Beneficial Exemption: Should it be Construed in a Strict or a Liberal way?

Introduction

The strict rule of interpretation means each of the words in the Statute should be interpreted by letter and no interpretation should be given beyond the spirit of the statute. In contrast, the liberal rule of interpretation is based on beneficial construction and aims to advance the purpose or object of the statute.

The Constitution Bench of the Hon’ble Supreme Court in the case of Dilip Kumar & Company¹ held that an exemption clause should primarily be interpreted in a strict manner. In case of any ambiguity, while interpreting the exemption clause, the benefit of the doubt should go in favor of the revenue.

In a recent judgment of Mother Superior Adoration Convent² the division bench of Hon’ble Supreme Court, while interpreting the exemption provided under the Kerala Building Tax Act, 1975 has distinguished itself from the said judgment of the Constitution Bench.

The division bench has made a distinction between general exemption provisions and exemption provisions having a beneficial purpose. Therefore, the interpretation rule would vary depending on the purpose of the exemption. The principles derived by the Hon’ble division bench would surely have an impact on future litigations in the Country relating to the availability of exemptions.

In this article, we have discussed the issue dealt and interpretations derived by the Hon’ble Division Bench. The article also focuses on the applicability of the judgment under the GST and Customs laws.

Levy under the Kerala Building Tax Act, 1975 and Question of law before the Division Bench

The Kerala Building Tax Act, 1975 (‘the Act’) levies a tax on the construction of Buildings and a luxury tax on certain residential buildings. The Act also provides an exemption in respect of buildings that are used principally for religious, charitable, or educational purposes are.

In the given case, the question was of levying tax on buildings that were either used by the nuns for residential purposes or by students staying in the hostel accommodations attached to various educational institutions.

It was argued by the Department exemption shall not be available in respect of the above buildings as these are used for residential purpose and not falling under the ambit of religious or educational purposes.

The question before the Division Bench of the Supreme Court was whether the subject hostel building and residential building, falls under the term ‘educational and religious purposes’ and thus entitled for the exemption under the Act.

Arguments of the parties

The State contended that the exemption could only be availed if building was principally used for religious or educational purposes and not for an activity which has no direct connection with religious/educational activity. Since no religious/educational activities were carried on at the buildings which accommodated the nuns and students therefore it would not entitled for the exemption.

The State has taken support from the Dilip Kumar case (supra) and contended that an exemption provision contained in a fiscal statute must be construed strictly and in the case of doubt or ambiguity must be construed in favour of the State.

On the other side, the assessee argued that the building should be exempted as a beneficial legislation which is meant to further religious, charitable and educational purposes should not be construed in a narrow fashion, and should be construed in a liberal way in accordance with the object sought to be achieved.

Order of Division Bench

The Division Bench in the given case distinguished itself from this general principle and held that beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted. Additionally, in case of an ambiguity in a beneficial exemption provision, it should be interpreted in favour of the assessee.

In reference to Dilip Kumar’s case (supra), it held that the Constitution bench has not made any distinction between exemption granted generally and exemption provisions that have a beneficial purpose, therefore, it cannot be said that for beneficial exemption liberal rule of construction has been done away with. In other words, for construction of beneficial exemption strict rule of interpretation may not be required to be applied.

Analysis

The Conclusion in the given case, with due respect to the authorities, in our humble view could also have been derived by applying the strict rule of interpretation. The exemption provision provides that any building that is used for religious, charitable or educational purposes are exempted from paying the building tax. The use of the term ‘religious purpose’ shows that the legislature did not intend to restrict the scope of application of the section to religious buildings (say Temple, Church, etc.)/Educational buildings (say School, Colleges etc.) The important factor to is to check whether the religious purpose/educational purpose is getting achieved or not.

In other words, if the legislature intended that only the building having the place of worship be exempted then it would have mentioned ‘Religious place’ instead of ‘Religious purposes’.

Further, the Rule of liberal interpretation cannot be applied as straight jacket formulae by the taxpayers using this judgment. In order to apply the ratio of this judgment, one would have to prove that its case falls within the meaning of ‘Beneficial Exemption’. Notably, what construes as ‘Beneficial Exemption’ has not been explained in detail by the Hon’ble Division Bench. In this regard, the Hon’ble Bench has just provided that an exemption provision should be liberally construed if the provision aims to grant incentive for promoting economic growth or otherwise has some beneficial reason behind it.

The principles derived by the Hon’ble Division Bench would surely have an impact on the future litigations in the Country relating to availability of exemptions.

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1. Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Company [2018] 95 taxmann.com 327 (SC).
2. [2021] 126 taxmann.com 68 (SC)[01-03-2021].