FM’s observations on some fundamental tax principles

In a conference on October on indirect taxes, Finance Minister (FM) Arun Jaitley made some fundamental observations ( Business Standard, October 2, page 4). He said, “You officers don’t have to extort taxes from those not liable to pay… as tax people, you are not entitled to invite fear. You have to invite respect that you are somebody who wants people to comply with national duty”. This is a much-required assertion by the FM, which will strengthen the hands of officers who suffer from the phobia of always charging the higher rate of duty. Such officers created “tax terrorism”, which is no longer there now and the correct position will be reiterated with the above statement of the FM.

Jaitley further said there were never grey areas in taxation law. In case of doubt, officers should “go straight”. The expression in taxation law means the case has to be decided on merits. Just because a doubt has been raised, the benefit of this doubt can’t automatically go to the assessee. This has been the subject of many Supreme Court (SC) judgments. In social media, I found some tax officers expressing opinions which are a misunderstanding of the correct principle, expounded by the FM. Therefore, I am discussing the legal position about benefit of doubt.

The SC has in one of its latest judgments, in the case of Meridian Industries vs CCE, reported in 2015 (325) ELT 417 (SC), clarified in very unequivocal terms that “if there is a doubt or if two interpretations are possible, then one which favours the department is to be resorted to while construing an exemption notification.” Taxpayers are not allowed the advantage of creating a doubt and then claiming the benefit of the doubt must go in their favour.

If we go through the earlier SC judgments on this issue, we find no benefit of doubt had been given by the court just because there was a doubt. It is very easy to create a doubt in interpretation of fiscal law, there being several judgements on every. So, the SC has given the benefit of doubt only after first going deep into the facts and law, and coming to the conclusion that the assessee is right on merit. Then only was the benefit of doubt given, more or less a superfluity. It is never the first consideration; only the second and the last.

The SC in the case of CCE vs Calcutta Springs – 2008(229)ELT161(SC) allowed the benefit of doubt to the assessee but after concluding that the merit was also on that side. The same principle was upheld earlier in some previous judgments, including in the cases of Novopan India Ltd vs CCE – 1994(73) ELT769(SC) and Liberty Oil Mills vs CCE – 1995(75)ELT13(SC). Both were cases of exemption.

The SC has held that in respect of undervaluation, the burden of proof is on revenue and in case of doubt, the benefit goes to the assessee. Examples are the cases of CC vs Orgochem - 2008(226)E.L.T.9(S.C.) and CC vs South India Television 2007(214)E.L.T.3(S.C.). In respect of the penalty in fiscal cases, the benefit of doubt is more easily given to the assessee, as held in the case of Iyer vs CC – 1999(110)ELT414(SC).

So, the conclusion is that the concept of benefit of doubt in criminal law is not applicable to fiscal law, where merit is the only consideration. If the merit in a classification case is on the side of the assessee, the benefit of doubt also goes to him. In case of exemptions, the benefit of doubt goes to revenue. Merely because there is doubt, no case is decided in fiscal law in favour of the assessee. In undervaluation, the burden of proof is on revenue and if there is a doubt, the benefit goes to the assessee. In the case of a penalty, the benefit goes to the assessee, more like in a criminal case.

Taxpayers are not allowed to take advantage of creating a doubt and then claim the benefit must go in their favour