235. That entities operating from or through Mauritius are granted in routine
course certificate of residence by the Mauritian income-tax authorities. There
is no provision for granting this under the Indo-Mauritius DTAC or under the Income-tax
Acts operative in India or Mauritius. But it is a practice in tax havens to grant
this certificate in order to preclude any investigation into the question of residency
of the entities operating from or through their jurisdictions. In Monaco, a Carte
de Sejour (residency permit) is granted on complying routine formalities which
include an evidence of some deposit in a Monegasque bank.. In Johansson v.
U S
[54]
the US Court of Appeals, 5th Circuit, rejected the Certificate
of Residence granted by the Swiss authorities to Johansson indulging in a Treaty-shopping
to evade tax. Those who procure the certificates of residence are accustomed to
plead that such certificate should be accepted without demur as they are granted
by authorities constituted by a sovereign government.
236. Arguing for the Union of India the then Solicitor-General stated in his submissions
before Delhi High Court that as the certificate granting citizenship cannot be
questioned so also the certificate of residence or incorporation granted by the
Mauritian authorities cannot be questioned. This argument was rejected by the
Court stating :
“Conclusiveness of a certificate of residence granted by the Mauritius tax authorities
is not contemplated under the treaty or under the income-tax Act. Whether a statement
shall be conclusive or not must be provided for under a legislative act e.g. Indian
Evidence Act. When evidence in relation to a matter under issue is produced before
the authorities exercising judicial function by reason of a circular issued by
CBDT it cannot be prescribed that such evidence shall be conclusive. Such a provision
as regards conclusiveness of a certificate must find place in the statute itself,
as for example we may notice that such a certificate or citizenship having regard
to the provisions of Section 9(2) of the Citizenship Act read with Rule 30 of
the Citizenship rules speaks of such a contingency.”
“The onus of proving that the balance standing to the credit of the diplomatic
mission’s current bank account falls within the exception created by the crucial
words in s13 (4) lies on the judgment creditor. By s13(5) the head of the mission’s
certificate that property is not in use or intended for use by or on behalf of
the state for commercial purposes is sufficient evidence of that fact unless the
contrary is proved. In the instant case the Colombian ambassador gave a certificate…….”
[57]
”
Even where the Colombian Ambassador’s certificate is treated as a sufficient evidence,
it is so “unless the contrary is proved”. This is so despite the fact that the
certificate is issued by the ambassador of a sovereign State. In Trendtex Trading
Corpn v Central Bank
[58]
the Court of Appeal of the United Kingdom was evaluating a certificate
granted by the ambassador of Nigeria saying whether or not an organization is
a department of State. Under public international law he represented the sovereign
state of Nigeria in the United Kingdom (section 3 of the Vienna Convention on
Diplomatic Relations of 1961) Lord Denning observed:
“It is often said that a certificate by the ambassador, saying whether or not
an organization is a department of state, is of much weight, though not decisive:
see Krajina v Tass Agency.
[59]
But even this is not to may mind satisfactory. What is the test which the
ambassador is to apply? In the absence of any test, an ambassador may apply the
test of control, asking himself: is the organization under the control of a minister
of state? On such a test, he might certify any nationalized undertaking to be
a department of state. He might certify that a press agency or an agricultural
corporation (which carried out ordinary commercial dealings) was a department
of state, simply because it was under the complete control of the government.
‘[The corporation] has never pursued any ordinary trade or commerce. All that
it has done is to promote the industrial development of the province in a way
that a government department does….’
238.It is wrong to say that the norms of international comity does not justify
the assertion that the Mauritian Certificate of Residence be accepted on that
score. The norms of international comity are just an act of courtesy analogous
to the norms of international morality(Georg Schwarzenberger, A Manual of International
Law; p. 4). “ The [ the rules of international law] are legally binding, while
the latter are for the most part rules of goodwill and civility, founded on moral
right of each state to receive courtesy from others.” ( J.G. Starke, Introduction
to International Law 10th ed. p.20). Starke refers to two
leading cases which show that the norms of international comity do not apply in
revenue matters, and matters relating to control of drugs( at p. 21):
“ ‘Comity’, in its general sense, cannot, however, be invoked to prevent the United
Kingdom, as a sovereign state, from taking steps to protect its own revenue laws
from gross abuse; see decision of the House of Lords in Colleco Dealing Ltd
v. IRC [1962] AC 1 at 19, [1961] 1 All ER 762 at 765. Likewise, a charge of
conspiracy to commit offence of importing dangerous drugs into the United Kingdom,
based on an alleged agreement made outside British jurisdiction, is not in violation
of ‘international comity’. (
239. That the Circular No. 789 creates the following two legal presumptions
with reference to the Certificate of Residence granted by the Mauritian tax authorities
:
(a) It says that a Certificate of Residence issued by the Mauritian Authorities
“will constitute sufficient evidence for accepting the status of residence.”
(b)
It says that the said Certificate shall be treated as a conclusive proof for establishing
“beneficial ownership for applying the DTAC accordingly”
What the section 33 of The Mauritius Offshore Business Activities Act 1992 does
in granting confidentiality against disclosure of information about beneficial
ownership, the Circular No. 789 does the same by creating a conclusive presumption.
The holder of a Certificate of Residence is to be presumed as the beneficial
owner of income. By creating this presumption the Central Board of Direct
Taxes creates a rule analogous to section 33 of the Mauritius Act but in utter
breach of law of our own country
[61]
. The Central Board of Direct Taxes created the above mentioned two conclusive
presumptions by making a clear trespass on the legislative field. The expression
“sufficient” in the circular would mean in its legal sense “legally satisfactory”
( The New Shorter Oxford English Dictionary). In measuring the conclusive
effect of the presumptions it is important to note that the mandatory directions
issued under section 119 of the Income tax Act is also supported by section 118
of the Act which enacts the rule of subordination in the intra-departmental operations.
By making the certificate of Residence a conclusive proof of beneficial ownershipthe
CBDT altered a fundamental principle of the income tax law and legislated a conclusive
presumption of far reaching importance. It is one of the fundamental principles
of the income-tax law that it is the real income which is chargeable to
tax in the hands of the beneficial or real earner of Income. The income-tax
law is founded on certain fundamental principles. The most fundamental principle
has been thus stated by Lord Scarman in IRC v Burmah Oil Co. Ltd
[62]
:
“First, it is of the utmost importance that the business community (and other,
including their advisers) should appreciate, as my noble and learned friend Lord
Diplock has emphasized, that Ramsay’s case marks ‘a significant change
in the approach adopted by this House in its judicial role’ towards tax avoidance
schemes. Secondly, it is now crucial when considering any such scheme to take
the analysis far enough to determine where the profit, gain or loss is really
to be found.”
“The term ‘beneficial owner’ (in French ‘beneficiaire effectif’, in German ‘Nutzungsberechtigter’)
is a term which was not generally used before . It appears that in English private
law, the terms ‘beneficiary’ or ‘beneficial’ owner’ are used to designate a person
who benefits financially from property held by another – such as by trust.
But that is merely a meaning ascribed to it by common usage rather than by a precisely
defined legal term. The International Bureau of Fiscal Documentation believes
that the terms ‘beneficial owners and ‘economic owner ‘ can be equated –
in contrast to ‘legal owner’ …. Treaty benefits should not be granted with a view
to formal title to dividends, interest, or royalties , but to the ‘real’ title.
In other words, the old dispute of ‘from versus substance’ should be decided in
favour of ‘substance’. In this connection, the entitlement as issue in these instances
is determined by reference to domestic- private - law. But- to repeat this one
again – the question of when such entitlement is not merely a formal one,
is a matter to be decided under treaty law.”
240. That the statutory role of the Income tax Authorities stands negated under
the Circular. The Hon’ble Bench’s Judgment is per incuriam. All the authorities
under the income tax law have statutorily structured roles for achieving the objects
set by the Income-tax Act. The object is to determine the correct quantum of tax
as per law, and to recover tax in accordance with the law. An Assessing Officer
plays a composite role as he is both an investigator and an adjudicator. The relationship
is sequential and also consequential. After discovering the correct state of facts
in a given case he evaluates them as an adjudicator. His role has been well explained
by Delhi High Court in Gee Vee Enterprise v Addl. CIT
[63]
“The civil court is neutral. It simply gives decision on the basis of the pleading
and evidence which comes before it. The Income-tax Officer is not only an adjudicator
but also an investigator. He cannot remain passive in the face of a return which
apparently in order but calls for further inquiry. It is his duty to ascertain
the truth of the facts stated in the return when the circumstances of the case
are such as to provoke an inquiry.”
241. The Hon’ble Division Bench should not have allowed the administrative authority
to exercise legislative power. “From 1872, conclusive presumptions are part of
the law of evidence and the legislative power to make laws on evidence and oaths
( entry12, List III, Sch. 7) must therefore include conclusive presumptions. Previous
legislative practice is relevant in considering the scope of legislative power:
In re The Central Provinces and Berar Act No XIV of 1938:
“There can, therefore be no doubt that the expression ‘rules of evidence’
construed in the light of the Indian legal and legislative history would
include some rules of conclusive proof…. It would be idle to contend that the
impugned rule is a part of the substantive law merely because it prescribes a
conclusive presumption.”
242. This Hon’ble Court observes:
“ 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 issuing ‘appropriate’ directions 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 assessing 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 of assessment of assesses covered by the provisions
of the DTAC.”
This Hon’ble Court misunderstood the role of the Assessing Officers under the
Income-tax ACT, 1961. To clarify means, to quote Collins Cobuild English
Language Dictionary:
“To clarify something, or to clarify someone’s mind on something means
to make it easier to understand and remove any doubts or confusion, for example
by giving more details or simpler explanation;”
There was no scope for any doubt calling for any clarification as the Assessing
Officers under the Income-tax Act work under structured protocol. If the Hon’ble
Court would have called upon the Government to disclose actual figures of revenue
loss to this country having per capita income one-tenth of that in Mauritius then
the Court would have realized the massive loot of our country. The Hon’ble Court
should not have dismissed it as inconsequential. This Hon’ble Court came
to this conclusion as it chose to exclude facts ( viz, facts in the Assessment
Order of M/S Cox & King ) under its illegal notion of Necessary Parties. If
this Hon’ble Court felt that the Assessing Officers were indulging in the “wastage
of time, talent and energy” it should have heard them before this pejorative comment.
To “waste” is to “use to no purpose , or for inadequate result or extravagantly”.
Under the law they had no option but to do what they did. The impugned Circular
was a subversion of their role prescribed by the statute, not amenable to abrogation
by a circular ultra vires in many ways. A circular which creates an opaque system
commanding the statutory authorities to close their eyes for the benefit of the
most unscrupulous prevents the discharge of public duties mandated by the statute,
and which clearly contravenes Art 14 of the Constitution as there cannot be two
classes of tax-payers under the Income-tax Act without any reasonable nexus to
a legally valid object. This Hon’ble Court missed this point though this Petitioner
always maintained it. The statutory authorities are not only :
…cabined, cribbed, confined, bound in
To saucy doubts and fears
but are also made to remain hapless and helpless witnesses to the Masque presented
at in the Ludlow Castle with scenes enacted in the dense fog of secrecy in tax
havens layers after layers.
243.
This Hon’ble Court failed to consider the Report of the JPC on Stock-Market
Scam which was placed before it, and in Written Submissions its attention
was drawn to several points discussed in it
[64]
; and the following was submitted to suggest that the power under Section
119 was not validly exercised. It was submitted:
“The CBDT was always against the abuse of the tax treaty by the treaty shoppers
but had to exercise its discretion under dictation
[65]
which renders its administrative act ultra vires, hence non est. This
conclusion emerges from the following facts mentioned in the J.P.C. Report:
(i)
The Chief Commissioner of Income-tax, Mumbai had brought to the notice of the
CBDT in August,1993 a case of Treaty Shopping. It was a Cayman Island Registered
Company taking advantage of the Indo-Mauritius DTAC. The Chief Commissioner was
informed by the CBDT that “since the gains were not derived by a resident of Mauritius
but were being passed on to the residents of some other countries through a Mauritius
Company, the Capital Gains would be taxable in India in accordance with the relevant
provisions of the Income-tax Act”. [ Para 12.162 of JPC Report]
(ii)
CBDT approached, in September,1993, the Indian High Commissioner at Mauritius
to take up the matter with Mauritian authorities to ensure that the benefit of
our bilateral tax treaty is not allowed to be mis-used by entering into a Protocol
by suitably amending the provisions of Article 13 (Capital Gains) of the Tax Agreement.
[ Para 12.162 of JPC Report]
(iii)
The CBDT registered a volte face by issuing a Circular of 1994 under dictation
of pressure from the Ministry of External Affairs and the then Finance Minister.
This conclusion emerges from the discussion in the JPC Report in paragraphs 163-165.
In para. 167 this fact is clearly stated by the representative of the CBDT tendering
evidence before the JPC.
(iv)
The Circular No 682 of 30.3.1994 is a mere paraphrase of the Art.13 of the Indo-Mauritius
DTA. Instead of issuing instructions in response to the queries raised by the
Chief Commissioner, Mumbai, the CBDT considered it prudent to evade the problem
as it was neither inclined to bend the law , nor was bold enough to reject the
pressure of the wielders of political power.
(v)
The discussions in paragraphs 12.170 onwards show that the CBDT lost its initiative
in the matter; and it became a passive onlooker to what was being done by the
Ministry of External Affairs
[66]
and the Finance Minister exposed to high pressure and persuasion by the Mauritian
authorities. The Ministry of External Affairs pleaded for economic growth of Mauritius
and stressed “good political relations with Mauritius”
[67]
. Though much fuss was created to take remedial actions but as the facts stated
in the JPC Report shows, the whole pursuit was deficient in sincerity: What emerged
in fact was no more than ‘Brownian Motion’.
(vi)
When the Assessing Officers in Mumbai were investigating cases in 24 of which
limitations were involved, the Chief Commissioner Mumbai did not consider their
actions contrary to law. If he would have considered their action contrary to
law he was duty bound to intervene in the matter. Even the CBDT, which must not
be unaware of all that was happening in Mumbai, did not find anything wrong in
what a group of dedicated senior officers did.
(vii)
The lobbyists for the FIIs raised hue and cry against orders passed by the Assessing
Officers. The Minister of Finance of Mauritius ‘took up the issue’ with the Finance
Minister of India. These facts are comprehensively stated in paragraphs 12.185-198
of the JPC Report; and these constitute the background under which CBDT Circular
of 13.04.2000 was issued.
It emerges from paragraph 12.195 that SLP was filed in the Supreme Court “ on
the advice of the Solicitor General of India”. By stating this, it is felt ,that
the witness who appeared before the JPC, was suggesting that the judgment of the
Delhi High Court was acceptable to the Board but for the advice of the then Solicitor
General of India now appearing as the Counsel for Global Business Institute Limited,
Mauritius (the credibility and credentials of which are unknown). The CBDT, it
seems, unwittingly under pressure and persuasion, became a party to the taxpayer’s
avoidance game, the evasion game, or the lobby game ; all designed to render effective
the core game to remove the connecting factor between the real tax beneficiary
and the taxing jurisdiction.
(viii)
The CBDT consistently held that the abuse of Indo-Mauritius DTAC be remedied.
The Secretary Revenue held inconsistent views in the matter (para 12.174; 12.191;
12.193 of the Report). Para 12.174 shows his readiness to draw up a Cabinet Note
seeking appropriate amendments in all Double Taxation Avoidance Agreements to
prevent avoidance of Capital Gains in India but by March 2000,as para 12.193 shows,
he developed an opinion that the ‘Assessment Orders- the 24 Orders-were an aberration’.”
( b ) The Status of the CBDT Circulars : P. Venkataraman Reddy J rightly thought
it proper (in Comm. of Customs v IOCL ) that this issue be referred
to the Constitution Bench.
244. That this Petitioner finds that his view on the status of the CBDT Circulars
finds full support from the judgment of Commissioner of Customs, Calcutta v.
Indian OIL Corporation Ltd. [2004 (165) E.L.T. 257 (S.C. ) decided on February
2004. This Case noticed this Judgment also (referred in it as UOI v Azadi Bachao
Andolan
[68]
. It appears that Hon’ble Justice Ruma Pal stuck to her view she had taken
with Hon’ble Justice B Srikrishna in this impugned Judgment. Hon’ble Justice P.
Venkataraman Reddy J considered Dhiren Chemical Industries, Navnit Lal C. Javeri
v. K. K. Sen, Ellerman Lines Ltd. V. CIT, K. P. Varghese v. ITO, Sirpur Paper
Mills Ltd v CWT,
[69]
Keshavji Raiji & Co v. CIT
[70]
, Bengal Iron CTO
[71]
, CST v. Indra Indusries
[72]
, Wilh, Wilhelmsen V CIT
[73]
Hindustan Aeronautics V. CIT
[74]
. Justice Reddy referred to Sirpur Paper Mills Case on which the
Hon’ble Delhi High Court had relied for its proposition:
“ 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”
Hon’ble Justice Reddy concludes his judgment expressing his desire that the matter
should go to the Constitution Bench. The Hon’ble Lordship was pleased to observe:
“I have referred to these cases to demonstrate that a common thread does not
run through the decisions of this Court. The dicta/observations in some of the
decisions need to be reconciled or explained. The need to redefine succinctly
the extent and parameters of the binding character of the circulars of Central
Board of Direct Taxes or Central Excise looms large. It is desirable that a Constitution
Bench hands down an authoritative pronouncement on the subject.”
This Petitioner submits that this Hon’ble Court’s dicta in the impugned Judgment
are productive of much public mischief, and deserve to be set right at the earliest.
Giving reference to the principal speech by Lord Bridge, Lord Hailsham of St.
Marylebone L C observed in R v. Shivpuri
[75]
:
“But there is obviously much to be said for the view about to be expressed by
my noble and learned friend that “If a serious error embodied in a decision of
this House has distorted the law, the sooner it is corrected the better’.”
Hence this Petitioner submits that the only way to remove distortions in law and
to establish correct propositions is to recall this Judgment so that this issue
can be referred to the Constitution Bench. If it is not done, gross miscarriage
of justice would continue in so many forms in so many cases making administrative
lawlessness flourish under misplaced judicial benediction.
( c ) The Hon’ble Court Overlooked the Role of the Quasi-Judicial statutory
authorities under the Income-tax Act, 1961.
245.That the said Circular subverted the fundamentals of the Income-tax Act by
robbing the quasi-judicial authorities of their statutory power to promote extra
designs. In the garb of clarifying, serious distortions were caused in
the law by the exercise of administrative power ultra vires to the core..
The Assessing Officers under the Income-tax Act work under structured role in
a structured protocol characterized by the following features:
(i) S. 5 of the I.T. Act prescribes that all assesses, whether resident or not,
are chargeable in respect of income accruing, 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
(ii) “Tax treaty rules assume that both contracting States tax according
to their own law; unlike the rules of private international law, therefore, treaty
rules do not lead to the application of foreign law.” (Klaus Vogel on Double
Taxation Conventions p.20; Philip Baker pp.34-35; Art.23(1) of the Indo-Mauritius
DTAC.).
(iii) An assessee must establish that it is entitled to the benefits under a DTAC.
Onus of showing that a particular class of income is exempt from taxation lies
on the assessee. 27 ITR 1.4 (S C), 29 ITR 529(S C ), 57 ITR 532,536 (S
C ).
(iv) It is a fundamental principle that only real income is taxable in
the hands of real earner. The principle was thus stated by Lord Scarman
in IRC v Burmah Oil Co. Ltd ( 1982) STC 60 HL quoted with approval by Lord
Brightman in Furniss v. Dawson (1984) 1 ALL ER 530 at 541 and also by our
Supreme Court in McDowell & Co v. CTO (154 ITR, 148 SC at page 157):
“First, it is of the utmost importance that the business community (and other,
including their advisers) should appreciate, as my noble and learned friend Lord
Diplock has emphasized, that Ramsay’s case marks ‘a significant change in the
approach adopted by this House in its judicial role’ towards tax avoidance schemes.
Secondly, it is now crucial when considering any such scheme to take the analysis
far enough to determine where the profit, gain or loss is really to be found.”
(v) There was nothing to clarify. An Assessing officer works in a given case
under a set protocol. His course of action is structured under the Income-tax
Act: to illustrate-
(a) Whosoever earns income is chargeable to income tax unless that person is exempt
(a) under International Law, (Kanga & Palkhivala p. 16) or (b) under some
provisions of the Income-tax Act granting exemption or under some double taxation
avoidance agreement.
(b)
The scope of income (section 5) is linked with the status as a resident
or non- resident ( section 6).
(c) If it is a company, the AO would examine facts to see whether it comes within
section 6 (3) (i), or under section 6 (3) (ii).
(d) If a company is claims the benefit under Indo-Mauritius DTAC, the AO is duty
bound to examine facts to decide if it is a case contemplated by Article 4 (3)
of the DTAC.
(e) If the effective control is in India, it would be taxed in India as
a resident even if the company is incorporated in Mauritius.
(f) If in the course of the aforesaid investigation (which is the integral and
unalienable part of the AO’s jurisdiction) he finds that the effective management
and control is in a third country it becomes a case of treaty-shopping, and the
AO has no option but to hold that the DTAC does not apply. The effect of such
a finding is that the company becomes a case of a non-resident simpliciter.
(g) In determining the residential status of a company the following two factors
are always to be taken into account :
A company may be resident here even though its entire trading operations are carried
on abroad. If the management and control is situated here, the company is resident
here, and it does not in the least matter where the actual selling and buying
of the goods takes place. (Kanga & Palkhivala, p. 256)
In section 6 (3) (ii) control means de facto control and not merely de
jure control. (Kanga & Palkhivala, p. 245). The word effective in the
expression “effective management” in Article 4 (3) (iii) means, as The New Shorter
Oxford English Dictionary says, “Actual, de facto, in effect ; …..”
(h) If he finds that he has discovered a case of Treaty Shopping, he is bound
to apply the provisions of the Income-tax Act.
(i) If he finds that this non-resident simpliciter is a Foreign Institutional
investor as defined in the Explanation (a) of section 115AD of the Income
tax Act, he would assess it as per the provisions of section 115 AD.
The above procedure is mandatory and without any exception.
246. That the nature of the jurisdiction of the Assessing Officers is comprensive,
both investigative and adjucatory (as explained inn Gee Vee Enterprises v.
Addl. CIT (1975) 99 ITR 375 at 386.Delhi) vide 240 at p. 215 vide para 240
at p. 215 .
247. That the Assessing Officers under the Income-tax Act in India cannot accept
the Mauritian determination of residency by accepting the Certificate of Residence,
inter alia, for the following reasons:
(a) That Tax treaty rules assume that both contracting States tax according
to their own law; unlike the rules of private international law, therefore, treaty
rules do not lead to the application of foreign law.”. “Tax treaties, unlike
conflict rules in private international law, do not face the problem of choosing
between applicable domestic and foreign law. Instead, they recognize that each
Contracting State applies its own law and then they limit the contracting States’
application of that law.”[ Klaus Vogel on Double Taxation Conventions p
26.].
(b)
That the Indian Assessing Officers are duty bound to examine in course of proceedings
before them all issues of facts to ascertain whether someone is a Mauritian resident.
[76]
Even the Certificate of Residence is a mere issue of fact open to scrutiny
under our tax proceedings.
(c ) That the Indian tax authorities cannot recognize the public law act of a
foreign authority without examining it as an issue of fact within the legal frame-work
of law he is functioning. Oppenheim’s, International Law states
[77]
:
“While effect is as a rule given to private rights acquired under the legislation
of foreign states—a subject which falls within the domain of private law—the
courts of many countries, including British and American courts, decline to give
full effect to the public law, as distinguished from private law, of foreign states
(unless otherwise required by any relevant treaty). In particular, they refuse,
in respect of assets within their jurisdiction, to enforce directly or indirectly
on behalf of a foreign state its revenue laws as well as its penal and confiscatory
legislation.”
With Mauritius we have no treaty which can make its public law relating to revenue
operate within our jurisdiction by rendering the Certificate of Residence per
se a conclusive proof on points of law at issue before the assessing Officers
in India.
( d ) That the official act of the Mauritian tax authorities can not legally be
recognized without a fresh look. This approach is warranted both by the Principle
of the Equality of States, and the Principle of Territorial Sovereignty. Oppenheim
observes:
“There is probably no international judicial authority in support of the proposition
that recognition of foreign official acts is affirmatively prescribed by international
law.”
[78]
( e ) That there is no doctrine of Comity of States to support the view that
the Indian tax authorities accept the Mauritian determination as final. The principles
of Comity of Nations do not apply in revenue field. J.G. Starke
[79]
refers to two leading cases which show that the norms of international comity
do not apply in revenue matters, and matters relating to control of drugs. ‘Comity’,
in its general sense, cannot, however, be invoked to prevent the United Kingdom,
as a sovereign state, from taking steps to protect its own revenue laws from gross
abuse
[80]
Where a statute is clear and unambiguous the “ comity of nations” is irrelevant.
248. In the leading case of Collco Dealings LTD v. IRC [1961] 1 All E R
762 at 765 Viscount Simonds observed in the context of the a Double Taxation Avoidance
Agreement:
“But I would answer that neither comity nor rule of international law can be invoked
to prevent a sovereign state from taking steps to protect its own revenue laws
from gross abuse or save its own citizens from unjust discrimination in favour
of foreigners.”
249. That the Division Bench of this Court consisting of only two Hon’ble Judges
virtually overruled the decision of the three judge Bench
[81]
in Sirpur Paper Mills Ltd v. CWT [(1977) 1 SCC 795 ]. This Hon’ble
Court held that the instructions issued by the Board may control the exercise
of power of the departmental officials in matters administrative but not
quasi-judicial. The Hon’ble Court said:
“It does not, however, imply that the Board may give any directions or instructions
to the Wealth Tax Officer or to the Commissioner in exercise of his quasi judicial
function. Such an interpretation would be plainly contrary to the scheme of the
Act and the nature of the power conferred upon the authorities invested with quasi
judicial power.”
The Hon’ble High Court t had relied on this case in its judgment now reversed
by the impugned Judgment (vide para 11 point II(b) supra). It quoted the
following passage from Sirpur Paper Mills Ltd. v. The Commissioner of Wealth
Tax Hyderbad 1970 (1) SCC 795.
“ It does not, however, imply that the Board may give any directions or instructions
to the Wealth –tax Officer or to the Commissioner in exercise of his quasi-judicial
function. Such an interpretation would be plainly contrary to the scheme of the
Act and the nature of the power conferred upon the authorities invested with quasi-judicial
power.”
This Hon’ble Court overlooked this decision of a larger Bench: hence acted against
its jurisdiction as the decision of a larger Bench is binding on a smaller Bench
as a matter of law. In fact this decision has been referred to by Hon’ble Justice
P. Venkatarama Reddy in Commissioner of Customs, Calcutta v. Indian OIL Corporation
Ltd
[82]
in a tone of appreciation for the view that through a circular the power
of the quasi-judicial authorities can not be taken away. The view that this Hon’ble
Court has taken in the impugned Judgment has brought about serious distortions
in law and has caused a patent miscarriage of justice.
A Schism in the Judicial Approaches. Art. 14 beached.
Pahwa Chemicals Pvt Ltd Case casts a new light
making the impugned Judgment untenable.
250. Pahwa Chemicals Pvt Ltd vs the Commissioner of Central Excise
[83]
. A Division Bench of 3 Hon’ble Judges delivered
an important decision wherefrom the following propositions can be culled:
(7)
‘It is the Act which confers jurisdiction on the concerned Officer/s. If,
therefore, the Act vests in the Central Excise Officers jurisdiction to issue
show-cause-notices and to adjudicate, the Board has no power to cut down that
jurisdiction.’
(8)
‘However, for the purposes of better administration of levy and collection
of duty and for purpose of classification of goods the Board may issue directions
allocating certain types of works to certain Officers or classes of Officers’
(9)
‘It is thus clear that the Board has no power to issue instructions or orders
contrary to the provisions of the Act or in derogation of the provisions of the
Act.’
(10)
‘The instructions issued by the Board have to be within the four corners of the
Act.’
(11)
‘The Circulars relied upon are, therefore, nothing more than administrative directions
allocating various types of works to various classes of Officers.’
(12)
‘These administrative directions cannot take away. jurisdiction vested in a
Central Excise Officer under the Act.’
(13)
‘But if an Officer still issues a notice or adjudicates contrary to the Circulars
it would not be a ground for holding that he had no jurisdiction to issue the
show cause notice or to set aside the adjudication.’
251. That, after rejecting this Petitioner’s plea, the Hon’ble Division Bench
of the Hon’ble Judges in the impugned judgment overturned the following propositions
upheld by the Hon’ble Delhi High Court:
(a)
The Central Board of Direct Taxes cannot issue any instruction, which would be
ultra vires the provisions of the Income-tax Act, 1961.
(b)
Any purpose other than the purpose contemplated by section 90 of the Act, however
bona fide it be, would be ultra vires the provisions of section
90 of the Income-tax Act;
(c) ) Having regard to the law laid down by the Supreme Court in McDowell and
Co. Ltd. v. CTO [1985] 154 ITR 148; [1985] 59 STC 277, it is open to the Income-tax
Officer in a given case to lift the corporate veil for finding out whether the
purpose of the corporate veil is avoidance of tax or not. It is one of the functions
of the Assessing Officer to ensure that there is no conscious avoidance of tax
by an assessee, and such function being quasi-judicial in nature, cannot be interfered
with or prohibited. The impugned circular is ultra vires as it interferes
with this quasi judicial function of the Assessing Officer;
The Hon’ble D.B. of this Hon’ble Court, in the impugned Judgment went on to hold:
(i) The ‘conclusion is inescapable that in case of inconsistency between the
terms of the agreement and the taxation statute, the agreement alone would prevail.’
(ii)
Section 90 is specifically intended to enable and empower the Central Government
to issue a notification for implementation of the terms of a double taxation avoidance
agreement which ‘would operate even if inconsistent with the provisions of the
Income-tax Act.’
(iii)
The only restriction on the power of the Central Board of Direct Taxes is to prevent
it from interfering with the course of assessment of any particular assessee or
the discretion of the Commissioner of Income-tax (Appeals).
(iv) The contention of the respondents, which weighted with the High Court, viz.,
that the impugned Circular No. 789 ([2000] 243 ITR (St.) 57) is inconsistent with
the provisions of the Act, is a total non sequitur. As we have pointed out, Circular
No. 789 ([2000] 243 ITR (St.) 57) 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 the Income-tax Act, 1961, in so far as assessees covered
by the provisions of the DTAC are concerned.
252. That the Hon’ble Division Bench in the impugned Judgment had drawn several
decisions including the decision of the Supreme Court in Collector of Central
Excise v. Dhiren Chemical Industries [2002] 254 ITR 554; [2002] 2 SCC 127;
[2002] 126 STC 122, 125 (SC), wherein this Hon’ble Court, interpreting the phrase,
"appropriate", had observed :
"We need to make it clear that, regardless of the interpretation that we
have placed on the said phrase, if there are circulars which have been issued
by the Central Board of Excise and Customs which place a different interpretation
upon the said phrase, that interpretation will be binding upon the Revenue."
253.. Commissioner of Customs, Calcutta v. Indian OIL Corporation Ltd.
[2004 (165) E.L.T. 257 (S.C. )
[84]
,decided on February 2004, noticed this impugned Judgment (referred as UOI
v Azadi Bachao Andolan
[85]
). It appears that Hon’ble Justice Ruma Pal stuck to her view she had
taken with Hon’ble Justice B Srikrishna in this impugned Judgment. Hon’ble Justice
P. Venkataraman Reddy J considered Dhiren Chemical Industries, Navnit Lal C.
Javeri v. K. K. Sen, Ellerman Lines Ltd. V. CIT, K. P. Varghese v. ITO, Sirpur
Paper Mills Ltd v CWT,
[86]
Keshavji Raiji & Co v. CIT
[87]
, Bengal Iron CTO
[88]
, CST v. Indra Indusries
[89]
, Wilh, Wilhelmsen V CIT
[90]
Hindustan Aeronautics V. CIT
[91]
. Justice Reddy referred to Sirpur Paper Mills Case on which the
Hon’ble Delhi High Court had relied for its proposition:
“ 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”
Hon’ble Justice Reddy concludes his judgment expressing his desire that the matter
should go to the Constitution Bench. The Hon’ble Lordship was pleased to observe:
“I have referred to these cases to demonstrate that a common thread does not
run through the decisions of this Court. The dicta/observations in some of the
decisions need to be reconciled or explained. The need to redefine succinctly
the extent and parameters of the binding character of the circulars of Central
Board of Direct Taxes or Central Excise looms large. It is desirable that a Constitution
Bench hands down an authoritative pronouncement on the subject.”
Now, a Division Bench of 3 Hon’ble Judges
[92]
in their judgment dated February 23, 2005 in Commissioner
of Central Excise, Bolpur Vs M/s Ratan Melting & Wire Iindustries, Calcutta
[93]
has directed a reference to a Constitution Bench in these words:
. “Though the view expressed in Kalyani's case (supra), and our view about invalidation
might clarify the observations in para 11 of Dhiren Chemical's case (supra), we
feel that the earlier judgment in Dhiren Chemical's case (supra) being by a Bench
of five Judges, it would be appropriate for a bench of similar strength to clarify
the position. In the circumstances, we refer the matter to a larger bench of five
Hon'ble Judges. Let the papers be placed before Hon'ble the Chief Justice of India
for constituting an appropriate Bench.”
Only a day after (i.e. on February 24, 2005) the Judgment in Pahwa
Chemicals Pvt Ltd referred above was
delivered from which a set of propositions has been derived..
254 That this deserves to be noted that the larger Bench in Commissioner
of Central Excise, Bolpur Vs M/s Ratan Melting & Wire Iindustries, Calcutta
[94]
has wholly vindicated the stand of this humble Petitioner which
he had taken before the Hon’ble High Court, in his Review Petition, and in his
Curative Petition. This Petitioner is delighted that this prayer, constantly made,
that the CBDT’s circular-making power requires a re-look succeeds, of course in
someone else’s case..
255. Thatit becomes clear that now even this Hon’ble Court doubts the
correctness of view taken on the point of the reach and ambit of the CBDT’s Circular
making power, and is tilting towards the view taken in the judgment of the Hon’ble
High Court reversed by the Division Bench of this Court in the impugned Judgment.
This is also pertinent to note that the Hon’ble Justice Ruma Pal, who constituted
the Division Bench along with Hon’ble Justice B N Srikrishna, was one
of the two Judges in Indian OIL Corporation Ltd Case, and had stuck to
her view taken in the impugned Judgment. But the Division Bench of 3 Hon’ble Judges,
which referred the matter to the Hon’ble Chief Justice for constituting a Bench
of 5 Judges, consisted of Hon’ble Justice Ruma Pal. In the impugned Judgment this
Hon’ble Court had relied on Dhiren Camicals Case to which Hon’ble Justice
Variava was a party. The Bench which decided Pahwa Chemicals consisted
of Variava, J. along with Dr AR. Lakshmanan and S.H. Kapadia, JJ.
256. Pahwa Chemicals Pvt Ltd was a Central
Excise case.The legal situations on the material points under
the Central Excise Act, 1944 and under the Income-tax Act, 1961 are not different,
as would be clear from the following:
(a)
Under the I.T.Act power under Section 119 is granted for ‘proper
administration of the Income tax Act’ [cl.(a)]. In the context of the Excise law,
this Hon’ble Court has observed in Pahwa Chemicals Pvt Ltd the
following:
“‘However, for the purposes of better administration of levy and collection
of duty and for purpose of classification of goods the Board may issue directions
allocating certain types of works to certain Officers or classes of Officers.”
(b)
Section 37 B
[95]
of the Central Excise Act read with Rule 233
[96]
of the Central Excise Rules, 1944, confers, in effect, power to issue circular/direction/instruction
only for the ‘proper administration’ of the Act. It is to be noted that the Central
Excise Rules are most comprehensive ( rules from 1 to 233B ) on all the material
points dealt with in the Act. Yet the Rule 233 grants a supplemental power to
the Board. ‘Supplemental” is an adjective of ‘supplement’ which means ‘thing or
part added to remedy deficiencies. (COD ). The Board and the Commissioners are
the creatures of the statute with a prescribed mission. They wield public power
in public law field for public purposes; so the power is to be exercised only
for ‘proper administration of the Act’.
(c)
In the impugned Judgment it is stated that the only limitation on the exercise
of power by the CBDT is as follows, to quote from the impugned Judgment:
“The proviso to sub-section (1) of section 119 recognizes two exceptions to this
power. The first, that the Central Board of Direct Taxes cannot require any income-tax
authority to make a particular assessment or to dispose of a particular case in
a particular manner. The second, is with regard to interference with the discretion
of the Commissioner (Appeals) in exercise of his appellate functions.
This is exactly the position under the proviso to Section 37B of the Excise Act.
It says:
“Provided that no such orders, instructions or directions shall be issued---so
as to require any Central Excise Officer to make a particular assessment or dispose
of a particular case in a particular manner; or
(a)
so as to interfere with the discretion of the Commissioners of Central Excise
(Appeals) in the exercise of his appellate functions.”
( d) Both the Boards of Excise and Customs, and of Direct Taxes are the creatures
of the Central Board of Revenues Act, 1963, which before this statutory reorganization,
were the integral parts of the Central Board of Revenue, which, in turn, had been
modeled on the Board of Inland Revenues to whose care the inland revenue had been
placed. In fact, the first PIL in revenue matters in the common law countries
pertained to the examination of the limits of the Board’s power. It was Inland
Revenue Comrs v National Federation of Self- Employed and Small Businesses Ltd.(1981)
2 ALL ER 93 at 107 (H L), quoted with approval by the Supreme Court of India in
S. P Gupta & Ors. v. President of India & Ors. (AIR 1982 SC 149 at
page 190), referred at several places in this Writ Petition.
An Issue raised for the first time as it can, on probability, be done only
in a PIL.
257. The confusion as to the powers of the CBDT is the inevitable and endemic
self-serving confusion in the minds of the income-tax authorities, and the counsels
who appear for the tax-payers. The CBDT is delighted if it can get unbridled power.
And power is most delicious when abused. The assesses never contest on legality
of the CBDT’s claim as most often they are the beneficiaries of the CBDT’s clemency.
It is this strange ethos which led this Hon’ble Court to hold that whilst beneficial
circulars, even if they against law, are binding on the Revenue, the burdensome
circulars are not binding on the tax payers. This Petitioner would make the following
two submissions:
(a)
This sort of view is founded on an outdated view that revenue is a matter between
an individual tax-payer and the Crown: an idea pleaded in Britain before the advent
of democracy. The modern view of taxation was succinctly stated by Lord Scarman
in Inland Revenue Comrs Case.
(b)
There can be circulars which are beneficial to a taxpayer but injurious to public
interest. Such Circulars cannot be questioned by the Tax Administration because
its apex body issues them. They would surely not be questioned by the individual
taxpayers because they are the beneficiaries. Such circulars can be questioned
before the Hon’ble Court only through PIL. The time is ripe to recognise a third
category of circulars : which are beneficial to certain taxpayers but injurious
to public interest.
258.It is obvious, on reading the impugned Judgment, that the Hon’ble Division
was of clear view that the impugned CBDT Circular could not be issued in exercise
of power under section 119 of the Income-tax Act. The impugned Judgment says:
“The contention of the respondents, which weighted with the High Court, viz.,
that the impugned Circular No. 789 ([2000] 243 ITR (St.) 57) is inconsistent with
the provisions of the Act, is a total non sequitur. As we have pointed out, Circular
No. 789 ([2000] 243 ITR (St.) 57) 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 the Income-tax Act, 1961, in so far as assessees covered
by the provisions of the DTAC are concerned. [ italics supplied].
( c) The judicial view is manifestly erroneous for the following brief reasons
which have been elaborated elsewhere in this Writ Petition:
(i)
None can ring out from the words and the context of anything in Section 90 of
the Income-tax anything to support this line of reasoning. It is, it is submitted,
beyond a court’s jurisdiction to see something which is not there.
(ii)
It was never the CBDT’s or anybody else’s case that the impugned circular was
issued or can be issued under Section 90 of the Act.
(iii)
Never till this day the CBDT ever issued a Circular under Section 90.
(iv)
A circular is issued only in terms of Section 119 as is clear from the submissions
already made.
( v) Section 90(1) empowers the Central government to issue a notification in
the Official Gazette, for making provisions necessary for implementing the
agreement” The definite article “the” before the word ‘agreement’ contemplates
a specific Agreement entered into by the Central Government under Section 90(1)
of the Act. The expression implementation implies that the Agreement exists
ab extra. To “implement” means to execute (a contract)[SOD]. Section 90
of the I.T.Act contemplates two distinct acts by the Central Government: creation
of an agreement, and its implementation.
(i)
Section 90(2) speaks of the beneficial “provisions of this Act” , not the
beneficial provisions of this tax treaty. It is wrong to distort it as if it said
“provisions of this treaty”.
(vii) The CBDT’s impugned Circular can sink or swim on being measured under Section
119 alone, it cannot invoke any other source of power as none exists under the
Act.
259. That this Petitioner submits that the conditions precedent for exercising
the powers under Section 119 of the I.T. Act are (i) proper administration of
the Income tax Act [cl.(a)], and (ii) proper and efficient management of the work
and assessment and collection of Revenue. The word “proper” in its attributive
sense means “according to the rules; right or correct” (Oxford Advanced Learner’s
Dictionary, encyclopedic edition). The word “administration” means “management
of public or business affairs.” The word “efficient” means “(esp. of tools, machines,
systems, etc) producing a satisfactory result without wasting time or energy”.
And the word “management” means “the application of skill or care in the manipulation,
use, treatment, or control of things or persons, or the conduct of an enterprise,
operation etc.” (The New Shorter Oxford English Dictionary). Should a circular
of the type of the Circular No 789 be ever considered for the proper administration
of tax law? A circular which promotes extrinsic purposes, which makes a cussed
trespass over the legislative field, which differentiates shockingly inter
se two groups similarly placed whose affairs have a common nexus with the
object of the statute, which creates an opaque system, which deprives the quasi-judicial
power of the statutory authorities, which subverts the appellate process under
the Act to set right human errors, which cause the loss of revenue de hors the
objective of the Revenue under the Act to collect not “a paisa less”, which puts
premium on unethical practice, which goes against the very grains of tax jurisprudence
cannot be said to be one for proper administration of tax law . The power under
Section was never contemplated to become the vanishing point of the income-tax
law. The expression “proper administration” cannot denuded of its content for
any reason whatsoever.
The inference which follows naturally from the judicial syllogism in
260. In Stuart v. Diplock 43 Ch D. 343, 356, Bowen J restated counsel’s
argument in the form of a syllogism in order to show that it contained the fallacy
of undistributed middle. This Petitioner sates the valid categorical syllogism
at the heart of Pahwa Chemicals Pvt Ltd Case as this by
an inevitable inference shows that the central stand in the judicial reasoning
in the impugned Judgment went so manifestly wrong that it is patently per incuriam.
The Syllogism which exists in Pahwa Chemicals Pvt Ltd Case
can be stated thus:
(1) The CBDT Circulars or instructions or orders contrary to the provisions of
the Act or in derogation of the provisions of the Act are ultra vires.’
(2) The CBDT issues a Circular( X ) contrary to the provisions of the Act or
in derogation of the provisions of the Act
(3) That Circular X is ultra vires.
The impugned Judgment against Art. 14 of the Constitution.
261. For a suppliant who comes before this Hon’ble, he comes before an integrated
apex judicial institution. That it discharges its functions in the Benches of
varying strength is its own affair. If ‘A’ Bench decides an issue as X
[97]
, But the ‘B’ Bench decides an identical issue as Z
[98]
, there is a manifest discrimination between A and B which would violate Art.
14 of the Constitution of India. The mandate of Art. 14 can not be scuttled or
diluted by any hyper-technical construction. It can be seen that the seminal principles
which constitute the central strand in the judicial reasoning in the impugned
Judgment are flawed as two similar situations are decided in the light of different
legal considerations. To do so would violate Art 14 both under its Old Doctrine,
and its New Doctrine. Now the judicial evaluation of the circular-making power
by this Hon’ble Court, as discussed above, is a sufficient reason for franting
a judicial relook so that nothing smacks of unreasonableness or arbitrariness,
nothing remains to exposed to the radiation of Art 14 of the Constitution of India.
EXTRANEOUS FACTORS
( d ) The Effect of the Judgment is to Promote Objects EXTRANEOUS to the Income-tax
Act, 1961
263. It is a settled rule of interpretation that statutory provisions be interpreted
in the light of its purpose of the statute. Lord Nicholls in MacNiven
(Inspector of Taxes) v. Westmoreland Investments Ltd
[99]
observed:
“ As noted by Lord Steyn in Inland Revenue Commissioners v McGuckian [1997]
1 WLR 991, 1000, this is an exemplification of the established purposive approach
to the interpretation of statutes. When searching for the meaning with which Parliament
has used the statutory language in question, courts have regard to the underlying
purpose that the statutory language is seeking to achieve. Likewise, Lord Cooke
of Thorndon regarded Ramsay as an application to taxing Acts of the general
approach to statutory interpretation whereby, in determining the natural meaning
of particular expressions in their context, weight is given to the purpose and
spirit of the legislation: see [1997] 1 WLR 991, 1005”.
The same approach is suggested by Article 31(1) of the Vienna Convention on
Law of Treaties:
“A treaty shall be interpreted in good faith in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in the light
of its object and purpose.”
Article 26 of the Vienna Convention on the Law of Treaties, 1969 dealing with
pacta sunt servanda says “Every treaty in force is binding upon the parties
to it and must be performed by them in good faith.”
264 The Policy quotient available to the Executive under the Income-tax Act is
nil. The governmental economic policies or any other policy is irrelevant for
the tax authorities till they are enacted in the statute itself. The Hon’ble Court
went against the very grains of the Income-tax Law by approving the thesis advanced
by the Attorney-General that the object of the impugned CBDT Circular and of the
Indo-Mauritius Double Taxation Avoidance Convention was to promote the massive
incoming of foreign exchange.
265. That this Hon’ble Court by mistake took it to be the Petitioner’s case that
the Indo-Mauritius Double Taxation Convention is bad for excessive delegation.
The Hon’ble Court held:
“….It would be wholly wrong for the Court to substitute its opinion as to what
principle or policy would best serve the objects and purposes of the Act, nor
is it open to the Court to sit in judgment of the wisdom, the effectiveness or
otherwise of the policy, so as to declare a regulation to be ultra vires merely
on the ground that, in view of the Court, the impugned provision will not help
to carry through the object
and purpose of the Act.”
The Hon’ble Court referred to Harishanker Bagla &Anr v. The State of MP
1955 SCR 380 and Kishan P. Sharma v. UoI (2000) 5 SCC 212, and quoted with
approval from M S B Board of S.H.S Ed & Anr. v. Paritosh B. Seth &
Ors (1984) 4 SCC 27 para 14. In Harishanker’s Case dealt with the issue
of the validity of delegation under the Cotton Textiles (Control) Order (1948),
The policy underlying the Order was to regulate the transport of cotton textiles
in a manner that will ensure an even distribution of the commodity in the country
and make it available at a fair price to all. The grant or refusal of a permit
is thus to be governed by this policy and the discretion given to the Textile
Commissioner is to be exercised in such a way as to effectuate the policy. The
Court held that the conferment of such a discretion to the Textile Commissioner
could not, therefore, be called unregulated or arbitrary and is not invalid on
that ground. Further, if there is any abuse of power, there is ample power in
the Courts to undo the mischief. Kishan and M S B Board bear out
a proposition relevant to the income-tax situation.
266. That the Hon’ble Court, it is most respectfully submitted, misdirected itself
by this distraction through a non-issue having the effect of the destruction of
the Petitioner’s case. This leads me to state following:
(a)
As this issue was never raised by the Petitioners, its attribution must be through
a judicial oversight; and to the extent it mattered in judicial decision-making
it was a mistake;
(b)
as the Hon’ble Court considered this as a material point in its decision-making
having a decisive effect, the whole discussion on this point deserves to be omitted
otherwise the Rules of Natural Justice stand violated;
(c)
if it is a judicial research, it is impermissible unless the Petitioners were
posted with the outcome of the judicial research, and were heard thereon; and
(d)
as the judicial perspective which the Hon’ble Court evolves to appreciate the
Petitioner’s case is patently erroneous as the Hon’ble Court applied principles
relevant to the delegation of power with guidelines to a case of a condition
precedent. The case under judicial consideration was: delegation of power,
within the frontiers of income-tax jurisprudence, must be exercised by conforming
to the conditions precedents legislatively prescribed. It came in the “precedent
condition category” where it was for the court to decide whether the precedent
condition had been satisfied. The case, thus, comes within the category discussed
by the House of Lords in R. v. Home Secy.. Ex. P. Khwaja (1984) A.C.74.
267. That it is well known that the resort to further the promotion of extraneous
purpose is always a mala fide exercise of power, mala fides, not in the sense
of malice or dishonesty but in the sense of acting unreasonably and using the
power to achieve an object other than that for which it was conferred. It is common
knowledge that those who act mala fide do not proclaim that fact; and mala
fide is a matter of inference from the conduct of the parties. Mala fides
are evident in exercise of the power which led this Respondent to submit before
the Hon’ble Delhi High Court:
“May be India was more kind to Mauritius than what was proper because of expectation
of support in some international fora. India might have thought of the Mauritian
support to her claim for the membership of the Security Council. But this could
not warrant this sort of indulgence for the following two reasons :
(a) Agreements under section 90 of the Income-tax Act can not be made for the
object other than that for which the power is conferred (howsoever noble
it may be); and
(b) Agreements under section 90 of the Income-tax Act should not be made for ulterior
reasons with the tiny-tots on the earth treated under International Law as Sovereign
States having the effect of :
(i)
creating pockets on foreign lands wherefrom to plunder the legitimate revenues
of our country;
(ii)
and creating areas of darkness where dirty money is amassed and laundered for
the benefit of fraudsters, scamsters, anti-national gangsters, crooks and knaves
of all hues and from all the different lands.”
It does not cease to be a mala fide exerciseof power even if the intention be
to promote another public interest (de Smiths Judicial Review of Administrative
Action 4th ed. page 335)”
268 That this Hon’ble Court should not have decided the case on such a plea as
advanced by the Att-General as it was not within the domain of its judicial function
The caution that Justice Holmes had given in Lochner v. New York
[100]
should not have been forgotten.: he said--
“This case is decided upon an economic theory which a large part of the country
does not entertain. If it were a question whether I agreed with that theory, I
desire to study it further and long before making up my mind.”
| 276.. This Hon’ble Court weighed and accepted some
questionable ideas of economics for which without expert assistance it
was quite ill equipped. This Petitioner had clearly stated in reply to
the Solicitor-General’s plea before the Hon’ble Delhi High
Court:17.It is on account of the treaty of the type of Indo-Mauritius DTAC
that our foreign reserve has crossed $ 50 billions. |
Section 90 is not for amassing foreign reserve. It is a
debatable proposition whether the fast waxing reserve made up substantially
with “hot money”
flows of the portfolio investors motivated only by their financial returns
on their investments through Capital gains and dividends can be really
good for a stable economic management. But this proceeding is not appropriate
for raising such issues. |
As this Hon’ble Court has held the promotion of some debatable economic ideas
of questionable worth to be the legitimate object for the exercise of the power
derived from the Income-tax Act, this Petioner has no option but to state the
following:
( I ) Plea to tilt law for obtaining more and more foreign exchang has often
been the delight of the most unscrupulous. Thomas Mun’s work , England’s Treasure
of Foreign Trade or The Balance of our Foreign Trade is the Rule of our Treasure
[ London, Richard Bentley, 1841.]
was published in 1664. He was an employee of the East India Company, and his
entire thesis promoted the policies of this Company which were to reap superprofit
by driving India towards what is known as the Sponsored State.
( ii ) That this Hon’ble Court did not examine the chemistry and the components
of foreign exchange. Most foreign exchange which comes through the Mauritius route
is “hot money”. If this Hon’ble Court would have examined its dynamics this Court
would surely have rejected this thesis advanced by the Attorney-General, the Counsel
for the tax haven Mr. Salve, and the tax haven’s theoretician Roy Rohatgi. Joseph
Stiglitz, the winner of the Nobel Prize 2001in economics, says in his Globalization
and its Discontents:
“ And as bad as premature and badly managed trade liberalization was for developing
countries, in many ways capital market liberalization was even worse. Capital
market liberalization entails stripping away the regulations intended to control
the flow of hot money in and out of the country---short-term loans and contracts
that are usually no more than bets on exchange rate movements. The speculative
money cannot be used to build factories or create jobs---companies don’t make
long-term investments using that can be pulled out on a moment’s notice---and
indeed, the risk that such hot moneys brings with it makes long-term investments
in a developing country even less attractive. The adverse effects on growth are
even greater. To manage the risks associated with these volatile capital flows,
countries are routinely advised to set aside in their reserves an amount equal
to their short-term foreign-loan loans.”
[101]
“Foreign investments is not one of the three main pillars of the Washington Consensus,
but it is a key part of the new globalization…… Foreign direct investment has
played an important role in many ---but not all-- of the most successful development
stories in countries such as Singapore and Malaysia and even China.”
[102]
( iii ) Getting foreign exchange at any cost can not be for the larger good.
Foreign exchange is used mostly by the well-off sections for increasing their
imported consumptions. Easy availability of foreign exchange has been used to
liberalize baggage allowance, holidays abroad, import of luxury items, etc. Where
it has gone for investments, it is highly capital intensive so it is resulting
in fewer new jobs. Other negative effects which are boun to flow are the following:
a.
speculative activity may be encouraged. Later resulting in hot money outflows.
b.
Speculative activity in stock exchange and increased risk for the local investors.
c.
Speculative activity slows down real investment in the economy. Because of the
risks being higher and returns on real investment being lower.
269. That if at all the Central Government for reasons beyond the common people
of the Republic thought it fit to facilitate indiscriminate arrival of foreign
exchange it should have got this sort of policy enacted by Parliament.. That the
Hon’ble Court was mistaken in its reasoning that Parliamentary enactment (or approval)
would have been “a procedure which would be time consuming and cumbersome, a special
procedure was evolved by enacting section 90 of the Act.” This view does not accord
with constitutional principle already submitted. Section 90 on plain terms is
constitutive rather than procedural. The plain provision of the Act has been overlooked
so that even a tax treaty formation can become a mere exercise of executive power
under Art. 73 of the Constitution of India. Besides it is founded on certain assumptions
which are wrong. And the observation of Lord Radcliffe who “never understood the
procedure of extra-statutory concessions in case of a body to whom at least the
door of Parliament is opened every year for adjustment of the tax code” (quoted
by Lord Edmund-Davies in Vestey v IRC (1997) 3 ALL ER 976 at 1002). In
our low arousal country, legislative changes are done at a pace outwitting all
other countries on the earth. In the Preface to the Eighth Edition of Kanga
& Palkhivala’s Income Tax there is a graphic account of legislative
fecundity in the field of the income-tax law in our country.
270. That this Hon’ble Court overlooked a fundamental constitutional principle
stated by Lord Mansfield stated in Rex v. Joha Wilkes
[103]
as far back as 1770 :
“ The constitution does not allow reasons of state to influence our judgment:
God forbid it should! We must not regard political consequences; how formidable
so ever they may be: if rebellion was the certain consequence, we are bound to
say, ‘Fiat justitia, ruat coelum.’ [ “Let justice be done though the heavens
fall.”
The same view was stated by the High Court of Australia in Att.-Gen. For the
U. K. v. Heinemann Publishers Australia Pty Ltd.
[104]
The High Court stated in this case certain points of great contextual
relevance:
(a) Courts do not assess friendliness amongst governments.
Australian courts are not competent to assess the degree of friendliness of a
foreign state, nor is that matter capable of resolution by the Executive assessment.
In the present case, the friendliness or hostility of
a foreign state seeking to enforce its claims in Australia had no relevant
connection with the applicable principles. (at p. 344 head note)
(b) The relevance of the Executive certificate.
“It is not an acceptable answer to this objection to suggest that the courts
might act on an Executive certificate to the effect that a foreign plaintiff is
a friendly state…….Quite apart from the likelihood of international embarrassment,
it would be subversive of the role the courts and the constitutionally entrenched
position of the judicature in this country if the enforceability of a claim were
made, by the general rule of common law, to depend on an Executive decision whether
a particular plaintiff should be able to obtain the judicial relief which it seeks.”
(at p.351)
(c) Public Policy of domestic law not to be violated.
“…a rule that foreign laws offensive to public policy of the domestic law will
not be enforced, domestic public policy prevailing over the offensive foreign
law. As Sir Hersch Lauterpacht observed in Netherlands v. Sweden: The Convention
of 1902 (1958)I C J Reports 54 at 92:
“in the sphere of private international law the exception of ordre public,
of public policy as a reason for the exclusion of foreign law in a particular
case is generally –or, rather, universally ---recognised” (at p. 351)
(d) The opinion of the Executive
If a practice of acting on the Executive’s opinion were adopted in this case,
on what ground could the court refuse to act on such an opinion in the next? The
case would be a precedent for possible future Executive embarrassment. (at p.
353)
271. That this Hon’ble Court missed to catch for whom the bell tolls if everything
is made to fall prostrate to the cause of the acquisition of plenty of foreign
exchange as this acquisition in itself is wholly dedicated to common good. This
is a specious pleading which this Petitioner was nonplus to hear from the Attorney-General.
This pleading is towards a cause of the so-called corporate India for the benefit
of a few net-worth entities which, with Lucifer-like logic and Gobbles-like propaganda
through media controlled by vested interests, have substantially succeeded in
high jacking public cause for the private benefits. To illustrate on sinister
effect of the massive augmentation of the balance of payment: If a comparison
is done between Articles XII and XVIII-B of GATT 1994 and the Understanding on
the Balance of Payments provisions of GATT 1994 be done one can notice that many
of the protections in agricultural segment would go hitting hard the poor agriculturists
of our country for whom the heart of the Corporate India seldom bleeds.
273. That the most appropriate course for this Hon’ble Court was not to entertain
issues ulterior and extraneous to the Income-tax Act. It was not the Balco
situation in which this Hon’ble Court adopted the doctrine of restraints in the
matters pertaining to economic management of the country. The income-tax law mandates
an entirely different approach.. Here there is no economic policy to implement;
it must, to be implemented, enter into the corpus of income-tax jurisprudence:
i.e. it must be legislatively enacted. While interpreting this law the role of
this Hon’ble Court is not to facilitate FDI or the incoming of Foreign Exchange.
To do so would be to act without Jurisdiction. Through oversight this Hon’ble
Court misdirected itself by upholding an extraneous purpose which has led to a
serious miscarriage of justice
274. That the legislative Amendment to Section 90 (1) of the Income-tax Act done
by the Finance Act 2003 with effect from April 1, 2004 proves this Petitioner’s
point that a tax treaty must conform to the Section 90 (1) otherwise it would
be bad for promoting object extraneous to the purpose for which the power is given
by the statute. This Petitioner submitted that to the extent the Indo-Mauritius
DTAC tries to promote “trade and investment”, it acts ultra vires. The
Government realized this; and while the case was under consideration before this
Hon’ble Court it amended Section 90(1) to prescribe that the Agreement could also
accord benefit by way of relief “to promote mutual economic relations, trade and
investment.” This legislative change is a sound pointer to the intention of Parliament.
If the DTAC could promote object extraneous to the statute then there was no need
for the Amendment. It is also to be noted that Parliament considered it a substantive
change; it was not done by a clarificatory change, ex abundante cautela.
275. That this Petitioner stated before this Hon’ble Court that after
the opening-up of India’s economy, even both the rapacious international financiers
and the crooks of all hues found a delightful channel for investing in India.
They browsed the scenario and found the politco-administrative system of our country
most manageable to their benefits. Often corruption and globalization seem to
go cheek by jowl. India was seen to have a declining Parliament, ill-informed
and corrupt executive, indifferent public opinion and a pliable press busy promoting
vested interests. It was the best of all times for the triumph of a Market
Economy wherein vices and virtues are all res commercium. For long the
abuse of the Indo-Mauritius DTAC remained a most ignominious public secret.. The
Income-tax Department was always against it.. It was right to do so. But the mighty
forces of darkness to which Shah Commission refers as the Root of All Evil always
succeeded in lynching the law. The Hon’ble High Court wanted to see the records
but they were not shown. It would have been most appropriate for this Hon’ble
Court to call for the records and correspondence pertaining to the use or misuse
of the Indo-Mauritius DTAC to see what was the view of the Income-tax Department.
The impugned Circular was dictated under the melodrama of the collapse of the
Stock-Market. Very recently when some restrictions were placed on transactions
through Participatory Notes the same melodrama was announced to be enacted. The
contemporary realities are shaping us as a Sponsored State in which nobody thinks
it appropriate to look beyond his nose.
Serbonian Bog
276. That a perusal of the observations of the Division Bench of this Hon’ble
Court on Treaty Shopping bring out, inter alia:
(i)
that Treaty Shopping facilitates the augmentation of resources needed for development;
and it is in tune with the “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”.
(ii)
that the remedial measures, if any needed, is in the domain of the Executive,
{by implication, not in the judicial domain). “it is dependent upon several economic
and political consideratio
The (i) is , it is respectfully submitted, bad economics, or, at least highly
debatable; and the (ii) does not conform to our jurisprudence as evolved by this
Hon’ble Court.
That the proposition (i) is highly contentious. The Hon’ble Division Bench has
treaded a topic the like of which Lord Ardmillan
[105]
declined to deal with while deciding a case by --justifying his reluctance
with a quotation from Milton’s Paradise Lost: he declined even treading
on the edge of ……that Serbonian Bog,
‘Twixt Damiata and Mount Casius old,
Where armies whole have sunk.
This Petitioner wishes if the counsel of prudence given by Justice Holmes in his
classic dissent in Lochner v. New York
[106]
to which a reference has already been made.
This Petitioner knows that it is no use for him to what this Hon’ble should not
have done. However as the Hon’ble Division Bench has adopted a particular economic
thesis, some extraversion may not be improper to make out his point that this
Hon’ble Court unnecessarily treaded ‘that Serbonian Bog’.
277.That this Petitioer feels that we are a turning point of our nation’s history
in which sound and balanced idea of evolving a welfare economy in an open democratic
society has become befogged and obfuscated by a corporate-driven conspiracy made
to pass for a mission for the weal of common men by a band of economists like
Friedrich von Hayek
[107]
, Milton Friedman
[108]
. The idea of a planned economy under the conditions of freedom, which Karl
Mannheim
[109]
had suggested, got eclipsed. For Hayek the concept of ‘social justice’ was
itself a threat to law; Friedman felt that true freedom can be brought about only
by a market economy. The Friedman argument put responsibility for slow economic
growth on the governmental policies. It assumed that only reduction in taxes and
a rolling back of regulations would generate forces for growth was adopted and
pleaded by Robert Solow. Friedman and other major lights of the Chicago school
turned out to be the rabid disciples of Adam Smith, the author of The Wealth
of Nations (1776).But a good number of thinkers were concerned with injustice
and poverty existing in our society. Stiglitz
[110]
found that Adam Smith’s ‘Invisible Man’ was conspicuous only by his absence.
The Indian socio-philosophical traditions, and the theories advanced Ronal Dworkin
[111]
and John Rawls
[112]
led, it is felt, Dr Amartya Sen to hold that there was no reason fo a just
social order from the free-market economics. Dr Sen’s ‘welfare economics’ had
a deep concern about inequality, poverty, lack of good health care and education.
His concept of Man has a high quotient of ethics. After having ruled the world
from the year of the Treaty ofVersailles to the Britton Woods, Keynesianism declined
but is again manifesting with verve in the recent years as a reaction to the ideas
fashinable in a marke ruled economy.. Gandhi’s economic ideas, despite some modifications
(which he would have himself permitted if he would have been alive to see the
realities of our day) are the profoundest, and are the most widely beneficial
to promote social justice and equality. .Nehru’s economic ideas, scattered all
over the Glimpses of the World History, are chiselled nuggets radiating
practical insight which make Friedman and Hyaek look mere hired propagandists
for Market, the third incarnation of a monster, the first two being the Leviathan,
and the State under the communist dispensation. The whole thing turns on the character
og the market and the character of government. This Petitioner does not intend
wasting the Hon’ble Court’s precious time by prolonging the saga of divergence
in the views of the economists as he thinks he has proved his point that the sphere
of economics abounds in quagmires and conundrums, contradictions and ambivalence,
arrogance deception, studied art and crafted covin….. The Hon’ble Division Bench
went patently wrong when it chose to tread in the economic realm leaving the right
observation-post of Legality. .
Adoption of Economic Perspective irrelevant to the point at issue.
278.That this Petitioner pauses to answer a contextual question: is there anything
in the income-tax act,1961 which warrants any judicial odyssey into the realm
of economic ideas howsoever fashionable. It is true that this Hon’ble Court in
S.B. Dayal v. U.P.
[113]
made the following sweeping statement, surely not from the legal observation-post,
but from the stand-point of a political scientist who is interested more in exploring
the factual realities in a particular phase of history, than formulating legally
sound principles. To quote:
“ In a modern society taxation is an instrument of planning. It can be used
to achieve the economic and social goals of the State. For that reason the
power to tax must be a flexible power. It must be capable of being modulated
to meet the exigencies of the situation. In a Cabinet form of Government,
the executive is expected to reflect the views of the legislatures. In fact
in most matters it gives the lead to the legislature. However much one might
deplore the New Despotism of the executive, the very complexity of modern
society and the demand it makes on its Govt., have set in motion forces which
have made it absolutely necessary for the legislature to entrust more and
more powers to the executive. Petition position as regards delegation of legislative
power may not be ideal, but in the absence of any better alternative, there
is no escape from it….In certain matters
they can only lay down the policy and guidelines in as clear a manner as possible.”
The above observations are unsound in many ways:
(i)
they sound like a requiem on the wrack of Parliamentary
democracy;
(ii)
if we deduce criteria from the prevailing realities alone, we may say that we
have a Prime Ministerial form of government, or more realistically, we are ruled
by a marked-driven oligopoly and corporate imperium. But such conclusions would
be only by defiling the Constitution.
(iii)
they do not take into account that the various tax statutes have their different
environment mandating, in some of them, adoption of certain policy factors, but
in others total exclusion of them;
(iv)
they are totally anachronistic in an era in which the roll-back of the state’
role is becoming a much acclaimed shibboleth;
(v)
if we ‘deplore’ the New Despotism of the executive, it becomes our duty not to
promote it, as mild concessions eat up the strongest of our most cherished values;
(vi)
if instead of role performance, an organ of the State becomes a docile follower
of another more majestic organ of the State, it merely digs its own grave at its
own accord allowing the history move up in the stream of time to the days of the
Stuarts.
Relativism and differentia inter se the statutes: Law is functional
279.That broadly three categories of tax statutes can be identified for examining
the validity of the exercise of the delegated power under Section 90 of the Income-tax
Act:
(a) The statutes where ‘tax’ is excluded from the concept of Money Bill, and
is levied under the distinct environment of the working of the local self-government,
and laws with strong economic quotient to respond to the different situations
specifically contemplated by those statutes. Gauri Shanker v. Municipal Board
[AIR 1958 Raj.192], Burmah Shell Oil Storage and Distributing Co. v. Tamluk
Municipality [AIR 1956 Cal397]; Jagdish Prasad v. Saharanpur Municipality
[AIR 1961 All.563; Ram Bachan v Bihar [AIR 1976 SC 1404]; Mohammad Ibrahim
v. U.P. [AIR 1967 All. 24; Kisan v. Bhushawal Municipality[ AIR 1966 Bom.
15 ; Municipal Corporation of Delhi v. Birla CottonSpg & Weaving Mills
[1968 SC 1232];Pandit Banarsi Das Bhanot v. M.P. [AIR 1958 SC909; Liberty Cinema’s
Case[AIR 1965 SC 1107
N.K Papiah & Sons( relating to C.P. and Berar Sales Tax Act (21 of
1947), v. Excise Commrs) AIR 1975 1007; Harishanker Bagla &Anr v. The State
of MP (Cotton Textiles (Control) Order (1948), Cl.3) [1955 SCR 380].It is
submitted that the premises and environment of the income-tax law and the customs
and excise laws are materially different in many ways:
(b) The distinct considerations between the laws of direct taxes and those of
indirect taxes were thus stated by O.Hood Phillips’ Constitutional and Administrative
Law [7th Edition Pg.45]. As this distinction is material to the
comprension of the specifics of direct taxes by keeping that historical differentia
in focus, this point has been elaborated at a more appropriate place vide para
314 of this Writ Petition.
(c)
The provisions under the Central Excise Act, 1944 are materially different, especially
for the following reasons:
(i)
There is very high quotient of economic policy at work under the Excise law (as
under Customs law) in contradistinction to the position under the Income-tax Act
wherein the permissible economic considerations are only those which are legislatively
enacted. No penumbral zone ever travels with the statutory provisions relating
to income tax.
(ii)
Under the Central Excise Act, 1944 power to grant exemption from duty of excise
is granted in wide terms under Section 5A of the Act. Section 38 of the Act prescribes
the mode of Parliamentary control. It says in Section 38(2):
“ Every rule made under this Act, every notification issued under [section 3A,
section 4A.] sub-section [1] of section 5A and section 11C and every order made
under sub-section (2) of section 5A, other than an order relating to goods of
strategic, secret, individual or personal nature, shall be laid, as soon as may
be after it is made or issued, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one session,
or in two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid, both Houses
agree in making any modification in the rule or notification or order, or both
Houses agree that the rule
should not be made or notification or order should not be issued or made, the
rule or notification or order shall thereafter have effect only in such modified
form or be of no effect, as the case may be: so, however, that any such modification
or annulment shall be without prejudice to the validity of anything previously
done under that rule or notification or order.]”
That a tax agreement in India is subjected to no such Parliamentary scrutiny.
The Hon’ble Court was, it is submitted, mistaken in not observing the differentia
inter se the situations under the laws of Direct taxes and Indirect taxes. This
overlooking renders the analogical reasoning erroneous. That the Hon’ble Division
Bench patently erred in not noticing the difference inter se different
statutes, and as a sequel, erred in relying on cases like Harishanker Bagla
&Anr v. The State of MP (Cotton Textiles (Control) Order (1948), Cl.3)
[1955 SCR 380].
( c ) The law of income-tax is sui generis as it nowhere grants to the
Executive the power to tax or untax. We will not e to be taxed under the executive
fiat, nor untaxed through the executive clemency
[ E ]
[ e] Section 119 becomes a vanishing point of tax-law; and the doctrine of
ultra vires gets abrogated.
280. That the way the Hon’ble Court has viewed Section 119 of the Income-tax Act,
1961 it has conferred on the CBDT, working under the directions of the Central
Government under the Central Board of Revenues Act, power which the Executive
organ never exercised after the days of the Stuarts. The following observations
in the Judgment under consideration relating to the power of the CBDT may be considered:
“The only bar on the exercise of power is that it is not prejudicial to the assessee.”
“The only restriction on the power of the CBDT is to prevent it from interfering
with the course of assessment of any particular assessee or the discretion of
the Commissioner of Income-tax (Appeals).”
“ As long as the circular emanates from the CBDT and contains orders, instructions,
or directions pertaining to proper administration of the Act, it is relatable
to the source of power under section 119 irrespective of its nomenclature.”
What if the directions of the CBDT be against law (statute or case law), or be
subversive of Public Policy?
What if the directions be against public interest of the common people of this
democratic Republic?
What if the directions emanate from that evil nexus between the politicians in
power and the bureaucrats wielding statutory public power?
What if the directions are issued under patent or crypto-psychic pressure from
the Multinational Corporations and their powerful lobbyists which because of evident
mismatch between these global gladiators which can even buy many sovereign States
any time they like on their terms alone?
281. That in view that this Hon’ble Division Bench has taken virtually abrogates
the well established doctrine of ultra vires. de Smith has stated:
“A modern lawyer might say that the Crown and its servants, like all other public
authorities, must not act ultra vires.”
[114]
282. The House of Lords in National Federation of Self-Employed and Small Businesses
Ltd
[115]
upheld the view of the Court of Appeal widening the concept of locus standi
through a remarkable judicial creativity.. Our Supreme Court relied on this decision
while determining the frontiers of Public Interest Litigation (PIL for short)
in S.P. Gupta & Ors v President of India & Ors (AIR 1982 SC 149).
Justice Bhagwati quoted with approval Lord Diplock’s observations in his speech
in the House of Lords:
“It would, in my view, be a grave lacuna in our system of public law if a pressure
group, like the federation, or even a single public-spirited taxpayer, were prevented
by out-dated technical rules of locus standi from bringing the matter to the attention
of the Court to vindicate the rule of law and get the unlawful conduct stopped…It
is not, in my view, a sufficient answer to say that judicial review of the actions
of officers or departments of central government is unnecessary because they are
accountable to Parliament for the way in which they carry out their functions.
They are accountable to Parliament for what they do so far as regards efficiency
and policy, and of that Parliament is the only judge; they are responsible to
a Court of Justice for the lawfulness of what they do, and of that the Court is
the only judge’.
[116]
Justice Bhagwati examined the problem of locus standi in Public Law in the light
of various decisions of the Supreme Court of India, and the English and American
authorities, and articulated his views with clarity and comprehensiveness in these
words:
“We would, therefore, hold that any member of the public having sufficient interest
can maintain an action for judicial redress for public injury arising from breach
of public duty or from violation of some provision of the Constitution or the
law and seek enforcement of such public duty and observance of such constitutional
or legal provision. This is absolutely essential for maintaining the rule of law,
furthering the cause of justice and accelerating the pace of realization of the
constitutional objective.”
[117]
This situation was stated through a diagram vide para 45 at p.. 181 of the Review
Petition.
“It is high time to declare law as to the Board’s power to issue circulars which
are beneficial to certain tax payers but injurious to Public Interest.
A. The whole set of Circulars
B. A sub-set of Circulars. (the beneficial Circulars )
C. Circulars beneficial to the assesses but injurious to public interest.
283. This distortion in judicial perspective emanated mainly by not appreciating
the PIL Character of this litigation. In an appeal from Nigeria in Eshgabayi
Eleko v. Govt. of Nigeria
[118]
[14] Lord Atkin made the following observation which our Supreme
Court has quoted with approval
[119]
[15] in several cases:
“In accordance with the British jurisprudence no member of the executive can I
interfere with the liberty and property of a British subject except on the condition
that he can support the legality of his action before a court of justice.”
( Emphasis supplied.)
The principle of legality is at work not only where the executive acts to the
detriment of a subject or citizen’s liberty or property, it is also involved where
the executive refuses to collect taxes due under a Parliamentary enactment. It
is so as
(a) this power of the executive is coupled with public duty;
(b) this power is to be exercised for collecting revenue which is for public good;
(c) under the modern world-view revenues, or public resources, are under public
trust;
(d) the people are entitled to see that the levy and collection of revenue accord
with law so that the State’s resources are available for public good.
This leads us to what view we hold about public power and public resources. In
McDowell & Co v CTO this Hon’ble Court had evolved juristic ideas
illustrating a paradigm shift in tax jurisprudence. The Hon’ble Constitution Bench
approves the broad approach that is shown by the House of Lords in Inland Revenue
Comrs v National Federation of Self- Employed and Small Businesses Ltd. and Furniss v. Dawson
284.. That Section 119 of the Income-tax Act grants power to be exercised on pre-conditions.
If the pre-conditions for invoking public power are breached, the exercise of
public power is wrong and dangerous. Section 119 grants power on prescribed pre-conditions
for the proper management and administration of the Act. Two points, it is felt,
need specific and contextual underscoring: these are the following—
(a) That the Conditions Precedent for exercising the powers are (i) proper administration
of the Income tax Act [cl.(a)], and (ii) proper and efficient management of the
work and assessment and collection of Revenue. The word “proper” in its attributive
sense means “according to the rules; right or correct” (Oxford Advanced Learner’s
Dictionary, encyclopedic edition). The word “administration” means “management
of public or business affairs.” The word “efficient” means “(esp. of tools, machines,
systems, etc) producing a satisfactory result without wasting time or energy”.
And the word “management” means “the application of skill or care in the manipulation,
use, treatment, or control of things or persons, or the conduct of an enterprise,
operation etc.” (The New Shorter Oxford English Dictionary). Should a circular
of the type of the Circular No 789 be ever considered for the proper administration
of tax law? A circular which promotes extrinsic purposes, which makes a cussed
trespass over the legislative field, which differentiates shockingly inter
se two groups similarly placed whose affairs have a common nexus with the
object of the statute, which creates an opaque system.
(a)
The Hon’ble Division Bench refers to the power of the CBDT to relax the rigour
of law. The marauders of our country’s revenue swooping on our resources as hordes
of masqueraders from different countries under the flag of the Mauritian Certificate
of Residence be viewed persons in distress worthy to be alleviated by this poor
country’s government even on the wreck of its own law?. And the loss of commission
that Mauritius gets by the good faith of pacta sunt servanda cannot be
a relevant factor in deciding hardship. Our per capita income just U.S. dollars
440 whereas in Mauritius it is U.S. dollars 3,540. In deciding the question of
hardship the Gandhian talisman has not ceased to be of relevance: the Father
of Nation (whom the government and the lobbyists have forgotten, but people shall
never ) said ( with which Granville Austin announces his “Working of a Democratic
Constitution” ): “ Recall the face of the poorest and weakest man whom you
have seen and ask yourself if the step you contemplate is going to be of any use
to him. Will he gain anything by it?” If the Mauritian view that the Certificate
if incorporation is per se enough that all other tax treaties may become irrelevant
as the residents of all the countries would board the Mauritian vehicle to count
the waves to deplete India. To recognize this position is to make a travesty of
justice we hold we live in two Indias , one in which 97% people exist, and the
other wherein 3% people enjoy best of all times believing the Universe is for
them alone. The lines from Blake express our conditions in graphic metaphor:
Some are born to great delight,
Some are born to eternal light.”
[1]
p. 80 . Dr T.B. Smith in his Tagore Law Lectures rightly said: ‘For me,
as for Lord Stair, Father of Scots law writing in the 17th century,
law is ‘reason versant about the affairs of men.’
[2]
.(1981) 2 ALL ER 93 at 107 (H L),
[3]
(1982) 2 All ER 93 at 112
[4]
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 and 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 act 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.”
[5]
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.
[6]
Ramchandra v. Govind AIR 1975 S.C. 915 relied on.
[7]
AIR1975 SC 915.
[8]
F No 500/60/2000-FTD (PL) issued by Ministry of Finance & Company Affairs,
Deptt. Of Revenue (Foreign Tax Division) New Delhi
[9]
(1981) 2 ALL ER 93 at 107 (H L)
[10]
Education Sec v. Tameside BC(50) 1977 AC 1014, quoted at page 1535
of Seervai’s Constitutional Law, Vol – II; Lord Somervell quoting
Brett v. Brett in AG v Prince Earnest Agustus 1957 AC 436 at 473
[quoted in Seervai, Cons. Law pg. 189]; per Justice Krishna Iyer in M.P
v. Orient Paper Mills ( AIR 1977 SC 687 overruled on another point in Orissa
v. Titagarh Paper Mills Ltd. AIR 1985 S C 1293; per Lord Esher M.R. in R.
v. Vestry of St. Pancras; Federation of Self- employed and Small Business
Ltd. (1981) 2 ALLER 93 at 107 (HL) quoted in S.P. Gupta v. President of
India & Ors. (AIR 1982 S C 149 at page 190.; Rohtash Industries Ltd.
v. S.P. Agarwall, AIR 1969,SC 707.; The Cheng Poh v. Public Prosecutor,
(1980, AC 458, PC ) discussed by H.M. Seervai on opp. 1125-1128 of his Constitutional
Law, vol -II.; Lord Denning in Breen v. A.E.U (1971) 2 QB 175.; Padfield
v. Minister of Agriculture, Fisheries and Food (quoted by Seervai, Constitutional
Law of India, Vol-II 4th ed.P. 1529).
[11]
(1990) 24 Q B D 371, 375
[12]
(1971)2 Q B 175
[13]
1980 L R 458 P C at p.472
[14]
AIR 1979, SC, 1459
[15]
de Smith, Judicial Review of Administrative Action, 4th
ed. p.335
[16]
AIR 1964, Raj. 205 at 213
[17]
56 ITR 198: AIR 1965 SC 1375
[18]
82 ITR 913 : AIR 1972 SC 524
[19]
131 ITR 509, AIR 1981, SC 1922
[20]
(1999) 237 ITR 889 at 890
[21]
Navnit Lal C. Javeri v. K. K. Sen, AIR 1965 SC 1375
[22]
AIR 1972 SC 524
[23]
56 ITR 198 = (AIR 1965 SC 1375)
[24]
Wambaugh, Study of Cases 2nd pp 17-18
[25]
Salmond, Jurisprudence 12th ed. p. 180
[26]
AIR 1981 SC 1922
[27]
Salmond, Jurisprudence 12th ed
[28]
[2001] 252 ITR 1 (SC)
[29]
[2002] 254 ITR 554
[30]
(1977) A.C.1014.
[31]
Law in the Making pp 263-264
[32]
(1970) 1 SCC 795,
[33]
(1990) 2 SCC 231,
[34]
(1994) Supp 1 SCC 310
[35]
(200) 9 SCC 66
[36]
(1996) 161
[37]
2003(8) SCALE 287, 306
[38]
(2000) 5 SCC 365
[39]
Ruma Pal, Arijit Pasayat and C.K. Thakker, JJ
[40]
Case No: Civil Appeal No. 4022 of 1999
[40]
(2005) 2 SCC 720at p. 27
[42]
(1999) 239 ITR 650 at 674
[43]
(1997) 3 All ER 976 at 1002
[44]
AIR 2000 SC 2178 at 2180
[45]
Case No: Civil Appeal No. 4022 of 1999
[45]
(2005) 2 SCC 720at p. 27
[46]
(1999) 239 ITR 650 at 674
[47]
The Object of the Income-tax Act:
[48]
Education Sec v. Tameside BC(50) 1977 AC 1014, quoted at page 1535
of Seervai’s Constitutional Law, Vol – II; Lord Somervell quoting
Brett v. Brett in AG v Prince Earnest Agustus 1957 AC 436 at 473
[quoted in Seervai, Cons. Law pg. 189]; per Justice Krishna Iyer in M.P
v. Orient Paper Mills ( AIR 1977 SC 687 overruled on another point in Orissa
v. Titagarh Paper Mills Ltd. AIR 1985 S C 1293; per Lord Esher M.R. in R.
v. Vestry of St. Pancras; Federation of Self- employed and Small Business
Ltd. (1981) 2 ALLER 93 at 107 (HL) quoted in S.P. Gupta v. President of
India & Ors. (AIR 1982 S C 149 at page 190.; Rohtash Industries Ltd.
v. S.P. Agarwall, AIR 1969,SC 707.; The Cheng Poh v. Public Prosecutor,
(1980, AC 458, PC ) discussed by H.M. Seervai on opp. 1125-1128 of his Constitutional
Law, vol -II.; Lord Denning in Breen v. A.E.U (1971) 2 QB 175.; Padfield
v. Minister of Agriculture, Fisheries and Food (quoted by Seervai, Constitutional
Law of India, Vol-II 4th ed.P. 1529).
[49]
(1990) 24 Q B D 371, 375
[50]
(1971)2 Q B 175
[51]
1980 L R 458 P C at p.472
[52]
AIR 1979, SC, 1459
[53]
de Smith, Judicial Review of Administrative Action, 4th
ed. p.335
[54]
(1964) 336 F. 2 ed. 809 ( U.S.C.A/ 5 Ct.)
[55]
Advance Ruling No. P-9 OF 1995, In re [1996] 220 ITR 377
[56]
Jowit’s Dictionary of English Law. p. 305
[57]
[1984] 2 All ER, P. 13
[58]
[1977] 1 All ER 881 at 894
[59]
[1949] 2 All ER 274,
[60]
[1971] 2 All ER 593 at 596 [1971] I WLR 604 at 609
[61]
Sarkar on Evidence 14th ed p. 66; M L Singhal & Chitaley,
The Indian Evidence Act p. 351. On beneficial ownership : Klaus
Vogel on Double Taxation Conventions at p 127
16. (1982) STC 60 HL quoted with approval by Lord Brightman
in Furniss v. Dawson (1984) 1 ALL ER 530 at 541 and also by our Supreme Court
in McDowell & Co v. CTO (154 ITR, 148 SC at page 157):
[63]
(1975) 99 ITR 375 at 386.
[64]
Chapter VIII OCBs AND SUB-ACCOUNTS OF FIIs p.165 of the Report esp. pages
179-186 ; Chapter XII ACTION BY INVESTIGATIVE AGENCIES p. 264 of the Report esp.pages
297 to 308; Chapter XIII THE MINISTRY OF FINANCE p.309 of the Report, esp. p.319
para 13.41 andObservations/ Conclusions/ Recommendations of the Report at page
470 para 8. 79, & 8.82; and p. 472 para 8.97; again pp.500-502 para 12.202,
12.203, 12.204, 12.205.The impugned CBDT Circular of 13. 4. 2000 is discussed/
referred in the Report at p. 304-305 para 12. 185 to12. 194 (b) the Report at
p. 319 para 13.41
[65]
Acting under dictation : “An authority entrusted with a discretion
must not, in the purported exercise of its discretion, act under the dictation
of another body or person. In at least two modern Commonwealth cases licensing
bodies were found to have taken decisions on the instructions of the heads of
government who were prompted by extraneous motives”. de SMITH’S Judicial review
of Administrative Action 4th ed. p 309 relying on Roncarelli
v. Duplessis [1959] S.C.R. 121; Rowjee v. State of Andhra Pradesh,
A.I.R. 1964 S.C. 962
[67]
in clear dereliction of duties under art. 3 of the vienna convention on diplomatic
relations of 1961 adopted by the un conference on diplomatic intercourse and immunities
:
‘1.the functions of diplomatic mission consist inter alia in : (a) representing
the sending state in the receiving state; (b) protecting in the receiving state
the interests of the sending state and of its nationals, within the limits permitted
by international law; (c ) negotiating with the government of the receiving state;
(d) ascertaining by all lawful means conditions and developments in the receiving
state, and reporting thereon to the government of the sending state; (e) promoting
friendly relations between the sending state and the receiving state, and developing
their economic, cultural and scientific relations….’
[68]
2003(8) scale 287, 306
[69]
(1970) 1 scc 795,
[70]
(1990) 2 scc 231,
[71]
(1994) supp 1 scc 310
[72]
(200) 9 scc 66
[73]
(1996) 161
[74]
(2000) 5 scc 365
[75]
[1986] 2 all er h.l. 334 lord hailsham of st. marylebone l c ,, lord elwyn-jones,
lord scarman, , Lord Bridge of Harwich and Lord Mackay of Clashfern.
[76]
Besides the provisions under the Indian Evidence Act, See Oppenheim’s International
Law para 21
[77]
Section144
[78]
Section 112
[79]
Introduction to International Law 10th ed. p.20
“ ‘Comity’, in its general sense, cannot, however, be invoked to prevent the
United Kingdom, as a sovereign state, from taking steps to protect its own revenue
laws from gross abuse; see decision of the House of Lords in Colleco Dealing
Ltd v. IRC [1962] AC 1 at 19, [1961] 1 All ER 762 at 765. Likewise, a charge
of conspiracy to commit offence of importing dangerous drugs into the United Kingdom,
based on an alleged agreement made outside British jurisdiction, is not in violation
of ‘international comity’. (DPP v. Doot [1973] AC 807 at 834-835)”
[80]
The House of Lords in Colleco Dealing Ltd v. IRC [1962] AC 1 at 19,
[1961] 1 All ER 762 at 765.
[81]
: J. C. Shah, K. S. Hegde, and A. N. Grover JJ.
[82]
[2004 (165) E.L.T. 257 (S.C. )
[83]
(2005) 2 SCC 720at p. 27 [Coram: S.N. Variava, Dr AR. Lakshmanan and S.H.
Kapadia, JJ. ]
[84]
Coram; Ruma Pal and P. Venkataraman Reddy, JJ.
[85]
2003(8) SCALE 287, 306
[86]
(1970) 1 SCC 795,
[87]
(1990) 2 SCC 231,
[88]
(1994) Supp 1 SCC 310
[89]
(200) 9 SCC 66
[90]
(1996) 161
[91]
(2000) 5 SCC 365
[92]
Ruma Pal, Arijit Pasayat and C.K. Thakker, JJ
[93]
Case No: Civil Appeal No. 4022 of 1999
[94]
(2005) 2 SCALE 280
[95]
‘The Instructions to the Central Excise Officers:-- The Central Board of
Excise and Customs…may, it considers it necessary or expedient so to do for the
purpose of uniformity in the classification of excisable goods or with respect
to levy of duties of excise on such goods, issue such orders, instructions and
directions to the CentralExcise Officers as it may deem fit……….’
[96]
‘Power to issue supplementary instructions.:--The Central Board of Excise
and Customs, the Chief Commissioners and Commissioners, may issue written instructions
providing for any supplemental matters out of these rules.’
[97]
The impugned Judgment.
[98]
M/s Pahwa Chemicals Pvt Ltd vs the Commissioner of Central Excise,
(1955) 2 SCC 720
[99]
[2001] All ER 865 H.L
[100]
(1904) 198 U.S. 45
[101]
at pp.65-66
[102]
ibid p. 67
[103]
(1770) 4 Burr, 2527, 2561
[104]
(1988) 62 Australian Law Journal Reports 344
[105]
P.L. Wylie & Lochhead v. Mitchell (1970) 8M, 552 quoted T B Smith,
Property Problems in Sale p.7
[106]
(1904) 198 U.S. 45
[107]
The Road to Serfdom (1944); The Constitution of Liberty (1960)
[108]
Capitalism and Freedom (1962); Free to Choose (with Rose Friedman).
[109]
Diagnosis of our Time(1943)
[110]
Civilization and its Discontent
[111]
Taking Rights Seriously.
[112]
A Theory of Justice
[113]
AIR 1972 SC 1168
[114]
de Smith, Judicial Review of Administrative Action 4th
ed 94
[115]
[1981] 2 All ER 93 HL
[116]
[1981] 2 All ER 93 at 107
[117]
A I R 1982 S.C. at p.194
[118]
[14] ( 1931 ) A.C. 662 at 670
[119]
[15] A.K. Gopalan v. The State A I R 1950 SC 27 ; Basheshar
Nath’s Case A I R 1959 SC 149
(1985) 154 ITR 148 SC
(1981) 2 ALL ER 93 at 107 (H L)
[1984] 1 ALL ER 530
A. The whole set of Circulars 
B. A sub-set of Circulars, (the beneficial Circulars)
