Commissioner of Customs v. Dilip Kumar (2018): ambiguity in a tax exemption favours the Revenue

For decades the interpretation of fiscal statutes in India carried an internal contradiction. Everyone agreed that a tax must be imposed by clear words and that a citizen could not be taxed by inference. But a parallel line of authority extended the same benefit-of-the-doubt logic to exemptions, reasoning that an exemption is simply the obverse of a charge and should equally be read in the subject's favour where its language was unclear. The two propositions could not comfortably coexist. In Commissioner of Customs (Import), Mumbai v. M/s Dilip Kumar and Company, decided on 30 July 2018, a five-judge Constitution Bench of the Supreme Court resolved the conflict, drew a clean line between charging provisions and exemption clauses, and overruled the precedent that had blurred it.

The facts in brief

The reference arose from a customs classification and exemption dispute. The importer had brought in concentrate declared as "Vitamin AB2D3K Animal Grade" and claimed the benefit of a concessional rate of duty under an exemption notification. The question that mattered for the Court was not the chemistry of the product but the method of construction: how should a court read an exemption notification whose language is capable of more than one meaning?

The appeal first came before a three-judge bench. That bench doubted the correctness of the rule laid down in Sun Export Corporation v. Collector of Customs, (1997) 6 SCC 564, where a three-judge bench had held that in case of doubt an exemption notification must be read in favour of the assessee. Recognising that the point went to the foundations of fiscal interpretation and could not be settled by a coordinate bench, the three-judge bench referred the interpretive question to a larger bench. The Constitution Bench was constituted to answer it. The underlying factual appeal was remitted for application of the principle the Court would settle.

The question

The reference distilled to a single, sharply framed issue. Where an exemption notification under a taxing statute is ambiguous — where its words are genuinely capable of two reasonable readings — does the benefit of that ambiguity go to the assessee claiming the exemption, or to the Revenue resisting it? And was Sun Export, which had answered in favour of the assessee, correctly decided?

Answering that required the Court to confront a logically prior question: are exemption provisions to be interpreted by the same canon as charging provisions, or do they stand on a different footing?

What the Court held

The Constitution Bench laid down the law in a small number of propositions of considerable reach.

First, every taxing statute — including its charging, computation and exemption provisions — must be interpreted strictly. There is no room for intendment, no scope for reading equitable considerations into fiscal language, and no presumption either way beyond what the words carry.

Second, where there is ambiguity in a charging provision, the benefit of the doubt goes to the assessee. The State must tax by clear words; if the charging language genuinely fails to reach the subject, the subject is not taxed. This is the orthodox rule and the Court left it untouched.

Third — and this is the heart of the decision — where there is ambiguity in an exemption notification or clause, the benefit of that ambiguity goes to the Revenue. The Court reasoned that an exemption is an exception to the general rule of liability, and the burden of bringing a case within the exception lies on the person who claims it. The assessee must therefore prove that its case falls squarely within the four corners of the notification. If two views are reasonably possible, the view favouring the Revenue is adopted at the threshold stage of eligibility. An exemption cannot be enlarged by intendment, implication or strained construction beyond the plain language of the notification. In so holding the Court expressly reaffirmed Hansraj Gordhandas v. H.H. Dave, (1969) 2 SCR 253.

Fourth, the Court overruled Sun Export Corporation v. Collector of Customs, (1997) 6 SCC 564. Sun Export had held that doubt in an exemption notification must be resolved in favour of the assessee; that proposition was declared incorrect.

Analysis

The elegance of Dilip Kumar lies in the asymmetry it formalises. Strict interpretation, the Court recognised, is not a single rule that always points the same way; it is a discipline of reading words closely, and the direction in which it cuts depends on which kind of provision is being read and on who bears the burden of bringing a case within it.

A charging provision asserts the State's claim on the subject's property. The settled premise of fiscal jurisprudence is that the State carries the obligation of clarity: a citizen may be taxed only by language that plainly reaches them. So when a charge is ambiguous, the gap is the State's to bear, and the subject escapes. An exemption operates in the opposite register. Once liability is established by a valid charge, an exemption is a concession that lifts the subject out of a charge that would otherwise apply. The person seeking the concession is asking to be treated as an exception to the general rule, and it is orthodox that whoever claims the benefit of an exception must establish entitlement to it. The burden therefore sits with the assessee, and an unresolved ambiguity means the assessee has not discharged that burden — so the exemption is not made out.

Seen this way, Sun Export had committed a category error. By importing the pro-subject rule for charges into the domain of exemptions, it gave the assessee the benefit of the doubt in precisely the setting where the assessee bore the burden of proof. The Constitution Bench restored coherence by recognising that the two situations are governed by different allocations of burden, and that the canon of strict construction must follow the burden rather than override it. The reaffirmation of Hansraj Gordhandas signals that this was not a doctrinal innovation but a return to a principle the Court regards as long settled — that an exemption is to be read on its plain terms and cannot be stretched by implication.

It is worth being precise about the stage at which the rule bites. The Court located the pro-Revenue tilt at the threshold of eligibility — the question whether the assessee qualifies for the exemption at all. The rule does not license a hostile reading of every word once eligibility is conceded; it governs the prior question of whether the claimant has brought itself squarely within the notification's language.

Why it matters

Dilip Kumar is now the controlling authority on how exemption notifications are read across the whole of Indian indirect and direct taxation — customs, the former central excise and service tax regimes, and the interpretive habits carried forward into GST. Its practical consequence is a real and durable shift in litigation posture. An assessee resisting a duty demand can still argue that an ambiguous charge does not reach it and claim the benefit of the doubt. But an assessee asserting an exemption can no longer lean on ambiguity; it must demonstrate, affirmatively and on the plain words, that it falls within the four corners of the notification.

For advisers, the decision recasts how concessional-rate and exemption claims are built. Eligibility must be established on the language of the notification itself, not on a sympathetic or purposive gloss, because a court confronted with two readings will now prefer the one that denies the exemption at the eligibility stage. For the Revenue, it confers a structural advantage in exemption disputes that Sun Export had withheld for over two decades. And as a matter of method, the case stands as the Supreme Court's clearest modern statement that strict construction in tax is not a slogan that always favours the taxpayer — it is a discipline whose direction is fixed by the burden of proof.

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Sources

• Commissioner of Customs (Import), Mumbai v. M/s Dilip Kumar and Company & Ors., (2018) 9 SCC 1; 2018 SCC OnLine SC 747 (Supreme Court of India, Constitution Bench, 30 July 2018).
• Bar & Bench, "Ambiguity in tax exemption notification to be interpreted in favour of State; SC overturns Sun Export."
• LiveLaw, "Benefit of ambiguity in tax exemption notification should go in favour of Revenue Department: SC Constitution Bench."
• SCC OnLine Blog, "Interpretation of fiscal exemptions: another debate commences."