Tax administration to be both strict and liberal

I have chosen this subject because of its contemporaneous importance. Finance Minister Nirmala Sitharaman, in a recent speech on the occasion of Income Tax Day celebration, said that “those gaming the system are the ones taxmen have to keep a watch on ... but if the assessees are not avoiding or evading taxes, the taxmen owe them good service”. It is a gem of an administrative principle which dates back to Mahabharata. Lord Krishna is supposed to have said: “Protect the good and destroy the evil people.” This is perennially the perfect principle of general administration and obviously also of tax administration. It has been desirable that the finance minister emphasised on this fundamental principle. It is quite often that officers of the department are either too strict or too liberal irrespective of whether taxpayers are evaders or complainant. That sort of attitude leads to a disaster or, in any case, a delay in conducting business. An example that comes to my mind is when some raw jute consignment came to the Calcutta port and it was found that the loading of several bags took place before the midnight of March 31, 1967 (which was the deadline), but a few continued getting loaded after the midnight. We in the Customs department realised that the transgression of time was only marginal and not intentionally carried out to violate the time limit of loading indicated in their license. So we took a liberal attitude without penalising them for the minor violation. This helped the jute industry, which even otherwise was under serious stress.

In fiscal law, this sort of situation happens quite often. Once an issue arose whether the exemption for the manufacture of soap where rice bran oil had been used would be available even if the rice bran oil was pre-treated into fatty acid and then brought to the factory for making soap. The Revenue department denied the exemption by adopting a very literal and strict interpretation. But the Supreme Court went into the object and purpose of the notification being the encouragement of the use of rice bran oil and allowed the exemption [Tata Oil Mills Company vs CCE-1989(43)ELT183(SC)].

In another case, U.O.I. vs. Wood Papers Ltd, 1990 (47) ELT 500 (SC), the Supreme Court has enunciated this principle very clearly. It observed that liberal and strict construction of an exemption provision is to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause, then it (exemption) being in the nature of an exception, is to be construed strictly and against the subject but once the ambiguity or doubt about the applicability is lifted and the subject falls in the notification, then full play should be given to it and it calls for a wider and liberal construction.

Over a period of time, there has been controversy over the applicability of strict or liberal approach in tax administration. One of the latest Supreme Court judgements in the case of CC vs. Tullow India Operations Ltd. – 2005 (189) ELT 401 (SC) has now enunciated and emphasised a point of view, which is a synthesis of the two antithetical approaches. In this case, the issue was whether an exemption notification, which requires the production of essentiality certificate from a government department “at the time of importation”, could be allowed to be availed of if the importer is not able to produce it at the time of import but produces it later. The Supreme Court allowed the production of the certificate even later. The Supreme Court said: “The eligibility clause in relation to an exemption notification is given strict meaning, that is, the notification has to be interpreted in terms of its language. Once an assessee satisfies the eligibility clause, the exemption clause therein may be construed liberally.” 

The conclusion about interpreting an exemption or administrative action is the following: The classical controversy between strict approach and liberal approach has now, with judicial approval, been replaced by an approach which is both strict and liberal at the same time. Taxmen should be strict with the lawbreakers and liberal with the compliant.

The writer is member, Central Board of Excise & Customs (retired)

Email: smukher2000@yahoo.com