First published on Taxmann on [2021] 126 taxmann.com 195 (Article)
A legalfiction is an assertion which may be untrue or unproven, but it is accepted as true for legal purposes. Legalfictions are pervasive in modern acts and legislations. This article is an insight into the operation of legalfiction. It is an attempt to point out the peculiarities which will help comprehend the functioning of the "deeming provisions".
Hon'ble Justice D.S Tewatia in the case of CIT v. Swaroop Krishan1 summarised the force of legalfiction in the following words
"A legal fiction may even say that a man shall be deemed to be a woman or a woman shall be deemed to be a man for certain purposes and when it is so enacted, it is not open to the Courts to start looking for various attributes of a man or a woman to see whether one is a man or a woman".
Introduction
The need for the creation of legal fictions arose out of the fact that while the societies changed and developed, the laws governing the societies remained fairly static. Hence the courts in common law jurisdictions invented this device to reduce the friction between rigid laws and the wants of society2. Creation of legal fiction was once considered the domain of the courts; Corporate personhood, nationality of a corporation, are prominent examples of the legal fiction created by the courts in England. Thus Legal fiction was invented by the courts as a device for attaining desired legal consequence and avoiding undesired legal consequences. However, not all legal fictions in operation today are the creations of judges. In India, this tool is adopted and even embraced by the legislature, and it is used frequently in creation of modern statutes.3
Use of Deeming Provision
The words deemed, construed, and presumed can be found sprinkled across various legislative provisions which show the persistent use of legal fiction in legislative drafting. However, the mere occurrence of such words is not a conclusive factor to determine whether the legislature intends to create a legal fiction or not. Whether a deeming provision imposes any artificial construction or is merely a clarification, can be determined from the construction of the statute. The Supreme Court in this regard has held that.
"A deeming provision might be made to include what is obvious or what is uncertain or to impose for the purpose of a statute an artificial construction of a word or phrase that would not otherwise prevail, but in each case, it would be a question as to with what object the Legislature has made such a deeming provision"4
Rules of Interpretation
Once it is determined that the statute creates a legal fiction, the following rules of Interpretation may apply.
(1) The court has to give full effect to the "deeming provisions" and take it to the logical conclusion by imagining the real and natural consequences flowing from the assumed situation.
Once the court concludes that the legislature intends to create a legal fiction through a statute, the court is to ascertain the purpose for which the legal fiction is created, further the court is to ascertain all the facts and consequences which are incidental or inevitable corollaries of giving effect to the legal fiction.But in so construing the fiction it is not to be extended beyond the purpose for which it is created. It cannot be extended by importing another fiction.5
(2) What follows from a deemed fact is also to be deemed, that is to say, whenever a fact is to be deemed, its consequences and incidents are also to be deemed.
Section 16 of the Income-tax Act provides that standard deduction (i.e. provision for day-to-day expenses in the course of employment) is allowed against income from salary to calculate taxable income. Section 17 of the Act creates a legal fiction that the salary would also include income from pension. The question that came before the court6 was whether standard deduction can also be claimed against income received as pension when the assessee is not in employment. The court held that even though the assessee receiving pension would not incur day-to-day expenses in respect of the employment, he would still be entitled to standard deduction as a natural consequence of the fiction created by section 17 of the Income Tax.
(3) It is to be noted that only facts may be deemed and not legal consequences which do not flow from the law as it stands. A legal consequence cannot be deemed nor, therefrom, can the events that should have preceded it can be deemed.
Where a court holds that a statute that imposes a new tax is invalid for want of power or jurisdiction, the legislature can not validate the law so declared invalid, merely by declaring that the decision of the court would not be binding. However, the legislature may deploy the tool of legalfiction to alter the preconditions of the judgement, so much so that judgement itself becomes unsustainable.7The legislature can through fiction make the tax already collected under that law valid by re-enacting the law and make the decision unviable, but it cannot alter the legal consequences of a judicial decision with a new legal fiction.
The Supreme court in a case where a validating Act provided that, notwithstanding other provisions of the Act, any judgement or decree, the villages of Raipura and Ummedganj should be deemed always to have continued to exist in Kota Municipality, the court observed that the deeming provision in the validating Act deems this legal position without deeming the preceding facts from which such legal consequence would flow.8 The legislature cannot be allowed to create a legal fiction which deems legal consequences but only law or facts that precedes the consequences.
(4) A legalfiction has a limited scope, and it cannot be expanded by giving purposive interpretation.
Where Section 9(1)(i) of the Act, provided that all income accruing or arising, whether directly or indirectly, through the transfer of asset situated in India, shall be deemed to accrue or arise in India. Section 5(2)(b) of the Income-tax Act, creates a fiction that income arising to a non-resident outside India, on the transfer of a capital asset situated in India, is deemed to accrue or arise in India and hence is liable to charge of Income Tax. In Vodafone International Holdings BV v. Union of India & Anr., the court held that the scope of section 9(1)(i) cannot be extended to cover indirect transfers of a capital asset situated in India as a legalfiction created by the legislature has a limited scope and cannot be expanded by giving the purposive interpretation.
LegalFiction vs Presumption
Legal fictions create an artificial state of affairs. When a fiction is created by law, it is not open to anybody to plead or argue that the artificial state of facts created by law is not true. It is settled law that only sovereign legislative bodies can create legal fictions and a subordinate authority does not have such powers. Presumptions are closely related to legal
fictions but they operate differently. Presumptions are inferences which the judges are directed to draw from certain states of facts in certain cases, and they are allowed a certain weightage on the scale of proof. Presumptions are of two kinds, rebuttable and irrebuttable. Presumptions are closely related to fiction, but they operate differently. Fictions are always in conflict with reality, whereas presumptions may work to be true. Normally any presumption is rebuttable unless the legislature creates an irrebuttable presumption.9
Conclusion
Professor Fuller while advocating a pragmatic approach to legalfictions warned of dangers inherent in the deployment of legalfictions. He argued that a fiction should be used with the consciousness of its falsity. This is perhaps best demonstrated in the approach adopted by the courts in implementing the fiction of Corporate personhood, where a company is deemed as a separate legal entity distinct from its members, but the corporate veil may be lifted owing to statutory provisions and judicial interpretation such as prevention of fraud and protection of revenue.
Comments