Supreme Court Summarises Principles For Interpreting Tax Statutes In Judgment On GST Input Tax Credit

The Supreme Court on Thursday (October 3) outlined the principles governing the interpretation of taxation statutes in the context of the Central Goods and Services Tax (CGST) Act, 2017.

A bench of Justice Abhay Oka and Justice Sanjay Karol summarised the principles of interpretation while dealing with a case involving the interpretation of Section 17(5)(d) of the CGST Act, which disallows Input Tax Credit (ITC) on goods and services used in the construction of immovable property, except for "plant or machinery."

The Court reiterated several established principles for interpreting taxation statutes.

Firstly, the Court emphasized that a taxing statute must be read strictly as written, with no additions or subtractions based on legislative intent or other factors. If the language of a provision is clear, even if its application leads to an absurd result, it is the responsibility of the legislature, not the Court, to address the absurdity.

“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”, the Court stated.

Further, the Court held that taxation statutes should be interpreted using a strict construction approach. If two interpretations of a tax provision are possible, the Court generally favors the interpretation that benefits the taxpayer, unless clearly expressed otherwise. Additionally, equitable considerations should not influence the interpretation of tax laws, and any interpretation must be based strictly on the language of the statute.

“While dealing with a taxing provision, the principle of strict interpretation should be applied; If two interpretations of a statutory provision are possible, the Court ordinarily would interpret the etc. provision in favour of a taxpayer and against the revenue”

The Court also clarified that presumptions or assumptions cannot be used in the interpretation of tax statutes. Tax laws must be interpreted in light of what is clearly expressed, and no words or provisions should be implied or added to the statute to fill perceived gaps. Moreover, it is not unjust if a taxpayer escapes taxation due to a failure by the legislature to express itself clearly in the law.

“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;”

However, the Court noted that in cases where literal interpretation results in manifest injustice, and where such a result was not intended by the legislature, the language of the statute may be modified to prevent unintended consequences.

The Court further emphasized that when a word used in a taxing statute has not been specifically defined, it should not be interpreted based on definitions from other statutes dealing with unrelated subjects. Instead, such terms should be understood in their commercial sense, according to trade practices and usage.

The Court applied these interpretative principles to hold that the classification of a building as "plant" under Section 17(5)(d) requires a case-by-case determination, applying a functionality test to decide whether the building plays an essential role in supplying services such as renting. The matter was remitted to the High Court to apply this test and determine if the petitioners' case fell within the "plant" exception, allowing ITC on their construction expenses.

The Court rejected the challenge to the constitutional validity of Section 17(5)(d), holding that it is not necessary to read down the provision to exclude cases where the immovable property is constructed for letting out on rent.

Case no. – C.A. No. 2948/2023

Case Title – Chief Commissioner of Central Goods and Service Tax and Ors. v. M/S Safari Retreats Private Limited and Ors.

Citation: 2024 LiveLaw (SC) 774

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