Mc Dowell & Company Limited Vs.
The Commercial Tax Officer [1985] INSC 91 (17 April 1985)
REDDY, O. CHINNAPPA (J) REDDY, O. CHINNAPPA
(J) MISRA RANGNATH CHANDRACHUD, Y.V. ((CJ) DESAI, D.A.
VENKATARAMIAH, E.S. (J)
CITATION: 1986 AIR 649 1985 SCR (3) 791 1985
SCC (3) 230 1985 SCALE (1)788
CITATOR INFO: D 1988 SC1824 (12) RF 1990 SC
202 (11)
ACT:
Concepts of Tax Evasion and Tax Avoidance,
difference in-Tax Planning Colorable device within the framework of law cannot
be allowed to be a part of Tax Planning.
New plea-Constitution of India, 1950-Appeal by Special Leave under Article 136-Supreme Court cannot entertain a plea
not taken in the High Court.
Andhra Pradesh General Sales Tax Act,
1947-"Turn over", scope of-Test for determining whether an excise duty
is a part of "turn over," under the Sales Tax Act- The incidence of,
excise duty being directly relatable to manufacture, validity of the decision
In McDowell's case reported in [1977] 1 SCR 914 reconsidered:
HEADNOTE:
"Excise duty" as defined in section
2(10) of the A.P. Excise Act, 1968 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 obtain distillery passes for release of liquor after
making payment of excise duty and present the same at the distillery there upon
the bill of sale or invoice is prepared by the distillery showing the price of
liquor but excluding excise duty. The appellant's books of account also did not
contain any reference to excise duty paid by the purchaser. The appellant,
there-ore, paid sales tax under the Andhra Pradesh General Sales Tax Act, 1957
on the basis of turnover which excluded excise duty. This position was not
accepted by the Sale Tax Authorities and the matter was contested right upto
the Supreme Court. The Supreme Court in Mc Dowell & Company Ltd. etc. v.
Commercial Tax Officer VIIth Circle, Hyderabad, etc. reported in [1977] 1 SCR
914 held that the Sales Tax Authorities were not competent to include in the
"turnover" of the appellant, the excise duty which was not charged by
it, but was paid directly to the Excise 792 Authorities the buyers of the
liquor, inasmuch as the excise duty did not go into the common till of the
appellant and did not become a part of the circulating capital.
After the judgment of the Supreme Court Rules
76 and 79(1) of the A.P. Distillery Rules were suitably amended with effect
from August 4, 1981. Amended Rule 76(a) provides that "No spirit of
liquor" manufactured or stored shall be removed unless the Excise duty
specified in rule 6 has been paid by a holder of D-2 licence before such
removal and the amended rule 79(1) provides that on payment of the excise duty
by the holder of D-2 licence a distillery pass for the removal of spirit fit
for human compensation may be granted in favour of any of the named persons
therein.
The appellant, being a D-2 licence holder was
served with a notice, on the basis of the amended provisions, by the respondent
proposing to include a sum of Rs. 4,49,09,532.40 representing the excise duty
paid directly by buyers of appellants' liquor in the appellants, turnover for a
part of the year 1982-83, Thereupon, the appellant again moved the High Court
for quashing the said notice. The High Court considered the effect of the
amended Rules and held that the primary liability to pay excise duty was
indisputably of the holder of the D-2 licence. The High Court dismissed the
writ petition on the findings (a) that the turnover related to liquor; and (b)
that the excise duty which was payable by the appellant but had by amicable
arrangement been paid by the buyer was actually a part of the turnover of the
appellant and was, therefore, liable to be so included for determining
liability for sales tax. When leave was granted by a Division Bench of the
Supreme Court to appeal against the judgment of the High Court, the correctness
of the decision in appellants' case reported in [1977] 1 SCR 914, was doubted and
the matter was referred to a larger Bench.
Dismissing the appeal, the Court, ^
HELD: (Per Chinnappa Reddy, J. (concurring)
1.1 Much legal sophistry and Judicial
exposition both in England and India 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 law still is, there is no equity about a tax. There is no presumption
as to a tax. Nothing is to be read in, nothings to be implied", during the
period between the two world wars the 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. In the wake of World War II huge profiteering and
racketeering became the order of the day, something which persists till today
but on a much larger scale. Therefore, the attitude of the entire English
Courts towards avoidance of tax perceptibly changed and hardened, The march of
the law against Tax avoidance schemes des- 793 cribed as magic performance by
lawyer turned magician continued and then came a significant departure from the
West-mininister and the Fisher Executors principle in 1982 and finally
"the ghost of West-minister" has been exercised in England. Thus, in
the very country of its birth, the principle of West-minister has been given a
decent burial and in that very country where the phrase "tax
avoidance" 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 courts are concerning
themselves not merely with the genuineness of a transaction, but with the
intended effect of it for fiscal purposes. No man now can get away with a tax
avoidance project with the mere statement that there is nothing illegal about
it.
[797 G-H, 798 F, 801 C, 807 A-D] Inland
Revenue Commissioners v. Fishers Executors, [1926] AC 395; Inland Revenue
Commissioners v. Duke of West- minister, [19361 AC 1; Lord Howard De Waldan v.
Inland Revenue Commissioners, [1942] 1 KB 389; Latilla v. Inland Revenue
Commissioners, [1943] AC 377: Griffiths v. J.P.
Harrizan Ltd. [1963] AC 1; Morgan v. Inland
Revenue Commissioners, [1963] Chancery 438; Public Trustee v.
Inland Revenue Commissioners, [1965] Chancery
286; Campbell v. Inland Revenue Commissioners, [1967] Chancery 651;
Greenberg v. Inland Revenue Commissioners, [1971]
3 All E.R.
136; W.T. Ramsay v. Inland Revenue
Commissioners, 11982] AC 300: Inland Revenue Commissioners v. Burmah Oil
Company Ltd, 1982 STC 30: Furniss v. Dawson, [1984] 1 All E.R. 530;
Commissioner of Income tax, Gujarat v. A.
Raman & Co., [1968]1 SCR 10; Commissioner of Income tax. Gujarat v.
Kharwar, 72 ITR 603 referred to.
2. The evil consequence of tax avoidance are
manifold:
(i) there is substantial loss of much needed
public revenue particularly in a welfare State like ours; (ii) there is the
serious disturbance caused to the economy of the country by the piling up of
mountains of blackmoney directly causing inflation; (iii) there is "the
large hidden loss" to the community 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 side and the
tax-gathered and his perhaps not so skillful, advisers on the other side; (iv)
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"; and (v) last but not 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 doggers". [808 H,
809 A- C]
3. The proper way to construe a taxing
statute, while considering 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. [809 E-F] Wood Polymer Ltd.
v. Bengal Hotels Limited, 40 Company Cases 597 referred to.
794
4. 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 upto 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 inter- pretation, to expose the devices for
what they really are and to refuse to give Judicial benediction. [809 G-H 810
A] W.T. Ramsay v. Inland Revenue Commissioners, [1982] AC 300; Inland Revenue
Commissioners v. Burmah Oil Company Ltd.
1982 STC 30; Furniss v. Dawson, [1984] I All
E.R. 530 quoted with approval.
HELD: (Per Ranganath Misra, J.)
1. Tax planning may be legitimate provided lt
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. [823 H, 824 A] Commissioner of Income tax v. A. Raman & Co.
(1968) 67 ITR II SC J Commissioner of Income-tax, Gujarat II v. B.M.
Kharwar, (1969) 72 ITR 603 SC; Bank of
Chettinad Ltd. v. Commissioner of Income-tax, (1940) 8 ITR 522 (PC);
Jiyajeerao Cotton Mills Ltd. v. Commission of
Income Tax and Excess Profits Tax, Bombay, (1958) 34 ITR 388 (SC) Commissioner
of Income Tax v. Sakarlal Balabhai (1972) 86 ITR 2 (SC) referred to.
Latilla v. I.R. 25 T.C. 107 quoted with
approval.
2.1 The incidence of excise duty is directly
relatable to manufacture but its collection can be deferred to a later stage as
a measure of convenience or expediency. [815 A-B] The Province of Madras v.
M/s. Boddu Paidanna & Sons [1942] ECR 90 R.C. Jall v. Union of India,
[1962] Suppl. 3 SCR 436; Re. Sea Custom Act, [1964) 3 SCR 787; M/s- Guruswamy
& Co. etc. v. State of Mysore & Ors., [1967] 1 SCR 548; Jullundur
Rubber Goods Manufacturers' Association v.
Union of India & Anr. [1970] 2 SCR 68;
A.B. Abdul Kadir & Anr. v. State of Kerala, [1976] 3 SCR 219 referred to.
2.2 On an examination of the provisions of
the A.P.
Excise Act, the Rules were framed thereunder
and the pronouncements of the Supreme Court, it is clear, that the conclusion
of the Court in Mc Dowells & Company Ltd. etc. v. Commercial Tax Officer,
Vllth Circle, Hyderabad etc., [1977] 1 SCR 914 at page 921 of [1973] 1 SCR,
that intending purchasers of the Indian liquors who seek to obtain distillery
passes are also legally responsible for payment of the excise duty is too
broadly stated. The "duty wag primarily a burden which the 795
manufacturer had to bear and even if the purchasers paid the same under the Distillery
Rules, the provisions were merely enabling and did not give rise to any legal
responsibility or obligation for meeting the burden. [815 B-D] The change in
Rule 76 of the AP Distillery Rules has clearly affirmed the position that
liability for payment of excise duty is of the manufacturer and the provisions
of rules 80 to 84 do not militate against it. These rules 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 a contract or
arrangement by any other person it would amount to meeting of the obligation of
the manufacturer and nothing more. [815 D-F]
2.3 The definition of "turnover",
in section 2(s) of the A.P. General Sales Tax Act, which is to the effect.
namely 'the total amount set out in the bill
of sale (or if there is no bill of sale, the total amount charged) as the
consideration for the sale or purchase of goods (whether such consideration be
cash, deferred payment or any other thing or value) Including any sums charged
by the dealer for anything done in respect of goods sold at the time of or
before the delivery of the goods and any other sums charged by the dealer,
whatever be the description, name or object thereof" clearly indicates that
the total amount charged as the consideration for the sale is to be taken into
account for determining the turnover. Where a bin of sale is issued (and
obviously the bill has to state the total amount charged as consideration), the
total amount set out therein is to be taken into account. In every transaction
of sale, there is bound to be a seller at one end and a buyer at the other and
transfer of title in the goods takes place for a consideration. [815 H,816 A-C]
2.4 Excise duty though paid by the purchaser
to meet the liability of the appellant, is a part of the consideration for the
sale and is includible in the turnover of the appellant. The purchaser has paid
the tax because the law asks him to pay it on behalf of the manufacturer. Here,
admittedly, the bills issued by the appellant did not include the excise duty;
Payment of excise duty is a legal liability of the manufacture, its payment is
a condition precedent to the removal of the liquor from the distillery and
payment by the purchaser is on account of the manufacturer. According to normal
commercial practice, excise duty should have been reflected in the bill either
as merged in price or being shown separately. As a fact, in the hands of the
buyer the cost of liquor is what is charged by the appellant under its bill
together with excise duty which the buyer has directly paid on seller's
account. The consideration for the sale is thus the total amount not what is
reflected in the bill. [818 C-F]
2.5 True, the excise duty component of the
price would not be an addition to the coffers of the dealer, as it would go to
reimburse him in respect of the excise duty already paid by him on the
manufacture of the goods. But even so, it would be part of the sale price
because it forms a component 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 796 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 changed by the dealer or is shown as a separate
item in the bill, The position is not different when under a 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. [816 G-H, 817 A-D]
2.6 The conclusion reached in the appellants'
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 not
become a part of the circulating capital, it does not constitute turnover, is
not the decisive test for deter mining whether such duty would constitute
"turnover". 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 passing of it. If there is no bar, the incidence would be
passed on to the purchaser in accordance with normal commercial practice. [819
A-C 821 B-C] The Province of Madras v. M/s. Boddu Paidanna & Sons, [1942]
FCR 90; RC Jall v. Union of India, [1962] Suppl. 3 SCR 436; Re. Sea Customs
Act, [1964] 3 SCR 787; M/s, Guruswamy & Co. etc. v. State of Mysore &
Ors, [1967] 1 SCR 548; jullundur Rubber Goods Manufacturers' Association v.
Union of India & Anr. [1970] 2 SCR 68;
A.B. Abbul Kadir & Ors. v. State of Kerala, [1976] 3 SCR 219: referred to.
Hindustan Sugar Mills v. Rajasthan State,
[1979] I SCR 276 applied.
Paprika Ltd. & Anr. v. Board of Trade,
[]944] All. E.R.
372; Love v, Norman Wright (Builders) Ltd.
[1944] I All E.R. 618 quoted with approval.
M/s George Oakes(P) Ltd. v. The State of
Madras, [1962] 2 SCR 570, Anand Swarup Mahesh Kumar v. The Commissioner of
Sales Tax, [1981] 1 SCR 707 discussed and distinguished.
3.A stand which has not been taken in the
writ petition before the High Court cannot be allowed to be taken in the
Supreme Court. Here the contention based on item 26 of the amended First
Schedule to the Sales Tax Act that the appellant had already paid tax on the
basis of 50 p. in the rupee on the fooling that the consideration for its
liquor did not include duty of excise pay able under the Excise Act and the
appellant cannot, therefore, be made liable for sales tax on a different
footing cannot be sustained. Such a stand had not been taken in the writ
petition before the High Court and there has been no 797 factual examination of
the position as to whether the classification indicated is not intended to
cover a totally different situation. Further for resolving the dispute as to
whether excise duty is a part of the turnover, reference to the Schedule is
indeed wholly irrelevant. [820 A-D] George Oakes (P) Ltd. & Ors. v. The
State Madras, 13 STC 98, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 570 of 1983.
From the Judgment and Order dated 6.12.1982
of the High Court of Andhra Pradesh in Writ Petition No. 7985/82.
Soli J. Sorabjee, Harish N. Salve, Ravinder
Narain and Mrs. A.K. Verma for the Appellant.
S.T. Desai, B. Parthasarthi and T.V.S.N.
Chari for the Respondents.
The following Judgments were delivered
CHINNAPPA REDDY, J. While I entirely agree with my brother Rangnath Misra, J.
in the judgment proposed to be delivered by him, I wish to add a few
paragraphs, particularly to supplement what he has said on the fashionable'
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
798 the period between the two world wars, the 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 Inland Revenue Commissioners v. Fishers
Executors(l) said: ` "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 term or of any
emotions that he can find in his favour in taxing Acts. In so doing he neither
comes under liability nor incurs blame." Lord Tomlin echoing what Lord
Sumner had said observed in Inland Revenue Commissioners v. Duke of West
Minister(2) follows type filing the prevalent attitude towards tax avoidance at
that time:
"Every man is entitled if he can to
order his affairs so that the tax attaching under the appropriate Acts is less
than if otherwise would be. 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
on increased tax." Then came World War II and in its wake huge
profiteering and racketeering, something which persists till today, but on a
much larger scale. The attitude of the Courts towards avoidance of tax
perceptibly changed and hardened and in Lord Howard De Waldan v. Inland Revenue
Commissioners(a) Greene, M.R., dealing with the construction of an
anti-avoidance section said:
"For years a battle of manoeuvre has
been waged between the legislature and those who are minded to throw the (1)
[1926] A.C. 395.
(2) [1936] A.C, 1, (3) [1942] I,KB 389.
799 burden of taxation off their own
shoulders on to those Of their fellow subjects. In that battle the legislature
has been worsted by the skill, determination and resourcefulness of its opponents
of whom the present appellant has not been the least successful. It would not
shock us in the least to find that the legislature has determined to put an and
to the struggle by imposing the severest penalities. It scarcely lies in the
mouth of the tax payer who plays with fire to complain of burnt fingers."
Expressing the same sentiment and dissertating on the moral aspects of tax
avoidance Lord Simon in Latilla v.
Inland Revenue Commissioners(1) said,
"My Lords, of recent years much ingenuity has been expended in certain
quarters in attempting to devise met hods of disposition of income by which
those who were prepared to adopt them might enjoy the benefits of residents 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 60. 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, Griffith v. JP Harrizan Ltd.(2), Morgan v.
Inland Revenue Commissioners'(3) Public Trustee v.
Inland Revenue Commissioners(4), Lord Denning
repeatedly referred to tax avoidance schemes (1) [1943] A.C. 377.
(2) [1963] A.C. 1.
(3) [1963] Chancery 438.
(4) [1965] Chancery 286.
800 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 little of the
lamp" and said ' it is a splendid scheme-it is almost too good to be true.
In law quite too good to be true. It won't do." (Campbell v. Inland
Revenue Commissioners(1), Stamp J. In re Western's Settlements observed-
"...There must be some limit to the devices which this Court ought to
countenance in order to defeat the fiscal intentions of the legislature. In my
judgment these proposals overstep that limit...I am not pursuaded with this
application represents more than a cheap exercise in tax avoidance which r
ought not to sanction as distinct from a legitimate avoidance of liability to
taxation.
In Greenberg v. Inland Revenue
Commissioners(2), Lord Reid dealing with a scheme for tax avoidance by forward
dividend stripping observed, " .... We seem to have travelled a long way
from the general and salutary rule that the subject is not be taxed except by
plain words. But I must recognise that plain words are seldom adequate to
anticipate and forestall the multiplicity of ingenious schemes which are
constantly being devised to evade taxation.
Parliament is very properly determined to
prevent this kind of tax evasion and, if the courts find it impossible to give
very wide meanings to general phrases, the only alternative may be for
Parliament to do as some other countries have done and introduce legislation of
a more sweeping character which will put the ordinary well-intentioned person
at much greater risk than is created by a wide interpretation of such
provisions as those which we are now considering." (1) [1967] Chancery,
651.
(2) 1971(3) All ER. 135.
801 "I am inclined to think that the
real explanation of these verbal difficulties may be that, in legislation of
such extreme complexity as we have here, it is not humanly possible for a
draftsman to preserve that consistency in the use of language which we
generally look for. Indeed, l sometimes suspect that our normal meticulous
methods of statutory construction tend to lead us astray by concentrating too
much 1 on verbal niceties and paying too little attention to the provisions
read as a whole." The march of the law against tax avoidance schemes
continued and came a significant departure from the West- minister and the
Fisher Executor. principle. In W.I.. Ramsay v. Inland Revenue Commissioners(1),
the House of Lords had to consider a scheme of tax avoidance which consisted of
a series or a combination of transactions each of which was individually
genuine but the result of all of which was an avoidance of tax. Lord
Wilberforce, with great force, observed, "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 Westminister. 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 sub
stance, 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 of transactions,
in tended to operate as such, it is that series or combination which may be
regarded. For this there is authority in the (1) 11982] AB 300.
802 law relating to income tax and capital
gains tax: See Chinn v. Hochstrasser [1981] A.C. 533 and Inland Revenue Com
missioners v. Plummer [1980] A.C. 896." "For the commissioners
considering a particular case it is wrong and an unnecessary self limitation,
to regard themselves as precluded by their own finding that documents or
transactions are not "shams", from considering what, as evidenced by
the documents themselves or by the manifested intentions of the parties, the
relevant transaction is. They are not, under the Westminister doctrine or any
other authority, bound to consider individually each separate step in a
composite transaction intended to be carried through as a whole." Later
again he observed, ".....For the taxpayers it was said that to accept the
revenue's wide contention involved a rejection of accepted and established
canons and that, if so general an attack upon schemes for tax avoidance as the
revenue suggest is to be validated, that is a matter for Parliament. The
function of the courts is to apply strictly and correctly the legislation which
Parliament has enacted: if the taxpayer escapes the charge, it is for
Parliament, if it disapproves of the result, to close the gap. General
principles against tax avoidance are, it was claimed, for Parliament to lay
down. We were referred, at our request, in this connection to the various
enactments by which Parliament has from time to time tried to counter tax avoidance
by some general prescription. The most extensive of these is Income and
Corporation Taxes Act 1970, sections 460 et seq. We were referred also to well
known sections in Australia and New Zealand (Australia, Income Tax Assesment
Act 1936 -51, section 260, New Zealand, Income Tax Act 1976, section 99,
replacing earlier legislation). Further it was pointed out that the capital
gains tax legislation (starting with the Finance Act 1965) does not contain any
provision corresponding to section 460. The intention should be 803 deduced
therefore, it was said, to leave capital gains tax to be dealt with by
"hole and plug" methods: that such schemes as the present could be so
dealt with has been con firmed by later legislation as to "value shifting":
Capital Gains Tax Act 1979, section 25 et seq. These arguments merit serious
consideration. In substance they appealed to Barwick C.J. in the recent case of
Federal Commissioner of Taxation v. Westraders Pty. Ltd. [1980] 30 A.L.R. 353,
354-355, " "I have a full respect for the principles which have been
stated but I 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 par- ties 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 courts to arrive at a conclusion
which corresponds with the parties' own intentions." "The capital
gains tax was created to operate in the real world, not that of make-belief.
The significance of Ramsay as a turning point
in the interpretation of tax laws in England and the departure from the strings
of Westminister were explained in Inland Revenue Commissioners v. Burmah Oil
Company Ltd.,(1) where Lord Diplock said, "It would be disingenuous to
suggest, and dangerous (1) [1982] S.T.C. 30 804 on the part of those who advise
on elaborate tax- avoidance schemes to assume, that Ramsay's case did not mark
a significant change in the approach adopted by this House in its judicial role
to a pre-ordained series of transactions (whether or not they include the
achievement of a legitimate commercial end) into which there are inserted steps
that have no commercial purpose apart from the avoidance of a liability to tax
which in the absence of those particular steps would have been payable. The
difference is in approach. It does not necessitate the overruling of any
earlier decisions of this House; hut it does involve recognising that Lord
Hamlin's oft-quoted dictum in IRC v. Duke of Westminister(1) "Every man is
entitled if he can to order his affairs so as that the tax attaching under the
appropriate Acts is less then it otherwise would be", tell us little or
nothing as to what methods of ordering one's affairs will be recognised by the
courts as effective to lesson the tax what would attach to them if business
transactions were conducted in a straight-forward way." Lord Scarman said,
"First, it is of the utmost importance that the business community (and
others, including their advisers) should appreciate, as my noble and learned
friend Lord Diplock has emphasised, that Ramsay's case marks "a significant
change in the approach adopted by this House in its judicial role" towards
tax avoidance schemes. Secondly, it is now crucial when considering any such
scheme to take the analysis far enough to determine where the profit, gain or
loss is really to be found," The winds of change continued to blow and in
Furniss v. Dawson(2) Ramsay was reiterated. Lord Brightman observed, "The
fact that the court accepted that each step in a transaction was a genuine step
producing its intended legal (1) [1936] AC. 1(@)19=[1935] All ER. Rep. 259 (at)
267.
(2) [1984] 1 Ali E.R. 530, 805 results did
not confine the court to considering each step in h. isolation for the purpose
of assessing the fiscal results." He further said, "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 and 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:- ". . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ . _ __ The true principle of decision in Ramsay was that the fiscal
consequences of a preordained series of transactions, intended to operate as
such, are generally to be asertained by considering the result of the series as
a whin, and not by dissecting the scheme and considering each individual
transaction separately.
" Lord Scarman in his characteristic
style observed, "The law will develop from case to case. Lord Wilberforcc
in W.T. Ramsay Ltd. v. IRC [1981] 1 All ER 865 at 872, [1982] AC 300 at 324
referred to 'the emerging principle' of the law. What has been established with
certainty by the House in Ramsay's case is that the determination of what does,
and what does not, constitute unacceptable tax evasion is a subject suited to
development by judicial process. The best chart that we have for the way
forward appears to me, with great respect to all engaged on the map-making
process, to be the words of Lord Diplock in IRC v.
Burmah Oil Co. Ltd. [1982] STC 30 at 32 which
my noble and learned friend Lord Brightman quotes in his speech.
These words 806 have space in the law for the
principle enunciated by Lord Tomlin in IRC v. Duke of Westminister [1936] AC I
at 19, [1935] All ER Rep. 259 at 267 that every man is entitled if he can to
order his affairs so as to diminish the burden of tax. The limits within which
this principle is to operate remain to be probed and determined judicially.
Difficult though the task may be for judges, it is one which is beyond the
power of the blunt instrument of legislation. Whatever a statute may provide,
it has to be interpreted and applied by the courts; and ultimately it will prove
to be this area of judge-made law that our elusive journey's end will be a
found. " Lord Roskill put it even more forcefully:
"The error, if I may venture to use that
word, into which the courts below have fallen is that they have looked back to
1936 and not forward from 1982.
They do not appear to have appreciated the
true significance of the passages in the speeches in Ramsay's case [1981] 1 All
ER 865 at 872-873, 881, [1982] AC 300 at 325, 337 of Lord Wilberforce and Lord
Fraser, and, even more important, of the warnings in the Burmah Oil Case [1982]
STC 30 at 32, 39 given by Lord Diplock and Lord Scarman in the passages to
which my noble and learned friend Lord Brightman refers and which I will not
repeat. It is perhaps worth recalling the warning given, albeit in another
content by Lord Atkin, who himself dissented in the Duke af Westminister's
case, in United Australia Ltd. v.
Barclays Bank Ltd.(1) ' When these ghosts of
the past stand in the path of justice, clanking 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 Westminister 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 ad ministration of this branch of the law for too long. I
confess that I had hoped that ghost might have found quietude with the
decisions in Ramsay and in Burmah. Unhappily it (1) [1940] 4 All E.R. 20 @
37=[1941] A.C. I @ 29.
807 has not. Perhaps the decision of this
House in these appeals , will now suffice as exorcism." Thus the ghost of
Westminister (in the words of Lord Roskill) has been exercised 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 Westminister has been given a decent burial and in that very
country where the phrase 'tax avoidance' 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 C frown. The
courts are now concerning themselves not merely with the genuineness of a
transaction, but with the intended effect of it for fiscal purposes. No one can
now get away with a tax avoidance project with the mere statement that there is
nothing illegal about it.
Some years ago, a diverting attempt was made
by a Correspondent to the London 'Times' to defend tax avoidance.
He said, "The taxpayer is morally bound
to obey the law, but is not bound beyond the law, for apart from the law
taxation would be blackmail or racketeering. There is not behind taxing laws,
as there is behind laws against crime, an in dependent moral obligation. When
therefore the tax-payer has obeyed the law, he had done all that morality
requires" He had further said, "It is said that by avoiding a tax he
throws a load on to some other taxpayer. But this is not quite accurate, for -
the deficiency might be met by reducing expenditure.. is it not a good thing
that there should be this last lawful remedy against oppressive taxation by a
majority, that human ingenuity can always find a way by which the minority can
escape from tyrannical imposts." The correspondent was answered by
another's correspondent who described the former's defence of tax avoidance as
'an amusing 808 attempt to raise the art of tax avoidance to the moral level of
political martyrdom and to make Hampdens of our modern tax dodgers'. Nor, may
we say, are our tax dodgers Gandhiji is on the Dandi March to protest against
the Salt Tax.
In Commissioner of Income tax, Gujarat v. A.
Raman & Co.,(1) JC Shah, JJ. speaking for himself and Sikri and Ramaswami,
JJ repeating almost verbatim the observations in Westminister and Fishers
Executors observed:
"Avoidance of tax liability by 80
arranging commercial affairs that charge of tax is distributed is not
prohibited.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 Legislative injunction in taking
statutes may not, except on period of penalty, be violated, but it may lawfully
be cumvented." The same Judge, speaking for himself, Ramaswami and Grover
JJ in Commissioner of income tax, Gujarat v.
Kharwar(2) expressely followed Westminister
and observed:
"The taxing authority is entitled and is
indeed bound to determine the true legal relation resulting from a transaction.
If the parties have chosen to conceal by a device the legal relation, it Is
open to the taking authorities to unravel the device and to determine the true
character of relationship. But the legal effect of a transaction cannot be
displaced by probing into the "substance of the transaction".
We think that time has come for us to depart
from the Westminister 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
manifold. First there is substantial loss of much needed public revenue,
particularly in a welfare state like ours. Next there (1) [1968]1 S.C.R 10.
(2) 72 ITR 603.
809 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 Sheatcraft 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 skilful,
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 tho judiciary in India too to part its ways from the principle of
Westminister and the alluring logic of tax avoidance. We now live In a welfare
state whose financial needs, if backed by the law, have to be respected and
met. We must recognise that there is behind taxation laws as much moral
sanction as behind any other welfare legislation and it is a pretence to say
that avoidance of taxation is not unethical and that It stands on no less moral
plane than honest payment of taxation. In our view, the proper way to construe
a taking statute, while considering 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.A hint of this approach
is to be found in the judgment of Desai, J. in Wood Polymer Ltd. v. Bengal
Hotels Limited(1) where the learned judge refused to accord sanction to the
amalgamation of companies as it would lead to avoidance of tax.
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 upto 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 as was done in Ramsay, Burma Oil
and Dawson, to expose the devices (1) 40 Company Cases, 597.
810 for what they really are and to refuse to
give judicial benediction.
We agree 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 Rules, and Indian liquor Rules all made under the Excise Act.
'Excise duty' as defined in section 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 not contain any reference to excise duty paid by the purchaser. The
appellant paid Sales Tax payable by it under the Andhra Pradesh General Sales
Tax Act, 1957, ('Sales Tax Act' for short), on the basis of its turnover which
excluded excise duty. The Company was assessed to sales tax on the basis of its
returns but later the Commercial Tax Officer was of the view that the Company
had failed to include the excise duty paid on the liquor sold by it to
wholesalers. The taking authority accordingly called upon the Company to show
cause why assessments made may not be reopened. The appellant moved the High
Court for quashing of such notice and having failed, carried the matter in
appeal to this Court.A Division Bench of this Court in Mc Dowell & Company
Ltd. etc. v. Commercial Tax Officer, Vll Circle, Hyderabad, etc., (1) (1)
[1977] 1 S.C.R. 914.
811 examined the provision of the Excise Act
and the Rules made there under as also the provisions of the Sales Tax Act.
This Court took the view:
"We hold that intending purchasers of
the Indian liquor who seek to obtain distillery passes are also legally
responsible for payment of the excise duty which is collected from them by the
authorities of the excise department.
This Court then proceeded to determine
whether excise duty paid directly to the Excise authorities or deposited
directly in the State Exchequer in respect of Indian liquor by the buyers
before - removing the same from the distillery could be said to form part of
the taxable turnover of the appellant distillery. Precedents w ere referred to
and the Court came to the conclusion that excise duty did not go into the
common till of the appellant and did not become a part of the circulating
capital. Therefore, the Sales Tax authorities were not competent to include in
the turnover of the appellant the excise duty which was not charged by it but
was paid directly to the excise authorities by the buyers of the liquor. The
appellant, therefore, succeeded before this Court and the notices issued by the
Sales Tax authorities were quashed.
The judgment of this Court was delivered on
October 25, 1976. Rules 76 and 79 of the Distillery Rules were amended with
effect from August 4, 1981. Rule 76(a) now provides:
"No spirit or liquor manufactured or
stored shall be removed unless the excise duty specified in rule 6 has been paid
by a holder of D-2 licence before such removal." It is not disputed that
appellant is the holder of a D-2 licence under the law. Amended rule 79 (1)
provides:
"76 (1). On payment of the excise duty
by the holder of D-2 licence 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 licence 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 situ 812 ated 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 Andhra Pradesh or from officer referred to in clause (a) above of
any other State to transport or export rectified spirits or wine, to such
district or State." On the basis of the amended provisions, the respondent
Officer issued a notice to the appellant proposing to include a sum of
Rs.4,49,09,552.40 representing the excise duty paid directly by buyers of
appellant's liquor in the appellant's turnover for a part of the year 1982-83.
Thereupon, the appellant again moved the High
Court for quashing of the notice. Reliance was placed on the earlier decision
of this Court. The High Court very appropriately felt bound by the decision of
this Court and considered the effect of the amended Rules and held that the
primary liability to pay excise duty was indisputably of the holder of the D-2
licence. It further found that the turnover related to liquor, excise duty
which was payable by the appellant but had by amicable arrangement been paid by
the buyer was actually a part of the turnover of the appellant and was,
therefore, liable to be so included for determining liability for sales tax. On
these findings the High Court dismissed the writ petition. When leave was
granted by a Division Bench of this Court to appeal against the Judgment of the
High Court, the correctness of the decision in appellant's case reported in
(1977) 1 S.C.R. 914, was doubted and the matter was referred to a larger Bench.
That is how the appeal came to be heard by us.
813 Mr. Sorabji, appearing in support of the
appeal at the very commencement of his submissions stated that there was no
constitutional question involved in the appeal. He also fairly stated that the
vires of the Excise Act and the Rules was not under challenge. Nor was the
amendment of Rules in 1981 in dispute.
The Federal Court In The Province of Madras
v. Messrs.
Boddu Paidanna & Sons,(1) held:
"There is in theory nothing to prevent
the Central Legislature from imposing a duty of excise on a commodity as soon
as it comes into existence, no matter what happens to it afterwards. whether it
be sold, consumed, destroyed, or given away. A taking authority will not
ordinarily Impose such a duty, because it is much more convenient
administratively to collect the duty tax in the case of most of the Indian
Excise Acts) when the commodity leaves the factory for the first time, and also
because the duty is intended to be an indirect duty which the manufacture or
producer is to pass on to the ultimate consumer, which he could 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 R.C. Jall v. Union of India,(2) 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 taking 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." (1) [1942] F.C.R. 90.
(2) [1962] Suppl. 3 S.C.R. 436.
814 In Re. Sea Customs Act, (1) this Court
said:
"With great respect, we accept the
principles laid down by the said three decisions (1939 F.C.R. 18; 1942 F.C.R.
90 and 1945 F.G.R. 179) in the matter of levy of an excise duty and the
machinery for collection thereof." In M/S. Guruswamy & Co. etc. v.
State of Mysore & ors (2) Sikri, J. (as he then was), spoke for the
majority and stated the ratio thus:
"These cases establish that in order to
be an excise duty (a) the levy must be upon 'goods' and (b) the taxable event
must be the manufacture or production of goods. Further the levy need not be
imposed at the stage of production or manufacture but may be imposed later.
" In Jullundur Rubber Goods Manufacturers' Association v.
Union of India & Anr., (3) Grover, J.
after extracting a part of the Judgment in Jall's case (supra) spoke for the
Court thus:
"The above statement of law in no way
supports the argument that excise duty cannot be collected from per sons who
are neither producers nor manufacturers. Its incidence certainly falls directly
on the production or manufacture of goods but the method of collection will not
affect the essence of the duty." In A.B. Abdul Kadir & Ors. v. State
of Kerala, (4) this Court restated the position thus:
"Excise duty, it is now well settled, is
a tax on articles produced or manufactured in the taxing country, Generally
speaking, the tax is on the manufacturer on the producer, yet laws are to be
found which impose a duty of excise at stages subsequent to the manufacture or
production." (2) (1964] 3 S.C.R. 787.
(3) [1967] 1 S.C.R. 548.
(4) [1970] 2 S.C.R. 68.
(1) [1976] 3 S.C.R. 219.
815 Thus, the incidence of excise duty is
directly relatable to manufacture but its collection can be deferred to a later
stage as a measure of convenience or expediency.
On an examination of the provisions of the
Excise Act, the Rules framed thereunder and the pronouncements referred to
above,) we are of the view that the conclusion of this Court at page 921 of the
Reports that intending purchasers of the Indian liquors who seek to obtain
distillery passes are also legally responsible for payment of the excise duty
is too broadly stated. The "duty" was primarily a burden which the
manufacturer had to bear and even if purchasers paid the same under the
Distillery Rules, the provisions were merely enabling and did not give rise to
any legal responsibility or obligation for meeting the burden. We do not
propose, however, to examine this aspect any further for the change in Rule 76
of the Distillery Rules has clearly affirmed the position that liability for
payment of excise duty is of the manufacturer. Provisions of 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 excise duty is
the primary and exclusive obligation of the manufacturer and if- payment be
made under a 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 he (the buyer) pays the excise duty to the excise authorise 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 a part of the turnover of the appellant.
'Turnover' is defined in s. 2(s) of the Sales
Tax Act to mean "the total amount set out in the bill of sale or if there
is no bill of sale, the total amount charged) as the consideration for the sale
816 or purchase of goods (whether such consideration be cash, deferred payment
of any other thing or value) including any sums charged by the dealer for
anything done in respect of goods sold at the time of or before the delivery of
the goods and any other sums charged by the dealer, whatever be the
description, name or object thereof." The definition clearly indicates
that the total amount charged as the consideration for the sale is to be taken
into account for determining the turnover. Where a bill of sale is Issued (and
obviously the bill has to state the total amount charged as consideration), the
total amount set out therein is to be taken into account. In every transaction
of sale, there is bound to be a seller at one end and a buyer at the other and
transfer or title in the goods takes place for a consideration.
In Hindustan Sugar Mills v. Rajasthan State,
(1) this Court observed:
"The test is, what is the consideration
passing from the purchaser to the dealer for the sale of the goods. It is
immaterial to enquire as to how the amount of consideration is made up, whether
it includes excise duty or sales tax or freight. The only relevant question to
ask is as to what is the amount payable by the purchaser to the dealer as
consideration for the sale...." The Court proceeded to say:
"take for example, excise duty payable
by a dealer who is a manufacturer. When he sells goods manufactured by him, he
always passes on the excise duty to the purchaser. Ordinarily it is not shown
as a separate item in the bill, but it is included in the price charged by him.
The sale Price in such a case could be the entire price inclusive of excise
duty because that would be the consideration payable by the purchaser for the
sale of the goods. True, the excise duty component of the price would not be an
addition to the coffers of the dealer. as it would go to reimburse him (1)
[1979] I S.C.R. 276.
817 in respect of the excise duty already
paid by him on the manufacture of the goods. But even so, it would be part of
the sale price because it forms a component 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 other wise,
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 a prior agreement, the legal liability of
the manufacturer-dealer for payment of excise duty is satisfied by the
purchaser by direct payment to excise authorities or to the state exchequer. In
Paprica Ltd. & Anr. v. Board of Trade, (1) Lawrence, J. stated:
"Whenever 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. The State of Madras, (2) quoted this extract with
approval and also referred to the following passage in the Judgment of Goddard,
L.J. in Low v. Norman Wright (Builders) Ltd (3):
"Where an article is taxed, whether by
purchase tax, customs duty, or excise duty the tax becomes part of the price
which ordinarily the buyer will have to pay. The price of an ounce of tobacco
is what it is because of the rate of tax, but on a sale there is only one
consideration though made up, of cost plus profit plus tax. So if a seller
offers goods (1) [1944] All E.R. 372.
(2) [1962] 2 S.C.R. 570.
(3) [1944] 1 All E.R. 618.
818 for sale, it is for him to quote a price
which includes the tax if he desires to pass it on to the buyer. If the buyer
agrees to the price, it is not for him to consider how it is made up or whether
that seller has included tax or not So far as the purchaser is concerned, he
pays for the goods what the seller demands, namely, the price even though it
may include tax. That is the whole consideration for the sale and there is no
reason why the whole amount paid to the seller by the purchaser should not be
treated as the consideration for the sale and included in the turnover. "
Admittedly, the bills issued by the appellant did not include the excise duty.
As already found, payment of excise duty is a legal liability of the
manufacturer; its payment ii a condition precedent to the removal of the liquor
from the distillery and payment by the purchaser is on account of the
manufacturer. According to normal commercial practice, excise duty should have
been reflected in the bill either as merged in price or being shown separately.
As a fact, in the hands of the buyer the cost of liquor is what is charged by
the appellant under its bill together with excise duty which the buyer has
directly paid on seller's account. The consideration for the sale is thus the
total amount and not what is reflected in the bill. We are, therefore, clearly
of the opinion that excise duty though paid by the purchaser to meet the
liability of the appellant, is a part of the consideration for the sale and is
includible in the turnover of the appellant. The purchaser has paid the tax
because the law asks him to pay it on behalf of the manufacturer.
Mr. Sorabji in the course of his submission
relied on a Division Bench decision of this Court in Anand Swarup Mahesh Kumar
v. The commissioner of Sales Tax. (1) This Court was considering the liability
for Sales Tax under the corresponding U.P. Act in respect of a dealer carrying
on business at Mandi Anandganj, Baraut in the District of Merrut. 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 (1) [1981] 1 S.CR. 707 819
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 part of the Schedule provides thus :
Item No Description of Point of levy. Rate of
tax goods
26. All liquors, other At the point than
country liquor of the first sale 2 (but including in the State.
Vodka) (1026) (a) not covered by 3 (50 paise)
item (b) below in the rupee, (b) Where the 3 (25 paise) consideration for in
the rupee. the sale or purchase of liquor includes the duties of excise payable
under the Andhra Pradesh Excise Act, 1968.
Apparently this amendment was brought about
after the Judgment of this Court in the appellant's appeal in 1976 and the
position has been further altered by amendment in 1984.
Sale of liquor has now been made exigible to
tax at every point other than the point of last 820 sale in the State. The
argument advanced before this Court is that the appellant had already paid tax
on the basis of 50p. in the rupee on the footing that the consideration for
sale of its liquor did not include duty of excise payable under the Excise Act
and the appellant cannot, therefore, be made liable for sales tax on a
different footing. This contention too has no force. Such a stand had not been
taken in the writ petition before the High Court and there has been no factual
examination of the position as to whether the classification indicated is not
intended to cover a totally different situation. For resolving the dispute as
to whether excise duty is a part of the turnover, reference to the Schedule ii
indeed wholly irrelevant.
Mr. Sorabji relied heavily on the
observations of Hidayatullah, J. (as he then was) speaking for the Court in the
case of George Oakes (Private) Ltd. & Ors. v. The State of Madras, (1)
where it was said:
"It was pointed out by this Court (in 12
STC 476) that the word 'price' in so far as the purchaser is concerned includes
the tax also, and that in laws dealing with sales-tax, turnover has, in England
and America also, been held to include the tax. The reason for such inclusion
is stated to be that dealer who realises the tax does not hand it over forth
with to Government but keeps it with him, and turns it over in his business
before the parts with it. Thus, the tax becomes, for the time being, a part of
the circulating capital of the tradesman, and is turned over in business. Again
it was said that the price paid by the purchaser was not so much money for the
article plus tax but a composite sum. Therefore, 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 obser- (1) 13 S.T.C. 98.
821 vations 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
Hidayatullah, J. as laying down the test for general application, it would be
very prejudical 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 S.C.R. 914 on the second aspect of
the matter, namely, when the excise duty does not go into the common till of
the assesses and it does not become a part of the circulating capital, it does
not constitute turnover, is not the decisive test for determining whether such
duty would constitute turnover.
A further contention was advanced by Mr.
Sorabji as his last submission that it is open to every one to so arrange his
affairs as to reduce the brunt of taxation to the minimum and such a process
does not constitute tax evasion;
nor does it carry any ignominy. In support of
this submission he relied on the observations of Shah, J.
speaking for this Court in Commissioner of
Income-tax v. Raman and Co.,(1) where it was said:
"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 accrues to him . Avoidance of
tax liability by so arranging commercial affairs that charge of tax is
distributed is not prohibited.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 operation of the Income tax Act.
Legislative injunction in taxing statutes may not except on peril of penalty,
by violated, but may lawfully be circumvented." Support was also sought
from the observations of the same learned Judge (as he then was) in the case of
Commissioner of Income- (1) [1968] 67 I.T.R. 11.
822 tax Gujarat II v. B.M. Kharwar.(1) After
quoting a passage from the judgment of the Privy Council in the case of Bank of
Chettinad Ltd. v. Commissioner of Income tax (2) this Court stated:
"The taxing authority is entitled and is
indeed bound to determine the true legal relation resulting from a trans
action. If the parties have chosen to conceal by a device the legal relation,
it 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.
In Jiyajeerao Cotton Mills Ltd. v.
Commissioner of Income tax and Excise Profits Tax Bombay (3) this Court
observed:
"Every person is entitled so to arrange
his affairs as to avoid taxation but the arrangement must be real and genuine
and not a sham or make-believe,..." The Gujarat High Court in the case of
Commissioner of Income tax v. Sakarlal Balabhai (4) said:
"Tax avoidance 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 (1) [1969] 72 I.T.R. 603.
(2) [1940] 8 I.T.R. 522.
(3) [1958] 34 I.T.R. 888.
(4) [1968] 69 I.T.R. 186.
823 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
Commissioner of Income-tax v. Sakarlal Balabhai.(1) We may also recall the
observations of Viscount Simon in Latilla v. I. R. (2) "Of recent years
much ingenuity has been expended in certain quarters in attempting to device
methods of deposition of income by which those who were prepared to adopt them
might enjoy the benefits of residence in this country while receiving the
equivalent of such incomes, 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 tento 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. Another consequence is that the Legislature has made amendments to
our Income Tax Code which aim at nullifying the affectiveness of such
schemes." 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 (2) [1972] 86 I.T.R. 2 (3) 25 T.C. 107.
824 resorting to dubious methods. It is the
obligation of every citizen to pay the taxes honestly without resorting to
subterfuges.
On this aspect one of us, Chinnappa Reddy, J.
has proposed separate and detailed opinion with which we agree.
In our view, therefore, there is no merit in
the appeal and the same is liable to be dismissed with costs. Hearing fee is
assessed at Rs. 5,000. We would like to add that now that a clear picture of
the situation has emerged the State of Andhra Pradesh should relationalise the
law on the subject, if necessary, by making other a appropriate amendments.
While granting leave and allowing stay of
proceedings, this Court had directed that bank guarantee be furnished for the
tax to the satisfaction of the assessing authority and in the event of the
respondent succeeding in the appeal, the appellant do pay interest at 12% per
annum. The respondent may now proceed to collect the dues of the State in
accordance with law.
S.R. Appeal dismissed.
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