TMI Blog1987 (1) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted its return for that year disclosing an income of Rs. 5,41,780. On perusal of the books of account of the assessee, the Income-tax Officer found that the assessee had not disclosed a sum of Rs. 3,50,000 which stood credited to the suspense account as security received. According to the assessee, this amount was not received as income, but as security paid to it in terms of an agreement dated January 19, 1973, to which the assessee and two others were parties and in terms of which the assessee transferred 17 licences of the value or Rs.11,78,109 for a sum of Rs. 3,50,000, being the assessee's profit margin ; and the security amount was to be adjusted towards the said profit margin on receipt of goods by the buyer. Rejecting the assessee's contention, the officer completed the assessment by adding the said sum of Rs. 3,50,000 minus Rs. 20,130 which was allowed as expenses, being commission paid to its agent at Cochin. The assessee appealed against that order and the appeal was allowed by the Appellate Assistant Commissioner. On further appeal by the Revenue, the Tribunal reversed the finding of the Appellate Assistant Commissioner and confirmed that of the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, if applicable. 3. The second party having agreed to finance the import has paid on his own behalf and on behalf of the first party, the agreed profit margin of Rs. 3,50,000 (Rupees three lakhs and fifty thousand only) in advance as security which amount M/s. Kerala Food Packers will adjust when goods are delivered to the first party and bills thereon made on the first party. 4. If goods are not imported within the validity period of the licences and the L.A. holder causes the licences to be lapsed, M/s. Kerala Food Packers shall appropriate the entire security deposit paid to them as advance. 5. Should the second party import any items under these licences which are against the Import Control Policy, all damages resulting out of that shall be for the account and risk of the first and second parties only." The agreement is styled as a letter addressed by the assessee to the first party and the second party. The goods covered by the licences were to be imported and financed by the second party. On arrival of the goods, the second party would clear the same in the name of the assessee and hand them over to the assessee for sale to the first party for a total considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the licences thus stood transferred to the second party, although illegally, for a total consideration of Rs. 3,50,000 received in advance as " security " to be adjusted against the " profit margin ". This so-called security was not to be refundable even if the goods were not imported by the second party during the stipulated period of operation of the licences, or, if, on account of violation of the Import Control Policy, damages became payable. In other words, what was received as security was not repayable, whether there was due performance of the contract or failure of performance of the contract. The fate of the contract or the subsequent events had no bearing on the amount received by the assessee. What was received by it became irretrievably its own money. It is true that the amount is shown in the books as security and credited to the suspense account. Bat the book entries divorced from the realities of the transaction and surrounding circumstances and opposed to principles of accountancy do not determine the legal nature of the transaction: Sutlej Cotton Mills v. CIT [1979] 116 ITR I (SC). The question really is at what point of time the assessee gained absolute contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s so that the tax attaching under the appropriate Acts is less than it otherwise would be" or of Learned Hand J. of the United States Second Circuit Court of Appeals in Helvering v. Gregory [1934] 69 F 2d 809: " Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury" or of J. C. Shah J. in CIT v. A. Raman Co. [1968] 67 ITR 11 (SC) (headnote) : " Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to 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, be violated, but it may lawfully be circumvented." though long and deeply embedded in tax jurisprudence, is now judicially viewed with disfavour owing to frequent misuse of the doctrine and its evil consequences and is regarded as totally inapplicable to salvage ingenious schemes containing composite transactions devised with a view to tax avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as whole, and not by dissecting the scheme and considering each individual transaction separately." Referring to Ramsay, Lord Scarman observed in Furniss v. Dawson [1984] 1 All ER .530, 532; [1984] 2 WLR 226 (HL) as follows (at page 230): " 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." Referring to the words of Lord Diplock in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] Simon's Tax Cases 30, 32, Lord Scarman continued ([1984] 2 WLR 226 (HL) at page 230): " These words leave space in the law for the principle enunciated by Lord Tomlin in IRC v. Duke of Westminster [1936] AC 1, 19; [1935] All ER Rep 259, 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 tas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Internal Revenue [1957] 248 F 2d 399 : " The Income Tax Act imposes liabilities upon taxpayers based upon their financial transactions ......... If, however, the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it; ........" On a careful consideration of the agreement as a whole, the conclusion that it was an attempt to defer payment of the tax is irresistible. One principal object of the agreement was to avoid payment of the tax in the year in which it was legally payable and to defer the same to a future year. This was an attempt to defeat the law, and no court can countenance it. In the circumstances, we are of the view that the sum of Rs. 3,50,000 admittedly received by the assessee on execution of the agreement dated January 19, 1973, was income received by it in that accounting year ending December 31, 1973. Accordingly, we answer question No. (1) in the affirmative, that is, in favour of the Revenue and against the assessee. Consequently, we recast question No. (2) as follows: "If question No. (1) is answered in the affirmative, whether Rs. 3,29,870 could be co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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