T N Pandey: Make tax avoidance norms clear

TAXING MATTERS

There has been tremendous litigation concerning tax-planning exercises by taxpayers since the apex court's decision in the case of McDowell & Co Ltd v CTO (1985) 154 ITR 148 was pronounced.

Although in this decision, the majority view (expressed through Rangnath Misra J) was that tax planning might be legitimate within the framework of law and only avoidance of tax by resorting to dubious methods is to discouraged, yet placed more reliance on Justice O Chinnappa Reddy's observations in this decision, where he chalked out a new role to take care of every device and scheme to avoid taxation.

It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation and to refuse to give them judicial benediction, the tax authorities have been discarding even the legitimate ways of tax planning by the assesses, ignoring the observations made in many court decisions in UK & India that avoidance of tax is not tax evasion and it carries no ignominy with it, for it is sound law and, certainly, not a bad morality for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum (per Jagadishan J in Aruna Group of Estates v State of Madras (1965) 55 ITR 642 at 648 (Mad).

The untenable views taken by the tax department, placing reliance on Mc Dowell's decision, can be seen from two cases mentioned below:

In the case of MV Valliappan v ITO (1988) 170 ITR 238 (Mad), the Revenue contended that the de-recognition of partial partition contemplated by section 171(9) was only for the limited purpose of levy and collection of income tax and that Section 171(9) was enacted as a measure to prevent tax evasion and must, therefore, be upheld, having regard to the decision of the Supreme Court in McDowell & co Ltd v CTO (1985) 154 ITR 48 (SC).

The Madras High Court expressed the view that even in the light of the new approach laid down in McDowell's case, every attempt by a taxpayer to reduce his tax burden cannot be rejected as impermissible on the ground that it is intended to avoid tax. The Madras High Court's decision has since been confirmed by the Supreme Court.

In CIT v George Williamson (Assam Ltd.) (2004) 187 CTR(Gau), the claim relating to lease rent was disallowed, placing reliance on McDowell's decision.

In this case, the assessee sold plant and machinery and took these back on lease from the buyers for use in their business. The CIT (A) & Tribunal held that the transactions were genuine and validly entered into and that the assets were sold and leased back purely on business consideration and there was no question of any colourable device, as the sale was made on a valuation determined by a qualified valuer.

The department's view, which it canvassed by taking up the matter to the high court was that the transaction is a device adopted by the company solely for reduction of taxable profit and tax thereon and as per the dictum laid down in McDowell & Co Ltd vs. CTO (1985) 154 ITR 148 (SC), the assessee is not entitled to claim deduction for such transactions.

The high court, taking into account the latest decision of the Supreme Court in the case of UOI v Azadi Bachao Andolan (203) 263 ITR 706 (SC), held that it was open for assessees to arrange their affairs in such a manner that it would not attract the tax liabilities, so far it can be managed within the permissible limit of law.

The assessees can very well manage their tax affairs so that the tax attracted in the transaction is less and will not fall outside the four corners of the law applicable at the relevant time.

Tax management is permissible, if the law authorises so. The Supreme Court, in the case of Azadi Bachao Andolan (2003) 184 CTR SC 450, has looked into the English decisions and has said that far from being exercised in its country of origin, Duke of Westminster continues to be alive and kicking in England.

Interestingly, even in McDowell, though Chinnappa Reddy, J, dismissed the observation of JC Shah, J in CIT v A.Raman & Co. (1968) 67 ITR 11 (SC) based on Westminster and Fisher's Executor, the opinion of the majority is a far cry from the view of Chinnappa Reddy.

The basic assumption made in the judgement of Chinnappa Reddy, J. in McDowell that the principle in Duke of Westminster has been departed from subsequently by the House of Lords in England is not correct.

Even in 1988 the House of Lords emphasised the continued validity and application of the principle in Duke of Westminster. The principle in Duke of Westminster is very much alive and kicking in CIT v. A. Raman are very much relevant even today. Not only is the principle in Duke of Westminster alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell. The situation is no different in the US and other jurisdictions too.

As the time has passed, the present position is that extreme views contained in the observations of Reddy, in McDowell's case have not been endorsed by the Supreme court in decisions given after the McDonnell's decision.

Even in that decision, the majority did not approve Justice Red's view. Hence, the IT Department has to ensure that the Assessing Officers do not continue to rely on the minority view in McDowell's decision with gay abandoned.

Doing so is merely proliferating litigation to nobody's advantage. The CBDT should take realistic view regarding the McDowell's decision and issue instructions to the assessing officers not to apply this decision mechanically, as doing so is leading to considerable unfruitful litigation.