Paragraph numbers below are the court’s original numbering, recovered from the source text.
52. Supra note I.
53. Ibid.
54. Ibid.
55. Ibid.
56. (1926) AC 395 at 412.
57. (1936) AC l; 19 TC 490.
58. Supra note I. A jurisprudence and "the ghost of Fisherf'9 (supra) and Westminster"° have been exorcised in the country of its origin". It is also urged thatMcDowell's61 radical departure was in tune with the changed thinking on fiscal jurisprudence by the English Courts, as evidenced in WT. Ramsay Ltd v. IRC62, Inland Revenue Commissioners v. Burman Oil Company Ltd.63, and B Furniss v. Dawson64• As we shall show presently, far from being exorcised in its country of origin, Duke of Westminster65 continues to. be alive and kicking in England. Interestingly, even in McDowe//66, though Chinnappa Reddy, J., dismissed the observation of J.C. Shah,J. in CIT v. A. Raman and C Compan;P based on Westminster68 and Fisher's Executors69, by saying ·~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", it does not appear that the rest of the learned Judges :of ,the Constitutional Bench contributed to this radical thinking. Speaking for the majority, D Ranganath Mishra, 'J, (as he then was) says in McDowell70 : • "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." (Emphasis supplied) This opinion of the majority is a far cry from the view of p!iinnappa F Reddy, J. : "In our view the proper way to construe a ta}{ing statute, while considering a device to avoid tax, is not to ask whether a provision should be construed liberally or principally, nor whether the transaction is not
59. Supra note 56.
60. Supra note 57.
61. Supra note I.
62. (1982) AC 300.
63. (1982) STC 30. 64. [1984] I All ER 530. 65. Supra note 57. 66. Supra note I. 67. [1968] 67 ITR 11. 68. Supra note 57. 69. Supra note 56. 70. Supra note I at Pg. 171. _, U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] unreal and not prohibited by the statute, but whether the transacti,on is a A device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it." We are afraid that we are unable to read or comprehend the majority judgment in McDowelf 1as having endorsed this extreme view of Chinnappa Reddy, J. which, in our considered opinion, actually militates against the observations of the B majority of the Judges which we have just extracted from the leading judgment of Ranganath Mishra, J. (as he then was). The basic assumption made in the judgment of Chinnappa Reddy,J. in McDowelf2 that the principle in Duke of Westminster73 has been departed -from subsequently by the House of Lords in England, with respect, is not C correct. In Craven v. White74 the House of Lords pointedly considered the impact of Furniss75, Burma Oif6 and Ramsay77 • The Law Lords were at great pains to explain away each of these judgments. Lord Keith of Kinkel says, with reference to the trilogy of these cases, (at p. 500): "My Lords, in my opinion the nature of the principle to be derived D from the three cases is this : the court must first construe the relevant enactment in order to ascertain its meaning; it must then analyse the series of transactions in question, regarded as a whole, so as to ascertain its true effect in law; and finally it must apply the enactment as construed to the true effect of the series of E transactions and so decide whether or not the enactment was intended to cover it. The most important feature of the principle is that the series of transactions is to be regarded as a whole. In ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps in it were contractually agreed in advance or had been determined on in F advance by a guiding will which was 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. 71. Supra note I. 72. Ibid. 73. Supra note 57. 74. [1988] 3 All ER 495. 75. Supra not~ 64. 76. Supra note 63. 77. Supni note 62. 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 or 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 s.460 of the Income and Corporation Taxes Act, 1970. c In Ramsay and in Burmah the result of application of the principle was to demonstrate that the true legal effect of the series of transactions entered into, regarded as a whole, was precisely nil." Lord Oliver (at p. 5 I 8-I 9) 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 the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides [see [1981] 1 All ER 865, (1982) AC 300 at 323]. Nor did it decide that the court is entitled, because of the subject's motive in entering into a genuine transaction, to attribute to it a legal effect which it did not have. Both Lord Wilberforce and Lord Fraser emphasise the continued validity and application of the principle of IRCv. Duke of Westminster, (1936) AC I (1935) All ER Rep. 259, a principle which Lord Wilberforce d~scribed as a '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 (at p.523) observes: "My Lords, for my part I find myself unable to accept that Dawson either established or can properly be used to support a U.0.1. v. AZAD! BACHAO ANDOLAN [SRlKRISHNA, J.] general proposition that any transaction which is effected for the A 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, (at page 524) 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 C carries out a further disposition to an ultimate disponee. The question is : when is a disposal not a disposal within the terms of the statute ? To give to that question the answer 'when, on an analysis of the facts, it is seen in reality to be a different transaction altogether' is well within the accepted canons of construction. To answer it 'when it is effected with a view to D avoiding tax on another contemplated transaction' is to do more than simply to place a gloss on the words of the statute. It is to add a limitation or qualification which the legislature itself has not sought to express and for which there is no context in the statute. That, however, desirable it may seem, is to legislate, not to E construe, and that is something which is not within judicial competence. r 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." Thus we see that even in the year i 988 the House of Lords F emphasised the continued validity and application of the principle in Duke of Westminster78 While Chinnappa Reddy, J. took the view that Ramsay79 was an authoritative rejection of principle in the Duke of Westminster8°, the House of Lords, in the year 200 I, does not seem to consider it to be so, as seen G from MacNiven (Inspector of Taxes) v. Westmoreland Investments ltd. 81 Lord Hoffmann observes: 78. Supra note 57. 79. Supra note 62. 80. Supra note 57. 81. [2001] I All ER 865 at 877-878. c "In the Ramsay case both Lord Wilberforce and Lord Fraser of Tullybelton, who gave the other principal speech, were careful to stress that the House was not departing from the principle in !RC v. Duke of Westminster, (1936) AC I, (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 Hous_e collapse them into a composite self-cancelling trai:i~action witho~t being guilty of ignoring the legal position and l.ooking at t.he substance of the matter? My Lords,'! venture to' suggest thaf scime of the difficulty which may have been felt in reconciling the Ramsay case with the Duke of Westminster's case arises out of an ambiguity in Lord Tomlin's statement that the courts cannot ignore 'the legal position' and have regard to 'the substance of the matter'. If 'the legal position' is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyanct: on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves 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 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 economist says that real incomes have fallen, he is not intending to contrast real incomes with U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA. J.] imaginary incomes. The contrast is specifically between incomes A which have been adjusted for inflation and those which have not. In order to know what he means by 'real', one must first identify the concept (inflation adjustment) by reference to which he is using the word. Thus in saying that the transactions in the Ramsay case were not B sham transactions, one is accepting the juristic categorisation of the transactions as individual and discrete and saying that each of them involved no pretence. They were intended to do precisely what they purpotted to do. They had a legal reality. But in saying that they did not constitute a 'real' disposal giving rise to a 'real' C loss, one is rejecting the juristic categorisation as not being necessarily detenninative 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 D should influence the construction of the concepts used by Parliament." With respect, therefore, we are unable to agree with the view that Duke of Westminster82 is dead, or that its ghost has been exorcised in E England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster83 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 CIT v. Raman84 are ver" much relevant even today. We may in this connection usefully refer to the judgment of the Madras High Court in M V. Vallipappan and Ors. v. JTG85, which has rightly concluded that the decision in McDowel/86 cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, G must be looked upon with disfavour. Though the Madras High Court had 82. Supra note 57. 83. Ibid. 84. Supra note 67. 85. (1988) 170 ITR 238. 86. Supra note I. A occasion to refer to the judgment of the Privy Council in !RC v. Challenge Corporation Ltd. 87 and did not have the benefit of the House of Lords's pronouncement in Craven88, the view taken by the Madras High Court :.: . appears to be correct and we are inclined· to agree with it. We may also refer 'to the judgment of Gujarat High Court in Banyan B and Beny v. Commissioner of Income-Tax 89 where referring to McDowe/!9°, the Court observed: c "The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case (1985) 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above ~ase has not affected the freedom of the citizen to . act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity." This accords with our own view of the matter. In CWTv. Arvind Narottam 91 , a case under the Wealth Tax Act, three trust deeds for the benefit of the assessee, his wife and children in identical terms were prepared under Section 21(2) of the Wealth Tax Act. Revenue placed reliance on McDowell92• Both the learned Judges of the Bench of this Court gave separate opinions. Chief Justice Pathak, in his opinion said (at p. 486): 87. [1987] 2 WLR 24. 88. Supra note 74. 89. (1996) 222 ITR 831 at 850. 90. Supra note I. 91. (1988) 173 ITR 479. 92. Supra note I. u.o.r. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA. J.] "Reliance was also placed by learned counsel for the Revenue on A McDowell and Company Ltd. v. CTO. (1985) 154 ITR 148 SC. That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity." Justice S. Mukherjee said, after noticing McDowell's case, (at page B 487): "Where the true effect on the construction of ~e deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected." In Mathuram Agrawal v. State of Madhya Pradesh93 another Constitution Bench had occasion to consider the issue. The Bench observed: "The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where D 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 provision which is relevant in interpreting a fiscal statute. Equally E 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." The Constitution Bench reiterated the observations in Bank of F Chettinad Ltd v. CIT94, quoting with approval the observations of Lord Russell of Killowen in !RC v. Duke of Westminster95 and the observations of Lord Simonds in Russell v. Scott96 • It thus appears to us that not only is the principle in Duke of Westminster91 alive and kicking in England, but it also seems to have G acquired judicial benediction of the Constitutional Bench in India, 93. [1999] 8 sec 667 at para 12. 94. (1940) 8 !TR 522 (PC). 95. Supra note 57. 96. [1948] 2 All ER 15. 97. Supra note 57. A notwithstanding the temporary turbulence created in the wake of McDowel?.8• Hence, reliance on Furniss99, Ramsay'°0 and· Burmah 0;1io1 by the respondents in support of their submission is of no avail. The situation is no different in United States and other jurisdictions B too. c The situation in the United State is reflected in the following passage from American Jurisprudence102: "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. A tax-saving motivation does not justify the taxing authorities or the courts in nullifying or disregarding a taxpayer's otherwise proper and bona fide choice among courses of action, and the state cannot complain, when a taxpayer resorts to a legal method available to him to compute his tax liability, that the result is more beneficial to the taxpayer ·than was intended. It has even been said that it is common knowledge that not infrequently changes in the basic facts affecting liability to taxation are made for the purpose of avoiding taxation, but that 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 chan~e 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 US Courts were cited in respect of the proposition that motive of fax avoidance is irrelevant in consideration 98. Supra note 1. 99. Supra note 64. 100. Supra note 62. IOI. Supra.note 63. 102. American Jurisp.rudence (1973 2nd Ed. Vol.71). U.O.I. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] of the legal efficacy of a transactional· situation. 103 We may recapitulate the observations of the Federal Court in Johanssonw4 as to the irrelevance of the motive for Johansson. To similar effect are the observations of the US Court in Peny R. Bas v. Commissioner of Internal Revenue105 : "we infer that Stantus was created by petitioners with a view to reducing their taxes through qualification of the corporation under the convention. The test, however, is not the personal purpose of a taxpayer in creating a corporation. Rather, it is whether that • purpose is intended to be accomplished through a corporation carrying out substantive business functions. If the purpose of the C corporation is to carry out substantive business functions, or if it in fact engages in substantive business activity, it will not be disregarded for Federal tax purposes." In Barber-Greene Americas, Inc. v. Commissioner of Internal D Revenue106 it was observed that a corporation will not be denied Western Hemisphere trade corporation tax benefits merely because it was purposely created and operated in such way as to obtain such benefits. Similarly, a corporation otherwise qualified should not be disregarded merely because it was purposely created and operated to obtain the benefits of the United States-Swiss Confederation Income Tax Convention. Though the words 'sham', and 'device' were loosely used in connection with the incorporation under the Mauritius Jaw, we deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catchall phrases to defeat or nullify the effect of a legal situation. As Lord F Atkin pointed out in Duke of Westminster107: "I do not use the word 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 G 103. See in this connection Grego1y v. Helvering 293 US465, 469 55 S.Ct. 226, 267, 7S; L.ed.566, 97 ALR 1335; Helvering v. St. Louis Tnist Company 296 US 48, 56 S. Ct. 7S, SOL; Becker v. St.Louis Union Trust Company 296 US 4S, 56 S.Ct. 7S, SOL. 104. Supra note 27. 105. (196S) US 50 TC 595. 106. (1960) 35 T.C. 365, 3S3, 384. 107. Supra note 57. only function of a court of law is to determine the legal result of his dispositions so far as they affect tax." Lord Tomlin said : "There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal a different transaction." c In Snook v. London and West Riding Investments Ltd. 108 Lord Diplock L.J., explained the use of the word 'sham' as a legal concept in the following words: "it is, I think, necessary to consider what; if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Contracting State. v. Maclure, (1882) 21 Ch.D.309; Stoneleigh Finance, Ltd. v. Phillips, (1965) l All ER 5 l 3 that for acts or documents to be a "sham'', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived." In Waman Rao and Ors. v. Union of India & Ors. 109 and Minerva . Mills Ltd. and Ors. v. Union of India and Ors. 110 this Court considered the import of the word "device' with reference to Article 3 IB which G provided that the Acts and Regulations specified Ninth Schedule shall not be deemed to be void or even to have become void on the ground that they are inconsistent with the Fundamental Rights. The use 6fthe word 'device' here was not pejorative, but to describe a provision of law intended to 108. [1967) All ER 518 at 528. 109. [1981) 2 sec 362 at para 45. 110. [1980] 3 sec 625 at para 91. _ U:O.I. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] produce a certain legal result. If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intennediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non~est based upon some hypothetical assessment of the 'real motive' of the B assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'-the-wisp. The judgment of the Privy Council in Bank of Chettinadm, wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Westminster112, was the law in this country when the Constitution C came into force. This was the law in force then, which continued by reason of Article 372. Unless abrogated by an Act of Parliament, or by a clear pronouncement of this Court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell113, we find no reference therein to having dissented from or overruled the decision of the D Privy Council in Bank of Chettinad1 14• If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this Court in Mathuram 115• We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from E Westminster116 to Bank of Chettinad1 17 to Mathuram 118, despite the hiccups of McDowel/119, the law has remained the same. 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 F prejudice to the national interests, as perceived by the respondents. In the result, we are of the view that Delhi High Court erred on all counts in quashing the impugned circular. The judgment under appeal is 111. Supra note 94. ll2. Supra note 57. 113. Supra note I 114. Supra note 94. 115. Supra note 93. 116. Supra note 57. 117. Supra note 94. 118. Supra note 93. 119. Supra note I. A•. set aside and it is held and declared that the circular No. 789 dated 13.4.2000 is valid and efficacious. We cannot part with this judgment without expressing our grateful appreciation to the Learned Attorney General, Mr. Harish Salve, Mr. Prashant Bhushan as also the pa1ty in person, Mr. S.K. Jha, all of whom B by their industrious research produced a wealth of material and by their meticulous arguments rendered immense assistance. B.S. Appeals allowed.