Good morning everyone,

It is a pleasure to stand before you today to delve into one of the most foundational yet
nuanced areas of legal interpretation—the interpretation of taxing statutes. Taxation is one
of the primary functions of the State. It enables the State to raise revenue to carry out its
functions and fulfil its constitutional obligations. However, because taxation directly affects
the property and financial liberty of individuals and institutions, it is governed by strict
constitutional and interpretative principles. Today, we will explore not only how courts
interpret these statutes but also why they do so in a particular manner. Our discussion will
traverse the core constitutional framework, major judicial doctrines, important precedents,
and the ever-relevant distinction between lawful planning and evasion.

Let us begin with the constitutional anchor for taxation law—Article 265 of the Indian
Constitution, which states, “No tax shall be levied or collected except by authority of law.”
This is not merely a declaratory statement. It establishes a constitutional limitation on the
power of the State. It mandates that for a tax to be validly imposed and collected, there
must be a clear and explicit law authorising it. In other words, no taxation by implication, no
taxation by analogy, and no taxation by equitable reasoning. This provision embodies the
principle of legality and reflects the doctrine of rule of law—a bedrock of constitutional
governance. The judiciary has consistently held that the taxing authority must strictly act
within the bounds of the statute. A very early and important affirmation of this principle was
seen in CIT v. Anjum M.H. Ghaswala (2001), where the Supreme Court reiterated that taxing
statutes must be followed as they are, and courts cannot inject notions of equity into fiscal
law.

Now, we come to one of the most central doctrines in this subject—the principle of strict
construction. Taxing statutes are not to be interpreted liberally or purposively like welfare
legislations. They are to be interpreted in a strict and literal manner. The logic is simple:
since taxation imposes a burden on the subject, the power must be exercised strictly
according to the letter of the law. This principle was emphatically laid down in A.V.
Fernandez v. State of Kerala (1957), where the Supreme Court held that there is no scope
for intendment in a taxing statute. If the person sought to be taxed does not fall squarely
within the plain words of the statute, no tax can be levied. Similarly, in the English case of
Partington v. Attorney-General (1869), Lord Cairns said, “If the person sought to be taxed
comes within the letter of the law, he must be taxed. If he does not, he must not be taxed,
however hard or unjust it may appear.”
Let us now understand this principle with real-life application through case laws. In Ellis
Bridge Gymkhana v. Commissioner of Wealth Tax (1998), the issue was whether a club could
be taxed under the Wealth Tax Act. The Act listed "individuals," "HUFs," and "companies" as
taxable persons but made no mention of clubs. The department tried to argue that a club
should be taxed in spirit because it owned wealth and functioned like an entity. The Court
rejected this view and ruled that unless the statute specifically included such entities, they
could not be taxed. This case beautifully illustrates that even if a taxpayer appears liable in
equity or intention, the law must be followed as written.

Another classic example is the decision in George Banerji v. Emperor (1917). The petitioner
had fitted a detachable motor on his bicycle and was fined for not paying tax applicable to
motor vehicles. The prosecution argued that it now qualified as a motor vehicle under the
Act. However, the Court held otherwise, stating that a detachable motor on a bicycle did not
meet the statutory definition of a motor vehicle. The conclusion was simple: you cannot
stretch or bend definitions in taxing statutes.

Moving forward, one of the most protective doctrines for taxpayers is that any ambiguity in
a taxing statute—especially the charging section—must be resolved in favour of the
assessee. This principle ensures that if there is doubt about whether a tax applies, the
benefit of that doubt goes to the taxpayer. In Express Mill v. Municipal Committee (1958),
the Supreme Court held that the taxing authority could not take advantage of ambiguous
wording to justify a levy. The rationale behind this doctrine is based on fairness and the
heavy burden taxation imposes on the citizen.

However, this protection does not extend to exemption clauses, which are treated
differently. Exemption provisions are considered exceptions to the general rule and are
interpreted strictly against the taxpayer. In Motiram Tolaram v. Union of India, the Court
observed that if a taxpayer wants to claim an exemption, they must clearly demonstrate
that they fall within the specific words of the exemption clause. If there is any ambiguity,
the exemption cannot be granted. Therefore, while the benefit of doubt helps taxpayers in
charging provisions, the same ambiguity harms them in exemption clauses.

The judiciary also often has to determine how to interpret words not defined in the statute.
Should they be given their technical meaning, popular meaning, or trade meaning? In State
of UP v. Kores (India) Ltd., the issue was whether carbon paper qualified as “paper” for tax
purposes. Though carbon paper is chemically a form of paper, the Court ruled it does not fall
within the common understanding of “paper” because it is used for a different purpose and
is commercially distinct. Similarly, in Dunlop India Ltd. v. Union of India, the Court relied on
the trade meaning of “rubber” to decide whether latex was included within its scope. This
case shows that courts often lean on the industry understanding of terms when the statute
is silent.

Another vital doctrine is that of substantial compliance, which is sometimes invoked to

A particularly interesting and evolving area of tax interpretation is the difference between
tax avoidance and tax evasion. While tax evasion is clearly illegal and punishable, tax
avoidance walks the grey line of legality. The courts have had to draw this line very carefully.
In CIT v. S.M. Exporting Co., the Court accepted a taxpayer's right to manage their affairs in a
way that minimizes tax liability legally. However, the seminal shift in judicial thinking came
in the case of McDowell & Co. Ltd. v. CTO (1986). Here, the company entered into a scheme
which, though technically legal, had the sole purpose of avoiding tax. The Court held such
colourable devices were impermissible and said: “Tax planning may be legitimate, but tax
avoidance through dubious schemes cannot be encouraged.” This decision marked the
beginning of the end of aggressive tax avoidance in India.

Following McDowell, the judiciary began favouring the “substance over form” approach,
especially in revenue matters. In Union of India v. Playworld Electronics, the Court
condemned artificial arrangements that were designed only to minimise tax liability. This
reflects a growing judicial sentiment that the interpretation of tax law must not only follow
the letter of the law but also the spirit and substance of transactions, especially when
dealing with complex corporate structures.

Nevertheless, the Supreme Court has not abandoned fairness altogether. In CIT v. J.H. Gotla
(1985), the Court moved away from strict literalism in favour of an interpretation that was
equitable and just. Here, a technical interpretation would have led to absurd and unfair
consequences, so the Court opted for a reasonable construction. This shows that while strict
construction remains the rule, courts may, in exceptional cases, adopt a purposive and
equitable interpretation to advance the object of the Act.

To conclude, the interpretation of taxing statutes reflects the delicate balance between
legislative authority and individual liberty. The judiciary has played a pivotal role in
protecting citizens from arbitrary taxation, while also ensuring that tax laws are not
defeated by clever legal loopholes. The general rules remain clear—strict interpretation of
charging sections, narrow interpretation of exemptions, benefit of ambiguity going to the
taxpayer—but with exceptions for fairness, anti-avoidance, and commercial reality. As
students and future practitioners of law, understanding these nuances is vital not just for
exams or courtrooms, but also for appreciating how the legal system sustains a nation’s
financial integrity.