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DELINEATION
CHAPTER II
Definitions
ARTICLE 3
GENERAL DEFINITIONS
(1) For the purposes of this Convention, unless the context
otherwise requires-
(a) the term "person" includes an individual, a company and any other body of
persons;
(b) the term "company" means any body corporate or any entity which is treated
as a body corporate for tax purposes;
(c) the terms "enterprise of a Contracting State" and "enterprise of the
other Contracting State" mean respectively an enterprise carried on by a resident of
a Contracting State and an enterprise carried on by a resident of the other Contracting
State;
(d) the term "international traffic" means any transport by a ship or aircraft
operated by an enterprise which has its place of effective management in a Contracting
State, except when the ship or aircraft is operated solely between places in the other
Contracting State;
(e) the term "competent authority" means-
(i) (In State A): -----------------------------------------------------
(ii) (In State B):-----------------------------------------------------
(2) As regards the application of the Convention by a Contracting State, any term not
defined therein shall, unless the context otherwise requires have the meaning which it has
under the law of that State concerning the taxes to which the Convention applies.
22A. Scope
Article 3 groups together the general provisions required for the interpretation of the
terms used in the Convention which are deemed to be necessary. Meaning of some important
terms has been explained exclusively in separate article, as assigned to them. Thus, the
term ‘fiscal domicile’ has been defined in Article 4 and ‘permanent
establishment’ in Article 5. The meaning of certain terms appearing in other Articles
are classified by the provisions of those Articles, such as ‘immovable
property’, ‘dividends’, ‘interest’, ‘fees for technical
services’. These expressions have been defined under the respective Articles as to
‘mean’ or ‘include’ or ‘does not include.’
Definition is a statement that sets forth and delimits the meaning of a word, phrase or
other symbolic expression as used in a given discourse or context. Definitions serve to
instruct persons who are ignorant or uncertain of a usage, to determine the consistency of
usage and reasoning in which a symbol or term is used and to help systematise a body of
knowledge.
Definition performs two functions, namely, (i) the avoidance of ambiguities; and (ii) the
avoidance, by means of abbreviation of tides repetitions. The principal function of the
definition is to steer away some of vagueness and ambiguity which would otherwise surround
the terms defined.
If a definition is provided to an expression, the courts are not free to construe the
expression otherwise unless it is so warranted by the use of the expression such as
‘except otherwise provided’ or ‘except if the context otherwise indicates.
An interpretation clause which extends the meaning of a word does not take away its
ordinary meaning. An interpretation clause is not meant to prevent a word from receiving
its ordinary, popular and natural sense whenever that would be properly applicable, but to
enable the word as used in the statute when there is nothing in the context or the
subject-matter to the contrary, to be applied to something to which it would not
ordinarily be applicable.
In the absence of any definition, a word or expression must be given the same meaning
which it receives in ordinary parlance or is understood in the sense in which the people
conversant with the subject-matter of the statute understand it. It is hazardous to
interpret a word in accordance with the definition in another statute or statutory
instrument and more so when such statute or statutory instrument is not construed as used
in a taxing statute or a notification issued thereunder it should be understood in its
commercial sense.
23. Person
The scope of the agreement as regards to the person to whom it is applicable is
generally described in Article 1 with the narration ‘this Convention shall apply to
persons who are residents of one or both of the Contracting States’. The expression
‘person’ is further defined in Article 3 as generally to include an individual,
a company and any other entity which is treated as a taxable unit under the taxation laws
in force in the respect Contracting State. Article 3 determines who is the
‘person’ and Article 4, his residence by examining whether a person in a
Contracting State is liable to tax therein by reason of his domicile, residence, place of
management or any other criterion of a similar nature.
The term ‘person’, defined under section 2(32) of the Ordinance, includes the
following:
- An individual
-A Hindu undivided family
-A company
-A firm
-An association of persons
-A local authority
-An artificial juridical person
This definition is inclusive. When a world is defined to include something, the definition
is extensive. A definition or interpretation clause which extends the meaning of a term,
does not take away its ordinary meaning. It is well
settled that the world ‘include’ in the interpretation clause is entitled to be
enumerative and not exhaustive. It has an extending force and it does not limit the
meaning of the term to the substance of the definition. When it is intended to exhaust the
signification of the world interpreted, the word ‘means’ is
used.
23.1. Individual - ‘Individual’ means natural person.
Whether an entity other than a natural person is deemed to be individual, depends upon the
domestic laws. In Pakistan the expression ‘individual’ is restricted only to a
human being and is not wide enough to include a group of individuals forming a unit. For
that entity, the appropriate term is "body of individuals" which is
conspicuously missing in section 2(23). In the repealed Act of 1922 it was separate
taxable unit.
it is well-settled that the expression "individual" under the Income Tax
Ordinance 1979 is restricted to a natural human being. This is manifest from the language
of section 2(40)(a)(i) & (ii) which makes the test of residence dependent upon actual
stay in terms of day for an individual during an income year. In case of "artificial
juridical persons" or even "body of individuals", if to be included in this
expression of individual, this test cannot be applied. Hence the intention of Legislation
is clear that "individual" should only mean a singular natural person.
23.2 Local authority - Local authority means a municipal
committee, district board, body of port commissioners or other authority legally entitled
to, or entrusted by the Government with, the control or the management of municipal or a
local fund. The authorities must have separate legal existence as corporate bodies. They
must not be mere governmental agencies but must be legally independent entities. Next,
they must function in a defined area and must ordinarily, wholly or partly, directly or
indirectly be elected by the inhabitants of the area. Next, they must enjoy a certain
degree of autonomy with freedom to decide for themselves questions of policy affecting the
area administered by them. The autonomy may not be complete and the degree of dependence
may vary considerably, but an appreciable measure of autonomy must be in existence. Next,
they must be entrusted by stature with such governmental functions and duties as are
usually entrusted to municipal bodies, such as those connected with providing amenities to
the inhabitants of the locality, like health and education services, water and sewerage,
town planning and development, roads, markets, transportation, social welfare services,
etc. Broadly, we may say that they may be entrusted with the performance of civic duties
and functions which would otherwise be governmental duties and functions. Finally, they
must have the power to raise funds for the furtherance of their activities and the
fulfillment of their projects by levying taxes, rates, charges or fees. This may be in
addition to moneys provided by Government or obtained by borrowing or otherwise. What is
essential is that the control or management of the fund must vest in the authority
[section 3(31) of the General Clauses Act, 1897].
23.3. Association of persons - ‘Association of
persons’ means an association in which two or more persons join in a common purpose
or common action, the object of which is to produce income, profits or gains.
Thus, an element of joint venture for the profit is necessary to
constitute an association of persons. An association
of persons can be formed only when two or more individuals voluntarily combine together
for a purpose. Volition on the part of members of the association is an essential
ingredient. Even a ‘minor’ can join an
‘association of person’ if his lawful guardian gives his consent.
It is always open to the members of association to withdraw from the same. No one can be
compelled to continue as a member. Coming together
or combining is a consensual act and depends upon the volition of the parties. Combination of persons for the purpose of producing
income by their joint act or venture in that direction is essential though such a
combination may not be a consequence of a contract. Association of persons need not
necessarily be on the basis of a contract of partnership. But when persons combine for
producing income, it should be assumed that it is a consensual act on their part and is
the result of understanding between them.
Co-sharers of an estate, widows succeeding to the
estate of the deceased, shareholders jointly
receiving dividends from shares do not constitute
an association or persons, as they do not form a unit for the promotion of any joint
enterprise to earn income, profits or gains and the collection of income from the estate
by one of the sharers or even by a common employee will not make that income from a joint
venture and each of the shares gets his income as an individual and not as an association
of persons. But business which is carried on by joint receivers on behalf of co-heirs or a firm’s business carried on by
receivers on behalf of the partners of the dissolved firm or business carried on by a group on joint basis, management of a business of a Hindu undivided family after its
partition being in the common hands are
illustrative examples of such business or management being said to be carried on by an
association of persons.
24. Enterprise of a contracting state
The term has been defined in sub-clause (c) of Article 3(1) to mean an enterprise
carried on by a resident of a Contracting State. An enterprise is a business undertaking
or a business organisation. The expression refers to an entire organisation rather than a
sub-division thereof. A group of business enterprises operating under a common control, as
for example, a company and its subsidiaries, is an enterprises for the purpose of the
double taxation agreements. Normally, an entity which is a division of the activities of a
natural person, such as proprietorship, partnership, joint venture, trust or corporation
carrying on any economic activity which may be having a separate and distinct existence
and be distinguished from a larger identity such as head office, controlling corporation
and may, therefore, be an establishment, are collectively taken an enterprise, if they
operate under the common control.
25. Terms not defined in double taxation agreement have the meaning
as defined in domestic law
There is a general clause to the effect that any term not defined in the agreement
shall, unless the context otherwise requires, has the meaning which it has for the
purposes of the law in force in that state relating to taxes which are the subject-matter
of Convention. A question arises whether any definition in the Income Tax Ordinance or
cognate Acts introduced or amended subsequently to the signing of the Convention which was
not in force or was in force in unaltered form originally will govern the transactions,
i.e., whether every definition in the Ordinance whenever it is introduced by way of
amendment or otherwise, will operate as a definition for considering the import of a term
used in the double taxation agreement. Broadly speaking, legislation by referential
incorporation falls in two categories: First, where a statute by specific reference
incorporates the provisions of another statute as of the time of adoption. Second, where
as statute incorporates by general reference the law concerning a particular subject as a
genus. In the case of the former, the subsequent amendments made in the referred statute
cannot automatically be read into the adopting statute. In the case of letter category, it
may be presumed that the legislative intent is to conclude all the subsequent amendments
also, made form time to time in the generic law on the subject adopted by general reference.
The principle of construction of a reference stature has been intelligently summed up by
Sutherland, thus: A statute which refers to the law of a subject generally adopts the law
on the subject as of the time the law is involved. This will include all the amendments
and modifications of the law subsequent to the time the reference statute was enacted.
When a provision draws reference to another in the same Act or in other Act, a distinction
has to be drawn between a mere reference or citation of one statute into another and
incorporation. In case of the former, any modification, amendment or repeal would have
similar effect on the provision referred to or cited, while in the case of latter the
provision incorporated would be unaffected.
The legislative device of incorporation by reference is well known device
where the Legislature instead of repeating provision of a particular statement in another
statement incorporates such provisions in the later statements by reference to earlier
statement or another statute. It is a device adopted for the sake of convenience in order
to avoid verbatim reproduction of the profusions of the earlier statement or of the
statute in the later statement or enactment. But the
expression ‘unless the context otherwise requires’ is intended to be a
qualificatory or excepting provision for incorporation by reference.
Though the definition to an expression as provided in the relevant Acts of the Contracting
States, and not so provided in the double taxation agreement will have relevance in
interpreting the provisions of the agreement, it does not mean that every definition which
has undergone modification or which has newly been inserted would operate as a definition
for considering the import of the term used in the double taxation agreement. It should be
understood that there is legislation by incorporation of the statutory provisions of the
statutes as it stands at the time of signing the double taxation agreement. Any change in
the statute or the definition would not affect the transaction between the two parties.
Their effect would otherwise be determined by the old definitions.
The rights and obligations of the contracting parties get crystalised on the basis of what
the law is in operation at the time of signing such contract. The double taxation
agreement operates on its own terms and articles. The Parliament of one country cannot
alter the wording of the double taxation agreement without the consent of both parties to
it. Though the Legislature of one country has
all the powers to modify, amend or enact a provision and to mandate its operation with
retrospective effect, but the area of its jurisdiction cannot extend beyond its territory
and so amended the other country which is a party to such agreement or treaty consents its
operation.
26. Interpretative principles of domestic laws -- Application to tax
agreements
Article 3(2) of the UN Model is a general interpretative clause, and applies only when a
term has not been defined in an agreement, though used in it. Domestic laws relating to
taxes which are the subject-matter of the agreement (and not any other) govern
interpretation of such terms. It means that if a term used in the agreement has a meaning
outside the tax laws, that meaning should give way to the meaning as understood under the
tax laws. But if it has meaning only outside the tax laws or under the tax laws other than
those relating to taxes covered under the agreement, the rule of Article 3(2) has no
application.
The applicability of the interpretative principles of the domestic tax laws is limited to
the terms used in the agreement which have not been defined in the agreement. The bounds
of their applicability are further subjected to the context if such context requires
ignoring them. Article 3(2) governs only the interpretation of the terms used in the
agreement. The words which are not defined in the agreement nor in the tax laws relating
to taxes covered under the agreement must be understood in the context in which these
occur. It is well established that the words occurring in a statute have to be understood
with reference to the objects of the Act and in the context in which they occur, in the
absence of any definition in that statute. The definition given for the terms in one
statute cannot automatically be imported for the interpretation of the same words in
another statute. In construing the words in a statute the state of things existing at the
time of passing of the statute and the background and the objects of the statute have to
be taken into consideration. It is a sound and
indeed a well known principle of construction that meaning of words and expressions used
in an Act must take their colour form the context in which they appear. Words used in a statute must, therefore, take colour from the objects
of the Act and it cannot be taken to have a uniform meaning in whatever statute it occurs. Sub-clause (2) of Article 3 of the UN Model
provides a guide to the extent the law of the Contracting State is applicable. The
parameters for its application have been set out by the following expressions used
therein:
‘In the application of the provisions of the Convention’
‘Unless the context otherwise requires’
‘The law in force in the State relating to the taxes’
The implications of these expressions are discussed below:
26.1 ‘In the application of the provisions of the
Convention’- The expression ‘application’ conveys determination of tax
liability of a person in respect of income which is likely to be assessed either in the
country of his residence or in that of where its source situates or in both in accordance
with the provisions of the agreement. The person’s obligations under the domestic tax
laws are abridged by the agreement provision. The tax authorities or the courts, whenever
a question arises before them relating to tax imposed on the person who is subject to
agreement in terms of domestic laws, determine such question by making a reference to the
provisions of the agreement or in other words, by applying its provisions. Whether or not
agreement is applicable or the income which is exempted from tax by any provision thereof,
also means application of the agreement. Every question concerning tax, about its extent,
about its exemption, about the person who is liable which requires reference to agreement
or interpretation of is provisions, is said to have been decided by its application.
Articles 1 and 2 use the expression. "This Convention shall apply ..." Thus, the
application of the convention relates to the persons who are residents of one or both of
the Contracting States, [Article 1], or the taxes imposed on behalf of each of the
Contracting States, irrespective of the manner in which they are levied [Article 2]. The
determination of the residential status of a person or the nature and extent of taxes
imposed by the Contracting State, requires reference to the provisions of the agreement
and their interpretation. The determination thus arrived at has been done by application
of the agreement provision. Domestic laws, therefore, are subject to such agreement
provisions.
26.2 ‘Unless the context otherwise requires’ - The
interpretation of the expression ‘otherwise’ can be explained by reference to
the particular context of the agreement provisions. if a definition is provided to an
expression, the courts are not free to construe the expression otherwise unless it is so
warranted by the use of the expression such as ‘except otherwise provided’ or
‘except if the context otherwise indicates’.26 In the absence of the definition, the authorities and the courts
should take the aid of the domestic laws relating to similar taxes as are the
subject-matter of the agreement bearing in mind that a word may be used in different
contexts and perspectives and that the authority or the court should select only that
meaning which is relevant to the context in which it has to interpret that word. An
endeavour has to be made to find out the exact sense in which the word has been used in a
particular context. The expression used in
statute should ordinarily harmonies with the object of the statute and which effectuates
its aims and objects which cannot be ignored. the
very conception of interpretation connotes that the words have to be construed in the
context in which they are used. They derive colour from their context. A word, like a man, is very often known by the company it keeps and
accordingly, a word is very often to be understood in the context and collocation it is
used. This rule of interpretation is known as noscitur a sociis. The interpretation of expression ‘otherwise’ can, however be
explained by reference to a particular context.
Unless the context otherwise requires, the words and expressions in the absence of their
definition in the agreement are to be understood in the manner as is done under the
domestic tax laws. The context may require an interpretation different from what is done
according to domestic laws, if such a reference fails to provide a solution to a tax
problem.
it is well established that, in the absence of definition in the statute, the words
occurring in a statute will have to be understood with reference to objects of the Act and
in the context in which they occur. Consequently definition given for the words in one
statute cannot automatically be imported for interpreting the same words in another
statute. It is not a sound principle of
construction to interpret expressions used in one Act with reference to their use in
another Act. Neither the meaning, nor the definition of the term in one statute affords a
guide to the construction of the same term in another statute and the sense in which the
term has been understood in the several statutes does not necessarily throw any light on
the manner in which the term should be understood generally. One the other hand, it is a
sound and indeed a well known principle of construction that meaning of words and
expressions used in an Act must take their colour from the context in which they appear. It is, therefore, clear that the words used in
stature must take colour form the objects of the Act. other
aspects to be taken into account are the state of things existing at the time of passing
the statute, the background and the objects of the statute.
26.3 Reference to law of the State - The question
arose whether Article 3(2) suggests that the meaning of any term in the agreement or
definition of any other term not defined in the agreement but defined in tax laws or
understood thereunder should be taken to mean or understood in accordance with the law
prevailing at the time when the agreement was entered into. reference to another Act for
definition of the terms not defined in a statute, in the language as expressed in Article
3(2) of UN Model, as aforesaid is akin to legislation by incorporation. In such
legislation any subsequent amendment in the original stature referred to would not have
nay effect in interpreting the meaning to be given to particular terms as occurring in the
statute in which such incorporation is made. reference
to domestic laws could be understood as the law prevailing at the time of signing the
agreement, and not the law as amended from time to time. the reason is obvious. the aims, objects and intention of the
agreement could be well understood in the context of the law prevailing at the time when
it was drafted and signed. What the law could be during the period to follow, nobody could
have visualised without divine prescience. Secondly, interpretation of the agreement
according to the amended law tantamount to allowing the States to alter the scope of their
international obligations. Thirdly, in view of the terminology used in Article 3(2), it
should be considered that there was legislation by incorporation of the statutory
provision of the Income Tax Act, 1922 (now repealed) and Income Tax Ordinance, 1979 in
Pakistan as it stood at the time of signing of the agreement and no further changes in the
said Ordinance could be called in aid for interpreting the terms of the agreement .A
distinction has to be made between a reference or citation of one statute into another and
incorporation. In the former, modification or amendment in the statute which is referred
to will also have effect on the other, while in the latter, there is no such effect. Thus,
the amendment of a Act which is incorporated in later Act has no effect on the latter Act,
or on the provisions incorporated therein is subject to certain exceptions.
26.3-1 Law in force may mean law in force at the time of
construction of term - The other view which is more plausible is that the expression
‘laws in force’ in Article 3(2) means the law in force at the time of
construction of a term is to be done and that the term is not restricted to the law in
force at the time of execution of the agreement. The
‘law in force’ should related to ‘taxes which are subject to the
Convention’. Taxes covered under the Convention are those which are imposed on income
on behalf of the Contracting State [Article 2 of the UN Model]. Section 9 of the Ordinance
is such a section which imposes charge on the total income of a person, in Pakistan. The
imposition is to be done in accordance with and subject to the provision of the Ordinance.
Thus, the ‘law in force’ referred to in Article 3(2) should be the one which
according to section 9 conforms. Other provisions of the ordinance determines a
person’s liabilities and rights and not those which were in operation at the time of
signing of the agreement. it is difficult to ascertain what the law was at the time of
execution of the agreement, in case of very old agreements. the person may not be having
knowledge about such laws and, therefore, he cannot be fastened with liabilities and
obligations or be denied agreement benefits on the basis of the antiquated laws. But this
is not to say that every definition which has been modified or redefined in the Income Tax
Ordinance, 1979 or whenever a new definition is introduced subsequent to the ratification
of the agreement will operate as a definition for import of the term used in the
agreement.
26.3-2 Relevance of existing laws - However, certain
provisions of the agreement model are relevant in the context of the existing laws. Their
relevance is lost if the interpretation is attempted on the basis of the unamended laws.
For example, the expression ‘income from other corporate rights which is subjected to
the same taxation treatment as income from shares by the laws of the State of which the
company making the distribution is a resident’, in Article 10(3) of the UN Model,
would be meaningful only if read with reference to the existing laws and not with those at
the time of signing in the agreement. The law cannot remain immutable as the society
changes. the law must in a changing society marches in line with the changed ideas and
ideologies. The ideas that seem revolutionary become outmoded with the passage of time and
heresies of today become the dogmas of tomorrow. What proves to be adequate and suited to
the needs of a society at a given time and in particular circumstances turns out to be
wholly unsuited and inadequate in different times and under different circumstances. The
law prevailing at the time of signing an agreement may have been found inadequate and
unsuitable presently and has undergone a drastic change either through the process of
judicial interpretation or of legislative enactment. There may be major changes in the
domestic laws which may render their application in the unmodified form to the agreement
impossible. ‘Ambulatory’ as opposed to ‘static’ interpretation has,
therefore, to be assorted to. The maxim contemporanea exposition as laid down by Coke was
applied in construing ancient statutes but not to interpreting Acts which are
comparatively modern. Further, in modern progressive society it would be unreasonable to
confine the intention of a Legislature to the meaning attributable to the word used at the
time law was made and unless a contrary intention appears, an interpretation should be
given to the words used to take in new facts and situations, if the words are capable of
comprehending them. reference to domestic law in
Article 3(2) should, therefore, be taken to mean reference to the law as amended from time
to time. As for the doctrine on interpretation the agreement and the Income Tax Ordinance
form a single statute and there is no question of pressing into aid and concept of
legislation by incorporation. These are not two different statutes so that the provisions
of one could be incorporated into the other. Why it could be so said is because the power
of the Federal Government to enter into agreement with the Government of any country for
the avoidance of double taxation or for exchanging information for the prevention of
evasion or avoidance is derived from section 163. Any agreement thus entered into in
pursuance of section 163 becomes part of the Ordinance itself.
The charging section 9 puts the total income of an assessee to charge to tax in accordance
with the provisions of the Act, which means in accordance with section 163 also. By
necessary implication chargeability of income to tax should also be in terms of the double
taxation avoidance agreement, if any. Therefore, as section 163 is a part of the statute,
any agreement made thereunder is also its part, and the double taxation avoidance
agreement and the Income Tax Ordinance form a single statute. The question of pressing
into aid the concept of legislation by incorporation does not arise as such a question
would be relevant when the statutes are different.
27. Other expression not specifically defined
There are some expressions which have been used in the UN Model Convention or are used
in the agreements but have not been defined under the interpretative provisions. These are
dealt with in the following paras.
27.1 Undertaking - According to Webster Dictionary,
"undertaking" means anything undertaken; any business, work or project, which
one engages in or attempts; or an enterprise. Almost the same meaning is given in the Law
Lexicon by T.P. Mukherjee (3rd Edition). In re: Sreee Yeltamma Cotton, Woollen & Silk
Mills Co. Ltd., the Mysore High Court considered
the meaning of the word ‘undertaking’ and observed as under:
"... it is not in its real meaning anything which may be described as a tangible
piece of property like land, machinery or the equipment; it is in actual effect an
activity of man which in commercial or business parlance means an activity engaged in with
a view to earn profit. Property, movable or immovable, used in the course of or for the
purpose of such business can more accurately be described as the tools of business or
undertaking, i.e. things or articles which are necessarily to be used to keep the
undertaking going or to assist the carrying on of the activities leading to the earning of
profit." (p. 291) The meaning of the expression ‘undertaking’ is a going
concern as distinct from its assets and liabilities.
Thus, an undertaking is an activity of man which in commercial or business parlance means
an activity engaged in with a view to earning profits.
27.2 Industrial undertaking - The words ‘industrial
undertaking’ should be interpreted to mean any venture or enterprise which a person
undertakes to do not which has relation to some industry or has some industrial
consequences. The notion of an undertaking basically means that it has got to be a
concrete and tangible venture in the path of industry to make it an industrial undertaking.
An industrial undertaking, therefore, would normally be, in its ordinary acceptation, some
industrial concern or enterprise or adventure which is undertaken to be done by the person
concerned. Whether the industrial undertaking means only the physical assets or the human
assets involved in it or the principles of organisation which cover it are to a certain
extent unrealistic because industrial undertakings cover a complex of ideas both physical
and non-physical and one cannot be chosen at the cost of the other. It is a complex of
ideas and methods of practical execution and, therefore, must necessarily involve both
tangible and intangible consideration.
27.3 Source - The Legislature in using the word
‘source’ meant, not a legal concept, but something which a practical man would
regard as a real source of income. Legal concepts
must, of course, enter into the question as to whom a given source belongs. But the
ascertainment of the actual source of a given income is a practical hard matter of fact.
Property is one possible source of income. The work of persons or acts done by persons are
other possible sources of income, if a person has rights over property or in relation to
property, he may have derived income from that property the source is property or if a
person by himself or by his servants or agents does work of some kind or acts in some way
he may derive income from that work or act.
A source may, and commonly does, consist of several factors. The character of the source
may depend upon which of the factors is dominant. The earnings of a carpenter who owns his
tools, or of a taxi driver who owns his car, are treated as wholly derived from personal
exertion, although they are, to a certain extent, derived form property. And there are
many forms of income which are regarded as wholly derived form property, notwithstanding
the fact that an appreciable amount of personal exertion is involved in connection with
the property. Where income is derived from wages or salary, again the source has several
factors. Personal exertion may be involved in negotiating and obtaining the contract of
employment, in performing the stipulated services, and in obtaining the payment for them.
The source of wages may, therefore, consist of three elements of getting the job, doing
it, and getting paid for it. Which of these factors is the most important element of the
source in a given case depends upon the facts of that case Thus, if the source of income
consists substantially in the making of contracts, the place where the contracts are made
may be regarded the only significant factor. If it consists in first making contracts and
then carrying them into effect in circumstances such that both elements are substantial
factors in the source, an apportionment must be made. If
the making of the contract is an insignificant factor, and the only substantial
element is its performance, the place of performance is the only relevant locus of the
source. Thus, the source does not mean the geographical source of income but rather the
‘nature’ of income A person who neither owns anything in a country nor has he
done anything in the country cannot device from that country.
27.4. Purpose - The word ‘purpose’ means design of
effecting something. It does not mean ‘motive’ which is a force which impels a
person to adopt a particular course of action. ‘Motive’ is highly subjective in
character and can be found mainly from a course of conduct. But the purpose is more
apparent and has immediate connection with the result which is brought out.
the purpose of a contract or agreement or arrangement must be what
it is intended to effect and that intention must be ascertained from its terms. These
terms may be oral or written or may have to be inferred form the circumstances but when
they have been so ascertained, there purpose must be what they effect. The word
‘effect’ means the end accomplished or achieved. If an arrangement has a particular purpose, then that will be its
intended effect and if it has a particular effect, then that will be its purpose. The
motive of a person, the impelling force for the person to adopt a particular course of
action, is not important as the sole and dominant purpose of a transaction, i.e., the
design of effecting something to be achieved or accomplished. The overt acts must be
looked at to find the effect of a transaction, whether such effect is
‘calculated’ or designed or could be predicted.
27.5. ‘For the purpose of’ - The expression ‘for
the purpose of has been used frequently in the double taxation avoidance agreements and,
therefore, requires discussion as to reveal its true meaning and content. the proposition
‘for’ has many shades of meaning but when used with the active participle of a
verb, it means ‘for the purpose of’ and connotes the end with reference to which
something is done. The expression ‘activity for profit’ may, therefore, mean
that the activity may not result the profit but it must be carried on with the object of
earning the profit. Profit-making must be the end to which the activity must be directed
or, in other words, the predominant object of the activity must be making of profit. Where
an activity is not pervaded by the profit motive it cannot be said to be an activity for profit.
27.6. ‘For the purpose of business’ - The Supreme
Court of India in CIT v. Malayalam Plantations Ltd. explained
as to what would be the import of the words ‘for the purposes of business’.
Subba Rao, J. surveyed the English as well as Indian decisions in that behalf and drew
pointed attention to two English decision, namely, Southern H.M (Inspector of Taxes) v.
Borax Consolidated Ltd. which, according to the
learned judge, gives a more liberal meaning to the expression ‘for the purpose of the
trade’ so as to include the purpose of protecting the assets of the company carrying
on the trade, and also to the opinion of Lord Davey in Strong & Co. of Romsey Ltd. v.
Woodified (Surveyor of Taxes) where, over and
above another accepted meaning of the words ‘wholly and exclusively laid out for
business’, they were held to mean that the disbursement must be made for purposes of
earning profits, the test has been expanded to meet diverse situations, namely, whether
the expenditure was incurred for removing the obstacles and impediments in the conduct of
the business and whether the amount has been paid in his capacity as a businessman or in
his personal capacity. A reference was also made to the decision in IRC v. Anglo Brewing
Co. Ltd. as to the meaning of ‘for the
purpose of such business’ which includes for the purpose of keeping the trade going
and of making it pay. Subba Rao, J. thereafter summed up the position as under:
"The aforesaid discussion leads to the following result: The expression ‘for the
purpose of the business’ is wider in scope than the expression ‘for the purpose
of earning profits’. Its range is wide: it may take in not only the day to day
running of a business but also the rationalization of its administration and modernization
of its machinery; it may include measures for the preservation of the business and for the
protection of its assets and property from expropriation, coercive process or assertion of
hostile title; it may also comprehend payment of statutory dues and taxes imposed as a
pre-condition to commence or for carrying on of a business; it may comprehend many other
acts incidental to the carrying on of a business. However wide the meaning of the
expression may be, its limits are implicit in it. The intention shall be ‘for the
purpose of’ the business, that is to say, the expenditure incurred shall be for the
carrying on of the business and the assessee shall incur it in his capacity as a person
carrying on the business. It cannot include sums spent by the assessee as agent of a third
party whether the origin of the agency is voluntary or statutory; in that event, he pays
the amount on behalf of another and for a purpose unconnected with the business..."
In CIT v. Birla Cotton Spg. & Wvg. Mills Ltd,
the assessee-company spent some amounts towards expenses in engaging lawyers and
conducting appropriate proceedings before the Investigation Commission for its case
relating to the assessment years in question before the court and also in courts where the
vires of that statute under which the Commission was constituted were challenged. The
question arose as to whether the charges so incurred in connection with the proceedings
before the Investigation Commission could be deducted in computing the profits of the
business of the assessee. The Supreme Court of India ruled that the charges were in the
nature of expenses incurred for the preservation and protection of the assessee’s
business from any process or proceedings which might have resulted in reduction of its
income and profits. In any case, the expenditure was incidental to the business and was
necessitated or justified by commercial expediency since it was incurred by the assessee
in opposing a coercive Government action with the object of saving tax and safeguarding
the business and was, therefore, allowable. The Supreme Court of India further observed
that the earning of profits and the payment of taxes are not isolated and independent
activities of a business. Since these activities are continuous and take place from year
to year during the whole period for which the business continues, and if the assessee
takes any steps for reducing its liability to tax which resulted in more funds being left
for the purpose of carrying on the business, where is always the possibility of higher
profits.
27.7 ‘In relation to’, ‘pertaining to’ -
The expression ‘in relation to’ (so also ‘pertaining to’) is a very
broad expression which presupposes another subject-matter. These are words of
comprehensiveness which might both have a direct significance as well as indirect
insignificance depending on the context. It has been
interpreted to be the words of widest amplitude. In
this connection reference be made to 76 Corpus Juris Secundum at pp. 620 and 621 where
it is stated that the term ‘relate’ is also defined as meaning to bring into
association or connection with. It has been clearly mentioned that ‘relating to’
has been held to be equivalent to or synonymous with as to ‘concerning with’ and
‘pertaining to’. The expression ‘pertaining to’ is an expression of
expansion and not of contraction and not restrictive.
The words ‘pertaining’ and ‘in relation to’ have the same wide meaning
and are used interchangeably for among other reason, which may include avoidance of
repetition of the same phrase in the same clause or sentence, a method followed in good
drafting. these are used in expansive sense. The expression ‘pertaining to’ does
not mean ‘forming part of’.
27.8. ‘Incident’ or ‘incidental’ The
ordinary dictionary meaning of the words ‘incident’ and ‘incidental’,
as given in the Living Webster Encyclopedic Dictionary of the English Language, published
by the English language Institute of America, Chicago, is to the following effect:
"Incidental: a. Occurring or liable to occur in connection with something else;
happening in fortuitous or subordinate conjunction with something else; casual or
incidental; liable to happen or naturally appertaining to - n. Something incidental as a
circumstances; pl. incidental items, esp. expenses."
"Incident: n. A distinct occurrence or event; something that occurs casually in
connection with something else, an event or matter of accessory or subordinate character;
a distinct episode within a story or play; a seemingly minor occurrence likely to touch
off more serious consequences, as in international relations.
Liable or apt to happen; naturally appertaining; conjoined or attaching, esp. as
subordinate to a principal thing; befalling; falling or striking as of rays of light on a
surface."
Legal Glossary of 1970 published by the Official Language (Legislative) Commission,
Government of India, Ministry of Law, at page 131, defines ‘incidental’ to mean
‘occuring or likely to occur in fortuitous or subordinate conjunction with something
else.’
27.9 Attributable - The expression ‘attributable to’
is not synonymous with the expression ‘derived from’. Though both may seemingly
mean the same thing the former is wider in import and scope than the latter. Whenever the
Legislature intends to give a restricted meaning it uses the expression ‘derived
form’. The expression ‘attributable to’ is used whenever extended meaning
is intended to the ascribed. The profits and gains from an activity could be said to be
attributable to it, if there is a reasonable nexus between such profits and gains and the
said activity. If this nexus exists, the receipts from sources other than the actual
conduct of the aforesaid activity are taken to be the income attributable to it The attribution is the cause which leads to the
happening of an event. It must be the cause as distinct from being part of the
circumstances in or on which the cause operates. If a rope is weak and on that account
breaks when it is carrying a normal load or a load less than the normal load, the cause of
break is not the load but the weakness of the rope. If there is an abnormal load, there
are two causes: one the weakness of the rope and the other abnormally heavy load. cause
means a thing or person or circumstances which produces an effect (cause and effect are
co-relative terms) or which occasions something. The income may be the effect of or
occasioned by some activity, though the direct and effective nexus between the two may be
absent. the income could thus be said to be attributable to that source. If instead of
being reasonable, the nexus is direct and proximate, the income can be said to have been
derived from that source.
27.10. Derived - In the Living Webster Encyclopedic Dictionary
of the English Language by the English language Institute of America, Chicage, the word
‘derived’ given therein has the meaning given below:
‘Derive, v.t. - derived, deriving [L. Derivare]. To draw or obtain from a source or
origin; to take, as a word, from a particular source, form from a root, stem or the like;
chem; to obtain as one substance or compound, from another. To trace from a source or
origin, as a custom or word; declare to come from a particular source; to obtain by
reasoning; deduce - v.i. To come from a source; originate. Derived, a drawn, obtained, or
descended from a source."
Thus, the word ‘derived’ is not a term of art. It demands an enquiry into the
genealogy of the item or the product. But the enquiry should stop as soon as the effective
source is discovered, and be not extended into another matter, however, closely connected
with effective source in question is. The word
‘derived’ connotes obtaining or drawing or receiving from a source. When
something is stated to be derived form something else, the latter is a source, while the
former is that which follows from that source. Profits
and gains can be said to have been derived from an activity carried on by a person only if
the said activity is the immediate and effective source of the said profit or gain. There
must be a direct nexus between the activity and the earning of the profit or gain. The
income, profit or gain cannot be said to have been derived from an activity merely by
reasons of the fact that the said activity may have helped to earn the said income or
profit in an indirect or remote manner. The
expression ‘derived’ cannot be accepted as equivalent to
‘referable to’.
27.11. Investment - Investment is an asset held by an
enterprise for the accretion of wealth through distribution, such as interest, royalties,
dividends and rentals, for capital appreciation or for other benefits to the investing
enterprise such as those obtained through trading relationships. Enterprises hold
investments for diverse reasons. For some enterprises, investment activity is a
significant element of operation, such as insurance companies and banks. Some hold
investments as a store of surplus funds; while some others hold trade investments in order
to cement trading relationship or establishing a trading advantage. Investments are held
primarily to protect, facilitate or further existing business or trading relations often
called trade investments, are not made with the intention that they will be available as
additional cash resources, and this classified as short term. Other investments, such as
investment in properties are intended to be held to generate income and capital gain. They
are, therefore, classified long term even though they are marketable.
There can be no doubt that in its most comprehensive sense, the word
‘investment’ is generally understood as signifying the laying out of money in
such a manner that it may produce revenue whether the particular method be a loan or the
purchase of stocks, notes securities or other property. In popular sense, the word
‘investment’ must be understood as to mean conversion of money into some specie
of property from which income or gain is expected to be received. So long as the act of investment brings into existence a specie of
property, it would be an investment within the ordinary or commercial parlance.
27.12. Notwithstanding - The expression
‘notwithstanding’ is potent and it could mean only ‘despite’, ‘in
spite of’ and ‘nevertheless’. A
clause beginning with the expression ‘notwithstanding anything contained in this Act
and in some particular provisions in the Act or in some particular Act or in any law for
the time being in force or in any contract’, is more than not appended to a section
in the beginning with a view to giving the enacting part of the section in the case of
conflict an overriding effect over the provisions of the Act or the contract mentioned in
the non obstante clause or any contract or document mentioned in the enactment following
it will have its full operation or that the provisions embraced in the non obstante clause
would not be an impediment for an operation of the enactment.
The Supreme Court of India in Chandravarkar Sita Ratna Rao v. Ashalata held that the expression ‘notwithstanding’ is in
contradistinction to the phrase ‘subject to’, the latter conveying the idea of a
provision yielding place to another provision or other provisions to which it is made
subject.
It is well known that a non obstante clause is legislative device which is usually
employed to give overriding effect to certain provisions over some contrary provisions
that may be found either in the same enactment or some other enactment that is to say to
avoid the operation and effect of all contrary provisions.
When two or more laws operate in the same field and each contains a non obstante clause
stating that its provisions will override those of any other laws stimulating and incisive
problems of interpretation arise. Since statutory interpretation has no conventional
protocol cases of such conflict have to be decided in reference to the object and purpose
of the laws under consideration. For resolving such inter se conflict, one test may be
applied though the persuasive force of such test is but one of the factors which combine
to five affair meaning to the language of the law. That test is that the later enactment
must prevail over the earlier one.
27.13. Otherwise - the expression ‘otherwise’
occurring in a combination of words sometimes being regarded as indicating the application
of ejusdem genris rule. For instance, the expression ‘contract or otherwise’
occurring in section 10 of the erstwhile Estate Duty Act, 1953 was interpreted by the
courts to mean either a sale of something akin to sale. the interpretation of the expression ‘otherwise’ can,
however, be explained by reference to particular context.
27.14 Subject to - The expression ‘subject to’ was a
matter of discussion before the Indian Supreme Court in South India Corpn. (P) Ltd. v.
Secretary, Board of Revenue The learned judges of
Indian Supreme Court held that the expression ‘subject to’ conveys the idea of a
provision yielding place to another provision or other provision to which it is made
subject. The Indian Supreme Court in K.R.C.S. Bala Krishna Chetty & Sons & Co. v.
State of Madras held that the words ‘subject
to’ has reference to effectuating the intention of the law and the correct meaning is
‘conditional upon’. The provisions of section 5 of the madras General Sales Tax
Act, 1939, where contained the expression ‘subject to such restrictions and
conditions’ were the subject-matter of discussion before the Supreme Court of India.
The appellants in that case were found contravening the provisions of the rules and they
could not be said to have observed the conditions upon which the exemptions under the
licence was available. It was contended before the Indian Supreme Court that the words
‘subject to’ do not mean ‘conditional upon’ but ‘liable to the
rules and the provisions’ of the Act. The Supreme Court of India did not agree with
this contention and held that on a proper interpretation of the section, it only meant
that the exemption under the licence is conditional upon the observance of the conditions
prescribed and upon the restrictions which are imposed by and under the Act whether in the
rules or the licence itself, that is, a licensee is exempt from assessment as long as it
conforms to the conditions upon which licence is given. In view of the Indian Supreme
Court decisions the expression ‘subject to any rules made this behalf suggest about
the paramountcy of rules and their mandatoriness.
27.15. Having regard to - The expression ‘having
regard to’ means that all relevant factors should be taken into account and
considered before a decision is taken. it means a duty. In Ryots of Garabandho v. Zamindar of Parlakimei the Privy Council observed that the expression ‘having regard
to’ only obliged the government to consider all relevant materials to which it must
have regard. The Privy Council in another case Ishak v. Thowfeck observed that the requirement that the Board shall ‘have regard
to’ certain matters tends in itself to show that the Board’s duty in respect of
these matters is limited to having regard to such matters. They must have an ultimate
discretion and are not bound to select a person or persons whom they consider unsuitable.
The Indian Supreme Court had occasion to consider the expression ‘having regard
to’ in Saraswati Industrial Syndicate Ltd. v. Union of India. Under clause 7(2) of the Sugar Control Order passed under section 3 of
the Essential Commodities Act, the Government is required to fix the price ‘having
regard to the estimated cost of production of sugar on the basis of the relevant
schedule’. In interpreting the term having regard to’, the Indian Supreme Court
relied upon the interpretation given to the expression by the Privy council in Ryots of
Garabandho v. Zamindar of Parlakimedi.
27.16 Includes - It is well settled that the word
‘includes’ is often used in interpretation clause in order to enlarge the
meaning of the words or phrases occurring in the body of the statute and that when it is
so used, these words and phrases must be construed as comprehending not only such things
as they signify according to their nature and import but also things which the
interpretation clause declares that they shall include. When such definition expressly
includes things which are not covered within the ordinary meaning of the word, it is clear
that the intention of the Legislature was to give a wide meaning to that word itself apart
from the definition. the words used in an
inclusive definition denote extension and they cannot be treated as restricted in any
sense. When inclusive definition is dealt with, it would be inappropriate to put a
restrictive interpretation upon terms of wider denomination. The word ‘includes’
is a inclusive definition and expands the meaning. An
inclusive definition is a specie of fiction and it is well settled that the only
limitation on the power of the Legislature to create a fiction is that it should not
transcend its power by its creation..
27.17. Means - Where an interpretation clause defines a word
to mean a particular thing, the definition is explanatory and prima facie restrictive; and
whenever an interpretation clause defines a term to include something, the definition is
extensive. While an explanatory and restrictive
definition confines the meaning of the word defined to what is stated in the
interpretation clause. So that wherever the word defined is used in the particular statute
in which that interpretation clause occurs, it will bear only that meaning unless where,
as is usually provided, the subject or context otherwise requires, an extensive definition
expands or extends the meaning of the word defined to include within it what would
otherwise not have been comprehended in it when the world defined is used in its ordinary sense.
27.18. Within - The word ‘within’ means on or
before. Where something is to be done within a
stated time ‘before’ a stated date, that means that it is to be done at some
time during the course of the stated time, immediately preceding the stated date: The
Bombay High Court in CIT v. Ekbal & Co. observed
that whereas ‘within thirty days’ is within two points of time: ‘one at
which the period begins and the other at which it expires’, not less then
‘thirty days’ is outside the two periods. Wren and Martin in English Grammer
made a distinction between the two propositions ‘in’ and ‘within’
thus: ‘in’ before noun denoting a period of time, means ‘at the end
of’, and ‘within’ means ‘before the end of’.
27.19. ‘And’ and ‘or’ - In ordinary usage
‘and’ is conjunctive and ‘or’ is disjunctive, but to carry out the
intention of the Legislature it is sometimes possible to take ‘and’ for
‘or’ and vice versa. But such occasions should be rare and should only be to
avoid absurd consequences that would follow if the words are taken in their liberal
meaning. The Indian Supreme Court in Manmohan Das
Shah v. Bishun Das and Tilkayat Shri Govindlalji
Maharaj v. State of Rajasthan interpreted word
‘or’ as ‘and’. The Indian Supreme Court in Ranchhoddas Atmaram v. Union of India held that the word ‘or’ is
construed as either. The Indian Supreme Court was considering the provision of the Sea
Customs Act, 1878 regarding the imposition of penalty. The learned judges, while unholding
the validity of imposition of penalty, observed that it was open to the customs
authorities to impose any of the alternative penalties and that on the plain language of
the provision which was in the affirmative form and did not contain negative or
prohibitive provision it gave an option to the customs authorities to impose any of the
two penalties.
27.20. ‘Where’, ‘when’ ‘if’ etc. -
The word ‘where’ is commonly used to introduce the cases or circumstances in
which the law is to be applied. The word ‘when’ is used when a single or rare
occurrence of the event is contemplated. ‘If’, however, is very often a better
word because it is the word generally used to introduce a condition in ordinary everyday
usage. The expression etc. does not share the character of an inclusive definition and
cannot, therefore, enlarge the scope of the expression along with it is
used.
