Sukumar Mukhopadhyay: Evasion not part of tax planning

EXPERT EYE

A recent Supreme Court judgment has brought into focus the issue of whether an interpretation of law should be given to a statute, which will encourage evasion of tax.

Legal analysts are of the opinion that of late there has been a regress in this time-honoured theory of interpretation. I am writing this to put at rest this misconception. The old theory enunciated in McDowell's judgment, AIR 1986 SC 649, still holds.

The nuance of this theory is best understood if it is contrasted with the other norm, which says the benefit of doubt must be given to the accused. But many judgments have reflected the social wisdom that a theory that favours the accused often leads to a hunt for loopholes, with the intention of asking for the benefit of some concocted doubt.

In any case, it does not fit in with fiscal laws, even if it does in criminal cases to some extent. Decisions soon started asserting that provisions of fiscal statutes should not be allowed to be interpreted to permit or encourage evasion.

The observation in Maxwell on Interpretation of Statutes (12th edition page 137) is a sort of first clear exposition of this idea. It says: "There is no doubt that the office of the judge is to make such construction as will suppress all evasions. When the courts find an attempt at concealment, they will brush away the cobweb varnish, and show the transactions in their true light".

We may add to that the succinct observation of Justice Krishna Iyer in the Commissioner of Income tax vs Arabinda Reddy, 1979 (4) SCC 721, "one day in our welfare state geared to social justice, this clever concept of avoidance against evasion may have to be exposed. Enough unto this day is the evil thereof."

In McDowell's case, there is a legendary judgment, which held that "tax planning may be legitimate provided it is within the framework of law. Colour-able devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is houn-ourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay tax without resorting to subterfuges".

This principle was reaffirmed by the Supreme Court in the Union of India vs Plywood Electronicscase, 1989 (41) ELT 368 (SC).

In a recent judgment in the Union of India vs Azadi Bachao Andolan case, (2000) 263 ITR 706Z , the Supreme Court has once again examined the meaning of "device" in the context of the Indo-Mauritius Double Taxation Avoidance Convention 1983 and observed, quoting Mc Dowell's judgment, that the principle enunciated in this judgment was strictly not applicable to the present case.

Reason being that the principle adopted for interpretation of a statute is not the same as the principle adopted for interpretation of treaties. Treaties are political documents and not just legal ones. So, this judgment is not against the principle enunciated in McDowell's case.

In fact, it is complementary to the earlier judgment and makes the theory even stronger that in a case of statutory interpretation there is no scope for taking a view, which will encourage evasion. We can conclude by saying that this theory has been further refined.

smukher2000@yahoo.com