Untitled Document

THE SUPREME COURT OF INDIA

(ORIGINAL CIVIL WRIT JURISDICTION)

Under Art 32 of the Constitution of India

Civil Writ Petition No of 2005

In the matter of:

SHIVA KANT JHA

A-320 SFS, Sarita Vihar

New Delhi-110 044 …. Petitioner

Vs.

1. UNION OF INDIA

Through The Secretary (Revenue)

North Block, New Delhi

2. Central Board of Direct Taxes

Through its Chairman

North Block, New Delhi

…. Respondents

WRIT PETITION UNDER ART. 32 OF THE CONSTITUTION OF INDIA

To

The Hon’ble Chief Justice of India and
And His companion Justices of the
Hon’ble Supreme Court of India

This humble Petitioner through this Writ Petition (PIL):

MOST RESPECTFULLY SHEWETH:

THE PRELUDE

1. That this humble Petitioner presents this Writ Petition under Article 32 of the Constitution of India seeking remedy against the breaches of the Articles 14, 19, and 21 of the Constitution. This remedy is sought against the Judgment, dated October 7, 2003, of the Division Bench of this Hon’ble Court (Coram: Hon’ble Justice Ruma Pal and Hon’ble Justice B.N. Srikrishna, JJ. ) [placed as ANNEX “A”] which allowed the Civil Appeal Nos 8161-62 of 2003 arising out of SLP ( C ) Nos. 20192-20193 of 2002 having the effect of setting aside the judgment and order of the Hon’ble Delhi High Court [ANNEX “B”]which had allowed Civil Writ Petition (PIL) No. 5646/2000 and Civil Writ Petition No. 2802/2000 having the effect of quashing the Circular No 789 dated 13th April 2000 issued by the Central Board of Direct Taxes in the light of the law declared by the Hon’ble High Court on a set of points of great constitutional importance, and public interest. In the impugned judgment the Division Bench of this Hon’ble Court held:

“In the result, we are of the view that Delhi High Court erred on all points in quashing the impugned circular. The judgment under appeal is set aside and it is held and declared that the circular No 789 dated 13.4. 2000 is valid and efficacious.”

An analysis of the points of law which the Hon’ble Delhi High Court declared are set forth in paras 11-12 infra for this Hon’ble Court’s convenient and easy comprehension. As the Hon’ble Division Bench held that the Hon’ble High Court “erred on all points”, no analysis of the impugned judgment is considered worthwhile as the impugned judgment specifically negates the propositions, which the Hon’ble Delhi High Court so pithily propounded in its judgment.

2. Aggrieved by the decision of this Hon’ble Court in the Civil Appeal Nos abovementioned, this Petitioner preferred a Review Petition, which was considered and dismissed in chamber by the Hon’ble Judges who had delivered the impugned judgment. Being convinced that the said Judgment caused gross miscarriage of justice, brought about serious distortions in law, and affected the administration of justice on account of obvious infractions of the rules of Natural Justice, and clear breach of appropriate jurisdictional norms this Petitioner moved a Curative Petition seeking remedy against the said judgment for reasons spelt out in the Grounds I-XVI of the Curative Petition. To ensure that justice does not languish, an application was made along with the Petition praying for an oral hearing for reasons set forth therein. The prayer was encored by moving a petition on Sept. 1,. 2004, when the Curative Petition appeared for the first time on the board. It was submitted that this Petitioner wanted to address this Hon’ble Court on the reach and ambit of the Curative Jurisdiction of this Hon’ble Court. But this Hon’ble Court was pleased to dismiss by its order dated December 08, 2004 the said Curative Petition after considering the Petition in the chamber: the Order passed in the Chamber runs as follows---

“We have carefully perused the contents of the curative petition as also the certificate given by the learned senior advocate filed with the petition. We are not satisfied that any ground has been made out for entertaining a curative petition within the parameters laid down by this Court in Rupa Ashok Hurra v. Ashok Hurra & Anr. 2002 (4) SCC 388. The curative petition is dismissed in limine.”

Some “Great Firsts” to the credit of this Writ Petition

3.That this humble Petitioner submits at the outset that a number of issues of greatest constitutional and national importance are raised for the first time in this Writ Petition:

(i) This Writ Petition contends, first the first time, that the decision of this Hon’ble Court in Rupa Ashok Hurra v. Ashok Hurra was made per incuriam, and requires a reconsideration so that this Petitioner’s fundamental rights guaranteed under the Constitution of India are effectively enforced.

(ii) ……..

(iii) …….

(iv) For the first time, a Superior Court in this wide world has held in this impugned Judgment that it has no power to provide a remedy against Fraud, and,at best, it merely makes a mere cri de Coeur to the Executive and Parliament to provide measures to eradicate this evil.

(v) For the first time in the civilized global jurisprudence, this Hon’ble Court has held the evil of Treaty-Shopping valid without showing any deference to the approaches shown by the superior courts in Britain, the U.S.A, Canada, France, Germany, and Switzerland et al.

(vi) For the first time in the recent years the Division Bench of this Hon’ble Court in the impugned Judgment not only departs from a decision of the Constitution Bench of this Hon’ble Court, but also provides it an indecent coup de grace with pejoratives like “hiccup” and “temporary turbulence”.

(vii) For the first time after the Stuarts, the impugned Judgment grants the Executive a Dispensing Power, and sustains per incuriam and per ignorantiam the proposition that the norm-creating act of the Executive can override the mandatory provisions of a Parliamentary enactment.

(viii) ……

(ix) For the first time in the world a judicial decision is founded on the opinion of the interested person.

(x) For the first time, a court relies for its central reasoning on a book by an author having no juristic credentials, and the book unworthy and unsound in many ways: a book like of which has not hitherto been relied in any of its judgments of this Hon’ble Court.

(xi) For the first time a Judgment has been delivered which reeks with gross breaches of the Rules of Natural Justice, and is conspicuous for certain acts patently without Jurisdiction.

(xii) For the first time in this case an issue of greatest constitutional importance, whether the Superior Courts are the organs of the State within he meaning of that term under Art. 12 of the Constitution, has been raised as a Principal issue for judicial consideration.

(xiii) For the first time, certain important principles of Public International Law have been ignored; and for the first time, a corporation, to the delight of the corporate imperium, is allowed to become an impervious cover-let of gross abuse, boding ill for our country.

(xiv) For the first time some of the prime issues thrown up by economic globalization have come up before this Hon’ble Court requiring creative judicial responses to the challenges emerging under the octopus-grip of all-embracing Globalization.

THIS WRIT PETITION’S RAISONS DE’ ETRE

The Purpose & the Scope

4. This Petitioner, bidden by his sense of national duty pro bono publico, moves this Writ Petition with utmost ubrimma fides, in order to submit:

(i) that the impugned Judgment fails in preventing the gross breach of Article 14 of the Constitution of India[1] as the validation of a classification inter se the Indian assesses (destined to swim and sink together for our country), and the tax-exempt/ non-taxed tax-haven residents (most of them bad faith masqueraders and poachers from the ‘third States’) is unfair; and the differentia having no rational relation to the object sought to be achieved by the Income-tax Act;[2] Besides, the impugned Judgment fails in preventing the operation of arbitrariness and unreasonableness, and forthis reason failed to ensure the triumph of the mandate of Art. 14 under what has come to be known as the New Doctrine of Art. 14 the quintessential logic of which is laconically stated by this Hon’ble Court in its profound statement that, “an action that is arbitrary , must necessarily involve negation of equality.[3]

(ii) That the impugned Judgment fails in preventing the gross breach of Article 14 ( New Doctrine) as it abounds in many arbitrary and unreasonable decisions having the gruesome effect of sustaining certain manifestly ultra vires acts, and other acts of administrative lawlessness.

(iii) that the impugned Judgment fails in preventing the gross breach of Article 19(1)(a) of the Constitution of India as by sustaining the Circular[4] No 789 of April 13, 2000 issued by the Central Board of Direct Taxes it has, in effect, ensured the operation of an opaque system having the inevitable effect of undermining the inalienable right of everyone to comment fairly upon any matter of public importance, a right considered one of the pillars of individual liberty--- FREEDOM OF SPEECH, which our courts have always unfailingly upheld recognizing the right to fair criticism of the public acts of the wielders of public power as an essential and unalienable birth-right of all citizens of the Republic of India. This right applies in no uncertain terms to the judgments of the courts as well as other topics of public importance.[5] [It frustrates the ] fundamental principle of accountability which is precisely stated by an expert: “In constitutional democracies, the accountability of the government officials to the citizenry makes possible the citizens’ responsibility for the acts of government.”[6]

(iv) that the impugned Judgment fails in preventing the gross breach of Article 21 of the Constitution of India as it has failed to protect the loot of our national resources by masquerades and fraudsters depleting our national resources essential to enable us to enjoy “the right to life” which at present stands denied to our common people even in such key-areas as education and health[7]. Through a sort of subversion of the polity, which “WE, the People” had given to ourselves, the parasitic predators, have subjugated the human right to life to the whims and vagaries of “sophisters, economists, and calculators”[8].

(v) that the impugned Judgment fails in providing effective remedy so that the forces detrimental to our Right to conserve Culture under Art. 29 does not get compromised.

(vi) that the impugned Judgment suffers from patent jurisdictional lapses, and is illustrative of serious instances of Substantive ultra vires (including what is ex facie per incuriam), Procedural ultra vires, and even Objective unreasonableness;

(vii) that this Hon’ble Court, under the terms of the Constitution, is competent and duty-bound to provide remedy against the braches of the aforementioned Fundamental Rights under Art 32 of the Constitution of India, and also under the imperatives of the constitutional oath so that now there cannot be a harking back to the view of the Attorney-General who addressing the court in the Five Knights’ Case ( one of the state trials of Stuart England ) for the Crown asked, “Shall any say, The King cannot do this? No, we may only say, He will not do this.”[9] It was precisely to ensure that in the American system one would be able to say, “The State cannot do this,” that the people enacted written Constitution containing basic limitations upon the powers of government[10]. And the same is the effect under our Constitution for reasons to be submitted in detail later.

(viii) The decision in Rupa’s Case[11] to the effect (a) that this Court is not within the scope of “State” as defined in Art 12 of the Constitution is patently per incuriam. This view was adopted on a “concession” made by the eminent counsels on both the sides without appreciating that the ‘concession’ was clearly per ignorantiam. The aforesaid judgment draws the frontiers of the doctrine of ex debito justititiae in unreasonably narrow protocol by its failure to recognize the premises and the corollaries of this doctrine so centrally innate and integral to the administration of justice. To the effect it mandated evaluation of the Curative Petition by Circulation in Chamber it prescribed a procedure which is arbitrary and unfair, especially in a case of the sort presented through the Curative Petition. Hence a re-look on Rupa’s Case is called for as this Hon’ble Court is committed to function as the supreme sentinel on the qui vive to protect the Constitution from onslaughts howsoever designed or dressed-up.

( vii ) …………

( viii )………..

THE CONTEXT AND THE PERSPECTIVE

5. That this Petitioner deems it appropriate to set forth with an extreme brevity the context which had led this Petitioner on a litigious odyssey which is now in its last stage in this Hon’ble apex Court. The synopsis of the Writ Petition filed before the Hon’ble Delhi High Court is quoted in extenso as it furnishes a concise statement of the cause of action so that the Petitioner’s case comes up in the round before this Hon’ble Court. The synopsis ran thus:

“1 Under the Income tax Act the general position is that all

assesses, whether resident or not, are chargeable in respect of income accruing , arising or received, or deemed to accrue or arise or to be received, in India; while residents alone are chargeable in respect of income which accrues or arises and is received outside India. This position often gives rise to Double Taxation of Income for avoiding which section 90 empowers the Central Government to enter into agreements for avoidance of double taxation.

2. In 1983 the Government of the Republic of India and the Government of Mauritius concluded a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment.

3. Indian economy was opened some time in 1991 for globalization and steps were taken to initiate process for adoption of free market economy. Relaxation of regulations and controls by the Indian Government on direct foreign investment into India took place in 1992. Guidelines for direct investment by foreign institutions investors (FIIs ) were announced.

4. Coevally Mauritius set up a legal regime the effect of which was to transform Mauritius into a tax haven. This was brought about mainly through the Mauritius Offshore Business Activities Act 1992, the Offshore Trusts Act 1992, and the International Companies Act 1994.

5. The Convention had been concluded, as is evident from its

preamble, “for the encouragement of mutual trade and investment”

in India and Mauritius. Some special benefits were given to Mauritius which is an island country in the Indian Ocean having population approximately 10,77,000. Its main export is sugar. The special benefits given to Mauritius were not initially considered to cause much fiscal injury. But once Mauritius became a tax haven the treaty shoppers from Canada. USA, Luxembourg and other western countries commenced the process of using the Mauritius route for investing in India solely to avoid the incidence of lawful tax. They set up conduit companies in Mauritius through which they made investments in the Indian Share Market. The most alluring provision was para 4 of Article 13 of the Indo-Mauritius Double Taxation Avoidance Convention. It provided that capital gains would be chargeable in case of a resident of Mauritius only in the country of his residence. And in Mauritius there is no Income tax on capital gains. By resorting to this device they avoided paying tax in utter breach of the object of the Indo-Mauritius Double Tax Avoidance Convention turning it into veritable rouge’s charter for causing wrongful gain to themselves and wrongful loss to India.

6. The Assessing Officers applied the settled law that the non-residents are liable to tax on income which accrues or arises to them in India. Benefits under Double Taxation Convention could be had only if the preconditions prescribed in the Convention are met. One of the pre-conditions is that the claimant of benefit must be a resident within the meaning of this term as defined in Para 1 of Article 4 of the Convention. The Assessing Officers discharged their public duties of

exploring the operative realities of such interlopers so that correct assessment of tax could be made under the Indian tax Law. They did their statutory duties of investigating the matrix of facts in a given case to determine whether a company seeking benefits under the Convention was really a Mauritian resident and was, besides, a beneficial owner of income.

7. The Central Government concluded the Convention with Mauritius in exercise of power under section 90 of the Income Tax Act. This treaty is not made in exercise of the general executive power under Article 73 of the Constitution of India but is made under section 90 of the aforementioned statute which prescribes rigid frontiers for exercising powers for concluding agreements for Avoidance of Double Taxation. In the matter of Indo-Mauritius Double Tax Avoidance Convention the Central Government failed in discharging its public duties to initiate a process for the revision , supersession , rescission or modification of the treaty when the fundamental change in circumstances undermined the consensus ad idem between the High Contracting Parties; and there emerged in India’s favour a case on the principle of clausula rebus sic stantibus. This was a mandatory duty emanating from section 90 of the Income Tax Act. Secondly, the Central Government failed in its legal duty to ensure that the agencies under it ensure that the Convention operates within its legitimate province, and its terms are not abused for extrinsic purposes. This duty rests on the Central Government on account of the combined

operation of Article 265 of the Constitution of India and Section 90 of the Income Tax Act. Thirdly, the Central Government failed in its public duty to ensure that the Central Board of Direct Taxes acted in accordance with law rather than in a patent breach of it by issuing Circular No. 789 which is wrong on the counts of illegality and unreasonableness. This duty lay on the Central Government as under the Central Boards of Revenue Act, 1963 the Board is subject to the control of the Central Government and is authorized to exercise such powers and perform such duties as may be entrusted to it by the Central Government or under any law. As the modern case law recognizes a legal duty owed by the Government to the general body of the taxpayers, and as the duties imposed upon the Central Board of Direct Taxes are in the interest of the general body of the taxpayers to see what the true assessment ought to be, and as an assessment proceeding under the Income-tax law (a species of Public Law) is, as Lord Hewart puts it in Rex v. Special Comrs(20 T C 381,384), “a public process directed to public ends”, Central Government failed in discharging its public duties under the law so that no wrongful loss is caused to the Revenue and ,as its inevitable consequence, to our country.

8. The Central Board of Direct Taxes issued a Circular under 789 dated April 13, 2000 the subject of which runs as under : “Clarification regarding taxation of income form dividends and capital gains under the Indo-Mauritius Double Taxation Avoidance Convention (DTAC)”. Though the source of power under which the impugned Circular was issued is not mentioned in the Circular it is reasonably possible to infer that the Circular is in exercise of powers under section 119 of the

Income tax Act. The effect of the Circular can be summarised in the following propositions :

(i) Incorporation makes, per se, a company an entity “liable to tax” under the Mauritius treaty law and “therefore to be considered as resident of Mauritius in accordance with the DTAC”.(para 1 of the Circular)

(ii) Certain doubts raised regarding the taxation of dividends in the hands of investors from Mauritius needed clarification. (para 2 of the Circular)

(iii) A Certificate of Residence issued by the Mauritian Authorities
“will constitute sufficient evidence for accepting the status of residence. (the last sentence of the para 2 of the Circular)

(iv) A Certificate of Residence issued by the Mauritian Authorities “will constitute sufficient evidence for accepting ….beneficial ownership for applying the DTAC.” (the last sentence of the para 2 of the Circular)

(v) The “FIIs etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13”. (para 3 of the Circular)

(vi) The circular “shall apply to all proceedings which are pending at various levels.” (para 4 of the Circular)

9. As to (i) supra, the Central Board of Direct Taxes went wrong in construing the concept of residence as it failed to take into account the special definition of residence set fort in para 1 of the Article 4 of the Convention. As to (ii) supra, doubts were unfounded and were sought to be merely created to justify intervention in statutory functioning of the assessing officers under the Income Tax Act. As to (iii) supra, the instruction subverts the statutory role of the assessing officers the prime function of which is the exploration of facts to ascertain operative realities by foreclosing the statutory pursuits by mandating the Assessing and the Appellate Authorities to treat the Certificate of Residence issued in Mauritius as a conclusive proof of the factum of residence thereby making a trespass on legislative field. As to (iv) supra, the statutory pursuits of statutory authorities to discover the beneficial owner or the real persons liable to tax on income is being stopped by deeming the Certificate of Residence so granted as a conclusive proof of beneficial ownership. This instruction violates fundamental principles of the Income- tax jurisprudence and is a blatant encroachment on legislative field. As to (v) supra, the Board’s Circular tends to promote interests which are extrinsic to the purpose for which powers are conferred on this statutory body entrusted only with powers of management and administration under section 119 of the Income Tax Act.

Over these several years many Assessment Orders were passed by the Income tax Authorities under sections 143 and 144 of the Income tax Act, and in several cases proceedings for conduct of inquiry and investigation have already been set afoot. The Circular No. 789 attempts to invalidate them by mandating the Income tax Authorities to follow certain instructions contained therein which are illegal, without jurisdiction and capable of producing serious injury to the Nation’s Public Resources.

The Circular No 789 has shown discriminatory leniency to certain persons for ulterior reasons extraneous to good management, and thereby deprived the national exchequer of considerable sums of money which could have available for promoting matters of public interest which our overheated economy committed to the ideals of the Welfare State needs so imperatively, so urgently for the weal of the We, the People of India. Besides, the impugned Circular violates Article 14 and Article 265 of the Constitution and transgresses other Constitutional limitations.”

An Essential extraversion:

6. As the cause of action emanated from the operation of the Indo-Mauritius Double Taxation Avoidance Convention (hereinafter referred as DTAC, or as Agreement), this Petitioner thinks that a short profile of facts describing the transformation of Mauritius into a tax-haven under a new legal regime, characteristic of all tax havens, would help this Hon’ble Court comprehend the issues of facts and law better as the issues would acquire ‘a local habitation and name.’[12] As overstuffing of this Petition with such details may be mere distracting extraversion, this Petitioner appends his article entitled “Mauritius turns into a tax haven” (marked ANNEX “D” ) . The facts set forth in the said paper constitute the integral part of the very gestalt giving rise to the cause of action of this Writ Petition.

6. That the Petitioner feels that globalization has spawned a new style of corruption. Before it whatever was earned from improper sources was mostly kept in the country itself. But because of mass communication , information technology and closer interactions in matters of commercial dealings, the fruits of corruption are gathered more often outside the territorial jurisdiction of India then India. The FIIs, the MNCs, and the OBCs, through their rich band of lobbyists provide a very stable system to indulge in corrupt practice on global basis. The country’s vigilance agencies have become anachronistic and outdated. The profile of the political structure of the world would show that it consists of sovereign States at different levels of political integration, socio-economic attainment, socio-political morality and culture. The countries less endowed with resources are ironically more prone to assertion on the plea of their sovereignty many of them tried in varying measure to turn their countries into spheres of darkness where the possessors of the ill-gotten wealth can find best places to keep un-noticed by those who are swindled or whose duty it is to bring the criminals to book. The modern technological advancement, specially in the field of information technology has broken all barriers in transmission of information, and has opened up the limitless possibilities to evade law and to amass wealth shrouded in secrecy. Now the global interactions have opened up infinite possibilities for restructuring global economy. In this restructuring the voice of common people world over is very low; the voice of the common people in the developing countries is evidently virtually mute. The powerful players emerge as the key-operators in global economic structure. They build their power centres. As financial providers they control the sinews of many governments. The promote their policies through an intricate, deceptive but accurately efficacious system of patronage whereby a powerful constituency of supporters is created amongst the senior bureaucrats and politicians. Hired intellectuals and the shady lobbyists mushroom to convince more and more persons who matter that globalization, and whatever goes by it, alone can do good for the society. Modern communication technology has made it possible to generate a new breed of money, the transmission of which is instantaneously global. Chances of detection of crimes in financial dealings have become so remote as to make it impossible to insure punishment, not to say quick punishment. Communications are so fast on our earth and in the space that ill-gotten wealth can quickly move to the tax havens and many other destinations where nothing matters except financial gains. This is an emerging world where the vigilance machinery would become substantially redundant because the payments for remissness would be made at remote places far from the jurisdiction of the States where they work.

7. That this Petitioner’s study led him to believe that the adoption of the OECD Model for entering into a tax treaty with Mauritius was improper. The abuse of this tax treaty is proved by facts widely known for years. Facts showing the misuse of the treaty were in the knowledge of persons who mattered, yet almost over two decades nothing was done to stop this gross illegality by which the public revenue of our country was systematically marauded. Let not an impression be formed that this was the only tax treaty, which was misused. This is being highlighted because somehow more facts have come out in public domain. But this illustrative lapse should be taken seriously as even a tiny aperture can give a view of what ails our system of governance. We have tolerated this loot through the Mauritius route for almost two decades. It is strange that over such a long period no government in power reacted to it. It is said that our government suffered, in early eighties of the last century, from an acute and growing balance of payment problem; and was striving, with no holds barred, for improving its balance of payment position. There was an industrial slow down causing much worry. In the Budget for 1982 the investment rules in the share- market were relaxed in favour of the non-residents Indians, or companies and trusts. The rules provided that they could invest directly in India and could repatriate their funds from India with ease. Our government was not unaware of the misuse of the routes through tax havens[13] Hamish McDonald in his book The Polyester Prince gives a graphic account of the miuse of a taxhaven route which took place in 1982. It is further seen that there is not much difference between the strategy and protocol adopted in 1982 and those adopted after 1995, more so by those who misused the Indo-Mauritius Double Taxation Avoidance Convention.In fact, all the craftsmen of scams and scandals structure their plots more or less in the identical format.

8. That the facts and submissions in the preceding paragraph are meant merely to highlight two points of importance relevant to the issues raised in this Writ Petition: (i) the protocol and the strategy of the abuse of a tax treaty through a tax haven route were known to the persons in power as early as 1982,(ii) the plot of deception crafted in early eighties of the last century was virtually used as a model for the unscrupulous after opening up of India’s economy after 1991. India’s contacts with Mauritius were deep and wide. In the general election of 1982 Aneerood Jugnauth became the Prime Minister and Paul Berenger was made the Minister of Finance. In August 1982 Prime Minister Mrs. Indira Gandhi visited Mauritius. She supported its claim over the Chagos Archipelago. The Indo-Mauritius DTAC was negotiated in August 1982 though the Government of India notified it giving domestic effect. in 1983. Both India and Mauritius had reasons to adopt the OECD Model of tax treaty. The obvious reason was that both the countries were facing balance of payments crisis. Mauritian economy was under severe economic constraints. “For its size, Mauritius was one of the world’s most indebted nations, with debts amounting to ê432 million in March”. [14] The lobbyists, the politicians and the bureaucrats had, perhaps, their reasons to misuse the Agreement. What was a trickle in the early eighties became a flood in the nineties. And after the wholesale opening up of our economy, and the commencement of the process of economic globalization, the treaty shoppers made the Agreement a veritable rouge’s charter. This Petitioner would submit later that that our Government adopted the OECD Model of the tax treaty without caring for the fact that this model did not conform to the provisions of our Constitution and the Income-tax Act, 1961.Such derelictions are natural if affairs are not under the sunshine.

9. That after 1994 the Income-tax Department kept on drumming into the ears of the Central Government that the Indo-Mauritius route was being abused under the colour of the tax treaty but nothing was done to prevent it. India has a strong diplomatic mission in Mauritius. It was the imperative role of the mission to take note of the following events and report about them to the government of India along with careful analysis and evaluation of such events from the point of view of India’s national interests. The Indo-Mauritius DTAC was negotiated in 1982. By 1992 Mauritius was all out to establish a legal regime by enacting several laws to transform herself into a tax haven. The Indo-Mauritius DTAC was founded on a profile of facts which underwent a sea change. The change brought about through the laws newly enacted, and the administrative style shaped by push and pressure of tax haven culture was so fundamental that the Government of India was duty bound to consider them to see if the consensus ad idem which produced the Convention was still operative: if not, whether some action was called for in view of the material changes in circumstances.

It was the duty of the diplomatic mission to take not of the misuse of the Indo-Mauritius DTAC by those not entitled to the benefits under the bilateral tax treaty[15]. The abuse was so flagrant, so staring, and so massive that not taking note of such things was an evident dereliction of duty.

10. That this humble Petitioner took note of the fact that our Supreme Court in in S. P Gupta & Ors.v. President of India & Ors[16] approved the ringing words of Lord Diplock in Inland Revenue Comrs v National Federation of Self- Employed and Small Businesses Ltd[17]:

"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 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 action 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."

and drew light from the words of Jefferson[18] and of Walt Lippman[19] to structure a Writ Petition on the pattern of Inland Revenue Comrs v National Federation of Self- Employed and Small Businesses Ltd seeking a sort of certiorified mandamus and declaration on points of law from the Hon’ble High Court which allowed the whole of the Writ Petition with an appreciation in its penultimate para of the Judgment[20] which this Petitioner accepted on behalf of the common people of this Republic. This Petitioner felt it his national duty as he was aware of the limitations of the government in dealing with the raw realities of onrushing economic globaliztion. Geza Feketeluty has aptly noted:

“Clearly, the reality of globalization has outstripped the ability of the world population to understand its implications and the ability of governments up cope with its consequences. At the same time, the ceding of economic power to global actors and international institutions has outstripped the development of appropriate global political structures.”[21]

And after examining India’s socio-political plight and the role of our Government Lord Meghnad J. Desai[22] aptly observed:

“The hope of India lies not in its politicians but in its citizens. They have to take their own future in hand and order shape.”[23]

Hence this PIL.

The Judgment by the Hon’ble Delhi High Court:

11.That the Hon’ble Delhi High Court in Shiva Kant Jha & Anr v. Union of India (C.W.P. NO. 5646 OF 2000: date of decision: 31st May 2002)[24] held that the Indo-Mauritius Avoidance of Double Taxation Convention was abused on a massive scale. The prime issues, which were considered and decided by the Hon’ble High Court, were:

(a) The source, nature and ambit of the Treaty-making power both in its generic sense as an exercise of “inherent sovereign power” under Art 73 of the Constitution of India, and in its specific sense of an Agreement done for avoidance of double taxation under Section 90 of the Income-tax Act,1961.

(b) The meaning of the terms of the Section 90 of the Income-tax Act,1961; and their relevance in construing the meaning of the relevant terms of the Indo-Mauritius Double Taxation Avoidance Convention.

(c) Whether it is legally permissible to exercise statutory powers under Sections 90 and 119, for the promotion of economic policies of the government, especially for inviting more and more foreign exchange and FDI investments.

(d) Whether the terms of the Indo-Mauritius DTAC can override the provisions of the statute.

(e) The proper scope of the Personal Scope of the DTAC. Whether the residents of the third States, masquerading as the Mauritian residents, can poach into the benefits of a bilateral treaty not meant for them: in short, whether Treaty- shopping is in accordance with law and public policy.

(f) The proper judicial role in the unravelment of fraud; and the proper judicial approach in adopting/evolving judicial norms for preventing the abuse of the DTAC can be prevented.

(g) Whether the CBDT Circular 789 dated 13.4.2000 is ultra vires the powers of the CBDT under the Income-tax Act, 1961. The nature and ambit of the power of the Central Board of Direct Taxes in issuing circulars under Section 119 of the Income-tax Act, 1961.

The following clusters of propositions of law emerged from the Delhi High Court’s said Judgment:

(I) The instructions issued by the CBDT must not be ultra vires.

(a) In order to be legally binding on the Revenue the circulars conveying instructions must be validly issued under section 119 of the Income tax Act.

(b) Where a circular is considered to have been issued by the CBDT in terms of section 119 of the Income Tax Act, the Central Government can neither supplement the reasons contained in the circular nor explain the same by affidavit, or otherwise

(c) The power of CBDT to issue instructions to subordinate authorities is limited. Such instructions can be issued for proper administration of the provisions of the Income-tax Act, and not otherwise. The CBDT cannot issue instructions that could be de’hors the provisions of the Income-tax Act.

(d) Under section 119 of the Income-tax Act the CBDT has a delegated power to be exercised within the four corners of the delegated authority[25]

(e) Through such circulars neither the essential legislative function can be delegated, nor arbitrary or naked power can be conferred..[26]

(f) The government, much less the CBDT, cannot, through an international treaty, lay down a procedure or evidentiary value of document, which would be de hors, the provisions of the Income-tax Act.[27].

(g) A statutory authority, must act within the four corners of the statute. [28]

II . The nature of the jurisdiction of the Assessing Officers.

(a) The function of an assessing officer is quasi-judicial in nature.

(b) It is now trite law that by reason of any power conferred upon any statutory authority to issue any circular, the jurisdiction of a quasi-judicial authority in relation thereto can [not] be taken away. Orient Paper Mills Ltd. V. Union Of India [29]; Sirpur Paper Mills Ltd v. CWT. Hyderabad[30]; Orient Paper Mills Ltd. V. Union Of India [31]; S.R. Chaudhary v. State of Punjab and Others [32]; Kishan Prakash Sharma v. Union of India[33]: followed.

(c) ‘Passing of an appropriate order of assessment is primary duty of the assessing officer which would include [detection of] conscious evasion of tax by an assessee. Such a function, which is judicial in nature, can be regulated but cannot altogether be prohibited.”

III. The jurisdiction of the Assessing Officers under the Income-tax Act.

(a) As passing of assessment order is the primary duty of the Assessing Officer. He has the competence to conduct investigation into conscious evasion of tax. “The statutory power of the Assessing authority cannot be taken away by reason of the impugned circular.”

(b) The Assessing officers’ function is judicial in nature, which “ can be regulated but cannot altogether be prohibited.

(c) A mere production of a purported residential certificate issued by an authority which makes the authorities put off their hands the circular could be ultra vires.

IV. Certificate of Residence

(a) Conclusiveness of a certificate of residence granted by the Mauritius tax authorities is not contemplated under the treaty or under the Income-tax Act.

(b) Whether a statement shall be conclusive or not must be provided for under a legislative act e.g. Indian Evidence Act.

V. The authorities have jurisdiction to lift the corporate veil to observe the operative realities

In a given case the assessing officer is entitled to lift the corporate veil for the purpose of finding out as to whether the purpose of the corporate veil is avoidance of tax or not. New Horizons Ltd v. UOI[34] ; Life Insurance Corporation v. Escorts and Others[35] cited.

VI. The tax treaty must conform to section 90 of the Income-tax Act, 1961.

(a) The formation of a tax treaty as a matter of political arrangement could not run “counter to the provisions of section 90 of the Income Tax Act.” [36]

(b) “The validity of the impugned circular is to be judged having regard to the limitations contained in section 90 of the income tax Act and not other wise.”

(c) Section 90 of the Income Tax Act does not confer an unguided or unbridled power. As the purpose of entering into a tax treaty is avoidance of double taxation the power in terms of section 90 is to be considered having regard to that.

(d) “A treaty which is entered into in terms of Article 73 of the Constitution of India the political expediency may have a role to play but not when the same is done under a statutory provisions.”

VII. The meaning of avoidance of double taxation.

(a) The expression double taxation has a definite and precise meaning[37]

(b) Income in fiscal legislative practice has a specific meaning and the avoidance of double taxation is a term of art.

(c) “Avoidance of double taxation would mean that a person has to pay tax at least in one country.”

(d) Section 90 talks of income generally. However, income in fiscal legislative practices has a specific meaning and the avoidance of double taxation is “however a term of art.”

(e) An assessee cannot be held to be entitled to take benefit of the treaty although it neither pays income tax in India nor in Mauritius. Such an action would be ultra vires.”

VIII. TREATY SHOPPING IS HELD ILLEGAL.

(a) “An abuse of the treaty or Treaty Shopping is illegal and thus necessarily forbidden.”

(b) The Indo- Mauritius Avoidance of Double Taxation Convention was entered into between the Government of the Republic of India and the Government of Mauritius for avoidance of double taxation and the prevention of fiscal evasion with regard to tax on income and capital gains and for encouragement of mutual trade and investment.

(c) “Treaty Shopping which amounts to abuse of the Indo-Mauritius Bilateral treaty may amount to fraudulent practice and cannot be encouraged.”[38]

(d) The company although had obtained residential certificate in Mauritius but had nothing to do therewith and factually. It got itself registered only for the purpose of tax avoidance so as to obtain benefit of the treaty.

(e) “ No law encourages opaque system to prevail.”

IX. Judicial attitudes to tax avoidance.

(a) The judicial attitude towards tax avoidance has undergone change as is evident from the decision of the Supreme Court in., McDowell & Co Ltd. V. CTO[39]; Inspector of Taxes v. Dawson[40]; cited

(b) The Hon’ble Court adopted functional and purposive approach.[41]

X. Remedy at the governmental level is not contemplated.

The suggestion to the effect that in such cases (of tax frauds) the attention of the Central Government can be drawn and the matter can be taken up at the government level is not contemplated in the statute. No law encourages opaque system to prevail.”

12.That towards the end of the judgment (the third paragraph from the end) the Court

observed: “Be it recorded that counsel for the parties have argued before us at great length and raised before us a large number of questions which have been noticed hereinbefore to but keeping in view the fact that only an interpretation of the statute vis-à-vis the impugned circular. We are of the opinion that we need not go further and leave the other contentions for being determined in an appropriate case.” (emphasis supplied)

The technique that the Court adopted is to ascertain the vires of the impugned Circular issued by the CBDT. Developing the ultra vires rule Hood Phillips explains how the examination of vires can be effectively done through the technique of interpretation. He observes: [42]

“As regards the innumerable statutory powers, the question is one of interpretation of the statute concerned. The acts of a competent authority must fall within the four corners of the powers given by the legislature.[43] The court must examine the nature, objects and scheme of the legislation, and in the light of that examination must consider what is the exact area over which powers are given by the section under which the competent authority purports to act.”[44]

And Lord Hoffmann in leading decisions of the House of Lords states with remarkable terseness:

“There is ultimately only on principle of construction, namely to ascertain what Parliament meant by using the language of the statute. All other principles of construction’ can be no more than guides which past judges have put forward, some more helpful or insightful than others, to assist in the task of interpretation.”[45]

The High Court construed the provisions of the Income tax Act, especially sections 119 and 90, and evaluated the impugned Circular[46]. The Court declared certain vital points of law, and held the impugned Circular bad as it is violated them. It is also possible to say that the Court held the impugned Circular ultra vires the powers of the CBDT as it was not a proper exercise of administrative and managerial power. It prevented the statutory authorities in due discharge of public duties by issuing instructions trespassing on the legislative field. It created an opaque system under which Treaty Shopping could flourish causing unjust enrichment and wrongful gains to the Treaty-shoppers and their mentors, and causing wrongful loss to the people of India. The CBDT Circular mandated an opaque system by creating administratively two conclusive presumptions, which completely restrained the statutory quasi-judicial authorities to explore the operative realities in a given case to see whether claims for benefits were in order. The object of this Circular was, admittedly, to help the FIIs, and the MNCs operating through the Mauritius route who through stealth and stratagem intended to take advantage of the bilateral tax treaty for mutual benefit between India and Mauritius .

The Structure Of This Writ Petition

13.That this Writ Petition is structured in the following parts:

(i) Part I deals with this Hon’ble Court’s decision in Rupa Ashok Hurra v. Ashok Hurra which, it is submitted, is fundamentally erroneous, hence needs a judicial re-look.

(ii) Part II contains submissions on the serious breaches of the Fundamental Rights conferred under Articles 14, of the Constitution of India both under its New Doctrine & Old Doctrine

\ (iii) ………..

(iii) ………….

(iv) Part V deals with the Petitioner submissions on the Right Perception of Judicial Role as the judicial narrowing of role in the impugned Judgment has resulted in a serious miscarriage of justice.

(vi) Part VI deals with GROUNDS and PRAYERS.

14. That this Petitioner deems it proper not to make the Global Business Institute Limited, (Jurist Consult Chambers, Cathedral Square, Port Louis, Mauritius), which was a co-Appellant before this Hon’ble Court in the proceeding which culminated in the impugned Judgment, a necessary party to this Writ Petition as this Petitioner does not consider it necessary to do so. In case this Hon’ble Court issues a notice on this Petition, or directs a specific compliance of any sort, this Petitioner, as duty bound, would serve a copy of this Writ Petition on the aforementioned Mauritian company.

PART I

JUSTICE DEMANDS A RE-LOOK ON Rupa’s Case[47]

An Examination of issues under broad spectrum.

15. That in this segment of this Writ Petition dealing with Rupa Ashok Hurra v. Ashok Hurra this Petitioner intends to submits:

(i) that this Hon’ble Court has decided per incuriam, on the concession by the counsels for the Appellants and the Respondents given per ignorantiam, the great constitutional question which this Hon’ble Court formulated in the following words:

“…. whether an aggrieved person is entitled to any relief against a final judgment/order of this Court, after dismissal of review petition, either under Article 32 of the Constitution or otherwise.”

(ii) that this Hon’ble Court has decided per incuriam that “ the superior Courts of justice do not fall within the ambit of “State” or “other authorities” under Article 12 of the Constitution” hence “ a final judgment/order passed by this Court cannot be assailed in an application under Art. 32 of the Constitution of India by an aggrieved

person whether he was a party to the case or not.”

(iii) that the parameters of the doctrine of Doctrine of ex debito justitiae and its essential normative corollaries were drawn up so narrowly that the cause of justice has suffered. The judicial narrowing deserves to be rectified at the earliest.

[A] Whether the judiciary is an organ of the “State”.

16. That Rupa Ashok Hurra v. Ashok Hurra this Hon’ble Court formulated the prime question with a prefatory comment as to its importance: to quote—

“In these cases the following question of constitutional law of considerable significance arises for consideration: whether an aggrieved person is entitled to any relief against a final judgment/order of this Court, after dismissal of review petition, either under Article 32 of the Constitution or otherwise.”

17. This Hon’ble Court explored the issue widely, and stated its reasons with remarkable articulation and precision thus:

“ Having carefully examined the historical background and the very nature of writ jurisdiction, which is a supervisory jurisdiction over inferior Courts/Tribunals, in our view, on principle a writ of certiorari cannot be issued to co-ordinate Courts and a fortiori to superior Courts. Thus, it follows that a High Court cannot issue a writ to another High Court; nor can one Bench of a High Court issue a writ to a different Bench of the same High Court; much less can writ jurisdiction of a High Court be invoked to seek issuance of a writ of certiorari to the Supreme Court. Though, the judgments/orders of High Courts are liable to be corrected by the Supreme Court in its appellate jurisdiction under Articles 132, 133 and 134 as well as under Article 136 of the Constitution, the High Courts are not constituted as inferior Courts in our constitutional scheme. Therefore, the Supreme Court would not issue a writ under Article 32 to a High Court. Further, neither a smaller Bench nor a larger Bench of the Supreme Court can issue a writ under Article 32 of the Constitution to any other Bench of the Supreme Court. It is pointed above that Article 32 can be invoked only for the purpose of enforcing the fundamental rights conferred in Part III and it is a settled position in law that no judicial order passed by any superior Court in judicial proceedings can be said to violate any of the fundamental rights enshrined in Part III. It may further be noted that the superior Courts of justice do not also fall within the ambit of State or other authorities under Article 12 of the Constitution.”

After analyzing Naresh Shridhar Mirajkar and Ors. v. State of Maharashtra and Anr. [AIR 1967 SC 1]; A. R. Antulay v. R. S. Nayak and Anr. [AIR 1988 SC 1531]; Smt. Triveniben v. State of Gujarat (1989 (1) SCC 678), and after referring to Krishna Swami v. Union of India and others (1992 (4) SCC 605); Mohd. Aslam v. Union of India (1996 (2) SCC 749); Khoday Distilleries Ltd. and another v. Registrar General, Supreme Court of India (1996 (3) SCC 114); Gurbachan Singh and another v. Union of India and another (1996 (3) SCC 117); Babu Singh Bains and others v. Union of India and others (1996 (6) SCC 565) and P. Ashokan v. Union of India and another (1998 (3) SCC 56). AIR 1988 SC 1531 : 1988 Cri LJ 1661, and after distinguishing Supreme Court Bar Association v. Union of India and another (1998 (4) SCC 409), and M. S. Ahlwat v. State of Haryana and another (2000 (1) SCC 278), this Hon’ble Court held:

“ On the analysis of the ratio laid down in the aforementioned cases, we reaffirm our considered view that a final judgment/order passed by this Court cannot be assailed in an application under Art. 32 of the Constitution of India by an aggrieved person whether he was a party to the case or not.”

18. This Hon’ble Court upheld that a writ of certiorari under Art. 32 can not lie to challenge an earlier final judgment of this Court. This Hon’ble Court seems to have drawn support for its view also from the fact that the Supreme Court and the High Courts are “superior courts “ and “the court of records”.

19. That the view taken in Rupa’s Case is, it is submitted, per incuriam for reasons for the following reasons:

(i) first, it is so with reference to the constitutional principles; and

(j) second, it is so on authorities and precedents.

Both on principles and on precedents have led this Petitioner to a considered view that Rupa’s Case needs a re-look pro bono publico. Reasons which have led this Petitioner to tht view are set forth with reasonable brevity in the paragraphs from 20 to 52..

20. That the following observation of this Hon’ble Court in the Rupa’s Case is clearly a constitutional solecism ex facie detrimental to public interest:

“It may further be noted that the superior Courts of justice do not also fall within the ambit of State or other authorities under Article 12 of the Constitution.”

21. The plain language of Art. 12 of the Constitution shows that the judiciary is an essential organ of the State within the sweep of the definition of that term. The Art. uses the expression “includes”, not “comprises”[48]. The definition is ‘inclusive’, not ‘expansive’. Art 12 of the Constitution defining “the State” makes even this inclusive definition subject to the context: it says: “In this Part, unless the context otherwise requires…..”. Glanville Williams, explaining the concept of ‘context’, says:

“It is, nevertheless, difficult to reconcile the literal rule with the “context” rule. We understand the meaning of words from their context, and in ordinary life the context includes not only other words used at the same time but the whole human or social situation in which the words are used.”[49]

22. It is submitted that viewed in socio-political perspective there are good reasons for mentioning specifically “Parliament” or “Legislature”; but for not mentioning “Judiciary.” Under the British Constitution Judiciary was always considered as integral part of the government, but Legislature, in its modern sense, was for long not a part of the government. No State can exist without a government but in most part of history government has functioned in many political societies without a formal Legislature. A political society, to say on the evidence of history, can organize itself through social norms and customs. But it has never survived without a government. Judicial power always inhered in the governmental authority. It is its structure and the operative protocol that changed in the different phases of the constitutional history. In his “The Law of Free Monarchies”, James I held that judiciary and executive powers inhered in the King who was God’s vice-regent on the earth.. Even if considered an agent of the State, the despot could assert “L’Etat, c’est moi”. With the emergence of the constitutional government, whether under the sporadic charters and under conventions, as in England; or through a written constitution with a constitutional architecture divided into organs conceived and concretized on functional principles, as in the United States and India, ideas and institutions underwent a radical change. Even under the modern constitutional history of England the Sovereign is the fountain of justice and the general conservator of peace of the realm. “In the contemplation of the law the Sovereign is always present in the court….”[50] The American Constitution, which provided us with a model of a written constitution with fundamental rights, was drawn up as a sub-conscious response to the Attorney-General’s plea in the famous Five Knights Case. “Addressing the court in the Five Knights’ Case (one of the state trials of Stuart England), the Attorney-General, arguing for the Crown, asked, “Shall any say, The King cannot do this? No, we may only say, He will not do this.”[51] It was precisely to insure that in the American system one would be able to say, “The State cannot do this,” that the people enacted a written Constitution containing basic limitations upon the powers of government.”[52]. The makers of our Constitution, with the past in their mind, had every reason to refer to Parliament or the Legislature in Art. 12, but there was no essential reason to refer to the ‘judiciary’ in the definition when it was “inclusive”, and when the other constitutional provisions provided no scope for any other perception. Under the zeitgeist which shaped these ideas of our constitution-makers the traditional governmental functions had become transformed into the functions of the State[53] which, to say the obvious, included the administration of justice. The position of “local authorities” is different as these have emerged in response to the political realities at grass roots of a democratic society.

23.This Hon’ble Court’s observation that “ the superior Courts of justice do not also fall within the ambit of State or other authorities under Article 12 of the Constitution” is a mere judicial ipse dixit as this view, it is submitted, is unsustainable both on constitutional principles and authorities. This Hon’ble Court would have got a right answer if a right question would have been framed. The right question is “whether the Judiciary is “the State” as defined in Art. 12?” If it is so, it must conform, ipso jure, to fundamental right conferred by Part III of our Constitution. Dr D.D. Basu has rightly stated[54]:

“The assumption that even when the fundamental right of an individual is affected by a judicial decision, the nly remedy of the aggrieve party is by way of appeal ignores the patent fact that Art 32 is an overriding and additional constitutional remedy which takes no account of appeal or other remedies, even though appeal to the Supreme Court has been separately provided for. The right to move the Supreme Court for the enforcement of a fundamental right is guaranteed by Art. 32……..But an appeal under Art. 136 is by special leave which is in the discretion of the Court and which cannot, therefore, be a substitute of the ‘guaranteed’

remedy under Art. 32. It is nowhere laid down in the

Constitution that Art will exclude Art 32. 136.[55]

The reasons which Dr Basu has stated make out a good case for invoking remedy under Article 32 of the Constitution even after exhausting remedies available under Art. 136 of the Constitution. This is so because the proceedings under Art 32 and those under Art 136 materially differ on certain vital points: to state a few with utmost brevity:

(i) Art. 32 of the Constitution confers a guaranteed fundamental remedy but Art 136 or Art. 226 confers no such right., This state of affairs makes Art 32 a dominant provision whereas Art 136 or Art. 226 are, in the context of the enforcement of the fundamental rights, clearly subordinate.

(ii) Dr Ambedkar who was at the most conscious point in the process of our constitution-making, described Art 32 of the Constitution as “the very soul and the very heart of the Constitution. Art 136 which provides a discretionary remedy cannot be elevated to the point to be considered the very soul of the Constitution. The soul of the Constitution cannot be at the discretion of anybody, not even of the guardian of the Constitution or its acknowledged upholder.

(iii) The power of Judicial review is derived from Art 32 of the Constitution. Our superior courts have considered Judicial Review a basic feature of the Constitution As such even Parliament cannot curtail the reach of Article even by exercising its constituent power.

(iv) Dr Basu has aptly observed: “It is nowhere laid down in the Constitution that Art 32 will be excluded by Art. 136.” No exclusion can be created as such an exercise would be manifestly without jurisdiction.

(v) The Judiciary wields no constituent power to amend the Constitution as contemplated under Art. 368 of the Constitution. It is not permissible for the Supreme Court to bring about in any form a legal position which has the effect of amending Art 32: turning it into something of this sort:

Art. 32 Remedies for enforcement of fundamental rights conferred by this Part.----The right to move the Supreme Court by appropriate proceedings for the enforcement of the rights conferred by this Part is guan teed; however, the Supreme Court will not enforce that right if the petitioner under Art. 32(1) has availed of remedy provided under Art 137 or that granted under the judicially devised Curative Procedure.”

The correct constitutional perspective, which can lead to a correct answer to the question under consideration, is stated by H M Seervai in his Constitutional Law of India in these words[56]:

“We must now consider whether the Judiciary is “the State” as defined in Art. 12, because if it is, it must conform to fundamental right conferred by Part III of our Constitution. Article 14 (Right to Equality) provides: “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.” In our Constitution, he italicized words have been borrowed from the 14th Amendment to the U.S. Constitution, which provides: “Nor shall any State…deny to any person within its jurisdiction the equal protection of the laws.” As will appear hereafter [Chapter IX ] Art. 14 is one Article in which our Courts have drawn most heavily on the decisions of the U.S. Sup. Ct., and the whole doctrine of “classification”, evolved by the U.S. Sup. Ct. has very rightly been adopted by our Courts. In the United States, it is well settled that the judiciary is within the prohibition of the 14th Amendment. A standard text book[57] states the position thus:

“The prohibitions of the Amendment have reference to action of the political body denominated by a State, by whatever instruments or in whatever modes that action may be taken. A State acts by its legislative, its executive, or its judicial authorities. It can act in other way. The constitutional provision, therefore, must mean that no agency of the State, or of the officers of agents by whom its powers are exerted shall deny to any person within its jurisdiction the equal protection of the laws. Whoever, by virtue of public position under a State Government….denies or takes away the equal protection of the laws, violates the constitutional inhibitions; and as he acts in the name and for the State and is clothed with the States’ power, his act is that of the State.”

24.That the exposition of the relationship inter se the State and one of its organs, the “government”, was at the heart of the matter before the U.S. Supreme Court in Poindexter v. Greenhow[58]:

“In the discussion of such questions the distinction between the government of a State and the State itself is important and should be observed. In common speech and common apprehension they are usually regarded as identical; and as ordinarily the acts of the government are the acts of the State, because within the limits of its delegation of power, the government of the State is generally confounded with the State itself, and often the former is meant when the latter is mentioned. The State itself is an ideal person , intangible, invisible, immutable. The government is an agent, and, within the sphere of the agency, a perfect representative; but outside of that it is a lawless usurpation. The Constitution of the State is the limit of the authority of its government, and both government and the State are subject to the supremacy of the Constitution of the United States and the laws made in pursuance thereof.”

The U.S Supreme Court in the above passage propounds the theory of ultra vires which with appropriate modifications applies to the exercise of the State power by all its organs in all the conceivable fields. This is the inevitable consequence in a political society with a government under constitutional limitations. David M. Levitan has put it felicitously when he observed: “Government just was not thought to have any “hip-pocket” unaccountable powers”.[59] Examining the concept of Sovereignty as operative in a modern State Oppenheim observes:

“The problem of sovereignty in the 20th Century. The concept of sovereignty was introduced and developed in political theory in the context of the power of the ruler of the state over everything within the state. Sovereignty was, in other words, primarily a matter of internal constitutional power and authority, conceived as the highest, underived power within the state with exclusive

competence therein”

This Petitioner would dwell on this point again when he submits on the unreasonable and arbitrary approach of the Central Government in exercise of its Treaty-Making Power.

25.That the constitutional government implies Division of Power amongst the three main organs of government: the executive, the legislature, and judiciary. “Pre constitutionalist governments, such as the absolute monarchies of Europe in the 18th century, frequently concentrated all powers in the hands of a single person”[60]. Judges of the superior British courts: “Down to the reigns of James I and Charles I, judges in England ( other than the Barons of the Exchequer) usually held office durante bene placito nostro (during the King’s pleasure). Like other Crown servants, they could be dismissed by the King at will, although they seldom were……….At last the Act of Settlement (1700), which was to come into force when the Hanoverians ascended the throne, provided “that …..judges’ commissions be made quamdiu se bene gesserint, and their salaries ascertained and established, but upon the address of both Houses of Parliament it may be lawful to remove them…..The statutory provisions now in force are the Supreme Court Act 1981, s. 11…”[61] ‘The true position, however, is stated by Anson: “the words mean simply that if, in consequence of misbehavior in respect of his office or from any other cause, an officer of state holding on this tenure has forfeited the confidence of the two Houses, he may be removed, although the Crown would not otherwise have been disposed or entitled to remove him….”’[62] The position under the Stuarts is summed up in these words by an expert:

“…The most common visual description of this political community was the metaphor of body politic. Like human body, government and

society were organic and their parts interdependent. Each element had its special and essential tasks to perform, without which the body could not function. At the head was the king, whose rule was based upon divine right and whose conception of his role in the state came closer to personal ownership than corporate management…… The monarch’s claim to be God’s vice-regent on earth was relatively uncontroversial…..”[63]

The status of judiciary in England, in contradistinction to that conceived and erected under the U.S. Constitution. is briefly brought out by Bertrand Russell while dealing with Locke whose philosophy shaped the thinking of the framers of the U.S. Constitution:

“It is surprising that Locke says nothing about the judiciary, although this was a burning question in his day. Until the Revolution, judges could at any moment be dismissed by the king; consequently they condemned his enemies and acquitted his friends. After the Revolution, they were made irremovable except by an Address from both Houses of Parliament. It was thought that this would cause their decisions to be guided by the law; in fact, involving party spirit, it has merely substituted the judges’ prejudice for the king’s. However that may be, wherever the principle of checks and balances prevailed the judiciary became a third independent branch of government alongside of the legislature and the executive. The most noteworthy example is the United States’ Supreme Court.”[64]

Under the U.S Constitution it was never doubted that Judiciary was an organ of the State. Chief Justice John Marshall recognized this position in Marbury v. Madison which he concluded with a fundamental proposition of constitutional government:

“Thus, the particular phraseology of the constitution of the United States confirms and strengthens the principle, supposed to be essential to all written constitutions , that a law repugnant to the constitution is void; and that courts, as well as other departments, are bound by that instrument.[65]” [italics used in the text].

It is to be noted that the judiciary is considered merely as one of the departments of the State.

26. That in the United Kingdom the Sovereign is “the fountain of justice”. In the contemplation of the law the Sovereign is always present in the court and therefore cannot be non-suited”[66]. In M.L.Sethi’s case, Mathew J, while tilting towards the view of Lord Denman in R. v Bolton (1841) 1 Q.B. 66 (that the question of jurisdiction is determinable at the commencement, not at the conclusion of the enquiry) the Hon’ble Court overlooked the specifics of the British Constitutional history wherein, for historical reasons, the Superior Judiciary is answerable only to God and the King. In para 6 of Rupa’s case this Hon’ble Court observed:

“In England while issuing these writs, at least in

theory, the assumption was that the King was present in the King's Court.”

Its full import becomes clear when certain fundamental principles of the British Constitutional history are taken into account. Holdsworth (History of English Law Vol. 6 page 239) refers to the theoretical possibility of a judgment of a superior Court being a nullity if it had acted coram-non-judice. But who will decide that question if the infirmity if it stems from an act of the Highest Court itself? He writes perceptively:

"............it follows that a superior Court has jurisdiction to determine its own jurisdiction; and that therefore an erroneous conclusion as to the ambit of its jurisdiction is merely an abuse of its jurisdiction, and not an act outside its jurisdiction ............"

"............In the second place, it is grounded upon the fact that, while the judges of the superior Courts are answerable only to God and the King, the judges of the inferior Courts are answerable to the superior courts for any excess of jurisdiction ........."

"Theoretically the judge of a superior Court might be liable if he acted coram non judice; but there is no legal tribunal to enforce that liability. Thus both lines of reasoning led to the same conclusion - the total immunity of the judges of the superior Courts."

In England the Superior Courts are answerable, as Holdsworth says, “only to God and the King”. This expresses the typical British view under which the King or Queen is all-powerful as God’s vice-regent on the earth. How can He or She go wrong? The very idea that a Superior Court can be fallible is an alien idea under the British system. The typical British position, which does not accord well with the constitutional polity of India, is succinctly stated by Glanville Williams thus[67]:

“ Their lordships take it amiss if the Court of Appeal announces that a decision of the House was per incuriam. On one occasion when the Court of Appeal did this and a further appeal was taken to the House of Lords, their lordships expressed strong disapproval. They regarded the action of the lower court, in the words of Lord Denning ( speaking subsequently in the Court of Appeal), “as a piece of lese-majeste. The House of Lords never does anything per in curiam[68]

That the constitutional history of the United Kingdom is sui generis as it illustrates the national rhythm in which tradition and individual talent worked in closer synergy which enabled its judiciary to ensure the presence of the past in the present with a skill which is a marvel of jurisprudence[69]. The fundamental constitutional principle theoretically valid to this date, had been stated by Blackstone (1723-1780):

“That the king can do no wrong is a necessary and fundamental principle of the English constitution.”[70]

It seems time stood still after the Proverb said: ‘The heart of kings is unsearchable’. In fact Alexis de Tocqueville felt there existed no constitution in England (elle n’existe point) in the sense of a superior , and fundamental law[71]. Only in this sort of political society its the Attorney-General in the Five Knights Case could say: “Shall any say, The King cannot do this? No, we may only say, He will not do this.”[72] The framers of the U.S Constitution made a conscious bold departure making all organs of the State subservient to a written constitution. We have followed the U.S. precedent. Hence under our Constitution there is no King or Queen with a pretence to function as God’s vice-regent to sit in the King’ or Queen’s Court to issue Prerogative Writs. The obiter dicta or casual dicta in the British cases quoted by our Superior Courts deserve to be treated with due reservation and discretion. It is altogether a different issue that the great British Society has an enormous, perhaps matchless, creative capacity to modernize itself in a way , again sui generis. . It is illustrated by the decision of the House of Lords in R v. Shivpuri[73]. The House had decided Anderton v Ryan[74] on May 19, 1985. In R v. Shivpuri the correctness of Anderton was questioned before a palinode composed by one of the original authors of the majority judgment in Anderton v. Ryan. It was Lord Bridge. Lord Hailsham of St. Marylebone L C in his concurring speech observed:

“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’. This consideration must be of all the greater force when the error is, as in the present case, to be corrected by a palinode composed by one of the original authors of the majority judgment.”

But that the judiciary is functionally an organ of the State is well recognized. This approach conditions the very definition of ‘law’ as given by Salmond[75]:

“The law may be defined as the body of principles recognized and applied by the State in the administration of justice.”

27. The Petitioner submits that by and large we share the common law tradition. In Att-Gen v BBC [1980] 3 All ER 161 at 181 Lord Scarman recognizes that under the common law tradition, whether in the U.K.(with an unwritten constitution) or Australia (with a written constitution) the judicial power is a species of sovereign power [of the State]:

‘….Though the United Kingdom has no written constitution comparable with that of Australia, both are common law countries, and in both judicial powers is an exercise of sovereign power I would identify a court in ( or ‘of’ ) law, i.e. a court of judicature , as a body established by law to exercise either generally or subject to defined limits, the judicial power of the state…….”.

The judiciary exercises the judicial power of the State. Art 144 of the Constitution of India states that it is the authority of the State which makes the judicial decisions effective. The fact that without the support of the authority of the State a judicial decision is ineffective emerges from the study both of the written constitution of Australia, and the unwritten constitution of the United Kingdom.

27 That the Petitioner has already submitted that in England the Superior Courts are answerable, as Holdsworth says, “only to God and the King”, and under the Constitution of India the King or the Queen is non-existent, and God is irrelevant in the polity or governance. Then to whom are our superior courts answerable? Our Constitution which We have given to ourselves contemplates no Grand Mughal. Our superior courts are answerable to the high institution of Judiciary itself. When a gross miscarriage of justice ex debito justitiae is brought to the notice of the same Court, the same is examined with detachment and objective reasonableness: Justice being the sole guiding star. Hence, in India miscarriage of justice can be remedied only under a system of institutional accountability in which the steadfast quest for justice is both common and constant.. Superior Courts are answerable to themselves as institutions, bound by the very inherent logic of their existence to do complete justice. But this Petitioner intends to come to this aspect of the matter later when he makes submissions on the reach and ambit of the doctrine of Ex debito justitiae {vide para 53 to 80 infra}

27A. That there is no irrebuttable presumption that the Hon’ble Judges can never act unreasonably or arbitrarily. To hold this as an axiom would go against Part IVA of the Constitution, which wants us to develop “scientific temper” which cannot be evolved without a spirit of inquiry. Freud would dismiss the notion of absolute rationality of anybody as a mere figment of delight, and absolute trust a road to disaster. If a smaller Bench departs from the decision of a larger Bench (as it has happened in the impugned judgment), the decision, it is submitted, is unreasonable and arbitrary in a blend. “A most important safeguard against the arbitrary and autocratic action of judges is the doctrine of precedents which is part of the law of England and India...And Art. 141 of our Constitution did likewise by providing that the law laid down by the Supreme Court is binding on all Courts in India. In Tribhovandas v. Ratilal[76] the Supreme Court rightly held that: “Precedents which enunciate rules of law form the foundation of the administration of justice under our system.” This statement was made in a case where a single judge of the Gujarat High Court had refused to follow a Full Bench decision of that Court, inter alia, on the amazing ground that if he followed that decision he would violate the judicial oath he had taken. The Supreme Court observed “…there is nothing in the oath of office which warrants a judge in ignoring the rule as to the binding nature of precedents which is uniformly followed.”[77] Lord Hailsham was right when he reminded the judges in his Hamlyn Lures that the rule. In the Valmikya 0a Bali made the severest criticism of Lord Rama’s conduct in striking him with an arrow from a hide. The Lord took it in the right spirit. He answered Bali comprehensively without slightest resentment. He explained his conduct with clarity, comprehensiveness quoting the high precedents by which even HE too was bound[78] he said:

You might have done what I have done;

Manu in the Smritis has said two slokas

Which the great ones have accepted and followed;

I have acted the way they counseled.

His answer covers a whole Canto of the Valmikya Ramayana. Shri Rama considered Himself bound by the fundamental norms of Rights and Duties as set forth in Manusmriti. Under our tradition even God can be questioned. God was severely questioned by Job in the Book of Job in the Old Testament of the Bible. But God’s answer was in a tone of fascist commandment to make Job feel that it was foolish on his part to question or doubt the ways of God because He is infallible, and his ways are above the comprehension of the ordinary mortals.. Raja Ram is called maryadapurusottam as he setup the highest standards of conduct. It was God’s style of silencing Job that must have made the Attorney General to argue in the Five Knights’ Case that it is atrocious to think of the King ever erring his realm. This led the British jurists to erect, in theory at least in theory, a doctrine under their constitutional law that as the Sovereign was God’s vice-regent ever present in the court, it was inconceivable to think that the superior court could ever go wrong inviting the operation of the prerogative writ for its correction. It is great that the judicial sensibility in modern democratic ethos has struck a new note. There is a good example of judicial responsiveness to the challenges of the day when Lord Bridge L.J. in Goldsmith v. Sperrings Ltd[79] expressed that there was no reason for the superior courts not to stand the test of scrutiny to which is subjected the inferior courts: “Hence there is a breach of the rule of audi alteram partem which applies alike to issues of law as to issues of fact. In a court of inferior jurisdiction this would be ground for certiorari; and I do not think that this Court should adopt in its own procedure any lower standards than those it prescribes for others.[80] (Italics supplied). To hold that the superior courts are not to be weighed and measured but the other tribunal can be weighed and measured is unfair. This is the view of Lord Bridge too.as are done other tribunals, has no valid rationale, and is, it is submitted, ex facie unreasonable and arbitrary.

28.That all the standard text-books on Political Science state that the elements of “State” are broadly four: (1) Territory, (2) Population, (3) Government, and (4) Sovereignty. The protocol of ‘Government” is structured in accordance with the system of polity adopted by a political society.” Judiciary” as an organ of government may be, inter se other organs, superior, orco-ordinate , or even subordinate. But under no system judiciary can be conceived as existing outside the frontiers of the “ State”.

28. That ours is a written constitution, detailed and eclectic. Two broad features are noteworthy for the present submissions: these are---

(a) We have incorporated in Part III of our Constitution a set of Fundamental Rights by adopting many key provisions of the Bill of Rights under the U.S. Constitution. Explaining this feature H M Seervai writes[81]:

“The incorporation of a Bill of Rights[82] was feature of the U.S. Constitution which the British Parliament consistently eschewed in the Constitution Acts enacted for Canada, Australia and India. As was to be expected this feature of the U.S. Constitution was adopted by the framers of our Constitution; but whereas the American Bill of Rights declares rights in terms apparently absolute, our Constitution declares the rights and prescribes the limitations in the Constitution itself. By enacting Art.32 the Constitution created a new fundamental right, namely, the right to move the Sup. Ct by appropriate proceedings for the enforcement of the rights conferred by Part III entitled “Fundamental Rights”.

(b) We, under our Constitution, have set up the machinery of government following “in essentials the British, and not the American model”[83]. Ours is a form of responsible government under which the executive is directly responsible and is the very creature of the Legislature, whereas the position is otherwise under the U.S. Constitution.

29. That this Hon’ble Court has committed, it is submitted, a fallacy of petition principii when it observed in Rupa’s Case: “….it is a settled position in law that no judicial order passed by any superior Court in judicial proceedings can be said to violate any of the fundamental rights enshrined in Part III” It is submitted with great respect that the settled position emerges from what H. M. Seervai has stated with succinctly:

“It is difficult to understand why the possibility of a judge violating the prohibition of Art. 14 should be brushed aside by our Sup. Ct. as fanciful speculation---eminent judges in the United States have not considered the violation by the judiciary of equality clause of the Fourteenth Amendment to be fanciful, and have repeatedly asserted that the equality clause binds the judiciary as it binds the legislature and the executive. Violation of Art. 14 by a judge may be difficult to prove, but if proved it must be condemned under Art. 32…”[84].

The same note is struck by another noted jurist Dr D.D. Basu:

“An analogous assumption that a court has the jurisdiction to decide right or wrong is an obsession following from the English notions about the status and functions of the courts. But the position must have changed after the adoption of the written constitution with a Bill of Rights.”[85]

As submitted earlier, the framers of the U.S. Constitution while drawing up a written constitution with a Bill of Rights rejected the typical plea pf the Attorney-General in the Five Knights’ Case. This passionate commitment to preserve and protect Fundamental Rights from acts of all authorities, intentional or unintentional, is felicitously thus expressed by the U.S Supreme Court in Poindexter v. Greenhow[86]:

“Of what avail are written constitutions, whose bills of right for the security of individual liberty have been written , too often,

with the blood of martyrs shed upon the battle field and the scaffold, if their limitations and restraints upon power may be over passed with impunity by the very agencies created and appointed to guard , defend and enforce them; and that, too, with the sacred authority of law, not only compelling obedience, but entitled to respect? And how else can these principles of individual liberty and right be maintained, if, when violated, the

judicial tribunals are forbidden to visit penalties upon

individual offenders, who are the instruments of wrong,

whenever they interpose the shield of the State? The doctrine is not to be tolerated. The whole frame and scheme of the political institutions of this country, State and Federal, protest against it. Their continued existence is not compatible with it. It is the doctrine of absolutism, pure, simple and naked; and of communism, which is its twin; the double progeny of the same evil birth.”

30.Under the U.S. Constitution, it is well settled that the judiciary is within the prohibition of the 14th Amendment. Two cases are referred as illustrations: Ex p. Virginia[87], and Shelley v. Kraemer[88]:

(a) The U.S. Supreme Court dealt with Shelley v. Kraemer an important constitutional question invoking the Fourteenth Amendment: whether the state judicial enforcement of private restrictive covenants amounted to state action. “The Court concluded that, but for the act of intervention of the state courts, the restrictive covenants could not have been enforced to prohibit the purchase of homes by willing minority buyers.” The Court held[89] that the act of judicial intervention of the state courts led to the enforcement of the restrictive covenants in breach of the 14th Amendment. The judgment of

the Supreme Court of Missouri and the judgment

of the Supreme Court of Michigan were reversed .At the outset Chief Justice Vinson, delivering the opinion of the Court, articulated the central issue in these words:

“These cases present for our consideration questions relating to the validity of court enforcement of private agreements, generally described as restrictive covenants, which have as their purpose the exclusion of persons of designated race or colour from the ownership or occupancy of real property.”

(b) It deserves to be noted that the Supreme Court of Missouri under Art V section 4(1) of the Missouri Constitution is a “Superior Court”[90]. It is also a Court of Record under Art. V Section 12 of the Constitution[91]. Article VI of the Constitution of Virginia declares its Supreme Court a Court of Record[92]. A court not of record is an inferior tribunal.

(ii) In Ex p. Virginia where a country court judge was indicted for excluding blacks from jury service. The Court observed: ‘ Whoever ……acts in the name and for the State, is clothed with the State’s power, his act is that of the State.” [ italics supplied].

31. That the syntax and semantics of some other Articles in Part III of the Constitution are clearly binding on the judiciary also. These are obviously Articles 20, 21, and 22 of our Constitution in which freedoms are declared in absolute terms. Article 14, even after having been pragmatized by the doctrine of “classification”, and humanized by the activist magnitude under the “New Doctrine “ of the Right to Equality remains the unswerving mandate to all the elements of the State. Discretion in issuing writs, orders etc. is counterbalanced by the constitutional duties. If the judiciary commits an unjust discrimination, its action is ultra vires. It is not inconceivable that even the superior judiciary can violate, or prevent violation of Art 20 of the Constitution. It is subversive of a constitutional democracy to prefer fundamentalism of any sort, about any institution. This duty is cast on our citizenry even by Part IV A of our Constitution which wants us “to develop the scientific temper”. The most important trait of the “scientific temper” is to believe that all assumptions are tentative; that the factors of error and uncertainty are always at work and that no institution in the world has rendered Lord Acton’s well-known counseling anachronistic:

32 That in Budhan Choudhry v. Bihar[93] Das J.:

(i) held that the inhibition of Art. 14 extend to all action of any one of the three limbs of State;observed, quoting Snowden v. Hughes[94], the Constitution does not assure uniformity of decisions or immunity from merely erroneous action, whether by the Courts or the executive agencies of the State unless it is shown that there was “any element of intentional and purposeful discrimination”. a precondition for a judicial condemnation as prescribed per Stone C.J. in Snowden v. Hughes[95].

It is submitted that H M Seervai is correct in observing in his Constitutional Law of India that Das J. extracted one passage from the judgment of Frankfurter J. in Snowden v. Hughes, but there is another passage which is directly relevant:

“And if the highest Court of a State should candidly deny to one litigant a rule of law which it concededly would apply to all other litigants in similar situation, could it escape condemnation as an unjust discrimination and therefore a denial of the equal protection of the laws?”[96]

It is respectfully submitted that this Hon’ble Court in Budhan Choudhry’s

Case overlooked the import of these pregnant words just quoted.

33.That the syntax and semantics of some other Articles in Part III of the Constitution are clearly binding on the judiciary also. These are obviously Articles 20, 21, and 22 of our Constitution in which freedoms are declared in absolute terms. Article 14, even after having been pragmatized by the doctrine of “classification”, and humanized by the activist magnitude under the “New Doctrine “ of the Right to Equality remains the unswerving mandate to all the elements of the State. Discretion in issuing writs, orders etc. is counterbalanced by the constitutional duties. If the judiciary commits an unjust discrimination, its action is ultra vires. It is not inconceivable that even the superior judiciary can violate, or prevent violation of Art 20 of the Constitution. It is subversive of a constitutional democracy to prefer fundamentalism of any sort, of any institution. This duty is cast on our citizenry even by Part IV A of our Constitution, which wants us “to develop the scientific temper”. The most important trait of the “scientific temper” is to believe that all assumptions are tentative; that the factors of error and uncertainty are always at work and that no institution in the world has rendered Lord Acton’s well-known counseling anachronistic:

34.That there are copious internal pointers in the Constitution itself which amply suggest thar our Constitution has structured even this Hon’ble Court under a set of clear limitations. Arts 1592), 17, 24, 28(3) , 30 suggest that it is not correct that fundamental rights are available only against the State. Freedoms declared by Art. 20, 21and 22 were in terms absolute and were not liable to be tested on the touchstone of reasonableness[97]. Following maters appear to be excluded from the original jurisdiction of the C and vested in other tribunals of the Constitution:

(i) Disputes specified in the Constitution.

Complaints as to interference with inter-State water supplies, referred to the statutory tribunal mentioned in Art. 262 read with s. 11 of the interstate water disputes Act (33 of 1956)

(ii) matters referred to the Finance Commission (Article 280)

(iii) Adjustment of certain expense as between the Union and the States (Article 290)

(iv) A reference to the Supreme Court under Article 143 (2) read with the proviso to the Article 131.

After examining the point at issue H.M.Seervai comments:

“Therefore if a writ of certiorari lies under Art. 32 for the enforcement of fundamental rights, it must follow that there are some fundamental rights which can be violated by a judge acting judicially in a court stricto sensu. The referring judgment of Venkatarama Aiyar J. records that it was conceded, and it is submitted rightly, that there were certain Articles of the Constitution specifically directed against the judiciary, eg. Art. 20 and that a violation by a court of Art. 20 would attract the writ of certiorari under Art. 32.”[98]

35. That it is submitted that not even on the point of Public Policy the Hon’ble Court’s view that “it is a settled position in law that no judicial order passed by any superior Court in judicial proceedings can be said to violate any of the fundamental rights enshrined in Part III” can be considered is sound. An examination of this judicial dictum from the point of Public Policy would show that public interest would not be promoted by making an organ of the State a law unto itself. We must have a forum to question every exercise of sovereign power even if it be by the apex judiciary. It is most respectfully submitted that it would be good for our Republic not to romanticize any department of the State. With history in the marrow of our bones it will be unwise to discount the wisdom which Freud [99] stated in these ringing and suggestive words:

“There is something to be said, however, in criticism of his disappointment. Strictly speaking it is not justified, for it consists in the destruction of an illusion. We welcome illusions because they spare us un-pleasurable feelings, and enable us to enjoy satisfaction instead. We must not complain, then, if now and again they come into collusion with some portion of reality,

and are shattered against it”.

“In reality our fellow-citizens have not sunk so low as we

feared, because they had never risen so high as we believed”.

36. That this Petitioner has submitted hitherto that this Hon’ble Court patently erred in Rupa’s Case in answering the key question: whether the Judiciary is “the State” as defined in Art. 12?. The Hon’ble Court rightly thought that if the Judiciary came within the meaning of the term in Art. 12 of the Constitution, it must conform to fundamental right conferred by Part III of our Constitution. And for the enforcement of such fundamental rights it would have no option but to exercise power under Art. 32 of the Constitution {unless it decides to draw on that source which Chief Justice John Marshall tapped with forte and finish in Marbury v. Madison[100]). The Hon’ble Court mentions in the very first sentence of the paragraph which this Petitioner has quoted from Rupa’ Case:

“Having carefully examined the historical background and the very nature of writ jurisdiction, which is a supervisory jurisdiction over inferior Courts/Tribunals, in our view, on principle a writ of certiorari cannot be issued to co-ordinate Courts and a fortiori to superior Courts”

This Petitioner respectfully submits that in so stating this Hon’ble Court has erred both in history and at law. The reasons which have led the Petitioner to this view are set forth, in brief, as follows:

(i) The “historical background” is neither correct nor comprehensive as this Hon’ble Court missed an immanent feature of British constitutional history that it always devises effective remedies to respond to the challenges of changing times.Lord Roskill aptly observed:

“In short the orthodox view was at that time that the remedy for abuse of the prerogative lay in the political and not in the judicial field. But, fascinating, as it is to explore this mainstream of our legal history, to do so in connection with the present appeal has an air of unreality. To speak today of the acts of the sovereign as ‘irresistible’ and absolute’ when modern constitutional convention requires that all such acts are done by the sovereign on the advice of and will be carried out by the sovereign’s ministers currently in power is surely to hamper the continual development of our administrative law by harking back to what Lord Atkin once called, albeit in a different context, the clanking of medieval chains of the ghosts of the past; see United Australia Ltd v Barclays Bank Ltd. [1940] 4 ALL ER 20 at 37, [ 1941] AC I at 29. It is, I hope, not out of place in this connection to quote a letter written in 1896 by the great legal historian F W Maitland to Dicey himself; the only direct utility of legal history (I say nothing of its thrilling interest) lies in the lesson that each generation has an enormous power of shaping its own law; see Cosgrove The Rule of Law: Albeit Venn Dicey: Victorian Jurist (1980) p 177. Maitland was in so stating a greater prophet than even he could have foreseen, for it is our legal history which has enabled the present generation to shape the development of our administrative law by building on but unhampered by our legal history”[101].

(ii) In CCSU v. Minister for the Civil Service Lord Brightman, Lord Fraser and Lord Roskill held that the contrary view, though good law in the days of Coke and Blackstone, has become ‘archaic’ as a result of the modern development of judicial review. Whitehall and Westminster are not deprived of the prerogative, but its use is ‘sub Deo et sub lege’. Lord Diplock observed: : “Judicial review has I think developed to a stage today when, without reiterating any analysis of the steps by which the development has come about, one can conveniently classify under three heads the grounds on which administrative action is subject to control by judicial review. The first ground I would call ‘illegality’, the second ‘irrationality’, and the third ‘procedural impropriety’. That is not to say that further development on a case by case basis may not in course of time add further grounds.” And Lord Roskill went to the extent of observing:

“Before considering the rival submissions in more detail, it will be convenient to make some general observations about the process now known as judicial review. Today it is perhaps commonplace to observe that as a result of a series of judicial decisions since about 1950 both in this House and in the Court of Appeal there has been a dramatic and indeed, a radical change in the scope of judicial review. That change has been described, by no means critically, as an upsurge of judicial activism. Historically the use of the old prerogative writs of certiorari, prohibition and mandamus was designed to establish control by the Court of King’s Bench over inferior courts or tribunals. But the use of those writs, and of their successors, the corresponding prerogative orders, has become far more extensive. They have come to be used for the purpose of controlling what would otherwise be unfettered executive action whether of central or local government. Your Lordships are not concerned in this case with that branch of judicial review which is concerned with the control of inferior courts or tribunals.”

(iii) There is a good example of judicial responsiveness when Lord Bridge L.J. in Goldsmith v.Perrings Ltd[102] expressed that there was no reason for the superior courts not to stand the test of scrutiny to which is subjected the inferior courts. Critical of judicial research the result to the aggrieved party, Lord Scarman, dissenting from Lord Denning, observed:

“….But the fourth and most important reason is that this part of the Master of Rolls’ judgment decides against the plaintiff on a ground on which Mr. Howser, for the plaintiff, has not been heard. This is because Mr. Comyn never took this point, and the Court did not put the point to Mr. Howser during the argument. Hence there is a breach of the rule of audi alteram partem which applies alike to issues of law as to issues of fact. In a court of inferior jurisdiction this would be ground for certiorari ; and I do not think that this Court should adopt in its own procedure any lower standards than those it prescribes for others.”[103].

Even this Hon’ble Court in National; Textiles Workers’ Union v. P.R. Ramakrishnan,held that a judgment by any court in violation of natural justice was a nullity. Bhagwati J observed: “The audi alteram partem rule which mandates that no one shall be condemned unheard is one of the basic principles of natural justice and if this rule has been held to be applicable in a quasi-judicial or even in an administrative proceeding involving adverse civil consequences, it would, a fortiori, apply in a judicial proceeding such as a petition for winding up of a company.” Chinnappa Reddy J. adopted the same view by observing: “Courts even more than the administrators must observe natural justice.”[104] Under the U.S jurisprudence this rule of justice expresses itself in the view hat a conviction without granting an opportunity of being heard is contrary to “the immutable principles of justice”[105], and amounts, in effect, to an impermissible ‘judicial usurpation’[106].

(iv) In the United Kingdom itself many technicalities pertaining the writs have been done away with. “Writs ceased to be issued in the name of the Crown after June 3, 1980: R.S.C. (Writ and Appearance) 1979 (S.I 1716). The reform was said to make writs less obscure and to ensure that they presented no obstacle to national susceptibilities when served outside the jurisdiction.”[107] Hence in our country there is no reason why the technical rules of the writs should rule us from the grave. In fact, this point was in a way noted by this Hon’ble Court in T C Basappa v. T Nagappa[108] where Mukherjea J. said:

“In view of the express provisions in our Constitution we need not now look back to the early history or the procedural technicalities of these writs in English law, nor feel oppressed by any difference or change of opinion expressed in particular cases of English Judges. We can make an order or issue a writ in the nature of certiorari in all appropriate cases and in appropriate manner, so long as we keep to the broad and fundamental principles that regulate the exercise of jurisdiction in the matter of granting such writs in English law.”

Explaining this observation H M Seervai writes:

“With his usual perceptiveness Mukherjea J, realized that the common law in England was constantly adjusting itself to new situations, and at times rediscovering powers which has remained unused. However, the “broad and fundamental principles”, require to be placed in their proper setting, if the part which the prerogative writs played in English when our Constitution came into force, and the part which it plays today, is to be fully understood.”

(v) It is well settled that the courts exercise supervisory jurisdiction in issuing the writ of certiorari. And the supervision goes to two points: one is the area of the inferior jurisdiction and the qualifications and conditions of its exercise; the other is the observance of the law in the course of its exercise. In such writs three elements are conspicuous:

(a) the technicalities of procedure,

(b) the content and the reach of the writ, and

(c) the target of operation of the writ.

The account of the writ of certiorari given in Rupa’s Case is inapt in the context of our Constitution as there is no need to attach importance to (a) and (c ) supra when these do not fetter the superior courts even in the United Kingdom.- It is well settled that the technical rules of the Law of Evidence do not apply in the Income-tax proceedings but the principles of evidence essential for the fair administration of law are always operative. The content and reach of the writ emerges from the fact that the Court of the King’s Bench was always associated with the work of government ensuring an effective supervision through the writs.

(vi) Our courts which have made a plenty of judicial innovations by departing from the British practice, should make a creative response of the sort Lord Bridge L.J. was making in Goldsmith v. Perrings Ltd[109] vide point (iii) supra. To illustrate this Petitioner refers to A. R. Antulay v. R. S. Nayak[110] wherein Sabyasachi Mukharji, J., speaking for the majority, said:

“The principle in England that the size of the Bench does not matter, is clearly brought out in the decision of Evershed M.R. in the case of Morelle v. Wakeling, (1955 (1) All ER 708) (supra). The law laid down by this Court is somewhat different. There is a hierarchy within the Court itself here, where larger Benches overrule smaller Benches…”.

37. This Hon’ble Court has stated in Rupa’s Case the effect of the careful examination of historical background in these words:

“Having carefully examined the historical background and the very nature of writ jurisdiction, which is a supervisory jurisdiction over inferior Courts/Tribunals, in our view, on principle a writ of certiorari cannot be issued to co-ordinate Courts and a fortiorari to superior Courts.”

But the “division of courts into superior and inferior courts for other purposes is not relevant to the issue of the writ of certiorari or prohibition. One of the lines dividing superior courts from inferior courts is that nothing is outside the jurisdiction of a superior court unless it is shown to be so, and nothing is within the jurisdiction of an inferior court unless it clearly appears. But this definition is irrelevant to the issue of a writ of prohibition, and it is submitted, to the writ of certiorari.”[111]

The irrelevance of the factor of a court being “superior” or “inferior”.

38. That the High Court or a smaller Bench of the Supreme Court is surely not a sub-ordinate court vis-à-vis the others but must be treated “inferior” for the purpose of judicial control in appropriate cases. The whole confusion emanates from focusing more on the secondary meaning of the word “inferior” rather than its primary meaning. The New Shorter Oxford Dictionary would show that “subordination” is its tertiary sense. “It is submitted that the correct question to ask is whether the High Courts are inferior courts vis-à-vis the Supreme Court for the purpose of issuing writs of certiorari and other appropriate writs under Article 32…….. That the Supreme Court and the High Courts are not co-ordinate courts is clear from the fact that an appeal in all civil and criminal matters lies to the Supreme Court and even where no appeal are provided, the Supreme Court has power under Art. 136 to entertain an appeal from any determination by the High Courts at any stage.”[112] In the context of this Hon’ble Court law was thus stated by Shetty J. in Triveniben v. State of Gujarat[113]:

“ This is undoubtedly a salutory Rule, but it appears to have only a limited operation. It apparently governs the procedure of a smaller bench when it disagrees with the decision of a larger bench. If the bench in the course of hearing of any matter considers that the matter should be dealt with by a larger bench it shall refer the matter to the Chief Justice. The Chief Justice shall then constitute a larger bench for disposal of the matter. This exercise seems to be unnecessary when a larger bench considers that a decision of a smaller bench is incorrect unless a constitutional question arises. The practice over the years has

been that a larger bench straightway considers the correctness of and if necessary overrules the view of a smaller bench. This practice has been held to be a crystallised rule of law in a recent decision by a Special Bench of seven learned Judges.”

The Hon’ble Court referred to A. R. Antulay v. R. S. Nayak[114] wherein Sabyasachi Mukharji, J., speaking for the majority, said:

“The principle in England that the size of the Bench does not matter, is clearly brought out in the decision of Evershed M.R. in the case of Morelle v. Wakeling, (1955 (1) All ER 708) (supra). The law laid down by this Court is somewhat different. There is a hierarchy within the Court itself here, where larger Benches overrule smaller Benches. See the observations of this Court in Mattulal v. Radhe Lal, (1975) 1 SCR 127: (AIR 1974 SC 1596), Union of India v. K. S. Subramanian (1977) 1 SCR 87 at p. 92: (AIR 1976 SC 2433 at p. 2437) and State of U.P. v. Ram Chandra Trivedi, (1977) 1 SCR 462 at p. 473 : (AIR 1976 SC 2547 at p. 2555). This is the practice followed by this Court and now it is a crystallised rule of law. See in this

connection, as mentioned hereinbefore, the observations of the State of Orissa v. Titaghur Paper Mills AIR 1985 SC 1293) (supra) and also Union A India v. Godfrey Philips India Ltd., 1985 Suppl (3) SCR 123 at p. 145 : (AIR 1986 SC 806 at p. 815)”.[115]

This judicial observation highlight the following points of great importance:

(a) In our Supreme Court the structure that has evolved is hierarchic whereunder “ larger Benches overrule smaller Benches”. The concept of “hierarchy within the Court itself” is one of seminal importance as disobedience to this binding norm would render the decision in breach of the norm clearly without jurisdiction, hence non est.

(b) “This is the practice followed by this Court and now it is a crystallised into arule of law.” Crystallization as a rule of law means the emergence of a binding rule of substantive law. In effect, the view is derived from the well-known maxim Cursus Curlaef Est Luxe Curiae ( The practice of the Court is the law of the Court).

In this view of the matter the larger Bench of the Supreme Court can, it is submitted, issue a writ of certiorari to a smaller Bench for the enforcement of Fundamental Rights.

39. That it is admitted that as a superior court, this Hon’ble Court has power to consider whether any matter falls within its jurisdiction or not. But two points deserve to be considered in this context:

(a) as an apex judicial body it is under a duty to itself and to the people to hold itself under constant self-introspection and criticism with ever readiness to swerve to the right course wherever it perceives this prudent to do;

(b) as an apex judicial body it should be in the best position to realize, as Lord Bridge did in Shivpuri[116] that the right perspective demands:

“If a serious error embodied in a decision of this House has distorted the law, the sooner it is corrected the better.”

The irrelevance of the factor of a court being “the Court of Record”.

40. That this Hon’ble Court erred in considering that the fact of a court’s being the Court of Record has any relevance to the exercise of power to issue the writ of certiorari. H M Seervai has, after a detailed examination of this issue, writes:

“ Nor is it relevant to consider whether the court is a court of record or not, because the county courts in England are by statute constituted courts of record, and ….writs of certiorari lie to them”[117]

Black’s Law Dictionary states that “the court of record “ is “A court that is required to keep a record of its proceedings and that may fine and imprison people for contempt”.

The main features of the Court of Record are: (1) keeps a record of the proceedings, and (2) power to fine or imprison for contempt. But from the fact that it is a court of record nothing follows, directly or implication, to support the judicial reasoning under examination.

ERRORS IN RATIO ANALYSIS OF PRECEDENTS CITED

41 .That this Hon’ble Court in Rupa’s Case, observes:

“ On the analysis of the ratio laid down in the aforementioned cases, we reaffirm our considered view that a final judgment/order passed by this Court cannot be assailed in an application under Art. 32 of the Constitution of India by an aggrieved person whether he was a party to the case or not.”

It is most respectfully submitted that on the correct analysis of the cases discussed by The Hon’ble Court it is seen that none of the cases disclose any ratio to support this Hon’ble Court’s view aforementioned view. This Petitioner is driven to this view after a most careful analysis of the cases analyzed by applying the standard technique for determining the ratio of a case. Salmond in his Jurisprudence has mentioned the two methods for conducting analysis for ratio determination: one as recommended by Professor Wambaugh. This method is known as the

“The “reversal” test of Professor Wambaugh[118] suggestS that we should take proposition of law put forward by the judge, reverse or negate it, , and then see if its reversal would have altered the actual decision. If so, then the proposition is the ratio or part of it; if reversal would have made no difference, it is not. In other words the ratio is a general rule without which the case would have been decided otherwise.[119]

On the other hand Dr Goodhart stressed on the material facts of a particular case: this method of determining ratio has come to be known as the “material facts” test. The test suggested by Dr Goodhart runs as under:

“According to this, the ratio is to be determined by ascertaining the facts treated as material by the judge together with the decision on those facts. ….. The “material facts” test is also valuable is stressing that propositions of law are only authoritative in so far as they are relevant to facts in issue in a case: a judicial statement of law therefore must be read in the light of facts of the case. And of course in the light of issues raised in the pleadings.”[120]

42. That in Naresh Shridhar Mirajkar and Ors. v. State of Maharashtra and Anr[121] the question raised before this Hon’ble Court was: whether the judiciary was “the State” as defined in Art 12 of our Constitution.. This petition was moved by certain journalists for the enforcement of their fundamental rights under Art. l9 (l) (a) and (g) as they felt that the judge’s order prohibiting the reporting of one Goda’s evidence had the effect of violating their rights to the freedom of speech and expression. As Hidayatullah J delivered a dissenting judgment (allowing the petitions) his judgment is to be ignored for determining the ratio of the case. This accords with the judicially established practice as is clear from what Salmond says[122]:

“A dissenting judgment valuable and important though it may be. Cannot count as part of the ratio, for it played no part in the court’s reaching the decision.”

43. That both the majority judgment ( by Gajendragadkar, C.J.I., Wanchoo, Mudholkar, Sikri, and V. Ramaswami, JJ.) and the concurring judgments (by Sarkar, Shah, R. S. Bachawat) dismissed the petitions expressly limiting their decisions to the violation of the rights under Art 19(1) of the Constitution. The threshold principle was very perceptively set forth in the majority judgment:

“As this Court has frequently emphasized, in dealing with constitutional matters it is necessary that the decision of the Court should be confined to the narrow points which a particular proceeding raises before it. Often enough, in dealing with the very narrow point raised by a writ petition wider arguments are urged before the Court, but the Court should always he careful not to cover ground which is strictly not relevant for the purpose of deciding the petition before it. Obiter observations and discussion of problems not directly involved in any proceeding should be avoided by courts in dealing with all matters brought before them: but this requirement becomes almost compulsive when the Court is dealing with constitutional matters.”[123]

Once this Hon’ble Court came to the conclusion that there was no violation of the fundamental rights under Art 19(1), there was no necessity to make observations as to the relevance of Art 32 of the Constitution. H.M. Seervai has accurately stated the effect of the judgments when he says:

“The majority view that a writ did not lie, clearly obiter because the point did not call for decision on the finding that the fundamental rights were not violated. But apart from being obiter, these observations are unfortunate, because, the majority judgment and the concurring judgments expressly confined themselves to the violation of Art 19…..”[124]

44. That on application of the “ reversal test” it can be seen that there is no effect on the actual decision even if it is accepted that the judiciary is “the State as defined by Art. 12 of the Constitution of India”. Once it is found that there was no violation of Art 19(1) no question survived to be considered whether a writ of certiorari could issue to a judicial body. To the same conclusion one comes by applying the “ material facts test”. The “material facts” before this Hon’ble Court were the following:

(i) In course of hearing held in public the Bombay High Court directed that the evidence tendered by Goda be not reported

(ii) Certain journalists filed an Art 32 Writ Petition contending that the judicial order prohibiting a report of the evidence was violative of their rights to the freedom of speech and expression guaranteed by Art 19(1)(a) ; hence a writ be issued for quashing the order.

(iii) This Hon’ble Court found that there was no violation of Art 19(1)(a). Only if the material facts would have shown a breach of the fundamental right under Art 19(1)(a), there could have emerged any question as to the appropriate constitutional remedy under Art 32 of the Constitution.

The fallacy in the judicial reasoning of this case has been thus brought out by Dr D. D. Basu:

“The assertion in the concurring judgment of Sarkar, J.[ (1966) S C R 744 at p.774], that “a legally valid act cannot offend a fundamental right”, offends against the very foundation of constitutional jurisprudence. As I have elaborately explained in my Tagore Law Lectures on Limited Government and Judicial Review, a written Constitution with justiciable provisions rests on a theory of higher law, which stands above the ordinary law. Not merely an act done under the ordinary law, but that law itself is liable to be unconstitutional and void if it contravenes the higher law embodied in the Constitution. Hence, the plea that the Executive or the Judiciary has acted in conformity with the law laid down by the Legislature would be no defence if the executive action or the judicial decision violates a mandatory provision of the Constitution, such as a fundamental right.”[125]

That Naresh Shridhar Mirajkar Case suffers from certain miscomprehension of the the certiorari jurisdiction in England. The Opinion of Gajendragadkar, C.J.I., that the writ of certiorari does not lie against an inferior civil court, is based on wrong information.The assumption is based on the observation in Halsbury’s Laws of England, 3rd ed Vol 11, 129-130 which stands corrected in the 1965 Supplement of Halsbury. Referring to this serious error, H M Seervai perceptively writes:

‘We have said that the discussion in the majority and other concurring judgments about the nature of the writ jurisdiction is not satisfactory. It is not clear whether the majority judgment ourported to propound a theory of its own as regards the writ of certiorari, or whether it purported to follow the Eglish authorities which it cited “incidentally.”…’[126]

45.That this Hon’ble Court has erred in its view of what constitutes the ratio in A. R. Antulay v. R. S. Nayak and Anr[127]. A reading of all the five majority judgments of a 7-Judge Bench shows that neither on the “reversal test” nor on “the material facts test” there is any ratio to support the judicial reasoning in the Rupa’s Case. The material question was thus formulated:

“The main question involved in this appeal, is whether the directions given by this Court on 16th Feb. 1984, as reported in R.S. Nayak v. A.R. Antulay, (1984) 2 SCR 495 at p. 557 : (AIR 1984 SC 684 at p. 718) were legally proper. The next question, is whether the action and the trial proceedings pursuant to those directions, are legal and valid. Lastly, the third consequential question is, can those directions be recalled or set aside or annulled in these proceedings in the manner sought for by the appellant”.

The right perspective in the context has been thus stated by Dr D. D. Basu in his Tagore Law Lectures:

“In view of the ample powers of revision under s. 115 of the Code of Civil Procedure and under Art 227 of he Constitution, the use of certiorari to quash the decision of a Civil Court does not appear in any reported decision. There is no reason, however, why certiorari cannot be resorted to quash the decision of a Civil Court on the ground of a defect of jurisdiction or error of law apparent o the face of the record, in proper case where the superior Court my be inclined to entertain it notwithstanding the existence of an alternative remedy by way of appeal or the like.”[128]

This Hon’ble Court held that the directions given by this Hon’ble Court in 1984 were given without jurisdiction as the directions had the effect of violating Antulay’s fundamental right under Art. 14 of the Constitution of India. The Hon’ble Court granted him remedy ex debito justitiae. It recalled its earlier directions and directed the conduct of trials in accordance with the law. The Hon’ble Court made the following vital observations:

(i) “…Gajendragadkar, J. reiterated that the powers of this Court are no doubt very wide and they are intended and "will always be exercised in the interests of justice." But that is not to say that an order can be made by this Court which is inconsistent with the fundamental rights guaranteed by Part III of the Constitution. It was emphasised that an order which this Court could make in order to do complete justice between the parties, must, not only be consistent with the fundamental rights guaranteed by the Constitution, but it cannot even be inconsistent with the substantive provisions of the relevant statutory laws (Emphasis supplied).”[129]

(ii) “But directions given per incuriam, and in violation of certain constitutional limitations and in derogation of the principles of natural justice can always be remedied by the court ex debito justitiae.”[130]

(iii) “We are correcting an irregularity committed by Court not on construction or misconstruction of a statute but on non-perception of certain provisions and certain authorities which would amount to derogation of the constitutional rights of the citizen.”[131]

(iv) “The basic fundamentals of the administration of justice are simple. No man should suffer because of the mistake of the Court. No man should suffer a wrong by technical procedure of irregularities. Rules or procedures are the hand-maids of justice and not the mistress of the justice. Ex debito justitiae, we must do justice to him. If a man has been wronged so long as it lies within the human machinery of administration of justice that wrong must be remedied. This is a peculiar fact of this case which requires emphasis.”

46. That in A. R. Antulay v. R. S. Nayak and Anr remedy sought by the Writ Petitioner was granted as the direction Ex debito justitiae removed the petitioner’s grievance fully. For him it hardly mattered whether his grievance was settled by resorting to a writ or order under Art. 32, or by a decision Ex debito justitiae.

On the “ CONCESSION” by the counsels

47.. This Hon’ble Court in Rupa’s Case , it is most respectfully submitted, seriously misdirected itself:

(a) by basing its decision on the “concession” by of counsels of both the sides having the effect of blurring the forensic focus by extinguishing the heat and light that a CONTEST inevitably generates; and

(b) by accepting their prayer that the only remedy under the circumstances should be granted is by way of Ex debito justitiae, which this Hon’ble Court has delineated in Rupa’s Case in constricted ambit, and narrow parameters..

What this Hon’ble Court has stated in Rupa’s Case deserves to be quoted in extenso:

“ In fairness to the learned counsel for the parties, we record that all of them at the close of the hearing of these cases conceded that the jurisdiction of this Court under Art. 32 of the Constitution cannot be invoked to challenge the validity of a final judgment/order passed by this Court after exhausting the remedy of review under Art.137 of the Constitution read with O. XL, R. 1 of the Supreme Court Rules, 1966.

However, all the learned counsel for the parties as also the learned Attorney-General who appeared as amicus curiae, on the notice of this Court, adopted an unusual unanimous approach to plead that even after exhausting the remedy of review under Art.137 of the Constitution, an aggrieved person might be provided with an opportunity under inherent powers of this Court to seek relief in cases of gross abuse of the process of the Court or gross miscarriage of justice because against the order of this Court the affected party cannot have recourse to any other forum.”[132]

48. . That this Petitioner submits to the extent the judicial determination in Rupa’s Case is founded on the counsels’ “concession”, it cannot, on established juristic principle, be treated as an authority for the propositions formulated therein. Salmond thus states the correct legal position:

“For the fundamental notion is that the law should result from being applied to live issues raised between actual parties and argued on both sides……In course of his judgment, however, a judge may let fall various observations not precisely relevant to the issue before

him…. Here of course, since the issue is not one that arises between the parties, full argument by counsel will be lacking, so that it would be unwise to accord the observation equal weight with that given to his actual decision[133].”

In London Hospital v. I.R.C. Lord Brightman J. observed:

“In conclusion I think it is desirable that I should make a brief reference to Baldry v. Feintuck. Counsel for the Medical College sought to rely on that case for the proposition that a Students Union is prima facie charitable. It is true that the motion proceeded on the footing that the States Union in that case was a charity. The contrary, however, was never argued. The point went by concession. I accepted the concession because I thought it correct. But a case which proceeds on the basis of a proposition which is not tested by argument is not of much value as an authority for the validity of that proposition. Baldry v. Feintuck has not, therefore, assisted me in reaching my conclusion”

“Concession” is “something you agree to do or else someone else do or have, especially to end an argument or conflict.”[134] An issue of great constitutional importance of the sort under judicial consideration should have been argued to full stretch. This Petitioner most respectfully submits that what was not done in Rupa’s Case be allowed to be done in course of this Writ Petition. The concession by the counsels appears amazing when by conceding on a vital points they failed in persuading the Hon’ble Court that the frontiers of the doctrine of Ex debito justitiae should not be drawn narrower than what was already well settled. A consequence of this sort is inevitable as ( to borrow expressions from Salmond ) “full argument” was not made.

49. That this Petitioner has respectfully submitted that this Hon’ble Court made a fundamental error by treating casual obier dicta ( it would hardly change perspective if they are treated ‘consider dicta” ) in Naresh Shridhar Mirajkar and Ors. v. State of Maharashtra and Anr and A. R. Antulay v. R. S. Nayak and Anr as the virtual ratioes of the Cases. In Orissa v. Sudhansu Sekhar Misra[135] this Hon’ble Court cited with approval the following observations of the Earl of Halsbury L.C.:

“A decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and every observation found therein nor what logically follows from the various observations made in it.”

The full import of what the Earl of Halsbury L.C. said becomes clear

when the following passage from Quinn v. Leathem[136] is gone through:

“Now before discussing the case of Allen v. Flood (1898) A.C. 1 and what was decided therein, there are two observations of a general character which I wish to make, and one is to repeat what I have very often said before, that every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to follow logically from it. Such a mode of reasoning assumes that the law is necessarily a logical Code, whereas every lawyer must acknowledge that the law is not always logical at all.”

In Ranchhoddas Atmaram v. Union[137] this Hon’ble Court held that the observations inthree of its decisions were not binding as “the question was never required to be decided in any of the cases and could not, therefore have been, or be treated as decided by this Court.”

50 .That this Petitioner has not adverted to the other decisions referred in Rupa’s

Case as they merely follow Naresh Shridhar Mirajkar and Ors. v. State of

Maharashtra and Anr and A.R. Antulay v. R. S. Nayak and Anr.

51 This Petitioner’s view set pleaded here finds full support from eminent experts like H. M. Serevai and Dr D. D. Basu. Prof. V.N.Shukla is correct in writing in his in his Constitution of India, (10th ed states at p. 26):

“H. M. Serervai for a forceful argument that judiciary is ‘the State’ even in the exercise of its judicial functions. This would also seem the view taken by Mukharji J. in A R Antulay v. R S Nayak[138] (1988) 2 SCC602”

Though Antulay was decided on appeal under Art 136, and not under Art. 32 of the Constitution of India. But the propositions formulated in the majority judgment clearly show that the Court would grant remedies under Art. 32 in an appropriate case.

Position under the Federal Republic of German Constitution.

52A. Art. 1(3) of the German Constitution states:

“The following basic rights are binding on legislature, executive, and judiciary as directly enforceable law.”

Art. 20(2) mentions ‘judiciary’ as one of the specific organs of the state. It says:

‘ All State authority emanates from the people. It is being exercised by the people through elections and voting and by specific organs of the legislature, the executive power, and judiciary.”

Art 92 which sets up a Court Organization. It vests judicial power in the Judges.

Art. 97 declares the Judges independent and subject only to law. Art 98(1) provides for the legal status of udges in the Federation and the States.

Art. 98(2) runs as under:

“Where a Federal Judge, in his officil capacity or unofficially, infringes the principles of this Constitution or the constitutional order of a State, the Federal Constitutional Court may decide by two-thirds majority, upon the request of the House of Representatives, that the Judge be given a different office or retired. In a case of intentional infringement, his dismissal may be ordered.”

“State” in Modern English Usage.

52B.That the commonsense view that Judiciary is comprehended within the concept of ‘State’ is revealed in the usage of the term in the in humanities in general. Jean Dreze and Amartya Sen state in course of their exposition of the Government, the State and the Market:

“The distinction between the state and the government may be of some significance in this context. The state is, in many ways, a broader concept, which includes the government, but also the legislature that votes on public rules, the political system that regulates elections, the role given to opposition parties, and the basic political rights that are upheld by judiciary.”[139]

An Examination From Theinternational Law Point Of View: Judiciary is ‘State’

52. That the settled principle under international law is that all the organs of the state , including judiciary, are bound to fulfill the state’s international obligations.[140] In Guincho Case (1984) ILR, 78 , p. 355, the European Court of Human Rights held that delays in national courts proceedings as a result of constitutional changes could only in exceptional circumstances constitute a justification for non-compliance with the state’s human rights obligations.[141] After a masterly analysis Oppenheim mentions that even in exercise of judicial functions the judiciary is one of the organs of the state. He observes:

“….. although often entirely independent of the government they are nevertheless organs of the state and their acts accordingly attributable the state.”[142] He summarizes in the following words the relevant facts, which show that the judiciary is without doubt an organ of the state:

“……If the courts or other appropriate tribunals of a state refuse to entertain proceedings for the redress of injury suffered by an alien, or if the proceedings are subject to undue delay, or if there are serious inadequacies in the administration of justice, or if there occurs an obvious and malicious act of misapplication of the law by the courts which is injurious to a foreign state or its nationals, there will be a ‘denial of justice’ for which the state is responsible (quite apart from the effect which such circumstances might have for the application of the local remedies rule). The state’s responsibility will at least require it to take necessary action to secure proper conduct on the part of the court, and may extend to the payment of damages for the injury suffered as a result of the denial of justice.”[143]

It deserves to be noted that when judiciary is considered “entirely independent of the government”, it refers to “government” stricto sensu , not in its generic sense. This meaning of “government” owes its existence to the constitutional history which brought about democracy under a constitutional polity crafted under a written constitution. Chief Justice John Marshall in Marbury v. Madison boldly stated this:

“It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases, must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must decide on the operation of each. So if a law be in opposition to the constitution; if both the law and the constitution apply to a particular case, so that the court must either decide that case conformably to the law, disregarding the constitution; or conformably to the constitution, disregarding the law; the court must determine which of these conflicting rules govern the case. This is of the very essence of the judicial duty.”[144]

[B] The Unfair Narrowing Of The Inherent Power Of The Court:

The Doctrine Of Ex Debito Justitiae Is Stated Per Incuriam.

53. That in Rupa’s Case[145] on appreciation of the arguing counsels’ “unanimous approach to plead that even after exhausting the remedy of review under Art.137 of the Constitution, an aggrieved person might be provided with an opportunity under inherent powers of this Court to seek relief in cases of gross abuse of the process of the Court or gross miscarriage of justice because against the order of this Court the affected party cannot have recourse to any other forum” this Hon’ble Court formulated the question for judicial consideration thus:

“whether an order passed by this Court can be corrected under its inherent powers after dismissal of the review petition on the ground that it was passed either without jurisdiction or in violation of the principles of natural justice or due to unfair procedure giving scope for bias which resulted in abuse of the process of the Court or miscarriage of justice to an aggrieved person.”[146]

And this Hon’ble Court, in Rupa’s Case, delineated its judicial

perspective in these terms:

“…..The provision of O. XL, R. 5 of the Supreme Court Rules bars further application for review in the same matter. The concern of the Court now is whether any relief can be given to the petitioners who challenge the final judgment of this Court, though after disposal of review petitions, complaining of the gross abuse of the process of Court and irremedial injustice. In a State like India, governed by rule of law, certainty of law declared and the final decision rendered on merits in a lis between the parties by the highest Court in the country is of paramount importance. The principle of finality is insisted upon not on the ground that a judgment given by the Apex Court is impeccable but on the maxim "Interest reipublicae ut sit finis litium”[147]

And in Rupa’s Case this Hon’ble Court formulated the following

impeccable (and oft-repeated) propositions:

“The concern of this Court for rendering justice in a cause is not less important than the principle of finality of its judgment. We are faced with competing principles ensuring certainty and finality of a judgment of the Court of last resort and dispensing justice on reconsideration of a judgment on the ground that it is vitiated being in violation of the principle of natural justice or apprehension of bias due to a Judge who participated in decision-making process not disclosing his links with a party to the case, or abuse of the process of the Court. Such a judgment, far from ensuring finality, will always remain under the cloud of uncertainty. Almighty alone is the dispenser of absolute justice - a concept which is not disputed but by a few. We are of the view that though Judges of the highest Court do their best, subject of course to the limitation of human fallibility, yet situations may arise, in the rarest of the rare cases, which would require reconsideration of a final judgment to set right miscarriage of justice complained of. In such case it would not only be proper but also obligatory both legally and morally to rectify the error.”[148] which led this Hon’ble Court in that case to the following upshot:

“The upshot of the discussion in our view is that this Court, to prevent abuse of its process and to cure a gross miscarriage of justice, may reconsider its judgments in exercise of its inherent power.”

This Hon’ble Court rightly drew out the two vitiating blemishes: “the abuse of judicial process’ and “ miscarriage of justice”, but failed in drawing up their necessary corrective corollaries. The Hon’ble Court narrowed these two vitiating factors without considering the lethal consequences the narrowing on the administration of justice, as the narrowed and constricted norms virtually denude the doctrine of ex debito justitiae of its wide content.

54. That in Rupa’s Case this Hon’ble Court considered the prescriptions to

ward off apprehension of over-flooding with second review “as a matter of

course in the guise of a curative petition under inherent power.” And

recognizing that “It is neither advisable nor possible to enumerate all the

grounds on which such a petition may be entertained.”

This Hon’ble Court prescribed the conditions and parameters in these

words:

“Nevertheless, we think that a petitioner is entitled to relief ex debito justitiae if he establishes (1) violation of principles of natural justice in that he was not a party to the lis but the judgment adversely affected his interests or, if he was a party to the lis, he was not served with notice of the proceedings and the matter proceeded as if he had notice and (2) where in the proceedings a learned Judge failed to disclose his connection with the subject-matter or the parties giving scope for an apprehension of bias and the judgment adversely affects the petitioner.”[149]

55. That, on reading the above mentioned judicial observation, this Petitioner is struck by the following three points:

(i) The language in which the conditions are prescribed make it clear that this Hon’ble Court was not chartering the full field of the doctrine of Ex debito justitiae, but was describing only two of its imperative norms as grounds for judicial consideration;

(ii) Though this Hon’ble Court referred to the wide expressions ( “ the prevention of the abuse of its process of the court” and “the curing a gross miscarriage of justice” ) and observed that

“It is neither advisable nor possible to enumerate all the grounds on which such a petition may be entertained.”

it, in effect, while articulating the operative formulations drew up the frontiers of the doctrine in such words which rob it of much of its plenitude recognized all along by the Superior Courts in India and England.

(iii) The entitlement to obtain judicial correction of the

impugned judgment is predicated on two conditions:

(1) violation of principles of natural justice ‘in that’ he was not a party to the lis but the judgment adversely affected his interests or, if he was a party to the lis, he was not served with notice of the proceedings and the matter proceeded as if he had notice; and

(2) where in the proceedings a learned Judge failed to disclose his connection with the subject-matter or the parties giving scope for an apprehension of bias and the judgment adversely affects the petitioner.

The ambit of the Rules of Natural Justice was drawn up by Lord Denning in Kanda v. Govt. of Malaya (1962) A.C. 322, 337 in these words:

“…. The essential characteristic of what is often called ‘natural justice’…. The Romans put them in the two maxims: Nemo judex in causa sua; Audi alteram partem. They have recently put in the two words ‘impartiality’ and ‘fairness’.

The expression “in that” in this Hon’ble Court’s judicial formulation reveals a semantic narrowing of the referent. This expression in plain language means: “You

use “in that” to introduce the reason for the statement you have just made”.[150] The first prescription for the remedy Ex debito justitiae is (i) extremely formal as it considers only “impleading” and “notice” in themselves sufficient complince. This sort of compliance is, no doubt, essential, but the rule of Audi alteram partem can get frustrated in many other ways. How can the requirement of this rule be considered fully met if in an impugned judgment such things as these happen in course of the hearing of the case ( an extract from the Summary submitted before this Hon’ble Court, on mention, on Sept. 1, 2004 when the Curative Petition had come on the board for the first time):

“The core issue of Treaty Shopping was decided in a patent breach of the rule of audi alteram partem as (a) as Lord McNair has been misread to see X where it is Y; (b) as the Conduit Company Report 1987 was used in breach of the rule compounded by the error of overlooking that the view was later revised and departed from in several jurisdictions( pp. 172-176 of the Curative).; (c ) as many material observations are based on mere surmise having the effect of accepting the slur that the then Attorney-General chose to inflict by implication, in breach of the rule of natural justice, on Mrs Indira Gandhi and Mr Pranab Mukherjee as they had gone to Mauritius in 1982 when the Indo-Mauritius DTAC was under negotiation; (d) as the entire admitted factual substratum in the PIL was not considered by circling out the facts in the Assessment of Cox & Kings by overlooking the settled law accurately stated in Mulla [ in his CPC 14th ed at p 868]; (e) as the sole reasoning for upholding Treaty Shopping is based on three long paragraphs from an interested person’s worthless book, meant for tax haven masqueraders ( which is a mere shabby defence of fiscal vampirism based on no judicial authority) utilized by the Hon’ble Court contrary to the rule of audi alteram partem; (f) as the perspective judicially mandated by McDowell and many other decisions of larger Bench was missed having deleterious effect on the operation of the rule of audi alteram partem and fundamental principles of justice.”

56. There are decided cases which mandate that the lapses in course of hearing having deleterious effect on the operation of the rule of audi alteram partem should also be cured Ex debito justitiae. The Rule of Audi alteram partem is bound to collapse if a judicial decision-making process takes into account extrinsic factors to turn them into decisive grounds . In the impugned judgment this Hon’ble Court quoted 3 long paragraphs from a book which, on all points of probability, give an impression that it was written to influence the decision in this very case. A hearing in which a Constitution Bench decision is collapsed by a Division Bench (going counter to the hierarchic structure of the Supreme Court in which a larger Bench decision is binding on the smaller Bench not as a matter of courtesy but as a matter of law[151]) with such pejoratives as “hiccup” and “temporary turbulence” can not constitute a fair perspective for the Rule of Audi alteram partem. If an issue of legality under the Income-tax Act, 1961 is examined de hors the provisions of the statute in order to promote an interest (for augmentation of foreign exchange etc ) alien to tax law, can it be considered that the Rule of Audi alteram partem is met? It is most respectfully submitted that the subtle crypto-psychic predilections can distort a determination. The exotic “holistic” economic ideas are likely to subjugate judicial consideration. It is clear that the Income-tax Act, 1961, commands every authority created under it to forget all his economics till Parliament selects any of its shibboleths to turn that into the law. It is not samyaka sravana (Right Hearing) without which, as Lord Buddha said, Right Comprehension is impossible.

An Anatomy of the Rule of Audi alteram partem

57 Some of the situations, under which the Rule of Audi alteram partem is bound to languish in breach, are thus summarised in Union v. T R Verma[152] per Venkatarama Aiyar J.:

“Stating it broadly and without intending it to be exhaustive… rule of natural justice require that a party should have the opportunity of addressing all relevant evidence on which he relies, that the evidence of the opponent should be taken into account in his presence, and that he should be given the opportunity of cross-examining the witnesses examined by that party, and that no materials should be relied on against him without his being given an opportunity of explaining them.”

As the summary is not exhaustive, a brief anatomy of this rule is attempted hereunder by this Petitioner to show, later, that the impugned judgment is not in compliance with his Rule of Audi alteram partem.

57A Lord Loreburn made a classic formulation of the ‘fair hearing test” in Board of Education v Rice[153]:

“In such cases the Board of Education will have to ascertain the law and also to ascertain the facts….. in doing either thy must act in

good faith and fairly listen to both sides, for that is a duty lying upon everyone who decides anything”.

58. This Petitioner submits that because of the adoption of constrictive parameters for providing remedy Ex debito justitiae this Hon’ble Court thought it appropriate to dismiss this Petitioner’s Curative Petition in limine. This Petitioner sets out to explore the judicially settled frontiers (advancing, of course) of this great doctrine of which JUSTICE alone is the sovereign goal. This is done to place before this Hon’ble Court submissions on the proper reach and ambit of the doctrine of Ex debito justitiae.

Judicial Correction Ex debito justitiae

59. That this Petitioner submits that on analysis and examination of decided cases a set of principles emerge which can cumulatively be considered the categorical imperatives of the Doctrine of Ex debito justitiae. These can be classified under three heads:

I. ILLEGALITY Substantive ultra vires
(i) Decision per incuriam of the constitutional or statutory provisions;

(ii) Decisions per incuriam of the binding judicial decisions;

II. PROCEDURAL IMPROPRIETY Procedural ultra vires
(i) Decisions without jurisdiction;

(ii) Decisions in breach of the Rules of Natural Justice;

(iii) Decisions tainted with irrationality (Objective unreasonableness).

III. Actus Curiae Neminem Gravabit
(An act of the Court shall prejudice no man)

 

In effect, essentially these grounds are one ground: ultra vires. The doctrine of ultra vires applies under our constitution system as all the organs (including the judiciary) are the organs of the State being the creatures of the Constitution.

Decision per incuriam of the constitutional or statutory provisions;

60. On precedents and principles it is settled that the courts are competent to grant remedy Ex debito justitiae in the following situations:

(i) Where a fundamental right is violated. In A. R. Antulay v. R. S. Nayak and Anr[154] this Hon’ble Court observed:

“In our opinion, we are not debarred from re-opening this question and giving proper directions and correcting the error in the present appeal, when the said directions on 16th February, 1984, were violative of the limits of jurisdiction and the directions have resulted in deprivation of the fundamental rights of the appellant, guaranteed by Articles 14 and 21 of the Constitution. The appellant has been treated differently from other offenders, accused of a similar offence in view of the provisions of the Act of 1952 and the High Court was not a Court competent to try the offence. It was directed to try the appellant under the directions of this Court, which was in derogation of Article 21 of the Constitution.”[155]

“We are clearly of the opinion that the right of the appellant under Article 14 regarding equality before the law and equal protection of law in this case has been violated. The appellant has also a right not to be singled out for special treatment by a Special Court created for him alone. This right is implicit in the right to equality. See Anwar Ali Sarkar's case (AIR 1952 SC 75)……”[156]

“ In Nawabkhan Abbaskhan v. State of Gujarat, (1974) 3 SCR 427 : (AIR 1974 SC 1471), it was held that an order passed without hearing a party which affects his fundamental rights, is void and as soon as the order is declared void by a Court, the decision operates from its nativity. It is proper for this Court to act ex debito justitiae[157].”

“It was emphasised that an order which this Court could make in order to do complete justice between the parties, must, not only be consistent with the fundamental rights guaranteed by the Constitution, but it cannot even be inconsistent with the substantive provisions of the relevant statutory laws (Emphasis supplied)”[158].

(ii) Where a statutory provision is not perceived or where a binding judicial decisions are not followed.

“….. We are correcting an irregularity committed by Court not on construction or misconstruction of a statute but on non-perception of certain provisions and certain authorities which would amount to derogation of the constitutional rights of the citizen.”

(iii) Where statutory provisions stand disregarded. The Court of Appeal observed in the Bristol Aeroplane Case[159]:

“It cannot …..be right to say in such a case the court is entitled to disregard the statutory provision and is bound to follow a decision of its own when that provision was not present to its mind. Cases of this description are examples of decision given per incuriam.”

It is a fundamental proposition of our constitutional law that “the Constitution and the laws bind every court in India, and that though the courts are free to interpret, they are not free to overlook or disregard the Constitution and the laws”[160]

61. In R.v.Shivpuri the House of Lords departed from the view taken by five Law Lords in Anderton v Ryan only a year back as the House felt that Anderton caused serious distortions in law. Lord Bridge in his principal speech articulated the ground for a reconsideration in an extremely compressed, almost axiomatic statement: “If a serious error embodied in a decision of this House has distorted the law, the sooner it is corrected better”. A distortion of law is itself a matter of gravest concern [as is illustrated by R. v. Secretary of State for Foreign and Commonwealth Affairs, ex parte Rees-Mog[161] wherein locus standi was given by the Queen’s Bench Division to Lord Rees-Mogg on the sole ground that he brought “ the proceedings because of his sincere concern for constitutional issues.”] Distortions in law, like the distortions on account of a curved mirrors, seriously affect the administration of justice as their pathogenic effects subvert the operation of the Rule of Natural Justice, lead, inevitably, to jurisdictional errors, and result in a serious miscarriage of justice. Distortion of law is a portmanteau of such lapses which affect the delivery system of justice, and cause a serious miscarriage of justice at the same time. It is this fundamental principle of fair justice delivery system which this Hon’ble Court stressed when it observed in Devidayal Rolling Mills v. Prakash Chimanlal Parikh [AIR 1993 SC 1982 at 1990]

“There is no question of any acquiescence, waiver or estoppels against a party where the error is committed by the court itself. This Court is under a bounden duty to correct its own mistake”[ italics supplied by H.M. Seervai, Const. Law 4th ed p. 2660].

The effect of this decision is thus stated by H.M. Seervai (at p. 2661):

“The above discussion shows that an order passed by the Supreme Court by mistake or under a miscomprehension is null and void, and the Supreme Court is under a duty to declare such an order null and void.”

The Petitioner would underscore the core observation, shared by the whole House: “If a serious error embodied in a decision of this House has distorted the law, the sooner it is corrected better”. The word “distortion” means, as the Collins Cobuild Dictionary says: “Distortion is the changing of the meaning or purpose of something that you strongly disapprove of”. The New Shorter Oxford English Dictionary defines it thus: ‘The action of perverting words, facts, etc. from their natural interpretation or intent; misconstruction, misrepresentation”. The finality of a judicial order does not mean de hors the law and justice, as even our apex court has never claimed to be above law and justice. Lord Hailsham was right when he reminded the judges in his Hamlyn Lectures that the rule “Be you ever so high, the law is above you” applies to the judges as it applies to ministers.(italics supplied). The word “final” does not mean de hors the law and justice, as even our apex court has never claimed to be above law and justice.. As a curved mirror puts things out of shape and makes them look crooked,serious legal mistakes ( whether per incuriam or per ignorantiam ) frustrate the right operation of the rules of Natural Justice, and create inhibitions, stock-responses, distractions, and mere assumptions in the judicial appreciation of the case presented.

62. This Petitioner would show in course of this Writ Petition how a host of legal distortions crept in the impugned Judgment: some of these are briefly mentioned hereunder:

( i ) It is a constitutional solecism to hold that the Agreement for the

Avoidance of Double Taxation is done in exercise of power

within the executive domain (Art. 73 of the Constitution of

India), as under our Constitution, as in the U.K., power over

taxation wholly and exclusively went out to Parliament; and can be exercised by the executive only within the strict frontiers of power granted by Parliament.. A tax-treaty is done in exercise of the delegated power on the terms of section 90 of the Income-tax Act, 1961. To call Section 90 a mere “special procedure” is to overlook the law as it is. The provision is couched and structured in ‘If….then’ format ( in technical language protasis….…apodosis)

( ii ) There are manifest distortions in this Hon’ble Court’s view of the Section 90 of the Income-tax Act as this Hon’ble Court overlooked many material terms of the Section: overlooked the terms at the base of the Section ( “enter into” ), overlooked the import of the core pre-condition for the exercise of the delegated power, “ the avoidance of double taxation”.

( iii ) Patent legal distortions become much worse when they become telescoped. To illustrate this, a paragraph from the impugned Judgment is quoted:

“The contention of the respondents, which weighed 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”. [p.30 of the Judgment.

A Circular is never issued under Section 90. There is not a word in Section even to contemplate its issuance. The judicial logic suffers from the fallacy of ex nihilo (out of nothing). It refers to “notification in the Official Gazette” which is as different from a Circular as is chalk as to cheese. As the main holding is patently wrong, deduction from it is bound to be wrong. The mistake gets further compounded when it is observed, “it must have the legal consequences contemplated by sub-section (2) of section 90.” The legal consequence of Section 90(2) has absolutely nothing to do with anything which Section 90(1) contemplates. Section 90 (2) was inserted by the Finance Act (No 2) Act, with effect from 1. 4. 1972 for an entirely different purpose. It authorizes the grant of benefits which in view of statutory amendments taxpayers get, but the beneficiaries of a tax treaty do not get because of the terms of a governing tax-treaty remained as they were.. To draw a crowning conclusion, “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” has no statutory warrant. Rather this Petitioner would show later that Section 90(2) proves the opposite conclusion. This Hon’ble Court, thus, acted per incuriam. [It was again a view per incuriam when this Hon’ble Court observed “By a Circular No. 682, dated March 30, 1994 ([1994] 207 ITR (St.) 7), issued by the Central Board of Direct Taxes in exercise of its powers under section 90 of the Act…….”]

( iii ) This Hon’ble Court’s view of Section 119 is clearly per incuriam. It is beyond comprehension to think that by exercise of power under this Section the Executive can exercise Dispensing Power, and bring the Income-tax Act, so draconian for our citizenry, to a vanishing point by immunizing the foreigners from the scrutiny by the quasi-judicial authorities. To call a Circular 789 an act towards the proper management of the Revenue is beyond comprehension. Instead of settling the law on the point, this Hon’ble Court adopted an erroneous view. It is seen that in Commissioner of Customs, Calcutta v. Indian OIL Corporation Ltd. [2004 (165) E.L.T. 257 (S.C. ) Hon’ble Justice P. Venkatarama Reddi J suggested that this issue deserves to be referred to the Constitution Bench. In Commissioner of Central Excise, Bolpur Vs M/s Ratan Melting & Wire Iindustries, Calcutta[162] a reference has been made for constituting a Constitution Bench. But in Pahwa Chemicals Pvt Ltd vs the Commissioner of Central Excise[163] material propositions contradicting some seminal principles in the impugned Judgment, have already been declare. This aspect of the matter is developed later vide paras 250-261.

( iv ) The view that the terms of the Agreement can override the statute is patently per ignorantium as it clearly goes against the Income-tax Act and the Constitution of India. The High Court decisions mentioned in the judgment to constitute stare decisis deserved to be overruled pro tanto; and the invocation of the doctrine goes manifestly against its grammar as judicially expounded in many a cases. The issue, whether the Circulars (or by that matter even the tax Agreements) can detract from the Statute, deserves to be referred to the Constitution Bench for an authoritative decision ( as also suggested by Hon’ble Justice Reddy, referred above).

( v ) To sustain Treaty-shopping as valid is to go against the Personal Scope of the DTAC, go counter to the universally established principle of public international law, and to do which has not before this Judgment was done anywhere in this wide World which has developed what the Statute of the International Court of Justice says, civilized jurisprudence. It is not a matter of pride for the common people of this Republic to know its highest Court, constitutionally bidden to do complete justice, is helpless in the unravelment of fraud, but thinks it enough to make a cri de Coeur to Parliament.

( vi ) In the jurisprudence of all the major jurisdictions the courts always frustrate fraud. The common law courts had developed the Doctrine of the Lifting of Corporate Veil under its creative jurisdiction. This Petitioner would show later how the exposure of fraud is integral both to our Public Policy which the municipal courts give effect, and the International Public Policy recognized under the peremptory norm of jus cogens. The following observation is clearly per incuriam:

“The decision of the Chancery Division in F.G. (Films) Ltd., In re [1953] 1 WLR 483 was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent "fraud". This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the courts are empowered to lift the veil of incorporation while applying the domestic law.”.

Dias in his Jurisprudence has discussed F.G. (Films) Ltd as laying down a general principle for frustrating fraud on the law. Not only the common law courts, even civil law courts crack shell to see the inner operative realities if justice demands so. The continental courts invoke several variants of the anti-abuse doctrine. It is wrong to say that “ the courts are empowered to lift the veil of incorporation while applying the domestic law.” This observation is clearly per incuriam. The doctrine of the Lifting of Corporate Veil has been held relevant by the International Court of Justice in the famous the Barcelona Traction, Light and Power Company Ltd[164] [ vide para 163 P. 160 infra ]. The ICJ considers this doctrine relevant as it illustrates the “general principles of law recognized by civilized nations” ( Art 38 of the Statute of the ICJ).

( vii ) That this Hon’ble Court permits the Executive to promote the economic policy of the government designed to invite more and more of the FDI and foreign exchange when this pursuit is wholly extraneous to the object for which power is granted under the Income-tax Act. There is not a word in the Income-tax Act which would show that the executive possesses any open-ended power. Economic policies under the law of income-tax are always enacted in specific terms. To use power to promote extraneous purpose is to act mala fide[165].

( viii ) That this Hon’ble Court read the Judgment of Justice Reddy in McDowell in a manner none would read. The Attorney-General Mr Sorabji’s most atrocious plea in the Court that Justice Reddy’s Judgment was a mere reaction to his provocation as a counsel of McDowell & Co has borne fruit. The Hon’ble Division Bench of two Judges acted beyond jurisdiction in subjecting the Constitution Bench decision to a treatment which make it a mere “hiccup” or temporary turbulence”.

Decisions per incuriam of the binding judicial decisions

63.That if a binding decision is not followed there is a serious breach of law which must be corrected at the earliest. In the impugned judgment the Division Bench of this Court failed to follow the Constitution Bench Decision in McDowell’s Case. The operative rule was thus stated in A. R. Antulay v. R. S. Nayak and Anr[166]:

“The principle in England that the size of the Bench does not matter, is clearly brought out in the decision of Evershed M.R. in the case of Morelle v. Wakeling, (1955 (1) All ER 708) (supra). The law laid down by this Court is somewhat different. There is a hierarchy within the Court itself here, where larger Benches overrule smaller Benches. See the observations of this Court in Mattulal v. Radhe Lal, (1975) 1 SCR 127: (AIR 1974 SC 1596), Union of India v. K. S. Subramanian (1977) 1 SCR 87 at p. 92: (AIR 1976 SC 2433 at p. 2437) and State of U.P. v. Ram Chandra Trivedi, (1977) 1 SCR 462 at p. 473 : (AIR 1976 SC 2547 at p. 2555). This is the practice followed by this Court and now it is a crystallised rule of law. See in this connection, as mentioned hereinbefore, the observations of the State of Orissa v. Titaghur Paper Mills AIR 1985 SC 1293) (supra) and also Union A India v. Godfrey Philips India Ltd., 1985 Suppl (3) SCR 123 at p. 145 : (AIR 1986 SC 806 at p. 815). p. 1548 para 46”.[ italics supplied].

Thiat the aforesaid view has been reiterated by this Hon’ble Court, per Shetty J. in Triveniben v. State of Gujarat[167] vide para 38 at p. 42 supra. The course which the Division Bench should have follwed should have what the 3-judges Division Bench had adopted in Commr. Of Central Excise v. Tatan Smelting & Wire by observing :

“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.”

Decisions without jurisdiction

64. Jurisdiction” of a Court involves an exercise of the judicial power which is derived from the judicial power of the State. “Jurisdiction’ means:

“…the authority which a court has to decide matters that are litigated before it or to take cognizance of matters presented in a formal way for its decision. The limits of this authority are imposed by the statute, charter, or commission under which the court is constituted, and may be extended.”

It is within this ‘jurisdiction’ that judicial power is exercised. “Judicial power” means;

“….the power which every sovereign authority must of necessity have to decide controversies between its subjects, or between itself and its subjects, whether the rights relate to life, liberty or property. The exercise of this power does not begin until some tribunal which has power to give a binding and authoritative decision (whether subject to appeal or not) is called upon to take action.”

If a Court exceeds the limitations on its “jurisdiction” or ignores (or overlooks) the rules of procedural fair play the court would

“abuse” the judicial process causing a “miscarriage of justice”[168]. A. R.

Antulay v. R. S. Nayak and Anr this Hon’ble Court states;

“The Privy Council in Debi v. Habib, (1913) ILR 35 All 331, pointed out that an abuse of the process of the Court may be committed by the court or by a party. Where a court employed a procedure in doing something which it never intended to do and there is an abuse of the process of the court it can be corrected. Lord Saw spoke for the Law Lords thus :-

"Quite apart from section 151, any court might have rightly considered itself to possess an inherent power to rectify the mistake which had been inadvertently made."

It was pointed out by the Privy Council in Murtaza v. Yasin, AIR 1916 PC 89 that :-

"Where substantial injustice would otherwise, result, the

court has, in their Lordships' opinion, an inherent power to set

aside its own judgments of condemnation so as to let in bona fide claims by parties .............".

Indian authorities are in abundance to support the view that injustice done

should be corrected by applying the principle actus curiae neminem gravabit

- an act of the Court shall prejudice no one”[169].In Antulay’s Case Ranganath

Misra J. observed:

“Brother Mukharji has referred to several authorities in support of his conclusion that an order made without jurisdiction is not a valid one and can be ignored, overlooked or brushed aside depending upon the situation. I do not propose to delve into that aspect in my separate judgment”.[170]

"The Judge had jurisdiction to correct his own error without entering into a discussion of the grounds taken by the decree-holder or the objections raised by the judgment-debtors."[171]

In Govind Menon v Union[172] the Sup Ct said:

‘A clear distinction must, therefore, be maintained between want of jurisdiction, and the manner in which it is exercised. If there is want of jurisdiction, then the matter is coram non judice and a writ of prohibition will lie to the Court or inferior tribunal forbidding it to continue proceedings therein in exercise of its jurisdiction.’

The exercise of power within “jurisdiction” must conform to certain basic principles of justice otherwise the Court would exceed its jurisdiction. The following observations of de Smith deserve to be noted:.[173]

“As a general rule, wrongful rejection of evidence by an inferior tribunal is not of itself a ground for the issue of mandamus or certiorari since it does not constitute a refusal or excess of jurisdiction but is merely an erroneous exercise of jurisdiction which is not redressable except on appeal. There are three main exceptions to this rule:

(a) Where the refusal to admit evidence amounts to a refusal to hear a party before the tribunal, or to a refusal to accord a hearing that complies with the audi alteram partem rule of natural justice, in which case certiorari will issue to quash the decision.

(b) Where a refusal to admit evidence amounts to a refusal of jurisdiction. This situation arises where the tribunal’s reason for rejecting the evidence is that it believes, erroneously, that it has no authority to determine the matter which the evidence is designed to prove.”

( c ) Even refusal to receive evidence may amount to a refusal to exercise jurisdiction. Prof Wade has summarized this point by stating that “Refusal to receive evidence on some relevant point may also amount to refusal of jurisdiction…… Refusal to consider a party’s case also has to be distinguished from refusal to accept his argument. As Lord Goodard CJ said:

‘……to allow an order of mandamus to go there must be a refusal to exercise the jurisdiction. The line may be a very fine one between a wrong decision and a declining to exercise jurisdiction; that is to say, between finding that a litigant has not made out a case, and refusing to consider whether there is a case……”[174]

Order when without jurisdiction.

65. (a) Rubinstein in his Jurisdiction and Illegality says :

"..........In practice, every act made by a superior Court is

always deemed valid (though, possibly, voidable) wherever it is relied upon. This exclusion from the rules of validity is indispensable. Superior Courts are the final arbiters of the validity of acts done by other bodies, their own decisions must be immune from collateral attack unless confusion is to reign. The superior Courts decisions lay down the rules of validity but are not governed by these rules."[175]

The idea that the decision of the apex court is beyond questioning even when it is nullity, or it causes a gross miscarriage of justice has nothing to commend itself. The implications of “void” and “voidable” were considered by the Privy Council in Calvin v. Carr[176]. A decision reached in violation of the principles of natural justice is void but until it is so declared by the court it has the existence in law. The inherent contradiction in between the first two sentences in the definition as given by Rubinstein deserves to be noted. The word “final” does not mean de hors the law and justice, as even our apex court has never claimed to be above law and justice.. “ Lord Hailsham was right when he reminded the judges in his Hamlyn Lectures that the rule “Be you ever so high, the law is above you” applies to the judges as it applies to ministers.(italics supplied) Rubinstein approves of a collateral attack only if “confusion is to reign”. What precisely he means is what Sydney Smith says:

“The only way to make the mass of mankind see the beauty of justice, is by showing them, in pretty plain terms, the consequences of injustice.”

This Petitioner most humbly would show later how this impugned Judgment would fail in protecting public interest under aspects of corrective justice..

(b) Even refusal to receive evidence may amount to a refusal to exercise jurisdiction. Prof Wade has summarized this point by stating that “Refusal to receive evidence on some relevant point may also amount to refusal of jurisdiction…… Refusal to consider a party’s case also has to be distinguished from refusal to accept his argument. As Lord Goodard CJ said:

‘……to allow an order of mandamus to go there must be a refusal to exercise the jurisdiction. The line may be a very

fine one between a wrong decision and a declining to exercise jurisdiction; that is to say, between finding that a litigant has not made out a case, and refusing to consider whether there is a case……”[177]

( c) A decision clearly per incuriam should not be allowed to stand[178] when it distorts law and seriously affects the nation’s interest. A decision in which the material statutory terms are not taken into account; and a decision which promotes extraneous purpose does cause a gross miscarriage of justice. Under the Income-tax Act the policy content is always enacted. To accept that a tax treaty under the Income-tax Act can be used to amass foreign exchange is to go counter to both the Act and the Constitution of India. To allow the statute to be used for purpose extraneous to its object is also to act without Jurisdiction. This Hon’ble Court missed a vital point that whatever be position in other tax laws, under the Income-tax Act entire policy component is always, without any exception, legislatively enacted. The authorities under the Act, including the CBDT, merely administer the statute without any power and authority to think about economic policies. If in this “market economy” the metajuristic interests of the FIIs and the MNCs are to be promoted for gaining “non-tax” benefits and for achieving amorphous and extraneous purpose then there was only one way: to amend the statute. Treaty Shopping involves a sale in bad faith the very good faith which alone sustains pacta sunt

servanda.

( d ) That it would be acting without jurisdiction if this Hon’ble Court turns a bilateral tax treaty into a multi-lateral convention. This Hon’ble Court can only

( a ) interpret the terms of the treaty; and

( b ) can only hold whether certain provisions

of the DTAC ( or whole of it) are valid for

domestic operation.

It can neither introduce a term in a treaty, nor can put a gloss thereon having the effect of modifying in any manner, proximately or not. Only the State possesses treaty-making power to be exercised in accordance with the Constitution[179]. A beneficiary under a tax Agreement must come within the Personal Scope[180] of the tax-treaty as defined in the Art 1 of the DTAC. This Hon’ble Court’s Judgment, against which this Curative is moved, goes against the mandatory terms of the bilateral tax treaty, violates the established principles of Public International Law, and goes counter to our Public Policy, and international Jus cogens. This fundamental error in the Judgment of this Hon’ble Court led it to uphold the evil of Treaty-shopping under the Doctrine of Necessary Evil, and by justifying it with reference to purpose wholly extraneous to the Act. The effect of the Hon’ble Court’s Judgment is to rewrite the Personal Scope of the DTAC which is beyond its Jurisdiction as the consensus ad idem must be of the Contracting States. Treaties, other than tax treaties, can be done in exercise of power under Art 73 of the Constitution; whereas a tax treaty is done in terms of Section 90 of the Income-tax Act, 1961. A tax treaty belongs to the province of contractual treaties. In this impugned Judgment, this Hon’ble Court transgresses the principles of Public International law and the Constitution as it widens the Personal Scope of the Indo-Mauritius DTAC to legitimize the derivation of treaty benefits by the third State residents not within the Personal Scope of this DTAC.

( e ) That this Hon’ble Court in Rupa’s Case rightly considers “the affectation of public confidence as regards the doctrine of integrity in the justice delivery system” as a valid ground for judicial re-consideration. This clause states virtually the tout ensemble ( a sort of portmanteau clause ).We are proud of the moral stature of our Superior Judiciary. But if, perish the thought, the delivery system of justice suffers from gross flaws there would, of course, be a gross miscarriage of justice requiring a grant of judicial remedy through an institutional corrective mechanism . These are:

(i) An erroneous perception of judicial role [ either by improper widening or unfair narrowing ] distorts judicial process in degrees which may vary from case to case. Perception controls and conditions judicial decision making. It would be shown later in the Petition how the

narrowing of the perception of Judicial role has led to an abdication of judicial duty, and making a mere cri de Coeur to the Executive and Parliament.

(ii) If a dissociation sets in, even for the noblest of reasons, in the judicial sensibility expressing itself in an evident tilt towards the Executive there is surely a gross miscarriage of justice as, in such a case, scales are not held even. Promotion of an extrinsic or extraneous purpose is illegal and unfair at the same time. Liversidge v Anderson[181] was one such case in which in the dissenting judgment Lord Atkin referred to the court “being more executive-minded than the executive.” First in Rossminster and then in Khwaja, the House of Lords held that the majority judgment in Liversidge was wrong, and Lord Atkin’s dissenting judgment was right--- a conclusion to which an overwhelming volume of competent legal opinion had come long ago.[182] Prof Allen says : “There is , apparently, something in the tranquil atmosphere of the House of Lords which stimulates faith in human nature.”[183]

(iii) It also produces a gross miscarriage of justice when a smaller Bench refuses to be bound by the decision of a larger Bench as it destroys the integrity of our judicial delivery system. If the Division Bench of two judges departs from the decision of the Constitution Bench by dubbing it a “temporary turbulence” and “hiccups”, there would be good reason to believe that justice become a casualty in some way. “A hiccup” is a small problem or difficulty , usually one which can be fairly easily put right”( Collins Cobuild English Language Dictionary) “Turbulence” is “a state of confusion and constant, disorganized change”. It is humbly submitted that this is what has happened in this case.

(iv) Whilst mistakes of law are generally errors in the course of jurisdiction, but if they become grossly shocking by going beyond the band of reasonableness, they become errors going to jurisdiction itself.

Decision in breach of the Rules of Natural Justice

66. This Hon’ble Court, which has produced a rich corpus of justice-oriented jurisprudence, with activist dimensions, would construe the Audi alteram partem creatively to render substantial and substantive justice. Even a conservative judge of the U.S Supreme Court, Justice Felix Frankfurter observed in Caritativo v. California[184]:

audi alteram partem ---hear the other side!--- a demand made insistently through the centuries, is now a command, spoken with the voice of the Due Process Clause of the Fourteenth Amendment, against state governments, and every branch of them……whenever any individual, however lowly and unfortunate, asserts his legal claim.”

Justice Frankfurter had observed: ‘The history of liberty has largely been the history of the observance of procedural safeguards.”[185]When material evidence is omitted from consideration on patently erroneous ground the rule of Audi alterem partem is violated. Goldsmith v. Sperrings Ltd[186] stated an important principle in the context of the Superior Court ( here the Court of Appeal ). Explaining how the judge’s “judicial research” was in breach of the rules of audi alteram partem Bridge,LJ. said:

“ Hence there is a breach of the rule of audi alteram partem which applies alike to issues of law as to issues of fact. In a court of inferior jurisdiction this would be ground for certiorari ; and I do not think that this Court should adopt in its own procedure any lower standards than those it prescribes for others.

It is a sound principle of justice that the Superior Courts should also be measured by the standards which they prescribe for the court of inferior jurisdictions. The words of Lord Bridge italicized in that quotation from Goldsmith v. Sperrings Ltd[187] are the word in gold. This would lead to a deeper faith in the integrity of the justice delivery system at the level Supreme Court. The majority judgment in Ridge v. Baldwin[188] would suggest that an inferior tribunal, which does not observe the principles of natural justice, acts without jurisdiction and its order is a nullity. Consequently, certiorari lies to quash the order of the Tribunal acting contrary to the principles of natural justice.

Lord Bridge in R. v. Home Sec. Ex p. Al-Mehdawi[189] observed that the traditional view, that a tribunal which denies natural justice to one of the parties deprives itself of its jurisdiction, may or may not be correct. But, “a breach of the Rules of natural justice is certainly a sufficiently grave matter to entitle the party who complains of it to a remedy ex debito justitiae”.

Infraction of the Rules of Natural Justice

67.That at the outset itself would highlight some of the instances of the breach of the Rules of Natural Justice:

(i) The very foundation of the PIL stood destroyed by the circling out the facts set forth in the Assessment Order of M/S Cox & King. Erroneous Rejection of all materials constituting the factual substratum amounts to the breach of the audi alteram partem[190] Where material facts get excluded from judicial deliberation there is clearly a gross breach of the principle of Audi alteram partem. Materials gathered by the Assessing Officer in the Assessment Order had been incorporated in the Writ Petition for rebuttal. All the facts stated in that Assessment Order stand admitted as none was ever denied, rebutted, or even qualified by the Union of India and others. The exclusion of such materials, essential to support the core issue in this case and to provide substratum to the case itself, is, it is respectfully submitted, acting both beyond Jurisdiction, and in the breach of Audi alteram partem.

( ii ) This Hon’ble Court acted in breach of the rule of Natural Justice and Fair play by accepting the plea of the Att-Gen. Mr. Sorabji and the counsel for the tax haven company, Mr. Salve, that the abuse of Treaty-shopping was “perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into.” [ the Judgment page 100: (263 ITR 706 at p. 753) ]. This plea had absolutely no basis. The acceptance of this plea on “no material” destroyed the Petitioner’s case against the Treaty Shopping. It has caused a serious miscarriage of justice. In Dhirajlal Girdharilal v. CIT[191], CIT v Daulatram Rawatmull[192], Dhakeswari Cotton Mills Ltd v. CIT[193], Omar Salay Mohammed v CIT[194]; and Lalchand Bhagat Ambica Ram v. CIT[195], the Supreme Court set aside the assessment on the ground that it is based on bare suspicion, conjectures and surmises and further held in the first two cases that a finding of fact would be

vitiated if it is based partly on conjectures or on material which were partly inadmissible or irrelevant, even though there may be some other relevant and admissible material to support the finding.”[196] Collins Cobuild English Language Dictionary defines the terms of material blemishes thus: If you surmise that something is true, you guess it from the available evidence, although you do not know for certain.” “Conjecture is the formation of ideas or opinions from incomplete or doubtful information.”“ Suspicion is the feeling that you do not trust someone or that something is wrong in some way, although you have no evidence for it.” In fact, this Judgment reveals a far graver error: by accepting the Appellants’ suggestion by this Hon’ble Court has led to the fallacy of ex nihilo (to draw something from nothing).

( iii ) T his Hon’ble Court quoted and relied on three long paragraphs from the bookby Roy Rohatgi, Basic International Taxation, without putting them under critical focus in course of arguments. In a long Section ( vide paragraphs 140 to 176 pp. 126-175infra ] this Petitioner has, with greatest humility but under duty of candour in public interest, has shown how this Hon’ble Court, through oversight, was led to form its view [ with an evident ambivalence in mood as revealed through the judicial invocation to the Executive and Parliament to take initiative to stop the evil ] on Treaty-shopping on the basis of the flawed ideas set forth in the book, unsound and unworthy in many ways to be stated later This Petitioner was driven to submit with candour in national interest, in para 87 of the Review Petition:

“Is it fair to make this book the source of sole uncritical reliance in deciding the issue of Treaty Shopping abhorrent to the very fundamentals of civilized jurisprudence? Can’t a multibillionaire accused get a hack to write for him a treatise promotive of his case before a court of law as in this globalised market economy everything is res commercium? Will a court of law in its proper role decide in his favour accepting the thesis of such an interested person? It is a sound adage that justice should be seen to have been done.”

This Hon’ble Court relied on the Conduit Companies Report 1987 in a clear breach of the rule of Audi alteram partem. If this Conduit Companies Report would have been ever put to this Respondent he would have proved how worthless and mischievous the reasoning of the Committee on Fiscal Affairs of the OECD was.

( v ) That the main reasons for sustaining the evil of Treaty Shopping is thus stated in the Judgment against which this Petition is moved:

“There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development. Deficit financing, for example, is one; Treaty Shopping, in our view, is another. Despite the sound and fury of the Petitioners over the so called ‘abuse’ of ‘Treaty Shopping’, perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of Treaty Shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy.”

This Petitioner would show that the core thesis --“A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy.”—is arrived at in clear breach of the Rules of Natural Justice. This thesis brings out the following three points for research the outcome of which depended on the variables and sub-variables about which reasonable persons can reasonably differ. An uncritical reliance on a book so sub-standard as Roy Rohatgi’s cannot be called even a seeming research. If this Hon’ble Court would have put the ideas in Roy Rohatgi’s in the central focus, this Petitioner would have shown how baseless they were. Lord Bridge L.J. in Goldsmith v. Perrings Ltd[197] observed that a judgment based on the Judge’s “judicial research”, the result of which has not been put to counsel, violates the rules of audi alteram partem since that rule applies both to facts and law. Dissenting from Lord Denning, Scarman L.J. said:

“….But the fourth and most important reason is that this part of the Master of Rolls’ judgment decides against the plaintiff on a ground on which

Mr. Howser, for the plaintiff, has not been heard. This is because Mr. Comyn never took this point, and the Court did not put the point to Mr. Howser during the argument. Hence there is a breach of the rule of audi alteram partem which applies alike to issues of law as to issues of fact. In a court of inferior jurisdiction this would be ground for certiorari ; and I do not think that this Court should adopt in its own procedure any lower standards than those it prescribes for others.[198]

68. The judicial deductions entering into the aforequoted paragraph are not from the terms or principles of the Income-tax Act, 1961, but are based on stock-responses and uncritical unilateral assumptions open to serious debate. Besides, the tone of the judicial exposition erecting towards the end the unanswerable doctrine of Necessary Evil, when the question of legality alone is under a focus, robs much of the content of judicial detachment. It is a salutary principle that if the judges have certain views as to economic management, and certain views as to degrees to which the Evil of expediency can be allowed to hold sway in the realm of legality, would not be disposed to decide issues dispassionately This is all the more so because of the vast dexterity of judicial “craftsmanship” which even this Hon’ble Court recognized when Justice Bhagwati observed in Union v. Sankalchand[199]:

“….some judges may, on account of threat of transfer be induced albeit, not consciously or deliberately to do that which pleases the executive to avert such injury and if they are competent and skilled in juridical craftsmanship it would not be difficult for them to find arguments to justify their action in falling in line with the wishes of the executive because reason is a ready-enough advocate for the decision one consciously or unconsciously desires to reach.”

It is most respectfully submitted that the judges who believe in extra-legal or meta-juristic notions may turn reason ‘a ready-enough advocate for the decision one consciously or unconsciously desires to reach.” It is respectfully submitted that this sort of the style of perception in a non-Balco-like situation where legality alone is a prime consideration violates not only the rules of Natural Justice, it also results in the breaking of jurisdictional frontiers. Laws LJ. in Thoburn v Sunderland City Council[200]aptly stressed on the principle of legality when in the context of certain provisions of European Communities Act 1972 observed:

“ Whatever may be the position elsewhere, the law of England disallows any such assumption.”

And the argument founded on the so-called economic expediency propounded by the two musketeers, the two appellants (the one claiming to represent the Republic of India, and the other understandably with a sur-realistic presence), leads this Petitioner to recall these lines from T.S. Eliot in Murder in the Cathedral:

The last temptation is the greatest treason:

To do the right deed for the wrong reason.

This Petitioner intends to place before this Hon’ble Court his submissions how the aforesaid ideas, relied on by the Division Bench of this Hon’ble Court in its impugned Judgment, suffer from two patent flaws:

(a) the Hon’ble Division Bench exceeded its jurisdiction in embarking on a speculative pursuit of identifying the so-called economic policies underlying Section 90(1) of the Income-tax Act, 1961; and

(b) assuming, arguendo, that the Hon’ble Bench was within its jurisdiction to gaze through a crystal, the economic theory accepted and propounded is flawed, and the right course for the Hon’ble Court was to put these ideas as an issue in course of hearing so that this Petitioner could address the Hon’ble Court how those ideas are worthless, and not in our nation’s interest.

As these are serious contentions by the Petitioner, he would develop his submissions in a separate Section of this Writ Petition

Judicial Faults are not to cause a prejudice.

69. “No man should suffer because of the mistake of the Court. No man should suffer a wrong by technical procedure of irregularities. Rules or procedures are the hand-maids of justice and not the mistress of the justice. Ex debito justitiae, we must do justice to him. If a man has been wronged so long as it lies within the human machinery of administration of justice that wrong must be remedied. This is a peculiar fact of this case which requires emphasis”.[201] That a Seven Judge Bench of this Court in Synthetics and Chemicals Ltd. and others v. State of U. P. and others, (1990) 1 SCC 109, quoting Lord Denning and Justice Jackson, stated that as soon as one finds a journey in the wrong direction, there should always be an attempt to turn to the right direction since law Courts ought to proceed for all times in the right path rather than in the wrong. In S. Nagaraj's case[202]. per Sahai, J: “Even the law bends before justice."And Lord Hewart in what has become a locus classicus has observed in Rex Sussex Justices[203]:

“…. A long line of cases shows that it is not merely of some importance but is of fundamental importance that justice should not only be done , but should manifestly and undoubtedly seen to be done.

…. Nothing is to be done which creates even a suspicion that there has been an improper interference with the course of justice.”

[ C ] The procedure for the consideration of the Curative Petition was extremely unfair and unreasonable.

70. That in Rupa’s Case a very unfair procedure for consideration of a Curative petition was devised and mandated. The procedure is unreasonable in many ways. Under the procedure the scope of judicial perception and evaluation is so narrow that, in some cases (as in this ), justice is bound to languish.

That the concept of Ex debito justitiae is explained in Mozley Whiteley’s Law Dictionary: “ As a matter of right; in opposition to a matter for the favour of or discretion. As debt of justice. As a matter of legal right. 3 Bla. Com. 48. Back’s Law Dictionary explains it: “From or as a debt of justice; in accordance with the requirement of justice; of right; as a matter of right.” And in Dinesh Dutt Joshi v State of Rajasthan 200 (8) SCC 570 this Hon’ble Court observed:

“It is well established principle of law that every court has inherent power to act ex debito justitiae---to do that real and substantive justice for the administration of which alone it exists or to prevent abuse of the court.”

An assertion of deficiency of justice is too important a plea to be disposed of without hearing, especially a case where there were demonstrated reasons for doing so. If justice is a debtor it must discharge its debt in full. To say that hearing is granted through a consideration in the chamber, is unfair as it misses the nature of the Curative jurisdiction, and the special grounds why even the Curative Petition must be heard in an open court if justice so warrants to be real and complete.

71. That the inherent jurisdiction of this Hon’ble Court which enables it to grant remedy Ex debito justitiae is wider than the power given to the Court under Art. 137 of the Constitution. The full range of lapses which may warrant a remedy Ex debito justitiae can not be subsumed under Order XLVII, rule I of the Civil Procedure Code. In fact, in exercise of inherent power this Hon’ble Court can provide remedy to set right all the serious lapses under any of the well known species of ultra vires. This Petitioner posits it as a cardinal principle of our constitutional law that every authority, irrespective of rank or realm (or scope and scale ), should bow to the Rule of Law for correction. There is no logic of much worth in the argument that in case of an apex institution the doctrine of judicial finality leaves no scope for correction, leaving only one course open to the citizenry: to blame our stars. It is this Petitioner’s fundamental belief that every institution of great impact is capable to produce its corrective mechanism. Introspection and self-evaluation is the essential part of an institution’s moral imagination.

72. That this Curative Petition was the rarest of the rare cases wherein Justice demanded an Oral Hearing in disposing of the matter ex debito justitiae. This Petitioner submitted in his Petition for Oral Hearing stating detailed reasons in support of the prayer as it is one of “some cases [where] the right to make written representations may not suffice” [per Lord Dilhorne in Pearlberg v Varty (1972) 1 WLR 534 HL], and it is a case where the grant of oral hearing would, to borrow the words of Lord Templeman in McMahon (1987) 2 WLR 869, 889, validate or reinforce “ possible defenses foreshadowed in those written representations”. Though by judicial interpretation “circulation” of the petition was interpreted to mean that the matter is to be discussed by the Hon’ble Judges (AIR 1980 SC 808 para 13), yet there can be some rare cases where Justice would languish if hearing is not granted. This is one such case. It was submitted that in Rupa Hurrah’s case, the judicial view of the court’s inherent curative power was unreasonably constrictive: hence needing a re-look to accord an expansive Judicial Grace ex debito justitiae and pro bono publico. In the Curative the Petitioner had submitted that the impugned Judgment of this Hon’ble Court (i) had caused serious distortions of law, both statutory and constitutional; (ii) was vitiated by the breach of the rules of Natural Justice even on core issues; (iii) had gone on several points beyond its jurisdiction; (iv) had caused serious miscarriage of justice because of several patent errors and evident misdirection; (v) had wrongly decided many issues of greatest importance for the people of the Republic of India; and (v) had gone against the decision of the Constitution Bench ( in McDowell & Co v. CTO[204] , followed in many cases, by dubbing it a “hiccup” and “a temporary turbulence” (which act is patently without jurisdiction); (vi) had, instead of deciding issues on legality, invoked totally extraneous political and economic reasons when in the whole corpus of the income-tax law policy quotient is legislatively enacted to become legal provisions leaving no scope for the operation of any doctrines of political prudence, economic holism, or of Necessary Evil. It was further pointed out that the core issue of Treaty Shopping was decided in a patent breach of the rule of audi alteram partem as (a) as Lord McNair has been misread to see X where it is Y; (b) as the Conduit Company Report 1987 was used in breach of the rule compounded by the error of overlooking that the view was later revised and departed from in several jurisdictions( pp. 172-176 of the Curative).; (c ) as many material observations are based on mere surmise having the effect of accepting the slur that the then Attorney-General chose to inflict by implication, in breach of the rule of natural justice, on Mrs Indira Gandhi and Mr Pranab Mukherjee as they had gone to Mauritius in 1982 when the Indo-Mauritius DTAC was under negotiation; (d) as the entire admitted factual substratum in the PIL was not considered by circling out the facts in the Assessment of Cox & Kings by overlooking the settled law accurately stated in Mulla [ in his CPC 14th ed at p 868]; (e) as the sole reasoning for upholding Treaty Shopping is based on three long paragraphs from an interested person’s worthless book, meant for tax haven masqueraders ( which is a mere shabby defence of fiscal vampirism based on no judicial authority) utilized by the Hon’ble Court contrary to the rule of audi alteram partem; (f) as the perspective judicially mandated by McDowell and many other decisions of larger Bench was missed having deleterious effect on the operation of the rule of audi alteram partem and fundamental principles of justice.

73. That in P.N. Iswara Iyer v. Registrar Sup. Ct [205] a hearing of the Review Petition was dispensed with on the ground that the Review Petition had been preceded by a full hearing in open Court. In view of this the objection to hearing the matter behind close doors lost much of its force.. It could have been seen from the GROUNDS of the Curative Petition that the whole criticism related to the decision-making process rather than to the actual decision itself. The breach of the Rules of Natural Justice, and the application of the ultra vires principle kept the focus of scrutiny on the process of judicial decision-making. It was clear that it was not a case where the Hon’ble Court had heard the Petitioner as the defects in the decision-making process can be evident only after the decision is made. In the Application for Oral Hearing the Petitioner had stated, inter alia, the following:

“That the Petitioner feels that under the decision-making procedure provided in Rupa’s case justice may become a casualty if an open oral hearing is not given. The three Hon’ble Judges considering this matter for the first time would surely require this Petitioner’s assistance to prove his points made in the Curative. There are still greater reasons why this Curative be heard in the open court. As this Curative would also be considered by the Hon’ble Judges who had decided the appeal and disposed of the Review, justice requires that an opportunity to this Petitioner to prove his points be given.. This is all the more needed as stock-responses and inhibitions can lead to situations which Justice Frankfurter contemplated when he said in Craig v Harne ( 331 US 367,392 (1947): “It has not been unknown that judges persist in error to avoid giving the appearance of weakness and vacillation”

And it is for such reasons that Lord Bridge in R v. Shivpuri evolved a

method how he should consider a case which he had decided as part of the common palinode less than a year back but was impeached on the grounds of legal distortions.

It is for good reasons that while correcting the serious distortions in law caused by the House of Lords that Lord Bridge stated in R v. Shivpuri[206] how the Court should go about it so that justice is not crushed under procedural quagmire:

“‘That seems to me to afford a sound reason why, on being invited to re-examine the language of the statute in its application to the facts of this appeal, I should initially seek to put out of mind what I said in Anderton v Ryan. Accordingly, I propose to approach the issue in the first place as an exercise in statutory construction, applying the language to the Act to the facts of the case, as if the matter were res integra. If this leads me to the conclusion that the appellant was not guilty of any attempt to commit a relevant offence, that will be the end of the matter. But, if this initial exercise inclines me to reach a contrary conclusion, it will then be necessary to consider whether the precedent set by Anderton v Ryan bars that conclusion or whether it can be surmounted either on the ground that the earlier decision is distinguishable or that it would be appropriate to depart from it under the 1966 Practice Statement.”

That Dimes v. Grand Junction Canal (Proprietors)[207] and again Scott v. Scott[208] laid down the basic rule of the English Judicature that courts do justice in public. In McPhersn v. McPherson the Privy Council observed:

“the order directing the proceedings of the trial to be held in camera was so completely beyond the powers of the court that although obtained at the instance of the appellant herself, it might be disobeyed by her with impunity.”

74. The Privy Council was, in effect, stating that an order beyond jurisdiction is no order under the eyes of the law. All this leads to the core issue: is the procedure as envisaged in Rupa’s Case is not capable of producing fair result in all cases. Clearly on the facts of this case the procedure was not fair. Such serious criticism of the impugned judgment which is said to be invalid under the eyes of law can not be brushed aside in chamber by the Hon’ble Judges.

[ D ] SUBMISSIONS SUMMED-UP

75. That this Petioner has striven to show that the judicial views in Rupa’s case

(i) that the superior court is not comprehended within the concept of the “State” under Art. 12 of the Constitution of India; and

(ii) that the judicial practice and jurisprudence excludes the Superior Courts from the ambit and reach of its corrective power under Art. 32 of the Constitution;

are erroneous, the first because it missed to appreciate the role of the “State” within the framework of modern constitution and public international law; and the second, because it missed to take into account the protean malleability and flexibility in view of the pragmatics of the judicial process. It is worth recalling F W Maitland wrote to Dicey: that “the only direct utility of legal history lies in the lesson that each generation has an enormous power of shaping its own law”.

76. That if this Hon’ble Court in Rupa’s Case would have explored the wide frontiers of its inherent powers and the profundity of the doctrine of Ex debito justitiae , it could have provided remedy for which certiorari is conventionally prayed for. Lord Diplock in Council of Civil Service Unions v Minister for the Civil Service[209] classified under three heads the grounds on which administrative action is subject to control by judicial review: ‘illegality”, ‘irrationality”, and “procedural impropriety”. Essentially these grounds are one ground, ultra vires.[210] But such serious blemishes in a judicial act of the Superior Judiciary also deserves to be set right, a fortiorari, as such lapses (if remain uncorrected on this or that ground) would shake people’s confidence in the probity of justice delivery system. This is the precise reason which might have led Lord Bridge L. In Goldsmith v. Sperrings Ltd[211] to state an important principle in the context of the Superior Court ( here the Court of Appeal ). Lord Bridge’s view has already been referred but because of its seminal importance in this context, it deserves to be repeated: explaining how the judge’s “judicial research” was in breach of the rules of audi alteram partem it was observed:

In a court of inferior jurisdiction this would be ground for certiorari ; and I do not think that this Court should adopt in its own procedure

any lower standards than those it prescribes for others.

77 .That , when all is said, without making fetish of for m, this Petitioner prays for Justice. This Hon’ble Court has vast powers to forge right remedy exercising the creativity of the common law jurisdiction which it shares in wide amplitude. Dr T.B. Smith in his Tagore Law Lectures Property Problems in Sale aptly observed:

‘For me, as for Lord Stair, Father of Scots Law writing in the 17th

Century, law is ‘reason versant about the affairs of men’”[212]

If legalese is marshalled to uphold the fraud of Treaty Shopping, as has happened in this impugned judgment, not only the high words in the several great decisions of this Hon’ble Court would become wasted words, but will let loose a vampire on national resources. The global gladiators: are fast creating a world of political intrigues, corruption, marked by an evident imbecility to control the mighty forces of the corporate imperium driven by insatiable corporate greed. The way our Government, represented by the most distinguished law officers, presented its case, brings to mind what Prof, John Kenneth Galbraith writes in his A Short History of Economics The Past as the Present (at p. 236):

‘ Here another great constant in economic life: as between grave ultimate disaster and conserving reforms that might avoid it, the former is frequently much preferred.

78. That this Writ Petition is moved with the hope that this Hon’ble Court would grant an effective judicial remedy in this case in which for the first time most momentous issues, involved in the economic architecture of this globalized world, have come up for judicial consideration. Our democracy is at cross-roads, and common citizens keep their fingers crossed. We cannot allow the mystique of a mask to wreck all values which our open society cherishes, and is committed to promote for the welfare of all. It is really a grand and great spectacle to see that that this Republic happens to have its justice process between the words of Gandhari ( that Truth alone triumphs)and the presence of Mahatma Gandhi ( who said: “ 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?”). This Hope is the sole driver to this Petition. At the beginning of the fascist era, Walter Benjamin had written:

‘Nur um der Haffnungslosen willen ist uns die Hoffnung gegeben.

[ It is for the sake of those without hope that hope is given to us.][213]

79.That, in the end, this Petitioner submits that Rupa’s Case was decided per incuriam when it held that he Superior Courts are not within he concept of the ‘State’ as used in Art. 12 of the Constitution. It also went wrong in its view of the ambit and reach of its inherent jurisdiction to grant remedy Ex debito justitiae. This Petitioner believes that his Curative was rejected in the chamber as the Hon’ble Bench went ahead examining the CrativePetition strictly in accordance with the the narrowly drawn up scope of the doctrine of Ex debito justitiae

80. That this Petitioner, without prejudice to what he has submitted hitherto, thinks it appropriate to mention that he does not want to make a fetish of form. His prayer is for grant of an effective remedy so that substantive justice is done in the case. It is inconceivable to think that anything can cripple the court in doing complete justice. When all is said, hismissionis achieved if this Hon’ble Court adopts a judicial technique of the sort Prof. Schmitthoff felt Lord Denning was accustomed to adopt in deciding cases where justic is of supreme importance.

“His approach is technological. He thinks of the result before he considers the legal reasoning on which it has to be founded. If the result to which established legal doctrine leads is obviously unfair or out of touch with what ordinary people would expect to be the law, he will examine first principles in order to ascertain whether they really compel an unjust solution and often this method will enable him to arrive at an answer which is more adequate to modern needs.”[214]

PART II

Section I

The Government Violated Article 14 ( The Old Doctrine) &The Impugned Judgment Provides No Remedy

[ A ]. CERTAIN CONSTITUTIONAL FUNDAMENTALS

81.That ‘general conception as to the scope of income-tax’ with reference to the legislative field under entry 82 of the union List of the 7th Schedule was explained by the Privy Council in Wallace Bros & Co. Ltd[215]. On analysis of the judgment, the following propositions emerge:

( i ) It is permissible and important in determining the scope and meaning of the legislative power to take into account what is ordinarily

treated as embraced within that topic in the legislative practice of the

country;

( ii ) The resulting general conception as to the scope of income-tax is, that given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him, income-tax may properly extend to that person in respect of his foreign income

( iii ) The general conception as to the scope of income-tax finds a place in the phrase “taxes on income” as used in the Government of India Act, 1935 [ now entry 82 of the Union List of the 7th Schedule to the Constitution of India.]

( iv ) The principle – sufficient territorial connection –not the rule giving effect to that principle –residence – is implicit in the power conferred by the Government of India Act, 1935.

82. That the foundation of the juristic thinking of the Privy Council in Wallace Bros & Co Case is the theory of Territorial Nexus. Territorial nexus is a pre-condition to become a bearer of rights or duties under the income-tax law. All laws are primarily territorial in operation. ‘The theory of territorial nexus was applied by the Federal Court in Gov. Gen. V. Raleigh Investment Co. and by the Privy Council in Wallace Brothers V. C.I.T., Bombay where it was held that

“.. the principle – sufficient territorial connection - not the rule giving effect to that principle – residence – is implicit in the power conferred by the Government of India Act, 1935.”

The Privy Council said that derivation from British India, of the major part of its income for a year, gave to a company for that year, sufficient territorial connection to justify its being treated as at dwelling in British India for all purposes of tax on its income for that year, from whatever source that income may be derived. “ A company which in substance lives on a country may rationally be treated as living in it”’.[216]

83. That S. 5 of the Income-tax Act, 1961 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.

84That Section 5 begins with : “Subject to the provisions of this Act” the total income is to be determined. The import of “subject to the provisions” in these Sections had been examined in Commissioner Of Income-tax V. F. Y. Khambaty[217] by the Bombay High Court which held that the expression ‘subject to’ in s. 5 does not connote that other provision of the act override the provisions of section 5. It only denotes that income which is excluded from the Scope of total income by reason of any provision should be excluded for the purpose of s. 5. The Hon’ble High Court observed, per Kania J.:

“Therefore, what the use of the said expression shows is that in considering what is total income under section 5, one has to exclude such income as is excluded from the scope of total income by reason of any other provision of the Income-tax Act and not that the other provisions of the Income-tax Act override the provisions of section 5 as suggested by Mr. Jetley.”

It is submitted that the view taken by the Hon’ble Bombay High Court in

Khambaty Case is the only correct view for the following reasons also:

( i ) It is one of the fundamental principles of our income-tax law, both as mandated by the Constitution and the Income-tax Act, 1961, that once a taxable event ( the generation of income) takes place in the territory of India, it comes, ipso jure, within the legislative field of entry 82 of the Union List in the 7th Schedule of the Constitution; and by virtue of the Charging Section of the Act becomes the subject matter of taxation. The Union of India becomes the person of inherence (having the legal right to charge tax); and the earner of income becomes the person of incidence ( the bearer of the burden of duty to pay tax). This fundamental principle can never be modified by the Executive Government as this would subvert the constitutional scheme as laid down by Articles 109, 110, and 265, and would be subversive of the central creed of the Parliamentary form of government as adopted under our Constitution. Art 265 erects under our Constitution one of the finest fruits of the struggle of the British constitutional history: it says, ‘No tax shall be levied or collected except by the authority of law.’ But it is to the obvious that the ‘law” must be a valid law. Here we have made a

departure from the British constitutional system wherein Parliament can do, theoretically speaking, anything, even making a man woman and woman into man ( realities have changed from Bagehot’s days, thanks to modern science). If our Parliament taxes X discriminating him from Y, or exempts X without being so kind to the similarly placed Y, the Parliamentary act would be held unconstitutional. Art 14, both under its Classical Doctrine and the New Doctrine, it would be struck down. Hence this Petitioner considers it a fundamental principle that once there is a taxable event in the territory of India there is no escape from the duty to discharge the burden of taxation to the Exchequer for the benefit of the nation. Power of taxation is no longer now a private affair of the Sovereign, it is a public trust for people’s benefit.

( ii ) The implication of the expression ‘subject to the provisions of this Act’ means that while income cannot be taxed unless it falls within Section 5, it is not necessarily to be taxed because it falls within this section; any other section may operate to save from taxation income which is within the purview of this section. The import of ‘subject to the provisions of this Act’ is broadly two:

(a) The provisions of the Act, eg sections 10-13A and sections 80HH to 86 may have the effect of exempting income which would otherwise be chargeable under this section.

(b) The amount of income from the various sources is to be ascertained subject to the provisions of the particular sections dealing with those sources, viz sections 15 – 59 of Act ( the detailed mechanism of computation of total income is under the various Heads of Income as prescribed in Section 14 and 14A of the Act).

It is essential to notice the scheme which inheres in th provisions referred in (a) and (b) above. The (a) has only intra-domestic impact, whereas (b) is oriented to work out real income. All the items of exemptions implement the governmental policies in various segments in the domestic field having effect on the Indian tax-payers and Indian economy. For granting such exemptions from taxation the State is amply compensated by way of what it gets in return from its own people in various fields, economic, social, educational and the like. Sections 10-13A deals with Charity. Exemption is granted to Charity as it does most often what ought to be done by the government in an egalitarian society of a welfare State. Sections 80HH –86 grants all sorts of economic incentives for the industrial and economic development. To illustrate: Section 80-IA of the Act grants Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. Income of such undertakings is exempt for certain years as such undertakings provide infrastructure facility for public good. Even if the Airports are modernized and restructured through a joint venture with the non-residents partnering in the Joint Venture, the exemption is not an exemption simpliciter, but it is an exemption for a national purpose so decided after Parliamentary deliberations. All the Special provisions relating to Profits of Shipping Business of the Non-residents, and all other provisions establish one fundamental principle that the Indian share of tax originating within the matrix of transactions within the Indian territory must be taxed. Exemptions wherever granted are always done legislatively and for the consideration of the socio-economic weal of our society. Gratis grant is beyond the power of Parliament, not to speak of the Executive. The Rajasthan High Court in H.R.& G. Industries v. State of Rajasthan ( A I R 1964 Raj. 205 at 213) says “It is well established that the power to exempt from tax is a sovereign power and no State can fetter its own much less the future legislative authority of its successor.”

( iii ) As tax revenues raised in accordance with the Parliamentary commission granted through the Act is under a trust, every exemption or deduction granted under the Act has a policy quotient pro bono publico. The days of the Stuarts are over. A tax treaty is not a legal alsatias[218]. Viscount Simonds in the leading case of Collco Dealings LTD v. IRC[219]

“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.”

( iv ) The expression “subject to the provisions of this Act” under sections 4 and 5 of the Income-tax Act,1961 does not grant, either expressly or by implication, any overriding effect to a tax treaty except to such terms of a tax treaty which have direct or proximate bearing on the determination of the incidence of charge of tax within the parameters of Sections 4 and 5 which constitute the charging section of the Act. But

such terms of a tax treaty must conform to the pre-conditions of Sec 90 (1)(b) [or other clauses thereof to the conditions stipulated therein.].

85. That it is essential to realize that our attitude towards taxation constitutes an inarticulate major premise in any decision-making, judicial or administrative, in the sphere of taxation. The modern attitude towards taxation has been described by Lord Scarman in IRC v. Federation of Self-Employed[220] thus:

“ But I do not accept that the principle of fairness in dealing with the affairs of taxpayers is a mere matter of desirable policy or moral obligation. Nor do I accept that the duty to collect ‘every part of inland revenue’ is a duty owed exclusively to the Crown. Notwithstanding the Treasury case in 1872, I am persuaded that the modern case law recognizes a legal duty owed by the Revenue to the general body of the taxpayers to treat taxpayers fairly, to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise, to ensure that there are no favourites and no sacrificial victims. The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect.”[221]

Lord Scarman has stressed on the duty of the tax-gatherers. Their duty is to collect ‘every part of inland revenue’. This duty is a duty not owed exclusively to the Crown. It is a legal duty owed by the Revenue to the general body of the taxpayers without discrimination. Like Lord Scarman, the Hon’ble Judges in McDowell’s Case adopted a pro-active role in prescribing the legitimate province of tax planning. What Justice Reddy has said about the creative role of the court in the field of income-tax law, is precisely what Lord Scarman hadobserved in Furnis v. Dawson[222]:

“The limits within which this principle is to operate remain to be probed and determined judicially. Difficult though the task may be for judges, it is one which is beyond the power of the blunt instrument of legislation. Whatever a statute may provide, it has to be interpreted and applied by the courts; and ultimately it will prove to be in this area of judge-made law that our elusive journey’s end will be found.”

It is worth mentioning that the pro-capitalist lobby and those with interest in evasion/avoidance of taxes were uncomfortable in the U.K. as much as they are now in India. After Furniss there was so much pressure on the British Government to ditch this rule propounded in Furnis. The Chief Secretary had to informed the Treasury the intention of his Government to soft peddle the administrative approach in following the line of approach mandated by the House of Lords in tax evasion cases. How things proceeded in the U.K. has been described by A.H. Hermann thus:

“Four years after the Law Lords put a seal of disapproval on

artificial tax avoidance schemes in their 1984 decision in Furniss v. Dawson and the tax lawyers are still refusing to concede defeat. Erratic decisions in the chancery, where some judges disapproved of the new approach, encourage them. The cry has been ‘Only Parliament can impose taxes and if the words of legislation can be read so as to bring an unintended benefit to the taxpayer, so be it.’’[223]

If something of the same sort is to happen in our country, the nature of the judicial role should be considered by a Bench not less than of 7 Hoh’ble Judges as in McDowell the four Hon’ble Judges had agreed with the concurring and supplemental judgment of Hon’ble Justice Reddy

86. That under our constitution the domestic courts have to give effect only to the law

of the land. Oppenheim’s International Law has correctly stated the position under the public international law thus:

“Although treaties may speak of the rights of the individuals as if they were derived from treaties themselves, this as a rule, is not normally the position. Such treaties, rather than creating the rights, impose the duty upon the contracting states to establish them in their national laws.”[224]

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.”[225] A tax treaty is to ensure that the tax payers do not suffer the injustice of double taxation if both the state of residence and of source assert to tax an assessee’s total income or a part of it. What a treaty for Avoidance of Double Taxation does, is to make a sort of rough factor analysis of capital and labour in the creative matrix from which income originates. The calculus of evaluation leads to the formulation of norms for the quantification of taxation of the doubly taxed persons, not with an idea to grant the benefit of non-taxation. Sovereign States do not come to picture, as they are not taxed in view of the international practice recognized under international law. They have no business to play a surrogate role for the unjust enrichment of their residents. Any such attempt would be all the more heinous if it is for the benefit of the masqueraders.

[ B ]. The Income-Tax Act Commands Peremptory Compliance:

The idea of ‘Classification’ is inbuilt in the mandatory provisions of the statute.

87. That in Ram Krishna Dalmia v. Justice S. R. Tendolkar[226] Das J. stated that the decisions affirming the principles relevant to the Right to Equality can be classified into five classes:

(i) A statute may itself indicate the persons or things to whom its provisions are intended to apply and the basis of the classification of such persons or things may appear on the face of the statute or may be gathered from the surrounding circumstances known to or brought to the notice of the Court. In determining the validity or otherwise of such a statute the Court has to examine whether such classification is or can be reasonably regarded as based upon some differentia which distinguishes such persons or things grouped together from those left out of the group and whether such differentia has a reasonable relation to the object sought to be achieved by the statute, no matter whether the provisions of the statute are intended to apply only to a particular person or thing or only to a certain class of persons or things. Where the Court finds that the classification satisfies the tests, the Court will uphold the validity of the law.

(iii) A statute may not make any classification of the persons or things for the purpose of applying its provisions but may leave it to the discretion of the Government to select and classify persons or things to whom its provisions are to apply. In determining the question of the validity or otherwise of such a statute the Court will not strike down the law out of hand only because no classification appears on its face or because a discretion is given to the Government to make the selection or classification but will go on to examine and ascertain if the statute has laid down any principle or policy for the guidance of the exercise of discretion by the Government in the matter of the selection or classification. After such scrutiny the Court will strike down the statute if it does not lay down any principle or policy for guiding the exercise of discretion by the Government in the matter of selection or classification, on the ground that the statute provides for the delegation of arbitrary and uncontrolled power to the Government so as to enable it to discriminate between persons or things similarly situate and that, therefore, the discrimination is inherent in the statute itself. In such a case the Court will strike down both the law as well as the executive action taken under such law.

(iv) A statute may not make a classification of the persons or things for the purpose of applying its provisions and may leave it to the discretion of the Government to select and classify the person or things to whom its provisions are to apply but may at the same time lay down a policy or principle for the guidance of the exercise of discretion by the Government in the matter of such selection or classification; the Court will uphold the law as constitutional.

(v) A statute may not make a classification of the persons or things to whom their provisions are intended to apply; it may leave it to the discretion of the Government to select or classify the persons or things for applying those provisions according to the policy or the principle laid down by the statute itself for guidance to the exercise of discretion by the Government in the matter of such selection or classification. If the Government in making the selection or classification does not proceed follow such policy or principle, then the impugned executive action be held illegal, not the statutory provision which is evaded.

88. That the Income-tax Act, 1961 itself indicates “ the persons or things to whom its provisions are intended to apply” and “ the basis of the classification of such persons or things’ is prescribed in the statute itself. The situation, with which this Writ Petition deals, comes in the first category of cases mentioned by Das J. in Ram Krishna Dalmia Case. The Income-tax Act,1961 makes it clear 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. Norms of residence, in effect, emanate from territorial nexus. It prescribes the mode of computation of “total income”. It prescribes in specific and precise terms where grant of tax mitigation or tax exemption is considered warranted. The Act does not entrust the Central Government, or any of its agencies or instrumentalities to exercise the power de hors the statute on any ground whatsoever. It is a high constitutional principle that we would not like to be taxed under the Executive fiat, nor untaxed through the Executive concession, even through its clemency.

89. That it is well established in the income-tax jurisprudence that whilst the burden of proof to establish the changeability to tax of a receipt to income-tax is on the Revenue, the burden of proof to escape from the tax-net through a deduction or an exemption is on the assessee. Once in the case of a non-resident a taxable event takes place in the territory of India, the non-resident is chargeable to tax thereon as a matter of mandatory law. If that assessee pleads to exit from the tax-net by invoking the provisions of an Avoidance of Double Taxation Agreement, the burden is on him to establish the existence of all the conditions for availing of the benefit to the satisfaction of the Assessing Officer, who is a quasi-judicial statutory authority having an exclusive jurisdiction to frame an assessment. Under the Indian legislative practice “avoidance of double taxation” is a term of art” The Petitioner would make his submissions on this concept at the appropriate place in this Writ Petition, but it is worth mentioning that the concept, as a term of art, does not mean what it means in the OECD Models and the OECD commentaries. The right import of the Avoidance of Double Taxation comes out from the study of the Indo-Pakistan Double Taxation Avoidance Agreement as it illustrates the concept of avoidance of double taxation taking into account all the factors which deserve to be evaluate in accordance with the principle of Right Proportionality.

90. That the effect of this Petitioner’s submissions in this sub-section is to highlight:

( a ) that we are concerned with a situation which squarely comes within the first of the five categories to which Das J. refers;

( b ) that the statute grants to the Executive neither the Dispensing Power nor the Power of Executive Clemency.

[ C ]. The Ambit of the concept of Double Taxation under Section 90 of the Income-Tax Act

91 That the provisions of Section 90(1) says: “The Central Government may enter into an agreement with the Government of any country outside India……” for avoidance of double taxation. That concept of Double Taxation has been explained in Black’s Law Dictionary:

“The imposition of comparable taxes in two or more States on the same tax payer, for the same subject-matter or identical goods.”

And Stroud’s Judicial Dictionary explains this concept in the following words :

“Whatever the precise scope of the rule against double taxation is, it must at least involve that it is the same income, that it is the same person in respect of the same piece of income that is being double taxed, whether directly or indirectly, and that the double taxation is by British assessment”

 

On close analysis the definition given in this technical dictionary following ingredients are noticed :

(i) The imposition must be of comparable taxes;

(ii) The incidence of tax should be on the same tax- payer;

(iii) The subject matter (or the taxable event) should be the same subject matter.

If any of the above three ingredients is missing or is unreasonably distorted there is no case of Double Taxation. Where there is no case of Double Taxation, there are obviously no questions of Avoidance of Double Taxation. Without there being a de facto liability for Double Taxation, the power conferred under section 90 of the Income tax Act cannot be exercised. In fact, there must be “if-then” ( protasis-apodosis) relationship involved in a given situation. This meaning of the term of art is fully illustrated in the terms and tenor of the Indo-Pakistan Agreement for Avoidance of Double Taxation, the basic features of which have been thus explained in Kanga & Palkhivala’s The Law and Practice of Income-tax[227]:

“The basis of the Agreement between India and Pakistan was not relief against double taxation but avoidance of double taxation. The consequence was that the assessee had not first to pay the tax and then apply for relief in the form of a refund, as he would have to do in a case where the provision was for relief against double taxation. The broad effect of the Agreement was that each country recovered tax only on that portion of the income which accrued within that territory, and took into account the income accruing in the other country only for rate purposes. From tax payable in respect of the entire income, an abatement was allowed at the time of making the assessment in respect of tax payable in the other country. In the case of dividend s declared by a company having income accruing in both the countries, each country recovered tax only on a portion of the dividend proportionate to the portion of the company’s income chargeable in that country. In such a case neither country was entitled under the Agreement to recover tax without any abatement on the entire dividend and then drive the assessee to the necessity of filing an application for refund.”

92.That the general principles at work in the Double Taxation Avoidance Agreements were summarized by the Central Board of Direct Taxes in Circular No. 39 dated April 13th 1970 issued in the context of Agreement between India and the Republic of France[228]:

“ The Agreement is based on the principles which have been adopted by India in the Agreements concluded by her so far with other West European countries. It provides, in substance, that the country in which the income from a particular source arise will be primarily entitled to tax that income and if such income is also taxable in the home country under the operation of its laws, double taxation will be relieved by the home country. For this purpose either the income is exempted from tax in the home country of the recipient of the income or the tax charged on that income in the source country is given credit for against the home country’s tax. In relieving double taxation by the latter method, the home country gives credit not only for the tax actually charged on such income in the source country but also the tax spared in that country under the special concessional provisions in her taxation laws for encouraging investment and promoting industrial development. In the Indo- French Agreement both these methods have been used.”

93 That this 1970 CBDT Circular, which purports to explain “the principles which have been adopted by India in the Agreements concluded by her so far with other West European countries”, illustrates the concept of avoidance of double taxation as understood in the Indian legislative practice which is also in tune with the import of the term as mentioned in the standard conforms standard texts already quoted. It is clear from the aforementioned extracts that under the Indian legislative practice the import of the concept of double taxation is settled. We are bound to keep in view the legislative practice of the land while determining the meaning of this term of art[229].

94. That Section 90 of the Act grants constitutive and creative power to the Central Government; and it prescribes under unambiguous and structured terms the statutory preconditions for the exercise of power under Sec.90. India’s double taxation avoidance agreements are in the nature of ‘delegated legislation’”[230] It is the common law jurisdiction of the court to “prevent a power of delegated legislation from being exceeded”.[231] “ The appropriate authority may be restrained from proceeding to make or confirm a scheme or order which is ultra vires.”[232] The Petitioner considers that it is a constitutional principle of greatest importance that the Executive Government, whether it functions in New Delhi or Detroit, or Port Louis , it can not go counter to the Constitution, unless, perish the thought, misfortune leaves it in the lurch when brute realpolitik tramples down a constitution as happened in the Treaty of Vienna or the Treaty of Versailles. In Council of Civil Service Unions v. Minister for the Civil Service[233] “Lord Brightman concurred with Lord Fraser in distinguishing between ‘a direct exercise of a prerogative power ‘ and ‘the case where the power has been delegated to the decision maker’ –eg by the 1982 Order in Council, or presumably by any other process of delegation---and confined his decision to delegation cases, saying that in them ‘the decision-making process ……arises under and must be exercised in accordance with the terms of that order’”[234]

95.That it deserves to be noted that the Income-tax Act, 1961does not have a single open-ended provision through which economic considerations can be imported. Wherever Parliament wants such considerations to play a role in a specific statute, it says so clearly.. The Preamble to the Bearer Bonds Act clearly said: ‘Whereas for effective economic and social planning it is necessary to canalize for productive purposes black money which has become a serious threat to the national economy……” There is nothing to suggest that Section 90 was inserted to promote the augmentation of foreign reserve about the worth of which all are not at one.

96.That the Division Bench of this Hon’ble Court somehow formed the idea that Section 90 was to facilitate the Government’s economic policies. The Solicitor-General and the Attorney General stressed only on the following two points:

(a) That the tax treaty was to promote economic policies; and

(b) That the tax treaty be construed in the light of ideas announced in the OECD countries.

They arbitrarily obliterated the fundamental differences between a treaty done under Art 73 of the Constitution, and a tax treaty done in exercise of delegated power under section 90 of the Income-tax Act. Apropos (b) supra, the whole idea was misconceived and unconstitutional. This Petitioner would come to this plea in an appropriate place of the Writ Petition.

[ D ]. The Mystery Of The Adoption Of The Oecd Model While Framing The Indo-Mauritius Double Taxation Avoidance Convention

97.That nobody knows how and why the negotiators adopted the OECD Model of a tax treaty in 1982. It is inappropriate to attempt trying to pry into the obscure reasons. But something that is in public domain is sufficiently suggestive. Swraj Paul wrting about his experience in India writes in his memoir Beyond Boundaries that by then a nexus existed between economic power and political power. He mentions how in 1982 there were serious efforts to invite the NRIs to invest in India. Dr. Manmohan Singh, then Governor of the Reserve Bank of India, endorsed with verve the policy of NRI portfolio investment. “He went on to outline the scheme and the streamlined procedures which would enable investors to remit funds and also secure repatriation of them.” Even this Petitioner, while talking to Dr Manmohan Singh, when the PIL was being heard before the Hon’ble Delhi High Court, got it from him that the prime object of the Indo-Mauritius tax treaty, when it was made, was to have more of foreign exchange as India needed it most at that time. The Petitioner appreciates the candour of Dr Singh in stating so though his researches have led him to the view that the maelstrom of the financial crisis in the early eighties were largely stage-managed to provide a free play for the corporate imperium which in the early eighties had established its sway thanks to the policies set afoot by Ronald Regan, the U.S. President under the pressure and persuasion of the U.S. corporate interests which were massively propagated as the only public interests. There could have been less precarious ways to get over the crisis. What had happened in America was itself a Mask of Deception. The 1982 debt crisis was used as a device dexterously devised by the experts, by the corporate interests masqueraders of all sorts.. In early eighties Mrs IndiraGandhi, the then Prime Minister, was depressed by the twists and turns of her circumstances. This provided an opportunity to the vested interests to serve hir interests. Some pleaded for this Model for framing the Indo-Mauritius Double Taxation Avoidance Convention as it was integral to the policy of wooing the foreign investors. The foreign investors had their own agenda to pursue. There were others who felt it a good device to park and launder tainted wealth outside. By 1982 the corporate-driven U.S. hegemony had succeeded in subjugating the political realm to the economic realm at the global level. The subjugation of the political realm was brought about by skill and stleath in a manner this felicitously described by Korten:

“The full political resources of corporate America was mobilized to regain corporate control of the political agenda and the court system. High on the political agenda were domestic reforms intended to improve the global competitiveness of the United States by getting government “off the back” of business. Taxes on the rich were radically reduced. Restraints on corporate mergers and cqusitions were removed. And the enforcement of environmental and labour standards was weakened, The government sided with aggressive U.S. corporations seeking to make themselves more globally competititive by breaking the power of unions, reducing wages and benefits, downsizing corporate workforces, and shifting manufacturing operations abroad to benefit from cheap labour and lax regulations.”[235]

98. That in 1982 none examined the legality of the adoption of the OECD Model. Good intention rode roughshod over the law. Our bureaucrats of this low arousal country seldom get aroused to feel that even the best of motives were not enough. In short, the Model was adopted for extraneous reasons: it hardly matters that they were said to be economic.

99. That the OECD Model contemplates a different type of constitutional system, and is founded on different socio-economic considerations. This Petitioner has examined these aspects in an article[236] which he encloses as an ANNEX “ E” so that this Hon’ble Court comes to know how this Model was framed, and how it worked in other countries. .If this Model was to be adopted, the law should have been changed to make the tax treaty a legislative act as it is in the U.S.A., the U.K., Canada, Australia, and France etc. Our Executive forgot to recognize that a delegate must not transgress the frontiers of power granted. The Petitioner’s strong submission is that in our country too a tax treaty be made only after Parliament’s approval as it is done in all the important countries world over..

[ E ]. Classification Of The Assesees Into Those Who Bear The Brunt Of Full Taxation, And Those Who Do Not Is Unfair, Unreasonable And Arbitrary.

100.That the doctrine of classification was developed to give a reasonable content and significance to the constitutional commandment under Art. 14 of the Constitution. In Ram Krishna Dalmia v. Justice S. R. Tendolkar[237] this Hon’ble Court observed:

“In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be funded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and (ii) that that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases, namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well established by the decisions of this Court that Art. 14 condemns discrimination not only by a substantive law but by a law of procedure.”

After analyzing the decisions of this Hon’ble Court on Art 14, H.M. Seervai summarizes the legal position thus:

“According to that doctrine equal protection of the laws must mean the protection of equal laws for all persons similarly situated. To separate persons similarly situated from those who are not, we must discriminate, that is, “act on the basis of a difference between” persons, or “observe distinctions carefully” between persons who are, and who are not, similarly situated. But as the distinction is to be made for the purpose of making a law, how must the distinction be related to the law? This is answered by the central test for a permissible classification: “Permissible classification must satisfy two condition, (i) it must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (ii) the differentia must have a rational relation to the object sought to be achieved by the statute in question”, with the qualification that “the differentia and object are different (so) that the object by itself cannot be the basis of classification”. A law based on a permissible classification fulfils the guarantee of equal protection of laws and is valid; a law based on impermissible classification violate that guarantee and is void.”[238]

101.That the terms of the Indo-Mauritius, or any other tax treaty made on the analogous Model, must be held domestically no-operative (not void as a treaty cannot be declared void by a domestic court) if they violate Art. 14 of the Constitution. Under that Article, the ‘classification’ contemplates that

(i) the classification must be based on an intelligible differentia which distinguishes those that are grouped together from others;

(ii) the differentia must be reasonably related to the object of the statute; and

(iii) the differentia and the object are distinct and separate..

102.That as per the preamble and the scheme of the Income tax Act, 1961, the OBJECT of the Act is to collect tax as per the law. Referring to the duties of the Board of the Inland Revenue Lord Scarman observed : “The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect.[239]” Lord Diplock, explaining the function of the Board of Inland Revenue, says “All that I need say here is that the Board are charged by statute with the care, management and collection on behalf of the Crown of income tax, corporation tax and capital gains tax. In the exercise of these functions the Board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge the highest net return that is practicable having regard to the staff available to them and the cost of collection.[240]” Lord Hewart observed in Rex v. Special Commissioner (20TC 381 at 384, quoted by Kanga & Palkhivala at p. 1509) that the duties imposed upon the Commissioners of Income tax are “in the interest of the general body of tax payers, to see what the true assessment ought to be, and that process, a public process directed to public ends.” And the Indian Revenue’s slogan : ‘not a paisa less, not a paisa more’ stresses the same point. In view of the overarching object of the Act, all those who come within the purview of the Act as the assesses constitute a class as all of them have effected some taxable events through transactions in the interstices of which income is generated. Income inheres in taxable events. As it was explained in Wallace Bros & Co. Ltd the general conception as to the scope of income-tax finds a place in the phrase “taxes on income” as used in the Government of India Act, 1935 [ now entry 82 of the Union List in the 7th Schedule to the Constitution of India.].

103. That the effect of the terms of the Indo-Mauritius tax treaty (and of other analogous tax treaties) is clearly to provide tax mitigation or tax exemption to the beneficiaries under the treaty. The net effect is either the lessening of the tax burden, or even the total deflection of the tax burden through grant of exemption. The valid approach could only be to factorize the contributions coming from other territories; and to reasonably reduce the tax burden under the Indian tax law on the taxable event taking place in the territory of India. The residents and the non-residents are all assesses under the Income-tax Act. The classification under which only one group of assessees is subjected to no taxation is invalid as the criteria for the classification cannot have a reasonable nexus with the object of the Act. The Indo-Pakistan tax treaty for Avoidance of Double Taxation, and the CBDT Circular quoted above illustrate how the tax shares under the two jurisdictions are to be distributed. This Petitioner’s submission is:

(i) that the effect of Sections 4 and 5 of the Act is not to grant a carte blanche to the Central Government in exercising power under Section 90 of the Act;

(ii) that if the Central Government’s view as to the ambit of power under section 90(1) is accepted, it would render the relevant provisions of Section 90 themselves clearly ultra vires.

(iii) that if the expression “avoidance of double taxation” receives a meaning in tune with that which is accepted in the Indian legislative practice, there can be a perfect harmony in the statutory provisions; and Section 90 would not be exposed to the wrath of Art 14 of the Constitution.

104. That in Mauritius, for long, incidence of tax was nil. Even now, the Global Business Category 1 is taxed at 15% but a generous foreign tax credit is available so that the effective rate is 1.5% . It is doubtful whether to call this a tax? In effect, it amounts to be a nominal fee for a lot of services and advantages available to them in the tax haven which has set up an opaque system. The tax payers constitute a class; and inter se them, there cannot be any classification further on reasonable criteria having no reasonable nexus with the object of the Income Tax Act. We should give to Section 90 (1) (b) a construction which does not expose it to a lethal Constitutional radiation. It is well settled that the provision should be so read as to save it from being ultra vires Article 14 of the Constitution of India (Jagdish Pandey vs. Chancellor, Bihar University AIR 1968 SC 353, 357).

105. That while assessing the reasonableness of the ‘classification’ we cannot afford to miss the fact that the benefits under a tax treaty is made available, by and large, to the foreigners. To the extent they are entitled to tax reductions in order to make the levy of tax rational and fair, they must get the benefit. But the principle of proportionality cannot be forgotten. In this phase of globalization, it becomes our bounden duty to save our resources for our suffering millions. We believe that what Viscount Simonds said is good for us:

“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.”[241]

[ F ]. A Classification Inter Se The Denizens Of Darkness And Those Under The Sunshine.

106.That in view of the secretive style of the global operators and gladiators, we must have high degree of Transparency. In this context, the classification inter se the treaty beneficiaries and others has acquired a new meaning. A tax treaty is a bilateral arrangement. It would be shown, while dealing with Treaty Shopping in the Section II of Part II, how deceptively the treaty benefits are stolen in bad faith. With Luxembourg we have no bilateral tax treaty, yet its residents masquerade to obtain benefits under Indo-Mauritius tax treaty. In, fact a copy of the Assessment Order in the case of M/S Cox & King had been filed to establish the profile of facts, but the Division Bench of this Hon’ble Court, in the impugned Judgment, arbitrarily and illegally circled it out thereby knocking down the very factual substratum of this PIL. These submissions would be substantiated in the appropriate contexts of this Writ Petition. When all is said, it is a worrisome fact that this impugned Judgment sustains Treaty Shopping The judicial role has been narrowed to the Blackstonean view which led the Hon’ble Bench to make a cri de Coeur to the Executive and Parliament to prevent the Fraud of Treaty Shopping when the abuse could be prevented under the common law jurisdiction and the Hon’ble Court’s jurisprudence (Shrisht Dhawan v. M/s Shaw Brothers.[242]). The celebrated dictum of Lord Denning: ‘Fraud unravels everything’”[243] goes unnoticed. The impugned Judgment stands in stark conflict with our Judicial Policy, and international Jus cogens, and also goes counter to this Hon’ble Court’s jurisprudence. The judicial cri de Coeur to Parliament is an exercise in futility as the decline of Parliament is almost complete as it has virtually allowed the Executive, as recently demonstrated, to make law taking Parliamentary consent for granted.

107.That if mere incorporation under a Mauritian Law, or mere grant a Certificate of Residence be enough then nothing would prevent if Mauritius decides to provide that status, or to issue that sort of certificates to every person on the globe who complies with the formality by paying some money to the government kitty. But if this happens then all other bilateral tax treaties would be reduced to irrelevance and the income-tax law would become a paradise for marauders leaving the people of India to rue their lot under consolation that the sovereign act of a sovereign friendly State deserves acceptance as a matter of uncritical assumption. This is not a figment of imagination of the petitioner; it has already have taken place. The Authority for Advance Rulings in a case reported as XYZ/ABC Equity Fund, In re , [2001] 250 ITR 194 is a recent case in which the applicant-company moved for rulings on certain points, describing itself as a collective investment vehicle resident in Mauritius. It is a vehicle which in modern commerce means by: “A privately controlled company through which an individual or organization conducts a particular kind of business, esp. investment” The Authority records in its order:

“The applicant has stated in the petition before us that it is a private equity fund (similar to a venture capital fund). It has allotted a large number of shares on a private placement basis to a limited number of prospective investors spread over Belgium, France, Germany, Hong Kong, Japan, Kuwait, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States of America.”

If in the spacious “vehicle” an assortment from such large parts of the globe can sail together across the Indian Ocean to India, than why not construct a vehicle, registered in Mauritius, wide enough to be a Noah’s ark where all the treaty-shoppers from all the parts of the globe can be accommodated rendering all double taxation avoidance agreements other than the Indo-Mauritius DTAC irrelevant and otiose. The Indo-Mauritius DTAC should not be made the vanishing point of all other tax treaties. It is strange that what could have been at its best a mere reductio ad absurdum has already taken place with the culpable complicity of our own Government. It would be fair and just to take into account, while appraising the conformity of the situation to Art. 14 of the Constitution, the morbid effects of Treaty shopping. Besides, it is in public domain that many Indian companies too are covertly following the Treaty Shoppers. When law gets diluted, and public morality is low, such sinister innovations abound; and none bothers about the morbid effect on our national interests..

108.That critical examination of the ways of the Stock Market and its cheer-leaders bring out the extent of discrimination that the common people have to suffer for the de luxe India. That the way and the extent to which the players on the Stock Market have extracted favours from the Government is a matter of deep concern for the people of India. The Common Minimum Programme of the present govt. stated in clear and categorical terms under the head ‘Capital Market “: “Misuse of double agreements will be stopped.” The Supreme Court also deprecated the evil of Treaty Shopping but wanted the Executive and Parliament to take remedial steps. Instead of eradicating the evil of unjust enrichment by the hordes of masqueraders, the CBDT Circular No 789, which makes the system opaque, continues in full majesty. It is unfair to increase the burden of taxes on the common people of this country, when unfair advantage is given to the FIIs, OCBs, and host of others for whom the rapacious international financiers are working. Even under the UPA Government the disgraceful Circular No. 789 of April 13, 2000 issued by the CBDT is yet to be withdrawn. How long will our common people suffer, with tongue-tied patience, poverty and unjust discrimination? In the matters of poverty eradication, education, health, and agriculture we have largely gilded words of a bankrupt benefactor. Even the small resources earmarked are siphoned off by the corrupt practices made horrendous in the opaque system which is contrived by numerous governmental acts: of which one is this disgraceful Circular issued by the CBDT.

[ G ] Distinction Between The Jural And Constitutional Zeitgeist Of India And That Of The OECD Goes Unnoticed Causing A Breach Of Art. 14 (Old Doctrine.)

109.That not to notice an important distinction between the jural and constitutional zeitgeist of India and that of the OECD countries for whom the OECD Model of tax Agreement had originally been drawn up, is enough in itself to prove a breach of Art. 14 of the Constitution of India.. On a posteriori reasoning the following features of the Indo-Mauritius Doble Taxation Convention emerge for the purposes of examing the vires of the Convention when scrutinized under the focus of Art. 14:

(i) In the OECD countries a tax Agreement is a legislative act whereas in India it is an administrative act in exercise of the power delegated to the Executive under Section 90(1) of the Income-tax Act, 1961.

(ii) In the OECD countries a tax Agreement cannot be questioned in view of the relevant provisions under their constitutional law.

(iii) The power to structure the terms of a tax Agreement in the OECD countries is wider as it is in tune with their legislative practice developed in the OECD countries during the interregnum between the Two World Wars, and thereafter.

(iv) The question of legality cannot be raised in the OECD countries, as in such countries the courts cannot declare the exercise of legislative power ultra vires. In the United States the Supreme Court exercises this power, but in the U.S.A. a tax Agreement is done under the terms of the Constitution, not exposed to Judicial Revieu they struck by an invisible radiation of the Fundamental Rights.

(v) In India a tax Agreement is neither discussed in Parliament, nor it is tabled in the House.

(vi) In India the terms of the grant of power to the Executive is extremely precise, and constitute express limitations on the Executive power in consonance with the Indian legislative practice determining the meaning of the terms of art used in Section90(1).

110. That this Petitioner deems it appropriate to mention, in brief, the constitutional positions in different countries, especially the OECD[244] countries. Constitutional provisions constituting limitations on the treaty making power in the field of tax haw has been sated in this Writ Petition under the sub-head “ (c ) Constitutional and statutory provisions pertaining to a “tax treaty” overlooked.”

111.That in the U.S.A. a tax Agreement is not an executive agreement. It is done in terms of Art. VI, cl. 2 of the Constitution mandating “ *** all Treaties made, or which shall be made, under Authority of the United States, shall be the supreme law of the land; and the judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” In Australia a tax treaty is enacted; and in all matters arising under a treaty the High Court has original jurisdiction. Under the French Constitution the President is more powerful than the all other organs of the Government. Per Art 52 he can negotiate and ratify treaties. Art 53(1) says:

“Peace treaties, commercial treaties and treaties or agreements relating to international organization, or implying a financial commitment on the part of the State, or modifying provisions of a legislative nature, or relating to the status of persons, or entailing a cession, exchange or ad junction of territory, may be ratified or approved only by Act of Parliament.”

Art 54 of the French Constitution is of importance. It says:

“If, upon the demand of the President of the Republic, the Prime Minister or the President of one or other Assembly or sixty deputies or sixty senators, the Constitutional Council has ruled an international agreement contains a clause contrary to the Constitution, the ratification or approval of this agreement shall not be authorized until the Constitution has been revised.”

Like India, Ireland ‘accepts the generally recognized principles of international law as its rule of conduct in relations with other States [ ( Art 29(3)] Art. 29 (5) and (6) of the Constitution prescribes the following:

“(5.1) Every international agreement to which the State becomes a party shall be laid before the House of Raepresentatives.

(5.2) The State shall not be bound by any international agreement involving a charge upon public funds unless the terms of the agreement shall have been approved by the House of Representatives.

(5.3) This section shall not apply to agreements or conventions of technical and administrative character.

(6) No international agreement shall be part of the domestic law of the State save as may be determined by Parliament.”

Under Art 73 of the Constitution of Japan the Cabinet ‘concludes treaties. However, it shall obtain prior or, depending on circumstances subsequent approval of the Diet.” Art 231 of the Constitution of South Africa provides detailed rules governing International Agreement: to quote—

“(1) The negotiating and signing of all international agreements is the responsibility of the national executive.

(2) An international agreement binds the Republic only after it has been approved by resolution in both the National Assembly and the National Council of Provinces, unless it is an agreement referred in sub-section (3).

(3) An international agreement of technical, administrative or executive nature, or an agreement which does not requires either ratification or accession, entered into by the national executive, binds the Republic without approval by the National Assembly and he Council within a reasonable time.

(4) Any international agreement becomes law in the Republic when it is entered into law by national legislation; but a self-executing provision of an agreement that has been approved by Parliament is law in the Republic unless inconsistent with the Constitution or an Act of Parliament…”

In the United Kingdom a Double Taxation Avoidance Agreement is an enactment as it is done through Order in Council on the resolution passed by the House of Commons. That in India the Executive Power under Article 73 of the Constitution cannot be exercised for framing tax treaties. The conjoint effect of Articles 109, 110 and 265 of the Constitution of India is that the Executive can do only what it is permitted to do (and in the manner it is permitted to do) by Parliament through an enactment. It cannot grant any exemption from tax, as even exemption is integral to the concept of the levy of tax. These Articles of our Constitution draw on the provisions of the United Kingdom’s Parliament Act 1911, and the Bill of Rights. In the Indian context this power is granted under section 90 of the Income-tax Act, 1961 that authorizes the Central Government to enter into double taxation agreements with other countries.

112. That the submissions in paragraphs in the above paragraphs are made to prove a vital point that the terms of the Convention , to the extent ultra vires and made in total exclusion of popular supervision through Parliament, are wholly unreasonable and arbitrary as they create an unfair hiatus to the detriment of the Indian tax-payers by providing undeserved gains for unjust enrichment to the foreign tax-payers (most of them are bad-faith masqueraders.)

113.The misuse of the Indo-Mauriius Double Taxation Avoidance Convention was noticed by the Income-tax Department early in the nineties. This Petitioner understands that the income-tax authorities posted in Mumbai brought this endemic abuse to the notice of the CBDT. The CBDT was also of the same view that it was high time to resort to remedial measures. But nothing could be done on account of the pressures and lobbying. The high-ups were so enamoured of the foreign ravishers that an idea was floated at the highest rung to render capital gains totally tax-free. We all know that the provision relating to Capital Gains was inserted by Section 12B in the Indian Income-tax Act, 1922 for the purpose of raising resources for our over-heated economy. But under the pressure of the IMF, World Bank, and other international financial institutions and their other domestic and foreign cohorts the Executive Government buckled as it most often does in these locust-eaten years marking the triumph of the corporate impeium.

114. The sinister approach to please the corporate imperium under market-driven economy was a potent ‘invisible hand’ shaping the various provisions of the Finance Act, 2003.It is marked by the following features:

(1) the extension of the foreign imperium by increasing FDI limits in some strategic and crucial enterprises, an endemic feature in every Sponsored State in which the compradors control the system;

(2) whilst the common man is bidden to bear the burden of increased taxation and cess under a projected rainbow of things to come without ensuring a sound and corruption-free delivery system, the predatory international financiers are massively patronized to maraud our resources under a system deliberately made more and more opaque: and

115.That from 1.4.88 the duration of holding a share in a company, for being treated as a short-term capital gain became 12 months instead of 36 months as in other cases. After 1991 there were waves of foreign investors who frolicked and played on our stock market to reap massive speculative profits, and to let them go out of the country without fearing scrutiny or vigilance. Capital market liberalization allowed investment capital to flow in and out. The predatory international financiers have made the best of this crazy international capital churn Even the provisions which emerge from the modified Securities Transactions Tax (STT), popularly called the turnover tax, are tailored for the powerful players.. FIIs investing through Mauritius pay no STCG. In any case nobody pays LTCG now. Treaty-shopping continues unabated except that a small STT, may be 0.01%-- 0.075% to be notionally paid if no set off claimed against tax on business income. Indians have to pay the STT apart from 10% STCG or tax on business at 30% as per the treatment given to a transaction. All these illustrate the perceptive view of Blake:

Some are born to great delight,

Some are born to eternal light.

From the above, the following consequences follow:

(a) Whilst those who invest in factories and infra-structure making their lot one with our country’s destiny would suffer statutory scrutiny and bear the burden of capital gains tax on the transfer of their capital assets, but those who reap harvests on the stock exchanges with their hot money, easily brought and more easily taken out, are ensured exemption not only from tax but also from the critical gaze of the income-tax authorities to detect the real owner and real source of income.

(b) Instead of abolishing the distinction in matters of chargeability to tax between the short-term and long-term capital gains, and imposing normal tax for raising revenue for poverty alleviation, our government is attempting to enhance burden on the common people through increased service tax and cess for promoting education.

(c) The rate of tax at 10% on short-term capital gains in all likelihood, stand frustrated as the international financiers would construct vehicles in such protocols that they, in the end, would succeed in make even the short-term gains on the stock exchanges wear a mask of the long-term capital gains.

(d) In effect, the abuse of tax treaties is being sought to be legalized: this would be a sad response to the cri de Coeur of the Supreme Court ( Azadi Bachao Andolan case ) which felt that the misuse be stopped but showed its inability to prevent it as it held that it had no jurisdiction to do so. The newly inserted provisions legalize substantially the ways of the Treaty Shoppers. To say that this clemency would be for all is to make a mockery of proportionality, and to miss the profile of the dominant investors on our stock exchanges. Dreze and Sen observed: “The recent history of Asia and Africa provides plentiful examples of market exchanges being used to make profits out of the miseries of the millions.” Again: “ The government’s interventions are, by and large, guided by the demands of social progress is surely a gigantic folly.”

(e) In the segment of short-term capital gains on transactions in the stock exchanges the evil of Treaty Shopping would continue. No proposal has been made to stop the abuse of the Tax-Treaty to which the CMP is committed. Even the disgraceful Circular 779 of 2000 is yet to be withdrawn.

(f) A more fundamental question is: why short-term capital gains are taxed at 10% only? We should note a constant to which Galbraith refers: “…as between grave ultimate disaster and conserving reforms that might avoid it, the former is frequently preferred.” Let us consider the issue of foreign exchange: for whom? For what? From which source? Why this indulgence to the capital market? The issue cannot be addressed without keeping in view the profile of the players on the stock market, and the role of the MNCs, FIIs, OCBs and their analogues. Liberalization of the financial and capital markets let loose a flood of short-term capital which Stiglitz explains as “… the kind of capital that looks for the highest return in the next day, week, or month, as opposed to long-term investment in things like factories.” The IMF has taught that if a red-carpet welcome is not given to foreign capital, it goes out or refuses to come in. The shared view of the IMF and its protégées is that their transactions in capital, and capital gains be not taxed; if at all taxed it be taxed less. This syndrome is endemic in everry Sponsored State. The East India Company wanted a revenue system more beneficial to them than to the natives. It is the same stance illustrated in tax policy even in the USA to which Stiglitz referred while portraying the Roaring Nineties:

“Another example was what we did with tax policy. As the bubble was going up and getting worse, what did we do? We cut capital gains taxes, saying to the market: if you make more money out of this speculative bubble, you can keep more of it. If you look at what happened to tax policy during the nineties, it is quite astounding. What we did in 1993 was raise taxes on upper-middle-income Americans who worked for living, and then in 1997 we lowered taxes for upper income Americans who speculated for a living. You ask the question: what sorts of values did this change represent?”

Such provisions as these, reveal the grotesque failure of the government in “saving its own citizens from unjust discrimination in favour of foreigners.” Transaction tax @ 0.15% could be a separate tax under entry 90 of the 7th Schedule of the Constitution (if appeasement doesn’t toll for it): it cannot not be income-tax which is imposed under entry 82 . It is, in effect, a separate levy. Our economic and fiscal policies evidence our strides towards becoming a sponsored state. An excellent analysisof this sort of scenario was made by J.K. Galbraith in his The Culture of Contentment. He drew on his ‘insider status’ as a trained economist in formulating his ideas.. A graphic account of the cental thesis of this book has been thus made by Peter Watson in his A Terrible Beauty:

“The Culture of Contentment is a deliberate misnomer. Galbraith is using irony here, irony little short of sarcasm. What he really means is the clture of smugness. His argument is that until the mid-1970s, round about the oil crisis, the Western democracies accepted the idea of mixed economy, and with that went economic social progress. Since then, however, a prominent class has emerged, materially comfortable and even very rich, which far from trying to help the less ortunate, has developed a whole infrastructure—politically and intellectually—to marginalize and demonise them. Aspects of this include

(i) tax reduction to the better off,

(ii) welfare cuts to the worse off

(iii) small, ‘manageable wars’ to maintain the unifying force of a common enemy,; the idea of ‘unmitigated laissez-faire as embodiment of freedom’, and

(iv) a desire for a cutback in government.

The more important collective end result of all this, Galbraith says, is a blindness and a deafness among the ‘contended’ to the growing problems of society. While they are content to spend, or have spent in their name, trillions of dollars to defeat relatively minor enemy figures (Gaddafi, Noriega, Milosevic ), they are extremely unwilling to spend money on the underclass matter nearer home. In a startling paragraph, he quotes figures to show that ‘the number of Americans living below the poverty line increased by 28 per cent in just ten years, from 24.million in 1978 to 32 million in 1988. By then nearly one in five children was born in poverty in the United States, morethan twice as high a proprtion as in Canada or Germany.[245]

116A.That, it is submitted, to hold this sort of tax arrangements, as done through the Indo-Mauritius Avoidance od Double Taxation Convention, constitutional would, in effect, be to uphold a classification which puts premium on tax evasion, dishonesty, fraud, and crime, and rewards even the crooks and criminals with tax benefits, and effective secret modes for money laundering and promotion of anti-national activities. As this contention by the Petitioner is extremely serious but supremely important for our country in examining the constitutional validity of the issues under consideration, this aspect of the matter requires a detailed submissions which this Petitioner intends to make later in this Writ Petition (Part II section II )

(1) 116BThat to hold as a matter of categorical proposition of law in the impugned Judgment that “circular shall prevail even if inconsistent with the provisions of the Income-tax Act, 1961”, and to hold in another case[246] that “the law declared by this Court is binding on the Revenue/Department and once the position in law is declared by this Court, the contrary view expressed in the circular should per force lose its validity and become non est”; and in still another case[247] that “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.”

is to discriminate in breach of Art. 14 of the Constitution as the law declared acquires two complexions on an identical issue.

116C. That to ignore the law declared by this Hon’ble Court that in Hindustan

Aeronautics Ltd v CIT[248] that :

“…. when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court.”

and to depart from a binding Constitution Bench Decision[249] in the impugned Judgment, but to hold in another case[250] that “the law

declared by this Court is binding on the Revenue/Department and once the position in law is declared by this Court, the contrary view expressed in the circular should per force lose its validity and become non est”,

is to gocounter to Art. 14 of the Constitution of India.

[ H ] Conclusion

117. That, on the facts of the case, there can be no permissible and valid classification betweenwn the tax-treaty beneficiaries and other tax-payers. The detailed submissions in this Section of this Writ Petition is made to impress on this Hon’ble Court, the upholder of the Constitution, that it is the finest hour for Judiciary to act by responding to the challenges of the day. This Petitioner is at his wit’s end to understand whether he hears our great Constitution’s swansong, or last laugh, or a terminal cry. The issues have been presented in a broad spectrumas they are not amenable to brief and easy exposition. This Hon’ble Court may have to take an overarching view of the raw realities of our world under this phase of economic globalization.

Sec II

The Petitioner’s Case Under Art. 14: Its New Dimension

118. In Ajay Hasia v. Khalid Mujib Sehravardi[251] this Hon’ble Court[252] spelt out a new dimension of Art 14 in these words of great power and import:

“ It was for the first time in E. P. Ayyappa v. State of Tamil Nadu, (1974) 2 SCR 348: (AIR 1974 SC 555), that this Court laid bare a new dimension of Article 14 and pointed out that that Article has highly activist magnitude and it embodies a guarantee against arbitrariness… From a positivistic point of view equality is antithetic to arbitrariness. In fact, equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14, and if it affects any matter relating to public employment, it is also violative of Article 16. Articles 14 and 16 strike at arbitrariness in State action and ensure fairness and equality of treatment".

" Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omnipresence.”

An Anatomy of unreasonableness:

119. That our jurisprudence has recognized that there exists a band of reasonableness within which reasonable persons can reasonably differ. Mistakes are endemic in any decision-making, but gross mistakes, substantive or procedural, amount to a remissness, which under graver circumstances, may become acts without jurisdiction. Bhagwati J. in R.K Garg v. Union of India [253] pointed out that a decision “ arbitrary and irrational having regard to all the facts and circumstances of the case…..”[254] would be violative of Art. 14. In this Section II of Part II of this Writ Petition submissions are made to show how the Central Government violated the mandate of the Art 14 of the Constitution by resorting to arbitrary and unreasonable acts; and also to submit that the Division Bench of this Hon’ble Court, in the impugned judgment, failed in providing rightful and well deserved remedy against such breaches. The elaborate submissions are made hereinafter not only to stress individual items of criticism but also to show their cumulative impact. In effect, the whole would be more than the aggregate pf parts.

[A] THE EVIL OF TREATY SHOPPING STANDS SUSTAINED.

(a) Fraud remains unraveled.

[Law languishes; Morality sobs: An infliction on the Nation’s reputation: Loot of Public Resources: Delight for the denizens and the Beneficiaries of the Opaque System: Reason ridden roughshod..]

120. It is not a matter of honour for the people of the Republic of India that fraud is allowed to masquerade on the unseemly ground of ‘Necessary Evil’. This strong criticism was virtually the burden of this Petitioner’ song all along his litigious odyssey in the courts. Yet this Petitioner thought it prudent to weigh weigh himself by making a reference to two eminent experts widely known world over: Ray August[255], and Dr M. L. Upadhyaya[256]. To much of his delight the Petitioner finds that he was not wrong in pleading so. Prof August states:

Countermeasures

“The tax authorities opposed to treaty shopping have found solutions to the problem both in national legislation and through the use of specific anti-abuse provisions in tax treaties.

Only two countries have anti-abuse legislation: Switzerland and the United States. Switzerland enacted an anti-abuse ordinance in 1962 that suspends treaty benefits whenever a Swiss company makes a claim for a tax reduction that is abusive. [257] A claim is abusive (a) if a substantial part of a Swiss company’s income is given to persons not entitled to treaty benefits, (b) if a substantial share of the Swiss company is held by nonresidents, (c) if the Swiss company is an agent of a nonresident, or (d) if the income is given to a Swiss family foundation or Swiss partnership in which nonresidents own a substantial portion.

The U.S. Tax Reform Act of 1986 introduced a national treaty abuse provision that limited treaty benefits to companies that are “qualified” residents of either the United States or the foreign country that was a signatory of the particular treaty[258]. Unqualified corporations are those with more than 50 percent of their stock in the hands of residents of third-party states, or that disburse more than 50 percent of their income to third-party residents.[259]

In coantulayuntries that do not have specific anti-abuse legislation, the problem of treaty shopping is attacked using general principles of equity. Common law countries (including Australia, Canada, and the United Kingdom) use a “substance over form” approach. That is, their tax authorities attempt to determine if the movement of income between foreign affiliated companies is based on legitimate commercial reasons or if it is merely a sham set up in order to obtain treaty benefits. Civil law countries (including France and Germany) use an “abuse” approach. In other words, their tax authorities ask whether a particular arrangement of companies constitutes an abuse, a misuse, or an improper use of a tax treaty.”[260] [Prof August, International Business Law (4th ed. 2004)].

And Dr Upadhyaya, after considering Lord McNair and other standard texts comes to the conclusion that Treaty Shopping is a fraud on the Constitution and the law: he concludes his comprehensive opinion in these words:

“Let us assume that two states have entered into a bilateral beneficial treaty securing certain benefits and advantages for their nationals only. There is no express or implied provision or suggestion to extend the benefits arising out of such treaty to the nationals of third States. In reality, the nationals of the third states pretending to be national entities of one of the contracting states claim such benefits.

Objections are raised to such claims. If one of the Contracting States wants to condone this apparent illegal or unethical practice, how should it go about it. There are two courses open. One either the two states by consent amend the terms of the treaty and provide for by an express term in the treaty and then amend its laws, if the said amendments have financial implications affecting its revenues. But if the executive without amending the laws give a clarification of the provision of the treaty and the law and by executive fiat condones the manifestly illegal practice and does what was not initially intended by the treaty, it would certainly be a fraud on the Constitution and a colourable exercise of power. This is clearly an attempt to do indirectly what it could not do directly ”.

159121. That the Hon ’ble Delhi High Court in its judgment in this case, on appreciating the heart of the matter, articulated the core question needing a decision in these words:

“The core issue is as to what should be done when on investigation it is found that the assessee is a resident of a third country having only paper existence in Mauritius without any economic impact with a view to take advantage of the double taxation avoidance scheme. No attempt has been made to answer the question on behalf of the Central Govt…”

But This core question was deliberately evaded by the Central Government as the Solicitor General, Mr. Salve, never took a position on this issue while the Hon ’ble High Court was hearing the PIL. The tone of disgust in the judicial observation was well earned by the Central Government.

So122. That so long the Indo-Mauritius DTAC was abused by certain Indians laundering their ill gotten wealth parked somewhere in this wide world, and so long some Mauritians, with deep historical bonds with India, acquired some mere unfair, but marginal advantage, the ordinary citizenry of this country remained indifferent to the abuse [though, as the records of the Income-tax Department, which nobody brought to public ken, would show that the Department was always in favour of preventing the abuse, but every effort was done to frustrate this pursuit by the vested interests working hand and glove with the persons wielding power.] With the so-called opening-up of the economy in 1991 began a phase of darkness in which Mauritius turned into a tax haven. The Government of Mauritius thought nothing improper in making even good faith (Pacta sunt servanda implies ‘good faith’ arrangement for mutual benefit) mere trading wares. There was a clear remissness on the part of the Central Government in not taking preventive and remedial actions. Power that gets under Section 90 is coupled with unfaltering duty pro bono publico. Treaty Shopping is a dishonest sale of benefits to dishonest purchasers in a dishonest market for dishonestly causing wrongful gains to those not entitled to them, and wrongful loss to those legally entitled to the benefits. In short, the Treaty-shopping is an improper use of a Tax-treaty in breach of the article on Personal Scope of a tax treaty. Explaining the concept of Treaty Shopping Philip Baker observes[261]:

“ Treaty Shopping consists of a state which is not a party to a treaty establishing an entity within a state which is a party in order to take advantage of the provisions of that treaty. The simplest example of the establishment of a “conduit company” in a Contracting State to receive income”.

123. TREATY SHOPPING is an attempt to cause wrongful gains to the persons not entitled to benefits under a bilateral tax treaty: it amounts to a fraud, and is clearly against the mandatory principle of Public International Law called Jus cogens. In France fraud is frustrated by invoking the doctrine of the “less principles generaux du droit.” by Conseil d’Etat. The Netherlands Supreme Court (the Hoge Raad) in 1986 applied with impact the doctrine of fraus legis to the use of a conduit company. Fraus is a Latin expression, which means deceit. Fraus legis means “fraud on law”. In Roman law it means: to quote from Black’s Law Dictionary:

“Evasion of the law; specif., doing something that is not expressly forbidden by statute, but that the law does not want done.”

This doctrine has been thus explained:

‘The doctrine of fraus legis may apply if a chosen structure – though legally different –produces the same results as another structure provided by the tax legislation and if it can be proved that there are no commercial reasons for this particular structure other than tax avoidance. In such a case the courts may disregard the artificial structure if it conflicts with the purpose and the spirit of the law, and they might look to the final result before passing judgment.’”

The Netherlands Supreme Court (the Hoge Raad) applied the doctrine of fraus legis, and called upon the subordinate court to prevent the abuse of the double taxation avoidance on this ground. Analogous approach is evident in the German courts. Phillip Baker’s discussion of the Swiss approach leads to the following conclusions:

(a) Switzerland felt so strongly against Treaty Shopping that a domestic legislation was framed.

(b) The Bundesgericht adopted the civil law approach to defeat fraus legis

Phillip Baker discusses positions in the U.K. and the U.S. A. wherein the Courts have in exercise of their normal jurisdiction of administering justice never appreciated Treaty Shopping.

124. That, on a close analysis of the world’s civilized jurisprudence, it can be said that Treaty Shopping is a conjoint product of Collusion and Fraud inter se the vested interests in Mauritius and the residents of the third States. The dressed-up evidence presented by those who wanted to masquerade as the Mauritian residents before the income-tax authorities to obtain benefits of a bilateral tax treaty between India and Mauritius, was a stratagem of fraud to cause wrongful gains by inflicting a wrongful loss on others.”[262]

(c) The Grounds for which Treaty Shopping is upheld are most unreasonable

125.That the Grounds, on which the Division Bench of this Hon’ble Court to uphold TREATY SHOPPING in the impugned Judgment, are unreasonable and arbitrary for the following reasons:

(a) The judicial view is contrary to the views of all acknowledged authorities on Public International Law; to mention a few: -Lord McNair[263]; Oppenheim[264]; Georg Schwarzenberger[265]; J.G.Starke[266]; Cheng, B[267]; Hyde[268]; O’Conell[269]…..

(b) The judicial view is vitiated by the fatal flaw of founding a finding of fact on a fiction as it suffers from the fallacy of ex nihilo nihil fit ( nothing comes out of nothing).

(c) The judicial view is based on a book most unworthy of reliance in the judicial proceeding in the court of last resort as it is written by an interested person suggesting ideas, wrong and shocking to some of the basic tenets of civilized jurisprudence. The impugned Judgment quotes three long paragraphs from a book to erect as its principal sole reason in support of Treaty Shopping and constitutes the cental reason and the prime motivation in to overturning McDowel. As this criticism is severe, though made entirely pro bono publico, this Petitioner would resort to a detailed analysis of facts to his point on all reasonable probality.

Mindful of his responsibility for the above criticism, this Petitioner would examine them comprehensively under the following specific sub-heads:

(I) Miscomprension of Lord McNair;

(II) The Fallacy of a plea from “Nowhere and No-material” assumed ex nihilo.

(III) An uncritical adoption of the untested ideas of of an interested person which renders the procedure unreasonable and arbitrary, and the crowning judicial act without jurisdiction..

( c ) EVEN THESE COULD HAPPEN.

“….. he that increaseth knowledge , increaseth sorrow.’ Ecclesaastes

( I ) The Problem Of Understanding English Prose: A Patent Mistake In Reading : Lord Mcnair

126. That the prose that Lord McNair wrote in Chapter XVII of his Law of Treaties was grossly misread and miscomprehended. McNair said:

“The British view appears to be, though it is difficult to assert that the question has ever been considered and answered as one of principle, that a treaty creates obligations between the contracting parties solely, that is, the contracting States (or, more popularly, their Governments), and not between one party and the nationals of another, or between the nationals of two or more parties; though, as we shall see, in practice it is often, and indeed usually, convenient to allow the assertion by or against individuals in municipal courts of rights or liabilities which their State has obtained for them or imposed upon them by treaty.”[270]

It is well established that it is the British view which has been accepted in our country[271]. H.M. Seervai states: “Again, the British Parliament which enacted the G.I.Act, 35, did not embody the American view of treaties in it. The existing law was continued by the G. I. Act, 35, by the Indian Independence Act, 1947, and by our Constitution…”[272]

127. After quoting the above quoted extract from Lord McNair, THE division Bench of this Hon’ble Court observes in the impugned judgment:

“It is urged by the learned counsel for the appellants, and rightly in our view, that if it was intended that a national of a third State should be precluded from the benefits of the DTAC, then a suitable term of limitation to that effect should have been incorporated therein.”

The learned Attorney-General of India, and the former Solicitor-General of India ( who appeared before the Hon’nble Supreme Court as a counsel of the tax haven company the credentials of which were never examined) presented a totally wrong import of this simple English prose. There can be two situations ( A ) and (B):

( A )

“A” situation as stated by Lord McNair

Treaty beneficiaries

{ X State ~ Y State } [ other States and their nationals symbolized as Z ]

(a) ~ a bilateral treaty between X & Y

(d) ~, being a bilateral treaty excludes ipso jure Z:

except when altered by the express or implied terms..

(B)

“B” situation ( as presented by the Appellants ).

Treaty beneficiaries

{ X State ~ Y State [ Z* ] }

except when precluded from the benefits.

128.That the import of Lord McNair’s exposition, which the Hon’ble Bench quoted in the impugned judgment, has been explained in Oppenheimn thus[273]:

The binding force of a treaty and its effects concern in principle the contracting states only, and not their nationals. The rule can, as has been said by the Permanent Court of International Justice, be altered by express or implied terms of the treaty, when the provisions become self-executory (even, occasionally, as regards persons who are not nationals of the contracting state concerned)[274]. [emphasis supplied]

In a footnote Oppenheim clearly refers specifically to Lord McNair’s exposition in Ch. XVII of his Treaties.

129.That a critical reading of Lord McNair’s text quoted by the Supreme Court takes one to an entirely different conclusion. The expression “Provided that any necessary implementation by municipal law has been carried out” refers to the typical British practice which we share. Lord McNair in Ch. IV of the Treatise deals with “Municipal Action to Implement Treaties”. Writing about the British practice Lord McNair says:

“ In this matter of the municipal effects of treaties, the United Kingdom affords a sharp contrast to the United States. In the United Kingdom, as we shall see, with a very limited class of exceptions, no treaty is self-executing: no treaty requiring municipal action to give effect to it can receive that effect without the co-operation of Parliament, either in the form of a statute or in some other way. Whenever a treaty, or anything done in pursuance of it, is likely to come into question in a court of law or require for enforcement the assistance of a court of law, the question at once will arise whether any action required on the part of the executive or the courts of law to give effect to the provisions of the treaty is, or is not, already authorized by the existing law of the land.”

It means that a statute should specifically provide grant of benefits to the third States’ nationals. Both the instances which Lord McNair illustrate specific statutory bequest. An Anglo-American Convention provided that professors on the staff of the universities of each country were exempt from taxation in respect of fees earned for lecturing in the other country, AND necessary changes in the tax laws were made. Power to extradite is integral to international sovereignty but can be modified by the statute. A “ necessary implementation by municipal law” is the pre-condition. So far the Indo-Mauritius DTAC is concerned there is no legislative provision to deviate from its pure bilateral situation by conferring benefits analogous to the situation referred by Lord McNair in his text , or in Glen v. Compania Cubana de Aviacion, S.S. referred by him in the footnote 1.Section 90(2) of the Income-tax Act contemplates the implementation of a tax treaty framed within the parameters of Section 90.It does not implement legislatively prescribed provisions granting benefits to the third State nationals.

130. That as the counsel for the Union of India had placed a wrong gloss on what Lord McNair said, the Petitioner thought it appropriate to obtain an opinion of an expert on what Lord McNair said in Chapter XVII of his book. The Opinion of Dr M.L. Upadhyaya, former Professor & Dean of the University Department of Law, Calcutta University would amply show that that the Attorney General was incorrect in reading Lord McNair.Dr Upadhyaya in his detailed Opinion states:

“Lord McNair in his book on the Law and Treaties, Oxford the Clarendon Press, 1961 on pages 333 discusses the effect of a treaty upon the nationals of third state. In this discussion examples have been given from such treaties where the contracting parties had agreed to provide or create obligations on third states to cooperate in the matter of extradition of figures. All this is ensured by express terms of the treaty with the assent of the third states or by necessary implications.

Let us assume here that there is a bilateral treaty between the two states which does not contain any express term as to confer rights and impose obligations but has taken necessary steps in term of its constitutional law to make it part of its municipal law. Certain rights and benefits have been conferred upon its nationals, persons, and bodies. The question further arises whether the nationals, persons, and bodies of third states may avail of such rights and benefits. If they were complete strangers, not related in any manner with the contracting states, the answer would be clearly no. But if some façade of an artificial relationship is created solely and only to avail of such benefits, will it be legitimate use of treaty provisions or a fraud on the treaty.

Martin Dixon in his recent Textbook on International law sums up the law on treaties in the following words: -

“ The Vienna Convention represents a reasonably comprehensive statement of the law of treaties and there is no doubt that it has exerted a great influence on customary law, as well as regulating matters for the parties to it. Of course, in many areas, the Vienna Convention gives primacy to the terms of each treaty, but this is perfectly in accordance with the nature of treaties as instruments flowing from the Consent of States”. (First Indian reprint 2001 by Universal Law Publishing Co. in arrangement with Blackstone Press limited U.K)

Let us assume that two states have entered into a bilateral beneficial treaty securing certain benefits and advantages for their nationals only. There is no express or implied provision or suggestion to extend the benefits arising out of such treaty to the nationals of third States. In reality, the nationals of the third states pretending to be national entities of one of the contracting states claim such benefits. Objections are raised to such claims. If one of the Contracting States wants to condone this apparent illegal or unethical practice, how should it go about it. There are two courses open. One either the two states by consent amend the terms of the treaty and provide for by an express term in the treaty and then amend its laws, if the said amendments have financial implications affecting its revenues. But if the executive without amending the laws gives a clarification of the provision of the treaty and the law and by executive fiat condones the manifestly illegal practice and does what was not initially intended by the treaty, it would certainly be a fraud on the Constitution and a colourable exercise of power. This is clearly an attempt to do indirectly what it could not do directly.”

131.. That the adoption of the patently mistaken view as to what Lord McNair had said led the Hon’ble Court to make a patent mistake when it observed:

“As a contrast, our attention was drawn to article 24 of the Indo-US Treaty on Avoidance of Double Taxation which specifically provides the limitations subject to which the benefits under the Treaty can be availed of. One of the limitations is that more than 50 per cent. of the beneficial interest, or in the case of a company more than 50 per cent. of the number of shares of each class of the company, be owned directly or indirectly by one or more individual residents of one of the Contracting States. Article 24 of the Indo-U.S. DTAC is in marked contrast with the Indo-Mauritius DTAC. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in article 24 of the Indo-U.S. Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder”.

The non-consideration of the specific terms within the statutory and constitutional framework led the Hon’ble Court to a serious error to which it stood betrayed by an incorrect analogical reasoning. The reasoning is ex facie wrong as:

(a) Absence of prohibition can not mean grant of permission for availing of benefits by those not party to the bilateral treaty done only for mutual benefit;

(b) The Hon’ble Court should not have departed from the following principle to which Broom refers Expressio unius est Exclusio Alterius Co. Litt (The express mention of one thing implies the exclusion of another)[275]:

‘And, where parties have entered into engagement with express stipulations, it is manifestly not desirable to extend them by implications; the presumption is, that having expressed some, they have expressed all the conditions by which they intend to be bound under that instrument.”

(c) On this view the Hon’ble Court would be adding a term to the tax treaty which cannot be done without an overriding justification to promote the cause of justice;

(d) Reference to the Article 24 in the Indo-U.S. treaty is misconceived because in the U.S.A. a treaty is the supreme law in the land as it is done under the U.S. Constitution after deliberations of the Senate.

(e) In the context of the Indo-Mauritius tax treaty there was absolutely no relevance to make reference to Art 24 of the Indo-U.S tax treaty. If the Division Bench of this Hon’ble Court thought it fit to rely on this as either as a collateral support or as an analogical reasoning, the Rule of audi alteram partem demanded that the Respondent should have an opportunity to address the Hon’ble Bench to show it was contrary to law, and was incorporated under the U.S pressure whose corporate imperium had to be placated as what the U.S wants that must be the law. It is with reference to Art 24 of the Indo-U S tax treaty that the Hon’ble Bench foreclosed, by implication, the question of its legal and constitutional validity under the Indian jural system. Besides, the Hon’ble Bench missed to take the judicial history of the post World War II global realities, most shockingly perceptible in this unipolar World. The OECD, as its mentors the IMF and the WTO, is U.S.-driven ( with occasional fruitless flutter of the European powers). The cases on which the Attorney General and the counsel for the tax-haven company relied belonged to the OECD countries where not only legal and constitutional provisions are different but even their public interests are different from that of India. As the Hon’ble Bench failed even in taking a judicial notice of the facts of history and constitutional-legal parameters, which in fairness it should have taken while referring to Art 24 of the Indo-U.S tax treaty, this Petitioner is under duty to submit on these points to bring out the gross unreasonableness in the judicial approach.

132. That in the U.S. even a tax treaty is legislated by its Senate after full deliberation over the terms of a proposed treaty sent to the Senate under the Letter of Submittal from the U.S. President. Besides, the United States, whether we like it or not, is above all laws ( including Public International Law as the invasion of Iraq has shown) except the laws of its own country [We are told in the impugned judgment that an arrangement made by our Executive Government with a foreign country for avoidance of double taxation can override the statute]. The U.S. knows how to protect its national interests. It is in public domain how after Sept. 11, 2001 the U.S President Bush debunked the sovereignty of the states by declaring that the United States ‘reserved the right to launch preemptive strikes without warning against terrorist states or groups suspected of plotting to use weapons of mass destruction against American targets.’ The United States never doubted the dictum of Viscount Simonds in a tax treaty case[276]:

“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.”

But our Attorney General Mr. Soli Sorabji found it prudent, after the impugned decision, to deride these great words of a great judge of a great country with an evident sarcasm and barb:

“Thank God there is no patriotic duty to pay taxes which can be legitimately avoided unless, like the great Justice Holmes, one enjoys paying taxes, sharing his anachronistic belief that it is the price for the purchase of civilisation. Tax practitioners and consultants would face serious problems if Justice Holmes is taken seriously.”[277]

This Petitioner is distressed to note that our country’s Principal Officer did not rise up to the occasion in playing his role.[278]

In the United States lapses are surely noticed, and violations are certainly punished. When a corporate scandal was noticed the government responds with wisdom and alacrity as is illustrated by the way nemesis visited the Enron Corp. or the WorldCom. The Hon’ble Division Bench relied a lot on the judicial decisions from the OECD countries, and the Commentaries on the OECD Models . The Hon’ble Bench could not ward off the lapses which often beset analogical reasoning Explaining the defects of an analogical reasoning Bacon said:

“I found in my own nature a special adaptation for the contemplation of truth. For I had a mind at once versatile enough for that most important object---- I mean the recognition of similitudes—and at the same time sufficiently steady and concentrated for the observation of subtle shades of difference. I possessed a passion for research , a power of suspending judgment with patience, of meditating with pleasure, of assenting with caution, of correcting false impressions with readiness and of arranging my thoughts with scrupulous pains. I had no hankering after novelty, no blind admiration for antiquity. Imposture in every shape I utterly detested. For all these reasons I considered that my nature and disposition had, as it were, a kind of kinship and connection with

truth.”[279]

133. .That the inference that the Hon’ble Division Bench has drawn from the absence of something like Art. 24 of the Indo-U.S. DTAC in the Indo-Mauritius DTAC is vitiated by a fundamental mistake caused by an assumption that if something is not prohibited it is, by way of inevitable inference , permitted. This sort of reasoning is not only patently erroneous under the rules of construction but is contrary to what the Hon’ble Court has done in the H.P.C. L Case[280]. And, it is respectfully submitted that the Petitioner had never tried to make out a case with reference to ‘motive’ of the companies which got themselves incorporated in Mauritius for taking undue advantage of the DTAC between India and Mauritius. The Petitioner’s case was that on the proper interpretation of the terms of the bilateral Indo-Mauritius DTAC the persons belonging to third States had no credentials to avail of benefits under the DTAC. In short, such persons did not, in reality, come within the Personal Scope of a DTAC. It is taken as a cardinal principle in the administration of justice that masqueraders are never allowed to wrongful gains to themselves and wrongful loss to others.

134. That the misunderstanding of what Lord McNair said in the text quoted in the Judgment led the Hon’ble to one more patent error in legal reasoning when it observed:

“It is true that an international treaty between States A & B is neither intended to confer benefits nor impose obligations on the residents of State C, but, there we are not concerned with this question at all. The question posed for our consideration is: If the residents of State C qualify for a benefit under the treaty, can they be denied the benefit on some theoretical ground that ‘Treaty Shopping’ is unethical and illegal? We find no support for this proposition in the passage cited from Oppenheim”.

It is respectfully submitted that the core question was: whether a tax treaty between A and B would confer benefits or impose obligations on residents of State C ?. The real question gets quenched in the way the Hon’ble Court articulated the question for judicial consideration “If the residents of State C qualify for a benefit….”. In fact a logical fallacy is at work, the fallacy of post hoc, ergo propter hoc (‘after this therefore because of this.’). The assumption that the residents of State C qualify for benefits under a tax heaven is itself under question: and it is to be decided by the terms of a tax treaty in the context of the municipal law and Public International Law.

( ii ) Selective reading from Philip Baker’s Double Taxation Conventions and International Law 2ed without noticing its contra is unfair, unjust, and arbitrary rolled into one.

135. This Hon’ble Court in its impugned Judgment states:

“The respondents then relied on observations of Philip Baker (Philip Baker, Double Taxation Convention and International Law, page 91

(1994), second edition) regarding a seminar at the IFI Barcelona in 1991, wherein a paper was presented on "Limitation of treaty benefits for companies" (Treaty Shopping). He points out that the Committee on Fiscal Affairs of the OECD in its report styled as "Conduit Companies Report 1987" recognized that a conduit company would generally be able to claim treaty benefits”.

The entire observation, it is submitted, is unsound in many ways: viz—

( a ) This Hon’ble Court made a patent mistake in stating that it was articulating the stand of the respondents. This sort of plea could be advanced only by the Appellants.

( b ) This Hon’ble Court notes that it was considering some observations by Phillip Baker regarding a seminar at the IFI Barcelona in 1991, wherein a paper was presented on "Limitation of treaty benefits for companies" (Treaty Shopping). “Observation” means “ a comment or remark that you make about something , especially as a result of having watched or thought it a lot.” [ Collins Co-build English Language Dictionary]. It is respectfully submitted that Phillip Baker made in his book, [ Double Taxation Conventions and International Law A Manual on the OECD Model Tax Conventions ] no observation of any sort. He merely noted in the footnote 53 at page 90 of his book: ‘This topic was the subject matter of Seminar at the I.F.A. Barcelona Congress in 1991---see the

Congress paper on “Limitation of Treaty Benefits for Companies Treaty Shopping.”

( c ) As the paper read at the Seminar at the I.F.A.. Barcelona Congress in 1991 was never placed before this Hon’ble Court, the Division Bench of this Hon’ble Court erred in relying on it..

( d ) Even without reading that I.F.A. paper the Hon’ble Court should have noticed that it dealt with Limitations of Treaty Benefits was a controversial topic. In the modified form this concept, because of the U.S. pressure was incorporated in the in the Indo-U.S. Tax treaty.[ The legality of this provision is yet to be tested as this Petyitioner believes that it does not accord with our law. The International Fiscal Association is a forum for all sorts of ideas. A paper read therein, the caliber of whose author is not known, should not have been even noticed by this Hon’ble Court. If it was to be used, it should have been placed in the court as an issue so that this Petitioner could have exposed its real worth in course of his argument.

136.That it is respectfully submitted that it was under serious mistake and miscomprehension that the Hon’ble Division Bench just before concluding[281] this core issue of Treaty made a laconic observation:

“He points out that the Committee on Fiscal Affairs of the OECD in its report styled as "Conduit Companies Report 1987" recognized that a conduit company would generally be able to claim treaty benefits”

This Hon’ble Court is referring to para 13 of the Conduit Companies Report 1987 which says: to quote in extenso--

‘ Normally under the OECD Model the conduit company is regarded as a person….resident in the State of the conduit….. It is therefore entitled to claim the benefits of the treaty in its own name.’

The reason for the view in para 13 is thus given : “ treaty benefits will have to be granted under the principle ‘pacta sunt servanda’ even if considered to be improper.”

137. That the view of the Conduit Companies Report 1987 referred above goes counter to the settled principles of civilized jurisprudence to which the Statute of the International Court of Justice refers. Pacta sunt servanda’ is founded on the Principle of Good Faith[282]. The Vienna Convention on the Law of Treaties in Art. 26 defines Pacta sunt servanda’

‘ Every treaty in force is binding upon the parties to it and must be performed by them in good faith.”

And Art. 31(1) provides:

“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.”

If this Conduit Companies Report would have been ever put to this Respondent he would have proved how worthless and mischievous the reasoning of the Committee on Fiscal Affairs of the OECD was. To call Treaty Shopping a good faith user of the Indo-Mauritius DTAC shocks conscience, baffles knowledge, and makes this ordinary citizen shiver when he finds this view receiving a notice from this Hon’ble Court. Those so-called experts hired by the OECD, an organization under no public accountability and under no judicial control, may say anything for which they are paid for; but it shocks a citizen’s conscience to find that it is getting a judicial nod from our apex Court.

138. That this Hon’ble Court would have surely taken a different view if it would have gone through the pages 93-94 of Phillip Baker’s book. The 1992 Commentary refers to a general provision ensuring treaty benefits in bona fide cases. Phillip Baker writes at p. 94 under the sub-heading “Domestic approaches to treaty abuse”

“The Conduit Companies Report discussed the use of domestic anti-avoidance provisions to counter Treaty Shopping. The Report concluded that the effectiveness of this domestic law attack will depend upon the issue of priority between domestic law and international law……..The majority of countries in the OECD took the view that such approaches were applicable even without specific provisions. The Commentary also helpfully emphasizes that anti-avoidance measures must comply with the spirit and purpose of tax treaties to avoid double taxation.”

The 1992 Commentary rightly said : “The Report concluded that the effectiveness of this domestic law attack will depend upon the issue of priority between domestic law and international law.” Had this issue been articulated in course of hearing this Petitioner would have shown that in different jurisdictions approaches differ: in some international law gets priority whilst in others domestic law[283]. As we follow the British practice, the right perspective would have been what is delineated by the Court of Appeal in Trendex Trading Corporation Ltd v. Central Bank of Nigeria[284]. The 1992 Commentary says : “The majority of countries in the OECD took the view that such approaches were applicable even without specific provisions.” The referent is the domestic anti avoidance provisions. If these experts, if they can be called ‘experts’, would have gone through the cases decided by the British Courts, the US courts, the Hoge Raad of the Netherlands, the Bundesfinanzhof of Germany, the Federal Court of Switzerland they would have seen that judiciary always rejected thir line of thinking. They were essentially lobbyists, not jurisconsults. These so-called experts would have read the decisions[285] of this Hon’ble Court, they would have found that our judges belong to the same fraternity to which Lord Denning belongs: Denning who articulated a fundamental of creed of judicial administration when he said in magisterial tone, “No judgment of court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything.”[286] The 1992 Commentary, Philip Baker writes, “also helpfully emphasizes that anti-avoidance measures must comply with the spirit and purpose of tax treaties to avoid double taxation.” If through domestic anti-avoidance measures the “the spirit and purpose of tax treaties to avoid double taxation” is to be promoted then what survives of the view of the Conduit Companies Report 1987? Clearly Nothing. If only this Hon’ble Court would have seen the worthlessness of the view of the Conduit Companies Report 1987, if only this Hon’ble Court would have gone through those pages ( pages 94-104 ) wherein Phillip Baker discusses the anti-avoidance approaches of the courts of various jurisdictions in the World, the judicial decision would have been different! This judicial overlooking led this Hon’ble Court to one more serious and sad mistake. The Hon’ble Court observes:

“True that several countries like the USA, Germany, Netherlands, Switzerland and United Kingdom have taken suitable steps, either by way of incorporation of appropriate provisions in the international conventions as to double taxation avoidance, or by domestic legislation, to ensure that the benefits of a treaty/convention are not available to residents of a third State.”

This Hon’ble Court would have found on reading those pages of Philip Baker that it is the COURT of these countries which applied anti-avoidance provisions of the domestic law. Whenever this sort of issue was before a court of law it decided against it. No court before this impugned judgment felt it prudent to pass the buck to the Executive or the Legislature. This Petitioner is at his wit’s end how the Division Bench of this Hon’ble Court forgot the robust creativity of the catena of great common law over centuries. This approach is no different when we use ‘common law’ in its larger sense comprending droit commun, gemeines Recht, diritto commun.[287]

( iii ) An Economy with Truth in Lord Coke’s style sufficient to collapse the plea.

139. That writing about the Trial of Sir Walter Raleigh Lord Denning writes:

“According to the law of evidence, as we know it, the trial of Sir Walter Raleigh was outrageous. It was a travesty of justice. The conduct of the Attorney General, Sir Edward Coke, was monstrous. Every bit of evidence against Raleigh was inadmissible. It was all hearsay, rumour and conjecture”[288]

Something worse happened in the proceeding before the Division Bench of this Hon’ble Supreme Court. The Division Bench of this Hon’ble Court observes in the impugned judgment in its concluding para dealing with Treaty Shopping:

“Despite the sound and fury of the respondents over the so-called "abuse" of "treaty shopping", perhaps, it may have been intended (emphasis supplied ) at the time when the Indo-Mauritius DTAC was entered into”.

This assumption caused serious distortions in the judicial perception causing a serious miscarriage of justice. This amounts to re-writing the Personal Scope of the tax treaty which was beyond the jurisdiction of this Hon’ble Court. Even if the Hon’ble Court was not bound to follow the technical rules of evidence, it was under judicial duty to apply the fundamental principles of the law of evidence. This flaw overtook the judicial reasoning as the Hon’ble Division Bench t virtually accepted the submissions both of the Attorney-General of India ( Mr. Sorabji) and the lawyer of the tax haven company ( Mr. Harish Salve) that the Indo-Mauritius DTAC was intended to be used for Treaty Shopping. This Petitioner submitted in clear terms that the Appellants’ plea was a mere figment of imagination forged out of fancy to generate a condition which could entitle the third States’ persons to take advantage of a bilateral tax treaty.

It is, to say the obvious, that when a court acts, or is even seemingly seen to act on material so tainted and unsound, it acts both out of jurisdiction and in breach of the Rules of Natural Justice.

( iv) On The Use Of A Text-Book In A Judicial Proceeding.

Roy Rohatgi’s Basic International Taxation

140. That the Division Bench of this Hon’ble Court while deciding the issue of Treaty Shopping quoted three long paragraphs[289] from Roy Rohatgi’s

Basic International Taxation.. As the Judgment would show, the Hon’ble Court relied on a book written by an interested person sans juristic credentials, and vitiated by gross errors. Without any personal reason (the Petitioner has never even known the said author, or seen him), this Petitioner states certain things about the author and the book in due discharge of public duty to the nation, including to this Hon’ble Court itself. It also in the interest of our jurisprudence not to allow such ideas set forth in the three paragraphs of the book, now ensconced in this Hon’ble Court’s impugned Judgment, to go unquestioned so that they, with this new-found glamour of judicial habitat, may not misguide others world-over.

141. That the principles, which guide the courts in selecting textbooks for high reliance, are well settled. Hood Phillips’ Constitutional and Administrative Law (7th ed ) at p 24 states:

“Whether a text-book will be treated as authoritative this special sense is determined by the tradition of the legal profession and the practice of the courts, and depends on such factors as the reputation of the author and the date when the book was written”

Oppenheim’s International Law[290] states:

“…..the work of writers may continue to play a part in proportion to its intrinsic scientific value, its impartiality and its determination to scrutinize critically the practice of states by reference to legal principle

142.That the well settled norms not only for selecting a textbook but also for using the materials therefrom are best summarised Megarry J. in Cordell v. Second Clanfield Properties[291]:

“I would add one comment, in amplification of certain observations that I made when during the argument Counsel cited a passage from the third edition of Megarry and Wade’s Real Property. It seems to me that words in a book written or subscribed to by an author who is or becomes a judge have the same value as those written by any other reputable author, neither more, nor less.The process of authorship is entirely different from that of judicial decision. The author, no doubt, has the benefit of a broad and comprehensive survey of his chosen subject as a whole, together with a lengthy period of gestation and intermittent opportunities for reconsideration. But he is exposed to the peril of yielding to pre-conceptions and lacks the advantage of that impact and sharpening of purpose which the detailed facts of a particular case bring to a judge. Above all, he has to form his ideas without the aid of the purifying ordeal of skilled argument on the specific facts of a contested case. Argued law is tough law….I would, therefore, give credit to the words of any reputable author in a book or article as expressing tenable and arguable ideas, as fertilizers to them and as a convenient expression of fruits of research in print, often in apt and persuasive language. But I would do no more than

that, and in particular, I would expose those views to the testing and refined process of argument. To-day, as of old, by good disputing shall the law be well known.”

In the light of the observations of Megarry J this Petitioner submits the following comments for judicial consideration as, in this Petitioner’s view, the deviations from the wee settled standard norms make the impugned Judgment unreasonable and arbitrary at the same time.

(i) Before Megarry J. a Counsel cited a passage from the third edition of Megarry and Wade’s Real Property. It deserves to be mentioned in this very context that in course of the whole appellate process before the Division Bench ‘the three passages’ from Roy Rohatgi’s Basic International Taxation were never cited (nor the book from which they are said to emanate ever produced ) during the argument by the Counsels. The Rule of Audi alteram partem required:

(a) That the passages be specifically cited in the course of argument in full comprehensiveness by producing the book wherefrom the passages are cited because it is always possible that other details in a given book not only render the ideas in the passages unreliable and diluted in cogency, but may also show that the author is unworthy of being treated “a reputable author” for the purpose of reliance in any judicial decision-making.

(b) That, if the ideas set forth in the passages are vital for the disposal of a case, it is expected that the Court should, of its own, “put the point [ to the Respondent] during the argument”. If above conditions of procedural propriety are breached “ there is a breach of the rule of audi alteram partem which applies alike to issues of law as to issues of fact”[292].

(ii) The author of Basic International Taxation, for reasons to be set forth later, can not be considered a “reputable author” or one with juristic credentials. A chartered Accountant by profession with a forte for tax planning dear to the Off-shore companies and the tax havens (with substantial interests in Mauritius) can not be considered a “reputable author” as understood in common law or civil law jurisprudence.

(iii) Whilst quoting the three long paragraphs verbatim from the Roy Rohatgi’s Basic International Taxation the Division Bench of this Hon’ble Court missed to notice the difference between “process of authorship is entirely different from that of judicial decision”. An interested person was writing this book while the PIL was before the Hon’ble Delhi High Court.

(iv) The quality of the content of the passages, to be discussed later, would show that the author did not have “the benefit of a broad and comprehensive survey of his chosen subject as a whole, together with a lengthy period of gestation and intermittent opportunities for reconsideration.”

(v) The Hon’ble Court should have noticed the author’s “pre-conceptions” which was so easy to discover if it would have seen the text of the book which in the Introduction and the initial chapters betrayed the author’s “pre-conceptions” in a language so pronounced as never to go unnoticed.

(vi) It is understandable that the author formed “his ideas without the aid of the purifying ordeal of skilled argument on the specific facts of a contested case” but it is beyond comprehension that the Division Bench of this Hon’ble Court missed the point so pithily made by Lord Bridge “Argued law is tough law”, and acted unreasonably and without jurisdiction by not exposing “those views to the testing and refined process of argument.” as “ To-day, as of old, by good disputing shall the law be well known.”

That as the basic reason in support of the judicial view is founded only on the three long paragraphs extracted from Roy Rohatgi’s Basic International Taxation it is essential to examine the juristic credentials of the author and the worth of his views so that the cause of justice is not subverted on any count.

As to the credentials of the author:

143. That, as to the credentials of the author the following points deserves to be noted:

(I) He himself writes in his Basic International Taxation that he was a partner of Arthur Andersen for about 25 years. In the 80’s he spent several years in India as Managing Partner of the Indian firm of Arthur Andersen, one of the “Big Five” accounting firms, which was convicted of obstruction of justice, and criminally punished under

federal law leading to its closure.

(II) He is a consultant who figures in the list of experts on the Website of http:\\www.nishithdesai.com. It was this Nishithdesai & Co which conducted the case of the Mauritian company before the Hon’ble Division Bench. . The website describes him as “ a strategy and international tax consultant to several Indian and Overseas companies.”

(III) The book was published in 2002 under ISBN 90-411-9852-0 Copy Righted 2002. The Writ Petitions [PIL] No.5646/2000 and No.2802/2000 were being pursued before the Hon’ble Delhi High Court during the period while the book was being written. The book was not referred before the Hon’ble Delhi High Court. In fact, it was completed when the Special Leave Petition(C) Nos.22521-22522 of 2002 were under consideration before the Hon’ble Supreme Court. Two strange thins happened when this matter was sub judice before this Hon’ble Court. First, a silhoutte from Mauritius, M/s Global Business Institute Ltd, descended soliciting this Hon’ble Court for being impleaded as a co-Appellant in the proceeding initiated by the Union of India under Art. 136 of the Constitution of India. M/s Nishith Desai & Co. was conducting the case of the Mauritian company on day to day basis though the matter was argued for grant of leave by Shri Arun Jaitely, Sr. Advocate ( who a few days after become the Hon’ble Law Minister of India), and then by Shri Harish Salve, Sr.Advocate (who had argued this very case, as Solicitor General of India, for Union of India before the Hon’ble Delhi High Court).

(IV) Roy Rohatgi is a FCA, M.B.Cs., B.Sc. His website roy@itpa.org mentions:

“Is a strategy and International Tax Consultant to several Indian and Overseas Companies. He is currently writing a book on Basic International Taxation will be later this year, Kluwer Law International’

There is nothing to indicate that he held any judicial office or was an advocate. The author was not trained in a judicial tradition, not methodised under jural discipline, and lacked judicial sensibility and detached perspective.

Roy Rohatgi’s deep interest in the Mauritius affairs is evidenced by the fact that he delivered several lectures on international taxation and tax planning in Mauritius to offshore professionals, particularly over certain years. During 2001 he was engaged as an advisor on the plans for development of the global business activities in Mauritius[http://www.Mauritius-finance.com]. He became the First Academic Director in an institute under/associated with the Financial Services Promotion Agency in Mauritius when the FSPA decided to run a course on international tax planning in August 2003. Even the academic pursuit is designed to a cause. International tax planning, it is admitted, uses knowledge of international taxation to develop, what the advisors of the Offshore companies say, efficient tax structures on cross-boarder transactions which involves Treaty Shopping. In the Advanced Course (Professional) the Second Semester is devoted to ‘Off-shore Financial Centres’, and the Semester Four is devoted to ‘Mauritius Taxation and Legal System. The object of the course was so designed that the participants should have:

“Learned how to apply the basic rules of international tax planning in practice and how to develop sound and cost- effective tax structures for overseas clients to add further value to their professional services rendered in Mauritius”

The Financial Services Promotion Agency (FSPA) IS A wing of Mauritius administration. Roy Rohotgi was appointed as the first Academic Director with plenary powers.

(V) His association with LL.M. programme in international taxation at St Thomas University School of Law hardly goes to establish his credentials as if he were a Prof Wade or a Dr T.B. Smith of the U.K., or a Prof Bernard Schwartz of the U.S.A., or a Prof Rene David of France. This Petitioner went through the LL M course at St Thomas University School of Law, at the St Thomas University of Law, Miami, U.S.A. and, as an expert[293], is of the considered view t that the LL M course is skewed in favour of the off-shore tax-planners.

(VI) The reviewer of Roy Rohatgi’s “Basic International Taxation ” published in 2002 Kluwer Law International, ISBN 9041198520, 704pp very perceptively observes:

“With this in mind, Rohatgi is at pains to point out that any information he gives should not be used as the basis for providing advice without further consultation and research. The point is well made and taken in the Preface and Chapter One. Thereafter the notes to that effect at the beginning of each chapter are largely superfluous. The reader simply needs to review the chapter of recent developments to be aware of the avalanche of continuous change that would make it dangerous in the extreme to rely solely on a textbook such as this to provide specific technical advice to a client.”

Roy Rohatgi deserves to be appreciated for his candour (though its absence could have hardly gone unnoticed): he said—

“Unfortunately, every rule in international taxation has many exceptions. The interested reader is advised to research them further, where appropriate”[Preface ]

“No book, not even a weekly updated loose-leaf service, can be a substitute for appropriate research and professional advice

on current situation. The information contained in this book should not be relied upon to undertake any transaction without such advice.” [italics supplied].

He admits at the outset of Chapter 2 that it “is not meant to be comprehensive.”

When even an ordinary client is advised to make his research before coming a view on a litigious issue , the materials in the ‘three paragraphs’ under reference could at best be material for a research. It is unreasonable and arbitrary to use them as ex cathedra wisdom in the judicial decision-making. And again to say the obvious, the outcome of that research can not be used against anyone without putting the result of the research across to him.. No such research was conducted was ever attempted.

(VII) Roy Rohatgi, as suggested by his book, his profession, and his professional history and present assignment, is an interested witness The view of an interested witness should be scrutinized with great caution and accepted only when it finds corroboration. Courts require as a rule of prudence that the evidence of interested witnesses should

be scrutinized with a little care [ AIR 1976 SC 2304; AIR 1973 SC 492 ] In case of foreign law a judge, barrister, advocate, or attorney will be competent, but not a merchant unconnected with the law though possibly acquainted with it. [ Sarkar p.790 ]. This humble Petitioner scanned through all the cases decided by this Hon’ble Court but has not found this Court ever relying on a book of this type.

(VIII) Under the circumstances, is it fair to make this book the source of sole uncritical reliance in deciding the issue of Treaty Shopping abhorrent to the very fundamentals of civilized jurisprudence? Can’t a multibillionaire accused get a hack to write for him a treatise promotive of his case before a court of law as in this globalised market economy everything is res commercium? Will a court of law in its proper role decide in his favour accepting the thesis of such an interested person? It is a sound adage that justice should be seen to have been done.

As to the worth of his exposition:

144. That it is respectfully, submitted, that the exposition of law is flawed in many ways: to mention some—

(a) For the propositions he made Roy Rohatgi relied on the following

mentioned in the footnotes 102 to 105 of his aforementioned book.

fn. “102 Stef van Weeghel, The Improper Use of Tax Treaties, pp. 119-160.

fn. 103–J.David, B.Oliver, Access to tax treaties (Intertax 1989/8-9, p 330)

fn. 104–Stef van Weeghel, The Improper Use of Tax Treaties, pp. 257- fn. 105 – For example, United States does not discourage Treaty Shopping for outbound investment by US companies. Similar principles are applied in Germany and the Netherlands by tax Courts. It appears that countries apply a double standard if it is in their favour.”

The Hon’ble Supreme Court overlooked some crucial facts which would have been clear if the propositions made by Roy Rohatgi would have been tested critically with reference to the above footnotes as they constitute the basis for the ideas set forth in the ‘three paragraphs’[294] under reference.. If Roy Rohatgi would have mentioned the full title of the book written by Stef van Weeghel the cat would have been out of the bag. The full title of the book is the Improper Use of Tax Treaties with Particular Reference to the Netherlands and the United States (ISBN 90-411-0737-1). He had written within a specific frame of reference. Stef van Weeghal of Stibbe, Simont, Monahan, Duhl, Amsterdam, the Netherlands has no established juristic credentials on our criteria of judging the worth of the publicists worthy to be referred and reliance in judicial proceedings. In the same way neither David nor Oliver has any juristic credentials. The author is totally wrong, or is guilty of suppression of facts, in drawing up footnote 105 which would be shown in the next para..

145. That the proposition of which footnote 105 is the support occurs in the para quoted by the Hon’ble Court. Roy Rohatgi has not cited any material to support his view “For example, United States does not discourage Treaty Shopping for outbound investment by US companies.” There is no U.S. Court decision to support Treaty Shopping. That in certain tax treaties the U.S.A permits the marginal cases of Treaty Shopping is hardly a material point in the present context as we are concerned with the legality of the transactions. His statement with reference to Germany is wrong. Perhaps he got his idea from Phillip Baker who has written in course of his discussion with reference to Germany:

“ In Germany, therefore, a distinction seems to be made between “outbound” Treaty Shopping by residents of Germany, which is subject to domestic anti-avoidance provisions, and “inbound” Treaty Shopping by non-residents which is permissible unless there are express anti-abuse provisions in the relevant treaty”[295]

It is strange that Roy Rohatgi showed no awareness of what Klaus Vogel writes taking into account subsequent events:

“In contrast, the new $ 50d Abs. 1a of the German EstG, in force since 1 January 1994, is directed against the abuse of double taxation treaties by foreign entities, rather than by resident ones. According to this provision, a foreign entity has ‘no claim to tax relief’ (including an exemption or tax credit under a DTC) to the extent that.‘persons participate in the entity to whom the tax relief would not be available if they were to receive the income themselves , and there are no economic or otherwise acceptable reasons for the interposition of the foreign entity, and it displays no economic activity of its own[296]

146.That Roy Rohatgi showed no awareness of the fact that no court of law in this wide world upheld Treaty Shopping. How can there be a shopping of treaty benefits ? In some situations persons not party to a treaty may be beneficiaries of a treaty. But this can happen only when the fount of benefits in their favour is recognized. How can good faith which supports and upholds pacta sunt servanda become wares to be traded on counters for the benefit of bad-faith purchasers. Treaty benefits operate under the law of obligations; and are res extra commercium. Every treaty must be performed in good faith.[297]

147. That Roy Rohatgi showed no awareness of the juristic principles universally accepted. In France fraud is frustrated by invoking the doctrine of the “less principles generaux du droit.” by Conseil d’Etat. The Netherlands Supreme Court (the Hoge Raad) in 1986 applied with impact the doctrine of fraus legis to the use of a conduit company. Fraus is a Latin expression which means deceit. Fraus legis means “fraud on law”. In Roman law it means: to quote from Black’s Law Dictionary:

“Evasion of the law; specif., doing something that is not expressly forbidden by statute, but that the law does not want done.”

This doctrine has been thus explained[298]:

‘The doctrine of fraus legis may apply if a chosen structure – though legally different –produces the same results as another structure provided by the tax legislation and if it can be proved that there are no commercial reasons for this particular structure other than tax avoidance. In such a case the courts may disregard the artificial structure if it conflicts with the purpose and the spirit of the law, and they might look to the final result before passing judgment.’”

The Netherlands Supreme Court (the Hoge Raad) applied the doctrine of fraus legis, and called upon the subordinate court to appraise the abuse of the ‘double taxation avoidance claim’ in this light. Analogous approach is evident in the jurisprudence of the German courts. Phillip Baker’s discussion of the Swiss approach leads to the following conclusions:

(a) Switzerland felt so strongly against Treaty Shopping that a domestic legislation was framed.

(b) The Bundesgericht adopted the civil law approach to defeat fraus legis, which is substantially analogous with the approaches in the common law jurisdictions.

By holding that the partnership should not be treated as a resident of Switzerland for treaty purposes the Court adopted the same functional approach which the House of Lords adopted in Furniss v. Dawson by ignoring the interposed company without negating its existence as a company.

148.That Roy Rohatgi did not consider the relevance of Furniss v. Dawson to the point under issue. The central doctrine of the House of Lords in Furniss v. Dawson [1984] 1 All ER 530, [1984] AC 474 can be invoked to frustrate Treaty Shopping. Philip Baker is of the view that it can be so utilized. He observes:

“The interesting question is whether, even apart from such specific provisions, the Inland Revenue could attack Treaty Shopping under the doctrine enunciated in Furniss v. Dawson. That doctrine applies where there is a “pre-ordained series of transactions” and steps are “inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax”. Where the doctrine applies the Revenue may impose tax ignoring the inserted steps. The most recent House of Lords case on the subject has added the requirement that the inserted step must be an element without independent effect.”

Commenting on Furniss v. Dawson Philip Baker makes the following perceptive comments. “Several decisions of the courts on the application of the Furniss v. Dawson principle have stressed that the principle is one of the statutory construction. In case of Treaty Shopping, the provisions being construed would be the relevant treaty provisions, and the courts have held that a wide and purposive approach should be taken to the interpretation of tax treaties ……. particularly, through a wide interpretation of the “beneficial owner” concept to exclude situations where the recipient, though technically the owner of income, was obliged to pay all or virtually all of the amount he receives to a third country resident….” A careful study of the judicial decisions of various European jurisdictions led Klaus Vogel ( Klaus Vogel on Double Taxation Convention, p. 119) to state what has emerged as a crystallized anti-abuse norm to frustrate Treaty Shopping. He rightly mentions that in “spite of differing categorization in common law and civil law countries, there is, as has been correctly observed, ‘a striking similarity in approach and result’.

149.That the exposition of law in Roy Rohatgi’s book is unsound as it is written from the OECD and taxhaven point of view. India is not a member of the OECD The following comments are considered appropriate.

(i) Roy Rohatgi does not state the correct law: ‘the purpose of tax treaties differ from that of domestic tax law’. A tax treaty in the Indian context, is only for avoidance of double taxation in case where a non-resident comes to bear an incidence of taxation both in the source country and in the country of residence. It is a patently mistaken view of law to think that there is anything like customary International Law of taxation.

(ii) That under Indian law all policy considerations are legislatively enacted in the Income Tax Act . The executive is incompetent to pursue any policy in matters of levy and collection of taxes de hors the statute. This position is common in India and in the U.K. with one material difference that in the U.K. statutory tax provisions are per se final whereas in India even such provisions are under constitutional limitations. If the executive does anything in matters of levy of tax or grant of exemption from tax from mere non-tax considerations (and without statutory authorization) such an executive act is contrary both to our constitution and the law. The whole confusion in Roy Rohatgi’s book is on account of not taking into account the constitutional provisions in different countries. In some countries the constitutions grant specific priority to treaties whereas in most other countries tax treaties are legislatively enacted though in some of such countries such statutory provisions are amenable to visible and invisible provisions of the entrenched rights under their constitutional law. The fallacy in the entire approach is that the author is not observing the differentials having bearing on tax treaties as operative in different jurisdictions.

(iii) It is settled by our Supreme Court that the statutory power can be used only for the purpose for which it is granted. It cannot be used even for noblest purpose if it is not within the province of the purpose for which it is granted. Only such non-tax considerations can be allowed to be at work which come within the statutory purpose. The doctrine of ultra vires can be evoked to set right such violations.

(iv) The paragraph 3 in the long quotation from Roy Rohatagi’s book is an assortment of confused propositions. The intended benefits in a bilateral tax treaty can only be for the benefit of their residents. Their residents ‘can mean’ only the real residents, not a band of mask wearers. The oublic policy which civilized jurisprudence always promotes is that deception, howsoever dexterous never triumphs. In a bilateral tax treaty third state residents have no place. Intention of a treaty is always spelt out from its Personal scope, and not by sophistry.

(v) The Statement ‘ the prevention of tax avoidance including the proper use of tax treaty may or may not be explicit or sole purpose of a tax treaty’ is a typical thesis dear to offshore companies consultants thriving on the tax heaven manipulations. The only authority for this view cited by Roy Rohatgi isStef van Weeghal’s Book about which this Petitioner has already submitted that it is unworthy of reliance; first because it is in the context of USA and Netherlands which have different constitutional and geo political consideration and second because no Court of Law in the World has given its nod to a proposition like this.

(vi) Roy Rohatgi’s statement is unsound as it promotes purposes extrinsic to purpose of Income-tax Act. A democratic republic is gets defaced, defiled, and, in the end, destroyed if it evades contitutional discipline. This fundamental norm was stressed by the Hon’ble High Court when in the judgment it quoted the observations of the Hon’ble Supreme Court in S. R. Chaudhary v State of Punjab:

“There can be no constitutional government unless the wielders of power are prepared to observe the limits upon governmental power.”

“Constitutional restraints must not be ignored or bypassed if found inconvenient or bent to suit “political expediency. We should not allow erosion of principles of constitutionalism.”

(vii) The concept of (sovereign jurisdiction), it is submitted,is totally meaningless under our Constitutional system, especially in tax matters as the Income-tax law has intra-domestic operation and is administered by the tax authorities who are duty bound to levy tax on income created under domestic economic transactions. Invocation of sovereignty has become a fad for the tax havens.

(viii) It is submitted that the Statement by Roy Rohatagi that ‘in Principle the use of treaty provisions by third country residents can never be improper provided it meets their objectives’ is an atrocious proposition. First, the statement suffers from the fallacy of circular reasoning. In the context of the use of a treaty by third country residents, the word ‘their’ would be referring the expression ‘third country residents’. The expression ‘the treaty provisions’ cannot be the referent of ‘their’ as to convey this import the correct expression would be ‘these’ or ‘those’. This is so because Roy Rohagi rhinks that a bilateral tax treaty can be exploited even by the third States residents. But this sort of view goes against all law and public policy, domestic and international.

(ix) No court of justice of any major developed country has given its benediction to Treaty Shopping. If some governments allow Treaty Shopping they do so for various specific reasons. As in all such countries the tax treaties are legislated, so in all those countries the tax treaties become vehicles of legislatively enacted economic, political, or social considerations. In India this does not accord with the law of the land.

(x) It is not difficult to understand why the US Government is not strict with tax heavens dotting the Caribbean Sea, or why the U.K. so much tolerant to the Island of Mann or to the Virgin Islands. The mega capitalists of these countries use these tax havens for parking funds off public gaze, for money-laundering, and for deflecting tax-incidence. Barbados is one of the few tax havens in the world with which the U.S.A. . has a tax reducing trearty. ‘Operators such as Prince Talal Bin Abdul-Aziz el Saud’s (P.O. Box, Riyadih, Soudi Arabia), Vanguard N.V. (Handelskada 6, Curaco, Nrtherlands Antilles) and many other foreigners hold billions of dollars worth U.S. real estate through Antilles holding companies, where once treaty benefits provided extensive tax relief.’[299] The Chief of state of Virgin Islands (U.S.) is the President of the United States. The Island of Man is a crown dependency of the United Kingdom whose Chief of state is the British Monarch. The Chief of the state for the Bahamas or Bermuda or Barbados is the British Monarch. The mighty U.S.A. and the U.K. know their top capitalists use tax havens. It has already ben mentioned how even a fleeting scrutiny by the Paris-based Financial Action Task Force led in 2001 to the banning of anonymous ownership of more than 100,000 international business companies registered in the Bahamas. Besides they know where to draw the lines. At the same time they are powerful enough to discipline these tiny countries with their massive might, if things become too much for them. The Government of India is not porful enough in the global politics to shape the policies of these tax havens even when they are detrimental to her. Let us not evade our hard realities.

(xi) Roy Rohatagi’s statement that Treaty Shopping is justified ‘for other non-tax regions’ unless it leads to a significant loss of tax revenues is simply shocking. Revenues, which go to the Consolidated Fund of India, bear different attributes, and are under Parliamentary Control. The consolidated Fund is a real wealth of the country under Public Trust. On good grounds this Petitioner had shown to the High Court that because of the abuse of Indo-Mauritius DTAC there was a huge loss of revenue. It is true that nobody knows how much loss was inflicted on this country by sharp operators from lands near and far. The different agencies of the government know about such revenue losses but pretend ignorance. Even if the total loss of revenue in the 24 cases which were disposed of by the Mumbai tax authorities is considered, some idea about the extent of loss could be had. As the government was itself ought to shield those who abused the tax Agreement, noattempt was ever made to estimate the extent of the loss. Whatever this Petitioner could place before the Hon’ble Delhi High Court was considered enough by the High Court to make the following comment in its judgment:

“ We would however like to make an observation that the Central Govt. will be well advised to consider the question raised by Shri Shiva Kant Jha who has done a noble job in bring into focus as to how the Govt. of India had been losing crores and crores of rupees by allowing opaque system to operate.

(xii) It is the constitutional mandate that every paise of revenue must be collected, as not even the whole of the executive is competent to waive a single paise of taxes of Income Tax raised under this statute. This is the rationale why not a paise of revenue is ever written off by the executive. The write-off procedure in the Income tax department is merely a process for transferring the uncollectable dues to the Register of Dead demands to be pursued for recovery, if possible, within the period of limitation. Foreign exchange or foreign investment does not belong to this category of the country’s resources. Nobody knows, not even the Reserve Bank what is the chemistry of the foreign exchange.

(xiii) Roy Rohatgi states that treaty network is built to attract foreign enterprises and offshore activities. It is contrary to international public law. Pacta sunt servanda,which is founded on good faith, cannot be turned into a device for turning good faith into wares of sale. Any such attempt is a clear fraud.

(xiv) Roy Rohatgi overlooks the fundamental difference between the tax-incentives given in the domestic tax laws and the benefits under a tax treaty. As a citizen this Petitioner was aghast when Shri Harish Salve stated before the Hon’ble Delhi High Court that as the residents of a particular State in the Union of India derive advantage of tax incentives by setting up industries in underdeveloped areas of the country, so do the non-residents operating through the Mauritius route. The Hon’ble Delhi High Court rejected this argument with a well reserved curt comment:

“The then Solicitor General could not comprehend the difference between the people of India who are committed to build the country, and are ready to die for its cause. If tomorrow there is any aggressions will these the fleeting mask wearers from the tax havens ever come to fight for the country. To miss this point is to inflict insult on those who fought for the country, and will never allow it to be in the lurch. But this shows the mind set of the Central Government which for promoting the ends of vested interest can go this far. This Hon’ble Court is under solemen constitutional duty to see that common people who have given themselves this Constitution are not taken for a ride by the persuaders and lobbyists”.

(xiv) If any tax concessions are to be given they must be given in transparent

form both for Parliament to deliberate, and the people of the country to judge and judge. The argument given by Roy Rohatgi is a typical argument given by the proponents of the Opaque System subversive of our Democracy and detrimental to our common interest.

(xvii) Roy Rohatgi counsels us through a meaningless sentence; ‘Overall countries need to take, and do take, the holistic view’. Holism in philosophy is a theory that certain holes are to be regarded as greater than the sum of their parts. He has not spelt out the parts of the hole, nor we know whether the hole has space for common Indians, or it is meant for those who on the ground of economic development exploit wrongfully the economic resources of this country. As a dictator sells dreams, these financial consultants promote their interests by merely painting a rainbow. It is not clear how the calculus of revenue losses and non-tax benefits works ; and if it works, for whose benefit it works. The approach of this author is vitiated by the concealed reference to which Baron

Anderson refers in R v. Hodge[300] where he said :

“the mind was apt to make a pleasure in adapting circumstances to one another, and even in straining them a little, if need be, to force them to form parts of one connected the whole; and the more ingenious the mind of the individual, the more likely was it, considering such matters, to overreach and mislead itself, to supply some little link that is wanting, to take for granted some fact consistent with its previous theories and necessary to render them complete.”

The untenable notion of economic holism led this Hon’ble Court to sustain the Fraud of Treaty Shopping by invoking the doctrine of Necessary Evil, by deriving aid from economic holism ( a doctrine of a suffocating intellectual error: vide Russell, Hist. Western Phil. Hegel p.714). Ordinary men and women could understand Satan saying, “Evil be thou my good”, but they would be at their wit’s end when he would find the spokesperson of the Union of India saying so. It is easy to go step further, to say ‘Lawlessness be thou our guide.’ The central light of the Budapest Sunday Circle[301], Gorge Lukas, like Kant, endorsed the primacy of thics in politics[302]. To justify something on the speciaous plea of Necessary Evil is to reject the central ideas of John Raws expressed in A Therory of Justice often refferd to by this Hon’ble Court.

(xviii) The rainbow that the author has painted on specious pleas would vanish if Joseph Stiglitz’s discussion of the Role of Foreign Investment in Globalization and its Discontents is gone through. It is unwise to evade realities.

(xix). That with greatest respect, this humble Petitioner submits that the entire exposition on the topic, ‘Is Treaty Shopping improper’ is unsound in many ways. The Hon’ble Court overlooked the failings of the exposition. Even the Joint Parliamentary Committee Report could go at least to the extent of saying in the concluding paragraph of chapter VIII of the JPC Report:

“The Committee regret that although Indian concerns about the Mauritius route had been formulated soon after the establishment of MOBAA resulted in substantial financial inflows into India, including money laundering by Indian companies making illegitimate use of the Mauritius route, once the India-Mauritius Joint Commission in February 1997 had endorsed the JWG decision of December, 1996, virtually no action was taken to

raise and pursue these concerns with the Mauritius authorities although foreign financial inflows into India from Mauritius rose to over Rs.15,000 crore, constituting nearly a third of all foreign investment in the country. The Committee are particularly disturbed to note that notwithstanding FM’s instructions to his Ministry officials after his meeting with the Mauritius Minister in September 12, 1998, and the offer made to the Indian Finance

Minister by the Mauritius Minister in September 1998, and the offer made to the Indian Finance Minister by the Mauritius Minister in March 2000 to address Indian concerns of recent origin, little or nothing was done in the Ministry or by the Minister to raise these issues with Mauritius. The Committee are of the view that although the inflow from Mauritius was, in principle, welcome, due care also needed to be exercised about possible misuse of this route. Instances of such misuse have come to light and misuse of the route appears to have been significantly responsible for market manipulations during the boom of 1999-2000 which led to the bust of 2001. The Committee commend the steps taken in July 2002 to amend the DTAA. Continued vigilance on this front will be necessary to prevent scams of the kind that occurred in 1999-2001 when due attention was not being paid to the dangers inherent in the virtually unregulated Mauritius route.”

(v) Crypto-pressure of Extraneous Factors: Rohatgi’s thesis examined further.

The Root Error that Ripples and Resonates

150. That it is most respectfully submitted that this Petitioner finds the heart of the matter in the case thus stated by this Hon’ble Court in the Judgment, immediately after the quotation of the ‘three paragraphs’ from Roy Rohatgi:

“There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development. Deficit financing, for example, is one; Treaty Shopping, in our view, is another. Despite the sound and fury of the Petitioners over the so called ‘abuse’ of ‘Treaty Shopping’, perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of Treaty Shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy.”[303]

151. That the Hon’ble Court’s view is apparently mistaken as there is absolutely nothing in the law to indicate that the view of the rapacious international financiers and the taxhaven beneficiaries was ever erected in the Income-tax Act as the statutory raison de trefor any provision. The famous words of Justice Holmes in his classic dissent in Lochner v. New York[304] come to mind:

“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.”

152.That this Petitioner submits that the issues could have been decided on reasonable statutory construction rather than by adopting a holistic view. Roy Rohatgi counsels in his book that a holistic view deserve to be adopted. The expression holistic is meaningless unless we know whether the common suffering souls of this country are within this holos, or they are out of it. General J.C. Smuts who had written Evolution and Holism would have shuddered at the use of this word without bothering to know the profiles of the parts and the resultant synergy in the holos, the whole. The approach which can understandably be excused when adopted by a former employee of Arthur Anderson can never be the approach of the Supreme Court of the Republic with more than 100 crores people most of them impaled on the wheel of fire of poverty and distress.

153. That as this Petitioner finds that the Hon’ble Division Bench set forth in the concluding paragraph on its treatment of Treaty Shopping the ideas which Roy Rohatgi had stated in its support, the Petitioner considers itb his duty to evaluate it critically with full candour, but with utmost good faith, in public interest.:

( 1 ) The assumptions about the ‘many principles of fiscal economy’ are all ex cathedra as they were never put as an issue for deliberation in the course of hearing. Besides, its rationale in sustaining Treaty Shopping is not clear. The expression fiscal means “belonging or relating to government finance or revenue”. The hypothesis is that the loss of revenue matters not, if non-tax benefits [a concept which conceals more than what it reveals] are received . Revenue of a country goes to the Consolidated Fund to be used for public cause under Parliamentary authorization or approval. It is the nation’s wealth. The foreign funds constitute largely this nation’s embarrassment, and are for the benefits of persons whose mask deserves to be stripped off. The country which takes seriously the conditions of people think about revenue the way Viscount Simonds thought when he said in : Collco Dealings LTD v. IRC [1961] 1 All E R 762 at 765:

“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.”

( 2 ) The Hon’ble Court has not mentioned the name of such developing countries who tolerate the embarrassment of evil for some larger cause. Roy Rohatgi mentions them; and which this Hon’ble Court quotes in extenso. The countries mentioned are: Cyprus, Madeira, Singapore, and Mauritius. Bertrand Russell had written that “proportionality” is an attribute of wisdom; Lord Diplock had wrung out the principles of proportionality as one of the four counts of Judicial Review. The Great Republic of India is surely in some morbid plight when Roy Rohatgi tries to prove his point with reference to such tiny tots of our terra firma. Cyprus is a country of 873000 people craving for the membership of the European Market ever ready to compromise its values for its mentors. Madeira’s existence was unknown to this Petitioner despite his credentials to write on geography. It is a group of island belonging to Portugal having not more than 264800 persons without tradition and jurisprudence. Singapore, a country of 264 sq. miles has a population of 3322000 people excluding the newly arrived non-residents 808000 where the press presses people :”Let’s Get on the Love Wagon.” And Mauritius: an area of 2040 sq kms and population of 1195000. It has preferential access to the U.S. and European Union markets under, respectively, the Africa Growth and Opportunity Act and the Cotonou Agreement. The Central Government evaded realities and allowed third country residents to sail under false colors under residence of culpable convenience effecting through fraudulent practice of Treaty Shopping incalculable and immense wrongful loss to India and wrongful gain to themselves. The facts in the following table speak loudly about the fraud at work. :

Country

Population

Area

GNP

Per Capita Income

Bahamas

274000

5378 sq mi

(1992) $3.2bn

$12020

Cyprus

600000

3571 sq mi

(1992) $7.1bn

$9820

Mauritius

1141000

720 sq mi

(1992) $3bn

$2700

Monaco

30600

0.75 sq mi

(1999) 475 mn

$16000

Nauru

9900

8.2 sq mi

(1989) $90mn

$10000

The Netherlands

15449000

13097 sq mi

(1992)$312 bn

$20590

France

58333000

212686 sq mi

(1992) $1279bn

$22300

Japan

124641000

145803 sq mi

(1992) $3508 bn

$28220

USA

262693000

3535935sq mi

(1994) $6727bn

$25744

India

944157000

1222396 sq mi

(1992) $272bn

$310

It is shocking that despite vast socio-economic differentials India is to be counseled the way Roy Rohatgi has done. Besides the fundamental error in analogy this is a disrespect to our country. We are not the birds of the same feathers. McReynolds observed:

“Loss of reputation for honorable dealing will bring us unending humiliation; the impending legal and moral chaos is appalling.”[305]

The Hon’ble Court which has great concern for an individual’s right to reputation should recognize this right of the nation for stronger reasons.

( 3 ). The doctrine of toleration of Evil “in the interest of long term development”, if allowed to have a grip over our thinking, even God would leave us to groan under the Slough of Despond. History is a witness deposing that this is the doctrine of supreme justification for the dictators, tyrants, crooks, and scamsters in all times, in all lands. Hitler destroyed the Weimer Constitution as a necessary evil to wipe out the disgrace that the Peace Treaty of Versailles had inflicted on Germany. Mrs. Gandhi justified the ignominious Emergency by drumming into our ears the shibboleth of Necessary Evil. The doctrine of Necessary Evil is against the grain of our society and our great tradition.

( 4 ) The Hon’ble Court should not have seen an analogy between deficit financing and Treaty Shopping as these are two concepts operating on different considerations having different effects on our economic destiny. The Encyclopedia Britannica, writing about deficit financing:

“practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds. Although budget deficits may occur for numerous reasons, the term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. The influence of government deficits upon a national economy may be very great.”

‘Treaty Shopping,’ on the other hand is a dishonest sale of benefits to dishonest purchasers of such benefits in a dishonest market for dishonestly causing wrongful gains to those not entitled to them, and wrongful loss to those legally entitled to benefits. To say that Treaty Shopping is good for economy is an erroneous notion. A lot of sound work has been done by impartial experts to demonstrate the deleterious effect of getting foreign funds by hook or by crook.

(5 ) The Hon’ble Court appears to have accepted the submissions both of the Attorney-General for India ( Mr. Sorabji) and the lawyer of the tax haven company ( Mr. Harish Salve) that the Indo-Mauritius DTAC was intended to be used for Treaty Shopping. The Hon’ble Court observed in the judgment:

“Despite the sound and fury of the Petitioners over the so called ‘abuse’ of ‘Treaty Shopping’, perhaps, it may have been intended at the time when the Indo-Mauritius DTAC was entered into.”

To ‘intend’ is ‘to plan or have in mind as one’s purpose or aim.’(Chambers 21st Century Dictionary)

This Petitioner had stated that this assertion was false as there was nothing, there could be nothing, to prove it, or even to suggest on the principle of probability. Mr. Salve had been paid for to plead whatever could advance his client’s case, fact or fiction. But it was shocking to find the Attn.-General doing that. The unstated but dexterously suggested idea was to free the BJP government (and its then F.M Mr. Yashwant Sinha ) from the remissness in promoting Treaty Shopping, and to put the blame on the Congress as the Indo-Mauritius DTAC had been signed when Mrs. Gandhi had visited Mauritius 1982 along with Mr. Pranab Mukherji, the then F.M in 1982. It was unbecoming of both the counsels to suggest this , even in pregnant aside. The Court was not the appropriate forum for playing politics. They brought out no travaux preperatoires (preparatory work). They brought nothing to suggest even remotely to prove this sinister suggestion. A DTAC founded on the mutuality principle is never, nowhere, used for the benefits of the treaty-shoppers. This Petitioner quickly responded that the Att-Gen should not have suggested such a baseless idea which is playing politics in course of the solemn judicial proceeding. This Petitioner had investigated how the Indo-Mauritius DTAC was entered into. This Petitioner submits that Hon’ble Court committed a mistake of fact by stating that the abuse of Treaty Shopping, “perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into.” This conclusion is based on no material: hence this conclusion of facts should be expunged from the Judgment so that this undeserved insinuation does not sully the reputation of Mrs. Gandhi who, when all is said, was a great patriot, perish the thought, perhaps the last patriot.

( 6 ) The Indian Constitution is not based on the rigid doctrine of separation of powers whereas the U.S. Constitution is based on the rigid separation of powers. We have structured our polity on the British model.[306] Under this system of jurisprudence judicial creativity is very wide. It is attested by the judicial activism shown by our courts. The problem of Treaty Shopping is, in fact, more amenable to judicial creativity. The core question in the case, as the Hon’ble High Court said, was the abuse of the DTAC by those not entitled for the purpose of causing wrongful gains to themselves and wrongful loss to our country. This abuse could have been rooted out by developing domestic anti-abuse provisions in course of judicial process. It is to be noted that the Doctrine of the Lifting of Corporate Veil was evolved by the courts, not the legislature. There is no reason why the Hon’ble Court should narrow down its vibrant creativity in a phase wherein the nation needs it most.

(7) Every body knows that the Indo-Mauritius DTAC was systematically abused to the full knowledge of the Executive. There are good grounds to believe that whichever be the political party in power, the lot of the country is just to be looted. Once the sinister realities have come to public knowledge the Executive should respond. In Furniss it was aptly stated that measures to eradicate tax avoidance were more suited to be evolved through judicial creativity than through the blunt instrument of the legislature. Lord Mansfield, stated the functions of the King’s Court, as far back in 1774, in these words :

“Whatever is contra bonos mores et decorum, the principles of our law prohibit, and the King’s court, as the general censor and guardian of the public manners, is bound to restrain and punish.”

(8) The Hon’ble Court observed in the impugned judgment ;

“ Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations.”

Economic and political considerations do determine the governmental policies. The history of income-tax law shows that under the income-tax frame of reference the governmental policies as approved by Parliament are legislatively enacted in precise terms. There is no provision in the income-tax law, which grants an open-ended power to the Executive. If the Executive wants a policy decision to be implemented it cannot be done without Parliamentary enactment. In Customs, Excises, or Commercial tax laws, on account of their different protocol of evolution, policy quotient is evident and quite substantial. In the ensemble of taxes the law of income tax is sui generis. It is also to be noted that the law of income tax is never made to be at the whims and fancy of the Executive. If the Executive is entrusted with such wide discretion and power over income-tax law the days of the Stuarts are on return. That the world in which the Executive is claiming such powers has become a dangerous world where unless a rigorous legal discipline is maintained, the public interests would suffer beyond repair. The Petitioner in an article had drawn a portrait of the emerging scenario: where he stated-

“The globalisation has spawned a new style of corruption. Before it whatever was earned from improper sources was kept in the country itself. Because of mass communication, information technology, and closer interactions in matters of commercial dealings, the fruits of corruption are gathered and amassed more often outside the territorial jurisdiction of India. The FIIs, the MNCs, and the OCBs, through their rich band of lobbyists provide a very stable system to indulge in corrupt practices on global basis. A country’s vigilance commission is totally outdated. The experts are in plenty to function on hire as their fund managers investing such resources in movable or immovable property from the North Pole to the south, perhaps exploring ways, if technologically feasible to transmit the bags of ill-gotten wealth in some vaults in the Sea of Tranquility on the Moon or some other Planet”

The entrustment of unbridled wide power to the Executive bodes ill for our democracy. The Hon’ble Court should adopt a pragmatic view of how the government is going to behave under pressure, persuasion, and temptation of all sorts which abound these days all around.. In a situation of this sort the Hon’ble Court should keep in mind the following:

(a) Chandrachud C.J aptly said:[307]

“Besides, as observed by Brandies J., the need to protect liberty is the greatest when Govt.’s purposes are beneficent.”

(b) Wade & Phillips rightly says[308]:

“These decisions established the fundamental principle that state necessity does not justify a wrongful act.”

( c ) The Supreme Court of India in S. R. Chaudhary v State of Punjab observed:

“There can be no constitutional government unless

the wielders of power are prepared to observe the

limits upon governmental power.”

(9) The Hon’ble Court is less than fair in saying that the “Court cannot judge the legality of Treaty Shopping merely because one section of thought considers it improper”. It is respectfully submitted that it is not a sectional thought; it is the considered view of those for whom the country matters more than the lust for wealth. What Treaty Shopping means to the people of this country can be stated in these words:

“Such matters cannot brook any delay, as the security of the country must be of supreme interest. The price of liberty and societal weal is always eternal vigilance. The Government must respond not only by withdrawing the aforementioned Circular but should also take all possible steps to see that there is no unjust enrichment, there are no recipients of wrongful gains, there are no sufferers on account of wrongful loss. It would be a queer irony that the government which rightly asserts its case against terrorism tends to become, perish the thought, a facilitator of terrorism! It would be foolish to wait till facts are proved beyond a reasonable doubt. When the issues relate to the security of the country a responsive and reasonable government should act on express probability itself. Whittier said –

“For all sad words of tongue or pen

The saddest are these: It might have been.’”

(10) The Petitioner respectfully submits the following observation is not fair to the common people of this country:

“ A holistic view has been taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy.”

The expression “holistic view”, as this Petitioner has already submitted, is a meaningless expression with sinister overtones. The idea that Treaty Shopping is justified as a “necessary evil” is repugnant to our moral sense without which a democratic polity is doomed to decay. When such problems come before the Hon’ble Court the issues be decided without frustrating the sense of social morality of the people. Our justice process is to do complete justice. It is not for nothing that it unfolds itself between the two metaphors of profoundest suggestions: the words of Gandhari ( Yatoh dharmah tato jayah) and the statute of Mahatma Gandhi[309].

154.. That this Petitioner draws corollaries from the above in the following terms:

(1) Once it is held that a tax treaty is to promote political and economic ends of the government of the day, it was natural and logical for the Hon’ble Court to have held that even a tax treaty is made in exercise of the executive power contemplated in Art. 73 of the Constitution of India.

(2) Once the doctrine of necessary evil was recognized, the core issue stood by express logic decided: that Treaty Shopping is not illegal.

( 3 ) That the Hon’ble Court narrowed its jurisdiction and compromised its creativity by subjecting it to the Blackstonean frontiers prescribed in the doctrine Judicis est jus dicere, non dare (now anachronistic and rejected by this Court in several Constitution Bench decisions). It is only by virtually eliminating its judicial creativity that the Court could pass on the buck to the Executive, or Parliament.

( 4 ) It also follows as a day follows night that the Hon’ble Court should show preference for hyper-technical reasoning which this Hon’ble Court generally rejects in doing complete justice.

( 6 ) But the judicial logic could not advance unless McDowell is interpreted out of existence. McDowell is virtually overruled on the most crucial points If this decision is allowed to operate Treaty Shopping could not be sustained. So it is glossed out as a mere ‘hiccup’.

( 7 ) But without subjugating law to the act of the Executive [whether a DTAC or circulars] the approved thesis could not have been advanced. So it follows naturally as leaves follow the trees: the Executive’s acts rank supreme. Hence the Hon’ble Court held that both the tax treaties and the circulars are above law ( by necessary implications, even above our Constitution.)

155. That it is most respectfully submitted that in the income-tax jurisprudence economic policies are no of no concern for the tax administrators. It is a settled principle of the income-tax law that the governmental policies are always enacted into law. Under the income-tax law no open-ended discretion is given. It is most respectfully submitted that this Hon’ble Court missed the grammar of the tax law not only in this case but also in CIT v. P.V.A.L Kulandagan Chettiar[310] very recently decided where this Hon’ble Court observed per incuriam:

“Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or agreement.”

It is good that this Hon’ble Court felt it unnecessary to refer to the legal literature of the OECD as our Court cannot follow that forgetting India’s own jurisprudence. Our Courts cannot be a reflecting mirror for the ideas manufactured by the OECD experts.. It is worthwhile to mention that the mistake emanates from not maintaining a distinction between the Central Government exercising statutory powers under the statutory powers under the prescribed statutory frontiers, and the Government as a policy planner with its constitutional duty get it approved and enacted by Parliament. Section 90 has granted power under precisely structured terms. A tax treaty cannot transgress the constraints of the provision. If the Government wants a wider range, or an open-ended scope, it must get the law so amended. The whole problem has cropped up because now the Government, without being a member of the OECD, wants to toe the OECD lines for the obvious reasons that the OECD Model gives enough scope to bungle, more so in our own country where a treaty is a private, often secret, affair of the faceless executive. The reason for this Hon’ble Court to uncritically adopt this line of thinking is that under our adversarial model of litigation right answer cannot be given if both the sides for their special and esoteric reasons are interested in getting only a wrong answer. Who thinks of the nation?

(vi) THE FRAUD OF TREATY SHOPPING escapes unravelment

156. The effect of fraud is expressed with a masterly stroke by Lord Denning LJ in Lazarus Estates Limited v. Beasley [311]:

“No judgment of court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything.”

The following points have been judicially established:

(i) The courts have recognized it as a fundamental jural postulate by holding that “fraud and collusion vitiate even the most solemn proceedings in any civilized system of jurisprudence”.

(ii) Judicial abhorrence to fraud is so deep that the courts recognized the taint of fraud as a special defence against a foreign judgment.

(iii) Fraud “is an extrinsic collateral act, which vitiates the most solemnest the proceeding of the courts of justice”.

(iv) Fraud vitiates not only judicial acts but even administrative acts.

(v) It is judicially established that no can take advantage of one’s own wrong.

(vi) The courts have expected it as a universal legal proposition that “all frauds affecting the Crown and public at large are indictable as cheats at common law.

(vii) Fraud in public law is not the same as fraud in private law: hence judicial approaches are also not the same..

157. It is common knowledge that in recent years the tax havens are widely used for evading tax. In fact, the economy of most tax havens largely depends on the promotion of the unwholesome activities having the effect of causing wrongful gain to those not entitled to tax benefits, and causing wrongful loss to those having legitimate claims to tax. Operators in the third countries thereby turn such treaties into veritable rouge’s charter. If the U.S. Company earns capital gains in India or in the United States it is liable to be charged to tax as per the laws prevailing in these countries; or, if the Luxemburg Company earns capital gains in India it would be taxed in India as an ordinary non-resident as there is no double taxation agreement between these two countries . If these companies set up subsidiaries in tax havens like Mauritius they are neither taxed in India nor in such tax havens on their capital gains. Sailing under false colours become most inviting for the tax dodgers as they wrongfully gain advantages of a bilateral treaty of which they are neither the parties nor beneficiaries. Between Mauritius and M/s Cox & Kings apparently there is no fraud at work. Mauritius as an independent member of the family of nations is free to setup its own financial architecture and legal regime most conducive to the promotion of economic policies of the government of the day. Hence Mauritius knew the nature of juristic persons being created by the foreign holding company. The government of Mauritius cannot plead ignorance of the objectives of the offshore company. Its knowledge is evident from the space of operation allowed to such a company. It must be aware of all the relevant facts of the company. If it was not aware of them it was so on account of its own closely contrived system. At least this much it surely knew that the subsidiary companies setup in Mauritius were a part of design to earn capital gains on the Indian Stock Market which are taxable neither in India nor in Mauritius. The Mauritian authorities indulged in deliberate collusion which helped the third States residents to further their fraud on India’s public interst. Without this knowledge the certificates of residence could not be given. Neither the Mauritian Income tax Act nor the Indo-Mauritius DTAC prescribed the issuance of that sort of certificate

158. That Treaty Shopping is considered a fraud on law in all civilized countries mainly for the following reasons:

(a) The most important of the seven fundamental principles of international law, says Georg Schwarzenberger, is that “Parties to consensual engagements must interpret and execute such engagements in good faith”[312]. Art 31(1) of the Vienna Convention on the Law of Treaties dealing with the rules pertaining to the interpretation of treaties provide:

“ 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.”

How can good faith which supports and upholds the pacta sunt servanda, the virtual grundnorm of treaty obligations, survive when is turned into trading wares in some unethical market covert? Such values are not wares to be treaded on counters for the benefit of bad-faith purchasers. The trading would itself be dishonest. In fact treaty benefits operate within the parameters of the law of obligations; and are clearly res extra commercium.

(b) And a pursuit of that type can go only when

(I) it operates in some area of darkness which may be a sovereign State which harvests its sovereignty by setting up a legal system which is opaque, impervious and largely impregnable; and

(II) a sovereign governments persuade themselves to believe that there is nothing wrong in an unjust enrichment

The OECD identified four dominant features of a tax haven: these are (a) no or nominal effective tax rates; (b) lack of effective exchange of information; (c) lack of transparency; (d) absence of a requirement of substantial activities. Tax havens are the jurisdictions which make themselves available for avoidance of tax which would otherwise be paid in relatively high tax countries. Mauritius transformed itself into a tax haven with all its classic features listed up by the OECD; and this fact is admitted by Mauritius Government.[313]

159. The grant of the Certificate of Residence to the real residents of the third State is a fraud on law. As Abbott C J said in Fox v. Bishop of Chester it is a “well –known principle of law that the provisions of an Act of Parliament shall not be evaded by a shift or contrivance:[314].If mere incorporation under a Mauritian Law, or mere grant a Certificate of Residence be enough then nothing would prevent if Mauritius decides to provide that status, or to issue that sort of certificates to every person on the globe who complies with the formality of paying some money to the government kitty. But if this happens then all other bilateral tax treaties would be reduced to irrelevance and the income-tax law would become a paradise for marauders leaving the people of India to rue their lot under consolation that the sovereign act of a sovereign friendly State must be accepted. Mauritius surely has legal competence to do this as has India to do the same under Article 245 (2) of the Constitution of India. Article 245 (1) simply states the rule of private international law that laws are territorial. Article 245(2) says that Parliament is competent to make law with extra-territorial operation. These powers, which are specifically spelt out in the Constitution of India, are implied in the Constitution of Mauritius by virtue of its internal supremacy and external independence. But such things are taking place in our country. The Authority for Advance Rulings in a case reported as XYZ/ABC Equity Fund, In re. , [2001] 250 ITR 194 is a recent case in which the applicant-company moved for rulings on certain points, described itself as a collective investment vehicle resident in Mauritius. It is a vehicle which in modern commerce means by late 20th century : “A privately controlled company through which an individual or organization conducts a particular kind of business, esp. investment” The Authority records in its order:

“The applicant has stated in the petition before us that it is a private equity fund (similar to a venture capital fund). It has allotted a large number of shares on a private placement basis to a limited number of prospective investors spread over Belgium, France, Germany, Hong Kong, Japan, Kuwait, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States of America.”

If in the spacious “vehicle” an assortment from such large parts of the globe can sail together across the Indian Ocean to India, than why not construct a vehicle, registered in Mauritius, wide enough to be a Noah’s ark where all the treaty-shoppers from all the parts of the globe can be accommodated rendering all double taxation avoidance agreements other than the Indo-Mauritius DTAC irrelevant and otiose. The Indo-Mauritius DTAC should not be made the vanishing point of all other tax treaties. It is strange that what could have at its best a mere reductio ad absurdum has already taken place with the culpable complicity of our own Government.

(vii) Judicial Approaches In Different Jurisdictions To Treaty-Shopping : A Sad Departure In This impugned Judgment

160.. In order to prevent Treaty Shopping the Courts of different countries have exercised their normal jurisdiction of doing justice by applying the anti-abuse provisions. Some illustrations from certain major countries are mentioned herein:

(a) The U.S.A.

“ In the United States, the courts and the Internal Revenue Service have applied the doctrine of substance over form to deny recognition to entities established for Treaty Shopping purposes.[315]” The Hon’ble Court misread Johansson v. U.S.[316] Phillip Baker points out that once Johansson failed in establishing his Swiss residency, despite a declaration to that effect by the Swiss tax authorities, it was enough to determine the case, “but the Court then went on to examine the issue of Treaty Shopping through a Swiss corporation formed to receive Johansson’s income………. The Court examined the objective of the treaty with Switzerland and found that this was the “elimination of impediments to international commerce resulting from the double taxation of international transactions”. The Court then held that this purpose was not violated by the refusal to grant tax exemption to a person” only technically , if at all, employed by a Swiss corporation”[317] Phillip Baker says[318] “The United States Tax Court also struck down an attempt at treaty-shopping in Aiken Industries, Inc. v Commissioner[319] The stratagem of Treaty Shopping was frustrated by the courts themselves as they disapproved of this evil on account of ingenuous sharp practice. Even the Administrative Rulings ( the Internal Revenue Rulings 84-153), to which Phillip Baker refers at p. 97 of his book, did not approve Treaty Shopping. In addition to all these is the recent practice of the inclusion of anti-abuse provision in a tax treaty. Phillip Baker writes concluding his exposition of the

U.S position:

“The United States has also been the most active country in seeking the inclusion of anti-avoidance provisions in its bilateral treaties. Recent examples are Article 28 of the U.S.-Germany Convention of 1989, and Article 26 of the U.S.- Netherlands Convention signed in 1992”[320]

(b) The United Kingdom

The Judiciary as a matter of judicial policy does not permit an abuse we call Treaty Shopping. With reference to the central doctrine of the House of Lords in Furniss v. Dawson [1984] 1 All ER 530, [1984] AC 474. Philip Baker observes:

“The interesting question is whether, even apart from such specific provisions, the Inland Revenue could attack Treaty Shopping under the doctrine enunciated in Furniss v. Dawson. That doctrine applies where there is a “pre-ordained series of transactions” and steps are “inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax”. Where the doctrine applies the Revenue may impose tax ignoring the inserted steps. The most recent House of Lords case on the subject has added the requirement that the inserted step must be an element without independent effect.”

Treaty Shopping generally involves the insertion of a formal entity to derive wrongfully the benefits under a treaty. Whether the insertion of an entity is a step without independent economic impact would depend on the specific facts of a case. Commenting on Furniss v. Dawson Philip Baker makes the following perceptive comments:

“Several decisions of the courts on the application of the Furniss v. Dawson principle have stressed that the principle is one of the statutory construction. In case of Treaty Shopping, the provisions being construed would be the relevant treaty provisions, and the courts have held that a wide and purposive approach should be taken to the interpretation of tax treaties ……. particularly, through a wide interpretation of the “beneficial owner” concept to exclude situations where the recipient, though technically the owner of income, was obliged to pay all or virtually all of the amount he receives to a third country resident….”

(c) IN OTHER COUNTRIES (As discussed by Phillip Baker and Klaus Vogel)

161. That Philip Baker has discussed in his Double Taxation Convention & International Tax Law the anti-abuse provisions with reference to important cases decided in the USA, the UK, the Netherlands, Germany and Switzerland. On close perusal of the standard books by Philip Baker & Klaus Vogel the following situations emerge:

(i) Any attempt which has the effect of promoting fraud must be frustrated. It accords well with the principles of justice and fair dealing which are known at the Conseil d’Etat of France as “less principles generaux du droit.”

(ii) The Netherlands Supreme Court (the Hoge Raad) in 1986 applied with impact the doctrine of fraus legis to the use of a conduit company. Fraus is a Latin expression which means deceit. Fraus legis means “fraud on law”. In Roman law it means: to quote from Black’s Law Dictionary:

“Evasion of the law; specif., doing something that is not expressly forbidden by statute, but that the law does not want done.”

This doctrine has been thus explained :

‘The doctrine of fraus legis may apply if a chosen structure – though legally different –produces the same results as another structure provided by the tax legislation and if it can be proved that there are no commercial reasons for this particular structure other than tax avoidance. In such a case the courts may disregard the artificial structure if it conflicts with the purpose and the spirit of the law, and they might look to the final result before passing judgment.’”

(iii) A Dutch company issued shares to a Netherlands Antilles corporation which in turn was owned partly by a Canadian company and partly by a Panamanian company. The Netherlands Antilles company sought to take advantage of the Antilles-the Netherlands double taxation avoidance arrangement in terms of the Kingdom Law. The Netherlands Supreme Court (the Hoge Raad) applied the doctrine of fraus legis, and called upon the subordinate court to appraise the abuse of the double taxation avoidance claim in this light.

(iv) Similar approaches characterize the German courts. This was done by invoking the well known doctrine of the abuse of legal forms. Phillip Baker discusses a 1986 decision of the Bundesfinanzhof “where German residents attempted to use entities established in foreign countries for Treaty Shopping purposes”.

(v) Phillip Baker’s discussion of the Swiss approach leads to the following conclusions:

(a)Switzerland felt so strongly against Treaty Shopping that a domestic legislation was framed.

(b) The Bundesgericht adopted the civil law approach to defeat fraus legis.

(c) By holding that the partnership should not be treated as a resident of Switzerland for treaty purposes the Court adopted the same functional approach which the House of Lords adopted in Furniss v. Dawson by ignoring the interposed company without negating its existence as a company; or which the U S Supreme Court adopted in Knetsc v. United States by holding that even a legitimate corporations may engage in transactions lacking economic substance.

(d)There is a bold assertion that residents of the third countries are to be excluded from the benefits of a bilateral tax treaty.

A careful study of the judicial decisions of various European jurisdictions led Klaus

Vogel ( Klaus Vogel on Double Taxation Convention, p. 119) to state what has

emerged as a crystallized anti-abuse norm to frustrate Treaty Shopping:

“In spite of differing categorization in common law and civil law countries, there is, as has been correctly observed, ‘a striking similarity in approach and result’ (Ward, D.A., Business Purpose Test, supra m.no. 76, at 69; Fischer, P., 72 Stu W 94 (1995) ). Recently, ideas first developed under the common law have crossed over into civil law countries; thus, e.g., the principles established by the Ramsay decision of the House of Lords (see supra m.no. 79) have been considered for application by authors in continental Europe (Fischer, P., loc. cit.; Bockli, P., in: Festchrift fur Cagianut, 289 (1990)). The greater of lesser aptitude of judges to switch from considering the legal form to considering the economic substance of a transaction is, it appears, not so much a question of the underlying doctrine - ‘abuse’ or ‘substance versus form’ – but rather far more a question of the disposition of a judge, or the legal tradition of a particular country (for more details, see Vogel, K., Abkommensrecht, supra m.no. 76, at 341ff.). Apart from this, the only discernible difference is that the Anglo-American doctrine focuses more on the fact that the standard has been changed (viz., from ‘form’ to ‘substances’), whereas the European doctrine of ‘abuse’ seeks to determine a criterion for such a change.”

(viii) A Corporation cannot be an impervious cover-let of gross abuse.

162. This Hon’ble Court observed in the impugned Judgment:

“ The decision of the Chancery Division in Re: F.G.Films Ltd. was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent “fraud’. This decision only emphasizes the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the Courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of the DTAC have been made applicable by reason of section 90 of the Income-Tax Act, 1961, even if they derogate from the provisions of the Income-tax Act, it is not possible to say tht this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasized, the whole purpose of the DTAC is to ensure that the benefits thereunder are available even if they are inconsistent with the provisions of the Indian Income-tax Act. In our view, therefore, the principle of piercing the veil of incorporation can hardly apply to a situation as the one before us.”[321]

This Hon’ble Court misdirected itself ( a ) in comprehending its own judicial role as the instrument of Justice (Dike ), and ( b ) in appreciating the principles in the leading case illustrating the (a): Re F.G. Films. This misdirection ensued on account of the following two factors:

(a) This Hon’ble Court erroneously adopted a formalistic and analytical approach when the modern jurisprudence admits of a functional approach.

(b) This Hon’ble Court was under an erroneous notion that it was beyond its jurisdiction to explore the inner realities of a company incorporated in a foreign land.

163. That this Hon’ble Court made a serious error of law by holding that Re R.G. Films Ltd[322] contemplates the Lifting of the Corporate Veil only in the province of “domestic law”. This view is apparently erroneous for the following reasons:

(I) The doctrine of the Lifting of Corporate Veil was considered in Public International Law also as it is a step in the quest of justice the province of which does not end with municipal law of any country. In the case concerning the Barcelona Traction, Light and Power Company Ltd[323] the Court noticed “the profound transformations which have taken place in the economic life of nations”; and, after discussing the circumstances in which this doctrine is invoked in domestic jurisdictions, stated that the process of lifting the veil “is equally admissible to play a similar role in international law[324].” This approach accords well with the view of Klaus Vogel that in evaluating artificial transactions structured for tax avoidance purposes it is proper to see the operative realities rather than their formal profile[325].

(II) Re R.G. Films Ltd states general principles universally recognized. Dias in his Jurisprudence draws general juristic principles in these words[326]:

“Public policy may make it necessary to look at the realities behind the corporate façade…….Courts are always vigilant to prevent fraud or evasion. Thus, they will not permit the evasion of statutory obligations. In Re FG(Films) Ltd., a film was made nominally by a British company, which had been formed for this purpose with 100 capital of which 90 were held by the director of an American company. The film was financed and produced by the American company, and it was held that the British company was not the maker of it within the meaning of the Cinematographic Films Act, 1948, SS 25(1)(a) and 44(1) but that it was purely the nominee of the American company. This case and others like it are example of the mask of corporate unity being lifted and account being taken of what lies behind in order to prevent fraud. The converse situation is also true, if a person finds it to his advantage to disregard corporate unity, he may discover to his discomfiture that the courts refuse to do so.

Devlin J once said ‘the legislature can forge a sledge hammer capable of cracking open the corporate shell, and the legislature has done so in a variety of statutes, principally to prevent the evasion of tax and other forms of revenue.”

(III). The certificate of incorporation is virtually its birth certificate. Under the tax jurisprudence the concept of incorporation is to be understood in the light of a host of legal provisions. It would be clear from the following:

(i) Section 2 (17) of the Income tax Act, 1961 recognizes the conventional view that a corporation is a person created in the country wherein it is incorporated. Section 6 (3) of the Income- tax Act prescribes the residential status for the Indian tax law purpose. It says-

“A company is said to be resident in India in any previous year, if- (i) it is an Indian company; or (ii) during that year, the control and management of its affairs is situated wholly in India.”

(ii) But this concept of residential status of a company has been clearly modified in framing the residential status of a company for the purpose of Article 4(1) of the Indo-Mauritius Double Taxation Avoidance Convention which says:

“For the purposes of this Convention, the terms “resident of a Contracting State” means any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place or management or any other criterion of similar nature. The terms “resident of India” and “resident of Mauritius” shall be construed accordingly.”

In fact, in framing the provisions of Article 4 (1) of the, the Contracting States have telescoped the concept of residence as understood under section 2 of the Income tax Act with the concept of “liability to pay tax” emanating from the charging sections of the Income tax Act. Clearly it is a case of semantic widening. Most often this point of jural telescoping is lost sight of as was done while framing Circular of the CBDT.

. (IV). That the development of jurisprudence is from the analytical to the functional is illustrated by the judicial approaches in the two leading cases, one decided by the House of Lords (Furniss v. Dawson)[327] and the other decided by the U.S Supreme Court (Knetsch v. United States).[328] The House of Lords ignored the existence of that tax haven company by circling out transactions effected though it without negating its corporate personality. As there was no economic impact of this transposed entity its relevance was not recognized in determining effect for the purposes of the tax laws. The U.S Supreme Court shows that even legitimate corporation may engage in transactions lacking economic substance; and so the Commissioner could disregard transactions between related legitimate corporations. This functional approach has been adopted in various other European jurisdictions to which references would be made in the chapter on “Treaty Shopping”. Corporate personality which incorporation brings about is designed to operate within its permissible province. It can never be allowed to become a rogue’s charter. Neither it can be allowed to become an impervious coverlet, a hard shell, for pursuing interests contrary to law, or public policy. What the line should be drawn is a matter of judicial statesmanship.

(V) That the aforesaid facts show that a company can be a legal person without being a resident for the purpose of a tax convention. The 1986 decision of the Bundesfinanzhof in German jurisdiction: the doctrine of the abuse of legal form[329] has been recognized. Klaus Vogel has outlined the judicial perspective in these words[330]:

“If the form of a transaction is not recognized for tax purposes under domestic law or under treaty law, the tax consequences which the tax payer sought to obtain through structuring the transaction in question will not occur and tax authorities will then apply those tax rules which would have applied according to the appropriate legal form of transaction…”

Even legitimate corporations may engage in transactions lacking in economic subsistence and the Commissioner may disregard transaction between related legitimate corporations (Knetsch v. United States[331] ).

(VI) In Johns v. Lipman[332]the Chancery Division granted specific performance holding that the defendant company was a creature of the first defendant, a mask to avoid reorganization by the eye of equity. The expression eye of equity is an expanding metaphor. Transparency and the eye of equity can ensure justice in this global world where opaqueness and lack of public accountability are the most disturbing facts. The Multinational Corporations argue for an impregnable corporate shell so that how they really operate is not under public gaze. No stone is left unturned in so structuring themselves as virtually all public accountability. Secrecy, and lack of public accountability are best promoted by advancing exclusively formal criteria. The tax havens, and those who sail in the common boat, think that it is not for them to see whether certain companies are managed by criminals, or whether they draw their fund from the tainted earnings from the most unscrupulous sources (amassed through bribery, receipt of kick-backs, drug-trafficking, insider-trading, embezzlement, computer fraud, under invoicing-over invoicing, and other sordid and morbid activities spawning scams having deep lethal consequences on the welfare of common people). The corporate façade should not be cracked to see what is what.

(VII). A corporation evolved as an as a form of business organization in which public interest was greatly involved. It was not conceived as an impervious coverlet [Life Insurance Corporation of India v Escorts Ltd.[333]; Commr. of Income-tax v. Meenakshi Mills ; Workmen v. Associated Rubber Industry; New Horizons Ltd. v Union of India [334]”; Juggi Lal Kamlapat v CIT[335]; State of UP v. Renusagar Power Company[336]. After examining various cases on “lifting of the veil” Gower’s Principles of Modern Company Law [337]states.

“Where then does this leave “lifting of the veil”? Well, considerably more attenuated than some of us would wish. There seem to be three circumstances only in which the courts can do so. These are :

(1) When the court is construing a statute, contract or other document:

(2) when the court is satisfied that a company is a “mere façade” concealing the true facts;

(3) when it can be established that the company is an authorized agent of its controllers or its members, corporate or human.”

(VIII). That it is submitted that the realities cannot be evaded. This Hon’ble Court stresses on the fact of “incorporation”. As a company is incorporated in Mauritius, it is the end of the matter. A company may become a coverlet of gross abuse. This shocks our conscience. The days of legal formalism are over. Tedeschi rightly points out:

“ In this era of increased corporate mobility, the choice of the place of incorporation may be purely a matter of convenience without any intention on the part of those who manifest the corporate will to have any other connection with the jurisdiction of incorporation.”[338]

How companies are incorporated and how they are used can be illustrated with reference in one of many examples. While evaluating the argument to prove residential status on the basis of mere “incorporation”, what is happening in God’s good World in this phase of globalization deserve a Judicial Notice. What the 2002 Britannica Book of the Year ( p. 392 ) says about The Bahamas, a country (Area 5382 sq.mil.) having Population only (2001) 298000 may not be untrue about Mauritius :

“The Bahamian government moved smartly against dubious offshore banks in Feb.2001;it closed down two operations and revoked the licenses of five others following the publication of a U.S. Senate report that described them as conduits for money laundering. In June The Bahamas was removed from the Paris-based Financial Action Task Force list of countries with inadequate laws to fight money laundering. The government had launched several initiatives, including the banning of anonymous ownership of more than 100,000 international business companies registered in the country.”

The other day we got news on the TV that a most widely known terrorist has vast wealth in Caribbean islands, Monaco and several other places apparently tax havens. He to finance terrorism world over through his financial network adopted complex ways. If a dreaded terrorist decides to transfer resources to India from Monaco or the Bahamas, or Luxemburg, or some of the islands in the Caribbean Sea, or the English Channel or some dot-like country in Micronesia or Polynesia, he would adopt a simple strategy. He would instruct his investment manager to structure some device for transferring resources into the target country. By way of illustration, he might float a subsidiary company or a conduit company in Mauritius for transacting on the Indian Stock Exchange….. But its evident sinister potentialities which the terrorists would grab must not be lost sight of….. The price of liberty and societal weal is always eternal vigilance…. It would be a queer irony that the government which rightly asserts its case against terrorism tends to become, perish the thought, a facilitator of terrorism!

T B Smith rightly says; ‘For me, as for Lord Stair, Father of Scots Law writing in 17th century, law id ‘ reason versant about affairs of men.’[339]

164. The Hon’ble Division Bench was duty bound to follow the principles of public international, especially when they rhyme well with our domestic law. Applying the perspective of public international law one can notice the gross error in the impugned judgment. It is a settled principle that the conferment of a corporate status by a state may not be recognized internationally without question. In the Nottebohm’ Case the International Court of Justice determined the principles governing “nationality” in these words:

“… a legal bond having as its basis a social fact of attachment, a genuine connection of existence and sentiments, together with the existence of reciprocal rights and duties. It may be said to constitute a juridical expression of the fact that the individual upon whom it is conferred, either directly by the law or as a result of an act of the authorities, is in fact more closely connected with the population of the State conferring nationality than with that of any other State”

“The Court found that there was no bond of attachment between Nottebohm and Liechtenstein, and that there was a long- standing and close connection between him and Guatemala, a link which his naturalization in Liechtenstein in no way weakened; that naturalization had been ‘ granted without regard to the concept of nationality adopted in international law’. Accordingly the Court held that Guatemala was under no obligation to recognize Nottebohm’s Liechtenstein nationality, and that Liechtenstein could not institute proceedings against Guatemala in respect of damage suffered by him.”[340]

“…. However, this power of investigation is one which is only to be exercised if the doubts cast on the alleged nationality are not only not manifestly groundless but are also of such gravity as to cause serious doubts with regard to the truth and reality of that nationality.”…..”Furthermore, it is not only international tribunals which may question the grant of nationality by a state to an individual. Even the national courts of other states may, although usually reluctant to do so, in certain circumstances feel it right to inquire into the justification and lawfulness of a state’s grant of its nationality. This is likely to be the case where the grant of nationality is questioned because of alleged non-conformity with international law.”[341] Oppenheim refers to the Federal German Constitutional Court’s decision in German Nationality (Annexation of Czechoslovakia Case ILR, 19 (1952), No. 56 in which the Court ‘accepted that while as a rule every state was entitled to provide in its own discretion how its nationality was acquired and lost, that discretion was subscribed by the general rules of international law according to which a state may confer its nationality only upon persons who have some close factual connection with it’[342]

165. That the summary of the international law position submitted above would show that the tax authorities in India were competent to go behind the Certificate of Residence granted by the Mauritius tax authorities when they had found, on investigation, that it was sheltering the masqueraders of the third States contrary to the intention of the bilateral tax treaty. The Indian tax authorities had discovered such facts and had stated in the Assessment Orders passed in 24 cases. One of such Assessment Order, passed in the case of M/S Cox & King, had been placed before the Court. It was most unreasonable to refuse to take notice of the Assessment Order on a plea per incuriam that that assessee had not been impleaded as a party. It was most unreasonable to circle out the Assessment Order when its facts had been incorporated in the Writ Petition filed before the Hon’ble High Court but were not traversed by the Union of India in its Counter-Affidavit, or by the Solicitor-General who represented it. The Court missed the established principle that the Petitioner’s grievance was against some public act of the Government, not against the beneficiaries of such illegal acts. The Assessing Officers who passed the statutory orders did not have “doubts” but has certain evidence untraversed by the Union of India, or even its the co-Appellant tax haven company. An analogy with a passport is quite apt. As in German Nationality (Annexation of Czechoslovakia Case ILR, 19 (1952), No. 56, by going behind the Certificate of Residence, they were merely examining “some close factual connection”. The Hon’ble Division Bench missed that a domestic court is competent to examine such Certificates,. The tax authorities are entitled to do so as they are duty bound by the law of the land. It is well settled that neither the principles of the Acts of the State nor of Comity applies in the field of revenue law.[343] It is well known that a passport “does not conclusively establish as against other states that a person to whom it is issued has the nationality of the issuing state. It constitutes merely prima facie evidence of nationality, which is normally accepted for usual immigration and police purposes[344]. It is true that a state “may for purposes of its own law make the possession of a foreign passport conclusive proof of the holder’s nationality of that foreign state….”[345] But it was the Hon’ble Bench’s patent mistake to sustain the CBDT circular which created a conclusive presumption in favour of those operating through the Mauritian route, when under the law[346] the creation of a conclusive proof or presumption is always a legislative act. It was a gross error to so obvious a point.

A corporation cannot be a coverlet of gross Misuse: A ‘Corporation’s’ Residence.

166.That the observation of Judge Manfred Lachs of the ICJ in In the North Se Continental Shelf Case[347] had aptly oserved:

“Whenever law is confronted with facts of nature or technology, its solution must rely on criteria derived from them. For law is intended to resolve problems posed by such facts and it is herein that the link between law and the realities of life is manifest. It is not legal theory which provides answers to such problems; all it does is to select and adapt the one which best serves its purposes, and integrate it within the framework of law.”

It is time now to evaluate our conventional ideas about “incorporation” of a company.We have already noticed the pragmatic solutions which were judicially arrived at in F.G Films’ Case in which for eradicating fraud ‘a lifting of corporate veil’ was considered justified (vide para 62(vi) p. 159 ).

The graphic accounts of the operative facts having a direct bearing on the point under consideration, is given by Alvin Toffler in his Power Shift[348]:

“Just as nations are proving inept in coping with terrorists or religious frenzy, they are also finding it harder to regulate

global corporations capable of transferring operations, funds,

pollution, and people across borders.

The liberalization of finance has encouraged the growth of some six hundred megafirms, which used to be called “multinationals” and which now account for about one fifth of value added in agriculture and industrial production in the world. The term multinational, however, is obsolete. Mega-firms are essentially nonnational.

Until the recent past, globe-girding corporations have typically “belonged” to one nation or another even if they operated all over the world. IBM was an unquestionably American firm. Under the new system for creating wealth, with companies from several countries linked into global “alliances” and “constellations,” it is harder to determine corporate nationality……….

What is the “nationality” of Visa International? Its headquarters may be in the United States, but it is owned by 21,000 financial institutions in 187 countries and territories. Its governing board and reginal boards are set up to prevnt any one nation brom having 51 percent of the votes.

With cross-national takeovers, mergers, and acquisitions on the rise, ownership of a irm could, in principle, switch from one country to another overnight. Corporations are thus becoming more truly nonnational or transnational, drawing their capital and management elites from many different nations, creating jobs and distributing their streams of profits to stockholders in many countries.

Changes like these will force us to rethink such emotionally charged concepts as economic natonalism, neocolianim, and imperialism……

As they lose their strictly national identities, the entire relationship between global firms and natonal governments is transformed. In the past, “home” governments of such companies championed their interests in the world economy, exerted diplomatic pressure on their behalf, and often provided either the threat (or the reality) of military action to protect their investments and peple when necessary.

In the early 1970s, at the behest of ITT and other American corporations, the CIA actively worked to destabilize the Allende governmentin Chile. Future overnments may be far less ready torespond to the cries for help from firms that are no longer national or multinational but truly tansnational……”

167. That under the circumstances of our times the easiest of all ways to respond to the present challenge is to use the judicially created doctrine of the Lifting of the Corporate Veil so well recognized in domestic and intenational jurisdictions.That this new insight through legitimate judicial creativity can solve one more problem generated by e-commerce in our Cyber Age.

168. That the e baffling controversy as to the regulations and taxation of e-transactions can also be solved if the idea of “incorporation” as an index of nationality is given up/ or by passed/ or judicially circled out by adopting a functional and purposive approach. A nation can assert its right to regulate transactions, and impose taxation thereon or incidental thereto, with respect to the commercial events taking place within a particular nation’s biosphere superjacent its territory. As such events would be brought about by factors with transnational habitat, appropriate mechanism wold have to be devised so that the regulations and taxation accord well with equity andjustice. This Petitioner recalls when Dr Nagendra Singh[349],( who later on became the President of the ICJ) , while discussing certain issues relating to the Agreements for Avoidance of Double Taxation, suggested that it was now time to consider the adoption of a Convention on Avoidance of Double Taxation, a multilateral treaty of the type of the various Conventions on the Law of the Seas.

(ix) By wrongfully circling out of the factual substratum of the Writ Petition contrary to the rules of Natural Justice and Fair play

169. That a PIL, generally speaking, suffers from paucity of facts which can constitute its credible substratum.. Whatever the government agencies may say the governmental process is extremely secretive. Between assertions and denials truth is most often lost. John Milton’s Comus to which this Hon’ble Court referred in Shrisht Dhawan v. Shah Bros[350] makes his Comus say:

‘’T is only daylight that makes sin.’[351]

This PIL was remarkable as all the material facts were brought out by a group of Income-tax Authorities who passed 24 Assessment Orders in the cases of treaty-shoppers, one of which, the Assessment Order[352] passed in the case of M/S Cox & King got a circulation in public domain; and its copy was filed by Azadi Bachao Andolan under Affidavit before the Hon’ble Delhi High Court. While framing the Writ Petition , all the material facts were systematically analyzed and incorporated in the Writ Petition so that the Central Government could get an opportunity to admit or deny, or qualify. In the Affidavit filed by the Central Government nothing was objected. Facts unrebutted, even by implication, stood admitted. Though the abuse of the tax treaty was a morbid affair widely known inside the Department, the whole matter remained under lid.

170. The Hon’ble Court observed in the impugned Judgment:

“The High Court seems to have heavily relied on an assessment order made by the assessing officer in the case of Cox and Kings Ltd. drawing inspiration therefrom. We are afraid that it was impermissible for the High Court to do so. An assessment made in the case of a particular assessee is liable to be challenged by the Revenue or by the assessee by the procedure available under the Act. In a Public Interest Litigation it would be most unfair to comment on the correctness of the assessment order made in the case of a particular assessee, especially when the assessee is not a party before the High Court. Any observation made by the Court would result in prejudice to one or the other party to the Litigation. For this reason, we refrain from making any observations about the correctness or otherwise of the assessment order made in Cox and Kings Ltd. Needless to say, we decline to draw inspiration therefrom, for our inspiration is drawn from principles of law as gathered from statutes and precedents”.

171. That the Hon’ble Court adopted a mistaken view when it felt it was not proper to put the assessment order of M/S Cox &King into judicial focus when it was not a party. It had been pointed out to the Hon’ble Court in my Written Submissions that the grievance was against the wielders of public power exercised in the field of public law. It was not against specific individuals or assesses. If certain executive acts are found contrary to law , the consequences of such determination would overtake those who enjoyed the undeserved benefits of the governmental acts contrary to law. If a tree is to be uprooted in obedience to law, none should think mournfully about the black ants or red ants which flourished on the tree so long it stood erect before law ceased to be a rogue’s charter. It is felt that the private beneficiaries of public wrong could not be the necessary parties. Mulla in his CPC 14th ed at p 868 writes:

‘Necessary parties are parties “who ought to have been joined”, that is, parties necessary to the constitution of the suit without whom no decree at all can be passed[353] “In order that a party may be considered a necessary party defendant, two conditions must be satisfied, first, that there must be a right to some relief against him in respect of the matter involved in the suit, and second, that his presence should be necessary in order to enable the Court effectively and completely to adjudicate upon and settle all the questions involved in the suit.”[354] Failure to implead a necessary party as a party to the proceeding is fatal.

“…. This principle has been applied to writ petitions also.[355]

172. That the Hon’ble Division Bench of this Hon’ble Court very unfairly destroyed the PIL by circling out the facts in the Assessment Order of M/S Cox & King. Erroneous Rejection of all materials constituting the factual substratum amounts to the breach of the audi alteram partem. Materials gathered by the Assessing Officer in the Assessment had been incorporated in the Writ Petition for rebuttal, if any. The exclusion of such materials is acting both beyond Jurisdiction, and in the breach of Audi alteram partem.

173. That in the case of M/S Cox & King alone in the assessment getting barred by limitatations in March 2000, the Assessing Officer computed Total Income at Rs 3,88,72,822. This was the smallest of the 24 cases in which the Assessing Officers passed Assessment orders.. 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 of this great Republic of poor people with per capita income U.S. dollars 440 [ as against per capita income of Mauritius at U.S. dollars 3540 ][356] should have evaluated what the loss of this revenue means from the observation-post of our suffering millions. As this aspect of the matter was overlooked the Hon’ble Division Bench went to the extent of making this uncharitable remark: “the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters.”

174. That the Hon’ble Division Bench miscomprehended facts when it observed that the correctness of the Assessment Order could be decided in the statutory appellate process inter partes. In fact the facts of that case were stated to provide factual moorings to the legal contentions as those could not be effectively made in vaccuo. Neither “inspiration” was sought to be derived from the Assessment Order ,nor its fount can be found in “statutes or precedents”. It involved a mixed question of facts and law, hence factual substratum was needed if the rule of Audi alterem partem was to operate effectively. The Hon’ble Bench wrongly considered that it was considering an inter partes situation, a situation between Cox & King and the Petitioner. In this PIL ,in fact the Petitioner is a party only in a very formal sense. The Hon’ble Division Bench misdirected itself by adopting the approach of an out ant out adversarial proceeding inter partes.

175. That variating on what was said in Kanda v. Government of Malaya[357] it is submitted respectfully: No one who has lost a case will believe he has been fairly treated if the material facts constituted the very substratum of his case is excluded patently contrary to law.

( x) What experts have to say on India’s position on Treaty Shopping.

176.That the Frontline[358] after this Judgment of this Hon’ble Court observed:

“ The island nation's financial regime, endowed with the key characteristics of a quasi tax haven, has facilitated this. Curiously, successive Indian governments, which have cried themselves hoarse about a runaway fiscal deficit and a resource crunch, have indulged in self-denial and have refused to tax the earnings of these foreign entities. But the issue is much more than lost revenues. The question is of equity. Can ordinary citizens be asked to pay taxes even as a small body of foreign-based entities are not even asked to pay a fraction of their earnings made through speculation on Indian soil? Although the Supreme Court on October 7 quelled the legal challenge to the government's refusal to clamp down on the Mauritius gateway, the controversy refuses to die.”

Shri K. Srinivasan, a former member of the Indian Revenue Service, is an expert of high distinction in the field of law relating the Avoidance of Double Taxation. His book on Guide to Double Taxation Avoidance Agreements (4th edition) is widely referred. After the perusal of this Judgment of this Hon’ble Court he has set forth his view in his article[359].

Treaty Shopping is a stolen pleasure

“ In taxation , as in life in general, stolen pleasures have always been the sweetest. If you can save some tax at the cost of the Government in your home-country or the country in which you have a source of income, you have, if nothing else, something to talk about in cocktail circuit. ‘Conduit companies’, incorporated in tax havens, help to exploit tax incentives available in low tax regimes. Part of the profits really made in relatively high tax States is secreted in such tax havens for repatriation in propitious times to the country of residence of the man behind the scenes, or utilized elsewhere to his advantage. Treaty Shopping is no more than your accessing the beneficial al provisions of the DTAA between two countries, in spite of your being a resident of neither of them. .It is a kind of gluttony for tax savings devices….”

Taxation Law is not for inviting foreign capital.

“If the Government is convinced that any special tax concessions should be offered to foreign capital/expertise to attract it to this country, let appropriate action be taken accordingly but it should be transparent and legal. Inaction in minimizing or neutralizing tax avoidance will be seen to amount to covert support to or acquiescence in them and erode the credibility of the Government.”

And Murlidharan in the Hindu Business Line Dec 27, 2003 had the following to say about this impugned judgment:

“ The Delhi High Court, in Shiva Kant Jha vs UOI{ (2002) 256 ITR 536}, seized the moral high ground when it squashed CBDT Circular 789 of April 13, 2000, by permitting the tax authorities to lift the corporate veil and find out whether assessee-companies registered in Mauritius were doing real business there or were only resorting to treaty-shopping so as to take advantage of the beneficial provisions of the Indo-Mauritian treaty vis-à-vis the one applicable to them. The Supreme Court has poured cold water on the Delhi High Court judgment by reversing it in UOI vs Azadi Bachao Andolan {(2003) 263 ITR 706}….”

It is most respectfully submitted that this Hon’ble Court should treat this article the way the House of Lords treated the article written by Professor Glanville Williams entitled “The Lords and Impossible Attempts, or Quis Custodiet Iposos Custodies? [1986] CLJ 33 which led the House of Lords in R v. Shivpuri to overrule a decision of the House given only a year back.

[ B ] TREATY SHOPPING IS A STOLEN PLEASURE

Binding Precedent not followed: A judgment read the way none would read it: Rule of Law breached: Arbitrariness and Unreasonableness both reach a climax.

Mcdowell Miscomprehended On Account Of Manifest Errors And Clear Misdirection.

177. That the core issue in this case could not have been answered the way it was done without miscomprehending McDowell & Co v CTO, which stood as a sentinel on the qui vive of the Revenue for long. Even the Hon’ble Court calls this decision “seminal”.

178. The first paragraph of the section dealing with McDowell in the impugned Judgment of the Hon’ble Court runs as under:

“The respondents strenuously criticized the act of incorporation by FIIs under the Mauritian Act as a ‘sham’ and ‘a device’ actuated by improper motives. They contend that this Court should interdict such arrangements and as if by waving a magic wand, bring about a situation where the incorporation becomes non est. For this they heavily rely on the judgment of the Constitution Bench of this Court in McDowell and Company Ltd. v. Commercial Tax Officer. Placing strong reliance on McDowell it is argued that McDowell has changed the concept of fiscal jurisprudence in this country and any tax planning which is intended to and results in avoidance of tax must be struck down by the Court. Considering the seminal nature of the contention, if is necessary to consider in some detail as to why McDowell, what it says and what it does not say.”

.

The aforequoted paragraph, it is most respectfully submitted, is an assortment of miscomprehended points, not at issue in the Writ Petitioner’s case.

179. That never in the past the Petitioner ever impeached the incorporation of companies by the FIIs etc on the ground of their motive. This was the shadow which the Appellants had created, and enjoyed boxing with a non-existent point as a burden of their song for long. The Petitioner had never tried to make out a case with reference to ‘motive’ of the companies which got themselves incorporated in Mauritius for taking undue advantage of the DTAC between India and Mauritius. The Petitioner’s case was that on the proper interpretation of the terms of the bilateral Indo-Mauritius DTAC the persons belonging to third States had no credentials to avail of benefits under the DTAC. In short such persons did not, in reality, come within the Personal Scope of a DTAC. It is taken as a cardinal principle in the administration of justice that Masqueraders are never allowed to cause wrongful gains to themselves and wrongful loss to others. The Petitioner’s case concerned not mere incorporation and the situs of incorporation; his case was with reference to the functional approach to the issue of incorporation from the observation-post of the income-tax law. The irrelevance of incorporation as the decisive fact for this purpose was shown with reference to cases from several jurisdictions. One of these cases was Furniss v. Dawson[360], a case of seminal importance decided by the House of Lords which the Constitution Bench of this Court referred several times with profound appreciation in McDowell & Co v CTO[361].In Furniss v Dawson the Dawson’s wanted to sell their shares in the family business to a company called Wood Bastow Holdings Ltd. But they wanted to postpone the payment of capital gains tax. So they formed an Isle of Man company ("Greenjacket") and exchanged their shares in the company owning the business for an allotment of shares in Greenjacket. The advantage of this transaction was that by paragraph 6 of Schedule 7 to the Finance Act 1965, a disposal of shares to Greenjacket in exchange for an allotment of its shares was treated as a reorganization of share capital and by paragraph 4 of the same Schedule a disposal of shares forming part of a reorganization was not treated as a disposal for the purposes of capital gains tax. By a preplanned transaction, Greenjacket then sold the shares to Wood Bastow for cash. But the Revenue claimed that there had been no "real" disposal to Greenjacket. It was merely a preplanned stage in a disposal from the Dawsons to Wood Bastow and fell outside the exception for a reorganization of share capital. Greenjacket was merely an artificially introduced intermediate party which was never intended to own the shares for more than an instant. Commercially, therefore, the transaction was a transfer by the Dawsons to Wood Bastow in exchange for a payment to Greenjacket. In answering the statutory question: "To whom was the disposal made?" the fact that the shares were routed through Greenjacket was irrelevant. The an Isle of Man company ("Greenjacket") continued its existence as an incorporated company but for tax purposes its operative realities were explored

180. What matters is the legal effects of facts in the light of the statutory provisions. This what Lord Hoffmann said in Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1, 13-14:

"If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work (Inland Revenue Commissioners v Duke of Westminster [1936] AC 1) or they do not (Furniss v Dawson [1984] AC 474.) If they do not work, the reason, as my noble and learned friend, Lord Steyn, pointed out in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991, 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes."

The whole case of the Petitioner was that on proper construction of the law the impugned Circular was bad and the Indo-Mauritius DTAC was abused. The Hon’ble High Court examined issues in the light of the rules of interpretation. Explaining the ultra vires rule Hood Phillips says how the examination of vires can be effectively done through the technique of interpretation. He observes : [362]

“As regards the innumerable statutory powers, the question is one of interpretation of the statute concerned. The acts of a competent authority must fall within the four corners of the powers given by the legislature.[363] The court must examine the nature, objects and scheme of the legislation, and in the light of that examination must consider what is the exact area over which powers are given by the section under which the competent authority purports to act.”[364]

On this approach nothing turns on the catchy and flashy word “sham” or “device”.

181 A. The Hon’ble Court observed in the impugned Judgment:

“They (the respondents) contend that this Court should interdict such arrangements and as if by waving a magic wand, bring about a situation where the incorporation becomes non est.”

This was never a case. It is an elementary knowledge that the writ of this Hon’ble Court can never render the incorporation in Mauritius non est. As a dimension of Sovereignty it was held by courts[365] that the writ of foreign courts does not run in the field of public law, especially revenue law. Oppenheim’s, International Law states[366] :

“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.”

Oppenheim further 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.”[367]

182. That it is an established principle of Public International Law that a State is competent to examine whether an official act in the domestic effect accords with the law before it recognizes it valid in its own jurisdiction. The Internationa Court of Justice in Nottebhom’s Case observed[368]:

“ a State cannot claim that therules [pertaining to the acquisition of nationality] which it has thus laid down are entitled to recognition by another State unless it has acted in conformity with this general aim of making the legal bond of nationality accord with the individual’s genuine connection with the State which assumes the defenceof its vcitizensby means of protection as against other States>”

This point has been submitted in para 164 at p, 165 also

182. The Hon’ble Court has observed: “…..it is argued that McDowell has changed the concept of fiscal jurisprudence in this country and any tax planning which is intended to and results in avoidance of tax must be struck down by the Court.” This modern view, of course not palatable to the global gladiators and the corporate imperium, is judicially accepted vide the view of Lord Scarman discussed in para 8.5 supra in the ideas set forth and the approaches shown in and McDowell & Co v CTO, and even S. P Gupta & Ors. V President of India & Ors[369].

183. McDowell: The Hon’ble Court has read McDowell, it is most respectfully submitted, in a way no judgment is to be read. Instead of proper inductions from the actual decision in that case, or examination and determination of the ratio decidendi contained in, or to be deduced from, the reasons given in the judgment, the Hon’ble Court focused only on examining whether Justice Chinnappa Ready was correct in his views on certain dicta of Lord Tomlin in IRC v Duke of Westminster[370] , and how the decision fared in certain other decisions by the courts, and how much “a far cry” exists inter se the views of Justice Ranganath Misra (for himself and on behalf of Y.V. Chandrachud, C.J., and D. A. Desai and E.S. Venkataramiah, JJ ) and that of Justice Reddy in the matter of tax avoidance. As the impugned Judgment produces serious distortions in law and causes a gross miscarriage of justice this humble Petitioner intends first to submit on the principles what this decision of the Constitution Bench unfolds, and then to show how this impugned Judgment has virtually overruled that unreasonably. Whilst conventionally the material facts test and reversal test are applied to determine the principles which a case brings out, the humble Petitioner believes that the best method (approximating the approach of I.A. Richards and C.K. Ogden in The Meaning of Meaning ) would be to read the decision in the light of what the Mimansa tells us:

There may be seven ways to read a book:

First and second concentrate on the threads

which unite the beginning and the end;

Third is what is said again and again;

Fourth is what is new therein,

Fifth is the targeted consequence

Sixth is what is mere peripherals’

And the last is the logic which supports or counters.

It says that in order to comprehend the meaning and import of a text or a book seven determiners should be taken into account. First, what is the central strand in the thematic structure of a piece of work directly connecting the beginning and the end. Second, the purpose revealing itself through tone and tenor. Third, what is suggested through variations on the core ideas. Fourth, identification of what is new (as any great work is intended to venture something new). Fifth,, the consequence and its impact on public interest.. Sixth, the nature of illustrative fillers, analogical reasoning, and supportive references. The incorrectness of material in this sixth category may not have any bearing on the principal meaning.[371] The seventh, the thrust of reasoning in supporting a position, or detracting from it.

184. In McDowell the principal judgment is by Justice Ranganath Misra ( for himself and three other brother judges) to which the judgment by Justice Reddy is supplemental on the topic of tax avoidance[372]. This topic of tax avoidance was central to the problem under the consideration before the Constitution Bench. This matter has been comprehensively noticed in the Judgment of Justice Misra who towards the end of the Judgment observes:

“Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. On this aspect one of us, Chinnappa Reddy, J., has proposed a separate and detailed opinion with which we agree.”

Justice Reddy at the outset of his judgment observed:“While I entirely agree with my brother, Ranganath Misra, J. in the judgment proposed to be delivered by him, I wish to add a few paragraphs, particularly to supplement what he has said on the "fashionable" topic of tax avoidance.” And it deserves to be noted that Justice Misra, delivering the majority judgment, observed that the four Hon’ble Judges agrred with the ‘separate and detailed opinion’ delivered by Justice Reddy in his concurring and supplemental judgment. Justice Reddy’s Judgment, thus, is integral to the principal Judgment the approach of which it supports, and is quintessentially summarised by Justice Misra in the above quoted penultimate para of his judgment. This crisp statement by Justice Misra follows immediately the judicial notice of the decisions cited by Mr. Sorabji, the counsel for McDowell & Co. The cases cited were CIT v A Raman & Co; CIT v. B. M. Kharwar; Bank of Chettinad Ltd v. CIT; Jiyajerao Cotton Mills Ltd v. CEPT; and CIT v. Sakarlal Balabhai. Justice Misra quoted with an implied approval a whole paragraph from the speech of Viscount Simon in Latilla v. IRC[373] which has become locus classicus in tax jurisprudence:

"Of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods maybe, those who adopt them are "entitled" to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary one result of such methods, if they succeed, is of course to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these maneuvers. Another consequence is that the Legislature has made amendments to our Income Tax Code which aim at nullifying the effectiveness of such schemes."

It deserves to be noted that Justice Reddy too had quoted Viscount Simon’s observations with his clear approval. These determiners are recurring and resonant in his whole Judgment, to quote a fragment:

“In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.”

185. That bereft of details, in McDowell an arrangement of transaction was so done that the only effect was avoidance of tax. It was structured to conform to the law if the legal identities of apparently dressed-up transactions alone were seen. The Hon’ble Court explored the operative realities, determined the true nature of the transactions, and gave legal effect to what emerged in true form. This would be clear from what the majority Judgment says in para 40 of the Report.

“According to Mr. Sorabji the excise duty had never come into the hands of the appellant and the Company had no occasion or opportunity to turn it over in its hands, and, therefore, the same could never be considered as a part of its turnover. The observations made by this Court were in a very different setting and what was being considered was whether the additional tax levied under the Madras Act formed a part of the turnover. If we accept the observations of Hidayatullah, J. as laying down the test for general application, it would be very prejudicial to the Revenue as between the seller and the buyer, by special arrangement, a part of what ordinarily would constitute consideration proper could even be kept out and the turnover could be reduced and tax liability avoided. We are of the view that the conclusion reached in the appellant's case in (1977) 1 SCR 914: (AIR 1977 SC 1459) on the second aspect of the matter, namely, when the excise duty does not go into the common till of the assessee and it does not become a part of the circulating capital, it does not constitute turnover, is not the decisive test for determining whether such duty would constitute turnover.”

186. That what this Hon’ble Court said in the above paragraph, quoted from Justice Misra’s Judgment, accords well with the recognized rules of statutory interpretation. In his speech Lord Nicholls in MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd[374] observed:

Ramsay brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the

transaction…….

Second, this is not to treat a transaction, or any step in a transaction, as though it were a 'sham', meaning thereby, that it was intended to give the appearance of having a legal effect different from the actual legal effect intended by the parties: see the classic definition of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802. Nor is this to go behind a transaction for some supposed underlying substance. What this does is to enable the court to look at a document or transaction in the context to which it properly belongs.

Third, having identified the legal nature of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision? …….

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…….”

The authorities under the Income-tax Act are under statutory duty to determine the real profile of facts to ascertain which entity ( person of incidence ) is chargeable and on what quantum of real income. Law is, to say the obvious, highly functional.

187. Most respectfully this Petitioner submits that it must be a mistake in comprehension which led the Hon’ble Court to hold that there is “a far cry” between the views of Justice Reddy and Justice Misra; or to hold that Justice Reddy’s view ‘militates” against the view taken by his other four brother Judges. In fact the quotation from Justice Misra’s judgment says precisely what Justice Reddy says in detail with flourish and solemn judicial passion. “Colourable” in the expression “colourable device” would mean “Pretended, feigned, counterfeit” [The New SOD]. As to “dubious”: “Something that is dubious is not considered to be completely honest or safe, and therefore cannot be trusted or approved of. [Collins Cobuild English Language Dictionary ]. And subterfuge means, as Cobuild says: ‘A subtrerfuge is a trick or deceitful way of getting what you want”.

188. It is most respectfully submitted that the Hon’ble Court through an oversight made serious mistakes in comprehending I .R.C v. Duke of Westminster[375]; and for that reason misunderstood the law declared by the Constitution Bench of this Hon’ble Court in McDowell. As from this miscomprehension emanated serious distortions in the judicial perspective producing a serious miscarriage of justice this humble Petitioner summarizes his position thus:

(I) Justice Reddy’s comments on the Duke of Westminster constitute what is called in Mimansa an ‘arthvaad’ which comes in the sixth category[376]. Hence, the Hon’ble Court should not have made so much of their notions as to Justice Reddy’s comments on the Duke of Westminster. In effect, it made too much of what hardly mattered.

(II) The Duke of Westminster dealt with the construction of certain plain transactions where the Revenue had no reasons to doubt the bona fides. In Furniss v Dawson[377] Lord Bridge highlighted this point when he said:

“The strong dislike expressed by the majority in the Westminster case[1936] AC 1 at 19….. for what Lord Tomlin described as the ‘doctrine that the Court may ignore the legal position and regard what is called “the substance of the matter” is not in the least surprising when one remembers that the only transaction in question was the duke’s covenant in favour of the gardener and the bona fides of that transaction was never for a moment impugned” (emphasis supplied by the Petitioner]

Lord Hoffmann, in MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd, explained the Duke of Westminster's case in paras 38 and 39 of his judgment: to quote--

“My Lords, I venture to suggest that some of the difficulty which may have been felt in reconciling the Ramsay case with the Duke of Westminster's case arises out of an ambiguity in Lord Tomlin's statement that the courts cannot ignore "the legal position" and have regard to "the substance of the matter". If "the legal position" is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business "substance" of the matter is not to ignore the legal position but to give effect to it.”

In Simon’s Taxes (3rd ed)[378] in the Chapter on “The Construction of Taxing Acts and Document” the following has been stated:

“ In the case discussed above there was no suggestion of bad faith, or that the particular form of the transaction was adopted as a cloak to conceal a different transaction. The documents in question were intended to be acted on, and were allowed by the parties to have their proper legal operation. Lord Tomlin stresses this fact in the Westminister case.[379]

It is different where a deed or agreement is never meant to have effect, even in the absence of bad faith. Thus, where a member of a congregation of secular priests, acting as headmaster of a school established by the congregation, entered into a written agreement, under which he was entitled to a salary, but in fact received nothing, the agreement having been drawn up simply to comply with the requirements of the Board of Education, Finlay, J., held that the agreement did not represent the real bargain, or any bargain, between the parties. In this special case, therefore, the priest was not assessable under Schedule E.[380] It follows therefore that if the tribunal of fact finds, on proper evidence that a party setting up a transaction has not established that it was a genuine transaction carried through bona fide, it can have not effect for tax purposes.[381] No case or argument can be founded on a non-genuine basis. Thus, in Johnson V. Jewitt[382] a taxpayer attempted to create an artificial loss of a huge sum on money by creating and juggling with seventy-nine companies and so claim a large tax rebate. The transaction was held to be a complete sham:

“We were asked, what was this if it were not trading?………… I would call it a cheap exercise in fiscal conjuring and book-keeping phantasy, involving a gross abuse of the Companies Act and having as its unworthy object the extraction from the Exchequer of an enormous sum which the Appellant had never paid in tax and to which he has no shadow of a right whatsoever”.[383]

From the above the following two seminal points emerge:

(a) The Duke of Westminster dealt with a bona fide situation; and

(b) The statement of Lord Tomlin involved an ambiguity. Ambiguity adds richness in poetry but is a blemish in legal prose. There was no need to resolve this ambiguity in the Westminster case as the decision was absolutely right as it came within the principle stated by Lord Tomlin. Had Lord Tomlin faced a problem involving a mask he would have been the first to rip it off. His statement should not be construed as if it were a statute. Treaty Shopping is, on all juristic principle, a fraud. It is respectfully submitted that Treaty Shopping is not a bona fide situation as was the covenant executed by the duke.

(c) The ambiguity in Lord Tomlin’s dictum, which bewildered many later judges, stands explained by Lord Hoffmann in MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd:

189. That it deserves to be noted that in all the cases to which the Hon’ble Court refers as approving Duke of Westminster this fundamental difference remained under the prime focus. That the Privy Council in Bank of Chettinad Ltd v. CIT[384] was dealing with a bona fide situation clearly coming within the category to which the situation in the Duke of Westminster belongs. It examined facts to see whether there was a business connection within the meaning of Section 42 of the Income-tax Act, 1922. The Privy Council held in favour of the Revenue. In Mathuram Agrawal v. State of M.P.[385] this Hon’ble Court referred to Bank of Chettinad Ltd. v. Commr. of Income-tax and Inland Revenue Commissioner v. Duke West Minister but McDowell & Co Ltd v. CTOwas not even referred. The Hon’ble Court was considering matters relating to M .P. Municipalities Act (37 of 1961), S.127A(2)(b) to see whether certain provisions were ultra vires the charging section. The fact-situation was a bona fide situation involving statutory construction. The Constitution Bench in Mathuram said nothing about McDowell, though its awareness cannot be doubted. It presented a bona fide situation. In the case of Bank of Chettinad Ltd. v. Commr. of Income-tax, Madras, (AIR 1940 PC 183), the Privy Council quoted with approval the following passage from the opinion of Lord Russel of Killowen in Inland Revenue Commissioners v. Duke of Westminster, (1936) AC 1.The Hon’ble Court was not examining what should be the right judicial approach in a case involving a camouflage causing wrongful gains to the treaty-shoppers and wrongful loss the people of India. It was not a case wherein there is a clear evasion of reality by excluding transparency so that a good faith arrangement is used to promote bad faith of deriving profits contrary to law and justice.

190.That It is most respectfully submitted that by not resolving the ambiguity in Lord Tomlin’s dictum ( to which Lord Hoffmann referred) the Hon’ble Court’s misdirected itself in law. Lord Tomlin’s dictum is still valid in X situation, not the Y situation. . The effect of both Craven v White and MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd is that the view propounded by Lord Tomlin cannot be applied to the X situation; and pro tanto the rule is obviously dead in England. Hence, it is most respectfully submitted, that the principle in Duke of Westminster is surely alive and kicking in the country of its birth but only within the legitimate sphere of its operation i.e. to cover situation X, not situation Y. This may be called judicial determination of the proper frontiers of a rule, or a judicial narrowing of a rule though in both the cases effects are the same: a treaty shopper cannot invoke Lord Tomlin’s dictum made under the ethos and aspects of a simple bona fide case..

191. That it is humbly submitted that right from the day McDowell was decided by the Hon’ble Court those who played truants with law were never comfortable. One petition had been moved before this Hon’ble Court for a reconsideration of the judgment (165 I T R St 225), but this Hon’ble Court did not think it worthwhile to proceed with it. The way this great decision of the Constitution Bench received in the open Court is extremely worrisome. When the Attorney-General was his ill deserved onslaughts on this judgment, it could just murmur: Et tu, Brute. To put the matter more suavely, “one of the tours de force of legal literature” (to borrow Prof. Wade’s words he used while appreciating Lord Atkin’s judgment in Liversidge v. Anderson, kissed its coup de grace in the impugned judgment by a smaller Bench.

In the U.K. too the vested interests behaved no better. Hermann writes:

“ Sensing a certain softness and confusion in 1988 composition of the Judicial Committee of the House of Lords the tax lawyers renewed their attack under the flag of the Special Committee of Tax Consultative Bodies. The first two parts of their report on Tax Law after Furniss v Dawson is a lament on the blow inflicted to tax avoidance industry, which will hardly bring me to tears”[386]

The laments of the tax lawyers promoting this industry, unworthy in the eyes of common people, went in vain in the U.K. as the House of Lords is yet to duck or ditch Dawson. .

189. That it is most respectfully submitted that this Hon’ble Court was mistaken in thinking that the law declared in Bank of Chettinad, which approved the Westminsr was binding on this Hon’ble Court in view of Art. 372 of the Constitution of India. The Hon’ble Court observed:

“Unless abrogated by an Act of Parliament, or by a clear pronouncement of this Court, we think that this legal principle would

continue to hold good”.

With respect it is submitted that:

(a) what McDowell states is the law under Art 141 of the Constitution; and

(b) the Hon’ble Court missed to see that facts in the Bank of Chettinad or Mathuram Agrawal are as different from McDowell as chalk is from cheese.

192. Status of McDowell after this Judgment of this Hon’ble Court is, in many minds, uncertain. The way McDowell has been discussed it is a natural conclusion that the Hon’ble Division Bench of this Hon’ble Court virtually overruled McDowell, a decision of the Constitution Bench of this Hon’ble Court.

193. It is humbly submitted that there is nothing in M. V. Vallippan v ITO[387], Banyan and Berry v. CIT[388] as there could not be so on account of ordinary but essential judicial decorum. In CWT v. Arvid Narottam[389] this Hon’ble Court did not consider it appropriate to invoke McDowell as it was dealing with a bona fide situation involving no cover-up. In Mathuram Agrawal v. State of M.P.[390] this Hon’ble Court considered matters relating to M .P. Municipalities Act (37 of 1961), S.127A(2)(b) to see whether certain provisions were ultra vires the charging section: it was a bona fide situation involving merely statutory construction. Arvid Narottam, Mathuram, and the Bank of Chettinad belong to a group evidently distinct from the group to which McDdowell belongs.

194. It is respectfully submitted that the Hon’ble Court misdirected itself in relying on the American law. American Jurisprudence rejects motivation as a ground for the rejection of a claim. Here the question is not of motivation but of appropriate construction of the Income-tax Act and the terms of the Indo-Mauritius DTAC. It contemplates a bona fide situation. The whole confusion sprang up on account of the exclusion of the factual substratum of the case which the Petitioner sought to bring to the notice of this Hon’ble Court by producing before it the uncontroverted facts from the Assessment Order passed in the case M/s Cox & King. This exclusion distorted judicial perspective as it was a clear breach of the rules of Natural Justice. The effect of Duke of Westminster and Helvering was thus state by Lord Bridge in Furniss v. Dawson[391]:

But in another sense the present appeal marks a further important step, as a matter of decision rather than as a matter of dictum, in the development of the court’s increasingly critical approach to the manipulation of financial transactions to the advantage of the taxpayer. Of course, the judiciary must never lose sight of the basic premise expressed in the celebrated dictum of Lord Tomlin in IRC v. Duke of Westminster…. that—

‘Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.’

Just a year earlier Learned Hand J, giving the judgment of the United States Second Circuit Court of Appeals in Helvering v. Gregory (1934) 69 F 2D 809, had said the same thing in different words:

‘Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury.’

Yet, while starting from this common principle, the federal courts of the United States and the English courts have developed, quite independently of any statutory differences, very different techniques for the scrutiny of tax avoidance schemes to test their validity”.

The Hon’ble Court has through oversight missed the point that was made in Johannsson’ case[392] where the U.S. Court of Appeals frustrated Treaty Shopping even by rejecting the Certificate of Residence granted by a foreign government. Though the case could have been decided even on the mere interpretation of section 871 (c ) of the Internal Revenue Code of 1954, the Court of Appeals declared law on the issues of fundamental importance in the administration of a tax treaty. This fact was dully noted by Philip Baker when he observed :

“This was sufficient to determine the case, but the Court then went on to examine the issue of Treaty Shopping through a Swiss corporation formed to receive Johansson’s income. The Court firstly stated its general approach to the shopping [393].”

195. That the Hon’ble Court made serious mistake by not sharing the historical perspective which McDowell adopts.The most important point in McDowell’s case is the recognition of TIME itself as a distinguishing factor in matter of interpretation. This approach brings to mind what Lord Buckmaster said in Stag Line Ltd. v. Foscolo Mango & Co. Ltd.[394]

“It hardly needed the great authority of Lord Herschell in Hick v. Raymond and Reid (2) to decide that in constructing such a word it must be construed in relation to all the circumstances, for it is obvious that what may be reasonable under certain conditions may be wholly unreasonable when the conditions are changed. Every condition and every circumstance must be regarded, and it must be reasonable, too, in relation to both parties to the contract and not merely to one.”

Justice Chinnappa Reddy in McDowell’s Case observed :

“During the period between the two world wars, a theory came to be propounded and developed that it was perfectly open for persons to evade (avoid) income-tax if they could do so legally [395]…….Then came World War II and in its wake huge profiteering and racketeering, something which persists till today, but on a much larger scale. The attitude of the courts towards avoidance of tax perceptibly changed and hardened……”

He referred to the observations of many eminent judges in many well known cases which showed advance towards greater effectiveness against tax avoidance. He quoted the observation of Lord Roskill in Furniss v. Dawson wherein the following had been observed:

“The error, if I may venture to use that word, into which the courts below have fallen is that they have looked back to 1936 and not forward from 1982.”

In short, Justice Reddy took into account the historical forces which have shaped our outlook to discharge of tax obligations in recent years. The years between the two World Wars, and also some years which followed the Second World War, judicial creativity was extremely low. The portrait of the decline of values which T.S Eliot provides in his The Waste Land has its parallel in many fields including jurisprudence. Prof. H.W. R. Wade said:

“During and after the second world war a deep gloom settled

upon administrative law, which reduced it to the lowest ebb at which it had stood for centuries. The Courts and the legal profession seemed to have forgotten the achievements of their predecessors and they showed little stomach for continuing their centuries-old work of imposing law upon government.[396]

This fact is duly recognized in MacNiven’s case where Lord Nicholls said:

“In Ramsay the House did not enunciate any new legal principle. What the House did was to highlight that, confronted with new and sophisticated tax avoidance devices, the courts' duty is to determine the legal nature of the transactions in question and then relate them to the fiscal legislation: see Lord Wilberforce, at [1982] AC 300, 326.”

196. That the Hon’ble Court has made a departure from McDowell on a point of fundamental importance as it affects the very jurisdiction and power of the Supreme Court itself. It is clear from the observations of the Hon’ble Court that it was not appreciative of Treaty Shopping. But instead of exercising its role to promote justice by to frustrating fraud on Revenue it chose to withdraw to the narrow the Blackstonean view expressed in the maxim “Judicis est jus dicere, non dare”: the court’s is to decide what the law is, and apply it; not to make it. The Hon’ble Court expressed just a cri de Coeur through observations like these:

“Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other form, is none of our concern”

“We are afraid that the weighty recommendations of the Working Group on Non-Resident Taxation are again about what the law ought to be, and a pointer to the Parliament and the Executive for incorporating suitable limitatations provisions in the treaty itself or by domestic legislation.”

“In our view, the recommendations of the Working Group of the JPC are intended for Parliament to take appropriate action.”

“True that several countries like the USA, Germany, Netherlands, Switzerland and United Kingdom have taken suitable steps, either by way of incorporation of appropriate provisions in the international conventions as to double taxation avoidance, or by domestic legislation to ensure that the benefits of a treaty/convention are not available to residents of a third State.”

This narrowing of judicial role is a worrisome departure in this phase of globalization wherein our democratic polity and our Constitution both are up against sinister hazards posed by heartless predatory international financiers, and those gentlemen of the accounting profession whose feats of creativity are designed to promote the interests, worthy or unworthy, of a miniscule section of the haves. In McDowell Justice Reddy had observed:

“ The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is "the large hidden loss" to the community (as pointed out by Master Sheatcroft in 18 Modem Law Review 209) by some of the best brains in the country being involved in the perpetual war waged. between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer ,and his perhaps not so skillful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless good citizens from those of the 'artful dodgers'.”

What Justice Reddy has said about the creative role of the court is precisely what Lord Scarman observed in Furnis v. Dawson.

A Judicial Oxymoron & The Judicial Cri De Coeur.

197. That the Hon’ble Davison Bench’s cri de Coeur for the Executive or Parliamentary intervention to prevent the evil of Treaty Shopping is a matter of grave public concern as it is a conjoint product of two manifest judicial mistakes: (i) an abnegation of an inherent judicial function which amounts to virtual abdication of the right judicial role; (ii) a non-perception an inherent contradiction in the convoluted judicial reasoning which makes, on the one hand, an invocation to the Executive or Parliament for action, but, on the other, decides the issue by approving it, which the inevitable effect of what the Division Bench has done as a matter of actual decision.

198.That this Petitioner submits that much light on the points under consideration is shed by Reg. V. Brown[397].The case pertained to consensual sado-masochistic homosexual activities. Lords Templeman, Jauncey, and Lowry dismissed the appeal. Lord Mustill deliverd a dissenting jdgment with which Lord Slynn ageed.

Lord Templemn dismissed the argument that every person has right to deal with his body as he pleases. He said:

“I do not consider that this slogan provides a sufficient guide to the policy decision which must now be made. It is an offence for a person to abuse his own body and mind by taking drugs…”[398]

“Lord Temleman rejected the contention that only Parliament could decide the question by observing that “…..the question must at this stage be decided by this House in its judicial capacity in order to determine whether the convictions of the appellants should be upheld or quashed.” It is submitted that Lord Templeman was clearly right, because no court can say that it will not decide the question actually raised before it but leave to Parliament to deal with the question raised.’[399] And a set pf perspective comments on this decision has thus been made by H M Seervai

“It is submitted that Lord Mustill and Lord Slynn did not realize the consequence of their statement that the question whether sado-masochists’ homosexual activities should be treated as a crime must be left to parliament to decide. If it is to be left to Parliament, it can only be on the basis that Parliament is free to decide whether it should be made a crime or not. But in realty, there is no free choice. It is absurd even to suggest that the British parliament would not treat as crimes these degrading bestial and de-humanizing activities, which are mala in se.This is altogether apart from the fact that while purporting to leave the question to Parliament to decide whether sado-masochistic activities were criminal or not criminal. Lord Mustill and Lord Slynn, far from leaving the decision to Parliament, by allowing the appeal, decided the question in favour of the appellants that these activities were not criminal. This is because that the accused had pleaded guilty after trial judge gave his ruling that consent was not a defence to their activity. This had been confirmed by the Court of Appeal had confirmed this and leave to appeal to the House of Lords was given. In other words, the observation of the dissenting Law Lords that the court was not competent to decide the question raised bfore it fails, because they did in fact decide the question. In view of Lord Mustill’s, and Lord Slynn’s theory that Parliament, and not the courts should decide whether the appellants’ activities were lawful of unlawful, the only order which the two Law Lords could pass consistently with their theory would be: “We pass no order on this appeal because it is for Parliament and not for the House of Lords to decide whether or not the appellants’ activities were lawful or criminal.” But they decided that the appellants’ activities were not unlawful---a reductio ad absurdum of their theory.”[400]

199.That the Hon’ble Judges of the Division Bench in the impugned Judgment departed from the correct perception of its judicial role the broad parameters of which were tus explained by Lord Justice Balcombe in his Maccabean Lecture on “Judicial decisions and Social attitudes” delivered before the British Academy on 2 Nov. 1993:

“It seems to me that if judge is faced with th question with which of its divorced parents should a child live: with the father who has remarried or with the mother, who now has set up home with her lesbian partner? the judge cannot avoid taking sides to some extent. To say that the lesbian home of mother is wholly irrelevant to the decision is just as much taking sides as it is to express a view on the issue. Much as I suspect most judges would prefer not to express a view on a controversial issue, they may be compelled to do so if this is necessarily an element to be taken into account in exercise of the discretion which the law which the law has conferred upon them. It cannot be right to say: I cannot exercise this discretion because this is an issue on which Parliament alone can rule.”

Commenting on this observation H M Seervai comments:

“In other words, Lord Justice Balcombe rightly held that refusal

to decide a question necessarily involves deciding in or

other two ways.”[401]

Lord Templeman concluded his judgment commenting:

“Society is entitled and bound to protect itself against a cult of violence. Pleasure derived from the infliction of pain is an evil thing. Cruelty is uncivilized. I wound answer the certified question in the negative and dismiss the appeals of the appellants against conviction.”

Lord Templeman the activity mala in se. “It is submitted that Lord Lowry is right when he described he activities as mala in se.”

200. That whilst deciding the legality of Treaty Shopping the Division Bench of this Hon’ble Court was deciding a contested issue “in its judicial capacity in order to determine whether [ Treaty Shopping ]should be upheld or quashed.” The ambit and reach of the judicial function in the context of this sort had been explained by the House of Lords in Furniss v. Dawson to which this Petitioner has drawn attention in para 206 p.196 .That the Hon’ble Judges of the Division Bench of this Court committed in effect three serious errors while treating the issue of Treaty Shopping:

(i) Despite what they said about the role of this Hon’ble Court, they took up the issue and decided against the Petitioner rendering he judicial cri de Coeur a meaningless exercise contradicting the judicial theory as to what it can do, or what it cannot do[402].{ This point has been further persued while submitting on this Hon’ble Court’s Judicial Role.

(ii) The judicial theory is a totally alien in our juristic zeitgeist as we have never allowed a dissociation inter se morality and justice to set in our sensibility. It is true that it would be an insult to our Parliament of India to believe that it would treat the grave injuries caused to the nation’s moral fibre to the resources of our poor society, illegal

(iii) This inane exercise in formal logic could be possible only because the Hon’ble Judges allowed a triumph to the Doctrine of Necessary Evil which could have delighted only Lucifer when he took the soul of Dr Faustus on barter for some terrestrial gains. Moral vision may even at times be stranger to the administration of law, it is inconceivable to hold them at loggerheads with each other. Gupta j. very aptly observed in R.K.Garg v. Union[403]:

To pass the test of reasonableness if it was enough that here should be a differentia which should have some connection with the object of the Act, then

these observations made in Maneka Gandhi and Royappa would be so much wasted eloquence.”

Criticism of McDowll was without Jurisdiction.

202A. It is respectfully submitted that it would have been appropriate for the Division Bench to refer McDowell to a larger Bench. This case was referred in the judgments of this Hon’ble Court in several cases, and was followed[404]. The treatment meted to McDowell does not accord with the doctrine of binding precedent.[405] In UoI & Ors v. Godfrey Phillips India Ltd[406] this Hon’ble Court held:

We find it difficult to understand how a Bench of two Judges in Jeet Ram's case could possibly overturn or disagree with what was said by another Bench of two Judges in Motilal Sugar Mills case. If the Bench of two Judges in Jeet Ram's case found themselves unable to agree with law laid down in Motilal Sugar Mills case, they could have referred Jeet Ram's case to a larger Bench, but we do not think it was right on their part to express their disagreement with the enunciation of the law by a co-ordinate Bench of the same Court in Motilal Sugar Mills. It is also settled that the effect of a larger Bench decision cannot be diluted or affected by a smaller Bench. This is what this Hon’ble Court observed in a recent decision P. Ramachandra Rao v. State of Karnataka[407]

“The declaration of law made by the Constitution Bench of five learned Judges of this Court in the decision reported in A.R. Antulay's case [(1992) 1 SCC 225] still holds the field and its binding force and authority has not been undermined or whittled down or altered in any manner by an other decision of a larger Bench. Consequently, the Benches of lesser number of Constitution of Judges…….could not have laid down any principles in derogation of the ratio laid down in A.R. Antulay's case either by way of elaboration, expansion, clarification or in the process of trying to distinguish the same with reference to either the nature of causes considered therein or the consequences which are likely to follow and which, in their view, deserve to be averted. Even where necessities or justification, if any, were found thereof, there could not have been scope for such liberties being taken to transgress the doctrine of binding precedents, which has come to stay firmly in our method of Administration of Justice and what is permissible even under such circumstances being only to have had the matter referred to for reconsideration by a larger Bench of this Court and not to deviate by no other means.”

202B.That, as stated in paras 64-65 at p. 64 & 65 supra, A. R. Antulay v. R. S. Nayak recognizes a hierarchy in this Hon’ble Court, “ the practice followed by this Court and now it is a crystallised rule of law” which was reiterated in by Shetty J. in Triveniben v. State of Gujarat,[408]; and practiced by the 3-Judges Bench of this Court in in Commr of Central Excise v. Tatan Smelting & Wire20050 2 SCALE 280 :

“….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.”

203C. It is worth underscoring that the Division Bench of two Hon’ble Judges should not have given to the judgment of Justice Reddy, with which all other Hon’ble Judges of the Constitution Bench specifically agreed, a short shrift “either by way of elaboration, expansion, clarification or in the process of trying to distinguish the same with reference to either the nature of causes considered therein or the consequences which are likely to follow and which, in their view, deserve to be averted”.

Even the Privy Council’s Bank of Chettinad, the Hon’ble Court purported to follow, was a decision by only three judges [(AIR 1940 P.C. 183 (Lord Russell of Killowen, Sir Lancelot Sanderson, and Sir M.R. Jayakar) ] whereas McDowell was by the Constitution Bench of this Hon’ble Court. It is felt that this Hon’ble Court would not have stated in the impugned Judgment:

“And as far as this country is concerned, the observations of Shah J. in CIT v. Raman [1968] 67 ITR 11 (SC) are very much relevant even today.”

if this Hon’ble Court would have noticed that even the majority judgment in McDowell had noticed the observation of Justice Shah in CIT v Raman & Co [1968] 67 ITR 11 SC; and with full consciousness of this case approved the judgment of Justice Reddy by observing:

“On this aspect, one of us, Chinappa Reddy J. has proposed a separate and detailed opinion with which we agree.”

“To agree” is explained in Collins Cobuild thus: “If one person agrees with another or if two or more people agree, they have the same opinion as each other.” The COD defines it as “hold a similar opinion.” “Agree” is semantically cognate with the expression “approve”. Collins Cobuild says “If you approve of an action , event, situation, etc. you are pleased that it has happened or that it is going to happen.” The New Shorter Oxford English Dictionary defines it to mean: “Confirm authoritatively; sanction” [ from Latin approbare, assent to as good]. In R. v. Shivpuri [1986] 2 All ER 334 at (H.L.) Lord Bridge of Harwich in his principal speech, which sent Anderton v Ryan packing only after less than a year holding that if “a serious error embodied in a decision of this House has distorted the law, the sooner it is corrected better”, observed ( at p. 341):

“I was not only a party to the decision in Anderton v. Ryan, I was also the author of one of the two opinions approved by the majority which must be taken to express the House’s ratio.”

The purpose of this reference to the opinion of Lord Bridge is to submit that as the “approval” by the House turns the declarations of principles in Lord Bridge’s Opinion in Ryan as “the House’s ratio”, so the expression of agreement in the penultimate para in the Judgment of Justice Misra (for himself and the three other Hon’ble Judges) makes the principles stated by Justice Chinnappa Reddy the Constitution Bench’s ratio. Any other view accords neither with the language used, nor with judicial decorum and propriety we are duty bound to assume. To make the expression “we agree” in the Judgment of the 4 Hon’ble Judges mean something else than adoption of Justice Reddy’s approach in McDowell would, perhaps, be on the authority to which Lord Atkin referred in his famous dissent in Liversidge v Anderson[409]:

“I know of only one authority which might justify the suggested method of construction. ‘When I use a word’ Humpty Dumpty said in rather scornful tone, ‘it means just what I chose to mean, neither more nor less’. ‘The question is,’ said Alice ‘Whether you can make words mean different things’. ‘The question is,’ said Hampty Dumpty, ‘who is to be the master ---that is all.”

203. That in this Petitioner’s view both the principal and the concurring judgments in McDowell are good law. Justice Misra in his judgment, in its the penultimate paragraph, draws up an excellent summary of Justice Reddy’ judgment. But then this is this Petitioner’s view of McDowell which most tax lawyers, like the Knights of King Arthur’s Round Table, would like to slay by hook or by crook. We hear that in a good number of income-tax cases before various Appellate Tribunals, tax lawyers much abler than this Petitioner, are arguing that McDowell is dead and gone. Articles are written by the experts singing the same tune.It would be good and great if this Hon’ble Court clarifies the present status of McDowell so that much of smog is over under judicial light. Criticism of McDowell is not a criticism of a judgment of our apex Court, but is the criticism of a whole value system projected in a masterly way by the five Hon’ble Judges of our apex Court through the trajectory of a tax case.

( b ) A wrong judicial observation-post and an entente cordiale of Collusion and Fraud.

204. That towards the end, but just before the words of appreciation even for the Petitioner, the Division Bench of this Hon’ble Court dealt with what it felt to be the forte of the this Petitioner’s core submission as one of the Respondents in the appeal. In the impugned Judgment the exposition under the rubric “Rule in McDowell” begins with a sentence which was a part of the shadow-boxing of the Appellants rather than a plea of the Respondent. The said Judgment says:

“The respondents strenuously criticized the act of incorporation by FIIs under the Mauritian Act as a "sham" and "a device" actuated by improper motives.”

The summing-up running over a little more than two pages[410] is only a gloss on the sentence just quoted. This Petitioner could submit that the whole exposition deserves to be circled out and ignored on account of utter irrelevance; but in due deference for the Bench he would submit how the judicial quest was totally misdirected and misconceived.

205.. That this Petitioner’s whole case before the Hon’ble High Court and this Hon’ble Court was founded on an assertion that Collusion and Fraud through their congeneric operation through an opaque system led the depredation on our country’s economic resources, and as a matter of natural consequence contributed to moral degradation and national insecurity. The plea was that , on analysis, a Treaty Shopping is a conjoint product of Collusion and Fraud[411] inter se the vested interests in Mauritius and the residents of the third States. The strategy was crafted through a network of collusion. The dressed-up evidence presented by those who wanted to masquerade as the Mauritian residents before the income-tax authorities to obtain benefits of a bilateral tax treaty between India and Mauritius, was a stratagem of fraud to cause wrongful gains by inflicting wrongful loss on others.”[412] As Comus was an offspring of Bacchus and Circe, a Treaty Shopping is fathered by Collusion and Fraud in Darkness.

206. That, assuming arguendo that it was this Petitioner’s case that the “incorporation” in Mauritius was a ‘device’ or ‘sham’, the principal plea went unnoticed with a disastrous consequence on the cause. “Incorporation” is a domestic legal act of Mauritius which neither this Petitioner, a citizen of the Republic of India, nor this Hon’ble Court can question it. The Indian tax authorities are merely examining the whole gamut of facts to determine right legal effect that they have to give in India applying the law of this Country. If a claim is made under a tax treaty , they have to examine all the facts from the point of view of income-tax law. Law is highly functional. This Petitioner has already referred to several cases to make out his point. In Furniss v. Dawson[413] the House of Lords ignored the existence of that tax haven company by circling out transactions effected though it without negating its corporate personality. As there was no economic impact of this transposed entity its relevance was not recognized in determining effect for the purposes of the tax laws. In Knetsch v. United States[414] the U.S Supreme Court shows that even legitimate corporation may engage in transactions lacking economic substance; and so the Commissioner could disregard transactions between related legitimate corporations. The 1986 decision of the Bundesfinanzhof in German jurisdiction: the doctrine of the abuse of legal form[415] has been recognized. Klaus Vogel has outlined the judicial perspective in these words[416]:

“If the form of a transaction is not recognized for tax purposes under domestic law or under treaty law, the tax consequences which the tax payer sought to obtain through structuring the transaction in question will not occur and tax authorities will then apply those tax rules which would have applied according to the appropriate legal form of transaction…”

That the aforesaid facts show that a company can be a legal person without being aresident for the purpose of a tax convention

207. That, arguendo, what this Hon’ble Court says is correct, nothing turns on using words ‘device’ and ‘sham’ “loosely.” “Device” means in its primary sense “intent, desire, will, pleasure, an inclination, a fancy” (New Shorter Oxford Dictionary) And “sham” in its primary sense means “ a trick, a hoax, something contrived to delude or disappoint expectation” (New SOD ). The whole problem in comprehension arose because this Hon’ble Court adopted a most unreasonable approach which foredoomed the PIL. The entire factual profile was excluded from judicial consideration . This was against established law as the Petitioner has submitted in Section XXII under sub-heading: “By wrongfully circling out the whole factual substratum of the Writ Petition the Hon’ble Division Bench acted beyond Jurisdiction and in violation of the rules of Natural Justice and Fair play’. A short account of what M/S Cox & King did is set forth in foot note 351 at pp. 169-170. may be seen. If what was done is not a device, not a trick then what else it is? .

208. That neither this Petitioner nor the Hon’ble High Court used these words as “magic mantras”. They were treating the whole issue as a mixed issue of fact and law and were treating the whole matter from the observation post of reasonable construction . If at all there was any ‘magic mantra’ it was the plea for Appellants ( by the tax-haven company for quite understandable reasons; by the UoI for reasons beyond understanding to a common man) that once a company is contrived and incorporated to be heaped in the hip-pocket of a Chartered Accountant in Mauritius or Cyprus, or Nauru or Aruba or Niue, the statutory authorities in India have no option but to go into sanyas accepting whatever is done from the dark corners under the consolation that that was the law of the land.. No law can promote fraud, if it does it can neither be recognized by our courts, nor it would be obeyed by our people.

209. That this Petitioner the judicial quest to determine “legal situation” on a completely wrong track. The purpose of the statutory construction is always to determine “legal situation.” Westmoreland Investments v MacNiven [2001] I All ER p. 865, at 874; [2002] 255 ITR 612 at 623 is a leading case which is already referred. But “legal situation” cannot be determined in blinkers. Facts are to be seen . And the determination is by the Indian tax authorities who “apply” ( Art 3 of the Indo-Mauritius DTAC) the DTAC and administer the I.T. Act. Legal situation, as this Hon’ble Court has observed in so many cases, is the deductions from facts under the aspects relevant law,

210. That the judicial reasoning is operating under the backdrop of invalid assumptions. This assumes certain thing as a legal situation then shows displeasure that it is being subverted. Clearly it is a fallacy of post hoc, ergo propter hoc. It involves a circularity. What is under question is itself assumed; and then turned into a ground of argument. This is unfair. This is also in breach of the rule of Audi alteram partem..

211.. That this Hon’ble Court misdirected itself in comprehending the judicial dicta by Lord Tomlin and Lord Atkin in Westminster. This aspect has already been stated by this Petitioner while submitting how the Constitution Bench decision in McDowel . This Court missed to see the distinction between a simple, bona fide and undisputed transaction, and a contrived, covert strategy to take advantage of the Indo-Mauritius DTAC [ because a Contracting State (Mauritius) chose in bad faith to make the good faith of the tax treaty a trading ware ]

212. That in Snook v. London and West Riding Investments Ltd Lord Diplock was considering a situation totally unlike that involved in Treaty Shopping. It contemplates a situation wherein:

“all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived."

Cox & King , or by that any another Treaty Shopper, when obtaining a certificate of “INCORPORATION” under the Mauritian law was not entering into a “sham” within the meaning of term which Lord Diplock contemplates. Besides, it would be a violation of international public law ( the principles of Sovereignty and Territoriality ) if the Indian tax authorities explore such things.

213.. That in Woman Rao v. Union of India [1981] 2 SCC 362 at para. 45 and Minerva Mills Ltd. v. Union of India has no reasonable bearing on the issue before this Hon’ble Court. The whole error is on account of not noticing the context. The ‘word ‘ is not cognate with fraud or Collusion.

214. That this Hon’ble Court assumed a ground which had never been taken. Nothing turned on mere ‘motive’. This Petitioner had maintained his stand both at the High Court and before this Hon’ble Court on a different aspect of the matter. It is respectfully submitted that the Petitioner had never tried to make out a case with reference to ‘motive’ of the companies which got themselves incorporated in Mauritius for taking undue advantage of the DTAC between India and Mauritius. The Petitioner’s case was that on the proper interpretation of the terms of the bilateral Indo-Mauritius DTAC the persons belonging to third States had no credentials to avail of benefits under the DTAC. In short such persons did not, in reality, come within the Personal Scope of a DTAC. It is taken as a cardinal principle in the administration of justice that Masqueraders are never allowed to wrongful gains to themselves and wrongful loss to others.

215. That if this Hon’ble Court would have seen the facts, this Petitioner is sure it might not have viewed the Petitioner’s quest as a mere adventure for “ a will-o'-the-wisp”. It was only because the Hon’ble High Court saw facts that could say in the penultimate part of the judgment:

“ We would however like to make an observation that the Central Govt. will be well advised to consider the question raised by Shri Shiva Kant Jha who has done a noble job in bring into focus as to how the Govt. of India had been losing crores and crores of rupees by allowing opaque system to operate.”

216. That while dealing with McDowell this Petitioner has submitted that Westminster's case, or the Bank of Chettinad's case or Mathuram's case belongs to an entirely different ethos. They do not contemplate a cover-up situation about which McDowell speaks. Not to see this seminal difference is to frustrate the demand of justice. It is grave constitutional mistake to invoke Art 372. It cannot be disputed that the expression “All the law in force’ includes the common law of the land which was being administered by the courts of India[417]. But the Division Bench made a patent mistake of law by not noticing:

(a) It was appropriate for the Divison Bench to its deference first to Art 141 of the Constitution which says: “The law declared by the Supreme Court shall be binding on all courts within the territory of India.”

(b) The Hon’ble Division Bench missed to notice that McDowell belonged to a different frame of reference, a different world altogether. Westminster's case, or the Bank of Chettinad's case or Mathuram's case deals, as has already been comprehensively stated, with simple cases of straightforward transaction in full transparency.

(c) The Bank of Chettinad's case was in the full judicial consciousness of the Constitution Bench which decided McDowell. Ranganath Misra, J. (for himself and on behalf of Y. V. Chandrachud, C. J. mod D. A. Desai and E. S. Venkataramiah, JJ.) took notice of the Bank of Chettinad in specific words as on this case the learned counsel for McDowell & Co (Mr. Sorabji, Sr. Advocate) strongly relied[418]. The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. if the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'."It is unacceptable to think that what was at the most conscious point of judicial deliberation was not understood by the five Hon’ble Judges of this Court. To the Petitioner it is an unstatable proposition. Assumuing, arguendo, that those Hon’ble Judges missed the obvious, the only reasonable course open to the Hon’ble Judges of the Division Bench was state reasons to the Hon’ble Chief Justice to constitute a larger Bench.

(d) It is submitted that the Hon’ble Division Bench acted without jurisdiction in departing from McDowell when as a matter of law ( as a matter of mandatory norm operative in the judicial hierarchy ) it was BOUND[419] by McDowel.

217. That the Hon’ble Division fails in adopting a functional view while considering the matter. The factors relevant to the decision making under the income tax law and those under the companies law are not the same. In tax jurisprudence the factors are examined “for the purposes of the tax”. Any leading tax case from the different jurisdictions would show this. In Furniss v. Dawson, the most celebrated of the tax cases, the personality of the company incorporated in the tax haven was neither questioned by the Crown, nor doubted by the Courts. It is only for tax purposes that the real operative realities were explored. The legal effect, to which the Hon’ble Division Bench refers, ensued and emanated from the facts found out. The Hon’ble Court missed that in modern law the transition in the approaches is from the analytical to the functional; and the law is most purposive in tax jurisprudence.

218 This Petitioner submits that this Hon’ble Court used the expression “supposedly” because it neither saw the facts, nor required the Central Government to disclose facts, nor took into account the JPC Report which the Petioner put forth before it, nor took into account the massive literature in public domain the judicial notice whereof should have been taken a PIL. Even the facts which had been admitted by the Union of India and were brought on record, the Hon’ble Division Bench thought it fit to exclude on grounds suffering from patent illegality.

The Petitioner thought that the Union of India, which dismisses an employee even for an accounting mistake of less than Rupees One hundred, would surely ask the Petitioner to shed light to find reasons, but nothing happened. Even the scrutiny by the Joint Parliamentary Committee of Parliament was a matter of mere solemn formality.

219. That this Hon’ble Court contrary to the law of income tax and the rules of Natural Justice assumed that the authorities under the Income-tax Act are on some economic mission. The income-tax Act is a Parliamentary authorization to raise revenue per law. The Revenue goes to India’s Consolidated Fund to be used under a Parliamentary mandate, under Parliamentary supervision and control. The incoming of FDI and Foreign Exchange may be in the economic field, it is not in the revenue field for which the Commissioners under the Income-tax Act hold Parliamentary commission to levy and collect. Economic field is a larger Set, whereas Taxation is a smaller set . To take a part for the whole is to go wrong both in n logic and law.

[ C ] The Rules of Natural Justice Breached: Acts without Jurisdiction

Serious breaches abound in the impugned judgment.

( A ) The Rules Of Natural Justice Violated By Stock-Responses, And Invalid And Illegal Assumptions

220. That the Rule of audi alteram partem contemplates a fair and receptive listener possessing, through natural endowment and acquired propensities, a measure of detachment which excludes extraneous factors, including the pshychic pshblemishes like inhibitions, stock-responses, concealed references, in decision making. In ancient times Lord Buddha stressed on samyaka sravana (Right Hearing). Modern psychologists would call the judicial technique “Solutions through insight”, the nature and content of which is briefly stated by an expert thus:

“In striving toward insight, a person tends to exhibit a strong orientation towards understanding principles that might bear on the solution sought. The person actively considers what is required by the problem, noting how its elements seem to be interrelated, and seeks some rule that might lead directly to the goal. The insightful thinker is likely to centre on the problem to understand what is needed, to take the time to organize his resources, and to recentre on the problem (reinterpret the situation) in applying any principle that seems to hold promise.”[420]

Two principles which must be at work in deciding a case are (a) the quest for justice under the aspects of Uncertainty, and (b) intuitive and imaginative perception of Proportionality and Probability. These norms would assist comprehending this Petitioner’s submissions as he believes that (i) mere impleading a person as a party , or (ii) mere service of notice of a proceeding of hearing in a court, or (iii) both, does not exhaust the content of the rule of audi alteram partem.And he respectfully submist that in Rupa’s Case this Hon’ble Court virtually denuded the rule of audi alteram partem of all its inner content. This aspect of the matter the Petitioner has already submitted in Part I of this Writ Petition. Here, with utmost brevity he would touch some glaring instances of the breaches of this great rule. Its inevitable impact is on the decision-making making the actual less than fair. In Ridge v. Baldwin, a leading case on natural justice, the House of Lords held that the dismissal of the chief constable, being vitiated by failure to give him a fair hearing, was void, and from that it follows inexorably that it was outside jurisdiction i.e. ultra vires.[421] That it is well settled that decisions rendered in violation of the rules of Natural Justice is void.[422] The Privy Council in Calvin v. Carr[423] held that a decision reached in violation of the rules of natural justice was void; but until it was so declared by a competent body or court , it had effect at law.

(b) An Extraneous Factor

221. .That it is most respectfully submitted that nothing violates the rule of audi alteram partem more insidiously than the judges’ own socio-economic views as these colour the judicial perception undermining judicial detachment without which the opportunity of being heard cannot be effective. The famous words of Justice Holmes in his classic dissent in Lochner v. New York[424] comes to mind:

“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.”

H.M.McLuhan[425] rightly says:

“ We have long been accustomed to the notion that a person’s beliefs are shape and color his existence. They provide the windows which frame, and through which he views, all events……….In cognition we have to interiorize the exterior world. We have to recreate in the medium of our senses and inner faculties the drama of existence. This is the work of the logos poietikos, the agent intellect.”

This Petitioner has already submitted on the flawed ideas which led this Hon’ble Court to uphold Treaty Shopping, and has submitted the adoption of such economic ideas justified by the expediency of the moment would have one sure and certain effect: the breach of audi alteram partem. This Hon’ble Court thinks about 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”. This Hon’ble Court fails to see the staggering difference between “Deficit financing” and “Treaty Shopping”. All this was bound to take this Hon’ble Court that this Petitioner’s ideas

were mere “sound and fury” [signifying nothing]. Once certain economic ideas are assumed as a working hypothesis this is how human mind works (as H.M.McLuhan has shown in his “Sight, Sound and Fury” ) And from this assumption leaps to errors are natural: “ perhaps, it may have been intended at the time when the Indo-Mauritius DTAC was entered into”. One can take off from one baseless assumption to another without even a warning “because reason is a ready-enough advocate for the decision one consciously or unconsciously desires to reach.”[426] And there is a further leap: a justification is formulated for judicial non-intervention for economic reasons when this Hon’ble Court was to consider only LEGALITY. And there is one more flight when this Hon’ble Court says: “ This court cannot judge the legality of Treaty Shopping merely because one section of thought considers it improper”. This Hon’ble Court missed to notice that no court in the World with civilized jurisprudence approved of Treaty Shopping, in fact wherever they have considered it they have rejected as against law and Public Policy. This Hon’ble Court, which quoted long passages from Roy Rohatgi’s Basic International Taxation ( which was being written when this PIL was sub judice & came out in 2002) should have noted that even this writer had not mentioned any decision, except one which had already been overruled. And then comes the crowning assumption which this Hon’ble Court should not have made because it is both fanciful and sinister. This Hon’ble Court should have refrained from arguing on “ a holistic view” as it drags us into a vortex of ideas which many of us consider deceitful, whereas many may consider it panacea for all ills in this fast emerging global society.

222. That the Income-tax Act 1961 does not erect any economic doctrine within its corpus. Statutory provisions may be the product of policies; but polices as such are not allowed an entry within the Statute. It appears to this Petitioner obvious that the court which persuades itself to hold an economic and social philosophy with a low moral mark-up for reasons of expediency would surely act in breach of the rule of audi alteram partem. Such views condition the response of the mind whatever be the submissions. One responds to an external stimulus conditioned by the assumptions made. Neurons function this way only. Perhaps for this reason Cuthbert Pound said: “We rate the judge who is only a lawyer higher than the judge who is only a philosopher.” And Lord Mansfield said[427]:

“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 coelu

It is beyond the province and function of this Hon’ble Court to appraise economic considerations when the issue turned on mere legality. It is for this reason in Att.-Gen. For the U. K. v. Heinemann Publishers Australia Pty Ltd. (1988) 62 Australian Law Journal Reports 344 [at P.B.I p.11 ] the High Court of Australia observed:

“Australian courts are not competent to assess the degree of “friendliness” of a foreign state, nor is that matter capable of resolution by Executive assessment. In the present case, the friendliness or hostility of the foreign state seeking to enforce its claims in Australia had no relevant connection with the applicable principles.”

That this Petitioner has submitted in detail how the entire admitted factual substratum of the PIL was circled out by excluding the facts in the Assessment of Cox & Kings by going counter to the settled law accurately stated in Mulla [ in his CPC 14th ed at p 868]. But it is sufficient here to say that the judicial act of exclusion put a shadow to shroud reality. In the words of T. S. Eliot:

Between the idea

And the reality

Between the motion

And the act

Falls the Shadow.

( c ) Legal Distortions

223.That legal distortions of fundamental nature are bound to distort the right perspective for the grant of hearing in compliance with the rule of audi alteram partem. Such seminal gross errors of facts or law may emanate on account of distorted judicial perception. This Petitioner would set out facts to show and substantiate that the rule of audi alteram partem suffered in the proceedings the crowning act of which was this impugned judgment. If the statutory provision gets ignored, or if a binding and relevant judicial ruling is not taken into account, the judicial perspective would become skewed, adversely affecting the justice of the case. Right judicial perception, for which hearing is granted, is impossible to evolve unless right factors, of course within the band of tolerance or reasonableness, are at work.

(d) Some Other Instances Compiled

224.. That this humble Petitioner would illustrate the invalidity of the impugned Judgment with reference to what appeared to the Hon’ble High Court the “core issue’ in this case: the issue of Treaty Shopping. For upholding Treaty Shopping this Division Bench of this Hon’ble Court Judgment gives only Four reasons:

( a) The opinion of Lord McNair in Chapter 17 of his Law of

Treaties;

(b ) The submission by the Attorney -General that that the

Indo- Mauritius;

( c) DTAC was originally intended for the benefit of the

Treaty Shoppers;

( c ) The views set forth in the Conduit Companies Report 1987

submitted by the Committee on Fiscal Affairs of the

OECD; and

( d ) The book by Roy Rohatgi, Basic International Taxation.

This humble Petitioner has shown in this writ Petition :

( i ) that ( a ) supra is manifestly wrong as it sees X where it is

Y;

( ii ) that ( b ) supra is false, as there is not even an iota of

material, not even a weakest probability, in support of

this;

] ( iii ) that ( c ) supra was never brought in the whole course of the

conduct of appeal before this Hon’ble Court; and

( iv ) that ( d ) supra was utilized in a gross breach of Natural

Justice.

In short, the decision of this Hon’ble Court on Treaty Shopping is invalid as it is in clear breach of the rules of Natural Justice. It is well settled that decisions rendered in violation of the rules of Natural Justice is void.[428] But, to say the obvious, it would remain in effect till this Hon’ble Court is pleased to declare it so; or to put it euphemistically, till this Hon’ble Court recalls it; or till this Hon’ble Court provides the Petitioner some corrective remedy.

[ b ] Jurisdictional Errors

225. That the refusal to receive evidence amounts to a refusal to exercise jurisdiction. Prof Wade has summarized this point by stating that “Refusal to receive evidence on some relevant point may also amount to refusal of jurisdiction…”[429]. The circling out of the whole factual substratum of the case contrary to law is beyond the legitimate scope of power to be exercised in its jurisdiction. That the breach of the rule of audi alteram partem is so gross as to amount to a manifest jurisdictional error. In Ridge v. Baldwin, a leading case on natural justice, the House of Lords held that the dismissal of the chief constable, being vitiated by failure to give him a fair hearing, was void, and from that it follows inexorably that it was outside jurisdiction i.e. ultra vires.[430]

226.. That this humble Petitioner has already submitted that this Hon’ble Court acted without jurisdiction by rewriting the Personal Scope of the Indo-Mauritius DTAC. It is a breach of Public International Law and the Constitution of India. This fundamental error in the Judgment of this Hon’ble Court led it to uphold the evil of Treaty-shopping under the Doctrine of Necessary Evil, and by justifying it with reference to purpose wholly extraneous to the Act. This fundamental error in the Judgment of this Hon’ble Court led it to uphold the evil of Treaty-shopping under the Doctrine of Necessary Evil, and by justifying it with reference to purpose wholly extraneous to the Act. The effect of the Hon’ble Court’s Judgment is to rewrite the Personal Scope of the DTAC which is beyond its Jurisdiction as the consensus ad idem must be of the Contracting States only.

227. That the impugned Judgment ignores, virtually overrules, a binding Constitution Bench judgment of this Court in McDowell’s case (1985) 154 ITR 148.The impugned judgment is thus not only in breach of judicial discipline by going against a judgment of a larger bench, it is actually rendered without jurisdiction, since no Bench of this Hon’ble Court has the jurisdiction to ignore or overrule a binding decision of a larger Bench. The Hon’ble Division Bench goes against the ratio of the Constitution Bench decision which is without jurisdiction.

(e) Slings most undeserved: Rule of Natural Justice breached.

228. The Hon’ble Division Bench in the impugned Judgment has passed words of censure on the work of those outstanding tax authorities who had passed 24 Assessment Orders in the cases of the Treaty Shoppers wherein limitations were involved in March, 2000.

“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 Central Board of Direct Taxes was justified in issuing "appropriate" directions vide Circular No. 789 ([2000] 243 ITR (St.) 57), 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.”

They are held to have been guilty of defiance (‘in the teeth of’), deliberately done (‘chose to’). They are held to have wasted their human resources for wrong purposes thereby committing a clear dereliction of their duty in public proceedings designed to promotion public good. These words are the words of displeasure which some of our finest officers have earned without any fault. If they would have been heard on why they did what they did , perhaps, they could have clarified their position to the satisfaction of this Hon’ble Court. They were entitled to get an opportunity of being heard. This Hon’ble Court owes certain duty to the citizens in the same way as Rama was under duty to hear Bali, and Ravana was under duty to hear Hanuman. This Petitioner knows that it was not for him to poke his nose between those officers and the Hon’ble Court. He has chosen to raise this issue for two reasons; first, as this is a PIL which this Petitioner had led to earn for them this censure; second, it is a painful if they be allowed to remain silent with a pent-up feeling so suggestively expressed by Kin Lear’s loving daughter Cordelia ( in William Shakespeare’s King Lear V. iii. ii.):

“We are not the first,

Who, with best meaning, have incurred the worst.”

[D] CBDT’s Circular No.789 of 2000: A continuing national disgrace.

( a ) Circular 789 of the CBDT is ultra vires and patently in breach of Public Policy.

229. That the CBDT Circular No. 789, which the Division Bench of this Hon’ble Court has sustained, is grossly arbitrary and unreasonable by all standards as the said CBDT Circular:

( a ) promotes extraneous purpose of promoting the interests of the FIIs and the MNCs;

( b ) makes a trespass on the legislative field by creating certain conclusive presumptions;

( c ) builds and ensures the continuance of an opaque system impervious to public gaze by going counter to the basics of an open and transparent political society.

( d ) promotes the Fraud and Collusion on massive scale through the sinister stratagem of Treaty Shopping.

230. This Hon’ble Court completely misdirected itself in observing in the impugned Judgment :

““As we have pointed out, Circular No.789 is a circular within the meaning of section 90: therefore it must have the legal consequences contemplated by sub-section (2) of section90. In other words, the circular shall prevail even if inconsistent with the provisions of Income-tax Act, 1961 insofar as assesses covered by the provisions of the DTAC are concerned.”

This Respondendent is at a loss to understand how the Hon’ble Court states that “Circular No.789 is a circular within the meaning of section 90”. There is no expression to suggest that this circular is in exercise of power under section 90 because there is nothing to empower the CBDT to issue a circular under section 90 of the Income Tax Act. There is nothing to indicate that this power is being discovered as a matter of judicial construction. This statement is, on account of overlooking the statutory provisions, Ex nihilo nihil fit. As this proposition is mistaken its sequel is, by inevitable logic, is bond to be erroneous. It is respectfully submitted that never till this date the CBDT ever issued a circular in exercise of power under Section 90 of the Act. Nothing comes out of nothing.

231. That the Hon’ble Court, it is respectfully submitted, went wrong in holding that the Circular No 789 was “within the meaning of section 90”; and this mistake led it to commit the following two mistakes too:

( a ) the Circular No 789 “must have the legal consequences contemplated by sub-section 90.” And

( b ) the said Circular “shall prevail even if inconsistent with the provisions of the Income-tax Act,1961 in so far as assesses covered by the provisions of the DTAC are concerned”

232. That the view stated above cannot be wrung out from “The Central Government may………. by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement”. This view is patently erroneous for the following reasons:

(a) The Section empowers only the Central Government to “make such provisions as may be necessary for implementing the agreement”, not the CBDT to issue the impugned Circular.

(b) The CBDT is a creature of the Central Board of Taxes Act, 1964. It is distinct from the Central Government. Nothing was brought out before the Hon’ble Court to show that it could exercise the power of the Central Government; or it was entitled to exercise such a power under any of the Rules of Business.

(c) That it was never asserted by the Appellants that the impugned Circular had been notified in the Official Gazette. The notification has a prescribed technical procedure.

(d) The Central Government can make provisions for implementing the Agreement by notifying them in the Official Gazette for mere awareness, and information both to the tax-payers and the tax-gatherers.. The expression “implementation” implies that the Agreement exists ab exrta as a consensual creature created inters parte India and Mauritius. It contemplates an Agreement conforming to the base provisions and the pre-conditions prescribed under section 90(1). The process of implementation is not the process of the creation of the terms capable of creating a vinculum juris under a tax treaty.

(e) There is nothing in the content of the Circular to indicate that it is issued under section 90(2).

(f) 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.

233. That the proper question is to ask: Whether the Central Government was right in issuing the impugned circular for the benefit of the FIIs, OCBs and other non-residents. This prime objective is clealy stated in the impugned Circular. If the purpose is to grant them benefits, the right course was to frame a law facilitating the incoming of foreign funds. This would ensure transparency. The Authority for Advance Ruling had aptly observed:[431]

“In order to encourage inflow of funds form the Emirates to India, the Government of India could bring about a legislation granting relief to such inflow of funds and income earned by investments of such funds. The Government of India has not chosen to do so. Therefore it will not be right to hold that the real object of this agreement instead of avoiding double taxation was to encourage inflow of foreign funds into India by reducing rates of taxes even when there was no double taxation of income at all. The object of the agreement was avoidance of double taxation of income and prevention of fiscal evasion. The agreement was entered into in exercise of the power conferred by section 90 of the Income-tax Act, section 24A of the Companies Profits (Surtax )Act and section 44 of the Wealth-tax 1957. Such an agreement could only be entered into, (a) for granting relief in respect of tax actually paid twice on the same income under the tax laws in force in both the countries, or (b) for avoidance of double taxation of income under the Income –tax Act and the Corresponding law in force in the foreign country.”( Emphasis supplied.}

Lord Edmund-Davies in Vestey v IRC (1997) 3 All ER 976 at 1002) said that Lord Radcliffe “never understood the procedure of extra- statutory concessions in case of a body to whom at least the door of Parliament is open every year for adjustment of the tax code.”

234. That the power to issue instructions under section 119 of the Income-tax Act is given to promote certain statutory purposes set out comprehensively in that section. To the extent the impugned circular promoted object extrinsic to that, the Central Board of Direct Taxes acted contrary to law[432]. The said circular was ultra vires the Board’s power. It amounted to malice in law.[433] Commenting upon nature and reach of the CBDT’s power the Delhi High Court had observed in its Judgment observed :

“Power of issuance of a circular in terms of section 119 of the Income tax Act has been delegated in Central Board of Direct Taxes for a limited purpose….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 statute as also the delegated legislation.”

In effect the Court appears to apply the well-settled principles of Administrative Law felicitously expressed in a number of decisions : to mention a few :

( a ) In R. v. Vestry of St. Pancras, Lord Esher M. R. observed :[434]

“If people who have to exercise a public duty by exercising their discretion take into account matters which the Courts consider not to be proper for the guidance of their discretion, then in the eye of the law they have not exercised their discretion.”

( b ) In Breen v.A.E.U. Lord Denning observed:[435]

“The discretion of a statutory body is never unfettered. It is a discretion which is to be exercised according to law. That means at least this : the statutory body must be guided by relevant considerations and not by irrelevant.”

( c ) In Teh Cheng Poh v. Public Prosecutor the Privy Council: [436]

“But, as with all discretions conferred upon the executive by Act of Parliament, this does not exclude the jurisdiction of the court to inquire whether the purported exercise of the discretion was nevertheless ultra vires either because it was done in bad faith (which is not in question in the instant appeal ) or because as a result of misconstruing the provision of the Act by which the discretion was conferred upon him the Yang di-Pertuan Agong has purported to exercise the discretion when the conditions precedent to its exercise were not fulfilled or, in exercising it, he has taken into consideration some matter which the Act forbids him to take into consideration or has failed to take into consideration some matter which the Act requires him to take into consideration.”

( d ) In State of UP v. Hindustan Aluminium Corporation the Supreme Court of India observed:[437]

Challenge to an Order of the State Government on the ground of malice in law is another aspect of the doctrine of ultra vires, for an offending act can be condemned simply for the reason that it is unauthorized. Bad faith has often been treated as interchangeable with unreasonableness and taking a decision on extraneous considerations. In that sense, it is not really a distinct ground of invalidity. If a discretionary power has been exercised for an unauthorized purpose that is enough to invite the Court’s review, for malice is “acting for a reason and purpose knowingly foreign to the administration”.

In short the principle at work is : “A power is exercised fraudulently if its repository intends to achieve an object other than that for which he believes the power to have been conferred.”[438] It is clear that the Hon’ble Division Bench of this Hon’ble Court missed this aspect of the matter and the right juristic principles which it had to apply to do justice in the cause.

Certificate of Residence

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[439] 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.”

237 .In India the Authority for Advance Rulings in the NETWEST case[440] found sufficient justification to reject the effect of the Certificate of Residence granted by the Mauritian authorities because the Authority found that the companies incorporated in Mauritius were wholly owned by the British company. The Authority rejected the petition holding that it was of “the opinion that the purpose of investment in this manner can only be for the purpose of avoidance of tax.” .A certificate designed to affect rights and duties are invariably rebuttable.[441] In Alcom Ltd v. Republic of Colombia the House of Lords observed:

“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…….”[442]

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[443] 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.[444] 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.

I confess that I can think of no satisfactory test except that of looking to the functions and control of the organization. I do not think that it should depend on the foreign law alone. I would look to all the evidence to see whether the organization was under government control and exercised governmental functions. That is the way is which we looked at it in Mellenger v New Brunswick Development Corpn.[445]:

‘[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’. (

DPP v. Doot [1973] AC 807 at 834- 835).

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[446]. 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 [447] :

“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 practice under the income-tax law is to tax real income of a real owner. It is quite legitimate for the Assessing Officers to examine a case to find out the beneficial owner of Capital Gains. By making the certificate of residence conclusive on the two points mentioned above the Central Board of Direct Taxes virtually promotes Treaty Shopping by negating an important anti-abuse provision. An interposed person cannot be the real owner. The Authority for Advance Ruling quotes with approval the following from that treatise of Kalaus Vogel on Double Taxation Conventions (1996) 220 ITR 377 at 388 :

“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[448]

“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[449]; 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[450] 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[451] 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”[452]. 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[453]. 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,[454] Keshavji Raiji & Co v. CIT[455], Bengal Iron CTO[456], CST v. Indra Indusries[457], Wilh, Wilhelmsen V CIT[458] Hindustan Aeronautics V. CIT[459]. 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[460]:

“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.[461] 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[462] :

“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.”[463]

( 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[464] 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[465] 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[466] 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[467] 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[468]. A Division Bench of 3 Hon’ble Judges delivered an important decision wherefrom the following propositions can be culled:

(2) ‘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.’

(3) ‘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’

(4) ‘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.’

(5) ‘The instructions issued by the Board have to be within the four corners of the Act.’

(6) ‘The Circulars relied upon are, therefore, nothing more than administrative directions allocating various types of works to various classes of Officers.’

(7) ‘These administrative directions cannot take away. jurisdiction vested in a Central Excise Officer under the Act.’

(8) ‘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. )[469],decided on February 2004, noticed this impugned Judgment (referred as UOI v Azadi Bachao Andolan[470]). 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,[471] Keshavji Raiji & Co v. CIT[472], Bengal Iron CTO[473], CST v. Indra Indusries[474], Wilh, Wilhelmsen V CIT[475] Hindustan Aeronautics V. CIT[476]. 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[477] in their judgment dated February 23, 2005 in Commissioner of Central Excise, Bolpur Vs M/s Ratan Melting & Wire Iindustries, Calcutta[478] 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[479] 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[480] of the Central Excise Act read with Rule 233[481] 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.

(vi) 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[482], But the ‘B’ Bench decides an identical issue as Z[483], 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 JuEdgment 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[484] 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[485] 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.”[486]

“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.”[487]

( 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[488] 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.[489] 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[490] 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[491] 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[492], Milton Friedman[493]. The idea of a planned economy under the conditions of freedom, which Karl Mannheim[494] 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[495] found that Adam Smith’s ‘Invisible Man’ was conspicuous only by his absence. The Indian socio-philosophical traditions, and the theories advanced Ronal Dworkin[496] and John Rawls[497] 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.[498] 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.”[499]

282. The House of Lords in National Federation of Self-Employed and Small Businesses Ltd[500] 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’.[501]

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.”[502]

This situation was stated through a diagram vide para 45 at p.. 181 of the Review Petition.

Oval:       B      C“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.

Oval:             CC             A


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[503][14] Lord Atkin made the following observation which our Supreme Court has quoted with approval[504][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[505] 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.[506] and Furniss v. Dawson[507]

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.

[ F ]

ART 14 NEW DOCTRINE CONTINUED

TREATY-MAKING POWER STATED PER INCURIAM

285. That as this Hon’ble Court’s view of Treaty-making power is evidently the most important determining factor in the judicial reasoning throughout in the impugned Judgment , and as this Petitioner submits that the judicial exposition is seriously flawed causing distortions in law and producing serious miscarriage of justice, he deems it appropriate to quote these two paragraphs from the Judgment as the strand of legal reasoning which is at work in the first paragraph is extended in the second paragraph to cover tax-Agreement situations.

“The power of entering into a treaty is an inherent part of the sovereign power of the State. By Art. 73, subject to the provisions of the Constitution of India, the executive power of the Union extends to the matters with respect to which Parliament has power to make laws. Our Constitution makes no provision making legislation a condition for entry into an international treaty in time either of war or peace. The executive power of the Union is vested in the President and is

exercisable in accordance with the Constitution. The Executive is qua

the State competent to represent the State in all matters international

and may by agreement, convention, or treaty incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under entries 10 and 14 of List I of the Seventh Schedule . But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected., no legislative measure is needed to give effect to the agreement or treaty.[508]” [(2003) 263 I T R 706, 721]

“When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United States such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council. Since in India, such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act.” [(2003) 263 I T R 706, 721]

286. The perusal of this Judgment would that show this Hon’ble Court has not been consistent in its expressions. The aforementioned first paragraph suggests that even a treaty relating to the avoidance of double taxation is done in exercise of power under Art. 73 of the Constitution. But in the said the Judgment the Hon’ble Court observes:

“In our view, the contention is wholly misconceived. Section 90, as we have already noticed (including its precursor under the 1922 Act), was brought on the statute book precisely to enable the executive to negotiate a DTAC and quickly implement it.”

[(2003) 263 I T R 706, 726]

Again in the said Judgment this Hon’ble Court states:

“……… we are of the view that section 90 enables the Central Government to enter into a DTAC with the foreign Government.” [(2003) 263 I T R 706, 726]

“Negotiation” in the matter of treaty-making is done at diplomatic level. If section 90 gives this power to negotiate then this Hon’ble Court should have accepted the plea of this Petitioner that a tax-treaty is done, so far India is concerned, in exercise of power under Section 90 of the Act, not under Art 73 of the Constitution. In the second extract there is a reference to the creative and constitutive power under Section 90 of the Act. But despite contradictions in the judicial view of the exercise of Treaty-making power, it is clear:

(a) that this Hon’ble Court considers that the entire Treaty-making power is in the executive domain under Art 73 of the Constitution; and

(b) that the effect of Section 90 of the Income-tax is nothing more than implementation of the tax-treaty existing ab extra in the domestic jurisdiction.

This line of reasoning was further stretched by this Hon’ble Court when it held that a tax treaty can override the statute. As from this judicial error serious consequences have followed, and as this position is both per incuriam and per ignorantiam, this Petitioner intends to draw up a detailed submissions.

287. That this Hon’ble Court went wrong for the reasons thus stated:

( 1 ) This Hon’ble Court relied on the ideas pertaining to Treaty-making power as set forth in Maganbhai’s Case without considering that in that case the observations were casual obiter as the issue to be decided did not require exposition of law on the point. The Petitioners did not dispute that the Union Government could enter into a covenant to be bound by the decision of an International Tribunal, and that its award would be binding on India; they merely contended that a constitutional amendment was necessary , since the award affected the territorial limits of India.” In this PIL this issue came to acquire a central position so this Court should have considered the law taking into account all the factors and variables.

( 2 ) In Maganbhai’s Case Hidayatullah, C.J. observed that “Lord McNair gives the settled law of modern times.” In his concurring judgment Shah, J also states the view as stated by McNair super-adding references to certain entries in the 7th Schedule to the Constitution of India. In Maganbhai’s Case neither the majority nor the concurring judgment considered the aspects of constitutional limitations affecting the very capacity of the organ ( here the Executive) to represent the State at the international level in the matter of incurring obligations on behalf of the State[509]. This Hon’ble Court should have taken into account in determining modern law on treaties the exposition in Oppenheim who describes “Constitutional restrictions”[510] under a Written Constitution providing Judicial Review. Even Lord McNair in later edition of his Treatise deals with the constitutional limitations on the Treaty-making power.

(3 ) Oppenheim states: “ For the United Kingdom, constitutional restrictions do not play a prominent part in the conclusion of treaties” Treaties are concluded in exercise of royal prerogative in matters of foreign affairs. The exercise of this prerogative power cannot be challenged in the English court.[511]

( 4 ) In the U.K. all powers concerning taxation went out of the executive domain under the Bill of Rights[512]: hence it went out of the province of the prerogative power of the Crown. What went out of the province of the Crown could not be the subject of the exercise power even at international plane. The principle of ex nihilo applies. Under the Constitution of India analogous situation emerges in view of Articles 265, 109, 110 of the Constitution. But what was excluded by the constitutional statutes in the U.K. and under the Constitution in India went ipso jure out of the province of the Executive power. Hence it affected the capacity of the representing State organ at the international plane.

( 5 ) In India power pertaining to the executive domain entrusted to the Executive under Art. 73 of the Constitution, and in exercising such powers the zone of the executive operation is co-terminus with the expanse of legislative power in view of the entries 10 and 14 of List I of the Seventh Schedule of the Constitution of India. In India the Constitution excludes power over taxation from the executive domain. It is not an instance of the eclipse of power, but of the non-existence power.

( 6 ) Both in India and the U.K only that much power the Executive can exercise in the matter of taxation as is specifically granted it, and on the terms of the grant strictly construed. It follows by way of inevitable corollary that if there is no legislative grant of power the Executive, neither in India nor in the U.K. , can enter into tax agreements even at the international plane as the Executive can not represent the State at international forum to incur international obligations sans the power pertaining to taxation.

( 7 ) In deference to this constitutional position both in India and the U.K. the Parliament has granted specific power to enter into tax-agreements

vide Section 90 of the Income-tax Act, 1961 and Section 788 of the United Kingdom’s Income and Corporation Taxes Act, 1988. In India Section 90 authorizes the Central Government to enter into an agreement on the prescribed conditions. In the U.K. the House of Commons, having exclusive control over taxation in view of Parliament Act 1911, maintains full legislative control in view of sub-Section (10)[513] of Section 788.

( 8. ) If the Central Government exceeds the power granted under the terms of the statute the violation of constitutional restrictions is manifest, and it must be taken to be case where “the state’s organs and representatives must have exceeded their powers in concluding such a treaty.”[514] Invalidity, and inability to perform are juridically two different things.

( 9 ) This Hon’ble High Court was moved through a PIL to declare the legality of the Indo-Mauritius DTAC, the ambit of the CBDT’s power to issue circulars, and to quash the Circular No. 789. Our Superior Courts in exercise of powers of Judicial Review are competent to declare the legality of a treaty in the municipal jurisdiction. If the Hon’ble Court finds that the Indo-Mauritius DTAC, in whole or in part, conflicts with the law of the land[515] then the Hon’ble Court may hold it domestically non-operative even if the treaty is duly concluded and is internationally binding. ( Lord McNair, The Law of Treaties, Chapter IV, p. 82.)[516] The binding force of the treaty under International law is to be distinguished from its internal applicability (Klaus Vogel on Double Taxation Conventions, p. 24 ).

( 10 ) This Hon’ble Court has manifestly overlooked both:

(a) the constitutional provisions of our Republic, and

(b) the statutory provisions under the Income-tax Act;

and the effect of the Judgment is:

( i ) to promote purpose extraneous to the object for which the power is granted to the Executive, and

( ii ) to make this Hon’ble Court appear a sounding-board and reflecting mirror of the incongruous ideas emanating from the OECD and its experts , and from such jurisdictions which have materially different constitutional and statutory parameters and jural variables.

( b) Patent mistakes of law in stating Treaty-making power

288.. That the ideas of this Hon’ble Court stated in the paragraph, already quoted from the Judgment, are seminal in the judicial exposition of the Treaty-making power. This Petitioner believes, in good faith, and states, with respect, that this Hon’ble Court misdirected itself in stating the law for reasons being set forth in the following paragraphs in this Section .

INHERENT SOVEREIGN POWER

289.That the Hon’ble Court erred in stating that:

“The power of entering into a treaty is an inherent part of the sovereign power of the State.”

The Executive under the Constitution of India is a creature of the Constitution, and, by way of constitutional logic, possesses no “inherent” sovereign power. This view is based on a mandatory norm recognized by international law as would be evident from what Oppenheim’s states in his International Law:

“Constitutional restrictions: It is well established as a rule of customary international law that the validity of a treaty may be open to question if it has been concluded in violation of the constitutional laws of one of the states party to it, since the state’s organs and representatives must have exceeded their powers in concluding such a treaty.. Such constitutional restrictions take various forms. Thus, under Article 2(2) of the Constitution of the United States the President can only ratify treaties – as distinguished form so-called executive agreements – with the advice and consent of the Senate, given by two-thirds of the senators present. Again, although by Article 52 of the French Constitution of 1958 the President exercises the treaty –making power. Article 53 requires that certain treaties, such as commercial treaties and treaties concerning international organizations or involving the state in financial obligations or which

modify a law, require ratification or approval by means of a legislative

act of the French Parliament. For the United Kingdom, constitutional restrictions do not play a prominent part in the conclusion of treaties.

While the general rule clearly suggests that invalidity is the consequence of concluding a treaty in violation of constitutional restrictions, there has been much discussion of the extent to which such a rule is to be applied. While the principle of the invalidity of acts done in excess of authority must be given due-and probably decisive –weight, there are clearly difficulties in requiring a state to go behind the ostensible authority of another state’s representative to conclude a treaty, or form an opinion as to a possibly controversial question of another state’s constitutional law; and to allow any violation of any constitutional restriction to invalidate a treaty could jeopardise the security of international transactions. Article 45 of the Vienna Convention – probably reflecting rules of customary international law – allows a state (by way of exception) to invoke non-observance of its internal law as a basis for invalidating its consent to be bound by the treaty only if the rule of internal law relates to competence to conclude treaties, if it is a rule of fundamental importance, and if the violation is manifest, i.e objectively evident to any state conducting itself in the matter in accordance with normal practice and in good faith.”[517]

Lord McNair states legal position in the same way. But the first point in his “Conclusion” deserves a specific notice because of its contextual relevance: to quote—

“A treaty which is made on behalf of a State by an organ not competent to conclude treaties or that kind of treaty, or which fails to comply with any relevant constitutional requirements, such a consequent of a legislative organ, is, subject to what follows, not binding upon that State….”[518]

“In International Law, nations are assumed to know where the treaty-making power resides, as well as the internal limitations on that power.[519] J. Mervyn Jones in his article on “Constitutional Limitatations on Treaty-making Power” examines the effect of constitutional limitations.[520] Two important English writers support the view that constitutional limitations are completely effective under international law[521]. It is time to give democratic orientation to international law.[522] The New Encyclopedia Britannica[523] aptly observes: :

“ The limits to the right of the public authority to impose taxes are set by the power that is qualified to do so under constitutional law. ….. The historical origins of this principle are identical with those of political liberty and representative government – the right of the citizens.”[524]

290. That it would be contrary to our Constitution to grant the Executive “extra-constitutional powers”. David M. Levitan has put it felicitously when he observed: “Government just was not thought to have any “hip-pocket” unaccountable powers”.[525] The theory of inherent sovereign power is anachronistic, hence erroneous in the context of our type of polity we have set up under the Constitution of India. Examining the concept of Sovereignty Oppenheim observes:

“The problem of sovereignty in the 20th Century. The concept of sovereignty was introduced and developed in political theory in the context of the power of the ruler of the state over everything within the state. Sovereignty was, in other words, primarily a matter of internal constitutional power and authority, conceived as the highest, underived power within the state with exclusive competence therein”

Under our constitutional frame-work the question of inherent power does not arise. The right question is: whether the government possessed the legal power to do what it has done. Ours is a government under the constitutional limitations, and hence, by inevitable logic of law, under the legal discipline imposed by parliament and the courts of law. Prof. Laski observed :

“ We have to make a functional theory of society in which power is organized for ends which are clearly implied in the materials we are compelled to use. The notion that this power can be left to the unfettered discretion of any section of society has been reveled as incompatible with the good life. The sovereignty of the state in the world to which we belong is as obsolete as the sovereignty of the Roman Church three hundred years ago”. [526]

291. Modern International Law and International Institutions have made great strides towards making the countries of the world good neighbours[527]. Human rights have received such wide expansion and reorganizations that even the levy of income tax has acquired a human right dimension. Our world has shrunk to become a global village. We are through a process of globalization. In this sort of the world invocation to sovereignty is meaningless. Any action and every action of a public authority is to be weighed on the calculus of rights and duties recognized under municipal law, and also under international law.

292.. It is respectfully submitted that the Hon’ble Court should have considered the different legal parameters of treaties cast in different protocols. Treaties like the Treaty of Vienna, or the Treaty of Versailles are made after trampling down the Constitutions of the vanquished. Such treaties are instances of the exercise of Sovereign power. The Court was not concerned with an international treaty like the Convention on Diplomatic Immunities. It was concerned with a tax treaty. It is most respectfully submitted that by overlooking juristic and pragmatic differentia inter se the different types of treaties the Hon’ble Court committed both mistakes of law and fact. There are several types of treaties. The New Encyclopedia Britannica classifies them in six categories in a more practical way in according to their object : (1) political treaties; (2) commercial treaties; (3) constitutional and administrative treaties; (4) treaties relating to criminal justice; (5) treaties relating to civil justice; and (6) treaties codifying international law. They have different protocols and different legal effects and incidents..

INDIA’S TREATY-MAKING POWER IS ON THE BRITISH MODEL

293.That in Gujarat v. Vora Fiddali[528] this Hon’ble Court held that in India treaties occupy the same status, and adopt the same treaty practice as in the United Kingdom. The British Parliament which enacted G.I. Act, 1935 did not embody the American view of treaties in it. The existing law was continued by the G.I. Act,1935 by the Indian Independence Act 1947, and by our Constitution.[529] This Hon’ble Court observed:

“…the British practice that has prevailed in this country has not proved in actual practice to lead to injustice, but has proceeded on a just balance between the acquired rights of the private individual and the economic interests of the community, and therefore, there is nothing in it so out of tune with notions of propriety or justice to call for its rejection”[530]

THE BRITISH PRACTICE

294. That the British practice is called a dualist approach under which “the constitution of the state accords no special status to treaties; the rights and obligations created by them have no effect in domestic law unless legislation is in force to give effect to them.”[531] The rational of this approach which is relevant under our constitutional system has been thus explained by an eminent modern authority :

“This approach reflects, on the one hand, the constitutional power of the executive generally to bind itself to treaty without the prior consent of the legislature and, on the other hand, the supreme power of the legislature under the constitution to make laws. In the United Kingdom, this division of powers was a product of the seventeenth-century constitutional struggle between the King of England and Parliament. This resulted in the power to legislate being almost completely vested in Parliament, yet with the Crown retaining in common law certain ‘royal prerogatives’ (the right to act without the consent of Parliament), which included the conduct of foreign relations and the making of treaties.[532] This division of powers was inherited by most former colonies of the United Kingdom, the United States being the principal exception.”[533]

In Maganbhai Ishwarbhai Patel v. Union of India[534] this Hon’ble Court stated the settled law of modern times thus:

“Lord McNair gives the settled law of modern times. According to him in the United Kingdom the concurrence of Parliament must always be obtained except in a very small number of cases. He opines that if the Courts are required to assist in the implementation, a law must obviously be found for Courts to act only in accordance with law. If a law is obligatory obviously Parliament must have a say because no law can be passed except by Parliament. However, even if a law be required, and yet the Crown enters into a treaty, the Courts take the act as final unless a law stands in the way. In other words unless there be a law conflicting with the treaty, the treaty must stand.”

Most accurate and comprehensive account of the British practice is given by Starke who points out that under the British practice a distinction is maintain between (i) customary rules of international law, and (ii) rules laid down by treaties. He states law with remarkable brevity and accurateness thus :

“(i) The rule as to customary international law according to the current of modern judicial authority is that customary rules of international law are deemed to be part of the law of the land, and will be applied as such by British municipal courts, subject to two important qualifications:

a. That such rules are not inconsistent with British statutes,[535] whether the statute be earlier or later in date than the particular customary rule concerned.

b. That once the scope of such customary rules has been

determined by British courts of final authority, all British courts are thereafter bound by that determination, even though a divergent customary rule of international law later develops.[536]

These qualification must be respected by British municipal courts, notwithstanding that the result may be to override a rule of international law; the breach of such a rule is not a matter for the courts, but concerns the executive in the domain of its relations with foreign powers.[537]……..

(ii) The British practice as to treaties, as distinct from customary international law, is conditioned primarily by the constitutional principles governing the relations between the executive (that is to say, the Crown) and Parliament. The negotiation, signature, and ratification of treaties are matters belonging to the prerogative powers of the Crown. If, however, the provisions of a treaty made by the Crown were to become operative within Great Britain automatically and without any specific act of incorporation, this might lead to the result that the Crown could alter the British municipal law or otherwise take some important step without consulting Parliament or obtaining Parliament’s approval.” [538]

That the Prerogatives of the Crown are under limitations. Despite the specifics of the unwritten and evolutionary constitution of the U.K. the treaty-making power of the Crown is not without limits. The Crown’s power of treaty making and limitations thereon has been thus stated in Keir & Lawson’s Cases in Constitutional Law: [ In order to make quotation from the book short only propositions directly relevant to the points under consideration have been culled out and pieced together.]

“There is no doubt that the Crown has full power to negotiate and conclude treaties with foreign states, and that, the making of a treaty being an act of State, treaty obligations cannot be enforced in a municipal court… Can the Crown bind the nation to perform any and every treaty which it makes? In general it seems that the Crown makes treaties as the authorized representative of the nation. There are, however, two limits to its capacity: it cannot legislate and it cannot tax without the concurrence of parliament”

In the U.K., seen in the historical perspective, the Crown had, once upon a time, all the powers conceivable. It lost many of such powers, in course of a grand constitutional history, to Parliament and the Courts so that people could enjoy the fruits of democracy under the Rule of Law. But it still retains powers which Parliament or the Courts have not chosen to deprive it of. We call this prerogative power. Under our Constitution no such cobwebs of the past survive. In the U.K the Crown is still the inheritor of inherent powers not yet deprived of; in India the Executive would sink or swim in terms of the Constitution. Limitations on the Prerogative of the Crown are now well recognized. Lord Denning observed in Laker Airways Ltd v. Department of Trade[539]:

“Much of modern thinking on the prerogative power of the executive stems from John Locke’s treatise, True End of Civil Government, which

I have read again with much profit, especially chapter 14 ‘Of

Prerogative[540]’ It was the source from which Sir William Blackstone drew in his Commentaries[541], and on which Lord Radcliffe based his opinion in Burmah Oil Co (Burma Trading ) Ltd v. Lord Advocate[542]. The prerogative is a discretionary power exercisable by the executive government for the public good, in certain spheres of governmental activity for which the law has made no provision, such as the war prerogative (of requisitioning property for the defence of the realm), or the treaty prerogative ( of making treaties with foreign powers). The law does not interfere with the proper exercise of the discretion by the executive in those situations; but it can set limits by defining the bounds of the activity; and it can intervene if the discretion is exercised improperly or mistakenly. That is a fundamental principle of our constitution. It derives from two of the most respected of our authorities. In 1611 when the King, as the executive government, sought to govern by making proclamations, Sir Edward Coke declared: ‘The King hath no prerogative but that which the law of the land allows him’: see the Proclamations Case[543]. In 1765 Sir William Blackstone added his authority[544]:

‘For prerogative consisting (as Mr. Locke has well defined it) in the discretionary power of acting for the public good, where the positive laws are silent; if that discretionary power be abused to the public detriment, such prerogative is exerted in an unconstitutional manner.’

Quite recently the House of Lords set a limit to the war prerogative when it declared that, even in time of war, the property of the British subject cannot be requisitioned or demolished without making compensation to the owner of it: see Burmah Oil Co(Burma Trading ) Ltd v. Lord Advocate[545]. It has also circumscribed the treaty prerogative by holding that it cannot be used to violate the legal rights of a British subject, except on being liable for any damage he suffered: see Attorney-General v. Nissan[546] .

“Seeing that the prerogative is a discretionary power to be exercised for the public good, it follows that its exercise can be examined by the courts just as any other discretionary power which is vested in the executive. At several times in our history, the executive have claimed that a discretion given by the prerogative is unfettered: just as they have claimed that a discretion given by a statute or by regulation is unfettered. On some occasions the judges have upheld these claims of the executive, notably in R. v. Hapden, Ship Money Case[547], and in one or two cases during the Second World War, and soon after it, but the judges have not done so of late. The two outstanding case are Padfield v. Minister of Agriculture, Fisheries and Food[548], and Secretary of State for Education and Science v. Metropolitan Borough of Tameside[549], where the House of Lords have shown that when discretionary powers are entrusted to the executive by statute, the courts can examine the exercise of those powers, so as to see that they are used properly, and not improperly or mistakenly. By mistakenly, I mean under the influence of a misdirection in fact or in law. Likewise, it seems to me that, when discretionary powers are entrusted to the executive by the prerogative—in pursuance of the treaty-making power—the courts can examine the exercise of them so as to see that they are not improperly or mistakenly."

DEDUCTIONS FROM THE BRITISH PRACTICE

294. That from the British practice the following two express limitations on the Executive’s Treaty-making power clearly emerge:

(a) The Executive in the U.K, over the course of its constitutional history, lost all powers over taxation except what is granted specifically within the frontiers prescribed in the statute. So a tax treaty is in the U.K under specific statutory power granted under Section 788 of the United Kingdom’s Income and Corporation Taxes Act 1988. The sub-Section (3) of this Section gives a tax treaty a specific override on the statute

(b) The ambit of the executive power pertaining to a subject of legislation gets eclipsed if the subject matter is already occupied by a Parliamentary enactment (as ruled in Laker Airways Case [1977] 2 All ER 182 CA)]. Taxation is a legislatively occupied field.

TREATY-MAKING POWER UNDER OUR CONSTITUTIONAL POLITY

295. That ours is a written constitution under which all the organs of the polity are the creatures of a written constitutions: hence bound by its limitations, both express and implied. This point has been made out by Oppenheim’s which has already been mentioned. In the United States if a treaty, despite the fact that it is a supreme law under Art Article VI, cl. 2 of the Constitution[550], can be hit by the entrenched provisions of the Constitution, India, like the United States,

is under Constitutional limitations, as under Article 73 of the Constitution the executive power of the Union is to be exercised “subject to the provisions of this Constitution”. In the context of the US Constitution Justice Homes in Missouri v. Holland[551] considered various aspects of Constitutional limitations including whether the impugned treaty was forbidden by “some invisible radiation from the general terms of the Tenth Amendment.” From the terms of the Article 73 of the Constitution of India it expressly follows that the power of framing Double Taxation Avoidance Agreements is subject to the limitations ensuing from Article 265 of the Constitution of India. As the Income tax can be levied only by law, exemption from its incidence can be granted only through some legislative provisions, and not through executive power delegated to the Central Government under section 90 of the Income tax Act. Describing these limitations H. M. . Seervai states:

“ The power to make treaties or enter into binding agreements with other nations, has an international as well as an internal aspect. In International Law, nations are assumed to know where the treaty making power resides, as well as the internal limitations on that power. As regards the internal aspect of a treaty or agreement, the Constitutional limitations, if any, on the treaty making power would come into play. For example, in the United States although it is for the President to negotiate a treaty, his power is to be exercised on the advice and with the consent of the Senate. If the Senate refuses its consent, or gives it subject to conditions, then the treaty does not become a law of the United States as provided by Art.6, cl.2, and would have no operation in the United States, although it may involve a breach of the treaty with foreign nation. Again, where a treaty imposes an obligation which affects the rights of the inhabitants of a Sovereign State, say, India, the treaty would have to be implemented by a law, and the same would be the position if the treaty involved expenditure of public funds because these can only be appropriated in the manner provided for in the Constitution. Although the power to enter into treaties and implement them is in terms absolute, having regard to the fact that we have a written federal Constitution, a Court would imply limitations on that power as they have been implied in the United States although no treaty entered into by the United States has been held constitutionally void. A treaty, for instance, cannot make provisions which would, in effect, amend the Constitution, or give up the form of Govt. set up by the Constitution, for it could not have been intended that a power conferred by the Constitution should, without an amendment of the Constitution, alter the Constitution”.

The Hon’ble Court held: “The power of entering into a treaty is an inherent part of the sovereign power of the State.” The Hon’ble Court has yoked together two heterogeneous constitutional principles an analogue of which can be found only in Hobbes’ Leviathan: “The Leviathan or commonwealth is ‘an artificial man’, sovereignty is its soul, the magistrates are its joints, ‘reward and punishment, by which fastened to the seat of the sovereignty every joint and member is moved to perform his duty, are the nerves that do the same in the body natural’ “[552] But this doctrine of inherent sovereign power of the Executive was tamed finally by the Bill of Rights whereunder it lost all power over taxation , either to levy or exempt, inaugurating an effective control of the Executive by Parliament. Any power having effect on taxation went out of the executive domain with the end of the Stuarts in England whose system, in this segment of constitutional law, we share without even slightest deviation. The Executive Power under Article 73 of the Constitution of India cannot be exercised for framing tax treaties. The conjoint effect of Articles 109, 110 and 265 of the Constitution of India is that the Executive can do only what it is permitted to do (and in the manner it is permitted to do) by Parliament through an enactment. It cannot grant any exemption from tax as even exemption is integral to the concept of the levy of tax. These Articles of our Constitution draw on the provisions of the United Kingdom’s Parliament Act 1911, and the Bill of Rights. In the Indian context this power is granted under section 90 of the Income-tax Act, 1961 which authorizes the Central Government to enter into double taxation agreements with other countries. Treaty making power affecting the levy or exemption of income- tax is wholly a statutory matter: hence can be exercised only within the frontiers of the statute by closely conforming to the terms of the law. Invocation of Art 73 is a patent breach of our Constitution because taxation is not under the executive domain..

296. That this Hon’ble Court has stated the following which is not in conformity with our Constitution:

“ Our Constitution makes no provision making legislation a condition for entry into an international treaty in time either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution.”

This Hon’ble Court’s view is founded on the British view which is no longer accepted even in the U.K. in this rigid classical form. This view is founded on the following two ideas:

(a) the Executive in our Constitution can exercise plenary power, untrammeled by the law or the Constitution of India, in matters of treaty-making at the international plane; and

(b) the Executive operates under the limitations under the municipal law alone as without legal or constitutional authorization the terms of the treaty cannot operate domestically to the prejudice of the rights and interests of the citizens, and cannot have effect de hors the law of the land.

This typical British view was stated by Lord Atkin in A.G. for Canada v. A.G. of Ontario[553] in the context of a rule applicable within the British Empire, which is relevant:

"It will be essential to keep in mind the distinction between (1) the formation, and (2) the performance, of the obligations constituted by a treaty, using that word as comprising any agreement between two or more sovereign States. Within the British Empire there is a well-established rule that the making of a treaty is an executive act, while the performance of its obligations, if they entail alteration of the existing domestic law, requires legislative action. Unlike some other countries, the stipulations of a treaty duly ratified do not within the Empire, by virtue of the treaty alone, have the force of law. If the national executive, the Government of the day, decide to incur the obligations of a treaty which involve alteration of law they have to run the risk of obtaining the assent of Parliament to the necessary statute or statutes. * * * * Parliament, no doubt, * * * * * * * has a constitutional control over the executive: but it cannot be disputed that the creation of the obligations undertaken in treaties and the assent to their form and quality are the function of the executive alone. Once they are created, while they bind the State as against the other contracting parties, Parliament may refuse to perform them and so leave the State in default."

Justice Shah quoted this view of Lord Atkin in Maganbhai v. Union[554] and observed:

“These observations are valid in the context of our constitutional set up. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition of the entry into an international treaty in times either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The executive is qua the State competent to represent the State in all matters international and may by agreement, convention or treaties incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under

Entries 10 and 14 of List I of the Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or other or modifies the laws of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty.”

That this Hon’ble Court misdirected itself in adopting the views expressed by Lord Atkin as these do not accord with our constitutional provisions.

297. That observations of Lord Atkin in Attorney General for Canada v. Attorney General for Onterio[555], which emanated from Canada, were quoted with approval both in the majority judgment delivered by Chief Justice Hidayatullah and in his concurring judgment by Justice Shah in Maganbhai v. Union of India[556] should be read in the context of the facts of that case. The Privy Council, per Lord Atkin, observed:

“Parliament, no doubt, as the Chief Justice points out, has a constitutional control over the executive: but it cannot be disputed that the creation of the obligations undertaken in treaties and the assent to their form and quality are the functions of the executive alone. Once they are created, while they bind the State as against the other contracting parties, Parliament may refuse to perform them and so leave the State in default. In a unitary State whose legislature possesses unlimited powers the problem is simple. Parliament will either fulfil or not treaty obligations imposed upon the State by its executive. The nature of the obligations does not affect the complete authority of the Legislature to make them law if it so chooses. But in a State where the Legislature does not possess absolute authority: in a federal State where legislative authority is limited by a constitutional document, or is divided up between different legislatures in accordance with the classes of subject matter submitted for legislation, the problem is complex. The obligations imposed by treaty may have to be performed, if at all, by several legislatures: and the executive have the task of obtaining the legislative assent not of the one Parliament to whom they may be responsible: but possibly of several Parliaments to whom they stand in no direct relation. The question is not how is the obligation formed, that is the function of the executive: but how is the obligation to be performed and that depends upon the authority of the competent legislature or legislatures.”

The Privy Council in this case stated two things:

(a) The Privy Council stated the typical British approach in this case emanating from the Canadian jurisdiction as the Preamble to the British North America Act, 1867 stated that :

“Whereas the Provinces of Canada, Nova Scotia, and New Brunswick have expressed their Desire to be federally united into One Dominion under the Crown of the Crown of the United Kingdom of Great Britain and Ireland, with a Constitution similar in Principle to that of the United Kingdom;”

Art. 9 stated states:

‘The Executive Government and Authority of and over Canada is hereby declared to continue and be vested in the Queen.”

(b) The Privy Council held that legislation implementing an international convention was void as it contravened Sections 91 and 92 of the British North America Act, 1867.

298.That Lord Atkin states a classical view when he drew a distinction between (1) the formation, and (2) the performance of the obligations constituted by a treaty is correct and well understandable. Under the British Constitution the Crown is not a creature of the British Constitution. The British constitutional history is an expanded metaphor of the struggle conducted over centuries in the name of people against the absolute power of the Crown. Even this day there is nothing wrong in saying that the Crown has all the powers conceivable except which it lost to Parliament and the Courts in course of the country’s grand and majestic constitutional history. It is, hence, understandable to think of inherited and inherent power. Treaty is done in exercise of prerogative power by the Crown as it concerned the Crown’s foreign affairs not of much consequence till the beginning of the 20th century. The Crown had all the conceivable power at the international plane as it had not been tamed by any constitutional mandate. Hence the formation of a treaty at international plane was wholly in the Executive’s province. In India the Executive possesses no extra-constitutional power. As a creature of the Constitution it is subject both in the matter of the formation of a treaty or performamce of obligation to the limitations placed by the Constitution and the law. Whether a member functions in Delhi, or Detroit it must conform to the Rule of Law.

.

299.That the Executive under our Constitution would be free from such obligations only when it is faced with the brute facts of realpolitik, in war or peace, where Constitution itself would cease to be of any relevance. In the Peace Treaty of Versailles Germany found herself in this sort of predicament. Short of this situation, in no other situation the Executive can go counter to the law and Constitution of the country.

300.That this Hon’ble Court’s following statement is ambiguous:

“ The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution”

If it means that the Executive power in full plenitude is vested in the President, then it is not the correct constitutional principle. The correct statement is this: the executive power as it stands after extractions and limitations under the constitutional and statutory provisions is vested in the President. To use a different metaphor , by the act of constitution and law certain powers have been deflected from the realm of the Executive: so what is vested in the President is what is still in the legitimate province of executive function. Power over taxation, whether of levy or granting of exemption vanished from the domain of the Executive both in England and India.

301.That, it is to be noted that neither the decision of the Privy Council in Attorney General for Canada v. Attorney General for Ontario[557],nor of this Hon’ble Court in Maganbhai v. Union of India[558] considered the great constitutional issues in the context of taxation. In Maganbhai this Hon’ble Court refers to the Treatise by Lord McNair as stating the law of treaties operative in modern times. Nowhere in this book the Executive’s power pertaining to tax treaties has anywhere been even referred.

302.That this Hon’ble Court misdirected itself by relying on certain observations on the Executive’s treaty-making power given in Maganbhai v. Union of India[559] . What was central to this PIL was not even peripheral in Maganbhai. The observations on the Treaty-making power in the majority judgment delivered by Chief Justice Hidayatullah and in his concurring judgment by Justice Shah in Maganbhai v. Union of India[560] are mere casual obiter. The issue to be decided in this case has been thus crisply and briefly stated by H. M. Seervai:

“ ….. Maganbhai v. Union. …There, the dispute about the boundary between India and Pakistan in the Rann of Kutch, which had led to an armed conflict, was brought to an end by referring the dispute to an International Tribunal, by whose award both countries agreed to be bound. The complicated facts of the case are set out in the judgment. The Tribunal’s award, by a majority, upheld, inter alia, the claim of Pakistan to three sectors of the Runn. The Petitioners did not dispute that the Union Government could enter into a covenant to be bound by the decision of an International Tribunal, and that its award would be binding on India; they merely contended that a constitutional amendment was necessary , since the award affected the territorial limits of India.”[561]

No constitutional issues relating the incidents of the Treaty-making power were raised, argued or was required to be decided . The observations were not even considered obiter as there is nothing in the majority or concurring judgment to suggest that this constitutional issue was a subject-matter under the white-heat of forensic arguments. On the other hand, in this PIL for the first time this issue was under the central focus. All the dimensions of this issue had been argued backed by massive documentations and long citations both in course of the proceedings before the Hon’ble High Court and this Hon’ble Court. It is respectfully submitted that this Hon’ble Court completely misdirected itself by giving a ‘short shrift’ to the matter which has caused distortions in law and miscarriage of justice at the same time.

303.That, in short, the Hon’ble Court was considering two distinct jural situations; but missed in observing the fundamental differences inter se these two:

(a) Treaties in generic sense but other than tax treaties which are sui generis; and

(b) Treaties affecting taxation, directly or indirectly.

Art. 73 of the Constitution of India contemplates treaties of the category ( a ) only. Double Taxation Agreements are agreements done not under Art 73 but exclusively under Section 90 of the Income-tax Act. The great constitutional principle can be thus articulated: the Executive has no power over taxation except what it is granted by Parliament by specific statutory provisions. This grant of power to the Executive is contained in Section 90 of the Income-tax Act. The Executive Government would act ultra vires its powers if it acts in breach of the statutory limitations provided in a closely structured Section 90.

This Hon’ble Court has observed:

“The Executive is qua the State competent to represent the State in all matters international and may by agreement, convention, or treaty incur obligations which in international law are binding upon the State”.

This Hon’ble Court has gone wrong in articulating its view in these terms as these are unsound in many ways. This Petitioner respectfully submits as under:

(1) The rules of international law on international representation regulate the scope of the power of organs of the subjects of international law to conclude treaties with another. It is also recognized that the principal representative of the State is its head. He has plenary powers to commit his State, but this power operates under certain limitations: viz.

(a) Obligations de hors Art. 103 of the Charter of the United States establishing the supremacy of the obligations under the Charter over any other contractual agreement whether past or future, and whether between members inter se or with non-member states.

(b) “Every state possesses treaty-making capacity. However, a state possesses this capacity only so far as it is sovereign.[562] But what can be done in exercising that capacity is governed by constitutional restrictions. The rule of ultra vires is at work in international constitutional and international law. Oppenheim has stated this thus:

“Constitutional restrictions: It is well established as a rule of customary international law that the validity of a treaty may be open to question if it has been concluded in violation of the constitutional laws of one of the states party to it, since the state’s organs and representatives must have exceeded their powers in concluding such a treaty….

Article 45 of the Vienna Convention – probably reflecting rules of customary international law – allows a state (by way of exception) to invoke non-observance of its internal law as a basis for invalidating its consent to be bound by the treaty only if the rule of internal law relates to competence to conclude treaties, if it is a rule of fundamental importance, and if the violation is manifest, i.e objectively evident to any state conducting itself in the matter in accordance with normal practice and in good faith.”[563]

(c) The States have plenary power yet the Court of Justice of the European Communities has held that in certain circumstances the member states have ceased to have any right to conclude treaties with third countries, the European Economic Communities alone having the right to do so in those circumstances.[564]

(d) International law permits no derogation from jus cogens. Art 53 of the Vienna Convention states that if a treaty which at the time of conclusion conflicts with peremptory norm of international law it would be void. The doctrine that unravels fraud is as would be shown, jus cogens as it is a peremptory norm in the civilized jurisprudence.. “Because of the importance of rules of jus cogens in relation to the validity of treaties, Article 66(a) of the Convention provides for the compulsory jurisdiction of the International Court of Justice (unless the parties agree to arbitration) over disputes concerning the interpretation or application of Article 53.”[565]

(3) Willoughby has pointed out that the foreign states are held to have a

knowledge of the location of treaty making powers. [Willoughby’s The Constitutional Law of the United States, p. 528, ] The effect of the elaborate discussion by Willoughby is thus stated by H.M. Seervai : “In International Law, nations are assumed to know where the treaty-making power resides, as well as the internal limitations on that power. [Seervai’s Constitutional Law of India, vol- I, pp. 306-307] This rule puts all the contracting parties under public notice of the manifest constitutional limitations. It is a manifest limitation under our Constitution as much under the British Constitution that a treaty affecting taxation can not be done in exercise of power under the executive domain.

(4) Under a democratic polity structured under constitutional limitations, the Executive would not be competent even at the international plane to incur obligations which can expose the State to the commission of defaults under international law. There is a vast jurisprudence on the Principle of International Responsibility The widely known and practiced rules are: “(1) the breach of any international obligations constitutes an illegal act or international tort, and ( 2 ) the commission of international tort involves the duty to make reparation.”[566] But to-morrow there may emerge or be created international criminal jurisprudence to take punitive actions for breach of obligations. And it may not be mere morbid phantom of surcharged brain to think some day a foreign power to protect the interests of some MNCs may exercise power, overt or covert, to pressurize our country with coercion and sanctions on the ground of the breach of treaty obligations incurred by the Executive. No democratic polity in the present globalized world would consider it proper. This aspect of the matter this Hon’ble Court did not consider. But as the consequence of the view that this Court has taken may even be disastrous for our democratic polity and the Rule of Law, this Petitioner examines in the following paragraphs three situations which may not be discounted as mere reductio ad absurdum.

(5) The Final Act of the Uruguay Round which led to the establishment of the WTO was approved and signed on 15 April, 1994 at the Ministerial level at Marrakesh, Morocco. The Agreement establishing the WTO became effective from Jan. 1, 1995. this was not a conventional consensual engagement: it was a pactum de contrahendo[567], that is, it involved an undertaking to negotiate or conclude another agreement or agreements. The

signing of this Final Act was a most important event of modern times[568] as its impact would be deep and wide on all institutions, even on the Rule of Law and the role of this Hon’ble Court. How the negotiation was conducted and the role of our country in the whole affair puts us to utter shame. Mr Dubey[569]writes;

“ Until the last days of the resumed mid-term review session, India had firmly adhered to the position that GATT was not the forum to discuss norms and standards of IPR protection nor could a higher level of IPR protection be a part of a liberal multilateral trading system. Then came the sudden reversal of India’s position and abject surrender in Geneva. What led to the shift in Government of India’s position has to remain a mystery for sometime to come. The argument given in justification of this turnabout in policy is that India found itself isolated in Geneva. However, the issue is not whether India was isolated, which might as well have been the case, but how this isolation came about. The fact is that we ourselves brought this isolation upon us as a part of a conscious policy.”

One has to go through the newspapers of those days when the Patent Bills were under consideration before Parliament to see with what little wisdom our government worked in the negotiation of the Final Act. Like the pathetic creatures constantly driven on and on by some relentless Furies of the Greek Tragedy we driven to accapt a reaty which turns our nation virtually a Sponsored State wherein even this Hon’ble Court would become a Court of residuary jurisdiction { as disputes in the vital fields of TRIPS, Trade in Services, TRIMS, Agriculture, Investment etc would be settled under the emerging regime by the WTO’s Disputes Settlement Body, and its Appellate Forum, none of them a regular court, not by our constitutional courts.). If someday we reject its determination, sanctions may be invoked, the one end of which may be mere reparation, but the other end may even be the kiss of the Cruise missiles. Those days are over when the breach of obligations at the international plane meant nothing for common populace. Is it proper under the raw realities of the times to free the Executive from the constitutional discipline? In fact there is nothing in international public law to compel us to adopt this sort of solution. 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.’ “[570]

(5) The Hon’ble Delhi High Court held:

“(a) The formation of a tax treaty as a matter of political arrangement could run “counter to the provisions of section 90 of the Income Tax Act.” [571]

(b) “The validity of the impugned circular is to be judged having regard to the limitations contained in section 90 of the income tax Act and not other wise.”

(c ) Section 90 of the Income Tax Act does not confer an unguided or unbridled power. As the purpose of entering into a tax treaty is avoidance of double taxation the power in terms of section 90 is to be considered having regard to that.

(d) “A treaty which is entered into in terms of Article 73 of the Constitution of India the political expediency may have a role to play but not when the same is done under a statutory provisions.”

This Hon’ble Court has reversed the above view. Now a tax treaty is formed under Art 73 of the Constitution but is made operative in Municipal Law by Section 90 of the Income-tax Act, 1961.This view, it is respectfully stated, takes us back to the days of the Stuarts; and makes the importation of the principles of the Bills of Rights in the Constitution of India a futile constitutional adventure. If the High Court’s view would have been sustained, the following would be the inevitable consequence:

(a) A tax treaty to be domestically valid must conform strictly to the terms of Section 90(1) of the I.T. Act, otherwise it is pro tanto invalid;

(b) A tax treaty done in exercise of power under Section 90 could not promote purpose extraneous to the object for which the delegated power is statutorily granted to the Central Government to enter into an Agreement with a foreign

government.

Now the Executive is said to have done a tax treaty under Art. 73 of the Constitution where under it can do anything in matter of levy and exemption of tax in the cases of the foreign tax payers. This Hon’ble Court was not impressed by the wisdom of the profound words of Viscount Simonds in the leading case of Collco Dealings LTD v. IRC[572]

“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.”

Now through tax treaties legal alsatias[573] ( places where law goes by discount)can be created for crooks to have the best of all times; now Art 14 of the Constitution can be breached, the Bihar-type politics can be played at international level with more than 200 players.

304.That this Hon’ble Court’s observation on the Executive’s Treaty-making power is

(a) anachronistic as this view was dear to the Executive and its think-tank in the 19th century and the early 20th century when the Executive’s actions mattered little even within domestic jurisdiction, not to say what the Heads of the States and the

Chancellors did at international plane;[574] [ The First World

War was declared in a manner so autocratic as this: “Formally speaking, the war came as though King Georg V still possessed undiminished the prerogatives of Henry VIII”[575]

(b) is counter to the constitutional fundamentals including those relating to taxation as this Hon’ble Court overlooked these aspects. It adopted ideas from Lord McNair without examining them under such constitutional fundamentals touched nowhere by Lord McNair . Treaty-making power in the field of TAXATION , to the best of the knowledge of this Petitioner, has not been considered by any standard writer in the Common law jurisdictions as never before so strange a plea was ever advanced before the British or the Indian Court.

305.That, apart from the above, this view of the Executive’s Treaty-making power would spawn many problems contrary to public interest in this phase of globalization wherein the following three features are most pronounced of which this Court should take judicial notice:

(a) The operations of the so-called Britton Woods institutions and the WTO are largely shrouded in secrecy. Their lobbyists and persuaders have written a lot suggesting grant of more and more economic power to the Executive without accountability to Parliament. Till this is done through the wreck of the Constitution it can be done through cultivating things under an opaque system. [ The transformation of Mauritius into a tax haven, the issue of the CBDT’s impugned Circular

(b) This Hon’ble Court which thought of taking a judicial notice of the decline in the country’s civic culture in Nilangekar’s Case , should take a judicial notice of the fact that corruptions and scams have been endemic after the opening-up of economy. This position is not peculiar to India. Even a reading of the politico-economic affairs in the Britannica Year Books of the recent years would show that the Slough of Despond is subtly but surely overtaking us.

(c) The Hon’ble High Court was correct in holding: “ No law encourages opaque system to prevail.” The view of this Hon’ble Court may lead to further undermining of our democratic constitution and corruption. This Hon’ble Court’s too much trust in the Executive is misplaced. H.G. Wells mentions[576]:

“Louis XIV was indeed the pattern King of Europe….. He made bribery a state method almost more important than warfare. Charles II of England was in his pay, and so were most of the Polish nobility, presently to be described.”

Pandit Nehru writing about the role of “Big companies” in the noxious era leading towards the First World War says:

“These armament firms were very rich and powerful, and many high officials and ministers in England, France, Germany, and elsewhere held shares in them, and were thus interested in their prosperity. Prosperity to an armament firm comes with war-scares and with wars. So this was the amazing position, that ministers and officials in many governments were financially interested in war! These firms tried other ways also of promoting war expenditure by different countries. They bought up newspapers to influence public

opinion, and often bribed government officials, and spread false reports to excite people.”[577]

Things have not become different. To grant so much power to the Executive at the international plane, exercised in opaque manner, would be bad for our democracy. Let us not forget what Freud said:

“There is something to be said, however, in criticism of this disappointment. Strictly speaking it is not justified, for it consists in the destruction of an illusion. We welcome illusions because they spare us unpleasurable feelings, and enable us to enjoy satisfaction instead. We must not complain, then, if now and again they come into collusion with some portion of reality, and are shattered against it.”[578]

306. That the amendment to Section 90(1) of the Income-tax Act 1961 brought about by the Finance Act 2003 throws up suggestions which contradict the view of this Hon’ble Court. In course of arguments before this Hon’ble Court this Petitioner brought to the notice of this Court that to the extent the Preamble of the Indo-Mauritius DTAC provides that the DTAC can be done for “the encouragement of mutual trade and investment” it goes counter to Section 90: and is to that extent contrary to the law. To counter this plea, Section 49 of the Finance Act 2003 substituted sub-section (1) of section 90 of the I.T.Act with effect from April 1, 2004 for granting relief in respect to “promote mutual economic relations, trade and investment. If the Indo-Mauritius DTAC could override the Statute there was no need to bring about this amendment. As the DTAC could not override the statute it had to be amended.

(c ) Constitutional and statutory provisions pertaining to a “tax treaty” overlooked.

307. In the Judgment the Hon’ble Court observes:

“When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United States such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council. Since in India, such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act.”

[(2003) 263 I T R 706, 721]

“In our view, the contention is wholly misconceived. Section 90, as we have already noticed (including its precursor under the 1922 Act), was brought on the statute book precisely to enable the executive to negotiate a DTAC and quickly implement it. Even accepting the contention of the Petitioners that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we are unable to see as to why a delegatee of legislative

power in all cases has no power to grant exemption. There are

provisions galore in statues made by Parliament and State legislatures wherein the power of conditional or unconditional exemption from the provisions of the statues are expressly delegated to the executive. For example, even in fiscal legislation like the Central Excise Act and Sales Tax Act, there are provisions for exemption from the levy of tax. Therefore we are unable to accept the contention that the delegatee of a legislature power cannot exercise the power of exemption in a fiscal statue.”

[(2003) 263 I T R 706, 725-726]

308.. That this Petitioner had summarized his case in his Concluding Submissions, which he had filed while concluding his arguments before this Hon’ble Court, thus:

“The Counsels of the Petitioners have evaded the constitutional fundamentals without which the proper construction of Sec 90 of the Income-tax Act, and the terms of a tax treaty made thereunder may not be correct. The Executive Power under Article 73 of the Constitution cannot be exercised for framing tax treaties. The conjoint effect of Articles 109, 110 and 265 of the Constitution of India is that the Executive can do only what it is permitted to do (and in the manner it is permitted to do) by Parliament through an enactment. It cannot grant any exemption from tax as even exemption is integral to the concept of the levy of tax. These Articles of our Constitution draw on the provisions of the United Kingdom’s Parliament Act 1911, and the Bill of Rights[579]. In the Indian context this power is granted under section 90 of the Income-tax Act, 1961 which authorizes the Central Government to enter into double taxation agreements with other countries.”[580]

The British Parliament which enacted G.I. Act, 1935 did not embody the American view of treaties in it. The existing law was continued by the G.I. Act,1935 by the Indian Independence Act 1947, and by our Constitution.[581] Anthony Aust discusses practice in different States, and points out why a tax treaty in the U.K. is a “ secondary legislation”[582].

The constitutional position in India and the U.K is precisely the same. Article 265 of the Constitution of India says : “No tax shall be levied or collected except by authority of law.” Law refers to a valid law. In the context of Article 265 of the Constitution it means an Act of the Legislature.[583] In its import it states the British position resting on the Bill of Rights that “TAXATION in England must be authorized by statute.” The impact of the Parliament Act of 1911 enacted in the UK is clear on Articles 109 and 110 of a Constitution of India. Article 110 (1) provides definitions of Money Bills which includes a Bill dealing with the imposition, abolition, remission, alternation, or regulation of any tax. This is what we get in the definition of Money Bill given in section 1 (2) of the Parliament Act 1911 with only one change that for “repeal” used in the UK Act, Article 110 (1) (a) uses the expression “abolition.” On this point our Constitution prefers the comprehensive definition of the terms pertaining to taxation than the Government of India Act, 1935 used in its section 37. Article 109 of the Constitution of India deals with the special procedure in respect of Money Bills. The Parliament Act, 1911 of the UK put an end to the power of the House of Lords to amend or reject a Money Bill. After this act they can cause delay for a period no more than a month. Under our Constitution a Money Bill originates only in the House of the People. The Council of States has no competence to reject or amend a Money Bill : only suggestion can be made which the House of the People may accept or may not accept. But this must be within 14 days of the receipt of Bill otherwise the Bill is deemed to have been passed by both Houses at the expiration of period of fourteen days from the date of the receipt of the Bill. The Government of India Act 1935 did not draw up distinction between Money Bills and other Financial Bills. It is clear that our constitutional provisions are closely affiliated to the provisions of the United Kingdom’s Parliament Act 1911. The Constitutional provisions in our country establish full and exclusive authority of our Parliament in matters of taxation. In effect the full and exclusive authority in matters of taxation is of the House of the People, as it is in the United Kingdom.

309. That this great constitutional issue was given a short shrift as the core issues were overlooked, and the source of the tax-treaty making was declared to be in the executive domain of power. The great principle of constitutional liberty and the Parliamentary control of the executive were overlooked. It deserves a mention: “Never after the days of the Stuarts any Government, except by Bismarck in Germany on road to tyranny, made this sort of assertion that treaty involving imposition or taxation can be done in exercise of mere executive power.” [584] It is submitted that these issues deserved judicial examination in the light of our constitutional fundamentals.

310.That Hon’ble Court says in the Judgment: “Since in India, such a treaty would have to be translated into an Act of Parliament…”. To “translate” in the context means to “bear, convey, or remove from one person, place, time, or condition to another” ( The New SOD). Its import is that a tax treaty, like any other treaty done in exercise of power under Art 73 , exists on international plane by its own right exposing the State to the risk of international delinquency for the breach of terms. If it has a domestic operation affecting any law it would have to be domestically implemented by law. It follows that a tax treaty is created on the international level through an executive act, but is implemented within the domestic jurisdiction under some law. In short, the Hon’ble Court states that a tax treaty is an executive act in exercise of power under Art. 73 of the Constitution; but within the domestic jurisdiction it has to be implemented under the provisions of Section 90 of the Income-tax Act, 1961. It is submitted with greatest respect that this view suffers from a patent error.

311.That the Hon’ble Court overlooked the expressions in Section 90 of the Income-tax Act which confers power to the Central Government to enter into an agreement with the government of another country. The most material part of Section 90(1) is not even mentioned in the Judgment when it:

a. grants constitutive and creative power to the Central Government, and

b. prescribes under unambiguous and structured terms the statutory preconditions for the exercise of power under Sec.90.

It is not correct, it is submitted, to treat this power mere procedural.

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.” Tax treaties, in all major countries , are enacted. 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. (n 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.)

312.That it is not clear what is the referent for the expression “time consuming and cumbersome” so that “a special procedure was evolved by enacting section 90 of the Act.” The word “cumbersome” , on account of its semantic ambiguity may mean either “Of a place or way: presenting obstruction, difficult to pass through” [The New SOD] or “fig. Involving effort but serving no purpose.” [The New SOD]. In the context the expression leads to the following conclusions:

(i) that the Parliamentary enactment or approval, or even presentation before Parliament for 21 days under Ponsonby Rule, would be “cumbersome” for the Executive which deserves to be freed from this cumbrous procedure;

(ii) that the Executive deserves this indulgence as it is promoting certain ends of great public importance; and

(iii) that the public good being the augmentation of foreign exchange which our country needs so much that even loss of revenue is to be tolerated[585]

though the mere laying of a notification or rule does not mean Parliamentary approval, this procedure at least grans a Pariament an opportunity to a notice of that. If the point (ii) be taken at face, there was no need for fundamental rights. Even the noblest motives cannot justify a departure from law. The point (iii) is, as has already been discussed, a mere argument of convenience de hors law.

313.. That the Hon’ble Court, it is humbly submitted, has overlooked the reasons why under the frame-work of the income-tax law the power of granting exemption has not been given to the Executive. In the Judgment the Hon’ble Court observed:

“Even accepting the contention of the Petitioners that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we are unable to see as to why a delegatee of legislative power in all cases has no power to grant exemption.”

[(2003) 263 I T R 706, 726]

Even grant of exemption is a legislative act. It is a constitutional principle of highest importance that neither we can be taxed through an executive fiat, nor untaxed through an executive concession. To tax or grant exemption form the two facets of the same thing. It was aptly stated by the Rajasthan High Court in H.R.& G. Industries v. State of Rajasthan ( A I R 1964 Raj. 205 at 213) :

“It is well established that the power to exempt from tax is a sovereign power and no State can fetter its own much less the future legislative authority of its successor. See Associated Stone Industries Kotah v. Union of India ILR (1958) 8 Raj 700 and Maharaja Shree Umed Mills Ltd v. Union of India ILR (1959) 9 Raj. 984”

Exemption cannot be granted through an executive act. Under the Income-tax Act 1961 no executive authority has been granted such power. When Section 119 (2 ) ( c ) empowers the CBDT to relax statutory provisions to relieve genuine hardship, it prescribes under the Proviso : “that the Central Government shall cause every order under this clause to be laid before each House of Parliament.” Wherever the Income tax Act grants exemptions it does specifically, viz. Sections 10, 293A, 294A. There is a great constitutional principle at work under the culture of income-tax law: We are neither to be taxed nor untaxed through an executive act. In India tax treaty is an executive act in exercise of the power delegated under Section 90:

(a) the power can be exercised only for the purpose for which it is granted, and

(b) the power can be exercised on satisfying the pre-condition prescribed under Section 90(1).It would be possible to challenge a tax treaty if it contravenes any Constitutional limitations. In Missoury v. Holland, 252 US 416, 64 L.Ed. 641 (1920) the Supreme Court of the United States explained Treaties as a source of legislative power. It upheld the Migratory Birds Treaty Act that regulated the taking of migratory birds in the United States in fulfillment of a treaty with Canada. Justice Holmes considered various aspects of Constitutional limitations including whether the impugned treaty was forbidden “by some invisible radiation from the general terms of the Tenth Amendment”

314.. That the Hon’ble Court, it is most respectfully submitted, erred in drawing analogies from other tax laws without taking into account the differences in the statutory provisions, and the principles specific to income-tax jurisprudence. The Hon’ble Court observed:

“There are provisions galore in statutes made by Parliament and State legislatures wherein the power of conditional or unconditional exemption from the provisions of the statues are expressly delegated to the executive. For example, even in fiscal legislation like the Central Excise Act and Sales Tax Act, there are provisions for exemption from the levy of tax”

[(2003) 263 I T R 706, 726]

Under tax jurisprudence we notice that income-tax law is closely structured which denies power to the executive except on the terms of the statute whereas under the law of indirect taxes the executive has received liberal grant of power to confer exemptions. This fact is attested by the statutory terms and also by what Hood Phillips says[586]: to quote—

“It was supposed to have been settled by Magna Carta and by legislation in the reigns of Edward I and Edward III that taxation beyond the levying of customary feudal aids required the consent of Parliament. One of the central themes of English constitutional history was the gaining of control of taxation and national finance in general by Parliament, and in particular the Commons; for this control meant that the King was not able to govern for more than short periods without summoning Parliament, and Parliament could insist on grievances being remedied before it granted the King supply. This applied at least to direct taxation. With regard to indirect taxation different considerations might apply. Down to the early seventeenth century import duties, for example, were regarded rather as licenses or concessions than as taxes and, further, the royal prerogative relating to foreign affairs – and hence the regulation of foreign trade in the national interest – was relevant. Issue was joined in two famous cases in the reigns of James I (the “Case of Impositions”) and Charles I (the “Case of Ship-Money”.

315.That the provisions under the Central Excise Act, 1944 are materially different, especially for the following reasons:

(a)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.

(b) 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.]”

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.

[ G ]

( d ) The Material Terms of the Income-tax Act overlooked or /and interpreted per incuriam

316.. That , as paragraphs in this Section would show, this Hon’ble Court misdirected itself as

( i ) it overlooked the material expressions of Section 90 of the Income-tax Act, 1961. It did not notice the import of the expression “enter into”; it did not consider the meaning of the term of art “avoidance of double taxation”; and it did not consider the fact that the ‘delegated power’ is not open-ended but is closely structured with clear pre-conditions expressed in the terms of art. It, through oversight, saw words which are conspicuous by their absence…

( ii ) it, instead of reading the so-called treaty models, the OECD or the U.N., in the light of the statutory provisions made a manifest mistake of reading the statute in the light of these Models which resulted in a manifestly erroneous slurring over of the law of the land;

( iii ) it failed to recognize that it was duty-bound to uphold the law, if possible by a harmonious reading with a treaty; if not possible, by unregretfully ignoring it , leaving the Executive either to resort to an unilateral denunciation, or a bilateral modification, novation or recession of the terms of Agreement by invoking good grounds which it had in

plenty.. The correct approach has been suggested in Cheny v. Conn[587] In this “ a taxpayer contended that the Finance Act 1964 conflicted with the Geneva Convention incorporated in the Geneva Conventions Act 1957, and that it was contrary to international law that part of his tax should go to the construction of nuclear weapons. Ungoed-Thomas J. held that there was no conflict between the two Acts; and Finance Act prevailed over international conventions, which are an executive act of the Crown; and that what Parliament enacts cannot be unlawful”[588] And in Collco Dealings LTD v. IRC [1961] 1 All E R 762 at 765 Viscount Simonds recognized (in the context of the a Double Taxation Avoidance Agreement) the supremacy of the domestic tax statute in such bold and categorical terms as these:

“But it is said in the first place that it is not entitled under an enactment but under an agreement ( which the appellant company, to add weight to argument, prefers to call a treaty ). This contention cannot be accepted. Its rights arise under the Act of Parliament which confirms the agreement and gives it the force of law.”

[ ii ] Core terms completely overlooked

317. That the Hon’ble Court completely overlooked in the Judgment the crucial and material provisions of Section 90(1) which runs as under:

“90(1) The Central Government may enter into an agreement with the

Government of any country outside India ---

(a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that county, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or

(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(3) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. …….”

318.. That the Hon’ble Court missed the import of the plain language of the base provisions of Section 90(1) which says: “The Central Government may enter into an agreement with the Government of any country outside India……”. This constitutes the authorization to the Executive Government to bring about the mandated contractual document called “agreement”. Without conferment of this power, as submitted above, the executive can not exercise any power, whether on international plane or under domestic jurisdiction , having the effect of untaxing any one de hors the statute. The Central Government has the discretion [ the Central Govt. may ]. The expression “enter into” is a verb of motion and action. The expression “enter into” is used in what the New Shorter Oxford English Dictionary calls “With prep. in specialized senses”. The New SOD explains the meaning of this expression thus:

“ enter into: take upon oneself (a commitment, duty, relationship, etc.); bind oneself by, subscribe to, (an agreement);”

It grants constitutive and creative power to the Central Government; and it prescribes under unambiguous and structured terms the statutory preconditions for the exercise of power under Sec.90. The material expressions of Section 90 should not have been circled out as the import of the provision could be drawn only from the language used. Maxwell puts it thus:

‘The rule of construction is “to intend the Legislature to have meant what they have actually expressed.’ The object of all interpretation is to discover the intention of Parliament, “but the intention of Parliament must be deduced from the language used” for ‘ it is well accepted that the beliefs and assumptions of those who frame Acts of parliament cannot make the law”.[589]

319. That India’s double taxation avoidance agreements are in the nature of ‘delegated legislation’”[590] It is the common law jurisdiction of the court to “prevent a power of delegated legislation from being exceeded”.[591] “ The appropriate authority may be restrained from proceeding to make or confirm a scheme or order which is ultra vires.”[592] The Petitioner considers that it is a constitutional principle of greatest importance that the Executive Government, whether it functions in New Delhi or Detroit, or Port Luis , it can not go counter to the Constitution, unless, perish the thought, misfortune leaves it in the lurch when brute realpolitik tramples down a constitution as happened in the Treaty of Vienna or the Treaty of Versailles. A distinction is drawn between a State’s sovereign activity (acta jura imperii) and its non-sovereign activity (acta jure gestiones). This distinction was explained by the Court of Appeal in Trendtex Trading Corporation Ltd v Central Bank of Nigeria[593] and by the House of Lords in Alcom Ltd v Republic of Colombia[594] in the context of the claim of sovereign immunity. Lord Denning pointing out the modern preference for the doctrine of restrictive immunity to the doctrine of absolute immunity observed:

“ A century ago no sovereign state engaged in commercial activities. It kept to the traditional functions of a sovereign: to maintain law and order: to conduct foreign affairs; and to see to the defence of the country. It was in those days that England, with most other countries, adopted the rule of absolute immunity.”

The specifics of a tax treaty are yet to be examined by any distinguished jurist in English speaking world This issue came up before this Hon’ble Court for the first time.

The structure of Section 90(1)[595] of the Indian Income–tax Act and that of Section 788 of the British I.C.T.A. , 1988[596] is analogous on certain points. The expression “it is expedient” in the British Act is semantically same as “as may be necessary” in the Indian Act. “Expedient” means” “Advantageous (in general or to a definite purpose); fit, proper, suitable to the circumstances of the case”[597].To “make such provisions as may be necessary for implementing the agreement” under the Indian Act is semantically analogous with “ then those arrangements shall have effect…” under the British Act. The word ‘implement” means, as the New Shorter Oxford Dictionary says, “put ( a decision or plan ) into effect”.

320.That a perusal of the Hon’ble Court’s Judgment shows, it is respectfully submitted, that the base provisions ( which is also the basic provision) itself were overlooked. If the Hon’ble Court could have considered these, it could have noticed that the power to enter into a tax agreement is derived not from Art 73 of the Constitution but from Section 90 of the I.T. Act. Under the British Income tax law a tax treaty is done under an Order in Council after the approval of the House of Commons having an exclusive authority on taxation after the Parliament Act 1911. It is worthwhile to compare the language in the base provisions of Section 90(1) of the I.T. Act 1961 with the base provisions in Section 788 of the Income and Corporation Taxes Act 1988 of the U.K. Two features clearly emerge:

(I) In England the Crown declares a tax treaty by an Order in Council. The British Act gives very wide power[598] to the Executive whereas under the Indian Income-tax Act it is only for the purpose of avoiding a double taxation vide section 90 (1) (b).

(II) In England there is a system under which Parliamentary supremacy over the exercise of the executive power is done in the following two ways:

(a) by providing that a tax agreement is to be made only in terms of the Act; and

(c) and by providing that no tax treaty can be made without a Resolution by the House of Commons having exclusive control over taxation.

Tax treaties, in all major countries , are enacted.[599] In India it is done in exercise of a delegated power, and without Parliamentary approval in any manner.

321. That the pre-condition for exercise of delegated power as conferred under Section 90 (1) of the Income-tax Act is precisely structured by Parliament by using a term of art: “…..for the avoidance of double taxation of income under this Act and under the corresponding law in force in that county”. The precondition precedes with a causative expression “for”. The pre-condition precedent for exercise of power to enter into a tax treaty is couched in the terms of art. The concept of Double Taxation has been thus explained in Black’s Law Dictionary and Stroud’s Judicial Dictionary to which this Petitioner has already referred in Part II Section I. On close analysis the definitions given in this technical dictionaries following ingredients are noticed :

(iv) The imposition must be of comparable taxes;

(v) The incidence of tax should be on the same tax- payer;

(vi) The subject matter (or the taxable event) should be the same subject matter.

If any of the above three ingredients is missing or is unreasonably distorted there is no case of Double Taxation. Where there is no case of Double Taxation, there are obviously no questions of Avoidance of Double Taxation. Without there being a de facto liability for Double Taxation, the power conferred under section 90 of the Income tax Act cannot be exercised. In fact, there must be “if-then” ( protasis-apodosis) relationship involved in a given situation. It is worth noting that Philip Baker, who calls his work On Double Taxation Conventions and International Tax Law a Manual on the OECD Model, comments:

“General subject-to-provisions provides that treaty benefits in the State of source are granted only if the respective income is subject to tax in the State of residence. This corresponds basically to the aim of tax treaties, namely to avoid double taxation”[600].

322. That, Hon’ble Court observes:

“ That the purpose of the DTAC is to effectuate the objectives in clauses ( a ) and ( b ) of sub-section (1) of Section 90, is evident upon a reasonable construction of the terms of the DTAC. As long as these two objectives are sought to be effected, it is not possible to say that the power vested in the Central Government, under section 90, even if it is delegated power of legislation, has been used for a purpose ultra vires the intendment of the section” p. 51

The observation noted above suffers from patent errors vitiating the determination of the prime issue before the Hon’ble Court.

323. This Hon’ble Court nowhere in the Judgment explains the concept of the Avoidance of Double Taxation. This is because this Hon’ble Court remained indifferent to the statutory provisions but was extremely mindful of the stipulations in the tax-treaty on the OECD model. As the propriety of the adoption of this Model was all along one of the prime issues, this Hon’ble Court should have examined the terms of the Agreement to see to what extent it contravened or went beyond the powers granted under the statute. This Petitioner has presented his case before the High Court i a detailed article “Indo-Mauritius DTAC, A Quest for Model : Law is lynched” [ANNEX “F” ].

324. This Hon’ble Court stated the following explaining Section 90 (1) of the Income-tax Act:

“The appellants contend that, acceptance of the respondents' submission that double taxation avoidance is not permissible unless tax is paid in both countries is contrary to the intendment of section 90. It is urged that clause (a) of sub-section (1) of section 90 applies to a situation to grant relief where income-tax has been

paid in both countries, but clause (b) deals with a situation of

avoidance of double taxation of income. In asmuch as Parliament

has distinguished between the two situations, it is not open to a court of law to interpret clause (b) of section 90, sub-section (1) as if it were the same as the situation contemplated under clause (a).”

“It is, therefore, not possible for us to accept the

contentions so strenuously urged on behalf of the respondents that avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States”.

(i) This Hon’ble Court is manifestly wrong in its ideas underlined. It is true that in the case of Section 90(1)(a) the assessee must show that taxes have been paid to establish its entitlement to relief. But the Section 90(1)(b) means what the concept of “Avoidance of Double Taxation’ means, as explained by Black’s or Stroud’s. It contemplates the exposure of an individual assessee to the incidence of income-tax. It does not stand to reason that some State can so arrange its affairs as to exclude some persons from even a reduced incidence of taxation whilst the individuals in the other State in which a taxable event takes olace groans under unmitigated incidence of taxation. This meaning is attested by the legislative understanding of the term if we consider how it was translated in working norms in the Agreement between India and Pakistan which pertained to “Avoidance of Double Taxation”. Its features are thus explained by Kanga & Palkhivala:

“The consequence was that the assessee had had not first to pay tax and then apply for relief in the form of refund, as he would have to do in a case where the provision was for relief against double taxation. The broad effect of the Agreement was that each country recovered tax only on that part of the income which accrued within that country, and took into account the income accruing in the other countries only for rate purposes from the tax payable in respect of the entire income which accrued within that country. and took into account the income accruing in the other country for rate purposes……..”

If “double” does not mean “twice” then that fallacy creeps for which, it is most respectfully submitted the only authority is that to which Lord Atkin refers in Liversdge vAnderson[601] :

“I know of only one authority which might justify the suggested method of construction. ‘When I use a word’ Humpty Dumpty said in rather scornful tone, ‘it means just what I chose to mean, neither more nor less’. ‘The question is’ said Alice ‘Whether you can make words mean different things.’ ‘The question is’, said Humpty Dumpty, ‘who is to be the master---that is all”

The meaning of “Avoidance of Double Taxation” has nowhere in the World robbed of its content. Many States have by specifically enacted provisions widened their jurisdiction in this field. India has not done so. What “Avoidance of Double Taxation” means on juristic principle would be clear from what the Canadian Federal Court of Appeal says in Attorney-General of Canada v. Kubicek[602], rejecting the tax-payer’s stand:

“ The ordinary meaning of "gain" for the purposes of Art. XIII of the Convention is the gain which is subject to tax. Given both the language and the otherwise apparent intention of the parties, this Court should find that the calculation of the reduction in the capital gain tax begins when the gain first began to accrue for Canadian income tax purposes. In this case, that is the December 31, 1971 starting

date, not the date on which the respondent acquired the property. This interpretation is more consistent with the purposes behind the Convention, the avoidance of double taxation and the proper allocation of tax between Canada and the U.S., than is the literal meaning advanced by the Tax Court Judge. We find ourselves in agreement with the words of Professor Brian Arnold:

The Tax Court of Canada rejected [the Applicant's] arguments because, according to it, section 40 of the Income Tax Act does not provide a definition of "gain," but a process for determining capital gain. There is no basis for this distinction. The Tax Court appears not to understand the purpose and effect of section 3 of the Income Tax Interpretations Act or article III(2) of the treaty.... Of course, the fundamental purpose of tax treaties is to eliminate double taxation. Since Canada does not tax a capital gain to the extent that it accrued before 1972, there is no justification for taking the ownership of property before that time into account for purposes of the transitional rule in article XIII(9).”

(ii) The liability to pay tax, which Section 90(1)(b) contemplates is that the incidence of liability should be in presenti, not in futuro or in vaccuo. The word “liability to tax” should have been construed in the light of the expression in the statute; and the ambiguity of the term noted in Black’s should have been resolved accordingly.

(iii) This Hon’ble Court adopts the view of the OECD experts and superimposes that on the concept of Avoidance of Double Taxation. This Hon’ble Court should have noted that under the law and the Constitution of India the Executive cannot by its act grant tax exemption. This point can be illustrated with reference to the “notification” under Section 10(23C) (iv) of the Income-tax Act. Section 10 deals with income not included in total income. Section 10(23C) (iv) grants this benefit of exclusion to income received by any person on behalf of “any other fund or institution established for charitable purposes which may be notified….” Section 296 of the Act prescribes that every notification issued under sub-clause (iv) of clause (23C) of Section 10 be laid before each House of Parliament…..” This deserves to be noted that the Agreement for Avoidance of Double Taxation is not placed before the Parliament. If a mere grant of exemption to a charitable purpose cannot be done without taking Parliament into confidence, how can, by adoption by mere administrative choice the OECD/UN Model, the Executive can be charitable to the residents of a Contracting Party which, for its unjust enrichment, rides roughshod over good faith (the bed-rock of pacta sunt servanda ) and the crucial consensus ad idem turning them into res extra commercium for bad-faith purchasers.

325..That in examining to what extent the OECD/UN Model is intra vires the Income-tax Act this Hon’ble Court has referred to various decisions from Canada and Australia [viz: John N. Gladden v. Her Majesty the Queen 85 D.T.C. 5188 at 5190 (the Canada-US Tax Treaty ); Commissioner of Taxation v. Lamesa Holdings [1997] 785 FCA (the Australian-Netherlands Tax Treaty); Chong v. Commissioner of Taxation [2000] FCA 635 ( Australia-Malaysia Agreement to avoid double taxation); The Estate of Michel Hausmann v. Her Majesty The Queen [1998] Can. Tax Ct. LEXIS 1140(the Canada-Belgium tax treaty. ]. This Petitioner respectfully submits that reliance on these cases is completely misconceived for reasons, inter alia, the following:

(i)In Canada every Tax-treaty is an enactment under a separate Act. As it would be seen that in Crown Forest Industries v. Canada (1995) 2 S.C.R. 802 the Canadian Supreme Court was considering the Canadian-US Tax treaty as Canada-United States Tax Convention Act, 1984. In Australia every Tax-treaty is specifically examined and integrated under the International Tax Agreements Act, 1953. In Belgium a tax treaty is enacted (which unfortunately the Andhra Pradesh High Court missed to notice in Visakhapatnam Case ). In India a tax Agreement is 100% executive creation, so it is clearly subject to judicial control.

(ii) As in Canada and Australia a Tax Treaty is a legislative act after popular deliberation, any sort of terms in the treaty can be formulated. This is not so in India.

(iii) The tax-laws in Canada-Australia do not provide a set of structured pre-conditions as does Section 90 of the Income-tax Act. The Central Government can sink or swim within the parameters of this Section: the tether controls the high and the mighty whether they act in Delhi or Amsterdam. The Canadian laws governing double taxation are open-ended and very widely worded.

(iv) If our Central Government has a dogged design not to work under the present statutory discipline it can bring about the following changes:

(a) make a tax treaty an enactment; and

(b) widen the terms of Section 90 as they are worded in Section 788 of the UK Income and Corporation Tax Act);

326. That this Petitioner humbly submits the following:

(i) The argument suffers from the fallacy of post hoc, ergo propter hoc ( after this, therefore because of this). The right course would have been to determine the purpose of Sections 90(1) (a) & (b), and then to see if the terms of the DTAC conform to that and how much is the deviance. It is a simple principle of law that the delegated power can not go beyond the trajectory of power conferred.

(ii) The core words constituting the purpose, and also the condition-precedents required no “reasonable construction” as no ambiguity of any sort was by the Hon’ble Court in such terms. In a situation of sort this pursuit at reasonable construction is contrary to the established jurisprudence. It was aptly observed by Maxwell[603] : Where the language is plain and admits of but one meaning, the task of interpretation can hardly be said to arise. “The decision”, said Lord Morris of Borth-y-Gest in a revenue case, “calls for a full and fair application of a particular statutory language to particular facts as found. The desirability or undesirability of the one conclusion as compared with another cannot furnish a guide in reaching a decision”[604].

(iii) The meaning of the terms of art is explained in Black’s Law Dictionary and Stroud’s Judicial Dictionary. It was referred yet it is not even noticed though these had been cited and explained at length. Not to consider such a vital point so centrally relevant is , in effect, to deny the operation of the Rule of Audi alteram partem in its full plenitude.

(iv) The Hon’ble Court went wrong in construing the terms of the DTAC to determine the semantic province of Section 90(1) (b) whereas the correct course was to determine the frontiers of the statutory provision and to read the DTAC in the light of the statutory limitations.

(v) The Hon’ble Court has totally missed the terms and the object of Section 90 (1) (b). This Hon’ble Court’s expression in the Judgment ---“As long as these two objects are sought to be effected….”-- remains shrouded in dense fog.

(vi) The Hon’ble Court is trying to make a distinction between the following two situations:

i. a purpose ultra vires the Section; and

ii. a purpose ultra vires the intendment of the Section.

As the Hon’ble Court totally missed in concentrating even a whit on the terms of Section 90(1)(b) there could not be any logic in a pursuit of that sort. Secondly, the expression ultra vires the Section is understandable but the expression “ ultra vires the intendment of the Section” contemplates a quest at the discovery of intendment. The word “intendment” in its legal sense is thus defined by the New Shorter Oxford Dictionary: “The sense in which the law understands a thing” If this is to suggest an approval of the Attorney-General’s plea that even at the outset the DTAC was intended to be used by the Treaty shoppers, it would become a travesty of justice as the good faith of a bilateral tax treaty framed for mutual benefit of the contracting States would become, by unilateral covert action of one of the Parties, a trading ware shocking to all civilized jurisprudence and Public International Law.

The way this Hon’ble Court has viewed the DTAC is clearly productive of a gross miscarriage of justice. The Hon’ble Court has read the Section in the light of the DTAC, and has read the DTAC in the light of the ideas from the OECD countries. The Hon’ble Court should have noted that India is not a Member of the OECD. This Hon’ble Court overlooked the fundamental differentia inter se India and the OECD Member countries. In all the OECD countries a tax-treaty is legislatively enacted; and in most of these countries the statutes / constitutions grant a tax treaty an override on the tax statute. This Hon’ble Court misdirected itself by carried away by the views of Klaus Vogel on the concept of “avoidance of double taxation” stated with reference to the postulates shared by the OECD countries wherein the legality of a tax treaty cannot be questioned as in these countries tax treaties are legislatively enacted. This Hon’ble Court’s reliance on Klaus Vogel stating that the agreement would be an independent mechanism for waiver of tax claims in certain circumstances by dividing tax sources, does not conform to Section 90 of the Income-tax delegating power to enter into a tax agreement. And this view accord well with our legislative practice and the meaning of “avoidance of double taxation as given in Black’s Dictionary and Stroud’s Judicial Dictionary already referred. What has led this Hon’ble Court to this manifest error is the mistake of putting the cart before the horse. Instead of construing the terms in the light of the law, it puts a gloss on it in the light of the Model the Executive chose to adopt. The way this OECD Model was framed and its conformity were examined by this Petitioner comprehensively in a Chapter entitled “Indo-Mauritius DTAC:A Quest for Model : Law is lynched” vide Annex “E”.

By importing a set of exogenous ideas this Hon’ble Court is led to cause serious distortions in the law. If this Hon’ble Court would have thought about Art 14 of the Constitution and general principle of justice it would have appreciated that this approach had nothing to commend itself. No treaty done by the Executive, the Petitioner states this as a universal proposition, can contravene Art 14 whether we think of its Old Doctrine relating to “classification” or the New Doctrine under which it is an antithesis of arbitrariness.

327. That the Hon’ble Court, it is humbly submitted, has overlooked the reasons why under the frame-work of the income-tax law the power of granting exemption has not been given to the Central Government under Section 90 of the Income-tax Act, 1961. To tax or grant exemption form the two facets of the same thing. It was aptly stated by the Rajasthan High Court in H.R.& G. Industries v. State of Rajasthan ( A I R 1964 Raj. 205 at 213) :

“It is well established that the power to exempt from tax is a sovereign power and no State can fetter its own much less the future legislative authority of its successor. See Associated Stone Industries Kotah v. Union of India ILR (1958) 8 Raj 700 and Maharaja Shree Umed Mills Ltd v. Union of India ILR (1959) 9 Raj. 984”

328. That in the Judgment the Hon’ble Court observed:

“Even accepting the contention of the Petitioners that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we are unable to see as to why a delegatee of legislative power in all cases has no power to grant exemption.”

The Petitioners contend that a tax treaty entered into within the umbrella of section 90 of the Act is essentially delegated legislation, if it involves granting of exemption from tax, it would amount to delegation of legislative powers, which is bad. The legislature must declare the policy of the law and the legal principles which are to control any given case and must provide a procedure to execute the law.[605]

The Petitioner’s case was that Section 90(1) of the Income-tax Act, 1961 prescribes a statutory condition precedents for exercise of power under Section 90(1). There is, hence, no question of legislature declaring policy of the law or legal principles. This issue was never raised either before the Hon’ble High Court or the Hon’ble Supreme Court. Hence the entire discussion in the Judgment and references to various decisions should have been avoided as this deflection in the judicial approach to a non-issue has led to a serious miscarriage of justice. The relevant legal position in the matter of framing a tax treaty is to be examined within the parameters of Section 90 only. The position has been thus stated in brief by an expert[606]:

“It is necessary to add that since every DTAA draws its authority or sanction from section 90, it is only if section 90 is attracted that the question of the terms of the DTAA prevailing against the letter of the law will arise. Section 90 becomes relevant only where some item of income derived by an assessee is taxed both in India and the treaty country. An essential condition for not charging tax on an income otherwise liable to tax in India is that is has already suffered or will suffer tax in the treaty country if exempted in India. The Revenue authorities in India are, therefore, entitled to satisfy themselves that the income in question has not been subjected to tax in the treaty country before waiving the Indian tax that is legitimately leviable on it.”

329. That the Hon’ble Court by mistake took it to be the Petitioner’s case that the DTAC is bad for excessive delegation. The Hon’ble Court held inter alia that:

“….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. 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 pointing of law having a decisive effect, the whole discussion on this point should be omitted otherwise the Rules of Natural Justice would be violated;

(c) if it is a judicial research, it is impermissible unless the Petitioners are posted with the outcome of the research and heard; and 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, to be exercised on conforming with the conditions legislatively prescribed with extreme precision in the terms of art: “ for avoidance of double taxation”. It came in “precedent condition category” where it was for the court to decide whether the precedent condition had been satisfied. The case, thus, comes within discussed by the House of Lords in R. v. Home Secy.. Ex. P. Khwaja (1984) A.C.74.

( v ) What is obvious is not always known.

347.That the patent mistake in the statutory comprehension which occurred in the impugned Judgment deserves a close consideration as this Hon’ble Court committed the same mistake in a similar case only a short while after in CIT v. Kulandagan.[607]

“8. Where liability to tax arises under the local enactment provisions of Sections 4 and 5 of the Act provide for taxation of global income of an assessee chargeable to tax thereunder is subject to the provisions of an agreement entered into between the Central Government and Government of a foreign country for avoidance of double taxation as envisaged under Section 90 to the contrary, if any, and such an agreement will act as an exception to or modification of Sections 4 and 5 of Income Tax Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of Section 90(2) of the Act. Section 90(2) makes it clear that 'where the Central Government has entered into an agreement with the Government of any country, outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee' meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein..”

The entire exposition, it is respectfully submitted, is wholly per incuriam. The basic mistake was not to see the plain words of the Section. As the above judicial view in Kulandagan is the same as that taken in this impugned Judgment, this Petitioner considers it his duty to submit that the judicial observations proceed from a set of wrong premises.

(a) Section 90 is couched in plain English using unambiguous term of art “avoidance of double taxation”. Section 90(2) is equally plain in terms. It is not permissible to resort to an interpretation when the language is plain. We cannot assert the presence of an ambiguity in order to drive a wedge to interjet any fashionable ideas dear to the FIIs, MNCs, and other gladiators of the present-day global economic architecture before whom (or which) the nation states have become dwarfed.

( b ) This Hon’ble Court has stated per incuriam that Sections 4 and 5 of the Act render the charge of a tax “subject to the provisions of an agreement…as envisaged under section90 to the contrary.” It is submitted that Sections 4 and 5 subjects charge to Section 90, not to the terms of an individual Agreement. The Agreement is the product of an administrative act in exercise of delegated power predicated on compliance with precisely structured pre-conditions. The Assessing Officers, being the creatures of the Act cannot give effect to those terms of an Agreement which do not strictly conform to the pre-conditions. The terms of the Section are not to be liberally construed as if the were incentive providing provisions with domestic impact. We are under duty to protect our resources from the foreigners; to quote again Viscount Simonds in the leading case of Collco Dealings LTD v. IRC[608]

“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.”

( c ) That this Hon’ble Court’s expression that the levy is to be “as envisaged under Section 90 to the contrary” involves a structural ambiguity, but the judicial observations in the last para of the judgment enable the Government to exercise a wide amplitude of power. Without mentioning , this Hon’ble Court is obliterating the fundamental difference between a treaty in generic sense contemplated by Art 73 of the Constitution, and a tax-treaty.

( d) The Hon’ble Court mentions that “such an agreement will act act as an exception to or modification of Section 4 and 5 of the Income-tax Act.” The correct effect of the provisions of Sections 4 and 5 is thus stated by Bombay High Court in Commissioner Of Income-tax V. F. Y. Khambaty[609], per Kania J.:

“Therefore, what the use of the said expression shows is that in considering what is total income under section 5, one has to exclude such income as is excluded from the scope of total income by reason of any other provision of the Income-tax Act and not that the other provisions of the Income-tax Act override the provisions of section 5 as suggested by Mr. Jetley.”

( f ) This Hon’ble Court observes that in case of a conflict the terms of a tax treaty would prevail. This Petitioner has stated in detail how and why this view is a constitutional solecism destructive of the Rule of Law. Various courts in various judgments have repeated this mistake as there was none to cotest it seriously. The Executive always wants to go to days of the Stuarts. The tax lawyers are the biggest beneficiaries of this wrong. The corporate imperium driven by the foreign forces are most delighted. With this OECD Model accepted by our Government they can effect the borrowings from the ideas of the OECD experts. If all the earlier decisions are scanned they are seen to bank on certain OECD countries’ treaties, and on the 1983 CBDT Circular the legality of which was not questioned by default. The whole approach suffers from an insidious fallacy which brins to mind what C.K. Allen said:

“And yet it is remarkable how sometimes a dictum which is based on no authority, or perhaps on a fallacious interpretation of authority, acquires a spurious importance and becomes inveterate by sheer repetition in judgments and textbooks”[610]

( g ) The only basis to come to the conclusion set forth in ( f ) supra is the provisions of Section 90(2) with a judicial gloss that “meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein.” The object of sub-section (2) to section was inserted by the Finance Act (No. 2) Act, 1991 was brought out in the Board’s Circular No 621 of December 19, 1991 (quoted at page 879 Chaturvedi & Pithisaria’s Income Tax Law, 4th ed.Vol. 7):

“Tax treaties generally contain a provision to the effect that the laws of the two Contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the treaty. It may so happen that the tax treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the Indian law existing at that point of time . However the Indian law may subsequently be amended, reducing the incidence of tax to a level lower than what has been provided in the tax treaty.

43.1 Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-a-vis other taxpayers, section 90 of the Income tax Act has been amended to clarify that any beneficial provision in the laws will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial”. (italics supplied)

The first part of the CBDT Circular gives the view of law which this Petitioner questions as legally wrong, politically inexpedient, socially iniquitous, and productive of much public mischief. In any case, in this present Writ Petition would be one of the important questions in this country. The second part of the extraxt in italics deserves to be read not in the light of its preceding portion but on its own terms and logic. The object of section 90 (2) as inserted by the Finance (No. 2) Act, 1991, is to grant the benefit of the Income tax Act as operative within domestic jurisdiction to even those who are beneficiaries under DTAA so that they are not deprived of the benefits to which other taxpayers would be entitled. It gives no warrant to hold what this Hon’ble Court has held. It makes the statute prevail to the benefit of the treaty beneficiaries who without Section 90(2) could not have got that. In fact it contracts the proposition that a tax treaty prevails on the statute. A treaty is subservient to the positive law. Oppenheim put it in suggestive terms:

“Although treaties may speak of the rights of the individuals as if

they were derived from treaties themselves, this as a rule, is not normally the position. Such treaties, rather than creating the rights, impose the duty upon the contracting states to establish them in their national laws.”[611]

[ H ]

( G ) The Indo-Mauritius Dtac Manifestly Misconstrued By Overlooking Many Of Its Material Terms And Expression.

348.. That this Hon’ble Court missed in noticing the differentia inter se various types of treaties. The so-called tax-treaty is merely an “agreement” under Section 90 of the Indian Income-tax Act; it is merely an ‘arrangement” under the British Act. It is for this reason that Viscount Simonds In Collco Dealings Ltd v. IRC [1961] 1 All E.R. H.L. observed (at p.765):

“ But it is said in the first place that it is not entitled under an enactment but under an agreement (which the appellant company, to add weight to the argument, prefers to call a treaty). This contention cannot be accepted. The appellant company has no rights under any agreement. Its rights arise under the Act of Parliament which confirms the agreement and give it the force of law”

It does not belong to the genus to which the Treaty of Versailles belongs which was a political treaty made a fait accompli by the exercise of the brute power of the victors. Keynes wrote his The Economic Consequences of the Peace. This humble Petitioner feels that it would have led to complete justice if this Hon’ble Court would have considered the Economic Consequences of the Indo-Mauritius DTAC. The construction of the DTAC , especially in the context of Treaty-shopping should not have been considered in a hyper-technical matter. It is this misdirection which has led this Hon’ble Court to invoke the Doctrine of Necessary Evil, and render a cri de Coeur to the same Executive which is on trial, and to the same Parliament whose leading lights turned Nelson’s eye to the abuse of the tax-haven routes.

349. The authorities under the Act have a structured role to charge everybody to tax who earned income in India.. If some one claimed to escape this net he must prove before the authority his entitlement for which he alone bears the burden of proof. The DTAC provides an exit from the provisions of the Act, but the claim must satisfy the preconditions without resort to a camouflage, fraud, or any other stratagem which our public policy (or international ius cogens or the principles of civilized jurisprudence) does not approve of in the administration of justice. This Hon’ble Court seriously misdirected itself in public international law by not taking into account the Principle of Territoriality which prescribes that the Writ of foreign public law does not run unless a treaty specifically overrides this rule[612].

( h ) This Hon’ble Court’s reading of the DTAC suffers from many manifest errors

PERSONAL SCOPE

350.. That the decision of this Hon’ble Court on the Personal Scope of the Agreement is per incuriam. This clearly emerges from the following:

(a) The Personal Scope of the Indo-Mauritius DTAC prescribes clearly the persons who are entitled to benefits under this DTAC. Article 1 of the DTAC says:

“This Convention shall apply to persons who are residents of one or both of the Contracting States.”

Personal Scope determines the focus of the tax treaty and limits the number of beneficiaries. All the tax treaties which our Central Government has concluded are bilateral. Each Agreement is the product of the meeting of minds (consensus ad idem) of the two Contracting States. The fundamental legal principal which determines the Personal Scope of a treaty is well settled both under international law, and within the domestic jurisdictions. The word mutual in the preamble of the DTAC becomes meaningless. The object, as set forth in preamble, is that the Convention is “for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment.” The key word in the preamble is mutual which has been defined by the New Shorter Oxford Dictionary to mean “of a feeling, action, etc : experienced, expressed, or performed by each of the parties concerned towards or with regard to the other ; reciprocal”

The DTAC is a bilateral convention. As per the settled principles of Public International law no resident of the “third State” can avail of the benefits under a bilateral treaty. In the context of international law the legal proposition has been thus stated by George Schwarzenberger A Manual of International Law 5th ed. p.160:

“Treaties confer no legal rights and impose no legal duties on non-parties”

To the same effect is the statement of law summarized by J G Starke in his Introduction to International Law ( p. 44)

“As a general rule a treaty may not impose obligations or confer rights on third parties without their consent (Vienna Convention , art 34), and, indeed, many treaties expressly declare that they are to be binding only on the parties. This general principle, which is expressed in the Latin maxim pacta tertiis nec nocent nec prosunt, finds support in the practice of states, in the decisions of international tribunals, and now in the provisions of the Vienna Convention (see arts (34-38)”.

The Vienna Convention on the law of Treaties, 1969 sets out provisions pertaining to “Treaties and Third States” in section 4. Prescribing general rules regarding Third States Article 34 says: “ A treaty does not create either obligations or rights for a third State without its consent.” Article 2 (h) defines “third States” : meaning “a State not a party to the treaty.

On the plain reading of language the DTAC is meant for the residents of the Contracting States. Georg Schwarzenberger says in his A Manual of International law ( at p.148):

“Parties to a consensual engagements must interpret and execute such engagements in good faith.”

Article 31(1) of the Vienna Convention on Law of Treaties states:

“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.”

Oppenheim in his classic work observes[613]:

“The binding force of a treaty and its effects concern in principle the contracting states only, and not their nationals. The rule

can, as has been said by the Permanent Court of International Justice, be altered by express or implied terms of the treaty, when the provisions become self-executory (even, occasionally, as regards persons who are not nationals of the contracting state concerned)[614].

Nothing was shown by our Government, and its co-Appellant from the tax haven, that there is any material, proximate or remote, to raise even a faltering probability that the this Indo-Mauritius DTAC was meant for the treaty-shoppers. George Schwarzenberger has observed[615]:

‘ While the revision of a treaty has as its object the change, for the future, of a text that may be perfectly clear, treaty interpretatation aims at the establishment of the true meaning of a treaty at the time when it was concluded.”

In Prenn v. Simmonds[616] Lord Wilberforce[617] said:

“In order for the agreement of 6 July 1960, to be understood , it must be placed in its context. The time has long passed when agreements , even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, anti-literal, tendencies, for Lord Blackburn’s well-known judgment in River Wear Commrs. V. Adamson provides ample warrant for a liberal approach. We must, as has been said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances, which the person using them had in view.”

No reference to any travaux preparatoires was made. The effect of the Hon’ble Court’s Judgment is to rewrite the Personal Scope of the DTAC which is beyond its Jurisdiction as the consensus ad idem must be only of the Contracting States.

The Concept Of “Liability” Stated Per Incuriam

351 That the Hon’ble Court has observed:

“In our view, the contention of the Petitioners proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of Article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words ‘liable to taxation’, but would have used some appropriate words like ‘pays tax’.”

In this context it is relevant to take note of the semantic ambiguity of the term liability which William R. Anson explains[618] thus in Principles of the Law of Contract ( quoted in Black’s Law Dictionary, 7th ed. p. 925:.

“The term ‘liability’ is one of at least double signification. In one sense it is the synonym of duty, the correlative of right ; in this sense it is the opposite of privilege or liberty. If a duty rests upon a party, society is now commanding performance by him and threatening penalties. In a second sense, the term ‘liability’ is the correlative of power and the opposite of immunity. In this case society is not yet commanding performance, but it will so command if the possessor of the power does some operative act. If one has a power, the other has a liability. It would be wise to adopt the second sense exclusively. Accurate legal thinking is difficult when the fundamental terms have shifting senses.”

352. That it is most respectfully submitted that the Hon’ble Court misconstrued the concept of liability as it was not construed in the context of the statute; nor its statutory object was taken into account. This Petitioner is driven to this conclusion mainly for the following reasons:

(a) The word liability has numerous shades of meaning. The Hon’ble Court did not try to construe the word in the proper context to resolve the semantic ambiguity of this term. The Hon’ble court had observed in Union v. Sakalchand[619]:

‘The words used in a statute cannot be read in isolation: their colour and content are derived from their ‘context’ and therefore, every word in a statute must be examined in its context. And when I use the word ‘context’ I mean it in its widest sense ‘as including not only other enacting provisions of the same statute, but its preamble, the existing state of the law, other statutes in pari material and the mischief which the statute was intended to remedy.’. The context is of greatest importance in the interpretation of the words used in a statute”

(b) The word liability can acquire only that sense which is in tune with the statutory pre-condition for entering into a tax treaty under section 90(1)(b) of the I.T. Act; “for avoidance of double taxation.” The river cannot rise above its source. This expression cannot authorize a tax treaty for doing something else; the net cannot be cast wider. The expression has become a term of art. It suggests:

(i ) The imposition must be of comparable taxes;

(ii) The incidence of tax should be on the same tax- payer;

(iii) The subject matter (or the taxable event) should be the same subject matter.

If any of the above three ingredients is missing or is unreasonably distorted there is no case of Double Taxation which can be avoided..

The word taxation involves certain completed act rather a mere potential act. The New Shorter Oxford Dictionary explains taxation thus:

“1. The estimation or determination of the amount of a fine, penalty, damages, etc; assessment. Now only Law, examination and assessment. ME. 2 Orig. a tax imposed or levied. Later, imposition or levying of taxes… the fact of being taxed”

353.That the Double-tax Avoidance Convention between India and Mauritius was signed in 1983. Its object, as stated in the preamble, was “for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains for the encouragement of mutual trade and investment.”

(c) The concept of the Avoidance of Double Taxation as generally understood under the Indian legislative practice is amply illustrated by several Agreements the features of are as follows:

(i)the Agreements are not the vehicles for granting exemption from taxation;

(ii)the Agreements must confirm to our Constitution and the law;

(iii)the benefits and burdens of taxation are equitably calibrated on the calculus of the reasonable operations of factors, including of labour and capital;

(iv)the terms of the Agreements are so devised as to be reasonable both to the source State and the State of residence; and

(v) The Agreements have pronounced tilt towards the source Stateas the right principle is that between the state of residence and the state of source, the latter is preferred for the levy of taxation.

( d ) The meaning of avoidance of double taxation would be amply clear if we keep in view the protocol of the Indo-Pakistan Avoidance of Double Taxation Agreement which by the close proximity illustrates the concept better. Its detailed analysis had been filed before the Hon’ble High Court; but the following summary from Kanga & Palkhivala would serve the present purpose: to quote[620]-

“The basis of the Agreement between India and Pakistan was not relief against double taxation but avoidance of double taxation…… The broad effect of the Agreement was that each country recovered tax only on that portion of income which accrued within that country, and took into account the income accruing in the other country only for rate purposes. From the tax payable in respect of the entire income, an abatement was allowed at the time of making the assessment in respect of the tax payable in that country.”

(f ) That if the word liability is construed as no-taxation in both the countries for the beneficiaries of the Indo-Mauritius DTAC, then the provision will violate Art.14 both under the new doctrine of Equality under which whatever is unreasonable or arbitrary is per se violative of equality; and the classical view of this doctrine[621].”

( g ) The word “liability” is a commercial concept; hence it be considerd as such rather than as a juristic concept. MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd.[622] Lord Hoffmann observed:

“ My Lords, it seems to me that what Lord Wilberforce was doing in the Ramsay case [1982] AC 300 was no more (but certainly no less) than to treat the statutory words "loss" and "disposal" as referring to commercial concepts to which a juristic analysis of the transaction treating each step as autonomous and independent, might not be determinative. What was fresh and new about Ramsay was the realization that such an approach need not be confined to well recognized accounting concepts such as profit and loss but could be the appropriate construction of other taxation concepts as well.”

That the issue can be best decided by posing a simple question. Aforeign government is exempt from taxation in India in terms of international practice. A foreign government cannot be allowed to use a tax Agreement as a source of profit. The tax Agreements cannot be turned into a network of good faith arrangements for commercial exploitation. It is only the tax payers who have the legitimate claim for avoidance of double taxation

A CASE OF NO-TAXATION

354 That the expression “avoidance of double taxation” is a term of art. It would shock any body who is made to believe that non-taxation or nominal taxation may also be a form of double taxation to be avoided. Where a tax treaty is legislated, things may be different. A sovereign Parliament, unless subject to Judicial Review as wide as we have in India, can do anything: even those to which George Orwell refers in his Animal Farm ( ch 1)

‘The creatures outside looked from pig to man, and from man to pig. And from pig to man again; but already it was impossible to say which was which.”

In India unless a tax payer pays tax doubly there is no double taxation. Any different view would expose the provision to the wrath of Art. 14 of the Constitution. Juristic borrowings and foreign case law are extremely dangerous unless their ideas are honed and evaluated in the constitutional and statutory ethos of our country. It was this principle which had been stressed in The Central Provinces Case[623] cautioning against the use of the Canadian, Australian, or the U.S. cases when the Hon’ble Court observed:

“ …for in the last analysis the decision must depend upon the words of the Constitution which the Court is interpreting and since no two Constitutions are in identical terms, it is extremely unsafe to assume that a decision on one of them can be applied without qualification to another. This may be so even where the words or expressions used are the same in both cases, for a word or phrase may take a colour from its context and bear different senses accordingly.”

[ I ]

RELIANCE ON CANADIAN AND AUSTRALIAN CASES INAPT

355. That this humble Petitioner most respectfully states that analogy often enlightens, but most often misguides. This happens so because often superficial resemblances promoting a particular proposition succeed, even unwittingly, in masking the fundamental differences. The risk of fallacy in an anological reasoning is best described in the words of Sir Francis Bacon to which an attention has already been drawn [vide para 132 supra……].

It is most humbly stated at the Hon’ble Court’s discussion of the Mauritian laws and the judicial decisions from Australia and Canada suffer from the fallacy which Bacon calls the fallacy of non “recognition of similitudes—and at the same time sufficiently steady and concentrated for the observation of subtle shades of difference.” This need for critical discrimination in borrowing of ideas from other jurisdictions had been emphasized by this Hon’ble Court in The Central Provinces Case[624].

356. That in the matter of treaty-making the constitutional provisions in the U.S.A, Canada and in other countries are materially different. In the USA the Constitution itself makes a treaty supreme law of the land. In Canada every tax treaty is legislated. In Australia every tax treaty is legislatively deliberated and incorporated in the Statute. In Under these circumstances this Hon’ble Court should not have relied on the Canadian and Australian cases as they are founded on materially different perception of the statutory and constitutional law. In CIT v. Vishakhapatnam Port Trust[625] the Hon’ble High Court relied on a Belgium tax treaty but missed the point that Art. 68 of the Constitution of that Country “provides that treaties of commerce and treaties which may impose obligations on the state or individuals have effect after the assent of Parliament.”[626]

357. That the Hon’ble Court went wrong in considering the Indo-Mauritius DTAC from the OECD point view. India is not a Member of the OECD[627]. This Hon’ble Court has drawn light and inspiration from the ideas shared by the OECD countries. This Hon’ble Court has heavily relied on Cahiers De Droit Fiscal Internationa; Chong v. Commissioner of Taxation ( Australian-Malysia situation); The Estate of Michel Hausmann ( Canadian situation). The Petitioner most respectfully submits that our Hon’ble Supreme Court

of India can not be allowed to become a reflecting-mirror or sounding-

board of the OECD thoughts. It is good that in CIT v. Kulandagan.[628]

Case this Hon’ble Court held that a resort to the judicial decisions of such countries was not worthwhile.

358. That this Hon’ble Court missed the constitutional fundamentals of greatest importance. In our country a tax treaty must meet two tests conjointly: these being—

( a ) It must conform to the limitations under the Income-tax Act, 1961. As the Central government exercises delegated power on structured pre-conditions the exercise of power is under the judicial control in accordance with the principles of Administrative law.

( b ) It, [and the statutory provisions under the Act, ] must conform to the constitutional limitations.

This Hon’ble Court overlooked the fact that as in almost all the European countries the treaties are legislated, the question of their conformity with the statute does not arise. In the U.S. A. a question can surely arise if a tax treaty violates the entrenched rights under the U.S. Constitution. As tax treaties ate legislatively enacted there is no restriction on what can be done under the tax treaties, Any sort of modulation in the incidence of taxation can be made in favour of the taxpayers. In the U.K. where a tax treaty is made on the Resolution of the House of Commons ( having an exclusive control on revenue under the provisions of the Parliament Act 1911 ), and where the statute grants override to a tax treaty, the range of what can be done though a tax treaty is extremely wide. Under our Income-tax Act the condition precedent is extremely precise and is stated in the terms of art well understood in our legislative practice ( which conforms to the lexical interpretation).

359. That this Hon’ble Court misdirected itself in adoption of appropriate judicial approach. It failed to concentrate on the statutory terms and the constitutional parameters under which we work.. In Thoburn v Sunderland City Council[629]the Queen’s Bench Division was considering certain vital legal issuesin the context of certain provisions of European Communities Act 1972. Laws LJ. made the following two constitutional points which are of relevance for us as we share on these points the British constitutional perspective[630], and also as the law pertaining to the treaties recognized in India is on the British model ( not the U.S. or the Continental models)[631]:

“….we are dealing here with the strict legal position ,

and ot with the realpolitik of thing…” .

“ Whatever may be the position elsewhere, the

law of England disallows any such

assumption.”

This Hon’ble Court should have noted that there is no customary law of international income-tax; and the right view even from the point of international law is what Georg Schwarzenberger says[632]:

“The automatic reception of international law into any of these systems of municipal law as recognized and practiced by each of the countries concerned. Moreover, little doubt exists that if any United Kingdom statute were to run counter to international law, British courts would, in the first place, do their best to harmonize it with their own views of the United Kingdom’s international obligations. If, however, such a construction proved impossible, they would be bound to give full effect to the statute.”

360. The effect of McDowell is, shorn of legalese and logomachy, is to promote justice by exposing and frustrating fraud on pubic interest. There is nothing in law which compels the Hon’ble Court to hold otherwise. In this World wherein many macro giants have thousands of incorporated companies in their hip-pocket, this Hon’ble Court is under duty to see that a corporation does not become a cover-let of gross abuse. The new realities have posed new challenges needing appropriate response from the court. In this context, it is appropriate to keep in view the observation of Judge Manfred Lachs vide para 360 t p. 309. supra.

[ J ] THE JUDGMENT HAS THE EFFECT OF PROMOTING CORPORATE IMPERIUM OF THE U.S.A .

361. That this “globalized” world presents a strange conundrum. Whilst it brags of ‘a common space’, the doctrine of Good Economic Neighborhood is hardly seen at work. The United States cares too hoots for the sovereignty of a state if its national interests are jeopardized Other cheerleaders of the same tribe do likewise. President Bush said with verve that the U.S reserved the right to launch preemptive strikes without warning against suspected states of plotting the use of the weapons of mass destruction against America. Then a spree began. The Kremlin showed its readiness to resort to preemptive strikes preemptively across international borders. Then it was the turn of the Austrian Prime Minister to say the same . It is believed that in this era of a “unitary maelstrom of cooperation and competition” the concept of Sovereignty has gone fut. But the irony is that the tax-havens and the tiny-tots of our planet are most vociferous about Sovereignty of the State. Sovereignty and Opaqueness delight them most. At the September 19-21, 2000 Commonwealth meeting of Finance Ministers in Malta many small States showed unhappiness with the Organization for Economic Co-operation and Development ( OECD)as, they felt, the Organization was subjecting them to sanctions for unlawful tax practices for operating offshore financial centres. “Those countries insisted that as sovereign states they reserved the rights to impose their own tax regimes.”[633] Their criticism was more strident in the conference held in Barbados chaired by Prime Minister Owen Arthur.[634] The reason is obvious: the impregnable and impervious Sovereignty provides unlimited scope for deception at the cost of others to flourish, unnoticed from public gaze.

362. That in the world after the Second World War the domination of the economic realm on the political realm was established with the corporate imperium as the most dominant driver in the overarching international architecture. This situation emerged because of the collective foolishness of the wielders of political power of the nation states. Europe was turned into a moonscape after the World War II. Britain had become the world’s greatest debtor. The whole Europe was prostrate for American assistance and clemency. The Truman Doctrine and the Marshall Plan had been forged. Under the U.S pressure the Organization for European Economic Co-operation was inaugurated on April 16, 1948. The OECD , signed on Dec. 14, 1960 BY 18 European countries, was an extension of the OEEC set up in 1948. It is extremely shocking to find our Government adopting the U.S. Model of the tax treaty forgetting its constitutional limitations and public interests. Our present consternation and future forebodings for a journey under a load on the road to serfdom are graphically described by David C. Korten in his When Corporations Rule the World. The corporations and the tax havens delighted most in darkness. What emerged is the evil world of Comus, offspring of Bacchus and Circe, who haunted an ‘ominous wood’ to lure travelers to drink a magic potion to turn them into monsters who abandoned their friends to ‘roll with pleasure in the sensual sty’. Comus, as those who plead for an opaque system, goes sharpening his specious reasoning:

’Tis only daylight that makes sin’.

363. The Hon’ble Bench failed to see what sinister case was set forth in the paragraphs which it uncritically quoted from Roy Rohatgi’s Basic International Law which led the Hon’ble Bench to justify its conclusion on the ground of ‘Necessary Evil.’ A parallel to this reasoning is conspicuously absent in the World’s ‘civilized jurisprudence’ [borrowing the expression from the Statute of the International Court of Justice]. By refusing to lift the corporate veil, and by virtually overruling McDowell the Hon’ble Court the impugned judgment, in effect, legitimizes what these corporations want: to be the most impervious coverlet totally unaccountable, like their mentors the IMF and the World Bank and the WTO. Hence this Petitioner submits that the impugned judgment is arbitrary and unreasonable by the standards of jurisprudence; and by that modicum of morality without which law becomes an ignoble tyranny. The OECD Model of a tax treaty expresses the World-view which the OECD countries plead and follow. Ours is a strange brave world in which the political process is becoming more and more transparent but economic process is becoming more and more opaque; as if they were inversely related. It was great that in the magisterial style of Chief Justice Marshall, the Hon’ble Delhi High Court said in the Judgment now reversed by the impugned Judgment:: “No law encourages Opaque System to prevail.”

[ K ]

Whether A Tax Treaty Can Override The Statute

A

The Law Of The Land Cannot Be Ridden Roughshod By An Executive Act

The Issues to be decided.

364. That it is understandable that the terms of an Agreement done by the Central Government in exercise of delegated power can prevail over the executive and administrative norms and regulations; but to say that they can even detract from the statue, or that they can ignore the law declared by the courts is to offend the Rule of Law itself.

Judicial Observations.

365. That the Hon’ble Court observed the following:

“A survey of the aforesaid cases make it clear that the judicial consensus in India has been that 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. When that happens, the provisions of such an agreement with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of this reasoning in the decisions we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making these sections “subject to the provisions “ of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.”[635]

“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.”[636]

“When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAC is entitled to seek benefits thereunder, even if the provisions of the DTAC are inconsistent with the provisions of the Income-tax Act, 1961”.

The Fundamental Problems dealt with the impugned Judgment.

366. That a perusal of the impugned Judgment it comes out that that the

Hon’bleDivision decided the relationship inter se the executive acts and the norms created by a statue or those declared by the Superior Courts. In plain English, the impugned Judgment

dealt with the following:

(a) what is the effect if there is a conflict between the circular or instructions issued under Section 119 or 118 of the Income-tax Act,1961, and

(i) the statutory provisions; or

(ii) the law declared by the Supreme Court or the jurisdictional High Court.

(b) What is the effect if there is a conflict between the terms of an Agreement purported to be under Section 90 of the Income-tax Act, and

(i)the statutory provisions; or

(ii) the law declared by the Supreme Court or the jurisdictional High Court.

The impugned Judgment is manifestly incorrect so far it upholds that through a Circuar the CBDT can override the statutory provisions, or can even direct the statutory quas-judicial authorities whether to perform their statutory duties or not.This Petitioner had submitted that:

(i) ‘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.

(ii) ‘These administrative directions cannot take away. jurisdiction vested in a Central Excise Officer under the Act.’

The High Court held that it is 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. Sirpur Paper Mills Ltd v. CWT. Hyderabad[637] was relied on. But under the impugned Judgment the impugned Circular was sustained which not only went against the Act, it also prevented the statutory authorities from doing their duties. This Petitioner pointed out that the CBDT’s power of issuing circulars cannot be sretched to save such circulars. He pleaded that this matter should be examined at length

367.That this Petitioner finds that his plea for reconsideration of some dicta in some cases required to be examined by putting the question in the central focus. The unsatisfactory state of law on the point of the circular-making power of the CBDT was admitted by P. Venkataraman Reddy J in Comm. of Customs v IOCL[638]who suggested that the issue deserved to be referred to the Constitution Bench. In Commissioner of Central Excise, Bolpur Vs M/s Ratan Melting & Wire Iindustries, Calcutta[639] the three-Judge Bench has suggested that a Constitution Bench be constituted to decide the issue of the circular-making power. But in Pahwa Chemicals Pvt Ltd vs the Commissioner of Central Excise[640], the latest of the decisions, a 3-Judge Bench has, in effect, agrred with this Petitioner’s proposition.

368.That it had been decided by this Hon’ble Court in Hindustan Aeronautics Ltd v CIT[641] that :

“…. when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court.”

Hence point (ii)(b) was not res integra. But in M/s Ratan Melting has referred analogous for the consideration Bench.

That it is respectfully submitted that the judicial view is grossly erroneous as there is not a word in Section 90 (2) of the Income-tax to support it. . Ex nihilo nihil fit. Circular No.789 is issued under Section 119 of the Income-tax Act. And this position was never questioned by the appellants. Precisely for this reason that the CBDT never issued any circular in exercise of power under Section 90 of the Act as the CBDT never saw a fount of that sort of power under Section 90(2). Nothing comes out of nothing. 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”. That the view stated above cannot be wrung out from “The Central Government may………. by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement”. The judicial view is patently for the following reasons also:

(a) The Section 90 of the Act empowers only the Central Government to “make such provisions as may be necessary for implementing the agreement”, not the CBDT which issued the Circular.

(b) The CBDT is a creature of the Central Board of Taxes Act, 1964. It is distinct from the Central Government. It is not empowerd to do so, hence it acted ultra vires.

(b) That it was never asserted by the Appellants that the impugned Circular had been notified in the Official Gazette. The notification has a prescribed technical procedure.

(d) The expression implementation implies that the Agreement exists ab exrta as a consensual creature conforming to the base provisions and the pre-conditions prescribed under section 90(1).

(e) There is nothing in the content of the Circular to indicate that it is issued under section 90(2).

(f) 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. 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”.

369. That for rendering the terms of a tax treaty functional and operative both the British Act and the Indian Act provides an analogous protocol. The expression “it is expedient” in the British Act is semantically same as “as may be necessary” in the Indian Act. “Expedient” means” “Advantageous (in general or to a definite purpose); fit, proper, suitable to the circumstances of the case”[642] To “make such provisions as may be necessary for implementing the agreement” under the Indian Act is semantically analogous with “ then those arrangements shall have effect…” under the British Act. The word ‘implement” means, as the New Shorter Oxford Dictionary says, “put (a decision or plan) into effect”.

370. That assuming, without admitting arguendo, that Section 90(2) can be someway stretched to make the tax-terms override the Statute, it would be totally against law and logic to give the terms an override on the strength of the CBDT Circular without any foundation in law as the Section 90(2) was inserted by the Finance Act 1991, though with retrospective effect from April 1, 1972. The CBDT Cir. Of April 2, 1982 cannot acquire any support as to its validity w.r.t. what was legislatively done almost a decade after.

371 .That the insertion of sub-Section 2 of Section 90 proves just the opposite. The object and the import of Section 90(2) had been stated in the Review Petition.[643] If it is assumed that a tax treaty overrides the statute, then it would be utterly futile to provide through the statutory amendment any benefit de hors the DTAC as has been done by the amendment done under Section 90 by the Finance Act, 2003. This fact should be taken as a legislative pointer to the right import of the provision..

372.That so many erroneous ideas have been telescoped in the above paragraphs quoted from the impugned Judgment that they deserve to be taken up in separate paragraphs. The judicial logic goes thus:

(a) Section 90 empowers the Central Government “to issue notification for the implementation of the terms of a double taxation agreement.”

(b) The provisions of such notified agreement “would operate even if inconsistent with the provisions of the Income-tax Act”.

But this is not what Section 90 of the Act says. The referent of the expression “provisions” is not the content ( the individual terms) of an Agreement but its referent is the expression “implementing”. The expression “make provision” has been thus explained in the New Shorter Oxford Dictionary:

“The action or an act of providing something; the fact or condition of being provided. Freq. In make provision, make prior arrangement or preparation (for ), supply necessary resources ( for).”

The Collins Cobuild Dictionary explains the expression “make provision”:

“If you make provision for something, you prepare for

it by making arrangements e.g. They made provision for

the defence of England…”

And what is to be implemented is an Agreement. And the Agreement is what is done under Section 90 in terms of Section 90 (1). In order to be valid it must not transgress the limitations on power put by the said Section. The case before the Hon’ble Court was: whether in exercise of power to avoid double taxation it is possible to bring about a situation of no-taxation, or even a nominal taxation. The word “implementation” in the Section refers to “ the agreement” ; but this in no way validates what goes counter to the terms of that Section. The trajectory of the word “implementing” cannot reasonably be widened as to include whatever the Executive wants even at the wreck of the law. The Central Government is empowered by Section 90 to perform the following two tasks:

(a) to enter into an agreement with the government of any country for the purposes specified in the Section 90; and

(b) to make preparation for giving effect to that Agreement

within the domestic jurisdiction.

No rule as to treaty override can emerge from the facts of notification in Official Gazette or “ from making such provisions as may be necessary for implementing the agreement”. Notification means, as the COD says, “make known; announce or report”. Black’s has spelt out its sense in the context of International Law as “a formal announcement of a legally relevant fact…” Implementation means, to quote COD, “Law performance of an obligation”. Creation of a tax treaty is a precedent act; its notification and implementation are the subsequent acts. In causing operative effect both are integral but they are separate and distinct events. We cannot draw something from a source where it does not exist. The word implementation in the context of Art 253 means a legislative implementation, whereas in Sec.90 it means administrative implementation as what the Central Govt does u/s 90 of the Act is to enter into an international contract. In exercise of this power to implement the range of the permissible power should not be transgressed. “Notification” is the official information to the all concerned within the domestic jurisdiction that an agreement with X country has been entered into. This accords with the meaning of this term in Collins Co-build which explains “notification” thus: “Notification is an act of informing someone officially about something”. And this is done through Gazette which is a Publication of an official character which contains government notifications…etc “.

373. When the Hon’ble Court says:

“When that happens, the provisions of such an agreement with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act.”

It is most respectfully submitted that the conclusion does not follow from the premises. This is on account of the conjoint effect of the operation of the fallacy of post hoc and the distorting ambiguity of the expression “provision”. The Hon’ble Court takes the word to mean what appears as the fourth sense of this word in the New Shorter Oxford Dictionary: to quote—

“(A clause or division of ) a legal or formal statement providing for some particular matter or making a stipulation or condition”

In this sense the word provision means, as Collins Cobuild says under sense 6 of this term: ‘A provision in an agreement or law is a condition which is formally included in it.” But this is not what the Section says. Ambiguity should have been resolved in the light of Section 90 (1) itself.

Case law noticed: manifest misdirection

374. .That the Hon’ble Court misdirected itself in relying on CIT v. Vishakhapatnam Port Trust[644]; CIT v. Davy Ashmore India Ltd[645] CIT v. R.M. Muthaiah[646]; and Arabian Express Line Ltd[647] . The conjoint effect of the CBDT Circular[648] No 333 dated 2-4-1982 and of Vishakhapatnam Port Trust: if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise; if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; and in case of difference between the provisions of this Act and the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the Court[649]. This Petitioner submitted that to the extent these cases made a blanket proposition that a tax-treaty would ipso jure detract from/or prevail over or override the statutory provisions it is invalid and non-operative within the municipal jurisdiction as propositions contra the law and the Constitution of India. The only constitutionally permissible course before this Hon’ble Court was:

(a) either to hold the view on the point under consideration invalid;

(b) or to read down the terms of the tax-treaty so that they conform to the statute in harmony.

375..That CIT v. Vishakhapatnam Port Trust[650] is the leading case as all the reasons on account of which the High Courts have accorded a tax treaty overriding effect on the statute are stated therein. These reasons are the following:

( a) the decision of the House of Lords in Ostime v. Australian Mutual Provident Society[651]

( c ) certain stipulations in the tax treaties of the European countries[652]; and

( d ) reliance on Sections 4 and 5 of the Income-tax Act, 1961.

As CIT v. Davy Ashmore India Ltd[653] CIT v. R.M. Muthaiah[654]; and Arabian Express Line Ltd[655] stress on these two points:

( a ) The CBDT circular no 333 of April 2,1982; and

( b ) The effect of Sections 4 and 5 of the Income-tax Act, 1961.

This Petitioner had pointed out to the Court that in Vishakhapatnam Port Trust the Andhra Pradesh High Court was wrong on relying on the decision of the House of Lords in Ostime v. Australian Mutual Provident Society[656] as the House was considering an enactment which the British Court cannot but follow as it is. In India this is not the case. Besides the High Court went wrong in relying on the decisions of the Belgian Supreme Court ( construing the French-Belgium Treaty), the German Federal Supreme Tax Court, and the Swiss Federal Tribunal as the Hon’ble High Court overlooked the specific statutory and constitutional symmetry of these countries. In each of these country a tax-treaty is an enactment. And their courts do not posses the wide power of Judicial Review which our Superior Courts possess. This Hon’ble Court accepted both these pleas as they are not considered grounds in support the view that a tax treaty can override the statute. [ Vide pp. 24-25 of the Judgment.]. This Hon’ble Court, in effect, relied on:

( a ) The CBDT circular no 333 of April 2,1982; and

( b ) The effect of Sections 4 and 5 of the Income-tax

Act, 1961.

This Petitioner would show in the subsequent two paragraphs how both the points are manifestly erroneous.

142. That the Circular No 333 runs as under (quoted at p. 25 of the Judgment):

“"The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income."

The CBDT Circular 333 does not give any basis to support its view. So far this Petitioner can see it was the view in some tax treaties of the OECD countries which led the CBDT to adopt this view. Surely this view was adopted on the pressure of that very lobby and the persuaders who inspired the Executive to adopt the OECD Model despite its non-conformity on many points with our law. This view that a tax treaty would override the statute was advanced before the Andhra Pradesh High Court in the income-tax Reference No 53 of 1978 ( the erroneous Vishakhapatnam Port Trust[657]. ) The decision of this case was given on June 17, 1983. The CBDT enjoyed this delicious power; the experts and tax-planners were understandably glad. Our Courts follow adversarial proceedings: they hardly bother when the two sides shake hands. It is only in a PIL that this Hon’ble Court gets invited by an ordinary citizen to exercise its constitutional jurisdiction to examine the legality of an administrative action having at its most conscious-point the exploding metaphor uttered by a housewife which are inscribed in the words of fire on the logo of this Hon’ble Court (yatoh dharmahstato jayah ).

376. That no High Court in upholding this asserted “correct position” ever considered it worthwhile to hold even a fleeting inquest to find out the basis and propriety of this view. This Hon’ble Court should have noted that most of the judgments have relied on the CBDT Circular No 333 dated April 2,1982. This circular’s validity was never questioned or considered. “Acquiescence for no length of time can legalize a clear usurpation of power” for as Dixon J observed, “time does not run in favour of the validity of legislation[658]. In the present case the circular should have been evaluated rather than uncritically accepted. Reliance on it illustrates the fallacy of the post hoc, it assumes that which is itself under question. This circular represents to the Executive’s point of view which does not conform to the law and the Constitution. In course of this PIL the Hon’ble Court should have adopted a different perspective. The Hon’ble Court should have realized in this proceeding the basic fallacy in relying on the CBDT Circular on which the High Courts relied. The Executive which frames a tax treaty of this type is naturally interested to make it immune from all attacks. The CBDT surely enjoys power ( most delicious when abused); and the assesses are the lucky lot to enjoy benefits. All decisions of the High Courts were given in proceedings wherein the vires of that Circular No 333 could not have been questioned. Neither the Government which issued it, nor the assesses who obtain obvious benefits could have reasons to pray before the courts for its examination on the touchstone of legality. But in this PIL to adopt this view is manifestly incorrect that now a citizen has a locus standi to question the legality of an administrative act or view on the count as much of legality as of propriety. By assuming the Correctness of the Circular 333 this Hon’ble Court’s view is tainted with the fallacy of post hoc, ergo propter hoc.

377.. This Hon’ble Court misdirected itself in considering both the import and the synergy of the Sections 4 and 5 of the Income-tax Act, 1961; and missed to ascertain the role and the province of these Sections vis-vis Section 90. This Hon’ble Court observed:

“If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making these sections “subject to the provisions “ of the Act”[659]

“We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC”[660].

The import of “subject to the provisions” in these Sections had been examined in Commissioner Of Income-tax V. F. Y. Khambaty[661] by the Bombay High Court[662] which held that the expression 'subject to' in s. 5 does not connote that other provision of the act override the provisions of section 5. It only denotes that income which is excluded from the Scope of total income by reason of any provision should be excluded for the purpose of s. 5. The Hon’ble High Court observed, per Kania J.:

“Therefore, what the use of the said expression shows is that in considering what is total income under section 5, one has to exclude such income as is excluded from the scope of total income by reason of any other provision of the Income-tax Act and not that the other provisions of the Income-tax Act override the provisions of section 5 as suggested by Mr. Jetley.”

In fact it is a matter of mere statutory construction: what can, on proper construction of the provisions on the substratum of the facts of a case ,and be reasonable to hold that certain income is validly excluded by any statuary provisions. In a case of this type rule of ultra vires operates as a matter of construction. This is what the Hon’ble High Court had done..

378. That it is with reference to these decisions of the High Court that the eminent expert Mr. K Srinivasan says:

“ The Revenue has suffered from the interpretation of what liability to tax means in some court rulings; and the damage to the Revenue that may result from the Supreme Court’s ruling in the Union of India v. Azadi Bachao Andolan [ 2003] 56 CLA 334 is likely to be considerable.”

379. That the Hon’ble High Court committed constitutional solecism by relying on the tax treaties of the OECD without realizing that in those countries tax treaties are enacted by legislature: and their constitutional provisions are different. Detailed submissions on this have already been made stating how this Hon’ble Court’s Judgment has become a reflecting mirror or sounding-board of impermissible ideas from the OECD countries.

380. That, to the extent sections 4 and 5 of the Income-tax Act, within the legitimate province of their function, give effect to whatever be its content, they constitute the mandate of the Act itself. Hence, there is no question of any override. It involves no overriding of the statute by a tax treaty. These provisions of the Act grant priority to Section 90 of the Act. But this cannot grant to a tax treaty as such any override de hors the Act [ section 90(1)]. A tax treaty must not transgress Section 90(1). The Petitioner in his written “Concluding Submissions” before this Hon’ble Court had stated the effect of Sections 4 and 5 in these words.

“The effects of the aforementioned submissions can be briefly thus stated:

(a)A tax treaty broadly consists of two segments:

i. the segment containing the terms of a tax treaty having bearing on the incidence of tax under charging Sections 4 & 5 of the Income-tax Act:

ii. the segment containing procedural provisions relevant for implementation of the treaty.

(b) The terms of a tax treaty in accordance with which the charging sections of the Act would operate in a given case must strictly conform to the grant of power through the terms of art under section 90(1) of the Income-tax Act. If the terms of a tax treaty go counter to the statutory preconditions, such terms of a tax treaty to the extent not within the permissible zone deserve to be held not in accordance with law. Such impermissible terms cannot prevail over the charging sections.

(c) The terms of the second segment would likewise be classified in two groups. Those which reasonably relate to implementation simpliciter would clearly be in accordance with law. But those terms which go beyond that sphere to override the law, would not be valid. On this point the provisions of the British Act bring out the differences in high relief as they’re overriding is complete both in view of provisions of section 788(3), and the fact that a tax treaty in the U.K. is an enactment. It is felt that the Instruction No.12 of 2002 dated 1st Nov. 2002 is clearly not in accordance with law.”

Precisely the same view has been stated by Sri K Srinivasan[663], an authority of great repute in the field of the law relating to the Avoidance of Double Taxation, in an article written after the perusal of this Hon’ble Court’s Judgment. His views which show how the Judgment has gone wrong would be analyzed later.

381. That the Hon’ble Court invoked the doctrine of Stare decisis in a fact situation where the jurisprudence of this Court does not approve of its application. After explaining the doctrine of Halsbury's Laws of England states :

“But the supreme appellate Court will not shrink from overruling a decision, or series of decisions, which establish a doctrine plainly outside the statute and outside the common law, when no title and no contract will be shaken, no persons can complain, and no general course of dealing be altered by the remedy of a mistake.".

And Corpus Juris Secundum says :-

"This rule is based on expediency and public policy, and, although generally it should be strictly adhered to by the Courts, it is not universally applicable."

The Hon’ble Court should have noted that this doctrine is to promote justice where unsettling of the bona fide settled affairs would be unfair. This doctrine was never conceived to be invoked in a mala fide situation.. That the Court missed the correct perspective on facts as for wrong technical reasons it excluded from its consideration the material facts in the Assessment Order of M/S Cox & King. These treaty-shoppers constitute a stream of marauders of our economy. The individual operators keep on changing, even splitting into many but all remain shrouded in dense fog engulfing their identity and credentials. A regular reader of newspaper is aware of the sinister behaviour of these silhouettes. Even The Indian Express[664] has something relevant to say: “According to the data available with SEBI, out of the total net investment of Rs 72,965 crores (over dollars 16 billions)

in equities as on September 30, 2003, 84 per cent is held by mutual funds, asset management companies, investment companies, banks and pension funds. “But who are the investors in these funds and companies? Sebi is not clear about it. It can be NRIs or resident Indians,” says an Indian fund manager who preferred anonymity.”

The doctrine of Stare decisis is not to be applied in such situations. It is most appropriate in the law of property and contract. On a micro view there must be justice on the side of the persons in whose favour it is invoked. The circling out of the facts, how the treaty shoppers played truants with law, was most unfortunate as miscarriage of justice became inevitable. To say that the above mentioned High Court decisions create Sarer decisis is simultaneously a complete miscomprehension of this well-known doctrine, and a mistaken comprehension of what these decisions decided.

These decisions of the Hon’ble Courts are examples of errors kept circulating none felt its business to place their propositions for a judicial evaluation by the courts. These cases belong to that category about which C.K. Allen writes[665]:

“And yet it is remarkable how sometimes a dictum which is really based on no authority, or perhaps on a fallacious interpretation of authority, acquires a spurious importance and becomes inveterate by sheer repetition in judgments and textbooks.”

382.That the Hon’ble Court has held that the Tax Agreements can override the statute. There is nothing in the Income-tax Act 1961, or in any other law of our country to grant the terms of a tax treaty a priority or an overriding effect over the Statute. To the extent a tax treaty conforms to the limitations of Section 90 (1), its terms pro tanto have overriding effect. But this overriding is accorded by the Sections 4 and 5; it is not on account of any fount of power in the treaty per se. In whichever country a tax treaty is given an overriding effect it is so provided by the supreme legislation . This would be clear from the following:

(a) Under Section 788 (3) of the United Kingdom’s Income and Corporation Taxes Act 1988 it is specifically provided through a non obstante clause.

(b) Section 4(2) if the International Tax Agreements Act, 1953 OF Australia provides:

“(2) The provisions of this Act have effect notwithstanding

anything inconsistent with those provisions contained in Assessment ACT (other than sections 160AO or Part IV of the ACT) or in any Act imposing Australian tax.’

(c) In Canada, the Acts introducing each treaty into domestic law also provide that the treaty will prevail over domestic law Thus section 5 of the Income Tax Conventions Implementation Act, 1986 provides:

“ (1) Subject to subsection (2), in the event of any inconsistency between the provisions of this Part or the Agreement and the provisions of any other law, the provisions of this Part and the

Agreement prevail to the extent of the inconsistency.

        1. “In the event of any inconsistency between the provisions of the Agreement and the provisions of the Income Tax Conventions Interpretation Act, the provisions of this Act prevail to the extent of the inconsistency.”

( d ) In Germany s. 2 of the General Tax Code provides:

“Treaties with other States as defined by Art. 59 para 2 (1) of the Basic Law take precedence over national tax laws if the treaties have been incorporated properly into applicable national law.”

(d) In France the Constitution of the Fifth Republic provides in Art

55 Title VI:

“Art. 55 Duly ratified or approved treaties or agreements shall, upon their publication, override laws, subject, for each agreement or treaty, to its application by other party.”

(f) The United States Constitution provides in Article VI, cl. 2, that:
* * all Treaties made, or which shall be made, under Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

Thus, all treaties made under the authority of the United States are to be the supreme law of the land and superior to domestic tax laws.

(g)In Belgium according to the Cour de Cassation: May 27, 1971, Etat Belge C. ‘Fromagerie Franco-Suisse Le Ski” S.A. (1971) Pas., I, 886. The Belgian Constitution is silent on this point but case law establishes that a treaty approved by the Belgian Parliament and having direct effect prevails over existing and subsequent domestic legislation.

(h) “In other countries, treaties have a superior status to domestic legislation: in some they are regarded as special law (lex specialis). [ as in Spain]. The issue of conflict then falls upon the maxim ‘lex posterior generalis non derogat legi priori speciali’ ( a subsequent general law does not override a prior special law). Tax conventions are given special status , for example, in Germany, France, the Netherlands, Japan, and Belgium.[666]

( i ) That the Constitution of India does not permit limitations on India’s Sovereign power in favour of any international organization or treaty though it is so in several constitutions in the world. [viz. Belgium (Art 25bis), Denmark (Art 20), Italy (Art 11), the Netherlands (Art 92), Spain (Art 93), the Federal Republic of Germany (Art 24)……

383. That every great constitutional democracy gives priority to its law over executive acts. The U.S-India tax treaty too provides that the law of the land cannot be ridden roughshod. Even when in the U.S a treaty is the supreme law of the land it is not permitted to play truants with the domestic law. This aspect of the matter deserves to be stressed as the Hon’ble Supreme Court has held a treaty a function of sovereign power. It is to be noted that India’s Commerce Minister by signing the Uruguay Round Final Act has virtually subjected the whole country to obligations of serious nature under the threat of international delinquency. Under this pactum de contrahendo there are provisions which would circle out the role of the courts including that of the Supreme Court by privatization of justice under the aegis of the WTO’s Disputes Settlement Body. But the U.S.A by statutory provisions maintains the overriding effect of the law of the land. This Hon’ble Court may consider the following provision in Section 3512 of the U.S.Code dealing with “Relationship of agreements to United States law and State law”:

“(a) Relationship of agreements to United States law

(1) United States law to prevail in conflict. No provision of any of the Uruguay Round Agreements, nor the application of any such provision to any person or circumstance, that is inconsistent with any law of the United States shall have effect…….”

384. That no great country allows its law to be bent or breached by an executive act. Parliamentary enactments cannot be overridden by the Executive fiat, as it has pathogenic effects destructive of the very fibre of a democracy. A lot of illustrations this Petitioner has already given in this Petition. One more is drawn from the tax treaties themselves. The import of the following provisions in the Indo-US, and the Indo-UK tax treaties be examined; and critically compared with the corresponding provisions under the Indo-Mauritius DTAC:

(a) Art.25 of the Indo-U.S. Convention for Avoidance of

Double Taxation:

(1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof ), the U.S. shall allow to a resident or citizen of the U.S. as a credit against the U.S. tax on income…

( b ) Art 24 of the Indo-UK Convention for Avoidance of

Double Taxation

(1) Subject to the provisions of the law of the United Kingdom regarding the allowances a credit against the United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle…..

( c ) Art 23 of the Indo-Mauritius DTAC

(1)The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this

Convention. Despite the fact that under the U S Constitution a tax treaty is a superior legislation it is subordinate by Art 25 not only to the existing U.S. law but also to the law to be framed. In the United Kingdom too the position is the same ( despite the fact that a tax treaty is done after the approval by the House of Commons having an exclusive control over taxation, per the provisions of the Parliament Act 1911 ). But in India there is no Parliamentary supervision of the tax treaties. Public Opinion, which Sir Ivor Jennings considers the supreme pre-condition for the working of a democratic constitution, is neither vigilant nor well informed. Under the Indo-Mauritius DTAC all our laws (including our Constitution?) are subject to the tax treaties. There is nothing to warrant this view; it is patently illegal and this Hon’ble Court should declare it boldly approving what the Hon’ble Delhi High Court has done. God knows with what design this provision was so worded in the Indo-Mauritius DTAC. Lack of transparency and enhanced executive power are the quivering desire of swindlers in all times. The JPC refers to the misuse of tax haven routes from British Virgin Islands. Panama, Isle of Man, and Mauritius (JPC Report p. 179). Scandalous use of a tax haven route was almost coeval with the formation of the Indo-Mauritius DTAC as would be clear from the graphic account given by Hamish McDonald in chapter 6 of his The Polyester Prince [(Allen & Unwin) a Xerox copy given to this Hon’ble Court in course of SLP hearing): a graphic account of how tax haven routes were misused even by those whose glories were orchestrated in season, out of season by the wielders of political power. Prof Galbraith says in A History of Economics: The Past as the Present (at p. 236):

“Here another great constant in economic life : as between

grave ultimate disaster and the conserving reforms that might avoid it, the former is frequently much preferred.”

For the first time in the history of this Republic these issues have come up before this Hon’ble Court. The Hon’ble Court should ensure the Rule of Light and the Rule of Law. In the case of a tax haven there is absence of transparency. This has been noted by the OECD in its report “ Harmful Tax Competition an Emerging Global Issue. It says in (para 114, at p. 46)

“Information on foreign transactions and taxpayers is essential for certain domestic counteracting measures to work properly, but is notoriously difficult to obtain with respect to tax havens and certain harmful preferential tax regimes.”

And, after noticing the abuse of the regimes by third countries (in para 118) it goes to the extent of recommending “that countries consider terminating their treaties with tax havens and not entering into treaties with these countries (para 130)

385. In the Common Law countries , the United Kingdom [Australia, Canada (except Quebec), the United States (except Louisiana)] traditional view is that an Agreement, whatever be name given, “once entered into domestic law (either automatically, after approval, or by transformation through legislation) has no higher status than any other law. The question of conflict may fall to be resolved, then, on the basis of the maxim “lex posterior derogat legi priori” ( a subsequent law overrides a prior law).”[667]

Following propositions need to be appreciated :

(a) A tax treaty is a self-executing treaty. “ 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.”[668] “The binding force of the treaty under international law is to be distinguished for its internal applicability. Internal applicability is a consequence only of treaties which-like tax treaties – are designed to be applied by domestic authorities in addition to obligating the States themselves, in other words, self-executing treaties.”[669] Tax treaty rules assume that both contracting State tax according to their own law, unlike the rules of Private International law ; therefore, treaty rules do not lead to the application of the foreign law.

(b) When a tax treaty is legislated as a whole investing all its provision with legislative force it has the force of a statute subject only to constitutional limitations, and radiation from the Fundamental Rights ( as in the U.S.A. or India) This common law view is manifested in Art. 231(4) of the South African Constitution:

“ (4) Any international agreement becomes law in the Republic when it is enacted into law by national legislation; but a self-executing provision of an agreement that has been approved by Parliament is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament”

(c) A Tax Treaty is sui generis because, whether it is done at the international level or any other level, it must conform to the statute as a tax treaty is done not under the Prerogative, or the executive power but under specific Parliamentary mandate..

(d) It is worthwhile to note that through a statute it is the sovereignty of Parliament, as invested into it by the Constitution, expressed. through a treaty it may accept some auto-limitations as a mark of deference to the comity of nations and the rules of international law, but it remains sovereign nonetheless. This position has been succinctly brought out by Laws LJ. in Thoburn v Sunderland City Council[670]:

“ . The British Parliament has not the authority to authorize any such thing. Being sovereign, it cannot abandon its sovereignty.”

( e ) In a tax treaty to which the statute does not give an override never

prevails on the statute. This point is clearly recognized in the leading case of Collco Dealings LTD v. IRC[671] wherein the supremacy of the domestic tax statute was recognized. Viscount Simonds aptly stated:

“But it is said in the first place that it is not entitled under

an enactment but under an agreement ( which the appellant company, to add weight to argument, prefers to call a treaty ). This contention cannot be accepted. Its rights arise under the Act of Parliament which confirms the agreement and gives it the force of law.”

386. That in same vein this Hon’ble Court observed:

The contention of the respondents, which weighed with the High Court viz. that the impugned circular No.789 is inconsistent with the provisions of the Act, is a total non-sequitur. As we have pointed out, Circular No.789 is a circular within the meaning of section 90: therefore it must have the legal consequences contemplated by sub-section (2) of section90. In other words, the circular shall prevail even if inconsistent with the provisions of Income-tax Act, 1961 insofar as assessees covered by the provisions of the DTAC are concerned.”

It is most respectfully submitted that it is a patent error on the part of this Hon’ble Court to say;

“ As we have pointed out, Circular No.789 is a circular within the meaning of section 90: therefore it must have the legal consequences contemplated by sub-section (2) of section 90”.

As the first part of the sentence is a patent error of law, the second part is erroneous by way of inevitable consequence. The Circular is issued under Section 119, and never under Section 90. Besides, the legal consequences of Section 90(2) follow as a matter of law itself where more beneficial statutory provisions , in contradistinction to the terms of a tax treaty, have been inserted in the Income-tax Act. As the Hon’ble Court erred patently in coming to such conclusion , it went wrong in paraphrasing its view on the point.

387. That neither Sections 4 and 5 nor the provision of Section 90 of the Income-tax ACT, 1961 could authorize this. The structure of Section 90(1)[672] of the Indian Income–tax Act and that of Section 788 of the British I.C.T.A. , 1988. For rendering the terms of a tax treaty functional and operative both the British Act and the Indian Act provides an analogous protocol. The expression “it is expedient” in the British Act is semantically same as “as may be necessary” in the Indian Act. To “make such provisions as may be necessary for implementing the agreement” under the Indian Act is semantically analogous with “ then those arrangements shall have effect…” under the British Act. It has already been mentioned that the word ‘implement” means, as the New Shorter Oxford Dictionary says, “put ( a decision or plan ) into effect”.

388. That Section 90 (2 ) of the Income-tax Act contemplates the transmission of the statutory benefits ( on account of some statutory change) to the beneficiaries of a tax treaty. It does not contemplate the reverse: that is, transmission of benefits ab extra and de hors the Act by overriding its provisions. The relevant provisions under the statutory provisions in the United Kingdom and India would show that a tax treaty can never override the statute. Under Section 778 (3) of the British I.C.T.A. 1988 specifically by enacting a non-obstante clause grants the provisions conforming to Section 788(1) an override on the Act. In India there is no such provision. When in the United Kingdom it was considered expedient to incorporate the provisions pertaining to the Mutual Agreement Procedure it was felt that it could not be done without a specific statutory mandate. The paragraph 20 which inserted a new Section 815AA into the British Taxes Act says:

“ 35. The paragraph provides statutory authority for the Inland Revenue to give effect to the solutions and agreements reached under the mutual agreement procedure …

36. Section 815AA (3) enables a consequential claim for relief to be made within twelve months of the notification of a solution or mutual agreement even if other time limits have expired.

37. New section 815AA applies so as to give effect to a solution or mutual agreement from the date of enactment (i.e. existing cases are covered). The time limit for presenting a new case , following enactment, is six years after the end of the chargeable period to which the case relates or any such longer period as may be specified in the relevant double taxation agreement.”

389. That there is a recent legislative indication, which shows that our Parliament does not consider it proper that a tax treaty should override the Statute. If the DTAC could be in itself enough there could be no need to amend Section 90(1) of the Income-tax Act by Finance Act 2002. When this Petitioner in course of hearing before this Court argued that the Preamble to the Indo-Mauritius DTAC contemplated terms even for promotion of trade and investment in clear contravention of Section 90, the Parliament amended the Section from April 1, 2004. This negatives this Hon’ble Court’s view that a tax treaty can override the statute. Besides, this brings out one more point of great importance: our Parliament which amended Section 90 to make the Preamble to the Indo-Mauritius DTAC by a statutory backing, and the British Parliament which erected the provisions of the Mutual Agreement Procedure in Section 815AA into the British Taxes Act. The constitutional substratum both in India and the U.K. is, thus, the same,.

390. That after this Judgment Sri K Srinivasan the author of the Guide to Double Taxation Avoidance Agreements[673] has examined the issue, after perusing this Judgment of this Hon’ble Court, whether a tax treaty can override the Income-tax Act. In an article, written after this Judgment, he has observed:

“ The doctrine of reciprocity in the tax treatment of their respective citizens by the Contracting States is written into sections 90 and 91 of the Act; and so is the necessity for the agreements into which the Government may enter with other countries, ensuring that they contain no provision which is repugnant to section 90’ It is obvious that no treaty into which India enters can contain any term or clause repugnant to the laws of India: municipal law will prevail if there is any inconsistency, except to the extent that section 90 permits or else the Act will have to be amended to avoid the inconsistency”

It is submitted this was this humble Petitioner’s position and plea all along. The Hon’ble High Court had accepted it, but this Hon’ble Court differed. It is submitted that as the House of Lords in R .v Shivpuri overruled its recently delivered judgment by 5 Law Lords on appreciation of an article written by Professor Glanville Williams entitled “The Lords and Impossible Attempts, or Quis Custodiet Iposos Custodies? [1986] CLJ , so should this Hon’ble Court recall its impugnedJudgment.

391. That it is possible to gather legislative view-point suggested strongly by the two Amendments to the Income-tax Act, 1961.

(a) When this Petitioner argued before this Hon’ble Court that the reference to “trade and investment” in the preamble to the Indo-Mauritius DTAC, and the provisions implementing this object had no statutory authorization, the Central Government saw no option but to amend the Section 90(1) at once. If the Attorney-General’s view was correct then there was no need to make a posthaste amendment of the statute as the treaty would have stood despite the statute.

(b)If the Indo-Mauritius DTAC prevails over the statute, it was meaningless to insert sub-Section 90(2) of the Income-tax Act,1961. If the DTAC gets priority or overriding effect, then the terms of the DTAC would prevail, not the more beneficial provisions of Section 90(2). This would make the object of the insertion of Section 90(2) meaningless

.

392.. That in short, serious distortions in law have been caused by this Judgment. This apparent error destroyed the Petitioner’s case before it could have its take off. If anything can be stipulated in a tax treaty of this sort, and any such a tax treaty can override the statute , our democracy and our Rule of Law are both at serious peril.

393..That by evaluating the view taken in the Judgment in terms of its probable consequences this humble Petitioner submits:

( a ) if power over taxation goes into the executive domain sans statutory empowerment then the great constitutional strides towards democratic control[674] of the executive power would be reversed to the days of the Stuarts;

(b ) if in generic sense a treaty done by the Executive in some dark dungeon of the World overrides the statute per se, then we admit that in the hip-pocket of the Executive there is sovereign power, derived from some extra-constitutional source, which can subjugate national sovereign space, modify the constitutional imperatives in socio-economic policy formulations, can abrogate federal features of our polity, and establish executive dictatorship which may even become, perish the thought, a covert commercial imperialism of foreign bodies many times more powerful than the nation states with many of them having sold their souls as did Dr Faustus in the great Marlowe’s The Tragical History of Doctor Faustus .. This Hon’ble Court should take a judicial notice of the trends and tendencies of our times in the historical perspective. This Petitioner’s comprehension leads him to believe that circumstances are conspiring to render our nation a sort of Sponsored State. This submission be not dismissed as a fanciful idea conjured up by an over-heated imagination let loose to paint a picture of doom. This Court may keep in consideration that it is what J. Bronowski considers human specific trait:

“There are many gifts that are unique in man; but at the centre of them all, the root from which all knowledge grows, lies the ability to draw conclusions from what we see to what we do not see, to move our minds ``through space and time, to recognize ourselves in the past on the steps of the present.” [675]

PART III

Section I

Art. 119(1)(a) breached.

394A. That in this Section this humble Petitioner submits that the right to the freedom of speech which is a preferred freedom guaranteed to us, is being undermined and made non-effective in an important segment of public administration in the public law field by CBDT Circular No 789 OF 13TH April, 2000 . The lethal consequence of this administrative remissness and administrative lawlessness is the denial of transparency.It affects adversely our Right to Know without which the right of expression is meaningless. This Section portrays the realities of the present in the context of which the validity of the said Circular deserves to be decided. As these realities are largely shrouded by the vested interests, this Petitioner combines a macro and micro view in a broad spectrum of submissions so that the points under consideration can come up before this Hon’ble Court in their perspective and proportionality.

[ A ]

Art. 19: its reach.

394B That Art 19(1)(a) of the Constitution of India grants to the citizenry of this Republic a fundamental “right to freedom of speech and expression”. Without it a sound Public Opinion cannot be formed. And we know that, as Sir Ivor Jennings said, without sound public opinion democratic polity cannot survive.. In R. v. Cmmr of Police Ex p Blackburn (No 2)[676] Salmon L.J. aptly said:

“It is the inalienable right of everyone comment fairly upon any matter of public importance. This right is one of the pillars of individual liberty--- freedom of speech, which our courts have always unfailingly upheld… The criticism here complained of, however, rumbustious, however wide of mark, whether expressed in good taste or in bad taste, seems to me to be well within (the limits of reasonable courtesy and good faith).”[677].

And Edmund Davies L.J. highlighted, in his characteristic style, the reach and importance of this right in these suggestive words:

“The right to fair criticism is part of the birth-right of all subjects of Her Majesty. Though it has its boundaries, that right covers a wide expanse, and its curtailment must be jealously guarded against. It applies to the judgments of the courts as well as other topics of public importance.”[678]

A democracy without its citizenry enjoying full fundamental rights is inconceivable. This lesson of history is learnt with difficulty but forgotten with ease. Freedom of speech and expression ensures an open society wherein a fair balancing exercise to which Conway v. Rimmer[679] refers, is done under the aspect of equity and equality.. The European Court of Human Rights differed from the ruling of the House of Lords in the thalidomide case, and upheld the right of expression holding the decision of the House of Lords granting an injunction prohibiting the publication by the Sunday Times of its thalidomide article, was an interference with the newspaper’s right to freedom of expression which could not be justified under Art. 10(2) of the European Convention on Human Rights as being ‘necessary in a democratic society’[680] Our Supreme Court too has expressly recognized the need to perform a balancing exercise between the public interest in the freedom of speech and expression and the public interest in the administration of justice.

Right to Know

395.That the fundamental right to “freedom of speech and expression” cannot be exercised properly unless with it goes the Right to Know. This Hon’ble Court has recognized the supreme importance of the Right to Know. In Reliance Petrochemicals Ltd. v. Proprietors of Indian Express Newspapers Bombay Pvt. Ltd[681] [ followed in S.N. Hegde v. The Lokayukta, Banglore[682].], this Hon’ble Court observed:

“We must remember that the people at large have a right to know in order to be able to take part in a participatory development in the industrial life and democracy. Right to know is a basic right which citizens of a free country aspire in the broaden horizon of the right to live in this age on our land under Art. 21 of our Constitution. That right has reached new dimensions and urgency. That right, puts greater responsibility upon those, who take upon the responsibility to inform.”

This Right to Know is immensely important under our constitutional system, at least for the five reasons:

(i) That we reserve to ourselves the right to keep the organs of the Constitution under our broad scrutiny so that as the ultimate source of political power we are ready to respond to challenges of the realities if our destiny so demands. We have not forfeited our ultimate rights, nor do we want to forget our ultimate duties, as the members of this political society constituted at present as the Republic of India.

(ii) That as the players of diverse constitutional roles we are decision-makers on points touching the public inresources and their management. It is impossible to exercise this function without Right to Know.

(iii) That for due discharge of the Fundamental Duties under Part IVA of the Constitution we must exercise our Right to Know in its full amplitude subject only to the constrictively interpreted restrictions prescribed in Art 19(2) of the Constitution.

(iv) That our country has suffered a lot on account of administrative opaqueness which reached its umbral zone during the Emergency the saga of which Justice Shah narrated in his celebrated Shah Commission Report. Granville Austin writes about India:

“The rampant corruption of which elected and appointed officials are believed guilty by citizens should be understood in terms of the survival society---of the scriptural injunction to help one’s own (this in a society where religious observance is common)---even while it is clear threat to the credibility of democratic

governance.”[683]

We have stated in Art 51 of the Constitution that we would foster respect for international law. We are under obligations to implement our duties under the U.N. Convention against Corruption approved by the General Assembly of the United Nations by resolution 58/4 of 31 October 2003. This Convention was signed in Merida in Mexico. Besides many other things of great value this Convention calls upon the states[684]:

(a) to ensure Transparency and Accountability in matters of public finance must be promoted;

(b) to make effort from members of society at large for preventing public corruption.

We are party to the Uruguway Round Final Act which commands transparency in the system of governance. To illustrate: The Trade Policy Review Mechanism, being Annex 3 to the Final Act referred says:

“B. Domestic transparency.:

Members recognize the inherent value of domestic

transparency of government decision-making on trade policy

matters for both Members’ economies and the multilateral trading system, and agree to encourage and promote greater transparency within their own systems, acknowledging that the implementation of domestic transparency must be on a voluntary basis and take account of each Member’s legal and political systems”

This Petitioner would bring to the notice of this Hon’ble Court the findings of the Report on the Laundering Typologies 2003-2004 by Financial Action Task Force on Money Laundering[685] showing its concern at corruption by the persons in power, and the malpractices by the professionals who make their talents available to the crooks of all sorts.

(v) In this phase of globalization there is a special reason for ensuring transparency in public matters. This Petitioner would depict the hard facts of our hard times later, but it is enough to mention here that we are in a phase when the government is fast withdrawing its roles from the spheres of public welfare, perhaps to play the police for the mighty rich, and to provide services they need but can not provide to themselves. The “invisible hand” of Adam Smith is fast turning into a vampire. The society of the common people run the risk of losing their soul, self, liberty, and property before they even realize what happened. We are inviting FDI, MNCs, FFIs . We have signed the Uruguay Round of the Final Act , and the member of the WTO. Under this global treaty cast in the format of pactum de contrahendo[686] we are undertaking obligations of all sorts: in the fields of trade, TRIPS, investment etc Without transparency our World would acquire a Kafkaesque surrealist scenario.

(vi) In the case of a tax haven there is absence of transparency. This has been noted by the OECD in its report “ Harmful Tax Competition an Emerging Global Issue. It says in (para 114, at p. 46)

“Information on foreign transactions and taxpayers is essential for certain domestic counteracting measures to work properly, but is notoriously difficult to obtain with respect to tax havens and certain harmful preferential tax regimes.”

The undertaking given by the Finance Minister to get rid of harmful tax practices by 2005 has already been referred[687].

[ B ]

The CBDT Circular No 789 OF 13TH APRIL, 2000

396.That this Petitioner has made the above submissions merely to draw up his observation- post for examining the Circular No 789 issued by the Central Board of Direct Taxes, which he considers a national disgrace, bad at law and worse in morality. This Circular offends Articles 14, 19, and 21 of the Constitution with a degree of gruesomeness inconceivable in civilized jurisprudence. Its text is reproduced here:

“The provisions of the Indo-Mauritius DTAC of 1983 apply to ‘residents’ of both India and Mauritius. Article 4 of the DTAC defines a resident of one State of mean “any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.” Foreign Institutional Investors and other investment funds etc. which are operating from Mauritius are invariably incorporated in that country. These entities are ‘liable to tax’ under the Mauritius Tax law and are therefore to be considered as residents of Mauritius in accordance with the DTAC.

2. Prior to 1.6.1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of share holding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under Section 115A etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.

3. The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13.

4. The aforesaid clarification shall apply to all proceedings which are pending at various levels.

5. The contents of this Circular may be brought to the notice of all the Commissioners of Income-tax and Assessing Officers in your region.”

6.

The Petitioner does not consider it worthwhile to rehash his submissions anymore. Suffice to say that this Circular asked the quasi-judicial authorities to abdicate their statutory function. In breach of international law, it made a foreign administrative act operate as an operative act in our territory. It, by making a trespass on the legislative field[688], created conclusive presumptions in favour of the foreign tax-payers. It asked the authorities to accept the Certificate of Residence a conclusive proof of residency and beneficial ownership. It promoted the extraneous object of providing illegitimate patronage to the FIIs and the hot money suppliers, and other sharp operators from the tax-havens. The authorities were bidden to forget their duties under the Income-tax Act to examine to dixscover the real owner as under this law it is the real owner who is chargeable on real income. These morbid details of sordid facts had led the Hon’ble Delhi High Court to declare the following propositions:

Treaty Shopping Is Held Illegal.

(a) “An abuse of the treaty or Treaty Shopping is illegal and thus necessarily forbidden.”

(b) The Indo- Mauritius Avoidance of Double Taxation Convention was entered into between the Government of the Republic of India and the Government of Mauritius for avoidance of double taxation and the prevention of fiscal evasion with regard to tax on income and capital gains and for encouragement of mutual trade and investment.

(c) “Treaty Shopping which amounts to abuse of the Indo-Mauritius Bilateral treaty may amount to fraudulent practice and cannot be encouraged.”[689]

(d) The company although had obtained residential certificate in Mauritius but had nothing to do therewith and factually. It got itself registered only for the purpose of tax avoidance so as to obtain benefit of the treaty.

(e) “ No law encourages opaque system to prevail.”

The Central Board of Direct Taxes might have been persuaded, perhaps pressurized, to issue this Circular, surely on some devil’s argument which be described only in these pregnant words of Shakespeare[690]:

And oftentimes, to win us to our harm,

The instruments of darkness tell us truths,

Win us with honest trifles, to betray’s

In deepest consequence.

[ C ]

The Realities In The Context Of Which The Circular 789 Be Considered By The Hon’ble Court

‘The instruments of darkness’

398.That this Petitioner has already submitted in detail that Mauritius turned into a tax haven.

Mauritius took to unfair practice was admitted by the Government of Mauritius itself which, in a written undertaking, had assured the OECD that it would dismantle the unfair regime by 2005][691]. In the Writ Petition this Petitioner stated the following:

“That, the Central Government was duty bound to initiate a process for revision of the terms of the Indo-Mauritius Double Taxation Avoidance Convention because of a fundament change in the state of facts which existed at the time the treaty was concluded in view of the transformation of Mauritius into a tax haven and the legal regime set up in the post 1992 period, thereby undermining consensus ad idem ( an agreement of the parties to the same thing ; a meeting of minds) relying on the principle of the clausula rebus sic stantibus (the treaty obligations subsists only so long as the essential circumstances remain unchanged) or with reference to Article 62 of the Vienna Convention on the Law of Treaties so that Convention could operate within its legitimate province excluding the “treaty shoppers” from marauding the benefits under the treaty. The Central Government was duty bound to take appropriate steps in the matter as many other countries are now enacting laws or abrogating or modifying the existing tax treaties so that the benefits are restricted to the actual residents of the treaty states.”

399. That it is common knowledge that in recent years the tax havens are widely used for evading tax. In fact, the economy of most tax havens largely depends on the promotion of the unwholesome activities having the effect of causing wrongful gain to those not entitled to tax benefits, and causing wrongful loss to those having legitimate claims to tax. Operators from the third countries turn such treaties into rouge’s charter. If the U.S. Company earns capital gains in India or in the United States it is liable to be charged to tax as per the laws prevailing in these countries; or, if the Luxemburg Company earns capital gains in India it would be taxed in India as an ordinary non-resident as there is no double taxation agreement between these two countries . If these companies set up subsidiaries in tax havens like Mauritius they are neither taxed in India nor in such tax havens on their capital gains. Sailing under false colours become most inviting for the tax dodgers.

400. That it is said that in the globalized economy different countries tend to share a common emerging space. That this pursuit would be good for the common people is not beyond doubt. But time is ripe to recognize that the pathogenic effects of globalization can be somewhat avoided only by ensuring complete transparency of the global economic process. Tax havens negate transparency. Tax evasion and criminal activities flourish in darkness. But right now what has become a matter of gravest concern for us is the evident risk of the use of the tax haven routes for transmission of money for promoting terrorism and effecting antinational activities.

401. That it is commonly shared concern that a lot of money is being generated by the most unscrupulous methods, through bribery, receipt of kick-backs, drug-trafficking, insider trading, embezzlement, computer fraud, under invoicing-over invoicing, and other tainted activities spawning scams having deep lethal consequences for the welfare of common people. Billy Steel has aptly commented that it is ‘the crime of the 90s’. He says:

“ Money laundering is the sleight of hand…a magic trick of wealth creation…..the lifeblood of drug dealers, fraudsters, smugglers, arms dealers, terrorists, and tax-evaders. It is also the world’s third largest business..”

There is a point to ponder in the comment that the economic globalization and briberization go together cheek by jowl.

But those who earn these ways try first to park them in places where the risk of detection, seizure, and confiscation is either non-existent or is minimal. Then they devise ways to disguise their criminal proceeds of their illegal origin. Somehow the predicate crimes must be concealed. The tax havens are considered the safe places to park such tainted wealth. Through companies floated in tax havens ill-gotten money can be effectively laundered and money brought into the normal economic channels. Many of the tax havens spread red carpet to welcome them. They ensure legal systems under which such pursuits are carried on without any risk of being subjected to scrutiny. The process is intensely shrouded in smog and darkness. First, the ill-gotten wealth, generated inside or outside a country, is amassed and placed somewhere in the dark areas on the planet. Then the tainted wealth is layered in various ways from a country to country, mostly task havens with a studied strategy to cover all trails. This process, called “layering”, is dexterously done through the countries which assure secrecy. Then comes the last stage in this craft of laundering: the stage of integration whereby the ill-gotten wea