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TMI Blog2010 (7) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... proper application of mind has held the said assessment order is barred by limitation. It is not in dispute that there was an order for deferment under section 12(6) of the Act which saved limitation and, therefore, that portion of the order of the Tribunal is liable to be set aside and in favour of the Revenue. As the Tribunal has remanded the matter back to the assessing officer for reassessment after carefully scrutinizing the factual aspects of the case, in doing so the assessing officer shall not take into consideration the third proviso to section 5(3)(a) of the Act again and is at liberty to pass appropriate orders excluding the said portion. - STRP No. 4 of 2000 - - - Dated:- 14-7-2010 - KUMAR N. AND NAGARATHNA B.V. (MRS.), JJ. For the Appellant : R.I.D. Sa, Government Advocate, For the Respondent : G. Sarangan, Senior Counsel for Sripal J. Sanghavi The judgment of the court was delivered by N. KUMAR J. This revision petition is filed by the Revenue challenging the order of the Karnataka Appellate Tribunal (Sales Tax), which has set aside the order of the first appellate authority holding that proviso to section 5(3)(a) of the Karnataka Sales Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any material on record. The authorities below very grossly erred in applying the provisions of third proviso to section 5 (3) (a) of the Act and erred in treating the second schedule goods sold by the assessee as the first sale. Therefore, they contended among other grounds that the orders passed by the assessing authority as well as the appellate authority is liable to be set aside. The Tribunal by a very lengthy order has held that proviso to section 5(3)(a) of the Act is not attracted to the facts of this case, as the assessee is not the proprietor of the trade mark and was not selling the said goods on account of being the proprietor of the trade mark. In so far as the year 1991-92 is concerned it held that the assessment order is barred by limitation and the return of turnover declared as per the annual turnover has to be accepted with liberty to take suitable action in accordance with law. Aggrieved by the same, the Revenue is in appeal. The learned Government Advocate, assailing the impugned order of the Tribunal contended that the brand owner trade make owner, Videocon India, a partnership firm, is not getting anything in turn by allowing the manufacturers to use th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, Bangalore. (3) M/s. Videocon VCR Limited, Bangalore, Mangalore and Hubli. (4) M/s. Videocon India, Bangalore, Mangalore and Hubli. (5) M/s. Malani Aqua Temp Private Limited, Bangalore. (6) M/s. Videocon India, Bangalore and Hubli. (7) M/s. Bombay Coolers (P) Limited, Bangalore, Mangalore and Hubli. (8) M/s. Videocon Appliance Limited, Bangalore, Mangalore and Hubli. Those companies are manufacturing various electrical and electronic products under the brand name VIDEOCON. Some of them are private limited companies and some of them are public limited companies. After manufacturing those products it is not in dispute they have sold the products to the assessee. On such sales, they have paid tax under the Act which is also not in dispute. After purchase of these goods, the assessee has sold the goods to other dealers. In the series of sales, the sale by the assessee to other dealers is the second sale which under the Act as the law stood on the date of sales was not taxable. It is also on record that the assessee has spent huge amounts for the purpose of advertisement of these products under the brand name, VIDEOCON. The price at which the assessee has sold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to such goods. A careful examination of the aforesaid provision makes it clear that when goods liable to tax are produced or manufactured by a dealer with the name or trade mark of any other dealer and which are not used by the latter, the sale of such goods by the dealer who has produced or manufactured to the dealer who is the brand name or trade mark holder shall not be deemed to the first sale. It is the subsequent sale of such goods by the dealer having the right either as proprietor or otherwise to use the said name or trade mark, either directly or through another, on his own account or on account of others shall be deemed to be the sale by the first dealer liable to tax under this section. The illustration to the said section makes the position very clear. It is only those sales by the manufacturers who utilise the trade mark and then sell the products to the proprietor of the trade mark, then only it is the second sale by such proprietor which is to be treated as the first sale for the purpose of tax under section 5 of the Act. In this case admittedly the proprietor of the trade mark is a partnership firm under the name of Videocon India. The seven manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Wheatcraft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skillful, advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said: 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization.' But, surely, it is high time for the judiciary in India too to part i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Taxes) v. Dawson [1984] 1 All ER 530 (HL). But from a catena of subsequent cases, it is clear that Duke of Westminster still holds the field. A reference to the relevant cases is made in the following paragraphs. In Inland Revenue Commissioners v. Fisher's Executors [1926] AC 395 at page 412 (HL) it is opined as follows: My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any expressed terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame. As Lord Atkin pointed out in Duke of Westminster's case [1936] AC 1 (HL); [1935] 19 TC 490, 511. I do not use the words device in any sinister sense: for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his dispositions so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a position, for all practical purposes, to secure that all of them were carried through to completion. It is also relevant to take into account, if it be the case, that one or more of the steps was introduced into the series with no business purpose other than the avoidance of tax. The principle does not involve, in my opinion, that it is part of the judicial function to treat as nugatory any step whatever which a taxpayer may take with a view to the avoidance or mitigation of tax. It remains true in general that the taxpayer, where he is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision such as section 460 of the Income and Corporation Taxes Act, 1970. Lord Oliver says: It is equally important to bear in mind what the case did not decide. It did not decide that a transaction entered into with the motive of minimising the subject's burden of tax is, for that reason, to be ignored or struck down. Lord Wilberforce was at pains to stress that the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable it may seem, is to legislate, not to construe, and that is something which is not within judicial competence. I can find nothing in Dawson or in the cases which preceded it which causes me to suppose that that was what this House, was seeking to do. While referring to the case of Duke of Westminster in H.M. MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd. [2002] 255 ITR 612 (HL); [2001] 1 ALL ER 865 (HL), Lord Hoffman observed as follows: In the Ramsay case [1982] AC 300 both Lord Wilberforce and Lord Fraser of Tullybelton, who gave the other principle speech, were careful to stress that the house was not departing from the principle in Inland Revenue Commissioners v. Duke of Westminster [1936] AC 1; [1935] All ER Rep 259. There has nevertheless been a good deal of discussion about how the two cases are to be reconciled. How, if the various juristically discrete acquisitions and disposals which made up the scheme were genuine, could the House collapse them into a composite self-cancelling transaction without being guilty of ignoring the legal position and looking at the substance of the matter? My Lords, I venture to suggest that some of the difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretence. They were intended to do precisely what they purported to do. They had a legal reality. But in saying that they did not constitute a 'real' disposal giving rise to a 'real' loss, one is rejecting the juristic categorisation as not being necessarily determinative for the purposes of the statutory concepts of 'disposal' and 'loss' as properly interpreted. The contrast here is with a commercial meaning of these concepts. And in saying that the income-tax legislation was intended to operate 'in the real world', one is again referring to the commercial context which should influence the construction of the concepts used by Parliament. Thus even in the year 2001 the House of Lords emphasised the continued validity and application of the principle in Duke of Westminster's case [1936] AC 1 (HL); [1935] 19 TC 490. American jurisprudence The situation in the United States is reflected in the following passage from American Jurisprudence (American Jurisprudence [1973] second edition, volume 71): The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive business activity, it will not be disregarded for Federal tax purposes. Indian view Avoidance of tax, i.e., reduction of tax by lawful means is not regarded as an instance of tax evasion though in the early years of the last century it was regarded as an instance of tax evasion. Following the English decision, the apex court in the case of Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income-tax and Excess Profits Tax [1958] 34 ITR 888 (SC) held that every person is entitled to so arrange his affairs as to avoid taxation but the arrangement should be real and genuine and not a sham or make-believe. The Supreme Court in the case of Calcutta Discount Co., Ltd. v. Incometax Officer, Companies District I, Calcutta [1961] 41 ITR 191 (SC); AIR 1961 SC 372, while dealing with the similar circumstances held that: Where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. In India, the courts have made a clear distinction between tax evasion and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had arranged in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus foregoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible under law. In case of Commissioner of Wealth-tax II v. Arvind Narottam [1988] 173 ITR 479 (SC), the Supreme Court held as under: . . . But the question which many ordinary taxpayers very often, in a country of shortages with ostentatious consumption and deprivation for the large masses ask, is, does he with taxes buy civilization or does he facilitate the waste and ostentation of the few. Unless waste and ostentation in Government spending are avoided or eschewed, no amount of moral sermons would change people's attitude to tax avoidance. In any event, however, where the true effect on the construction of the deeds is clear, appeal to discourage tax avoidance is not a relevant consideration. In the case of Union of India v. Playworld Electronics Pvt. Ltd. [1990] 184 ITR 308 (SC); [1990] 68 Com Cas 582 (SC); [1989] 3 SCC 181, while holding that colourable devices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tution Bench reiterated the observations in Bank of Chettinad Ltd. v. Commissioner of Income-tax [1940] 8 ITR 522 (PC), quoting with approval the observations of Lord Russell of Killowen in Inland Revenue Commissioners v. Duke of Westminster [1936] AC 1; 19 TC 490 and the observations of Lord Simonds in Russell v. Scott [1948] 2 All ER 15. ... We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. ... Though the words 'sham' and 'device' were loosely used in connection with the incorporation under the Mauritius law, we deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catch-all phrases to defeat or nullify the effect of a legal situation. . . From the aforesaid discussion it is clear that there is no inconsistency or deviation in the approach to the interpretation of the taxation law in England, America as well as in India. It is now well-settled that a citizen is entitled to arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. In so far as the observations of Justice Chinnappa Reddy, J., that time has come for us to depart from the Westminster [1936] AC 1 principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J., and similar observations made elsewhere is answered by the apex court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC); AIR 2004 SC 1107 as under paras 146 and 154: 146. With respect, therefore, we are unable to agree with the view that Duke of Westminster's case [1936] AC 1 (HL); [1935] 19 TC 490 is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster's case [1936] AC 1 (HL); [1935] 19 TC 490 is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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