Supreme Court Clarifies Principles For Interpreting Taxation Statutes Under CGST Act, 2017

Supreme Court Clarifies Principles For Interpreting Taxation Statutes Under CGST Act, 2017

The Supreme Court has outlined key principles governing the interpretation of taxation statutes in the context of the Central Goods and Services Tax (CGST) Act, 2017. A bench comprising Justices Abhay Oka and Sanjay Karol summarized these principles while addressing 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 for the construction of immovable property, except in cases of "plant or machinery."

In its judgment, the Court reiterated several well-established principles for interpreting taxation statutes. Firstly, it emphasized that a taxing statute must be strictly interpreted as written, without adding or subtracting anything based on legislative intent or other factors. The Court clarified that even if the literal application of a provision leads to an absurd result, it is the legislature’s responsibility, not the Court’s, to address any such absurdity.

The Court stated: “A taxing statute must be read as it is, with no additions or subtractions on the grounds of legislative intent or otherwise. If the language of a taxing provision is plain, the consequence of giving effect to it may lead to some absurd result, but this is not a factor to be considered when interpreting the provision. It is for the legislature to step in and remove the absurdity.”

Additionally, the Court noted 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 the statute explicitly provides otherwise. Furthermore, the Court emphasized that equitable considerations should not influence the interpretation of tax laws, and any interpretation must be based strictly on the statute's language.

“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 provision in favor of the taxpayer and against the revenue,” the Court explained.

The Court further clarified that presumptions or assumptions cannot be used when interpreting tax statutes. Tax laws must be understood based on what is explicitly expressed in the text, and the Court should not imply or add provisions to fill perceived gaps. The Court added that it is not unjust for a taxpayer to escape taxation if the legislature fails to express itself clearly in the law.

“A taxing provision cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in light of what is clearly expressed. The Court cannot imply anything that is not expressed. Moreover, the Court cannot import provisions into the statute to supply any deficiency. There is nothing unjust if the taxpayer escapes taxation due to the legislature’s failure to express itself clearly,” the judgment noted.

However, the Court acknowledged that in cases where a literal interpretation leads to manifest injustice, which was clearly unintended by the legislature, the language of the statute may be modified to prevent unintended consequences.

Moreover, the Court emphasized that when a term used in a taxing statute is not specifically defined, it should not be interpreted based on definitions from other statutes that deal with unrelated subjects. Instead, such terms should be understood in their commercial sense, according to trade practices and usage.

Applying these principles of interpretation, the Supreme Court held that the classification of a building as "plant" under Section 17(5)(d) of the CGST Act requires a case-by-case determination. The Court adopted a functionality test to assess whether a building plays an essential role in supplying services, such as renting, and thus may be classified as "plant" for ITC purposes. 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 also rejected a challenge to the constitutional validity of Section 17(5)(d), holding that it is unnecessary to read down the provision to exclude cases where the immovable property is constructed for the purpose of renting out.