Interpretation of Statutes
(45) Construction to avoid absurd results
1. Introduction:
Statutory interpretation is one of the most significant judicial functions, as it determines how the legislature's intent is given life through the courts. A fundamental principle in this process is that construction of a statutory provision which leads to an absurd, unjust, or impracticable result must be avoided. The judiciary, while bound by the text of the law, must ensure that literal interpretation does not defeat the object and spirit of legislation. This doctrine rests on the presumption that the legislature, as a rational body, does not intend to create irrational consequences or inequitable outcomes. Courts, therefore, often employ purposive interpretation, harmonizing the provision with its context and purpose. Numerous landmark decisions, including K.P. Varghese v. ITO, CIT v. J.H. Gotla, and CIT v. HCL Technologies Ltd., have reiterated this rule, emphasizing that laws must be construed to advance justice, avoid anomalies, and promote coherent, consistent application of statutory schemes.
2. Description:
(i) Calcutta Electric Supply Corporation Ltd. v. CIT (1989) 179 ITR 580 (Cal):
It is well-settled that construction of a statutory provision leading to an absurd result should be avoided.
The words "regular assessment" used in section 214 of the Income-tax Act, 1961, do not connote the first assessment only. Where the entire assessment itself has been set aside by the Commissioner of Income-tax under section 263 of the Act, it cannot be the intention of the Legislature that interest payable under section 214 of the Act alone will remain intact while the assessment itself is non-existent in the eye of law. Unless interest is quantified, no payment can be made.
Such quantification can only be made after assessment is made and the tax payable is determined. It cannot be the intention of the Legislature to enjoin the Central Government to pay interest under section 214 even in the absence of an order of assessment. Such a view is also fortified by the provisions of section 215 of the Act, where the assessee has to pay interest when the advance tax paid by him falls short of the tax determined on regular assessment. The words "regular assessment" are used in section 215 also and it is difficult to visualise a situation where the assessee would be asked to pay interest under section 215 of the Act when the regular assessment itself had been vacated by the Commissioner under section 263 of the Act. The provisions of section 215 are in pari materia with the provisions of section 214 of the Act and it is quite logical to presume that no interest is payable by either the Government or the assessee when the regular assessment has been vacated under section 263. If the meaning of the words "regular assessment" is restricted only to the very first assessment made by the Income-tax Officer, then, by arbitrary and fanciful additions to the returned income of an assessee, the tax payable may be determined at a very high figure denying the assessee any interest under section 214.
If the tax determined in such arbitrary assessment is sacrosanct, the whole section will then be reduced to a mere absurdity as the wrong done cannot be set right by appellate or revisional orders. It is well-settled that construction of a statutory provision leading to an absurd result should be avoided.
When the assessment itself is set aside and the total income computed in the regular assessment has ceased to exist, it follows that the interest allowed to the assessee as per the regular assessment cannot stand by itself having independent determination. Determination of interest is a part of the process of assessment and consequential quantification of the tax liability of an assessee; where assessment is non est, interest determined on the basis of such assessment cannot survive. Interest under section 214 of the Act, therefore, cannot be held to be payable to an assessee up to the date of the regular assessment even if the regular assessment has been set aside by the appellate authority or by the Commissioner in revision.
(ii) CIT v. J.H. Gotla (1985) 156 ITR 323 (SC):
The assessee, running an oil mill, incurred heavy losses in earlier years, which were carried forward. Later, he gifted part of the oil mill machinery to his wife and minor sons, who, along with another person, formed a partnership and carried on the same business. Under Section 16(3) of the 1922 Act, the income of the wife and minor children from this firm was included in the assessee’s total income. The assessee sought to set off his earlier losses against this income. The Revenue denied the set-off, arguing that the business was not carried on by the assessee himself. The Supreme Court held that strict literal interpretation would lead to an absurd and unjust result, defeating the object of the law. It ruled that the profits of the wife and minor children included under Section 16(3) must be treated as the assessee’s own business income, permitting set-off under Section 24(2)
(iii) Oxford University Press v. CIT (2001) 247 ITR 658 (SC):
Oxford University Press, operating in India, claimed exemption under Section 10(22) as part of the University of Oxford, arguing that it existed solely for educational purposes. The Revenue contended that it merely ran a commercial press and was not engaged in educational activities in India. The High Court denied the exemption. The Supreme Court held that granting tax exemption to commercial establishments under the guise of universities would lead to manifestly absurd and discriminatory results, as it would treat profit-making entities as equal to genuine educational institutions. The Court emphasized that even foreign universities could claim exemption, but only if they imparted education or engaged in educational activity in India. Since Oxford University Press in India was not directly involved in education, it was not eligible for exemption. This interpretation avoided irrational outcomes and upheld the intent of Section 10(22).
(iv) CIT v. HCL Technologies Ltd. (2018) 404 ITR 719 (SC):
The assessee, engaged in software exports, claimed deductions under Section 10A. The issue arose whether certain expenses excluded from “export turnover” should also be excluded from “total turnover.” Revenue argued otherwise, which would lead to inflated deduction calculations. The Court held that excluding expenses only from export turnover but not from total turnover would create a mathematical absurdity, making the formula unworkable. Harmonious construction required that what is excluded from export turnover must also be excluded from total turnover. This ensured the formula achieved its intended purpose of reflecting true export profits. The Court rejected a narrow literal reading and adopted a purposive interpretation to prevent irrational and illogical results, protecting the integrity of Section 10A calculations.
(v) K.P. Varghese v. ITO (1981) 131 ITR 597 (SC):
The assessee sold a house to his daughter-in-law and children for ₹16,500, the same price he originally paid. The ITO assessed capital gains by substituting the fair market value of ₹65,000, relying on Section 52(2) of the Income-tax Act, which allowed substitution if the fair market value exceeded the declared consideration by 15% or more. There was no evidence of understatement of consideration or tax avoidance. The Supreme Court held that literal interpretation of Section 52(2) would lead to manifestly unreasonable and absurd results, such as taxing honest transactions. The Court ruled that Section 52(2) applies only where consideration is understated and the assessee actually received more than declared. This construction aligned with the purpose of preventing tax evasion rather than penalizing genuine transactions. The burden of proving understatement rests on the Revenue. This purposive interpretation avoided irrational consequences and ensured fairness.
(vi) CIT v. Bharti Hexacom Ltd. (2023) 458 ITR 593 (SC):
Telecom operators, including Bharti Hexacom, paid one-time entry fees and annual variable licence fees under the 1999 Telecom Policy. They claimed the annual fees as revenue expenditure. The Delhi High Court classified the fee as partly capital (pre-31.07.1999) and partly revenue (post-31.07.1999). The Revenue contended that both were capital expenditure under Section 35ABB since the licence was non-transferable and non-assignable, and default could result in revocation. The Supreme Court rejected the artificial bifurcation, holding that both payments were integral to acquiring and maintaining the telecom licence, a composite capital asset. It observed that any interpretation allowing dual classification would create absurd and unworkable results, contrary to legislative intent. Therefore, both entry and variable licence fees were capital in nature and to be amortized under Section 35ABB. This avoided conflicting classifications and ensured logical, consistent application of the statute.
(vii) Keshavji Ravji & Co. v. CIT (1990) 183 ITR 1 (SC):
A partnership firm paid interest to partners on capital contributions while also receiving interest from partners on borrowings. The ITO disallowed the gross interest paid without setting off interest received, under Section 40(b). The firm argued only the net interest should be disallowed, as both transactions were mutual and involved the same partnership funds. The Supreme Court held that interpreting Section 40(b) to disallow gross interest without netting would lead to irrational and unjust outcomes, treating mutual transactions as unrelated. It ruled that where transactions have elements of mutuality, only the excess interest paid should be disallowed. This purposive reading aligned with the true relationship between partners and the firm. The Court emphasized that statutory provisions must be construed to reflect their substance and context, avoiding mechanical interpretations that create absurd results.
(viii) Vinubhai Mohanlal Dobaria v. CCIT (2025) 473 ITR 394 (SC):
The assessee filed delayed returns for AY 2011-12 and 2013-14. Prosecution was initiated under Section 276CC for failure to file returns on time. The compounding application for AY 2013-14 was rejected on grounds that it was not a “first offence” as per 2014 guidelines, since a show-cause notice for AY 2011-12 was already issued before the 2013-14 return was filed. The Supreme Court held that an offence under Section 276CC is committed on the day immediately following the statutory due date, irrespective of when the return is actually filed later. Interpreting otherwise would allow assessees to manipulate timings to escape liability, an absurd consequence contrary to legislative intent. Since both offences were committed before the first show-cause notice, the AY 2013-14 default qualified as a “first offence,” and the compounding application was wrongly rejected.
3. Conclusion:
The rule against absurdity serves as a safety valve in statutory interpretation, ensuring that rigid literalism does not result in chaos or injustice. By reading provisions contextually and purposively, courts safeguard the true legislative intent while preventing misuse of statutory language. Decisions such as CIT v. Bharti Hexacom Ltd., Vinubhai Mohanlal Dobaria v. CCIT, and Oxford University Press v. CIT demonstrate how this principle operates across diverse tax and corporate laws. This approach balances legislative supremacy with judicial responsibility, ensuring that while courts do not rewrite statutes, they also prevent interpretations that render laws oppressive, contradictory, or unworkable. In a dynamic legal system, this doctrine maintains coherence and public trust by ensuring that justice is served not just through technical compliance, but through rational, equitable outcomes. Ultimately, avoiding absurdity in interpretation upholds the rule of law, fostering consistency and fairness in legal administration.