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of <h1>Tax exemption notifications require strict interpretation with burden on assessee to prove applicability within parameters</h1> <h3>Commissioner of Customs (Import), Mumbai Versus M/s. Dilip Kumar And Company & Ors.</h3> Commissioner of Customs (Import), Mumbai Versus M/s. Dilip Kumar And Company & Ors. - 2018 (361) E.L.T. 577 (SC), (2018) 9 SCC 1 The core legal questions considered in this judgment revolve around the interpretative approach to tax exemption provisions or notifications, specifically:1. What is the correct rule of interpretation to be applied when there is ambiguity in a tax exemption provision or notification regarding the entitlement of the assessee or the applicable rate of taxRs.2. Whether the principle that ambiguities in tax exemption notifications should be interpreted in favour of the assessee, as laid down in the earlier Sun Export Corporation case, remains good law.3. How to distinguish between the interpretation of charging provisions (tax imposition) and exemption notifications under taxation statutes.4. What is the scope and application of strict interpretation and literal interpretation in the context of taxation and exemption notifications.5. The role and applicability of the doctrine of substantial compliance in exemption claims.6. The burden of proof on the assessee claiming exemption and the treatment of ambiguities in exemption notifications.Issue-wise Detailed AnalysisIssue 1: Interpretative Rule for Ambiguity in Tax Exemption ProvisionsThe judgment begins by revisiting the ratio in the Sun Export Corporation case, where it was held that ambiguity in a tax exemption provision or notification must be interpreted in favour of the assessee claiming the benefit. This principle was doubted by subsequent Benches, including a two-Judge Bench and a three-Judge Bench, due to the unsatisfactory and conflicting state of law.The Court notes that the Sun Export case was decided by a three-Judge Bench and that the principle it laid down requires reconsideration. The present Constitution Bench was constituted to resolve this conflict.The Court distinguishes between the interpretation of charging provisions (which impose tax) and exemption notifications (which provide exceptions). It is recognized that while ambiguities in charging provisions are resolved in favour of the assessee, ambiguity in exemption notifications should be resolved in favour of the revenue. This distinction is rooted in the principle that taxing statutes must be strictly construed to avoid burdening citizens beyond legislative intent.Issue 2: Strict Interpretation of Taxation Statutes and Exemption NotificationsThe Court extensively reviews the principles of statutory interpretation, emphasizing the importance of legislative intent and the role of plain and unambiguous language. It reiterates the settled principle that taxing statutes must be strictly construed, and there is no equity or presumption in tax matters.Strict interpretation is defined as confining the operation of the statute to cases clearly within its letter and spirit, without expanding it by implication or equitable considerations. The Court clarifies that strict interpretation does not necessarily equate to literal interpretation, especially when literal interpretation leads to absurdity or defeats legislative intent.In the context of exemption notifications, the Court holds that strict interpretation applies at the threshold stage-i.e., when determining eligibility for exemption. The burden lies on the assessee to clearly establish entitlement within the parameters of the exemption notification.Once eligibility is established, a liberal construction may be applied to the exemption itself, but this does not extend to expanding the scope of the exemption beyond the clear language of the notification.Issue 3: Ambiguity in Exemption Notifications and Benefit of DoubtThe Court examines the jurisprudence on whether ambiguity in exemption notifications should be resolved in favour of the assessee or the revenue. It notes that Sun Export Corporation held that ambiguity should favour the assessee, but this view has been doubted and distinguished in later cases, including Surendra Cotton Oil Mills and others.After a detailed survey of case law, including Hansraj Gordhandas, Parle Exports, Wood Papers Ltd., Mangalore Chemicals, and Hari Chand, the Court concludes that ambiguity in exemption notifications must be resolved in favour of the revenue. This is because exemptions increase the tax burden on others and must be clearly and strictly defined.The Court underscores that a person claiming exemption must establish that his case squarely falls within the exemption notification. If there is doubt or ambiguity, the benefit must go to the State.Issue 4: Distinction Between Charging Provisions and Exemption NotificationsThe Court elaborates on the distinction between taxing provisions and exemption provisions. While taxing provisions must be strictly construed and ambiguities resolved in favour of the assessee, exemption provisions, being exceptions, must be strictly construed against the assessee.The Court refers to Article 265 of the Constitution, which prohibits taxation without authority of law, reinforcing that the State cannot burden citizens without clear legislative mandate.It also highlights that the principle of strict interpretation applies equally to charging, computation, and exemption clauses at the threshold stage.Issue 5: Doctrine of Substantial Compliance and 'Intended Use'The Court discusses the doctrine of substantial compliance as developed in Hari Chand, distinguishing between mandatory and directory conditions in exemption notifications. Mandatory conditions must be strictly complied with, while some procedural or technical requirements may be satisfied by substantial compliance.This doctrine, however, does not alter the principle that ambiguity in exemption notifications must be resolved in favour of the revenue.Issue 6: Burden of Proof and Treatment of Competing ArgumentsThe Court affirms that the burden of proving entitlement to exemption lies on the assessee. The Court rejects arguments that ambiguities should be resolved in favour of the assessee, emphasizing the potential inequity and increased burden on other taxpayers if exemptions are extended beyond clear legislative intent.The Court also rejects the artificial distinctions drawn in some cases (e.g., between 'ingredients' and 'supplements' in animal feed) as logically unsound and irrelevant to the principle of interpretation.Key Evidence and FindingsThe Court examined the factual background of the import of Vitamin E50 powder classified under prawn feed and the denial of concessional customs duty by the department, which classified the product under a different chapter attracting higher duty. The adjudicating authorities and tribunals had differing views, with the lower authorities denying benefit and appellate authorities granting it based on Sun Export case.The Court found that the legal principle in Sun Export case was unsatisfactory and required reconsideration, irrespective of the factual distinctions.Application of Law to FactsThe Court did not decide the merits of the factual classification dispute but focused on the legal principle governing interpretation of exemption notifications. It held that the principle that ambiguity in exemption notifications must favour the assessee is incorrect and overruled it.The factual disputes would be considered by an appropriate Bench after the legal principle is settled.Significant Holdings'Every taxing statute including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly.''In case of ambiguity in a charging provision, the benefit must necessarily go in favour of subject/assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State.''The ratio in Sun Export case is not correct and all the decisions which took similar view as in Sun Export Case stands overruled.''Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.''When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.'The Court also laid down the principle that strict interpretation involves literal or plain meaning but does not require literalism that leads to absurdity or defeats legislative intent. It emphasized that exemption notifications, being exceptions to taxing statutes, must be narrowly and strictly construed, and that the doctrine of substantial compliance applies only to procedural or directory requirements, not to the core eligibility conditions.In conclusion, the judgment clarifies and settles the long-standing confusion in the law of taxation regarding the interpretation of exemption notifications, establishing that ambiguity in such notifications must be resolved in favour of the revenue, thereby placing the onus on the assessee to clearly demonstrate entitlement to the exemption.
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