1988 (5) TMI 366 - HC - Income Tax

Summary

Issues Involved:
1. Nature and scope of the principle from Furniss v. Dawson.
2. Application of the Ramsay principle to various tax avoidance schemes.
3. Determination of what constitutes a preordained series of transactions or a composite transaction.
4. Analysis of specific cases to determine if they fall within the Ramsay principle.

Summary:

1. Nature and Scope of the Principle from Furniss v. Dawson:
The judgment examines the principle derived from Furniss v. Dawson, which built upon the decisions in W.T. Ramsay Ltd. v. Inland Revenue Commissioners and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. These cases established that tax avoidance schemes involving artificial transactions with no commercial purpose other than tax avoidance should be viewed as a whole. The key feature is that such transactions should be disregarded for fiscal purposes if they are preordained and have no business purpose apart from tax avoidance.

2. Application of the Ramsay Principle:
The Ramsay principle, as extended by Furniss v. Dawson, applies to both circular and linear transactions. It involves disregarding intermediate steps in a series of transactions if they are inserted solely for tax avoidance. The principle requires that the series of transactions be preordained and that the intermediate steps have no commercial purpose apart from avoiding tax. The court must look at the end result and apply the relevant taxing statute to determine if the transactions fall within its scope.

3. Determination of Preordained Series of Transactions:
The judgment emphasizes that for a series of transactions to be considered preordained, there must be a plan in advance, and the transactions must be carried out as a continuous process without genuine interruptions. The transactions should be viewed as a single composite whole if they meet these criteria. The court must consider factors such as the extent of negotiations or arrangements at the time of the first transaction, the likelihood of the subsequent transactions being carried out, and the nature of the negotiations.

4. Analysis of Specific Cases:
- Craven v. White: The court found that the transactions were not preordained as the sale to Oriel was not certain at the time of the share exchange with Millor. The taxpayers were keeping their options open, and there was no practical certainty that the sale would take place. Therefore, the share exchange was an independent transaction, and the appeal was dismissed.
- Inland Revenue Commissioners v. Bowater Property Developments Ltd.: The court held that the transactions were not part of a composite transaction as there was a genuine interruption in negotiations, and the sale to Milton Pipes was not certain. The appeal was dismissed.
- Baylis v. Gregory: The court concluded that the initial share exchange was an exercise in strategic tax planning, with no subsequent transaction in view. The transactions were independent, and the appeal was dismissed.

The judgment underscores the importance of analyzing the facts of each case to determine if the transactions form a single composite whole or are independent. The Ramsay principle is a tool for statutory construction, not for legislating against tax avoidance at large.