"Equity & Taxation Are Strangers": Supreme Court Summarizes Principles Regarding Interpretation Of Taxation Statutes

The Supreme Court, in its judgment upholding the constitutional validity of clauses (c) and (d) of Section (5) of Section 17(5) of Central Goods and Services Tax Act, 2017 (CGST Act), summarized rules regarding interpretation of Taxing Statutes.

The Court said that while interpreting taxing statutes, it is not a function of the Court to supply the deficiencies.

The Bench of Justice Abhay S Oka and Justice Sanjay Karol summarized the principles in para 25 of the judgment:

a. A taxing statute must be read as it is with no additions and no subtractions on the grounds of legislative intendment or otherwise;

b. If the language of a taxing provision is plain, the consequence of giving effect to it may lead to some absurd result is not a factor to be considered when interpreting the provisions. It is for the legislature to step in and remove the absurdity;

c. While dealing with a taxing provision, the principle of strict interpretation should be applied;

d. If two interpretations of a statutory provision are possible, the Court ordinarily would interpret th provision in favour of a taxpayer and against the revenue;

e. In interpreting a taxing statute, equitable considerations are entirely out of place;

f. A taxing provision cannot be interpreted on any presumption or assumption;

g. A taxing statute has to be interpreted in the light of what is clearly expressed. The Court cannot imply anything which is not expressed. Moreover, the Court cannot import provisions in the statute to supply any deficiency;

h. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly;

i. If literal interpretation is manifestly unjust, which produces a result not intended by the legislature, only in such a case can the Court modify the language;

j. Equity and taxation are strangers. But if construction results in equity rather than injustice, such construction should be preferred;

k. It is not a function of the Court in the fiscal arena to compel the Parliament to go further and do more;

l. When a word used in a taxing statute is to be construed and has not been specifically defined, it should not be interpreted in accordance with its definition in another statute that does not deal with a cognate subject. It should be understood in its commercial sense. Unless defined in the statute itself, the words and expressions in a taxing statute have to be construed in the sense in which the persons dealing with them understand, that is, as per the trade understanding, commercial and technical practice and usage.

ASG N. Venkatraman and Senior Advocates Arijit Prasad, Sujit Ghosh and Arvind P Datar appeared for the parties.

ASG N. Venkatraman and Senior Advocates Arijit Prasad, Sujit Ghosh and Arvind P Datar appeared for the parties.

The appeal challenged the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act, which restricted the Input Tax Credit (ITC) for goods and services used in the construction of immovable properties.

The assessees contended that the bar on claiming ITC for inputs used in constructing immovable properties was arbitrary and irrational. They argued that this results in treating unequally placed businesses on the same footing, thus violating Article 14. Further, they asserted that the denial of ITC in such cases leads to the cascading effect of tax, which goes against the principle of GST that allows credit for tax paid at earlier stages of production and distribution.

It was further argued that even assuming that coming into existence of an immovable property was an intelligible differentia, it had no nexus with the objects of the CGST Act. The reason was that denying credit in such cases perpetuates and continues the cascading effect of tax, contrary to the very object of the CGST Act of eliminating the cascading effect of tax and achieving tax neutrality.

The Supreme Court noted that the challenge to constitutional validity did not meet the test of reasonable classification, which was a part of Article 14 of the Constitution. “To satisfy the test, there must be an intelligible differentia forming the basis of the classification, and the differentia should have a rational nexus with the object of legislation. The Union of India rightly contends that immovable property and immovable goods for the purpose of GST constitute a class by themselves,” the Court explained.

The Court found, “It is not shown how the provision is arbitrary and discriminatory. The fact that the provisions could have been drafted in a better manner or more articulately is not sufficient to attract arbitrariness.”

Consequently, the Court held, “We fail to understand the argument that the classification is underinclusive and creates discrimination. In this case, equals are not being treated as unequals. The test of vice of discrimination in taxing law is less rigorous. Ultimately, the legislature was dealing with a complex economic problem. By no stretch of the imagination, clauses (c) and (d) of Section 17(5) can be said to be discriminatory.”

The Court further observed that the expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17.

"The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant. Then, it is taken out of the exception carved out by clause (d) of Section 17(5) to sub-section (1) of Section 16. Functionality test will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what we have held earlier, it will have to be decided whether the construction of an immovable property is a “plant” for the purposes of clause (d) of Section 17(5).", it said.

Regarding the challenge against Section 16(4 the Court noted that the words “thirtieth day of November” were substituted with effect from 1st October 2022 for the words “due date of furnishing of the return under Section 39 for the month of September”.

"We fail to understand how sub-section (4) of Section 16 becomes discriminatory when the legislature says that a registered person shall not be entitled to take ITC in respect of any invoice or debit note for the supply of goods or services or both after the thirtieth day of November following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. It is not shown how the provision is arbitrary and discriminatory. The fact that the provisions could have been drafted in a better manner or more articulately is not sufficient to attract arbitrariness.", it said.

Accordingly, the Supreme Court partly allowed the appeals.

Cause Title: Chief Commissioner of Central Goods and Service Tax & Ors. v. M/s Safari Retreats Private Ltd. & Ors. (Neutral Citation: 2024 INSC 756)

Appearance:

ASG N. Venkatraman; Senior Advocates Arijit Prasad, Sujit Ghosh, Abhratosh Majumdar, Arvind P Datar, and V Raghuraman; AOR Gurmeet Singh Makker, Mukesh Kumar Maroria, Meera Mathur, Suvendu Suvasis Dash, Prasenjeet Mohapatra, D.L. Chidananda, et al; Advocates Sonu Bhatnagar, Abhishek A Rastogi, Vipin Jain, Vinay Saraf, Priyanka Rathi, Ashwini Chandrasekaran, Anshika Aggarwal, Pooja M Rastogi, et al

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