Interpretation of Statutes
(46) Equitable Construction
1. Introduction:
Equitable construction is a vital principle of statutory interpretation that seeks to ensure justice, fairness, and harmony in the application of laws. It recognizes that a strict literal interpretation of a statute may sometimes lead to unjust, irrational, or unintended consequences, defeating the very purpose for which the law was enacted. In such circumstances, courts adopt an equitable approach, reading the statute in a manner that fulfills its spirit and object while preventing hardship or absurdity. This doctrine is especially significant in tax laws, where rigid literalism can unfairly burden taxpayers or confer unintended benefits. Judicial pronouncements such as Keshavji Ravji & Co. v. CIT, M.K. Mohammed Kunhi v. ITO, and Vikrant Tyres Ltd. v. First ITO have emphasized that equitable construction does not rewrite statutes but interprets them contextually. It serves as a safeguard, balancing legislative intent with justice, ensuring that statutory provisions achieve their true purpose without compromising fairness.
2. Description:
(i) Keshavji Ravji and Co. v. CIT (1990) 183 ITR 0001 (SC):
Equitable construction is not excluded where strict literal construction does not lead to result intended.
Where two or more transactions on which interest is paid to, or received from, the partner by the firm are shown to have the element of mutuality and are referable to the funds of the partnership as such, section 40(b) of the Income-tax Act, 1961, does not preclude the quantifying of the interest on the basis of such mutuality. In such circumstances, the interest paid to a partner by the firm in excess of what is received from the partner could alone be included under section 40(b), in computing the firm's profits. Circular No. 33-D (XX V-24) of 1965 of the Central Board of Direct Taxes broadly accords with this view. The mere fact that the transactions are split into or spread over two or more accounts should not by itself make any difference if, otherwise, the substance of the transaction is the same. One of the relevant tests would be to see whether the funds on which interest is paid or received partake of the same character.
As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature.
When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in a subsequent legislation in the same or similar context.
To the extent not prohibited by the statute, the incidents of the general law (of partners) are attracted to ascertain the legal nature and character of a transaction. This is quite apart from distinguishing the "substance" of the transaction from its "form". The court is not precluded from treating what the transaction is in point of fact as one in point of law also.
To say that the court could not resort to the so-called "equitable construction" of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes.
(ii) ITO v. T.S. Devinatha Nadar (1968) 68 ITR 252 (SC):
For AY 1943-44, the assessment of a firm was reopened under Section 34, and additions were made. Based on the reassessment, the ITO rectified the individual assessments of partners under Section 35(5) to align their income with the firm’s revised income. The High Court quashed this rectification, holding that the partners’ completed assessments could not be altered retrospectively. The Supreme Court held that Section 35(5) aimed to eliminate discrepancies between a partner’s individual assessment and the firm’s final assessment. The term “completed assessment” included assessments made prior to April 1, 1952. The Court emphasized that the provision must be equitably construed to achieve legislative intent and prevent injustice. It rejected a rigid interpretation that would perpetuate discrepancies, noting that equitable construction allows courts to balance the rights of both Revenue and taxpayers by ensuring fairness in rectification powers.
(iii) Sundaram Finance Ltd. v. IAC (1984) 7 ITD 845 (Madras - SB):
The assessee argued that under Section 37(3) read with Rule 6D, “traveling expenses” should cover only transit expenses, not hotel expenses incurred at the destination. The Revenue included hotel expenses in the disallowance. Conflicting Tribunal decisions prompted reference to a Special Bench.
The Tribunal held that “traveling expenses” include both transit and stay at the destination but clarified that certain business-related hotel expenses, like telephone bills or secretarial assistance, should not be disallowed. It applied equitable construction, reasoning that the legislature’s purpose was to curb extravagant allowances, not to penalize genuine business expenditure. A literal interpretation would unjustly disallow legitimate costs. Hence, equitable construction was used to interpret the statute in a balanced manner, ensuring its purpose was met without creating hardship.
(iv) Addl. CIT v. Vestas RRB India Ltd. (2005) 92 ITD 1 (Delhi):
The assessee deposited PF contributions after statutory due dates but before filing its return. The AO disallowed the deduction under Section 43B read with Section 36(1)(va). The Finance Act, 2003 amended these provisions to allow such deductions if payment was made before the return filing date. The issue was whether the amendment applied retrospectively. The Tribunal held that the amendment was curative and must be construed retrospectively. Applying equitable construction, it reasoned that a prospective interpretation would produce unjust results—permitting habitual defaulters to benefit while penalizing minor delays. Equitable construction required a fair reading to remove undue hardship and achieve the law’s remedial purpose. Therefore, payments made before the filing of the return were allowed as deductions, even if beyond statutory due dates
(v) InterGlobe Aviation Ltd. (IndiGo) v. Addl. CIT (2021) 131 taxmann.com 98 (Delhi - SB):
IndiGo received credits from an engine manufacturer for selecting its engines for aircraft acquired via purchase or lease. The AO treated the credits as revenue receipts, while the assessee claimed them as capital receipts. The Special Bench held that the credits were capital receipts, as they were linked to acquisition of fixed capital assets and not business operations. The Tribunal emphasized that interpretation should be based on the substance of transactions, not merely their form. By applying equitable construction, the Court avoided an interpretation that would treat capital incentives as taxable revenue, which would be unjust and contrary to commercial realities. This equitable approach harmonized tax law with business practice and ensured fairness in taxation.
(vi) Vikrant Tyres Ltd. v. First ITO (2001) 247 ITR 821 (SC):
The assessee initially paid tax based on assessment orders. Upon a favorable appellate order, the tax was refunded. Later, the High Court reversed the order, and the Revenue issued fresh demand notices, which were paid promptly. The AO demanded interest under Section 220(2) for the interim period. The Supreme Court rejected the interest demand, holding that Section 220(2) applies only when there is a default in paying taxes demanded under a valid notice. Since the assessee had complied with all notices, there was no default. The Court underscored that in taxation, equitable construction is not about imposing fairness beyond the statute but about preventing injustice through faithful interpretation. It emphasized that no tax or levy can be imposed unless clearly provided by law, and literal meaning must prevail unless it causes absurd or inequitable results
(vii) ITO v. M.K. Mohammed Kunhi (1969) 71 ITR 815 (SC):
The assessee was penalized under Section 271(1)(c) for concealment of income. While his appeal was pending before the ITAT, he requested a stay on the collection of penalties. The Tribunal denied the stay, holding it had no power to grant such relief. The High Court ruled in favor of the assessee, stating the Tribunal possessed incidental powers to stay recovery proceedings. The Supreme Court held that though Section 254 of the Income-tax Act did not expressly provide for stay powers, such authority is implicit in its appellate jurisdiction. If the Tribunal could not grant a stay, appeals would be rendered nugatory, leading to injustice. The Court emphasized equitable construction, stating statutory powers must be interpreted broadly to ensure justice and prevent absurd consequences. Hence, the Tribunal has inherent power to grant stays in deserving cases to protect the effectiveness of appeals.
(viii) Nila Infrastructures Ltd. v. ACIT (2023) 451 ITR 283 (Gujarat HC):
The assessee’s completed assessment was reopened under Section 148 on grounds including TDS default, VAT/service tax accounting issues, MAT credit utilization after amalgamation, and alleged bogus bills. The reopening was initiated beyond four years from the end of the relevant assessment year.
The Gujarat High Court quashed the reopening, emphasizing equitable construction. It held that once full disclosures were made during original assessment, reopening cannot be based on a mere change of opinion or borrowed satisfaction from another officer’s findings. Section 147 must be interpreted to protect taxpayers from arbitrary reassessment powers. The Court underscored that equitable construction demands harmonizing statutory language with principles of fairness and preventing reopening to “fish out evidence” without concrete reasons. This prevents misuse of statutory provisions against assessees.
3. Conclusion:
Across these cases, courts explained equitable construction as a guiding principle where statutory interpretation should balance literal meaning with fairness and legislative intent. It is particularly vital in tax law to prevent outcomes that are unjust, discriminatory, or contrary to the purpose of the statute. Equitable construction does not rewrite the law but ensures that interpretation aligns with both justice and the statute’s objectives, avoiding absurd or harsh consequences.
Equitable construction plays a transformative role in bridging the gap between the letter of the law and its spirit. It acts as a guiding light for courts to prevent the misuse of statutory provisions and avoid inequitable or absurd results. Through landmark rulings such as Nila Infrastructures Ltd. v. ACIT and InterGlobe Aviation Ltd. v. Addl. CIT, the judiciary has consistently upheld that statutes, including taxing statutes, must be interpreted to align with commercial realities and social justice. This approach harmonizes strict legal mandates with equitable considerations, ensuring that neither taxpayers nor the Revenue gain undue advantage through technicalities. Ultimately, equitable construction strengthens the integrity of the legal system by promoting certainty, fairness, and justice. It reminds us that the law is not merely a mechanical set of rules but a dynamic instrument designed to serve society’s broader goals, ensuring that justice prevails in both form and substance.