TMI Blog1985 (4) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. 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 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'. 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. Appeal dismissed. - Civil Appeal No. 570 of 1983, W.P. No. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed terms or any omissions 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 IRC v. Duke of Westminster [1936] AC I ; 19 TC 490 as follows, typfying the prevalent attitude towards tax avoidance at that time (p. 520 of 19 TC): " Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it 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 gatherers may be of his ingenuity, he cannot be compelled to pay an 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 Walden v. IRC [1942] 1 KB 389 ; 25 TC 13 1, Lord Greene, M.R., dealing with the construction of an anti-avoidance section, said (p. 134 of 25 TC) : " For years a battle of manoeuvre has been waged between the legislature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 persuaded that this application represents more than a cheap exercise in tax avoidance which I ought not to sanction, as distinct from a legitimate avoidance of liability to taxation. In Greenberg v. IRC [1971] 3 All ER 136; 3 WLR 386, Lord Reid, dealing with a scheme for tax avoidance by forward dividend stripping, observed (p. 401 of 3 WLR): " We seem to have travelled a long way from the general and salutary rule that the subject is not to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer [1980] AC 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 aye not, under the Westminster 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 (p. 458): 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and the departure from the strings of Westminster were explained in Inland Revenue Commissioners v. Burmah Oil Company Ltd. [1982] STC 30, where Lord Diplock said: " It would be disingenuous to suggest, and dangerous 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 ; but it does involve recognising that Lord Tomlin's oft-quoted dictum in IRC v. Duke of Westminster [1936] AC I at 19, [1935] All ER Rep 259 at 267, 'Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be, ' tell us little or nothing as to what methods of ordering one's affairs will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 leave space in the law for the principle enunciated by Lord Tomlin in IRC v. Duke of Westminster [1936] AC I at 19; [1935] All E 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 in this area of judge-made law that our elusive journey's end will be found." Lord Roskill put it even more forcefully (p. 230 of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 independent moral obligation. When, therefore, the taxpayer 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 correspondent who described the former's defence of tax avoidance as " an amusing 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 Gandh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 a civilized society. I like to pay taxes. With them I buy civilization." But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster 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 a moral plane than honest payment of taxation. In our view, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taxing 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 McDowell Company Ltd. v. Commercial Tax Officer [1977] 1 SCR 914; 39 STC 151, examined the provisions of the Excise Act and the Rules made thereunder 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 coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 license. It further found that the turnover related to liquor; excise duty which was payable by the appellant but had by an 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 the appellant's case in [1977] 1 SCR 914, was doubted and the matter was referred to a larger Bench. That is how this appeal came to be heard by us. Mr. Sorabji, appearing in support of the appeal at the very commencem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 [1970] 2 SCR 68 ; AIR 1970 SC. 1589, 1593, Grover J., after extracting part of, the judgment in Jall's case [1962] Supp 3 SCR 436 ; AIR 1962 SC 1281, spoke for the court thus : " The above statement of law in no way supports the argument that the excise duty cannot be collected from persons 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 Abdul Kadir v. State of Kerala [1976] 3 SCC 219; [1976] 2 SCR 690 ; AIR 1976 SC 182, 189, this court restated the position thus (headnote) : " 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 or the producer, yet laws are to be found which impose duty of excise at stages subsequent to the manufacture or production. Thus, the incidence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ". 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 of title in the goods takes place for a consideration. In Hindustan Sugar Mills v. State of Rajasthan [1978] AIR 1978 SC 1496, 1499 ; [1979] 1 SCR 276, 286 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 freig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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 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, 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 is a condition precedent to the removal of the liquor from the distillery and payment by the purchaser is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Vodka) (1026) (a) not covered by (50 paise) item (b) below in the rupee (b) Where the (25 paise) consideration for the in the rupee." 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 sale in the State. The argument advanced before this court is that the appellant had already paid tax on the basis of 50 paise 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 CIT v. Raman Co. [ 1 968] 67 ITR 11 (SC), where it was said (p. 17): " The law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him... 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, be violated, but it may lawfully be circumvented. " Support was also sought from the observations of the same learned judge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are 'entitled' to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary , one result of such methods, if they. succeed, is, of course, to increase Protanto 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 had made amendments to our Income-tax Code which aim at nullifying the effectiveness 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 beli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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