Category Archives: Tax

In a Taxing Statute – There is no room for Intendment

In the case of Hansraj Gordhandas v. CCE and Customs, AIR 1970 SC 755 : (1969) 2 SCR 253, it was held as under:
“It was contented on behalf of the respondent that the object of granting exemption was to encourage the formation of cooperative societies which not only produced cotton fabrics but which also consisted of members, not only owning but having actually operated not more than four power-looms during the three years immediately preceding their having joined the society. The policy was that instead of each such member operating his looms on his own, he should combine with others by forming a society which, through the cooperative effort should produce cloth. The intention was that the goods produced for which exemption could be claimed must be goods produced on his own behalf by the society. On a true construction of the language of the Notifications dated 31.07.1959 and 30.04.1960 it is clear that all that is required for claiming exemption is that the cotton fabrics must be produced on power looms owned by the cooperative society. There is no further requirement under the two notifications that the cotton fabrics must be produced by the cooperative society on the power looms ‘for itself’. It is well established that in a taxing statute there is no room for any intendment but regard must be had to the clear meaning of the words. The entire matter is governed wholly by the language of the notification. If the taxpayer is within the plain terms of the exemption it cannot be denied its benefit by calling in aid any supposed intention of the exempting authority. If such intention can be gathered from the construction of the words of the notification or by necessary implication therefrom, the matter is different, but that is not the case here.”
Thus, the aforesaid decision makes it quite clear that in a taxing statute there is no room for any intendment but regard must be had to the clear meaning of the words. The entire matter is governed wholly by the language of the notification. It has also been held by the Constitution Bench, if the tax payer is within the plain terms of the exemption, it cannot be denied its benefits by calling in aid any supposed intention of the exempting authority. That apart, it has also been stated therein that if different intention can be gathered from the construction of the words of the notification or by necessary implication therefrom, the matter is different. State of Jharkhand v. Tata Steel Limited, (2016) 11 SCC 147.

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Tax and Cess – Distinction

In the case of Vijayalakshmi Rice Mill v. Commercial Tax Officers, Palokal, (2006) 6 SCC 763, a distinction was sought to be drawn between ‘Cess’ and ‘Tax’ in the following terms:

“Hence ordinarily a cess is also a tax, but is a special kind of a tax. Generally tax raises revenue which can be used generally for any purpose by the State. For instance, the Income Tax or Excise or Sales Tax which generate revenue can be utilized by the Union or State Governments for any purpose, e.g. for payment of salary to the members of the armed forces or civil servants, police, etc. or for development programs, etc. However, cess is a tax which generates revenue which is utilized for a specific purpose. For instance, health cess raises revenue which is utilized for health purposes, e.g., building hospitals, giving medicines to the poor etc. Similarly education cess raises revenue which is used for building schools or other educational purposes. Gujarat Ambuja Exports Ltd. v. State of Uttarakhand, (2016) 1 UPLBEC 627.

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The Doctrine of Mutuality

The doctrine of mutuality finds its origin in common law. One of the earliest modern judicial statements of the mutuality principle is by Lord Watson in the House of Lords, in 1889, in New York Life Insurance Company v. Styles (Surveyor of Taxes), (1889) LR 14 AC 381. The appellant in that case was an incorporated company. The company issued title policies of two kinds, namely, participating and non-participating. The members of the mutual life insurance company were confined to the holders of the participating policies, and each year, the surplus of receipts over expenses and estimated liabilities was divided among them, either in the form of a reduction of future premiums or of a reversionary addition to the policies. There were no shares or shareholders in the ordinary sense of the term but each and every holder of a participating policy became ipso facto a member of the company and as such became entitled to a share in the assets and liable for a share in the losses. The company conducted a calculation of the probable death rate amongst the members and the probable expenses and liabilities; calls in the shape of premiums were made on the members accordingly. An amount used to be taken annually and the greater part of the surplus of such premiums, over the expenditure referable to such policies, was returned to the members, i.e. (holders of participating policies) and the balance was carried forward as a fund in hand to the credit of the general body of members. The question was whether the surplus returned to the members was liable to be assessed to income tax as profits or gains. The majority of the Law Lords answered the question in the negative.
It may be notice that in Styles Case, (1889) LR 14 AC 381, the members had associated themselves for the purpose of insuring each other’s life on the principle of mutual assurance, that is to say, they contributed annually to a common fund out of which payments were to be made, in the event of death, to the representatives of the deceased members. Those persons were alone the owners of the common fund and they were alone entitled to participate in the surplus. This surplus was obtained partly from the profits arising from non-participating policies and other business. It was held that that portion of the surplus which arose from the excess contributions of the holders of participating policies was not an assessable profit. The individuals insured and those associated for the purpose of receiving their dividends and meeting other stipulated requisites under the policies were identical. It was held that that identity was not destroyed by the incorporation of the company.
Lord Watson even went to the extent of saying that the company in Styles Case, (1889) 4 LR 14 AC 381 did not carry on any business at all, which perhaps was stating the position a little too widely as pointed out by Viscount Cave in a later case, Jones (Inspector of Taxes) v. South-West Lancashire Coal Owner’s Association Limited, 1927 AC 827 (HL), but be that as it may all the noble Lords who formed the majority were of the view that what the members received were not profits but their respective shares of the excess amount contributed by themselves. They held thus:
“When a number of individuals agree to contribute funds for a common purpose and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits.”
Lord Watson’s statement was explained by the House of Lords in Cornish Mutual Assurance Company Ltd. V. IRC, 1926 AC 281, wherein it was held that a mutual concern may be held to carry on a business or trade with its members, though the surplus arising from such trade is not taxable income or profit.
The High Court of Australia first considered the mutuality principle in Bohemians Club v. Acting Federal Commissioner of Taxation, (1918) 24 CLR 334 (Aust) :
“A man is not the source of his own income….A man’s income consists of moneys derived from sources outside of himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income. The contributions are, in substance, advances of capital for a common purpose, which are expected to be exhausted during the year for which they are paid. They are not income of the collective body of members any more than the calls paid by members of a company upon their shares are income of the company. If anything is left unexpended it is not income or profits, but savings, which the members may claim to have returned to them.”
One of the first Indian cases that dealt with the principle was CIT v. Royal Western Indian Turf Club Ltd., AIR 1954 SC 85. It quoted with approval three conditions stipulated in English & Scottish Joint Coop. Wholesale Society Ltd. V. CIT , (1947-48) 75 IA 196: AIR 1948 PC 142, which were propounded after referring to various passages from the speeches of different Law Lords in Styles Case, (1889) LR 14 AC 381. It was held as follows:
“From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy-holders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.” Bangalore Club v. CIT, (2013) 5 SCC 509.

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Rebate of Tax

Rebate as defined in the New International Webster’s Pocket Dictionary and Bloomsbury Concise English Dictionary is “discount”, to allow as a deduction from a gross amount. It is a discount repaid to the payer. Rebate as defined in Corpus Juris Secundum, Vol. 52 CJ, P. 1189 is “The etymological or dictionary meaning of the term includes any discount or deduction from a stipulated payment, but handed back to the payer after he has paid the stipulated sum, even when such discount or deduction is equally applied to all from whom such payment is demandable.”
Rebate is though ex hypothesi in the nature of subsidy and other incentives given by the Government but conceptually rebate of tax and incentives are different and it needs to be explained in reference to the purpose and nature of such rebate of tax introduced by the Legislature. The claim for rebate need not necessarily be handed back to the payer after he has paid the stipulated sum, it can also be paid in advance of payment. It is nothing but a remission or a payment back or it is sometimes spoken of as a discount or a drawback.
Rebate as defined in Estate of Bernard H. Stauffer v. Commissioner of Internal Revenue, 48 TC 277 (1967), means abatement, discount, credit, refund or any other kind of repayment. Rebates have been normally used as justifiable incentives given by the Government to stimulate small industries or newly established industries. But to understand rebate of tax as rebate per se would be a misnomer. Rebate of tax is the rebate on rate of tax and is essentially the arithmetic of rate. The term “rate” is often used in the sense of standard or measure. It is the tax imposed at a certain measure or standard on the total turnover of the goods. Rate, in other words is the relation between the taxable turnover and the tax charged.
Rebate of tax or exemption is distinguished from non-imposition or non-liability in A.V. Fernandez v. State of Kerala, AIR 1957 SC 657, wherein the court held:
“In rebate of tax, the sales or purchases would have to be included in the gross turnover of the dealer because they are prima facie liable to tax and the only thing which the dealer is entitled to in respect thereof is the deduction from the gross turnover in order to arrive at the net turnover on which the tax can be imposed.” State of Uttar Pradesh and Others v. Jaiprakash Associates Limted, (2014) 4 SCC 720.

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