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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 ..... on sets, mixies, air coolers, air conditioners, audio equipment, etc., after purchasing the same from local registered dealers and from outside the State. The assessee is having branches at Hubli and Mangalore in Karnataka and all over India outside the State of Karnataka. The assessee is the user of the brand name, "VIDEOCON" for the sale of its manufactured products, namely, colour televisions manufactured at its manufacturing unit located at Giddenahalli, Attibele Hobli, Anekal Taluk, Bangalore District. The assessee is a selling distributor of Videocon products inside the State of Karnataka. The assessee filed annual return in form No. 4 for three years. In the said return for the year 1991-92 they have shown taxable turnover as Rs. 13,46,16,042.67, for the year 1992-93-Rs. 8,15,61,685 and for the year 1993-94-Rs. 5,50,78,225. However the assessing authority has determined the taxable turnover as for the year 1991-92-Rs. 25,69,40,113, for the year 1992-93-Rs. 26,48,88,014.13 and for the year 1993-94-Rs. 30,74,57,495.98. Aggrieved by the same, the assessee preferred appeals under section 20 of the Karnataka Sales Tax Act, (for short, hereinafter referred to as, "the Act"). All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax could be gathered. In those circumstances, the third proviso to section 5 (3) (a) applies and the sale by the assessee which is second sale is to be treated as first sale. That is what precisely the assessing officer and the first appellate authority have done. The Tribunal without proper appreciation of the facts on record as well as the law on the point committed a serious error in interfering with the said assessment orders and in holding that the third proviso to section 5(3)(a) is not attracted to the facts of the case and, therefore, the additions made by the authority are illegal. Therefore, he submits a case for interference is made out. The learned senior counsel appearing for the assessee on the other hand submitted that as long as the manufacturers have sold the product to the assessee who in turn have paid tax for the first sale and unless the said sale transaction is shown to be sham and when the said sale is not in favour of the proprietor of the trade mark, the third proviso to section 5(3)(a) is not attracted as rightly held by the Tribunal. Therefore, he submits no case for interference is made out. In fact, he also submitted for the assessment year 1994-95 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be paid on the said amount. It is in this background, necessary to look into the third proviso to section 5(3)(a) on which reliance is placed. "5. Levy of tax on sale or purchase of goods.-(1) Every dealer shall pay for each year tax on his taxable turnover at the rate of (twelve per cent) at the point of first sale. ... (3) Notwithstanding anything contained in sub-section (1), the tax under this Act shall be levied,- Provided further that where any goods liable to tax under this Act are produced or manufactured by a dealer with the name or trade mark registered under the Trade and Merchandise Marks Act, 1958 (Central Act 43 of 1958), of any other dealer and which are not used by the latter as raw materials, component parts or packing materials as defined under the Explanation to section 5A, 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 be, but the subsequent sale of such goods by the dealer having the right either as proprietor or otherwise to use the said name or the trade mark, either directly or through another, on his own account or on account of others shall be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid provision is not attracted to the facts of this case. Without disputing the aforesaid factual position it was contended on behalf of the Revenue that the court has to lift the veil and appreciate the undisputed facts. The proprietor of the trade mark "VIDEOCON" is manufacturing black and while TVs that too in a very small number. All their products are manufactured by these manufacturers. Though there is a licence agreement, it is without any consideration and all these manufacturers supply the manufactured products to the assessee who is acting for and on behalf of the proprietor of the trade mark. It is the assessee who spends money for advertisement which enures to the benefit of the manufacturer as well as the proprietor of the trade mark and it is the assessee who is making huge profit and because of the huge expenditure incurred by the assessee, the profit margin is set off and the assessee is gaining advantage and reducing the liability to pay tax. Therefore, he submits if the facts are properly appreciated in the right perspective, it is a clear case of evasion of the tax and the court should not permit such an act. In support of his contention he relied on a C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it . . ." Reliance was also placed on the judgment of the apex court in Wood Polymer Limited v. Bengal Hotels Limited [1970] 40 Com Cas 597 (SC), where it was held as under: "It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation was done in Ramsay [1982] AC 300, Burmah Oil [1982] Simon's Tax Cases 30 and Dawson [1984] 1 All ER 530 to expose the devices for what they really are and to refuse to give judicial benediction." Relying on this passage it was contended that time has come to depart from the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax." In fact, in English Law also, in the case of Sherdley v. Sherdley [1986] 2 ALL ER 202, the following passage has the effect of reiterating the principles of Duke of Westminster: ". . . The basic proposition is that any taxpayer is entitled so to order his affairs that his liability to tax is as low as possible (Inland Revenue Commissioners v. Duke of Westminster [1936] AC 1 (HL); [1935] ALL ER 259). However, he is not entitled to pretend so to order his affairs by entering into a sham transaction and, if he does so, the Inland Revenue can call on the Commissioners and, ultimately, the courts to declare that it is a sham transaction and, as such, is to be disregarded. . ." In Craven (Inspector of Taxes) v. White (Stephen) [1990] 183 ITR 216 (HL); [1988] 3 All ER 495 (HL), Lord Keith of Kinkel says, with reference to the trilogy of the aforesaid cases. ". . . the court must first construe the relevant enactment in order to ascertain its meaning; it must then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord Wilberforce described as 'cardinal principle'. What it did decide was that, that cardinal principle does not, where it is plain that a particular transaction is but one step in a connected series of interdependent steps designed to produce a single composite overall result, compel the court to regard it as otherwise than what it is, that is to say, merely a part of the composite whole. . ." Lord Oliver observes: "My Lords, for my part I find myself unable to accept that Dawson either established or can properly be used to support a general proposition that any transaction which is effected for the purpose of avoiding tax on a contemplated subsequent transaction and is therefore 'planned' is, for that reason, necessarily to be treated as one with that subsequent transaction and as having no independent effect even where that is realistically and logically impossible." Continuing, Lord Oliver observes: "Essentially, Dawson was concerned with a question which is common to all successive transactions where an actual transfer of property has taken place to a corporate entity which subsequently carries out a further disposition to an ultimate disponee. The questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business 'substance' of the matter is not to ignore the legal position but to give effect to it. The speeches in the Ramsay case [1982] AC 300 and subsequent cases contain numerous references to the 'real' nature of the transaction and to what happens in 'the real world'. These expressions are illuminating in their context, but you have to be careful about the sense in which they are being used. Otherwise you land in all kinds of unnecessary philosophical difficulties about the nature of reality and, in particular, about how a transaction can be said not to be a 'sham' and yet be 'disregarded' for the purpose of deciding what happened in 'the real world'. The point to hold on to is that something may be real for one purpose but not for another. When people speak of something being a 'real' something, they mean that it falls within some concept which they have in mind, by contrast with something else which might have been thought to do so, but does not. When an econom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where such changes are actual and not merely simulated, although made for the purpose of avoiding taxation, they do not constitute evasion of taxation. Thus, a man may change his residence to avoid taxation, or change the form of his property by putting his money into non-taxable securities, or in the form of property which would be taxed less, and not be guilty of fraud. On the other hand, if a taxpayer at assessment time converts taxable property into non-taxable property for the purpose of avoiding taxation, without intending a permanent change, and shortly after the time for assessment has passed, reconverts the property to its original form, it is a discreditable evasion of the taxing laws, a fraud, and will not be sustained." Several judgments of the U.S. courts are in respect of the proposition that motive of tax avoidance is irrelevant in consideration of the legal efficacy of a transactional situation (see in this connection Gregory v. Helvering 293 US 465, 469, 55 S.Ct. 226, 267, 78 L.Ed.566. 97 ALR 1335, Helvering v. St. Louis Trust Co. 296 US 48, 56 S.Ct. 78, 80L; Becker v. St. Louis Union Trust Co. 296 US 48, 56 S.ct. 78, 80L). To similar effect are the following obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea raised by the Income-tax Officer is that income which could have been earned by the assessees was not earned, and a part of that income was earned by the Hindu undivided families. That according to the Income-tax Officer was brought about by 'a subterfuge or contrivance'. Counsel for the Commissioner contended that if by resorting to a 'device or contrivance', income which would normally have been earned by the assessee is divided between the assessee and another person, the Income-tax Officer would be entitled to bring the entire income to tax as if it had been earned by him. But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under section 147(b) may be made o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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. It is not the economic results sought to be obtained by making the provisions which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the Legislature." In fact, the said question arose for consideration before the apex court, in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC); AIR 2004 SC 1107 . The learned senior counsel for the respondent relied upon the said judgment to contend that the opinion of Chinnappa Reddy J. has been watered down. In the aforesaid decision, after referring to the entire catena of cases up-to-date including the aforesaid Constitution Bench judgment as well as the opinion expressed in the said judgment by Justice Chinnappa Reddy, the apex court held as under: "146. With respect, therefore, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he law does not oblige a trader to make the maximum profit that he can out of his trading transactions. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted. The basic proposition underlining this taxation law is that any taxpayer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as low as possible. If the taxpayer 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. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. 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. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arrangement of the assessee to avoid payment of tax does not contravene any statutory provision and is within the four corners of law, it cannot be found fault with. The transactions referred to are neither sham or unreal. Though we could see that these three companies are floated with the intention of avoiding payment of tax, as long as the said act is within the frame work of law and is not a sham transaction, the benefit of the law or the loopholes in the law would enure to the benefit of the assessee. After seeing how this loophole has been exploited within the four corners of law, the Parliament has promptly now amended the law plugging the loophole. Therefore, by any judicial interpretation we cannot read it into the section which was not intended by the Parliament at the time of enacting this provision. Therefore, the order passed by the Tribunal is in consonance with the law of the land. The substantial question of law raised in this appeal is answered against the Revenue and in favour of the assessee. In so far as the assessment year 1991-92 is concerned, the Tribunal without proper application of mind has held the said assessment order is barred by limitation. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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