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TMI Blog1985 (4) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... e" topic of tax avoidance. My excuse for inflicting this extra opinion is that the ingenious attempts to rationalise and legitimise tax avoidance have always fascinated and amused me and made me wonder how ready the minds are to adapt themselves and discover excuses to dip into the treasury. The shortest definition of tax avoidance that I have come across is the art of dodging tax without breaking the law ". Much legal sophistry and judicial exposition have gone into the attempt to differentiate the concepts of tax evasion and tax avoidance and to discover the invisible line supposed to exist which distinguishes one from the other. Tax avoidance, it seems, is legal; tax evasion is illegal. Though initially the law was, and I suppose the law still is, " there is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied ". During the period between the two world wars, a theory came to be propounded and developed that it was perfectly open for persons to evade (avoid) income-tax if they could do so legally. For some time it looked as if tax avoidance was even viewed with affection. Lord Sumner in IRC v. Fisher's Executors [1926] A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are 'entitled' to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these manoeuvres. " In several cases, Griffiths v. Harrison (Watford) Ltd. [1963] AC 1, Morgan v. IRC [1963] Ch 438 and Public Trustee v. IRC [1965] Ch 286, Lord Denning repeatedly referred to tax avoidance schemes and described them as magic performance by lawyer-turned-magicians. Lord Harman, almost in the same words as Lord Denning, described a tax avoidance scheme as one "which smells a li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions each of which was individually genuine, but the result of all which was avoidance of tax. Lord Wilberforce, with great force, observed (p. 45 7 of [1981] 2 WLR) "Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well known principle of Inland Revenue Commissioners v. Duke of Westminster [1936] AC 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded : to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents merit serious consideration. In substance they appealed to Barwick C.J. in the recent case of Federal Commissioner of Taxation v. Westraders Pvt. Ltd. [1980] 30 ALR 353, 354, 355. I have a full respect for the principles which have been stated but do not consider that they should exclude the approach for which the Crown contends. That does not introduce a new principle: it would be to apply to new and sophisticated legal devices the undoubted power and duty of the courts to determine their nature in law and to relate them to existing legislation. While the techniques of tax avoidance Progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to Parliamentary congestion or (most likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case, the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result-did not confine the court to considering each step in isolation for the purpose of assessing the fiscal results. " He further said (p. 242 of 2 WLR): My Lords, in my opinion, the rationale of the new approach is this. In a preplanned tax-saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case, the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. " In the same case, Lord Fraser explained the principle of Ramsay as follows (p. 22 8 of 2 WLR) : " The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately. " Lord Scarman in his characteristic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king their mediaeval chains, the Proper course for the judge is to pass through them undeterred'. 1936, a bare half century ago, cannot be described as part of the Middle Ages but the ghost of the Duke of Westminster and of his transaction, be it noted a single and not a composite transaction, with his gardener and with other members of his staff has haunted the administration of this branch of the law for too long. I confess that I had hoped that that ghost might have found quietude with the decisions in Ramsay and in Burmah. Unhappily it has not. Perhaps the decision of this House in these appeals will now suffice as exorcism." Thus the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. Should it be allowed to rear its head in India? I have referred to the English cases at some length, only to show that in the very country of its birth, the principle of Westminster has been given a decent burial, and in that very country, where the phrase " tax avoidance bad originated, the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep frown. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'." We think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are mani fold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of blackmoney, directly causing inflation. Then there is " the large hidden loss " to the community (as pointed out by Master Sheatcroft 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 the one side and the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee with Ranganath Misra J. that the appeal should be dismissed. RANGANATH MISRA J.-The appellant company, a licensed manufacturer of Indian liquor at Hyderabad, is in appeal by special leave questioning the dismissal of its writ petition by the High Court. Manufacture, sale-wholesale and retail- as also storage and transport of liquor are regulated by the Andhra Pradesh Excise Act, 1968 (" Excise Act " for short), and the Andhra Pradesh Distillery Rules, the Andhra Pradesh Indian Liquor (Storage in Bond) Rules and the Andhra Pradesh Foreign Liquor and Indian Liquor Rules, all made under the Excise Act. " Excise duty " as defined in s. 2(10) of the Excise Act is leviable on the manufacture of liquor and the manufacturer cannot remove the same from the distillery unless the duty imposed under the Excise Act has been paid. Buyers of Indian liquor from the appellant's distillery as alleged by it, obtain distillery passes for release of liquor after making payment of excise duty and present the same at the distillery whereupon the bill of sale or invoice is prepared by the distillery showing the price of liquor, but excluding the excise duty. The appellant's books of account also did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant is the holder of a D-2 license under the law. Amended rule 79(1) provides : " 79(1). On payment of the excise duty by the holder of D-2 license, a distillery pass for the removal of spirit fit for human consumption may be granted in favour of any of the following persons only, namely (a) a person holding a license in the Andhra Pradesh or in other States for sale of spirit by wholesale or retail and when the spirit is to be transported or exported beyond the limits of the district in which the distillery is situated to a person holding a permit signed by the Excise Superintendent of the District of destination or an officer of that district authorised in this behalf. (b) A person holding a permit signed by the Officer of any other state referred to in clause (a) above for the export of such spirit from the Andhra Pradesh into that State. (c) A person holding a permit signed by an Officer duly authorised in that behalf for export of such spirit to an Union Territory. (d) A person holding a permit from the Excise Superintendent of any district in the Andhra Pradesh or from an Officer referred to in clause (a) above of any other State to transport or export rect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not do if the commodity had, for example, been destroyed in the factory itself. It is the fact of manufacture which attracts the, duty, even though it may be collected later; ... " This view has been followed by this court and the position has been put beyond doubt by a series of decisions. In Jall Parsi v. Union of India [1962] Supp 3 SCR 436; AIR 1962 SC 1281, 1287, it has been observed: " The excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country ... Subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost... is not lost ... The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience." In In re Sea Customs Act [1964] 3 SCR 787; AIR 1963 SC 1760 (para 24), this court said : " With great respect, we accept the principles laid down by the said three decisions ([1939.1 FCR 18; [1942] FCR 90 and [1945] FCR 179) in the matter of levy of an excise duty and the machinery for collection thereof. In Guruswamy & Co. v. State of Mysore [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turer. Provisions of the rules 80, 81, 82, 83 and 84 do not militate against the conclusion that the payment of excise duty is a liability exclusively of the manufacturer. In these rules, detailed provisions have been made regarding obtaining of distillery pass, correct calculation and full payment of excise duty, the manner of depositing such duty and ultimately issue of the spirit under the pass from the distillery. These rules, therefore, do not detract from the position that payment of excise duty is the primary and exclusive obligation of the manufacturer, and if payment be made under contract or arrangement by any other person, it would amount to meeting of the obligation of the manufacturer and nothing more. It was the stand of the appellant before the High Court that it makes a condition precedent for the buyer of its finished goods that be (the buyer) pays the excise duty to the excise authorities directly, and only On production of the receipted challan, liquor is issued from the distillery by way of sale under the supervision of the excise authorities. In view of such an arrangement, the excise duty paid by the buyer does not become part of the turnover of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aler. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. " We would like to add, that the position is not different when under prior agreement, the legal liability of the manufacturer-dealer for payment of excise duty is satisfied by the purchaser by direct payment to the excise authorities or to the state exchequer. In Paprika Ltd. v. Board of Trade [1944] 1 All ER 372 (KB), Lawrence J. stated (p. 374): " Wherever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands but it does not cease to be the price which the buyer has to pay even if the price is expressed as 'X' plus purchase tax. This court in Messrs. George Oakes (P.) Ltd. v. State of Madras [1 962] SCR 570; AIR 1962 SC 1037, 1041, quoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales tax under the corresponding U. P. Act in respect of a dealer carrying on business at Mandi Anandganj, Barut, in the District of Meerut. The sales tax authorities had included in the dealer's purchase turnover, " market fee " and the commission payable to the commission agent operating within the market area for the purpose of computing sales tax. The decision turned on the definition of "turnover of purchase" in the U.P. Act and the provision of the Adhiniyam and the Rules made thereunder. Market fee and commission payable to an agent are very different from excise duty and a very different position emerges in law in regard to them. No support is available from that decision for the appellant's case. We would like to point out that the relevant consideration is not whether the law permits the incidence of the duty to be passed on to the purchaser; but whether there is a prohibition against the passing of it. If there is no bar, the incidence would be passed on to the purchaser in accordance with normal commercial practice. Mr. Sorabji built up an argument in support of the appellant's stand by referring to the amendment to the First Schedule to the Sales Tax Act The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, in calculating the total turnover, there is nothing wrong in treating the tax as part of the turnover, because 'turnover ' means the amount of money which is turned over in the business. According to Mr. Sorabji, the excise duty had never come into the hands of the appellant and the company had no occasion or opportunity to turn it over in its hands, and, therefore, the same could never be considered as a part of its turnover. The observations made by this court were in a very different setting and what was being considered was whether the additional tax levied under the Madras Act formed a part of the turnover. If we accept the observations of Hidaytullah J. as laying down the test for general application, it would be very prejudicial to the Revenue as between the seller and the buyer, by special arrangement, a part of what ordinarily would constitute consideration proper, could even be kept out and the turnover could be reduced and tax liability avoided. We are of the view that the conclusion reached in the appellant's case in [1977] 1 SCR 914, on the second aspect of the matter, namely, when the excise duty does not go into the common till of the assessee and it does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to. the assessee as in a case falling within section 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within section 44E or assume diverse other forms ... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producing asset, so that the right to receive income arising from the asset which, theretofore, belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability : no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise... " This decision has been affirmed by this court in CIT v. Sakarlal Balabhai [1972] 86 ITR 2 (SC). We may also recall the observations of Viscount Simon in Latilla v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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