SELECT JUDICIAL PRONOUNCEMENTS ON “SUBSTANCE OVER FORM”

“Substance over form” is an important concept often used in interpretation of tax laws, agreements and business contracts. Following are some of the judicial pronouncements which explain the concept substance over form:

• In NABHA POWER LIMITED & ANR. Versus PUNJAB STATE POWER COROPORATION LIMITED & ANR. - 2024 (11) TMI 216 - Supreme Court (LB), Supreme Court observed that the golden rule of interpretation is that the words of a contract should be construed in their grammatical and ordinary sense, except to the extent that some modification is necessary in order to avoid absurdity, inconsistency or repugnancy. (See para 5.01 Kim Lewison, The Interpretation of Contracts, 3rd Edition). Similarly, any invocation of the business efficacy test as canvassed would arise only if the terms of the contract are not explicit and clear. The business efficacy test cannot contradict any express term of the contract and is invoked only if by a plain and literal interpretation of the term in the agreement or the contract, it is not possible to achieve the result or the consequence intended by the parties acting as prudent businessmen. [See Nabha Power Limited (NPL) Versus Punjab State Power Corporation Limited (PSPCL) & Anr. - 2017 (10) TMI 1549 - Supreme Court, (para 49) and Adani Power (Mundra) Limited vs. Gujarat Electricity Regulatory Commission and Others, (2019) 19 SCC 9 (para 24)].
• In Manpreet Engineering and Const. Co. (Engineers and Constructor) Versus The Union of India through Central Excise and Service Tax Department and Others - 2016 (7) TMI 560 - JHARKHAND HIGH COURT, it was held that it is settled law that taxing statutes require strict interpretation. Theory of substantial compliance has no place in taxing statute as otherwise every assessee would term part compliance as substantial compliance leading to chaos. Similarly, theory of ‘no-prejudice’ cannot be advanced by erring assessee in payment of taxes as no prejudice is caused to Government on breach of VCES scheme which only disentitles an assessee to avail same. Further, merely because some errors have been committed by department in respect of one or two declarants for late payment of VCES installment does not mean that same error is extended to every declarant. There is no right of equality in illegality.

• In The Principal Commissioner of Service Tax, Customs, Central Excise & Service Tax, Hyderabad Service Tax Commissionerate, Hyderabad Versus M/s. R.R. Global Enterprises Pvt. Ltd. - 2016 (9) TMI 636 - ANDHRA PRADESH HIGH COURT, the High Court applying ‘Doctrine of substantial compliance’ held that the said doctrine seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke an exemption. What can be forgiven is the non-compliance of unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted. Therefore, condition that details of exporters invoice should be specifically mentioned in lorry receipt and shipping bill is a mandatory condition, which acts as an evidence of actual export and non-compliance with said condition would lead to denial of refund/exemption of service tax paid on transport of export goods.

• In Entertainment World Developers Ltd. Versus Union of India - 2011 (9) TMI 767 - MADHYA PRADESH HIGH COURT, it was held that even if amendment is not merely clarificatory but creates a substantive liability or right, the Parliaments right to legislate and create liabilities or rights with retrospective effect can be curtailed only by a restriction placed upon the legislative power of Parliament by one or the other provision of Constitution of India.

One must clearly understand a distinction between a law being enforced retrospectively and a law that operates retroactively. The law stricto sensu is not retrospective, but would be retroactive.

Earlier, the nature of law, as substantive or procedural, was taken as one of the determinative factors for judging the retrospective operation of a statute. However, with the development of law, this distinction has become finer and of less significance. Justice G.P. Singh, in his Principles of Statutory Interpretation (12th Edition, 2010) has stated that the classification of a statute, as either a substantive or procedural law, does not necessarily determine whether it may have retrospective operation. For example, a statute of limitation is generally regarded as procedural, but its application to a past cause of action has the effect of reviving or extinguishing a right to sue. Such an operation cannot be said to be procedural. It has also been noted that the rule of retrospective construction is not applicable merely because a part of the requisites for its action is drawn from a time antecedent to the passing of the relevant law. For these reasons, the rule against retrospectivity has also been stated, in recent years, to avoid the classification of statutes into substantive and procedural and the usage of words like existing or vested. Referring to a judgment of the Australian High Court in the case of Maxwell v Murphy (1957) 96 CLR 261,it is recorded as follows:—

One such formulation by Dixon C. is as follows: The general rule of the common law is that a statute changing the law ought not, unless the intention appears with reasonable certainty, to be understood as applying to facts or events that have already occurred in such a way as to confer or impose or otherwise affect rights or liabilities which the law had defined by reference to the past events. But given rights and liabilities fixed by reference to the past facts, matters or events, the law appointing or regulating the manner in which they are to be enforced or their enjoyment is to be secured by judicial remedy is not within the application of such a presumption.

• In M/s. Super Poly Fabriks Ltd Versus Commissioner of Central Excise, Punjab - 2008 (4) TMI 31 - Supreme Court, the Honble Supreme Court has specifically laid down the ratio as under:

8.There cannot be any doubt whatsoever at a document has to be read as a whole. The purport and object with which the parties thereto entered into a contract ought to be ascertained only from the terms and conditions thereof: Neither the nomenclature of the documents nor any particular activity undertaken by the parties to the contract would be decisive.

• In State of Andhra Pradesh Versus Kone Elevators (India) Ltd. - 2005 (2) TMI 519 - Supreme Court, Apex Court held that the substance of the contract is determinative and not its form. Thus, the essence of the contract is crucial and to be seen, keeping in mind the intention of the parties.
• In Bakhtawar Trust & Ors. Versus MD Narayan & Ors. - 2003 (6) TMI 205 - Supreme Court, it is well settled in law that it is open to the legislature to pass a legislation retrospectively and remove the base on which a judgment is delivered. In the said case, in paragraphs 20 and 26, it has been held thus:

20. In VIJAY MILLS COMPANY LIMITED Versus STATE OF GUJARAT - 1992 (12) TMI 220 - Supreme Court, it was held—

18. From the above, it is clear that there are different modes of validating the provisions of the Act retrospectively, depending upon the intention of the legislature in that behalf. Where the Legislature intends that the provisions of the Act themselves should be deemed to have been in existence from a particular date in the past and thus to validate the actions taken in the past as if the provisions concerned were in existence from the earlier date, the Legislature makes the said intention clear by the specific language of the validating Act. It is open for the legislature to change the very basis of the provisions retrospectively and to validate the actions on the changed basis. This is exactly what has been done in the present case as is apparent from the provisions of Clauses (3) and (5) of the Amending Ordinance corresponding to Sections 2 and 4 of the Amending Act 2 of 1981. We have already referred to the effect of Sections 2 and 4 of the amending Act. The effect of the two provisions, therefore, is not only to validate with retrospective effect the rules already made but also to amend the provisions of Section 214 itself to read as if the power to make rules with retrospective effect were always available under Section 214 since the said section stead amended to give such power from the time the retroactive rules were made. The legislature had thus taken care to amend the provisions of the Act itself both to give the Government the power to make the rules retrospectively as well as to validate the rules which were already made.

26.Where a legislature validates an executive action repugnant to the statutory provisions declared by a court of law, what the legislature is required to do is first to remove the very basis of invalidity and then validate the executive action. In order to validate an executive action or any provision of a statute, it is not sufficient for the legislature to declare that a judicial pronouncement given by a court of law would not be binding, as the legislature does not possess that power. A decision of a court of law has a binding effect unless the very basis upon which it is given is so altered that the said decision would not have been given in the changed circumstances.

• In MOPED INDIA LIMITED Versus ASSISTANT COLLECTOR OF C. EX., NELLORE AND OTHERS - 1985 (2) TMI 42 - Supreme Court, the Supreme Court held that while interpreting the terms of an agreement, court has to look to the substance rather than the form and observed as follows:—

Now it is true that this amount allowed to the dealers has been referred to in the agreement as commission but the label given by the parties cannot be determinative because it is, for the court to decide whether the amount is trade discount or not, whatever be the name given to it.