Shivakantjha.org - The Judgment: What it means
The Judgment: What it means
In the case of
Shiva Kant Jha v. Union of India & Ors
[C W P NO. 5646 of 2000 delivered
by the High Court of Delhi at New Delhi on May 31, 2002 at 4.25 P.M.
By Shiva Kant Jha
Knowledge of the facts which constituted the cause of action for the Public
Interest Litigation in Shiva Kant Jha v. Union of India would help better
comprehension of the Hon’ble Delhi High Court’s landmark judgment.. The
synopsis of the Writ Petition is a compressed account of material facts. The thrust
of the central reasoning manifested itself in the grounds and prayers. Arguments
were advanced to support the grounds and supplicate for the grant of prayers.
It cannot be gainsaid that a judgment means what its words mean: no subtraction
or addition to it can be made with reference to pleadings. But the context helps
understanding the full import of a judgment.
2. The Synopsis of the Writ Petition runs as under :
1. Under the Income tax Act the general position is that all assesses,
whether resident or not, are chargeable in respect of income accruing , arising
or received, or deemed to accrue or arise or to be received, in India; while residents
alone are chargeable in respect of income which accrues or arises and is received
outside India. This position often gives rise to Double Taxation of Income for
avoiding which section 90 empowers the Central Government to enter into agreements
for avoidance of double taxation.
2. In 1983 the Government of the Republic of India and the Government of Mauritius
concluded a Convention for the avoidance of double taxation and the prevention
of fiscal evasion with respect to taxes on income and capital gains and for the
encouragement of mutual trade and investment.
3. Indian economy was opened some time in 1991 for globalization and steps
were taken to initiate process for adoption of free market economy. Relaxation
of regulations and controls by the Indian Government on direct foreign investment
into India took place in 1992. Guidelines for direct investment by foreign institutions
investors (FIIs ) were announced.
4. Coevally Mauritius set up a legal regime the effect of which was to transform
Mauritius into a tax haven. This was brought about mainly through the Mauritius
Offshore Business Activities Act 1992, the Offshore Trusts Act 1992, and the International
Companies Act 1994.
5. The Convention had been concluded, as is evident from its preamble, “for
the encouragement of mutual trade and investment” in India and Mauritius. Some
special benefits were given to Mauritius which is an island country in the Indian
Ocean having population approximately 1077000. Its main export is sugar. The special
benefits given to Mauritius were not initially considered to cause much fiscal
injury. But once Mauritius became a tax haven the treaty shoppers from Canada.
USA, Luxembourg and other western countries commenced the process of using the
Mauritius route for investing in India solely to avoid the incidence of lawful
tax. They set up conduit companies in Mauritius through which they made investments
in the Indian Share Market. The most alluring provision was para 4 of Article
13 of the Indo-Mauritius Double Taxation Avoidance Convention. It provided that
capital gains would be chargeable in case of a resident of Mauritius only in the
country of his residence. And in Mauritius there is no Income tax on capital gains.
By resorting to this device they avoided paying tax in utter breach of the object
of the Indo-Mauritius Double Tax Avoidance Convention turning it into veritable
rouge’s charter for causing wrongful gain to themselves and wrongful loss to India.
6. The Assessing Officers applied the settled law that the non-residents are
liable to tax on income which accrues or arises to them in India. Benefits under
Double Taxation Convention could be had only if the preconditions prescribed in
the Convention are met. One of the pre-conditions is that the claimant of benefit
must be a resident within the meaning of this term as defined in Para 1 of Article
4 of the Convention. The Assessing Officers discharged their public duties of
exploring the operative realities of such interlopers so that correct assessment
of tax could be made under the Indian tax Law. They did their statutory duties
of investigating the matrix of facts in a given case to determine whether a company
seeking benefits under the Convention was really a Mauritian resident and
was, besides, a beneficial owner of income.
7. The Central Government concluded the Convention with Mauritius in exercise
of power under section 90 of the Income Tax Act. This treaty is not made in exercise
of the general executive power under Article 73 of the Constitution of India but
is made under section 90 of the aforementioned statute which prescribes rigid
frontiers for exercising powers for concluding agreements for Avoidance of Double
Taxation. In the matter of Indo-Mauritius Double Tax Avoidance Convention the
Central Government failed in discharging its public duties to initiate a process
for the revision , supersession , rescission or modification of the treaty when
the fundamental change in circumstances undermined the consensus ad idem
between the High Contracting Parties; and there emerged in India’s favour a case
on the principle of clausula rebus sic stantibus. This was a mandatory
duty emanating from section 90 of the Income Tax Act. Secondly, the Central Government
failed in its legal duty to ensure that the agencies under it ensure that the
Convention operates within its legitimate province, and its terms are not abused
for extrinsic purposes. This duty rests on the Central Government on account of
the combined operation of Article 265 of the Constitution of India and Section
90 of the Income Tax Act. Thirdly, the Central Government failed in its public
duty to ensure that the Central Board of Direct Taxes acted in accordance with
law rather than in a patent breach of it by issuing Circular No. 789 which is
wrong on the counts of illegality and unreasonableness. This duty lay on the Central
Government as under the Central Boards of Revenue Act, 1963 the Board is subject
to the control of the Central Government and is authorised to exercise such powers
and perform such duties as may be entrusted to it by the Central Government or
under any law. As the modern case law recognises a legal duty owed by the Government
to the general body of the taxpayers, and as the duties imposed upon the Central
Board of Direct Taxes are in the interest of the general body of the taxpayers
to see what the true assessment ought to be, and as an assessment proceeding under
the Income-tax law (a species of Public Law) is, as Lord Hewart puts it in Rex
v. Special Comrs(20 T C 381,384), “a public process directed to public ends”,
Central Government failed in discharging its public duties under the law so that
no wrongful loss is caused to the Revenue and ,as its inevitable consequence,
to our country.
8. The Central Board of Direct Taxes issued a Circular under 789 dated April
13, 2000 the subject of which runs as under : “Clarification regarding taxation
of income form dividends and capital gains under the Indo-Mauritius Double Taxation
Avoidance Convention (DTAC)”. Though the source of power under which the impugned
Circular was issued is not mentioned in the Circular it is reasonably possible
to infer that the Circular is in exercise of powers under section 119 of the Income
tax Act. The effect of the Circular can be summarised in the following propositions
:
(i) Incorporation makes, per se, a company an entity “liable to tax”
under the Mauritius treaty law and “therefore to be considered as resident of
Mauritius in accordance with the DTAC”.(para 1 of the Circular)
(ii) Certain doubts raised regarding the taxation of dividends in the hands
of investors from Mauritius needed clarification. (para 2 of the Circular)
(iii) A Certificate of Residence issued by the Mauritian Authorities
“will constitute sufficient evidence for accepting the status of residence. (the
last sentence of the para 2 of the Circular)
(iv) A Certificate of Residence issued by the Mauritian Authorities “will
constitute sufficient evidence for accepting ….beneficial ownership for applying
the DTAC.” (the last sentence of the para 2 of the Circular)
(v) The “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”. (para 3 of the Circular)
(vi) The circular “shall apply to all proceedings which are pending at various
levels.” (para 4 of the Circular)
9. As to (i) supra, the Central Board of Direct Taxes went wrong in
construing the concept of residence as it failed to take into account the
special definition of residence set fort in para 1 of the Article 4 of
the Convention. As to (ii) supra, doubts were unfounded and were sought
to be merely created to justify intervention in statutory functioning of the assessing
officers under the Income Tax Act. As to (iii) supra, the instruction subverts
the statutory role of the assessing officers the prime function of which is the
exploration of facts to ascertain operative realities by foreclosing the statutory
pursuits by mandating the Assessing and the Appellate Authorities to treat the
Certificate of Residence issued in Mauritius as a conclusive proof of the factum
of residence thereby making a trespass on legislative field. As to (iv)
supra, the statutory pursuits of statutory authorities to discover the
beneficial owner or the real persons liable to tax on income is being stopped
by deeming the Certificate of Residence so granted as a conclusive proof
of beneficial ownership. This instruction violates fundamental principles of the
Income- tax jurisprudence and is a blatant encroachment on legislative field.
As to (v) supra, the Board’s Circular tends to promote interests which
are extrinsic to the purpose for which powers are conferred on this statutory
body entrusted only with powers of management and administration
under section 119 of the Income Tax Act.
10. Over these several years many Assessment Orders were passed by the Income
tax Authorities under sections 143 and 144 of the Income tax Act, and in several
cases proceedings for conduct of inquiry and investigation have already been set
afoot. The Circular No. 789 attempts to invalidate them by mandating the Income
tax Authorities to follow certain instructions contained therein which are illegal,
without jurisdiction and capable of producing serious injury to the Nation’s
Public Resources.
11. The Circular No 789 has shown discriminatory leniency to certain persons
for ulterior reasons extraneous to good management, and thereby deprived the national
exchequer of considerable sums of money which could have available for promoting
matters of public interest which our overheated economy committed to the ideals
of the Welfare State needs so imperatively, so urgently for the weal of the We,
the People of India. Besides, the impugned Circular violates Article 14 and Article
265 of the Constitution and transgresses other Constitutional limitations.”
3. The Grounds and Prayers in the Writ Petition were framed in these
words:
GROUNDS
(a) For that the Central Government which entered into the Indo- Mauritius
Double Taxation Avoidance Convention in exercise of powers under Section 90 of
the Income tax Act failed in its duties to take appropriate steps on observing
a fundamental change in the state of facts which existed at the time the Convention
was concluded having the effect of undermining consensus ad idem between
the High Contracting Parties; and there emerged in India’s favour a case on the
principle of clausula rebus sic stantibus.
For that the Central Government failed in its legal duty emanating from Article
265 of the Constitution of India anof Direct Taxes acted in accordance with law
rather than in a patent breach of it by issuing Circular No. 789 which is wrong
on the counts of illegality and unreasonableness.
(d) For that the Central Government which entered into the Indo-Mauritius
Double Taxation Avoidance Convention within the limitations of Section 90 of the
Income tax Act failed in its public duties in taking appropriate steps against
the wrongful exploitation of the Mauritius route by the NRIs and FIIs who indulged
in treaty shopping to the detriment of the Public Revenue of our country.
(e) For that the Circular No. 789 issued by the Central Board of Direct Taxes
contravenes Article 265 of the Constitution of India as it grants certain exemption
to certain persons which cannot be done in exercise executive power as grant of
exemption from taxation or conferment of the benefit of tax mitigation is a legislative
act..
(f) For that the Circular No. 789 violates the Article 14 of the Constitution
of India as it is unreasonable and arbitrary, an also because it is discriminatory.
(g) For that the Circular No. 789 shows the abdication of public duties cast
on the Central Board of the Direct Taxes under the provisions of the Central Boards
of Revenue Act, 1963, and of the Income tax Act 1961.
(h) For that the Circular No. 789 through it arbitrary instructions is prohibiting
the statutory authorities from discharge of there duties under the law.
(i) For that the Circular No. 789 trespasses on legislative field and, therefore,
is ultra vires the power of the Central Board of Direct Taxes.
(j) For that the Circular No. 789 is not in terms of Section 119 of the Income
tax Act and, therefore, is without jurisdiction. The Circular No 789 has shown
discriminatory leniency to certain persons for ulterior reasons extraneous to
good management, and thereby deprived the national exchequer of considerable sums
of money which could have been available for promoting matters of public interest
which our overheated economy committed to the ideals of the Welfare State needs
so imperatively, so urgently.
PRAYER
4. That under the circumstances aforementioned in this Petition the
humble Petitioner is approaching this Hon’ble High Court in Public Interest with
a prayer that the Hon’ble High Court may be graciously pleased to :
(a) issue such appropriate direction /order /writ as the Court deem proper,
under the circumstances brought to the knowledge of the Hon’ble Court, to the
Central Government to initiate a process whereby the terms of the Indo-Mauritius
Double Taxation Avoidance Agreement are revised, modified, or terminated and \or
effective steps taken by the High Contracting Parties so that the NRIs and FIIs
and such other interlopers do not maraud the resources of the State;
(b) declare and delimit the powers of the Central Government under section
90 of the Income tax Act, 1961 in the matter of entering into an agreement with
the Government of any country outside India;
(c ) declare and delimit the powers of the Central Board of Direct Taxes in
the matter of the issuance of instructions through circulars to the statutory
authorities under the Income tax Act, specially through such circulars which are
beneficial to certain individual taxpayers but injurious to Public Interest;
(d) declare the illegality of Circular No. 789 of April 13,2000 issued by
the Central Board of Direct Taxes and to quash it as a matter of consequence ;
(e) issue mandamus so that the respondents discharge their statutory duties
of conducting investigation and collection of tax as per law ;
(f) issue appropriate direction / order or writ of the nature of mandamus,
as the Court deem fit, so that all remedial actions to undo the effects of the
acts done to the prejudice of Revenue in pursuance of Circular No. 789 are taken
by the authorities under the Income tax Act, 1961.
And / or
(g) This Hon’ble Court may be pleased to pass any other or further direction
(s), order (s), as it may deem fit and proper in the facts and circumstances of
the case.
II
5. A study of the judgment of the Hon’ble Court would show that it
has three clear-cut segments :
(i) The Hon’ble Court quashed the CBDT Circular 789 of April 13, 2000. This
actual decision is binding, and so are the reasons which led the Hon’ble Court
to quash the Circular .
(ii) The Hon’ble Court declared law on some important points. Some of these
points declared by the Hon’ble Court are clearly supportive of the Court’s actual
decision quashing the CBDT Circular. But their importance is on account of their
wider relevance in the management of our economy. The Court clarified and declare
law on certain vital points essential for disposing of the Writ Petition which
has been allowed in full.
(iii) The Hon’ble Court suggested to the Central Government to consider certain
points of importance raised by me as the PIL Petitioner but were not decided by
the Court as the Writ Petition could be disposed of even without deciding them.
This judicial suggestion to the Central Government was laced with an observation
that these issues would remain open to be taken up in appropriate cases. In my
considered view the points of law declared by the Hon’ble Court are of greatest
impact in many ways. The use of declaration in public law became common in the
United Kingdom after the implementation of the Rules of Court (Order 53, in 1977
) which was enacted in section 31 of the Supreme Court Act 1981. Under the Indian
Court Practice declaration and injunction were always used as effective weapons
by the Courts in exercise of the power of judicial review in public law field.
In this Judgment the Hon’ble Court stated the law on points emanating in the Writ
Petition with masterly strokes and extraordinary precision.
III
6. The following clusters of propositions of law emerge from the Delhi
High Court’s judgments in Shiva Kant Jha v.Union of India.:
I. The instructions issued by the CBDT must not be ultra vires.
(a) In order to be legally binding on the Revenue the circulars conveying
instructions must be validly issued under section 119 of the Income tax Act.
(b) Where a circular is considered to have been issued by the CBDT in terms
of section 119 of the Income Tax Act, the Central Government can neither supplement
the reasons contained in the circular nor explain the same by affidavit, or otherwise
(c) The power of CBDT to issue instructions to subordinate authorities is
limited. Such instructions can be issued for proper administration of the
provisions of the Income-tax Act, and not otherwise. The CBDT cannot issue instructions
which could be de’hors the provisions of the Income-tax Act.
(d) Under section 119 of the Income-tax Act the CBDT has a delegated power
to be exercised within the four corners of the delegated authority[1]
(e) Through such circulars neither the essential legislative function can
be delegated, nor arbitrary on naked power can be conferred..[2]
(f) The government , much less the CBDT, cannot, through an international
treaty, lay down a procedure or evidentiary value of document which would be dehors
the provisions of the Income-tax Act.[3].
(g) A statutory authority, must act within the four corners of the statute.
[4]
II. The nature of the jurisdiction of the Assessing Officers.
(a) The function of an assessing officer is quasi-judicial in nature.
(b) It is now trite law that by reason of any power conferred upon
any statutory authority to issue any circular, the jurisdiction of a quasi judicial
authority in relation thereto can[not] be taken away. Orient Paper Mills Ltd.
V. Union Of India [5]; Sirpur Paper Mills Ltd v. CWT. Hyderabad[6]; Orient Paper Mills Ltd. V. Union
Of India [7]; S.R. Chaudhary v. State of Punjab
and Others [8]; Kishan Prakash Sharma v. Union
of India[9]: followed.
(c) ‘Passing of an appropriate order of assessment is primary duty
of the assessing officer which would include [ detection of ] conscious evasion
of tax by an assessee. Such a function, which is judicial in nature, can be regulated
but cannot altogether be prohibited.”
III. The jurisdiction of the Assessing Officers under the Income-tax Act.
(a) As passing of assessment order is the primary duty of the Assessing Officer.
He has the competence to conduct investigation into conscious evasion of tax.
“The statutory power of the Assessing authority cannot be taken away by reason
of the impugned circular.”
(b) The Assessing officers’ function is judicial in nature which “ can be
regulated but cannot altogether be prohibited.
(c) A mere production of a purported residential certificate issued by an
authority which makes the authorities put off their hands the circular could be
ultra vires.
IV. Certificate of Residence
(a ) Conclusiveness of a certificate of residence granted by the Mauritius
tax authorities is not contemplated under the treaty or under the Income-tax Act:and
not by a CBDT circular.
(b) Whether a statement shall be conclusive or not must be provided for under
a legislative act e.g. Indian Evidence Act.
V. The authorities have jurisdiction to lift the corporate veil to observe
the operative realities
In a given case the assessing officer is entitled to lift the corporate veil
for the purpose of finding out as to whether the purpose of the corporate veil
is avoidance of tax or not . New Horizons Ltd v. UOI[10] ; Life Insurance Corporation v. Escorts and
Others[11] cited.
VI. The tax treaty must conform to section 90 of the Income-tax
Act,1961.
(a) The formation of a tax treaty as a matter of political arrangement
could run “counter to the provisions of section 90 of the Income Tax Act.” [12]
(b) “The validity of the impugned circular is to be judged having regard to
the limitations contained in section 90 of the income tax Act and not other wise.”
(c) Section 90 of the Income Tax Act does not confer an unguided or unbridled
power. As the purpose of entering into a tax treaty is avoidance of double
taxation the power in terms of section 90 is to be considered having
regard to that.
(d) “A treaty which is entered into in terms of Article 73 of the Constitution
of India the political expediency may have a role to play but not when the same
is done under a statutory provisions.”
VII. The meaning of avoidance of double taxation.
(a) The expression double taxation has a definite and precise meaning[13]
(b) Income in fiscal legislative practice has a specific meaning and the avoidance
of double taxation is a term of art.
(c ) “Avoidance of double taxation would mean that a person has to pay tax
at least in one country.”
(d) Section 90 talks of income generally. However, income in fiscal legislative
practices has a specific meaning and the avoidance of double taxation is “however
a term of art.”
(e) An assessee cannot be held to be entitled to take benefit of the treaty
although it neither pays income-tax in India nor in Mauritius. Such an action
would be ultra vires.”
VIII. TREATY SHOPPING IS HELD ILLEGAL.
(a) “ An abuse of the treaty or treaty shopping is illegal and thus necessarily
forbidden.”
(b) The Indo- Mauritius Avoidance of Double Taxation Convention was entered
into between the Government of the Republic of India and the Government of Mauritius
for avoidance of double taxation and the prevention of fiscal evasion with regard
to tax on income and capital gains and for encouragement of mutual trade and investment.
(c) “Treaty Shopping which amounts to abuse of the Indo-Mauritius Bilateral
treaty may amount to fraudulent practice and cannot be encouraged.”[14]
(d) The company although had obtained residential certificate in Mauritius
but had nothing to do therewith and factually. It got itself registered only for
the purpose of tax avoidance so as to obtain benefit of the treaty.
(e) “ No law encourages opaque system to prevail “
IX. Judicial attitudes to tax avoidance.
(a) The judicial attitude towards tax avoidance has undergone change as is
evident from the decision of the Supreme Court. McDowell & Co Ltd. V. CTO[15]; Inspector of Taxes v. Dawson[16] ; cited
(b) The Hon’ble Court adopted functional and purposive approach.[17]
X. Remedy at the governmental level is not contemplated.
The suggestion to the effect that in such cases ( of tax frauds ) the attention
of the Central Government can be drawn and the matter can be taken up at the government
level is not contemplated in the statute. No law encourages opaque system to prevail.”
IV
7. Almost towards the end of the judgement (the third paragraph from
the end) the Court observed :
“Be it recorded that counsel for the parties have argued before us
at great length and raised before us a large number of questions which have been
notice hereinbefore to but keeping in view the fact that only an interpretation
of the statute vis-à-vis the impugned circular. We are of the opinion that we
need not go further and leave the other contentions for being determined in an
appropriate case.” (emphasis supplied)
8. The technique that the Court adopted is to ascertain the vires
of the impugned Circular issued by the CBDT. Developing the Ultra Vires rule
Hood Phillips explains how the examination of vires can be effectively
done through the technique of interpretation. He observes : [18]
“As regards the innumerable statutory powers, the question is one
of interpretation of the statute concerned. The acts of a competent authority
must fall within the four corners of the powers given by the legislature.[19]
The court must examine the nature, objects and scheme of the legislation, and
in the light of that examination must consider what is the exact area over which
powers are given by the section under which the competent authority purports to
act.”[20]
And Lord Hoffmann in a leading decisions of the House of Lords states with
remarkable terseness:
“There is ultimately only on principle of construction, namely to ascertain
what Parliament meant by using the language of the statute. All other principles
of construction’ can be no more than guides which past judges have put forward,
some more helpful or insightful than others, to assist in the task of interpretation.”[21]
The High Court construed the provisions of the Income tax Act, especially
sections 119 and 90, and evaluated the impugned Circular. The Court declared certain
vital points of law, and held the impugned Circular bad as it is violated them.
It is also possible to say that the Court held the impugned Circular ultra vires
the powers of the CBDT as it was not a proper exercise of administrative and managerial
power because it prevented the statutory authorities in due discharge of public
duties by issuing instructions trespassing on the legislation field with a view
to allow an opaque system to operate in which the illegal treaty shopping can
take place as the statutory authorities would not be able to lift the veil to
see the operative realities despite clear jurisdiction to do so under the law,
both statutory and judiciary. Considered either way the impugned Circular is bad.
9. It is clear from the exposition of the points in the judgment that
the Hon’ble Court had adopted a broad judicial prospective obviously to do justice
to the comprehensive grants advanced in the Writ Petition, and the Prayers falling
into two segments, one directed against the impugned Circular on the ground of
being ultra vires, and the other directed against the Central Government and the
CBDT for remissness of abdicating their public duties. It is clear that the Hon’ble
Court found all the grounds taken in the Writ Petition valid; and so allowed the
Writ Petition.
10. All the legal points which are mention in Section III had been
discussed at length in oral arguments that I presented before the Court and in
the Written Submissions of about 150 pages supported by 4 volumes of Paper Books.
The Court was competent to grant relief by declaring law on some important points
of public interests. In K.K Kochuni v. Madras[22]
the Supreme Court observed that there was no problem in grant of declaration and
injunction under Article 32 of the Constitution of India. Similar observation
were made in Dwarka Nath v. ITO[23]
In short, the judgment has two clear effect :
(i) The impugned Circular of the CBDT stand quashed as ultra vires
in both of its senses: (a) as being beyond the competence of the CBDT under section
119 of the Act; and (b) as being contrary to patent and mandatory legal rules
and public policy.
(ii) By combining the different grounds taken in the Writ Petition and the
Prayers made therein the Court synergised the issues in a broad spectrum so that
the mandatory legal norms are declared in this public law field for the wilders
of public power to do their public duties.
11. The following observations in the judgment quoted in para 7 supra
should have been, it is respectfully submitted, differently worded to avoid even
a slightest confusion. It is true that a large number of questions were “noticed”[24] by the Hon’ble Court, and they were integral
to the issues brought to the notice of the Court. All the points of law which
have been summarized in Section III are so clearly in tuned with the settled judicial
principles that there is nothing in them which can wait for another round of litigation.
V
12. CBDT Circular no. 789 of 13th April, 2000 was held to
be ultra vires the Income-tax Act; hence the Hon’ble Court quashed it.
It is worth examining which of the points of law declared by the Court discussed
above were expressly involved in the judicial logic which led to the squashing
of the said circular. In this context the following points deserve to be noted
:
(a) The Circular was bad to the extent it deprived the quasi- judicial authorities
under the Income- tax Act of their legitimate statutory jurisdiction and power
to investigate the real operative realities which may even involve lifting of
the corporate veil.
(b) The Circular was bad as it mandated certain directions ultra vires
the powers of the CBDT under section 119 of the Income- tax act, 1961 .
(c) The Circular was bad as through the directions it facilitated an opaque
system to operate [ As only under an opaque system fraud on Public Interest would
go unnoticed, undetected, and’ hence, unlamented.]
(d) The Circular was bad as it deprived the statutory authorities to detect
the cases of treaty shopping which is illegal.
(e) The Circular was bad as it deprived the statutory authorities from evaluating
cases whether such cases were really the cases to see if they were really Avoidance
of Double Taxation.
(f) The Circular is bad also because it is founded on an erroneous view that
the Double Taxation Avoidance Convention is the product of the exercise of the
sovereign treaty making power under Art. 73 of the constitution rather than in
exercise of statutory power delegated under section 90 of the Income tax Act.
(g) The Circular is bad as it steadfastly refuses to acknowledge a fundamental
principle of modern jurisprudence so pithily stated by Lord Denning : “ Fraud
unravels everything”.[25]
(h) The Circular is bad as it is in breach of the Law of Treaties by facilitating
the abuse of a bilateral treaty for the benefit of those not entitled: thereby
causing wrongful loss to India.
All the above prepositions are integral to the judicial logic which led the
Hon’ble Court to quash the impugned circular.
VI
13. The judicial observation quoted in paragraph 7 supra should
be read with the judicial observation made in the penultimate paragraph of the
judgment. Recording appreciation for this humble Petitioner, the Hon’ble Court
observed :
“ We would however like to make an observation that the Central Govt. will
be well advised to consider the question raised by Shri Shiva Kant Jha who has
done a noble job in bringing into focus as to how the Govt. of India had losing
crores and crores of rupees by allowing opaque system to operate”.
14. The paragraph quoted in paragraph 7 supra and this paragraph
are in close spatial and logical sequence. The Court, through words of pregnant
suggestions, desires that the Central Government should consider certain important
questions which had been raised in the course of the PIL proceedings. The Court
did not mention the questions but it was mindful of their importance. It was precisely
for this reason that the Court required the Central Government to consider them.
The Central Government would have the benefit of the materials in 4 volumes of
bulky Paper Books which I had field; and the Written Submissions in more than
150 closely typed legal size paper which I made. Besides, the strong group of
the Central Government Advocates were assisted by several distinguished officers
belonging to the Indian Revenue Service. It is presumed that they must have noted
those points for information of the mind of the Central Government.
15. I do not think it would be proper for me to point out with precision
all such points which the Court might be having in its judicial consciousness
when in idioms of understatement it made suggestions to the Central Government
to consider them.. But the points of great importance which I, as the PIL Petitioner
submitted at length, but which the Court might have had in its judicial consciousness
which the Court might have thought worthy of being considered by the Central Government.
It is felt that these are the points which in the appropriate proceedings would
some day come before the Court if the Central Government refuses to consider them
and to do what is just and proper under the law. Such points included these :
(i) The lack of propriety and apparent illegality in the adoption of the OECD
Model for framing the Indo-Mauritius DTAC.
(ii) The impropriety of framing tax treaties in terms of the prevailing Models
as these do not conform to our statutory and constitutional limitations of which
the Contracting States are presumed to have notice.
(iii) As the condition precedent for concluding a tax treaty is avoidance
of double taxation and as this expression under the Indian legislative practice
is a term of art, any double taxation avoidance agreements is ipso jure
violative of law.
(iv) Article 13 of the OACD Model for framing the Indo-Mauritius DTAC was
wrongly incorporated in the Indo-Mauritius DTAC when capital gains do not constitute
a species under the Mauritius Income-tax Act. Article 13 owes its existence either
to the uncritical and unperceptive state of mind of those who authored it unmindful
of national interests; or to some design unwisely crafted bringing no credit to
the executive.
(v)) How can Capital Gains be the subject matter of an avoidance of double
taxation agreement when such gains are not even income under the Mauritius
Income-tax Act. Without elaborating the point the Hon’ble Court with remarkable
brevity and directness observed:
“ There may not be any doubt that Section 90 talks of income generally. However,
income in fiscal legislative practice has a specific meaning and the avoidance
of double taxation is a term of art.”
(vi) The provisions pertaining to exchange of information are totally
ineffective as these do not confer on the competent authorities legal investigative
power. From a tax haven what can be exchanged as the baskets would remain ever
empty? Why should we continue to be an eternal Peter Pan?
(vii) In this phase of emerging globalization, when transparency is at discount,
the only institution which can rise up to the occasion is the Judiciary. The courts
of the civilized countries have already evolved the norms of international jurisprudence
with an abiding commitment to do justice, complete justice[26].
(viii) The necessity to revise the Indo- Mauritius tax treaty is acknowledged
by persons with good credentials to speak on the subject[27].
16. The point mentioned at para 13 (iii) has been judicially clarified in
the judgment primarily from the Administrative Law point of view. The Court has
clarified what this sole pre-condition (avoidance of double taxation) means
as the income tax authorities, while evaluating claims under a double taxation
avoidance agreement would see whether there is a case of double taxation.
VII
REMIDIAL ACTIONS :
16. In the last paragraph of the judgment the Hon’ble Court sets forth
operative direction in these words:
“For the reasons aforementioned this writ petition is allowed and the impugned
circular is quashed. Consequently if the assessing authorities intend to reopen
any proceedings they would be entitle to take recourse to such proceedings as
are open to them in law. The petitioners are also entitled to costs which is assessed
at Rs. 10,000/= . …”
17. The legal effects of the quashing of the impugned Circular and
of the points of law declared by the High Court would be what they should be in
the light of the various decisions of the High Courts and the Supreme Court wherein
the points of law relevant to the context have been settled.
18. The Hon’ble Court refers to the discretion of the assessing authorities
under the Income Tax Act, 1961. All statutory actions are initiated on the existence
of certain jurisdictional facts, or conditions precedents. If the assessing authorities
come across certain jurisdictional facts on the basis of which certain statutory
actions are to be initiated, then the assessing authorities are duty bound to
initiate such actions. They are under the statutory duty to play the composite
role of the investigator and the adjudicator. It is well established that if,
in a particular fact- situation, it is appropriate to exercise a specific jurisdiction,
it must be exercised as public duty. The object of the Income-tax Act, 1961 is
to collect the correct quantum of tax from taxpayers in accordance with the provisions
of the law. This power is coupled with duty. It was well observed in Julius
v. Bishop of Oxford[28].
“….there may be something in the nature of the thing empowered to be
done, something in the object for which it is to be done, something in the title
of the person or persons for whose benefit the power is to be exercised, which
may couple the power with duty, and make it the duty of the person in whom the
power is reposed, to exercise that power when called upon to do so.”
19. In appropriate cases the Assessing Officers may consider taking
action under the provisions of the Income-tax Act,1961: viz-
(i) Action under section 147 of the Income Tax Act.
The provisions of section 147 of the Income Tax Act as substituted by the
Direct Tax Laws (Amendment ) Act 1987. w.e.f. 1.4.89 have been explained by the
Gujrat High Court in Praful Chunilal Patel : Vasant Chunilal Patel v. Asst.
CIT [29] .
(ii) Action under 154 of the Income Tax Act. The judgment declares
law so it should be given effect as if this was law all along. It is well established
principle that full effect should be given to a fiction and it should be carried
to its logical conclusion.[30]
(iii) Action under section 263 of the Income Tax Act, 1961.
(iv) Giving effect to the law declared by the High Court in the appellate
proceedings under the Act.
[1] The Court observed; “ Power
of issuance of a circular in terms of Section 119 of the Income Tax Act has been
delegated to the CBDT for a limited purpose. By reason of such neither the essential
legislative function, can be delegated nor arbitrary thereby uncanalised or naked
power can be conferred. Delegated authority, it is trite must act within four
corners of delegated legislation. It is not only to at having regard to the purpose
and object for which the power has been delegated, it must act having regard to
the provisions of the statue as also the delegated legislation.”
[2] The Hon’ble Court explained
the limits on the power of delegation with reference to the observations of the
Supreme Court in Krishn Prakash Sharma v. Union of India (2001) 5 SCC 212.
[3] Ramchandra v. Govind AIR 1975 S.C. 915 relied
on.
[4] AIR1975 SC 915.
[5] AIR. 1969 SC 48.
[6] 1970(1) SCC 795.
[7] 1970(3) SCC 76.
[8] 2001(7) SCC 126.
[9] 2001(5) SCC212.
[10] 1995 (1) SCC 478.
[11] AIR 1986 S.C. 1370.
[12] The Hon’ble Court quoted at length from the judgement
of the Supreme Court of India in S. R. Chaudhary v State of Punjab wherein the
apex Court observed, inter alia, the following:
“ There can be no constitutional government unless the wielders of power are
prepared to observe the limits upon governmental power.”
“Constitutional restraints must not be ignored or bypassed if found inconvenient
or bent to suit “political expediency. We should not allow erosion of principles
of constitutionalism.”
[13] The definition of double
taxation as given by Black’s Law Dictionary quoted . The Court quoted from
Philip Baker’s Double Taxation and International Law. The interpretation
accords well with the interpretation of the concept of double taxation avoidance
as stated by the United States Court of Claims in Compagnie Financiere de Suez
et de L’union Parisienne v. The United States. [ 492 F.2d 798 (1974) The US
Court considered Gregory v. Helvering, [293 U.S. 465, 55 S.Ct. 266, 79
L.Ed. 596 (1935)]; Johansson v. United States, [336 F.2d 809 (5 Cir., 1964)]
; Jordan v. Tashiro, [278 U.S 123, 49 S.Ct. 47, 73 L.Ed. 214 (1928)];
Maximov v. United States, [373 U.S. 49, 56, 83 S.Ct. 1054, 1058, 10 L Ed.
2d 184 (1963)]
[14] The court observed :
“Petitioner has annexed a copy of the assessing authority in the case of Cox and
Kings. A bare perusal; of the said order shows that therein it was found that
the company although had obtained residential certificate in Mauritius but had
nothing to do therewith and factually it got itself registered only for the purpose
of tax avoidance so to obtain benefit of the treaty.”
[15] (1985)154 ITR 148.
[16] (1984) All E.R. 530, House of Lords.
[17] The Court quoted from
McDowell & Co v .C I T ( 1985 ) 154 I.T.R. 148 where the apex Court
observed “The courts are now concerning themselves not merely with the genuineness
of a transaction, but with the intended effect of it on fiscal purposes.”
[18] O. Hood Phillips’ Constitutional and Administrative
law 7th ed. P. 662
[19] Per Lord Greene M.R. in Carltona Ltd v. Commissioners
of works [1943] 2 All ER 560, 564
[20] Per Sachs J., Commissioners of Customs and
Excise v. Cure and Deeley Ltd. [1962] 1 Q.B. 340
[21] Westmoreland Investments v MacNiven [2001] I All
ER p. 865, at 874; [2002] 255 ITR 612 at 623
[22] AIR 1959, SC 725
[23] AIR 1966, SC 81 at p. 85
[24] notice, mention; …the New S O D
[25] Lazarus Estates Ltd v. Beasley ( 1956 )
1 Q.B. 702 at 712. Also see Shrist Dhawan v Shah Bros AIR 1992 S C 1555
[26] Geza Feketekuty in the
2001 Britannica Book of the Year observed “ Clearly, the reality of globalization
has stripped the ability of the world population to understand its implications
and the ability of the governments to cope with its consequences. At the same
time, the ceding of the economic power to global actors and international institutions
has outstripped the development of appropriate global political structures”
[27] K.Srinivasan, “ Need for Revision: India’s tax
treaty with Mauritius” ( 2000 ) 37 CLA ( Mag.) 123
[28] (1880)5 App. Cas.214,223 Quoted by H. M Seervai
, Constitutional Law of India, VOL II 4TH ed. p. 1494. Ccited
with approval by the Sup. Ct, in Commr. Of police v. Gordhandas Bhanji
(1952) S.C.R 135, 147, 152, (52) A.SC. 16. Also see V. Sreeramamurthy v. I.T.O
(57) A.A.P 114, 118; Kashiram v. Collector, 24 Parganas (58) A.Cal.
524; Aluminium Corpn. V. C. Balakrishnan (59) A.Cal. 114. The above cases
were relied on in Sivnarayan v. Asst. Commr, Commercial Taxes (67) A.A.P.
253 , 256.
[29] (1999)236 ITR 832,838 (Guj)
[30] State of Bombay v. Pandurang 1953 SCR 773;
ITO v. Alfred 44 ITR 442 (SC); CIT v. Pratap 41 ITR 421 (SC).
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