Telangana High Court

Oxford Ayyappa Consulting Services ... vs Principal Commissioner Of Income Tax ... on 7 June, 2024

Author: P.Sam Koshy

Bench: P.Sam Koshy

            THE HON'BLE SRI JUSTICE P.SAM KOSHY
                                   AND
     THE HON'BLE SRI JUSTICE LAXMI NARAYANA ALISHETTY

          WRIT PETITION Nos.46510 and 46467 of 2022

COMMON ORDER:

(per the Hon'ble Sri Justice P.SAM KOSHY)

Since the grounds of challenge being the same and the

question of law to be decided also being the same, both the writ

petitions are taken up and decided by this common order.

For convenience, W.P.No.46510 of 2022 is being taken as the lead

case, so far as the facts are concerned.

2. The instant writ petition i.e. W.P.No.46510 of 2022 is filed

seeking issuance of writ of mandamus declaring the initiation and

continuation of proceedings dated 14.12.2022, issued by the

respondent No.1/Principal Commissioner of Income Tax (Central)

vide DIN & Letter No:ITBA/COM/F/17/2022-23/1047994899(1),

for the assessment year 2019-2020, under Section 144BA of the

Income Tax Act, 1961 (briefly 'the Act' hereinafter) and all

consequent proceedings thereto as illegal, arbitrary, ultra vires the

Income Tax Act, lacking in subject jurisdiction and to set aside the

same and further direct the respondents not to take any coercive

steps or action against the petitioner.

3. Heard Mr. S.Ganesh, learned Senior Counsel appearing

along with Ms. Rubaina S. Khatoon, learned counsel for the

petitioner and Mr. N.Venkataraman, learned Additional Solicitor

General of India along with Ms. Mamata, learned counsel for the

respondent-Department.

4. The whole issue revolves around the issuance of bonus

shares to the shareholder firm namely Ramky Estate and Farms

Limited (for short "REFL"). The petitioner sold the shares of REFL

to Advisory Services Pvt. Ltd (for short "ADR"). Prior to the

aforesaid sale of shares to ADR, REFL had issued bonus shares to

its shareholders in the ratio of 5:1. Owing to the issuance of bonus

shares, the face value of each share of REFL got reduced to 1/6th of

its value. The sale of REFL shares to ADR resulted in a short term

capital loss to the petitioner as per the provisions of the Act.

5. The petitioner set-off the short term capital loss incurred on

the sale of shares of REFL against the long term gains made on

another transaction of sale of shares in Ramky Enviro Engineers

Limited (for short "REEL").

6. For the assessment year 2019-2020, the petitioner filed his

income tax return reporting the income under the head 'Capital

Gains' arising out of the sale of shares of REEL after adjusting the

capital loss incurred on the sale of REFL shares and paid the

requisite income tax.

7. According to the learned Senior Counsel appearing for the

petitioner, the transactions undertaken by the petitioner were one

which was covered by Section 94(8) of the Act, which is primarily

enacted to prevent the avoidance of tax. However, respondent No.2

in the course of the assessment of income for the year 2019-2020,

sought to treat the transactions as impermissible avoidance

arrangement as per the General Anti-Avoidance Rules (for short

"GAAR") under chapter X-A starting from Section 95-102 of the Act.

In the process, notice dated 02.08.2022 was issued by the

respondent No.2 i.e. Reference Notice under Rule 10UB(1) of the

Income Tax Rules, 1962, and sought for objections from the

petitioner under Section 144BA(1) of the Act.

8. The petitioner immediately submitted his response to the

said notice on 16.08.2022 rebutting the entire allegations. The

petitioner also questioned the validity of the said reference notice

issued by respondent No.2. It is thereafter that the respondent

No.1 has issued the impugned notice on 14.12.2022 stating that

the transactions undertaken by the petitioner qualifies as a

"Impermissible Avoidance Arrangement (for short "IAA") under

chapter X-A of the Act and objections were again called from the

petitioner. According to the learned Senior Counsel, initiation of

proceedings under chapter X-A of the Act is illegal and uncalled

for.

9. It was the contention of the learned Senior Counsel that the

entire transactions in question; are all transactions which are

covered under Chapter 'X' the provisions of the Specific Anti-

Avoidance Rules (for short "SAAR"). Chapter X-A was made as a

special provision relating to avoidance of tax, the provisions of

chapter X-A containing the General Anti-Avoidance Rules (for short

"GAAR") thereafter cannot be made applicable to the said

transactions. It is this issuance of notice under Section 144BA

invoking chapter X-A of the Act which is under challenge in the

present writ petitions. The challenge primarily is on the

applicability of the said provision and hence without jurisdiction

and unsustainable in the eyes of law.

10. According to the learned Senior Counsel, chapter X-A of the

Act was enacted specifically as GAAR. The chapter itself contains a

set of general provisions for identifying tax avoidance arrangement

and for levying tax thereon. It is further submitted that since the

transactions undertaken by the petitioner is one which falls under

chapter X of the Act dealing with SAAR, hence, the provisions

under chapter X-A cannot be invoked. It is here that the

respondent No.1 has committed an error in law while issuing

notice invoking Section 96 of the Act, which is the provision

otherwise, referred as GAAR which would not be attracted to the

facts of the petitioner.

11. It is further submitted that the relevant provision of law to be

taken note of in the present writ petition is Section 94(8) of the Act

which specifically deals with buying and acquiring of any units.

The explanation to the said provision specifically enumerates that

units referred to in the Section shall have the meaning assigned to

it in clause B of the explanation to Section 115AB. Further, when

we read clause B to the explanation to Section 115AB, it would

clearly indicate that the Parliament while enacting the law meant

units to be units of a mutual fund specified under clause 23(D) of

Section 10.

12. According to the learned Senior Counsel, the entire provision

of law under Section 94(8) is with an intention to curb tax

avoidance in relation to the bonus stripping. It was specifically

contended that the loss arising on purchase/acquire and sale of

units of mutual fund is to be ignored for computation of income

chargeable to tax subject to satisfying the conditions stipulated

under the provisions. The Parliament while enacting Section 94(8)

never had the intention of including shares and security within the

scope of bonus tripping. If the Parliament would had intended the

same, they would have included it within the rigors of Section 94(8)

of the Act.

13. Contending the same, the learned Senior Counsel submitted

that what has been specifically excluded from the provisions

curbing bonus stripping by way of SAAR cannot be indirectly

curbed by applying GAAR. This in the opinion of the learned Senior

Counsel was nothing but expansion of the scope of a specific

provision in the Income Tax Act which is otherwise impermissible

under the law.

14. In the instant case, the transactions undertaken by the

petitioner involved subscription and sale of shares and not units of

mutual fund. According to the learned Senior Counsel for

attracting or for invocation of Section 94(8) it was the pre-requisite

to have buying and acquiring of units of mutual fund. Else, the

provision of Section 94(8) would not get attracted. Hence, the

petitioner was entitled to set-off of short term capital loss sustained

on sale of shares. It was submitted that the transactions of bonus

stripping are subject to the specific provisions of Section 94(8) of

the Act, which is a SAAR enabling provision. It was further

submitted that any loss incurred on account of the purchase and

sale of shares, there upon, resulting in bonus stripping is required

to be computed as per Section 94(8) and the respondents cannot

be permitted to resort to the provision under Section 96 of the Act.

15. It was also the contention of the learned Senior Counsel that

the provision of Section 94(8) being a specific provision, therefore

impliedly excludes the application of the general provision i.e.

Section 96. It was strongly contended that the respondent No.1 in

the given factual backdrop ignoring the applicability of Section

94(8), straightway proceeded to treat the subscription and sale of

shares by bringing them under the ambit of Section 96 of the Act.

This according to the learned Senior Counsel applying Section 96

was without appreciating the specific and applicable provisions

relating to bonus stripping and it was Section 94(8) which was

required to be applied at the first instance.

16. According to the learned Senior Counsel, there were

guidelines issued in the year 2012 by an expert committee on

GAAR, known as Shom Committee which was constituted to

undertake stakeholders' consultations and finalize the guidelines

for GAAR. The said committee is said to have recommended that

where SAAR is applicable to a particular transaction, then GAAR

should not be invoked to look into that element. The Shom

Committee's recommendation was by and large accepted by the

Central Government. According to the petitioner, this in other

words means that where the provisions of chapter X gets attracted,

the provisions of chapter X-A dealing with GAAR by implications

stands excluded. Thus, the impugned proceedings initiated deserve

to be held as contrary to law, in excess of jurisdiction and thus

liable to be set aside/quashed.

17. In support of his contention, learned Senior Counsel referring

to the book of Principles of Statutory Interpretation by GP Singh,

contended that in order to avoid inconsistency and repugnancy,

harmonious construction of the provision was required to have

been followed by the respondents. In addition to this, the learned

Senior Counsel relied upon the judgments of the Hon'ble Supreme

Court of India in the case of Union of India vs. Shiv Dayal Soin &

Sons (P) ltd. And Others 1, Commercial Tax Officer, Rajasthan

vs. Binami Cements Limited and Another 2 and R.S. Raghunath

vs. State of Karnataka and another 3.

18. Per contra, learned Additional Solicitor General of India,

appearing for the respondent-Department, referring to the

impugned show cause notice contended that the case itself at the

first instance is not maintainable for the reason that it is the show

cause notice which is under challenge; and that the writ

jurisdiction is not meant to assail a show cause proceedings unless

there is patent illegality on the ground of jurisdiction. In the

instant case, according to the learned ASG appearing for the

1 2003 Volume 4 SCC 695 2 2014 8 SCC 319 3 1992 1 SCC 335

respondent-Department, there has been no specific material

available to entertain the writ petitions where the challenge

primarily is to the show cause proceedings.

19. According to the learned ASG, the petitioner can very well

enter appearance before the authorities concerned and take all the

relevant objections in support of his contentions. That the

authorities concerned shall duly consider all the contentions that

the petitioner will raise in his response. Thus, no strong case for

interfering with the impugned show cause notice at this juncture is

made out.

20. It was further contended vide order dated 05.02.2019, the

Board of Directors had sanctioned inter corporate deposit of Rs.350

crores to related entity i.e. REFL. The mischief played by the

petitioner was that all the ledgers reflected the writing of the loan

to the tune of Rs.288.50 crores during the month of March, 2019,

and further the said amount was claimed as business loss and set

off against the capital gains.

21. Drawing the attention to the events that had transpired

within a short span of time, learned ASG contended that in the

AGM that was held on 27.02.2019, the share capital of REFL was

increased of its authorized share capital to Rs.1130,00,00,000/-

comprising of equal number of shares. The AGM further decided to

allot 7,64,40,100 shares on a private placement basis to Shri Alla

Ayodhya Rami Reddy and 5,56,52,175 shares on a private

placement basis to M/s.Oxford Ayyapa Consulting Services Private

Limited.

22. Immediately thereafter, in a short span of time, the

petitioner/assessee purchased the aforementioned 5,56,52,175/-

of REFL. Subsequently, on 04.03.2019, REFL declared bonus

shares in the ratio of 1:5. As a consequence of bonus shares

declaration, the value of the shares got declined from Rs.115/- per

share previously to Rs.19.20/- per share. On 14.03.2019, the

petitioner/assessee in turn further sold Rs.5,56,521/- shares to

another firm i.e. ADR on the rate of Rs.19.20/- per share, thereby,

resulting in a business loss of approximately Rs.462 crores.

23. Immediately thereafter, the petitioner/assessee transferred

the newly issued shares of REFL purchased at the rate of

Rs.19.20/- per share to another related entity i.e. ADR which again

is without any business purpose. The so called purchaser i.e. ADR

did not even have sufficient sources of funds to buy the shares of

REFL. Funds in this regard were provided by M/s.Oxford Ayyapa

Consulting Services India Private Limited to ADR. Thus, the money

which was funded by M/s.Oxford Ayyapa Consulting Services India

Private Limited were returned by way of rotation of funds from

within the group itself in the form of transfer from one group

concerned to another. This entire exercise has been carried out

with a sole motive of evading tax. Thus, the aforesaid transaction is

nothing but round stripping of funds with no commercial

substance. Moreover, the entire exercise has been done only with a

mala fide intention of avoiding the payment of tax by creating

losses. The entire transaction was made in the creation of a loss to

the tune of Rs.462 crores without any economic, rational and

commercial substance.

24. Likewise, the sanctioning of inter corporate deposit of Rs.350

crores on 05.02.2019 to M/s.Ramky Infrastructe Limited repayable

in sixty (60) months with a moratorium period of two (2) years,

wherein in the books, the disbursement is reflected in the month of

February and March, 2019. Whereas, the ledger reflects writing off

of the loan to the tune of Rs.288.50 crores in the month of March,

2019. Further, the disbursement made during the same month

clearly establishes the non-genuineness of the inter corporate

deposit and the motive or object exclusively being claiming of

business loss against taxable gains. It is in this context that the

learned ASG appearing for the respondent-Department submits

that in the given factual backdrop, the proceedings had to be

initiated under Chapter X-A of the Act.

25. In the light of the contentions put forth on either side,

for proper appreciation of the dispute, it would be relevant at this

juncture to take note of the provisions of chapter X and chapter X-

A. Chapter X deals with the special provisions relating to avoidance

of tax. Chapter X-A at the same time is brought by way of an

amendment to the Income Tax Act, 1961, consequent to the

Finance Act, 2013, with effect from 01.04.2016.

26. What is also required to be seen is that the learned Senior

Counsel appearing for the petitioner contends that since there is a

special provision relating to avoidance of tax envisaged under the

Act, under the said circumstances, the general provision of law of

anti-avoidance cannot be applied and the respondents are required

to scrutinize the case of the petitioner strictly within the four

corners of the provisions of chapter X i.e. SAAR and chapter X-A

i.e. GAAR cannot be invoked.

27. It is worth taking note of the fact that here is a situation

where the special provision of law was already there in the Act

when the general provision of law has been subsequently enacted

by way of an amendment. Normally it is the vice-versa, i.e., where

the general provision of law already being in force, the special

provision of law is subsequently enacted. It is in those said

circumstances, the Hon'ble Supreme Court of India as also the

various High Courts have repeatedly held that when a special

provision of law stands enacted, then the general provision of law

would not and cannot be invoked. In the instant case chapter X-A

has been only brought into force with effect from 01.04.2016 in

terms of the Finance Act, 2013. Thus the said contention of the

learned Senior Counsel appearing for the petitioner cannot be

accepted.

28. What next to be appreciated is the fact that chapter X-A

begins with a non-obstante clause, where in Section 95(1) dealing

with the applicability of the General Anti-Avoidance Rules, it has

been held that, notwithstanding anything contained in the Act if

the Assessing Authority finds that an arrangement entered into by

the Assessee is an impermissible avoidance arrangement, the

determination has to be done in respect of the consequential tax

arising there from and shall be subject to the provisions of chapter

X-A. This in other words means that by virtue of the aforesaid non-

obstante clause, the provisions of chapter X-A gets an overriding

effect over and above the other existing provisions of law.

29. So far as the contention of the learned Senior Counsel

appearing for the petitioner that the case of the petitioner is one

which should have otherwise fallen under Section 94(8) of the Act,

it would be relevant also to take note of the said provision of

Section 94(8). As is known to all, Section 94 deals with avoidance

of tax by certain transactions in securities. Securities can be of

different natures like stocks, mutual funds, derivatives of non-

recognized stock exchanges and the case of the petitioner is that

the transactions of the petitioner is one which would fall under

Section 94(8). At the relevant point of time sub-section 8 of Section

94 dealt with only buying and acquiring of units within a period of

three (3) months prior to the record date. The explanation to the

said Section provides for definitions of certain terminologies used

in the said sub-section which includes the definition of securities

and the definition of units. For ready reference both, the definition

of securities as also the definition of units provided under clause B

and clause D to the explanation of Section 94 is being reproduced

herein under:

"(b) "securities" includes stocks and shares;

(d) "unit" shall mean, --

(i) a unit of a business trust defined in clause (13A) of section 2;

(ii) a unit defined in clause (b) of the Explanation to section 115AB; or

(iii) beneficial interest of an investor in an Alternative Investment Fund, defined in clause (b) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and shall include shares or partnership interests.

30. Before the formal codification of the General Anti Avoidance

Rules (GAAR) into law in 2018, the judicial system had already

established its own set of rules known as the Judicial Anti-Avoidance

Rules (JAAR). The JAAR operated under the principle of 'substance

over form', essentially seeking to uncover misleading structures or

transactional arrangements that lacked real commercial substance.

These rules weren't arbitrary but were carefully crafted tools designed

to scrutinize transactions and financial arrangements that might

otherwise escape tax obligations through legal loopholes. These anti-

avoidance rules, therefore, were used to ensure that all transactions

were conducted transparently and within the spirit of the law. The

legal amendments that followed were driven by the judiciary's firm

commitment to uphold these anti-avoidance principles, using the

power of law to enforce it. As a result, a new chapter, Chapter X-A,

was added to the Act. This chapter, which comprises Sections 95 to

102, provides a detailed account of various types of transactions that

could be potentially viewed as illegal tax avoidance arrangements.

This chapter doesn't just list out these transactions, but also provides

an extensive definition of conditions that render a transaction or

arrangement devoid of commercial substance. Additionally, it lays out

the potential consequences that such arrangements could face.

Furthermore, Section 100 of this chapter clarifies that this Chapter is

applicable in addition to or as a substitute for any other existing

method of determining tax liability. This provision emphasizes the

legislative intention that the GAAR provisions should act as an all-

encompassing safety net. It's designed to capture all illicit

arrangements, ensuring that tax on these arrangements is calculated

using the provisions of this Chapter.

31. In the present case, the petitioner puts forth an argument

rooted in the belief that the Specific Anti Avoidance Rules (SAAR),

particularly Section 94(8), should take precedence over the General

Anti Avoidance Rule (GAAR). This contention, however, is

fundamentally flawed and lacks consistency .The reason being the

Petitioner's own previous assertion that Section 94(8) is not applicable

to shares during the relevant time frame. This inherent contradiction

in the Petitioner's stance significantly weakens the overall credibility

of their argument.

32. As per the Revenue's perspective, given the multiple

transactions that the taxpayer has undertaken, the case should be,

one which should fall under the umbrella of Chapter X-A and not

Chapter X. Section 94(8) might be relevant in a simple, isolated case

of the issuance of bonus shares, provided such issuance has an

underlying commercial substance. However, this provision does not

apply to the current case, as issuance of bonus shares here is

evidently an artificial avoidance arrangement that lacks any logical or

practical justification. It is clear that this arrangement was primarily

designed to sidestep tax obligations, in direct contravention of the

principles of the Act.

33. As far as the petitioner's reliance on the 2012 Shome

Committee Report is concerned, in the given factual backdrop, the

same is totally misplaced and misconstrued. Even the contention of

the petitioner that the aforementioned Report with regard to SAAR

under Section 94 would override the GAAR in Chapter X-A, is

unacceptable. The Committee's stance that SAAR should generally

supersede GAAR mainly pertains to international agreements, not

domestic cases such as this. This stand, as per the report is further

substantiated by the Finance Minister's declaration, made on January

14, 2013. During this announcement, the Minister stated that the

applicability of either GAAR or SAAR would be determined on a case-

by-case basis.

34. What further weakens the petitioner's argument is the

subsequent introduction of a Rule under Section 95 and Section 100.

This provision indicates that Chapter X-A could be used in

conjunction with, or as a substitute for, other Sections of the Act. This

development again highlighted the selective and misinterpreted use of

legal provisions by the Petitioner.

35. Further, the Finance Bill, 2013, only incorporated some of the

expert committee's recommendations and CBDT also clarifies that

both GAAR and SAAR would be applied depending upon the specifics

of each case. However, Petitioner's assertion is that the facts of the

case are irrelevant in determining the application of a general law is

also fundamentally flawed. This stance was already addressed and

refuted by the Supreme Court in the case of The Commissioner of

Income-Tax (Central), New Delhi vs. M/s. S. Zoraster and

Company 4. The Court, in its wisdom, stated that laws must be

interpreted based on the specific facts of each case. The Petitioner's

argument, thus, is not only inconsistent but also contradicts the well-

established legal principles.

36. The current arrangement is being scrutinized as it is considered

devoid of commercial substance as per Section 97. It is perceived as a

deliberate misuse of the Act's provisions, going beyond the intended

use of the law, and manipulating it to one's advantage. It creates

extraordinary rights and obligations that seem to be conducted not in

good faith. These unusual rights and obligations are not in line with

the general principles of fair dealing, leading to the conclusion that

it's an impermissible avoidance agreement under Section 96.

Consequently, the arrangement falls under the purview of Chapter X-

A. Given these circumstances, procedures were set in motion to apply

the rules and regulations of Chapter X-A to this arrangement.

37. The Vodafone judgment provides crucial insight into this issue.

The judgment implies that the business intent behind a transaction

4 (1972) 4 Supreme Court Cases 15

could serve as a strong piece of evidence that the transaction isn't a

deceptive or artificial arrangement. The commercial motive behind a

transaction often reveals the true nature of the transaction. However,

the judgment also places the burden of proof on the Revenue to prove

any fiscal misconduct. This means, the Revenue needs to provide

sufficient evidence of any alleged wrongdoing. In stark contrast,

Section 96(2) places this responsibility on the taxpayer. It requires the

taxpayer to disprove the presumption of a tax avoidance scheme. This

is a significant shift in responsibility. In this particular case, there is

clear and convincing evidence to suggest that the entire arrangement

was intricately designed with the sole intent of evading tax. The

Petitioner, on their part, hasn't been able to provide substantial and

persuasive proof to counter this claim.

38. Section 144AB outlines the procedure for applying the rules in

Chapter X-A. This section ensures that transactions are thoroughly

evaluated at multiple levels and from various perspectives before

determining any connected outcomes. This involves a comprehensive

examination of all the elements of the transaction, upholding the

principles of fairness at each step. It ensures that the process is

thorough, fair, and just. However, the Petitioner has chosen to seek

this court's intervention instead of following the process set out under

Section 144AB. This circumvention of the process raises questions

about the Petitioner's motives.

39. The Hon'ble Apex Court in the case of M/s. S. Zoraster and

Company (supra), held at paragraph Nos.17 to 20 as under, viz.,

"17. As we have already pointed out the certificate has been granted by the learned Judges on the basis that the general question whether a presumption under Section 114, Illustration (f) of the Evidence Act can be raised is of great importance and that it is likely to arise in many future cases, not restricted to income tax. It should be remembered that this Court should not be invited to decide any question of law much less the substantial question of law purely in the abstract. Such question of law must reasonably arise on the basis of the material on record. Further, the substantial question of law, in order to be certified as fit to be decided by this Court must arise on the facts of a particular case. With great respect to the learned Judges who dealt with the applications for grant of certificate, we are constrained to remark that they have ignored the finding of fact recorded by the Appellate Tribunal in its supplementary statement, dated March 18, 1961, that the Revenue has placed no materials to prove that the cheques were posted at Delhi. It should be remembered that when the reference was made in the first instance, the Punjab High Court felt that the Appellate Tribunal had not given any finding as to whether the cheques in question were sent to the assessee by post and whether the assessee had given any direction in that regard to the Government of India. In view of the absence of such a finding, the High Court, by its order, dated March 24, 1955, called for a supplementary statement from the Appellate Tribunal under Section 66(4) of the Act. This order was challenged before this Court by the assessee unsuccessfully. The purpose of seeking a supplementary statement was to focus the attention of the Appellate Tribunal to this aspect, namely, the posting of cheques claimed to have been done at Delhi by the Government of India. That the Revenue miserably failed to establish the fact of posting of cheques at Delhi, is clear from the finding recorded by the Appellate Tribunal in its supplementary statement, which finding

has been accepted by the High Court in its judgment, dated February 21, 1967, when answering the reference. The High Court has also then recorded a finding that the Revenue has failed to place any material before the Appellate Tribunal to prove that the cheques in question were being sent by the Government of India through post. Unfortunately, all these aspects have been missed by the learned Judges when dealing with the applications filed by the Revenue for the grant of certificates.

18. On the above findings recorded by the Appellate Tribunal and confirmed by the High Court, no question of applying any presumption under Section 114 of the Evidence Act arises for consideration. The learned Judges, dealing with the applications for grant of certificates, had no jurisdiction to go behind the finding recorded in the original judgment disposing of the reference. In our opinion, the entire discussion on this aspect of posting of the cheques at Delhi by the learned Judges is beside the point, as that question no longer was available to the Revenue, in view of the finding recorded against it, to which we have made a reference earlier.

19. When once the question of a presumption under Section 114, Illustration (f) of the Evidence Act does not fall to be considered in these proceedings, in view of the specific finding recorded by the Appellate Tribunal against the Revenue, and accepted by the High Court, in our opinion, the High Court was not justified in certifying on this ground, that the cases are fit for appeal to this Court.

20. As the issue of certificates by the High Court is not proper, the only course open to us is to cancel the certificates and set aside the order of the High Court granting them. The result is that the above appeals have become unsustainable, as they have been brought to this Court on the basis of certificates, which, as held by us, have not been properly granted."

40. Further, the Hon'ble Apex Court in the case of McDowell & Co.

Ltd. v. CTO 5 held at paragraph Nos.17 and 18 as under, viz.,

"17. We think that time has come for us to depart from the Westminster [1936 AC 1 : 1935 All ER Rep 259] principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a Welfare State like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black-money, directly causing inflation. Then there is "the large hidden loss" to the community (as pointed out by Master Wheatcroft [18 Modern Law Review 209] ) by some of the best brains in the country being invloved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers, and accountants on one side and the tax-gatherer and his perhaps not so skilful, advisers on the other side. Then again 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". Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the "artful dodgers". It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr Justice Holmes, who said, "Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization". But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a Welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other

(1985) 3 SCC 230

welfare legislation and it is a pretence to say that avoidance of taxation is 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 statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd. and Bengal Hotels Limited, In re [47 Com Cas 597 (Guj HC)] where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.

18. 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 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 with the aid of "emerging" techniques of interpretation (sic as) was done in Ramsay [1982 AC 300 : (1981) 1 All ER 865] , Burmah Oil [1982 STC 30] and Dawson [(1984) 1 All ER 530] , to expose the devices for what they really are and to refuse to give judicial benediction."

41. Tax planning may be legitimate provided it is within the

framework of law. Colourable devices cannot be part of tax planning

and it is wrong to encourage or entertain the belief that it is

honourable to avoid the payment of tax by resorting to dubious

methods. It is the obligation of every citizen to pay the taxes honestly

without resorting to subterfuges.

42. Accordingly, we are of the considered opinion that the Revenue

has persuasively and convincingly shown that the transactions in the

instant case are not permissible tax avoidance arrangements. The

evidence points towards the fact that these transactions do not qualify

as permissible under the tax laws. Therefore, the provisions of

Chapter X-A would become applicable. Therefore, the current writ