner indicated before, and if another construction is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in in-justice, then such construction should be preferred to the literal construction.”

A distinction has to be made between the conditions which are the foundation for making the claim and the conditions which are provided to facilitate the assessment. The former is substantive condition without the fulfilment of which deduction cannot be allowed and, therefore, strict rule of interpretation is to be applied. However, the latter is procedural or machinery one and, therefore, the provisions regarding such conditions should be construed liberally.[5]


There are several reasons for interpreting tax statutes such as CGST and SGST liberally. The GST statutes are still in their initial stage and contain ambiguities. Strict interpretation of provisions requiring filing returns under the ambit of exports instead of deemed exports, omission to file nil-returns, minor errors in E-way bills and other unforeseen irregularities cannot be interpreted strictly.  Insofar as taxation statutes are concerned, Article 265 of the Constitution of India prohibits the State from extracting tax from the citizens without authority of law.[6] It is axiomatic that taxation statute has to be interpreted strictly because State cannot at their whims and fancies burden the citizens without authority of law. In other words, when competent Legislature mandates taxing certain persons/certain objects in certain circumstances, it cannot be expanded or interpreted to include those, which were not intended by the Legislature.  

In the case of Rai Prexim India Pvt. Ltd. v. State of Kerala[7], the High Court of Kerala interpreted the provisions relating to E-way bills liberally to prevent the abuse of charging provision by the assessing authorities. The goods of the petitioners were detained because in the first e-way bill generated by the petitioner place of delivery was mentioned as Tayhanamthitta, Kerala – 686547′. The value of the goods was shown as Rs. 3882200/-. Considering the mention of place of delivery as ‘Payhanamthitta’ a mistake, that e-Way bill was cancelled and the petitioner generated another e-Way bill where the place of delivery was correctly shown as ‘Pathanamthitta’. However, the value of the goods was mentioned as Rs. 388220/- instead of Rs. 3882200. Taking exception to this e-Way bill, the goods were detained. The court held that if a human error which can be seen on naked eye is detected, such human error cannot be capitalised for penalisation. A similar approach was adopted in  M/s. Xerox India Ltd. vs. State of Karnataka[8], where dealer disputed tax liability on the basis of judgment of apex court, but after receiving clarification from apex court, assessee had immediately paid the tax with interest. The Karnataka High Court held that penalty cannot be leviable merely because it is lawful to do so. Hence penalty is not justifiable in such cases.

In the case of Modern Pipe Industries vs. State of U.P. and Ors.[9], at the time of migration to GST,  assessee had by mistake obtained registration as sole proprietor instead of partnership firm. The Allahabad High Court directed the department to issue necessary login id/password in the name of partnership firm within a period of two weeks and the corrected registration certificate within a week after and also directed not to levy penalty if the applicant deposits the tax and files GST return within two weeks of issuance of correct registration certificate. This reflects the intention of the judiciary to comply with the norms of equity. In M/s Indus Towers Limited Vs. The Assistant State Tax Officer[10], mere infraction of the procedural rules like Rules 55 and 138 of the State GST Rules cannot result in detention of goods though they may result in imposition of penalty. In other words, detention of goods merely for infraction of the procedural rules in transactions which do not amount to taxable supply is without jurisdiction.

Through these judicial interpretations, courts have made it clear that minor irregularities such as an error on the registration number of the vehicle or amount on the E-way bills should not be charged and benefit of doubt must go to the accused. However, in cases where ambiguities in law still remain and the judiciary cannot fill these gaps created by the legislature, the rule of strict interpretation is still the followed.


The provisions of GST statutes follow the due process and give significant value to mens rea and good faith. For example, Section 126 of Central Goods and Services Tax Act, 2017 lays down the general principles while imposing penalty. It reads and states, “ No officer under this Act shall impose any penalty for minor breaches of tax regulations or procedural requirements and in particular, any omission or mistake in documentation which is easily rectifiable and made without fraudulent intent or gross negligence.”  A breach is considered a ‘minor breach’ if the amount of tax involved is less than five thousand rupees, or an omission or mistake in documentation shall be considered to be easily rectifiable if the same is an error apparent on the face of record. The penalty imposed under the Act depends on the facts and circumstances of each case and are commensurate with the degree and severity of the breach. Therefore, if a situation of minor irregularities exists, it must be addressed cautiously. Other principles that enshrine such equitable consideration under this provision are:
  1. No penalty shall be imposed on a
    ny person without giving him an opportunity of being heard;
  2. The officer under this Act shall while imposing penalty in an order for a breach of any law, regulation or procedural requirement, specify the nature of the breach and the applicable law, regulation or procedure under which the amount of penalty for the breach has been specified;
  3. When a person voluntarily discloses to an officer under this Act the circumstances of a breach of the tax law, regulation or procedural requirement prior to the discovery of the breach by the officer under this Act, the proper officer may consider this fact as a mitigating factor when quantifying a penalty for that person;
  4. The provisions of this section shall not apply in such cases where the penalty specified under this Act is either a fixed sum or expressed as a fixed percentage.
The provisions of the statute also distinguish between cases in which the accused has the necessary mens rea and those in which the accused is merely negligent. As per Section 73 of the CGST Act, where any tax is not paid, short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized for any reason other than reason of fraud or wilful misstatement or suppression of facts to evade tax and a notice has been issued to such person, if the person has paid tax, interest and penalty within specified time from issuance of show cause notice, no penalty shall be payable.[11] Similarly, Section 74 of the CGST Act provides for reduction of penalty in case of fraud or wilful misstatement. An express provision is also made by virtue of Section 135 of the Act which states, “in any prosecution for an offence under this Act which requires culpable mental state on the part of accused, the court shall presume the existence of such mental state. but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.” The GST statutes also provide for different schemes by classifying offences into the categories of bailable and non-bailable offences, and cognizable and non-cognizable offences. The statute itself is similar to any other penal statute.

The ambiguity and unfairness that these provisions fail to eradicate is the fact that minor breaches are kept only within the realm of Rs. 5,000. Therefore, if a consignor has been given documents with minor errors, but the value of goods lead to imposition of penalties more than Rs. 5, 000 then the goods are subject to detention and confiscation. Moreover, the penalty is levied on the consignor and the driver of the vehicle by confiscating the vehicle rather than directly imposing it only on the owner of the goods. Thus, the entire object of Section 126 gets defeated. The only way forward is equitable interpretation of tax statutes, The author does not propose equitable interpretation of tax statutes as an absolute rule, but envisages such interpretation to be neutral and free from the biased views regarding benefits that the Revenue Department may obtain on account of its absence.

Tax Statutes, although penal in nature, assume the accused to be guilty unless proven innocent. Therefore, any benefit of doubt favours the Revenue Department or the State and not the assessee. GST statutes were introduced recently and numerous ambiguities exist regarding the procedure of filing returns under IGST, CGST and SGST. The law does not incorporate provisions to address minute loop holes in the procedure of E-way of bills and deemed exports. CGST treats both the consignor and the owner of the goods equally when it comes to penalties such as detention, confiscation and seizure. A minor mistake on the part of a small vendor costs him a disproportionate loss due to strict interpretation of tax statutes. However, it must be kept in mind that there are exceptions to these rules and whenever necessary, tax statutes should be interpreted in good faith.

[1] (1997) 6 SCC 564.

[2] AIR 2018 SC 3 606.

[3] 2001 (1) SCC 578.

[4] AIR 1985 SC 1698,

[5] Rambagh Palace Hotel (P) Ltd. v. Deputy Commissioner of Income Tax, (2004)8 2 TTJ (Delhi) 581.

[6]  INDIA CONST. art 265.

[7] 2019[23] G.S.T.L. 454

[8] 2014 78 KarLJ 109 (Tri.) (DB).

[9] (2017) 84 taxmann.com 254 (Allahabad).

[10] (2018) 5 SGSTR 402 (Ker).

[11] Chunauti H. Dholakia, Offences and Penalty provisions under GST, Available at:  http://idtc-icai.s3.amazonaws.com/download/knowledgeShare18-19/offences_and_penalties_under_GST_29-08-2018.pdf.

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