Mc DOWELL & COMPANY LIMITED v. THE COMMERCIAL TAX OFFICER

Mc DOWELL & COMPANY LIMITED

• v. 's THE COMMERCIAL TAX OFFICER

April 17, 1985

[Y.V. CHANDRACHUD, C.J., D.A. DESAI, 0. CttiNNAPPA REDDY c E..S. VENKATARAMIAH AND RANGANATH MISRA, JJ.J

Concept! of Tax Evasio11 and Tax Avoidance, difference in-Tax Planning -Colourable device within the framework of law cannot be allowed to be a part of Tax Planning. D New plea-Constitution of India, 1950-Appea/ by Special Leave under Article 136-Supreme Court cannot entertain a plea not taken in the High Court.

Andhro Pradesh General Sales Tax Act, 1947-"Turn over", scope of- Test for determining whether an excise duty is a part ofuturn over," under the E Sales Tax Act-The Incidence of excise duty being directly relatable to manufac· ture, validity of the decision in McDowell's case reported in (1977} 1 SCR 914 reconsidered:

"Excise duty" as defined in section 2(10) or the A.P. Excise Act, 1968 is l~viable on the manufacture of.liquor and the manufacturer cannot remove the F • 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 exci~e duty 8.nd present the" same at the distillery thereupon the bilJ of sale or invoice is prepared by , the distillery showing the price of liquor but excluding excise duty. The appeJ. lant's books or account also did not contain any reference to excise duty paid by the purchaser. The appellan~. tbereforo, paid sales tax under the Andhra G Pradesh General Sales Tax Act, 1957 on tho basis of turnover which excluded .excise duty. This position w~s not accepted by the Sales Tax Authorities ~and the matter was contested right upto the Supreme Court. The Supreme Coor~ in Mc Dowell & Company Ltd. etc, v. Commercial Tax Officer Vllth Circle, Hyderabad, etc. reported in [1?77] 1 SCR 914 held that the Sales Tax Autho· rities were not competent to include fn the "turnover'' of the appellant, the excise dutr which was not char$ed by it b.ut was paid directly to the Excise ff

792 SUPRBME COURT REPORTS · (1985] 3 S.C.R. Authorities by the buyers of the liquor, inasmuch as the excise duty did not A go into the common till of the appellant and did not become a part of the cir· culating 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. Amen- ded Rule 76(a) provides that "No spirit of liquor" manufactured or stored shall 8 be removed unless the excise duty specified in rule 6 has been paid by a holder of 0 ..2 licence before such removal and the amended ruli' 79(1) provides that on payment of the excise duty by the bolder 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.

0 The appellant, being a D-2 licerice 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 excis~ duty paid. directly by buyers of appellants' liquor in the appellants, t~rnover for a part of the year 1982·83, Thereupon, the appellant again moved the High Court Tor quashing the said notice. The High Court considered the effect of the amended Rules and held that the prlmary liability to pay excise duty was indisputably of the holder of the D-2 licence. The High Court dismissed the writ p.:tition on the fin(lings (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 soJncluded for determining liability for sales tax. When leave was granted by a Division Bench of the Supreme Court to appeal against the judg- ment of the High Court, the correctness of the decision in appellants' case reported in [1977) I SCR 914, was doubted and the matter was referred to a larger Bench.

Dismissing the appeal, the Court,

MC. DOWELL & CO. V. COMMERCIAL TAX OFFICER 793 cribed as magic performance by lawyer turned magician continued and then came a significant departure from the West-minister and the Fisher Executors principle in 1982 and finally "the ghost of West-ministe~" 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 towar'ds tax avoidance has changed and the smile, cynical or even atfectionate though it migh.t have been at one time, has now frozen into a deep frown. The courts are concerning themselves not merely with the g~nuineness 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, 80I C, 807 A-DJ

Inland Revenue Cornmissioners v. Fishers Executors, [1_926] AC 395; c Inland Revenue Commissioners v. Duke of West-minister, (1936] AC l; Lord Howard De Waidan v. Inland Revenue Commissioners, [194211 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 ; Pt1b/ic TrusteeJ v. Inland Revenue Commissioners, [1965] Chancery 286; Camp- bel/ v. ln!and Revenue Commissioners, [1967] Chancery 651 ; Greenberg v. Inland Revenue Commissioners, [1971] 3 All E.R. 136 ; W.T. Ramsay v. Inland Revenue Commissioners, [1982] AC 300: Inland Revenue Commissioners v. Burmah Oil D Company Ltd., 1982 STC 30 ; Furniss v; Dawson, [1984] I All E.R. 530 ; Com- missioner oi Income tax, Gujarat v. A. Raman & Co., [1968] 1 SCR 10 ; Com- missioner ~I Income tax. Gujarat v. Kharwar, 12 ITR 603 referred to.

2Copy pinpoint2. The evil consequence of tax avoidance are manifold : (i) there iS sub- stantial loss of much needed public revenue particularly in a welfare State Hke ours ; (ii) there is the serious disturhfl,.nce caused to the economy of the country by the piling up of mountain.s of blackmoney directly causing inflation ; (iii) there is "the large hidden J6ss" 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 eicpert 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 trans Ierring the burden of tax liability to the shoulders of the guideless, good citizens from those of the "artful doggers". [808 H, 8C9 A-CJ

3Copy pinpoint3. 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 prohibi- G ted by the statute, but whether the trans·action 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 fl:ferred to. H

794 . SUPREME COURT REPORTS (1985] 3 s.c.R.

4Copy pinpoint4. 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 tbe nature of the new and sophi!ticated 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 intere pretation, to expose the devices for what they really are and Jo refuse to give r judicial benediction. (809 G-H 810 Al B W.T. Ram•ay v. Inland Revenue Commissioners, [1982] AC 300 ; Inland Revenue Commi1sioners v. Burmah Oil Company Ltd, 1982 STC 30 ; Furniss v. Dawson, [1984] 1 All B.R. 530 quoted with approval,

HELD.: (Per Ranganath Misra, J.) c

2.1 The incidence of excise duty is directly relatable to manufacture but its collection can be deferred to a Jater stage as a measure of convenience or expediency. [815 A-BJ

F The Province of Madra• v. M/J. Boddu Paidanna & Sons [1942] ECR 90 ; .. R.C. Jal/ v. Union of India, [1962] Suppl. 3 SCR 4J;6 : Re. Sea Cnstoins Act, [1964) 3 SCR 787 ; M/s. Guruswamy &: Co. etc. v •. State of Mysore & Ors., (1967] 1 SCR 548: Ju//undur Rubber Goods Manufacturers• Association v. Union o/lndia & Anr. [1970] 2 SCR 68 ; A.B. Abdul Kadir & Anr. v. State of'Kera/a, [1976] 3 SCR 219 referred to. G 2.2 On an examination of the prov1s1ons of the A .P. Excise Act, the Rules were framed thereunder and the pronouncement·; of the Supreme. Court, it is clear, that the conclusion of the Court in Mc Dowells & Company Ltd. etc. v. Commmia/ Tax Officer, Vllth Circle, Hyderabad <'!C., [1977] 1 SCll. 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 was primarily a burden which the

Mc. DOWELL & CO. V. COMMERCIAL TAX OFFICER 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 obli~ation for meeting the burden. [815 B-Dl

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 iules do not detract from the position that payment of excise duty is the primary and exclusive obli- B gation of the manufacturer and if payment be made under a contraCt or arrange- ment by any other person it would amouat 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 c 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 dolle 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 des· ctiptioo. 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 D 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 considt'ration. (815 H,816 A~C]

E 2.4 Excise duty though paid by the purchaser to meet the liability of the appellant, is a part of the consideration for th~ sale and is in'cludible in the . turnover of the appellant. The purchaser has paid the tax becau)e the Jaw asks him to pay it on behalf of the manufacturer. Here, admittedly, the bills issued by the appellant did not include the excise duty; Pay1nent of ~xcise 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 F 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 hill 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] G 2.5 True, the excise duty component of the price would not be an addi- tion 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 considera- tion 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 H

si:n>REME coullt REPORTS [t98SJ ~ s.c.ft. otherwise, under which the purchaser would be liable to pay the amount of A 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, The po5ition is ont different when under a prior agreement, the legal liability of the manufacturer dealer for pay- m1>nt 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-DJ B 2.6 The conclusion reached in the appellants' case in [19'17] 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 circu- lating capital, it does not constitute turnover, is not the decisive test for deter- mining whether such duty wollld constitute "turnover". The relevant conSid~ra­ tion is not whether the law permits the incidence of the duty to be passed oq to c 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 "'ith ' normal commercial practice. (819 A-C ' 821 B·C]

The Province of Madras v. M/s. Boddu Paidanna &: Sons, [1942] FCR 90; RC Jail v. Union of India, (1962] Suppl. 3 SCR 436 ; Re. Sea Customs Act, [1964] D 3 SCR 787 ; M/s, Guruswamy & Co. etc. v. State of Mysore & Ors., (1967] 1 SCR 548 ; Jullundur Rubber Goods Manufacturers' Association v. [Jn/on of India & Anr. [1970] 2 SCR 68 ; A.B. Abbul Kadir & Ors. v. Stare of Kl!ra/a, [1976] 3 SCR 219; referred to.

Hindustan Sugar Mills v. Rafasthan State, (1979] l SCR 276 applied. E Paprika Ltd. & Anr. v, Boar<l of Trade, (1944] 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, F followed.

Anand Swarup Mahesh Kumar v. The Com1nissioner of Sales Tax, {1981] l SCR 707 discussed and distinguished.

3. A stand which has not been taken in the writ petition before the High G Court cannot be allowed to be taken in the Supreme Court. Herc the conten- tion 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 oq the footing that the consideration for its liquor did not include duty of excise pay- able under the Exche 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 HighC_ ·ouri and there has been no H

MC. DOWELL & co. v. COMMERCIAL TAX OFFICER (c. Reddy i.) 797 factual examination of the position as to whether the classification indicated is A 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-DJ -

George Oakes (P) Ltd. & Ors. v. The State of Madras, i3 STC 98, distin· guished. B

CIVIL APPELLATE JURISDiCTION : Civil Appeal No. 570 of 1983.

Fr.om the Judgment and Order dated 6.12.1982 of the High Court of Andhra Pradesh in Writ Petition No. 7985/82. c Soli J. Sorabjee, Barish 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 Res- D pondents.

The following Judgments were delivered

CHINNAPPA REDDY, J. While I entirely agree with my brother Ral'ganath Misra, J. in the judgment p~oposed to be delivered by E 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 infticting 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; F .. 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 disc0ver the invisible line supposed to exist which distinguishes G 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 H tax. Nothing is to be read in, nothing is to be. implied'', during

798 SUPREME couiir REPoii1s [ 1985] 3s.c.it A the period between the two world wars, the theory came to he oro- pounded 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 fnland Revenue Commissioners v. Fishers Executors(') said: B "My Lords the highest authorities have always recog- nised 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 be may legitimately claim c the advantage of any expressed term or of any emotions that be 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 bad said observed fo Inland Revenue Commissioners v. Duke of West Minister(~) follows '

D typefiing the prevalent attitude towards tax avoidance at that time:

"Every man is entitled if he can to order bis affairs so that the tax attaching under the appropriate Acts is less than if otherwise would be. If he suceeeds in ordering them E so as to secure this result, then, however, unappreciative the Commi11sioners of Inland Revenue or his fellow tax payers may be of bis ingenuity. he cannot be compelled to pay on increased tax."

F Then came World War II and in its wake huge profite~ring and racketeering, something which persists till today, but on a much -·· larger scale. The attitude of the Courts towar<ls avoidance of tax perceptibly changed and hardened and in Lord Howard De W:aldan v-:Tn/and Revenue Commissioners<'> Greene, M.R., dealing witll the construction of an anti-avoidance section said : G "For years a battle of manoeuvre has been waged bet- ween the legislature and those who are minded to throw the

(I) [1926] A.C. 39S. (2) (1936] A.C. 1. H (3) [1942] I,KB 389.

!.ic. boWELL &co. v. coMMERclAL 'tAX 0FF1CER (C. Reddy, ).) 799 burden of taxation off their own shoulders on to those of A 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 nol 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 Siinon in 'Latilla v~ Inland Revenue Corn1nissioners(1) said, c

"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 adopf them might enjoy the benefits of resi- D dents 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 cours.e, no doubt that. they are within their legal E 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 oti the shoul- F 'ders of the great body of good citizens who do not desire or do not know how, to adopt these manoeuvres."

Jn several cases, Griffiths v. JP Harrizan Ltd.('), Morgan v. Inland Revenue Commissioners'(3 ) Public Trustee v. Inland Revenue Commls- G sloners('), Lord Denning repeatedly ~eferred to tax avoidance schemes

(1) [1943] A.C. 377. (2) [1963] A.C. 1. (3) [1963] Chancery 438. (4) U96Sl Chancery 286- H

• aoo b9n5J 3s.c.it. - SUPREME COURT RFPOllTS

and described them as magic performance by fawyer-turned-magi- A cians. Lord Harman, almost in the same words as Lord Denning described a tax avoidance scheme as one ''which smells a little of the I.mp" 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." (Camp- be/l v. Inland Revenue Commissioners(l), Stamp J. In re Westem's B 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 propo- sals overstep that limit ... ! am not pursuaded with this appli- c cation 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. Inland Revenue Commissiuners( 2), Lord Reid dealing with a scheme for tax avoidance by forward dividend sttip- D ping 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 \1'USt recognise that plain E words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very pro-. perly 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 Parlia- ment to do as some other countries have done and intro- .. duce 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 provi· sions as those which we are now considering." .G.,-, ........................

(1) [!9671 Chancery, 651. H (2) 1971(3) All ER. 135. '

iJc. DOWELL &CO. v. COMr-iERClA.t TA.Ji OFFIC~R. (C. Reddy,"J.) SOi "I am inclined to think that the real explanation of A these verbal difficulties may be that, in legislation of such extreme complexity as we have here, it is not humanly pos- sible for a draftsman to preserve that consistency in the nse of language which we generally look for. Indeed, I some· times suspect that our normal meticulous methods of statutory construction tend to lead u' astray by concentrating too much II on verbal niceties and paying too little attention to the provi- sions read as a whole.'"

The march of the law against tax avoidance schemes continned and cam; a significant departure from the West-minister and the f'isha Executors principle. In W.l. Ramsay v. Inland Revenue c Commissioners(1), the House of Lords had to consider a scheme of tax avoidance which consisted of a series or a combination of tran- sactions each of which was individually genuine but the result of all of which was· an avoidance of tax. Lord Wilberforce, with great force, observed, D

"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 overex- E tended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not com- pel the court to look at a document or a transaction in blin- kers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was inten- .. ded to have effect as part of a nexus or series of transac- tions, or as an ingredient of a wider transaction intended F

as a whole, there is nothing i~ the doctrine to prevent it being so regarded : to do so is not to prefer form to sub- stance, or substance to form. ft is the task of the court to ascertain the legal nature of any transaction to which it is G 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

H (I) (1982] AB 300.

802 SUPREME COURT RBPORts f19SSJ 3 S.C.R. A 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 B it is wrong and an unnecessary self limitation, to regard themselves as precluded by their own finding that docu- ments or transactions are not "shams", from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transac- c tion is. They are not, under the Wes/minister 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, D

"··· ... 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· E to be validated, that is a matter for Parliament. The func- ·tion of the courts is to apply strictly and correctly the legis-. lation 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' F tax avoidance are, it was claimed, for Pnliament to lay down. We were referred, at our request, in this connec-· tion to the various enactments by which Parliament bas '- from time to time tried to 9ounter ta~ 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 t<l well known sections in Australia and G New Zealand (Australia, Income Tax Assessment Act 193~ -51, section 260; New Zealand, Income Tax. Act 1976, sec, tion 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 H

MC~ DOWBLL & CO. v. COMMERCIAL TAX OFFICER (C. Reddy, J.) 803

deduced jherefore, it was said, to leave capital gains tax A · 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 Commisslo· nerofTaxation v. Westraders Pty. Ltd. [1980] 30 A.L.R. B 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 c and sophisticated legal devices ihe 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 (mo.it likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the par· E 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 iegal analysis made': legislation cannot be required or even be desirable to ena- ble the courts to arriv·e at a conclusion which corresponds with the parties' own intentions." p

"The capital gains tax was creat~d to operate in the real world, not that of make-belief.

The significance of Ramsay as a turning point in the intei pre- tation of tax laws in England and the departure from the, strings of G Westminister were explained in Jn/and ·Revenue Commissioners v. Burmah Oil Company Ltd.,(') where Lord Dip lock said,

"It would be disingenuous to suggest, and dangerous , (I) [1982JiS.T.C. 30 H

804 SUPREME CUOR T REPORTS (1985) 3 S.C.R.

A on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay's case did not mark a sig- nificant 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 legiti- mate commercial end) into which there are inserted steps B that have no commercial purpose apart from the avoi- dance of a liabi!Hy 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 re- cognising that Lord Hamlin's oft-quoted dictum in !RC v. c Duke of West minister(') "Every man is entitk:d if he can to order his affairs so as that the tax attaching under the ap- propriate Acts h less then it otherwise would be", tell us Ii/Ile 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 cru- cial 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 obser- ved, G "The fact that the court accepted that each step in a transaction was a genuine step producing its intended legal

(1) [19361 AC. I(@) 19~[19351 All ER. Rep. 259 (al) 267, (2) [198411 Ali E.R. 530.. H

MC. DOWELL & CO. v. COMMERCIAL TAX OFFICER (C. Reddy,/, 805

results did not confine the court to considering each s,tep in 'A 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 u distinction is to he 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 con- c' tractual case the fiscal consequenees will naturally fall to be assessed in the light of the contractually agreed results."

In the same case Lord Fraser explained the principle of Ramsay as follows:- p

''------------------------- ------The true principle of decision in Ramsay was that the fiscal consequences of a preordained series of tran- sactions, intended tu operate as such, are generally to be asertained by considering the result of the series as a whnJ,-, E .and not by dissecting the scheme and considering each indi- vidual transaction separately."

Lord Scarman in his characteristic style observed,

"The Jaw will develop from case to case. Lord Wilberforce in W.T. Ramsay Ltd. v. !RC [1981] I All ER 865 at 872, [1982] AC 300 at 324 referred to 'the emerging prin - ciple' 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 eva- G sion is a subject suited to deve/Jpment 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 pro- cess, to be the words of Lord Diplock in !RCv. Burmah Oil Co. Ltd. [1982] STC 30 at 32 which my noble and learned friend Lord Brightman quotes in his speech. These words H.

806 SUPREME COURT REPORTS [1985] 3 S.d.R. A have space in the law for the principle enunciated by Lord Tomlin in !RC v. Duke of Wes/minister [1936] AC 1 at 19, [1935] All ER Rep. 259 at 267 that every man is entitled ifhe can to order his affairs so as to diminish the burden of tax .. The limits within which this principle is to operate remain B 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 Jaw that our elusive journey's end will be 0 found."

Lord Rosklll put it even more forcefully :

"The error, if I may venture to use that word, into which the courts below have fallen b that they have looked back to D 1936 and not forward from 1982. They do nof 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 E Diplock and Lord Scarman in the passages to which ll\Y noble and learned friend Lord Brightman rnfers and which I will not repeat. It is perhaps worth recalli.ng the warning given, albeit in another context by Lord Atldn, who himself dissented in the Duke af Westminister's case,· in· United F Australia Ltd. v. Barclays Bank Ltd.( 1) 'When these ghosts of the past stand in the path of justice, clanking their mediaevt1l chains, the proper course for the judge is to pass through them undeterred.' 1936, a bare half century ago, cannot l)e 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 G and with other members of his staff has haunted the ad- ministration of this branch of the law for too long. I con- fess that I had hoped that ghost might have found quietude with the decisions in Ramsay and in Burmab. Unhappily it

H (I) [l94Q) 4 All E.R. 20@ 37=[19411 A.C. 1 @ 29.

MC."DOWELL & CO. v. COMMERCIAL TAX OFFICER (C. Reddy, J.) 807

has not. Perhaps the dedtston of this House in these appeals A 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? t . B 1' 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'· if might have been at one time, has now frozen into a de.ep 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. D Some years ago, a diverting attempt was made by a Corres- pondent' lo 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 apari from the law taxation E

would be blackmail or racketeering. There is not behind· taxing laws, as then 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 s.aid, · F ., "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 exp.enditure ...... is it not a goOd thing that there should be this last lawful G remedy against oppressive taxation by a majority, that • human ingi:nuity can always find a way by which the minority can escape from tyrannical imposts."

The correspondent was answered by another's correspondent wbo described the fonner's defence of tax avoidance as .'an ainusin!J ff

808 SUPREME COURT REPORTS [1985] 3 s.c.a. A attempt to raise the art of tax avoidance to the moral level of political martyrdom and to make Hampdens of our moder!! .tax dodgers'. Nor, may we say, are our tax dodgem Gandhijis on the Dandi Mar~h to protest against the Salt Tax.

B In Commissioner of Income tax, Gujarat\', A. Raman Ci'Co~,(l)'• 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 byso arranging commetcial ' c · affairs that charge of tax is distributed is not prohibited.' 'A· taxpayer may resort to a device to divert the lnco~e before" ''"" · ,,./I it accrues or arises to him. Effectiveness of the device '"'. " depends not upon considerations· of morality, but on the·,., " Legislative injunction in taxing statutes may not~ (:xcept oi{ . . ' D period of penality, be violated, but it may lawfully be cir! cumvented." '

The same Judge, speaking for himself, Ramaswaml and Grover JJ in Commissioner of Income tax, Gujarat v. Kharwar(') expr~ssely, · followed Westminister and observed:

"The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a tran- saction. If the parties have chosen. to conceal by a device the legal relation, It Is open to the taxing authorities to F 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 tran- saction".

We think that time has comelfor us to depart from the Wcst- minister principle as emphatically as the British Courts have done ' and to dissociate ourselves from the observations . of Shah;. 1. and similar observations made elsewhere. The evil consequences:or'tax avoidance are manifold. First there Is substantial loss ofmuch needed public revenue, particularly in a welfare state like ours. Ne~t there

1 (I) [1968] 1 S.C.R 10. H (2) 72 !TR 603.

MC. :DOWELL & CO. v. C0.11/olBRCiAL TAX OFFICER (C. Reddy, J.) 809 ·

is the serious disturbance·caused to the economy of the country by A the piling up of mountains of backmoney, directly causing inflation. Then there i1 "the large hidden toss" 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, law- yers and accountants on one side and the tax-gatherer and his per- B' haps .not 10 skilful, advisers on the other side. Then again there is the 'sense of Injustice and inequality which tax avoidance arouses in the breasta 1 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 trans- ferring the burden of tax liability to the shoulders of the guideless good citizens from those of the 'artful dodgers'. It may, indeed, be e difficult for lesser mortals to attain the state of mind .of Mr. Justice Holme~;·,who·aald, '.'Taxes·are what we pay for civili;zed 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 or'Westmlnister and ihe alluring' logic of tax avoidance. D· 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 ther.e ls·behlnd taxation laws as inuch moral sanction as behind any _ other welfare ,Ieglslatio~ ·and It ls a pretence to .say that aYoldance of taxation ls 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 taxing statu,te, ,while considering a device to avoid tax, is not.to· a~k whether the provisions should be .construed literally, or liberally. :nor.· whe.ther 1the transaction is not unreal and not. prol)ibi- ted.by :the 1tat1,1te, but whether. the transaction .is a device to avoid taxc, ·and whether the transaction Is such that thejudicial process may accord •i.t•· appronl to it. A hint of this approach ~ . is, to . beI found in the-judgment of Desai, J. in Wood Polymer Ltd. v. Bengal Hotels Limited(!) where· the learned judge refused to accord sanction to the _ '- • . I - ·. . . '

amalgamation· . - of companies ' as it would lead ' to avoidance L•~ of tax. t - 1 f - . . ' It is nelthedair nor desirable to expect the legislature to inter-' ,Yenc ~nd,tate care of every device and scheme to avoid taxation. If Is up(o the Court· to take stock to determine the nature of the new and ' 1ophisticated 'legal devices· to· avoid tax and· consider whether the. aitu~tio~ created by the ciev!ces could be ·related to the existing legis- lation with• the aid of 'emerging' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, tQ expose the devices (I) 40 Company Cases, 597. H

810 SVPRBMB COVRT REPORTS [1985] 3 s.c.R. A for what tbey really are and to refuse to give judicial benediction.

We agree with Ranganath Misra, J. that the appeal should be dismissed,

B RANGANATH MISRA, J, The appellant company, .a lice1!sed manufacturer of Indian liquor at Hyderabad, is in appeal by special leave questioning the dismissal of its writ petition by the High ' Court. · c 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 D made under the Excise Act. 'Excise duty' as defined in section 2(10) or" the Excise Act is leviable on the manufacture ofliquor and the m'a.nufa- ·· cturer cannot remove the same from the distilleryunless the duty im· posed 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 E. 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 And hr a Pradesh~ F 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 lat.er 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 up.on the Company to show cause why assessments made may not be re- G" opened. 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. etc. v. Commercial Tax Officer, Vil Circle, Hyderabad, etc., c1>

H, (I) [1977] I S.C.R. 914.

Mc. fiOWELL &co. v. COMMElicIAL TAX OFFICER (R. Misra, J.)" [sii examined the provision of the Exice Act and the Rules made there- A 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 n responsible for payment of the excise duty which is collec- ted 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 Exshequer in respect of Indian liquor by the buyers before c removing the same from the distillery could be said to form part of th• taxable turnover of the- appellant distillery. Precedents were 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 '. D authorities were not competent to include in the turn.over 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. F 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 manu- factured 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 E licence under the law. Amended rule 79 (I) provides :

"76 (1). On payment of the excise duty by the holder of 0-2 licence a di•tillery pass for the removal of spirit fit for human consumption may be granted fo favour of any of the following persons only, namely :- "G (a) a person holding a licence in the Andhra Pradesh or in other States for sale of spirit by wholesakor retail and when the spirit is to be transported or exported beyond the limits of the district in which the distillery is situ- H

sh SUPREME COtiRT REPORTS [i98SJ j s.c.a; A 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 n 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 dµly authorised in that behalf for export of such spirit to an c Union Territory.

(d) A person holding a permit from the Excise Superinten-· dent of any district in Andhra Pradesh or from 'officer referred to in clause (a) above of . any other State to D transport or export rectified spirits or wine, to such district or State."

On the basis of the amended provmons, 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 ,F 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 arra11gemeµt been paid by the buyer was actually a.part of the turnover of the appel- lant and was, therefore, liable to be so included for determining G 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) I 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. H

MC. DOWELL&: co. v. COMMBRCiAi. IAX OFFICER (R. Misra, i.) 81:\ > Mr. Sorabji, appearing in support of the appeal at the very A commencement of his submissions stated that there was no consti- tutional question involved in the appeal. He also fairly stated that the vires of the Excise Act a'nd the Rules.was not under challenge. Nor was the amendment of Rules in 1981 in' dispute.

"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, conaumed, destroyed, or ginn away. A taxing authority will not ordinarily lmpcise such a duty, because it is much more convenient administratively to collect the duty (as 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 com- modity 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 ; ... " .' E.

'This view has been followed by this Court' and the position has been put beyond doubt by a series of decision's. In R.C. Jail v. Union of lfldia,<•> it, has been observed : ! , • ,I.I 1 Ii 1 ,. , r vi ,, , F "The Excise duty is primarily a duty on the production · or manufacture of goods produced or ·manufactured within u the country, Subject always to the legislative competence of the taxing ·authority, the said tax can be levied at a convenient stage so long as the character of the impost is not lost. The method of collection does not affect the . G essence of the duty but only relates to the machinery of collection for administrative convenience."

(I) [1942] F.C.R. 90. t (2) (19621 Suppl. 3 S.C.R. 436. h

. 814 SUPREME•duoRT REPORTS (1985] 3~.c.k. lirH~<~i:d ar;)i: ..f,f l~fil:li;i.'.i In Re. Sea Customs Act, (1) this Court said : A "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.''. B . , -, In M/S. Guruswamy & Co. etc. v. State of Mysore & ors(') Sikri, J. (as he then was), spoke for the majority and stated the ratio thus:

c "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 tho sta:• of production or manufacture but may be imposed later." D In Jullundur Rubber Goods Manufacturers' Association v. Union of India & Anr., (3 ) Grover, J. after extracting a part of the Judg- ment in Jail'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 inci- dence certainly falls directly on the production or manu· facture of goods but the method of collection will not affect the essence of the duty." .\ F In A.B. Abdul Kadir & Ors. v. State of Kera/a, <'l!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, G~nerally speaking, the tax is on the manufacturer on the producer, G yet laws are to be found which impose a duty of excise at stages subsequent to the manufacture or production.''

(2) 11964) 3 S.C.R, 787. (3) (1967] I S.C.R. S48. (4) [1970] 2 S.C.R. 68, H (I) [1976] 3 S.C.R. 219.

Mc, DOWELL &co. v. coMMBRdiAL TAX OFFICER (R. Misra, }.) 8iS Thus, the incidence of excise duty is directly relatable to manufacture but its collection can be deferred to a later stage as a me~s ure of convenience or expediency.

On an examination of the provisions of the Excise Act, the Rules framed thereundor and the pronouncements referre'd to above,) we are of the yiew that the. conclusion of this Court at ·page 92( of the Reports that intending purchasers of the Indian liquors who seek to obtain distillery passes are also legally respon- sible 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," c 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 manu- D facturer. 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 deposi· ting such duty and ultimately issue of the spirit under the pass from E the distillery. These. rules, therefore, do not detract from the· posi- tion '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. F It was the stand of the appellant before the High Coor! that it makes a condition precedent for the buyer of its finished goods that he _(the buyer)' pays the excise duty to the excise authorties directly and only on production of the r~ceipted challan, liquor is issued from the distillery by way of sale under the supervision of the excise authorities. Io view of such an arrangement, the excise~ G 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 ~oosideratioo for the sale H

816 SUPRBMB cotiRT RBPOR TS (1985} 3 s.c.R. •A or purchase of goods (whether such consideration be cash, deferred payment of ariy 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 there- of." B The definition clearly indicates that the total amou~t 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 obvi- ously the bill has to state the total amount charged as considera- c tion), 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. Rajasthan State, (') this Court D observed: '· •I ._,, ','The test is, what is the consideration passing from ... the purchaser to the dealer for the sale of tho goJd;. It is immaterial to enquire as to how the amount of con.sidera· tion is made up, whether it includes excise duty or sales E t. tax - or'f~eight. . l The only t relevant ; question to ask is as' to . what is the amount payable by the purchaser to .!lie dealer as c0nsideration for the sale .... " ' Th~ Court proceeded to say'; " 1 ., I . 1 it' • •, r t· ,

11 . •:take for ·example, .excise duty .payable by a dealer who .. "' is.a1manufacturer. Whenrhe sells· goods manufactured ,by, , llhim, he always passes.qn the excise duty to ,the purchaser. q,Ordi.narily 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 , G ·<duty because that would be the consideration paya.ble by the purchaser for the sale of the goods. True, the •.excise duty component of the price would not be an addition to the cof'fers of the dealer, as it would go to reimburse.him

o> '[t979l 1 s.c.R. 276.

MC. DOWELL & co. v. COMMERCIAL TAX oFFIECR (k. Mir;a, 1.) 811 · in respect of the excise duty already paid by him on the A manufacture of the goods. But even so, it would be part . of the sale price ·because it forms a component of the con- •sideration for the sale of the goods that the amount repre- sentfog excise duty would be payable by the purchaser. • There is no other manner 'of 'liability, Istatutory or other- wise, under which the purchaser would be liable to pay the B l .;'\ - amount of excise duty to the dealer. And oil this reason- ing, 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." • ' '!"" t -f" c " , We would like to add, .that.the position is not different when . under .a prior agreement, the legel .liability of the manufacturer- . dealer for payment of excise duty is• satisfied by the purchaser-by -1 direct payment to excise authorities or t.o the state exchequer. In Paprica Ltd. &' Anr. v. Board of Trade, (1) Lawrence, J,;,_stated : -~ .,. ,.n . ~

;, "Whenever a sale attracts purchase tax, that tax pre- sumably 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 E · • as·•x• plus purchase tax.'" ' . . .. . .l This Court in Messrs: George Oakes (P) Ltd. v. The State of "Madras, (1l quoted this extract with approval .and also referred to the following passage in the Judgment of Goddard, L.J. in Love v. Norma11 Wright (Builders) Ltd.(8 ): F 'J I '·I

~ "Where an article is taxed,• whether by·purchase tax, cus- . , ' , . ,,toms duty, or excise duty 'the tax' becomes part of the price - f .'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, 1- · ·but on a sale there is only one consideration though made .up, of cost .plus profit ·plus tax. So if a ·Seller offers ·goods

(I) [1944] All B.R. 312. (2) [1962] 2 S.C.R. 510. (3) [194411 All B .R. 618. vH

8is sbPREM~ COURT kErORts (1985] 3 s.c.il. 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."

c 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 pay- ment by the purchaser is on accont of the manufacturer. According to normal commercial practice, excise duty should have been re- D ficcted in the bill either as merged in price or being shown separa- tely. 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 ac~ount. The consideration for the sale is thus the total. amount and not what is refiected in the bill. We are, therefore, clearly of the opinion that E excise duty though paid by the purchaser to meet the liability of the appellant, is a part of the consideration for the sale a)ld is inclu- dible in the turnover of the appellant. The purchaser bas paid the tax because the law asks him to pay it on behalf of the manu- facturer.

F Mr. Sorabji in the course of his submission relied on a Divi- ' ' sion Bench decision of this Court in Anand Swarup Mahesh Kumar v. The Commissioner of Sales Tax. <'> This Court was oonsidering the liability for Sales Tax under the corresponding ~J.P. Act in respect of a dealer carrying on business at Mandi Anandganj, G 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

'. (I) (1981] 1 S.C-R. 707 H

MC. DOWELL'& co. v. COMMERCIAL TAX QFFICER (R. Misra, J.) 819

turned on the definition of 'turnover of purchase' in the lJ.P., Act A and the provision of the Adhiniyam and the Rules made thereunder. Market fee and commision 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 B consideration is not whether the law permits the incidence of the duty to be passed on to the purchaser but whether there is a prohi· bition 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. c Mr. Sorabji built up an argument in support of the appellant's stand ''by referring to tlie amendment to the First Schedule to the Sales Tax Act. The relevant part of the Schedule provides thus :·

Item No. i . ( , 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. . E . . Vodka) (1026)

(a) not covered by 3 (50 paise) item (b) below in the rupee,

(b) Where the 3 (25 paise) E consderation for in the rupee. the sale or purchas·e of I iquor includes the duties of excise payable under the Andhra Pradesh Excise c Act, 1968.

Apparently this amendment was brought about after the Judg· ment 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 lbeen made exigible to tax at every point 0th.er than.the point of last

820 SUPREME COURT REPORTS [1985] 3, S.C.R •. A sale in the State. The argument advanced before this Court is that .. the appellant bad 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 · fo~ ·sales tax ,on ··a different.. B footing, This contention too has no force .. S~ch; sta~d.. had: 1.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 'class!~. ficalion indicated is not intended to cover a totally different situa· tion. For resolving the dispute as to whether excise duty.is .a ,' part of the turnover, reference to the Schedule is indeed wholly,, C. 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 in· eludes the tax also, and that in laws dealing with lsale$-tax, turnover has, in England and America also, been held to include the tax. The reason for such inclusion Is stated lo be .Ef that dealer who realises the lax does not hand it over forth- with to Government but keeps it with him, and turns it over in his business before he parts with it. Thus, the tax becomes, for the time being, a part or the circulating capi- tal of the tradesman, and is turned over in business. Again it was said that the price paid by the purchaser was not so II much money for the article plus tax but a composite sum. Therefore, in calculating the total turnover, there is noth- ing wrong in treating the tax as part of the turnover, because 'turnover' means the amount of money which is turned over in the business."

G 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 obser7

MC. DQWELL & CO. v. COMMERCIAL TAX QF!'ICER (R. Misra, J.) 82\.

vations .. made by this Court were in a very' different setting and what was beina·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 r I, ' · •• ' , , ,, t-. , I the seller .. and' the· buyer, by special arrangement, a part of ' · _ f'· · " l ' ·· I what ordinarily would constitute consideration proper could even .l be kept out and the turnover'could lie reduced and 'tax liability avoided. :We are· of the view that the conclusion reached' in the appellant's C'ase in (1977) I' S.C.R. 9i4 on the second aspect of the matter, namely, when the excise duty does not·go into.the common a till of the assessee and it does not become part' of' the .~irculating c capital, it does not constitute turnover, is not the decisive· test for determining whether such duty would constitute turnover. ..... t "' . "l f

A furtlier conte.ntion was advanced by Mi. Sorabji as his' lait 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 D docs not constitute tax evasion;,nor does ii brry any ignominy.' In 1upport of this submission he relied 'on tb'e'observati6ns of Shah, 1. apeaking for this Court in Commissioner of Income-tax v. A Raman and Co.,(1) where it was said : " " ·1 E "The law does not oblige a trader to make the maxi- mum profit that be 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 con- siderations of moralitv, but on the operation of the lncome- tax Act. Legislative injun'ction 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 lear- ned Judge (as he then was) in the case of Commissioner of Income-

(I) [1968] 67 J.T.R. 11. H •t

p. 822 Copy page pinpoint

A 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 fncome ·tax, (')this Court stated:

"The taxing authority is entitled and is indeed bound tn determine the true legal relation resulting froin a trans· B action. If the parties have chosen to conceal by a device the legal relation, it open to the taxing authorities to unra· vel 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 'substanc~ of the tians· c action'."

In Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income· tax and Excise Profits Tax, Bombay, (8) this Court observed :

"Every person is entitled so to arrange his affairs as D 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 Commissio'ner of Income· tax v. Sakar/a/ Ba/abhai,~) said : E "Tax avoidance postulates that the assessee is in re· ceipt of amount which is really and in truth his income liable to tax but on which he a.voids payment of tax by some artifice or device. Such artifice or device may appa· rently 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 440 or mask the true character of the income by disguising it as a capi- tal receipt as in a case falling within section 4.4E 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

(I) (1969] 72 J.T.R. 603. (2) (1940] 8 I.T.R. 522. (3) [1958] 34;1.T.R. 888. H (4) [1968] 69_1.T.R. 186.

MC. DOWELL '&·co. v. COMMERCIAL TAX OFFICBR (R. Misra, J.) 823 ) receive income arising from the asset which theretofore . A 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 .... " B This decision has been affirmed by this Court in Cammissioner of Income-tax v. Sakar/al Balabhai.(1) We may also recall the observations of Viscount Simon in Latif/a v. l. R. :(') c "Of recent years much ingenuity has been expended in c~rtain quarters in attempting to device method> of de- position of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalant of such incom,, without sharing in the appropriate burden of British taxa- c tion .. 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 pro- E fessional 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' ten to the load ·of tax on the shoulders of the great body of good citizens who do not desire, or do not c know how, to adopt these manoeuvres. Another conse- quence is that the Legislature has made amendments to our Income Tax Code which aim at nullifying the affecti- veness of such schemes."

Tax planning may he legitimate provided it is within the G 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) (19721 86 I.T.R. 2 (3) 25 T.C. 107.

824 SUPREME COURT REPORTS [1985) 3 S.C.R •. A 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. B , 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 0 . 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 D 123 per annum ..The respondent may now proceed to collect the dues of the State in accordance with law.

E S.R. Appeal dismissed.