Case: Union Of India  Vs. Azadi Bachao Andolan

595]. "We infer that Stantus was created by petitioners with a view to reducing their taxes through qualification of the corporation under the convention. The test, however, is not the personal purpose of a taxpayer in creating a corporation. Rather, it is whether that purpose is intended to be accomplished through a corporation carrying out substantive business functions. If the purpose of the corporation is to carry out substantive business functions, or if it in fact engages in substantive business activity, it will not be disregarded for Federal tax purposes." 164. In Barber-Greene Americas, Inc. vs. Commissioner of Internal Revenue [1960) 35 T.C. 365, 383, 384] it was observed that a corporation will not be denied Western Hemisphere trade corporation tax benefits merely because it was purposely created and operated in such way as to obtain such benefits. Similarly, a corporation otherwise qualified should not be disregarded merely because it was purposely created and operated to obtain the benefits of the United States-Swiss Confederation Income Tax Convention. 165. Though the words “sham”, and “device” were loosely used in connection with the incorporation under the Mauritius law, we deem if fit to enter a caveat here. These words are not intended to be used as magic mantras or catshall phrases to defeat or nullify the effect of a legal situation. As Lord Atkin pointed out in Duke of Westminster [supra note 57]: "I do not use the word device in any sinister sense; for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his dispositions so far as they affect tax." Lord Tomlin said: "There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal of different transaction." 166. In Snook vs. London and West Riding Investments Ltd. [(1967) All ER 518 at 528] Lord Diplock L.J, explained the use of the word “sham” as a legal concept in the following words: "it is, I think necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any), which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Contracting State vs. Maclure (1882) 21 Ch. D. 309; Stoneleigh Finance, Ltd. vs. Phillips (1965) 1 All ER 513) that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived." 167. In Waman Rao and others vs. Union of India & others [1981) 2 SCC 362 at para 45, and Minerva Mills Ltd and others vs. Union of India and others [1980) 3 SCC 625 at para 91] this Court considered the import of the word “device” with reference to Article 31B which provided that the Acts and Regulations specified Ninth Schedule shall not be deemed to be void or even to have become void on the groud that they are inconsistent with the Fundamental Rights. The use of the word “device” here was not pejorative, but to describe a provision of law intended to produce a certain legal result. 168. If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the “real motive” of the assesssee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o”-the-wisp. 169. The judgment of the Privy Council in Bank of Chettiand [supra note 94], wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Westminster [supra note 57], was the law in this country when the Constitution came into force. This was the law in force then, which continued by reason of Article 372. Unless abrogated by an Act or Parliament, or by a clear pronouncement of this Court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell [supra note 1], we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad [supra note 94]. If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this Court in Mathuram [supra note 93]. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster [supra note 57] to Bank of Chettinad [supra note 94] to Mathuram [supra note 93], despite the hiccups of McDowell [supra note 1], the law has remained the same.170. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]31. The contention of the respondents, which weighed with the High Court viz, that the impugned circular No. 789 in inconsistent with the provisions of the Act, is a total non-sequitur. As we have pointed out, Circular No. 789 is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section (2) of section 90. In other words, the circular shall prevail even if inconsistent with the provisions of Income-tax Act, 1961 insofar as assessees covered by the provisions of the DTAC are concerned.In our view, the contention is wholly misconceived. Section 90, as we have already noticed (including its precursor under the 1922 Act), was brought on the statute book precisely to enable the executive to negotiate a DTAC and quickly implement it. Even accepting the contention of the respondents that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we areee as to why a delegatee of legislative power in all cases has no power to grant exemption. There are provisions galore in statutes made by Parliament and State legislatures wherein the power of conditional or unconditional exemption from the provisions of the statutes are expressly delegated to the executive. For example, even in fiscal legislation like the Central Excise Act and Sales Tax, Act there are provisions for exemption from the levy of Tax [See Section 5A of Central Excise Act, 1944 and Section 8(5) of the Central Sales Tax Act, 1956]. Therefore we areto accept the contentionthat the delegate of a legislative power cannot exercise the power of exemption in a fiscalour view, the High Court was not justified in reading the circular as not complying with the provisions of section 119. The circular falls well within the parameters of the powers exercisable by the CBDT under Section 119 of the Act.50. The High Court persuaded itself to hold that the circular is ultra vires the powers of the CBDT on completely erroneous grounds. The impugned circular provides that whenever a certificate of residence is issued by the Mauritius Authorities, such certificate will constitute sufficient evidence of accepting the status of residences as well as beneficial ownership for applying the DTAC accordingly. It also provides that the test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13. This, the High Court thought amounts to issuing instructions "de hors the provisions of the Act".51. In our view, this thinking of the High Court is erroneous. The only restriction on the power of the CBDT is to prevent it from interfering with the course ofof any particularassessee or the discretion of the Commissioner of Income-Tax (Appeals). It would be useful to recall the background against which this circular was issued.As early as on March 30, 1994, the CBDT had issued circular no. 682 in which it had been emphasised that anyus deriving income from alienation of shares of an Indian company would beto capital gainstax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5of the Income-taxAct, 1961 by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the CBDT was justified in issuingdirections vide circular no. 789, under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assesssing officers discharging the onerous public duty of collection of revenue. The circular no. 789 does not in any way crib, cabin or confine the powers of the assessing officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter ofes covered by the provisions of the DTAC.56. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No. 789 dated 13.4.2000 is ultra vires the provisions of section 119 of the Act. In our judgment, the powers conferred upon the CBDT by sub-sections (1) and (2) of Section 119 are wide enough to accommodate such acourt reiterated the legal position, well established by a long series of decisions, in Maharashtra State Board of Secondary and Higher Secondary Education and another vs. Paritosh Bhupeshkumar Sheth and others [(1984)4 SCC 27 at paralong as the body entrusted with the task of framing the rules or regulations acts within the scope of the authority conferred on it, in the sense that the rules or regulations made by it have a rational nexus with the object and purpose of the status, the court should not concern itself with the wisdom or efficaciousness of such rules or regulations. It is exclusively within the province of the legislature and its delegate to determine, as a matter of policy, how the provisions of the statute can best be implemented and what measures, substantive as well as procedural would have to be incorporated in the rules or regulations for the efficacioushe objects and purposes of the Act. It is not for the Court to examine the merits or demerits of such a policy because its scrutiny has to be limited to the question as to whether the impugned regulations fall within the scope of the regulation-making power conferred on the delegate by the statute".Applying this test, we areto hold thatimpugned circular amounts to impermissible delegation of legislative power. That the amendment made in section 90 was intended to empower the Government to enter into agreement with foreign Government, if necessary, for relief or avoidance of double taxation, is also made clear by the Finance Minister in his Budget Speech,to accept the contentionof the respondent that the DTAC is ultra vires the powers of the Central Government under Section 90 onts susceptibility toon behalf of the residents of third countries.63. The High Court seems to have heavily relied on an assessment order made by the assessing officer in the case of Cox and Kings Ltd. drawing inspiration therefrom. We are afraid that it was impermissible for the High Court to do so. An assessment made in the case of a particular assessee isbe challenged by the Revenue or by the assessee by the procedure available under the Act. In a Public Interest Litigation it would be most unfair to comment on the correctness of the assessment order made in the case of a particular assessee, especially when the assessee is not a party before the High Court. Any observation made by the Court would result in prejudice to one or the other party to the litigation. For this reason, we refrain from making any observations about the correctness or otherwise of the assessment order made in Cox and Kings Ltd. Needless to say, we decline to draw inspiration therefrom, for our inspiration is drawn from principles of law as gathered from statutes and precedents.We are inclined to agree with the submission of the appellants that, merely because exemption has been granted in respect of taxability of a particular source of income, it cannot be postulated that the entity is notas contended by the respondents.In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same asx. Liability to taxation is a legal situation;of tax isa fiscal fact. For the purpose of application of Article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actualx. If this were not so, the DTAC would not have used the wordsbut would have used some appropriate words like. On the language of the DTAC, it is notto accept the contentionof the respondents that offshore companies incorporated and registered under MOBA are notunder the Mauritius Income-tax Act; nor is itto accept the contentionthat such companies would not bein Mauritius within the meaning of Article 3 read with Article 4 of the DTAC.95. There is a further reason in support of our view. The expressionhas been adopted from the Organisation for Economic Co-operation and Development Council (OECD) Model Convention 1977. The OECD commentary on article 4, definingsays; "Conventions for the avoidance of double taxation do not normally concern themselves with the domestic lawsof the Contractinglaying down the conditions under which a person is to be treated fiscally asand, consequently, is fullyto tax in. The expression used isby reasons of various factors. This definition has been carried over even in Article 4 dealing within the OECD Model Convention 1992.It is, therefore, not possible for usto accept theso strenuously urged on behalf of the respondents that avoidance of double taxation can arise only when tax is actually paid in oneIn our view, the recommendations of the Working Group of the JPC are intended for Parliament to take appropriate action. The JPC might have noticed certain consequences, intended or unintended, flowing from the DTAC and has made appropriate recommendations. Based on them, it is not possible for us to say that the DTAC or the impugned circular are contrary to law, nor would it beto interfere witheither of them on the basis of the report of the JPC.There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development. Deficit financing for example, is one treaty, shopping in our view, is another. Despite the sound and fury of the respondents over the so called "abuse" of "treaty shopping", perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for low long is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy.of the Privy Council in Bank ofChettiand [supra note 94], wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Westminster [supra note 57], was the law in this country when the Constitution came into force. This was the law in force then, which continued by reason of Article 372. Unless abrogated by an Act or Parliament, or by a clearis Court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell [supra note 1], we find no reference therein to having dissented from or overruled the decisionof the Privy Council in Bank ofChettinad [supra note 94]. If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this Court in Mathuram [supra note 93]. We are, therefore,to accept thecontention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster [supra note 57] to Bank of Chettinad [supra note 94] to Mathuram [supra note 93], despite the hiccups of McDowell [supra note 1], the law has remained the same.170. We areto agree with the submissionthat an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the