Friend of WWB India, Ahmedabad V. The Dy. DIT (Exemption), Ahmedabad

ITA 1927/AHD/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 9069 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 01-03-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 22-07-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY R. AGARWAL
• Assessee Lawyers: J.P. SHAH
• Keywords: Gift; Search and seizure; Charitable institution; Avoidance of tax; Sham transactions
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 12A; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. NO: 1927/AHD/2016 & S.P. NO. 64/AHD/17 (ASSESSMENT YEAR: 2011-12) FRIEND OF WWB INDIA, AHMEDABAD 101, SAKAR-I BUILDING, OPP. GANDHIGRAM RAILWAY STATION, AHMEDABAD- 380009 V/S DEPUTY DIT (EXEMPTION), AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAATF0274B APPELLANT BY : SHRI J.P. SHAH, SANJAY R. SHAH & M.J. SHAH, A. R. RESPONDENT BY: SHRI SANJAY R. AGARWAL, CIT/ D.R. ( )/ ORDER DATE OF HEARING : 01 -03-201 7 DATE OF PRONOUNCEMENT : 09 -03-2017 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. WITH THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE C ORRECTNESS OF THE ORDER OF THE LD. CIT(A)-9, AHMEDABAD DATED 25.05.2016 PER TAINING TO A.Y. 2011- 12. ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 2 2. THE BONE OF CONTENTION BETWEEN THE REVENUE AND THE APPELLANT RELATES TO CORPUS DONATION OF RS. 45 CRORES GIVEN BY THE ASSES SEE TO INDIAN FOUNDATION FOR INCLUSIVE GROWTH HEREINAFTER REFERRED TO IFIG. THE REVENUES ALLEGATION IS THAT THIS CORPUS DONATION GIVEN BY THE ASSESSEE (HE REINAFTER REFERRED TO AS FWWB) IS NOT ACCORDING TO THE PROVISIONS OF THE LAW AND, THEREFORE, CANNOT BE TREATED AS APPLICATION OF SURPLUS. THE OTHER GRI EVANCE OF THE ASSESSEE IS DIRECTLY RELATED TO THIS ALLEGATION OF THE REVENUE AND ARE, THEREFORE CONSEQUENTIAL IN NATURE. 3. FWWB, INDIA IS A REGISTERED TRUST. THE MAIN STATED OBJECT OF THE TRUST IS TO ADVANCE AND PROMOTE DIRECT PARTICIPATION OF POOR WO MEN IN THE ECONOMY THROUGH NATIONAL AND INTERNATIONAL INSTITUTIONS WOR KING FOR THE DEVELOPMENT OF THE WOMEN IN INDIA. FWWB, INDIA IS A TRUST REGISTERED UNDER THE BOMBAY PUBLIC CHARITABLE TRUST ACT, 1950 AND SOCIETY REGISTERED UNDER THE SOCIETY REGISTRATION ACT, 1860. FWWB, IND IA HAS BEEN REGISTERED AS A CHARITABLE TRUST U/S.12A OF THE I.T. ACT, 1961 VIDE NO. HQ,III/32(F.7)/81- 82/ IV DATED 2 ND JULY, 1982. THE ASSESSEE TRUST HAS BEEN GRANTED AP PROVAL OF 80G(5) BY DIT(E) AHMEDABAD VIDE ORDER BEARING NO. DIT(E)/80G(5)/1005/ 2007-2008 DATED 04.06.2008. 4. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEE DINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS ENTERED IN BUSINESS TRANSFER AGREEMENT WITH AFIG (ANANYA FINANCE OR INCLUSIVE GROWTH PRIVATE LIMITED ) (AFIG) FOR SELLING OF ITS MICRO FINANCE ACTIVITY (MFA) TO AFIG FOR CONSIDERAT ION OF RS. 45 CRORES. IT IS A MATTER OF FACT ADMITTED BY THE APPELLANT THAT THE RE HAS BEEN NO ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 3 MOVEMENT OF MONEY. THE FUNDS HAVE NOT MOVED FROM AF IG TO FWWB, FWWB TO IFIG AND FROM IFIG TO AFIG. ONLY JV ENTRIES HAVE BEEN PASSED WITH THE INSTRUMENT OF PAYMENT OBLIGATION NOTE AND BOARD RESOLUTIONS. 5. LET US FIRST UNDERSTAND THE IMPUGNED TRANSACTIONS E NTERED BETWEEN THE PARTIES. THE APPELLANT WAS CARRYING ON ACTIVITIES T O ADVANCE AND PROMOTE DIRECT PARTICIPATION OF POOR WOMAN IN THE ECONOMY T HROUGH NATIONAL AND INTERNATIONAL INSTITUTIONS WORKING FOR THE DEVELOPM ENT OF THE WOMEN IN INDIA. ONE OF THE ACTIVITY CARRIED ON BY THE ASSESS EE WAS MICRO FINANCE ACTIVITY (MFA) IN THE EARLIER ASSESSMENT YEARS, THE ACTIVITIES OF THE ASSESSEE INCLUDING MFA WAS ACCEPTED AS CHARITABLE ACTIVITIES VIDE ASSESSMENT ORDER MADE U/S. 143(3) OF THE ACT FOR A.Y. 2006-07 & 2007 -08 WHICH ARE PLACED ON RECORD AT PAGES 345 TO 351 OF THE PAPER BOOK. THE A SSESSEE TRUST SOLD ITS MFA TO AFIG FOR A CONSIDERATION OF RS. 45 CRORES. I NSTEAD OF RECEIVING THE CONSIDERATION IN CASH, IT WAS AGREED BY THE CONTRAC TING PARTIES THAT AFIG SHALL ALLOT SHARES WORTH RS. 45 CRORES TO IFIG. THU S, IFIG RECEIVED A CORPUS DONATION FROM THE ASSESSEE AND ACQUIRED CONTROLLING INTEREST IN AFIG. 6. THE REVENUE ALLEGES THAT BECAUSE OF THIS CIRCUITOU S TRANSACTION, ASSESSEE HAS CLAIMED THE CORPUS DONATION OF RS. 45 CRORES DU RING THE YEAR UNDER CONSIDERATION AS THE APPLICATION OF INCOME AS BEING GIVEN AS DONATION TO ANOTHER CHARITABLE TRUST. THE REASONS GIVEN BY THE FIRST APPELLATE AUTHORITY IN NOT ACCEPTING THIS AS A GENUINE TRANSACTION AND TREATING AS A COLOURABLE DEVICE ARE ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 4 (I) IFIG IS NOT A REGISTERED TRUST AND ITS APPLICAT ION FOR REGISTRATION U/S. 12A OF THE ACT HAS BEEN REJECTED. (II) IFIG HAS NOT DONE ANY CHARITABLE ACTIVITY WITH THE ALLEGED CORPUS DONATION BUT HAS ACQUIRED CONTROLLING INTEREST IN A FIG. (III) THE TRUSTEES OF IFIG ARE ALSO THE TRUSTEES OF THE APPELLANT TRUST. 7. WE WILL NOW CONSIDER THE ALLEGATIONS OF THE REVENUE ONE BY ONE. 8. THE FIRST ALLEGATION IS THAT IFIG IS NOT A REGISTER ED TRUST. IT IS TRUE THAT IFIG HAS BEEN DENIED REGISTRATION U/S. 12A OF THE ACT. H OWEVER, REGISTRATION U/S. 12A OF THE ACT ONLY ENTITLES THE ASSESSEE TO CLAIM EXEMPTION UNDER SECTIONS 11 & 12 OF THE ACT. THERE MAY BE A CASE WHEN A TRU ST DOES NOT WANT TO AVAIL EXEMPTIONS GIVEN UNDER THE INCOME TAX ACT AND AGREES TO PAY TAXES ON ITS INCOME. THEREFORE, NON-REGISTRATION OF IFIG WOULD NOT DISENTITLE THE APPELLANT OF ITS CORPUS DONATION. 9. THE NEXT ALLEGATION IS THAT IFIG IS NOT DOING ANY C HARITABLE ACTIVITY AND IS ONLY A LINK CHANNEL AND NOT DIRECTLY INVOLVED IN RE LIEF TO POOR. IT IS AN ADMITTED FACT THAT THE MICRO FINANCE ACTIVITY WHICH WAS ERSTWHILE CARRIED ON BY THE APPELLANT TRUST WAS TRANSFERRED TO AFIG. 10. MFA WHICH WAS CONSIDERED AS A CHARITABLE ACTIVITY I N APPELLANTS HAND WILL NOT LOSE ON ITS CHARACTER IN THE HANDS OF AFIG. SIN CE IFIG IS NOW HOLDING MORE THAN 99% OF THE SHARES OF AFIG FOR ALL PRACTIC AL PURPOSES, IT CAN BE ASSUMED THAT IFIG IS DOING MFA ACTIVITIES THROUGH A FIG AND THUS IS ENGAGED ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 5 IN CHARITABLE ACTIVITIES. IT IS LIKE A PRINCIPAL DO ING CHARITABLE ACTIVITY THROUGH HIS AGENT. THEREFORE, IT CANNOT BE SAID THAT THE PR INCIPAL IS NOT ENGAGED IN ANY CHARITABLE ACTIVITY. 11. THE THIRD ALLEGATION IS THAT THE SETTLERS OF IFIG T RUST ARE THE TRUSTEES OF THE APPELLANT TRUST AND, THEREFORE, THE ENTIRE SET UP I S A COLOURABLE DEVICE TO AVOID TAXATION. 12. THE ISSUE OF COLOURABLE DEVICE AS A TOOL FOR AVOIDA NCE OF TAX HAS BEEN ELABORATELY CONSIDERED BY THE HONBLE SUPREME COURT IN THE CASE OF UNION OF INDIA AND ANOTHER VS. AZADI BACHAO ANDOLAN AND A NOTHER IN 267 ITR 706 AND AT PAGE 753, THE HONBLE SUPREME COURT HAS CONS IDERED THE RULE IN MCDOWELL AS UNDER:- THE RESPONDENTS STRENUOUSLY CRITICIZED THE ACT OF I NCORPORATION BY FIIS UNDER THE MAURITIAN ACT AS A 'SHAM' AND 'A DEVICE' ACTUATED B Y IMPROPER MOTIVES. THEY CONTEND THAT THIS COURT SHOULD INTERDICT SUCH ARRAN GEMENTS AND, AS IF BY WAVING A MAGIC WAND, BRING ABOUT A SITUATION WHERE THE INCOR PORATION BECOMES NON EST. FOR THIS THEY HEAVILY RELY ON THE JUDGMENT OF THE C ONSTITUTION BENCH OF THIS COURT IN MCDOWELL AND CO. LTD. V. COMMERCIAL TAX OFFICER [1985] 154 ITR 148. PLACING STRONG RELIANCE ON MCDOWELL'S CASE [1985] 1 54 ITR 148 (SC) IT IS ARGUED THAT MCDOWELL'S CASE [1985] 154 ITR 148 (SC) HAS CH ANGED 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, IT IS NECESSARY T O CONSIDER IN SOME DETAIL AS TO WHY MCDOWELL'S CASE [1985] 154 ITR 148 (SC), WHAT I T SAYS, AND WHAT IT DOES NOT SAY. IN THE CLASSIC WORDS OF LORD SUMNER IN IRC V. FISHE R'S EXECUTORS [1926] AC 395 AT 412 (HL) : 'MY LORDS, THE HIGHEST AUTHORITIES HAVE ALWAYS RECO GNIZED THAT THE SUBJECT IS ENTITLED SO TO ARRANGE HIS AFFAIRS AS NOT TO ATTRAC T TAXES IMPOSED BY THE CROWN, SO FAR AS HE CAN DO SO WITHIN THE LAW, AND THAT HE MAY LEGITIMATELY CLAIM THE ADVANTAGE OF ANY EXPRESSED TERMS OR OF ANY OMISSION S THAT HE CAN FIND IN HIS ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 6 FAVOUR IN TAXING ACTS. IN SO DOING, HE NEITHER COME S UNDER LIABILITY NOR INCURS BLAME.' SIMILAR VIEWS WERE EXPRESSED BY LORD TOMLIN IN IRC V. DUKE OF WESTMINSTER [1936] AC 1 (HL); 19 TC 490, 520 (HL) WHICH REFLECT ED THE PREVALENT ATTITUDE TOWARDS TAX AVOIDANCE : 'EVERY MAN IS ENTITLED IF HE CAN TO ORDER HIS AFFAI RS SO THAT THE TAX ATTACHING UNDER THE APPROPRIATE ACTS IS LESS THAN IT OTHERWISE WOUL D BE. IF HE SUCCEEDS IN ORDERING THEM SO AS TO SECURE THIS RESULT, THEN, HOWEVER, UN APPRECIATIVE THE COMMISSIONERS OF INLAND REVENUE OR HIS FELLOW TAX PAYERS MAY BE O F HIS INGENUITY, HE CANNOT BE COMPELLED TO PAY AN INCREASED TAX.' THESE WERE THE PRE-SECOND WORLD WAR SENTIMENTS EXPR ESSED BY THE BRITISH COURTS. IT IS URGED THAT MCDOWELL'S CASE [1985] 154 ITR 148 (SC) HAS TAKEN A NEW LOOK AT FISCAL JURISPRUDENCE AND 'THE GHOST OF FISHER'S CAS E [1926] AC 395 AT 412 (HL) AND WESTMINSTER'S CASE [1936] AC 1 (HL); 19 TC 490, HAVE BEEN EXORCISED IN THE COUNTRY OF ITS ORIGIN'. IT IS ALSO URGED THAT MCDOW ELL'S CASE [1985] 154 ITR 148 (SC) RADICAL DEPARTURE WAS IN TUNE WITH THE CHANGED THINKING ON FISCAL JURISPRUDENCE BY THE ENGLISH COURTS, AS EVIDENCED I N W. T. RAMSAY LTD. V. IRC [1982] AC 300, INLAND REVENUE COMMISSIONERS V. BURM AH OIL COMPANY LTD. [1982] SIMON'S TAX CASES 30 AND FURNISS V. DAWSON [ 1984] 1 ALL ER 530 (HL). AS WE SHALL SHOW PRESENTLY, FAR FROM BEING EXORCISE D IN ITS COUNTRY OF ORIGIN, DUKE OF WESTMINSTER'S CASE [1936] AC 1 (HL); 19 TC 490 C ONTINUES TO BE ALIVE AND KICKING IN ENGLAND. INTERESTINGLY, EVEN IN MCDOWELL 'S CASE [1985] 154 ITR 148 (SC), THOUGH CHINNAPPA REDDY J. DISMISSED THE OBSER VATION OF J. C. SHAH J. IN CIT V. A. RAMAN AND COMPANY [1968] 67 ITR 11 (SC) B ASED ON WESTMINSTER'S CASE [1936] AC 1 (HL) ; 19 TC 490 [68] AND FISHER'S EXECUTORS CASE [1926] AC 395 AT 412 (HL), BY SAYING (PAGE 160 OF [1985] 154 ITR) 'WE THINK THAT THE TIME HAS COME FOR US TO DEPART FROM THE WESTMINSTER PRIN CIPLE AS EMPHATICALLY AS THE BRITISH COURTS HAVE DONE AND TO DISSOCIATE OURSELVE S FROM THE OBSERVATIONS OF SHAH J., AND SIMILAR OBSERVATIONS MADE ELSEWHERE', IT DOES NOT APPEAR THAT THE REST OF THE LEARNED JUDGES OF THE CONSTITUTIONAL BE NCH CONTRIBUTED TO THIS RADICAL THINKING. SPEAKING FOR THE MAJORITY, RANGANATH MISH RA J. (AS HE THEN WAS) SAYS IN MCDOWELL'S CASE [1985] 154 ITR 148, 171 (SC): 'TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITH IN THE FRAMEWORK OF LAW. COLOURABLE DEVICES CANNOT BE PART OF TAX PLANNING A ND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOURABLE TO AV OID 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.' (EMPHAS IS SUPPLIED) THIS OPINION OF THE MAJORITY IS A FAR CRY FROM THE VIEW OF CHINNAPPA REDDY J. (PAGE 160): 'IN OUR VIEW THE PROPER WAY TO CONSTRUE A TAXING STATUTE, WHILE CONSIDERING A DEVICE TO AVOID TAX, IS NOT TO ASK WH ETHER A PROVISION SHOULD BE ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 7 CONSTRUED LITERALLY OR LIBERALLY NOR WHETHER THE TR ANSACTION IS NOT UNREAL AND NOT PROHIBITED BY THE STATUTE, BUT WHETHER THE TRANSACT ION IS A DEVICE TO AVOID TAX, AND WHETHER THE TRANSACTION IS SUCH THAT THE JUDICIAL P ROCESS MAY ACCORD ITS APPROVAL TO IT.' WE ARE AFRAID THAT WE ARE UNABLE TO READ OR COMPREHEND THE MAJORITY JUDGMENT IN MCDOWELL'S CASE [1985] 154 ITR 148 (SC) AS HAVING ENDORSED THIS EXTREME VIEW OF CHINNAPPA REDDY J., WHICH, IN OUR C ONSIDERED OPINION, ACTUALLY MILITATES AGAINST THE OBSERVATIONS OF THE MAJORITY OF THE JUDGES WHICH WE HAVE JUST EXTRACTED FROM THE LEADING JUDGMENT OF RANGANATH MI SHRA J. (AS HE THEN WAS). THE BASIC ASSUMPTION MADE IN THE JUDGMENT OF CHINNA PPA REDDY J. IN MCDOWELL'S CASE [1985] 154 ITR 148 (SC) THAT THE PR INCIPLE IN DUKE OF WEST- MINSTER'S CASE [1936] AC 1 (HL) HAS BEEN DEPARTED F ROM SUBSEQUENTLY BY THE HOUSE OF LORDS IN ENGLAND, WITH RESPECT, IS NOT COR RECT. IN CRAVEN V. WHITE [1988] 3 ALL ER 495 ; [1990] 183 ITR 216, THE HOUSE OF LORDS POINTEDLY CONSI- DERED THE IMPACT OF FURNISS CASE [1984] 1 ALL ER 53 0 (HL), BURMA OIL'S CASE [1982] SIMON'S TAX CASES 30 AND RAMSAY'S CASE [1982 ] AC 300 (HL). THE LAW LORDS WERE AT GREAT PAINS TO EXPLAIN AWAY EACH OF T HESE JUDGMENTS. LORD KEITH OF KINKEL SAYS, WITH REFERENCE TO THE TRILOGY OF THESE CASES, (AT PAGE 225 OF [1990] 183 ITR) : 'MY LORDS, IN MY OPINION THE NATURE OF THE PRINCIPL E TO BE DERIVED FROM THE THREE CASES IS THIS : THE COURT MUST FIRST CONSTRUE THE R ELEVANT ENACTMENT IN ORDER TO ASCERTAIN ITS MEANING; IT MUST THEN ANALYSE THE SER IES OF TRANSACTIONS IN QUESTION, REGARDED AS A WHOLE, SO AS TO ASCERTAIN ITS TRUE EF FECT IN LAW ; AND FINALLY IT MUST APPLY THE ENACTMENT AS CONSTRUED TO THE TRUE EFFECT OF THE SERIES OF TRANSACTIONS AND SO DECIDE WHETHER OR NOT THE ENACTMENT WAS INTE NDED TO COVER IT. THE MOST IMPORTANT FEATURE OF THE PRINCIPLE IS THAT THE SERI ES OF TRANSACTIONS IS TO BE REGARDED AS A WHOLE. IN ASCERTAINING THE TRUE LEGAL EFFECT OF THE SERIES IT IS RELEVANT TO TAKE INTO ACCOUNT, IF IT BE THE CASE, T HAT ALL THE STEPS IN IT WERE CONTRACTUALLY AGREED IN ADVANCE OR HAD BEEN DETERMI NED ON IN ADVANCE BY A GUIDING WILL WHICH WAS IN A POSITION, FOR ALL PRACT ICAL PURPOSES, TO SECURE THAT ALL OF THEM WERE CARRIED THROUGH TO COMPLETION. IT IS A LSO RELEVANT TO TAKE INTO ACCOUNT, IF IT BE THE CASE, THAT ONE OR MORE OF THE STEPS WAS INTRODUCED INTO THE SERIES WITH NO BUSINESS PURPOSE OTHER THAN THE AVOI DANCE OF TAX. THE PRINCIPLE DOES NOT INVOLVE, IN MY OPINION, THAT IT IS PART OF THE JUDICIAL FUNCTION TO TREAT AS NUGATORY ANY STEP WHATEVER WHI CH A TAXPAYER MAY TAKE WITH A VIEW TO THE AVOIDANCE OR MITIGATION OF TAX. IT REMA INS TRUE IN GENERAL THAT THE TAXPAYER, WHERE HE IS IN A POSITION TO CARRY THROUG H A TRANSACTION IN TWO ALTERNATIVE WAYS, ONE OF WHICH WILL RESULT IN LIABI LITY TO TAX AND THE OTHER OF WHICH WILL NOT, IS AT LIBERTY TO CHOOSE THE LATTER AND TO DO SO EFFECTIVELY IN THE ABSENCE OF ANY SPECIFIC TAX AVOIDANCE PROVISION SUCH AS SECTIO N 460 OF THE INCOME AND CORPORATION TAXES ACT, 1970. ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 8 IN RAMSAY AND IN BURMAH THE RESULT OF APPLICATION O F THE PRINCIPLE WAS TO DEMONSTRATE THAT THE TRUE LEGAL EFFECT OF THE SERIE S OF TRANSACTIONS ENTERED INTO, REGARDED AS A WHOLE, WAS PRECISELY NIL.' LORD OLIVER (AT PAGES 252 OF [1990] 183 ITR) SAYS : 'IT IS EQUALLY IMPORTANT TO BEAR IN MIND WHAT THE C ASE DID NOT DECIDE. IT DID NOT DECIDE THAT A TRANSACTION ENTERED INTO WITH THE MOT IVE OF MINIMISING THE SUBJECT'S BURDEN OF TAX IS, FOR THAT REASON, TO BE IGNORED OR STRUCK DOWN. LORD WILBERFORCE WAS AT PAINS TO STRESS THAT THE FACT THAT THE MOTIV E FOR A TRANSACTION MAY BE TO AVOID TAX DOES NOT INVALIDATE IT UNLESS A PARTICULA R ENACTMENT SO PROVIDES (SEE [1981] 1 ALL ER 865 AT 871 ; [1982] AC 300 AT 323). P NOR DID IT DECIDE THAT THE COURT IS ENTITLED, BECAUSE OF THE SUBJECT'S MOTIVE IN ENTERING INTO A GENUINE TRANSACTION, TO ATTRIBUTE TO IT A LEGAL EFFECT WHIC H IT DID NOT HAVE. BOTH LORD WILBERFORCE AND LORD FRASER EMPHASISE THE CONTINUED VALIDITY AND APPLICATION OF THE PRINCIPLE OF IRC V. DUKE OF WESTMINSTER [1936] AC 1; [1935] ALL ER REP. 259, A PRINCIPLE WHICH LORD WILBERFORCE DESCRIBED A S A 'CARDINAL PRINCIPLE'. WHAT IT DID DECIDE WAS THAT THAT CARDINAL PRINCIPLE DOES NOT, WHERE IT IS PLAIN THAT A PARTICULAR TRANSACTION IS BUT ONE STEP IN A CONNECT ED SERIES OF INTERDEPENDENT STEPS DESIGNED TO PRODUCE A SINGLE COMPOSITE OVERAL L RESULT, COMPEL THE COURT TO REGARD IT AS OTHERWISE THAN WHAT IT IS, THAT IS TO SAY MERELY A PART OF THE COMPOSITE WHOLE.' LORD OLIVER (AT PAGE 258 OF [1990] 183 ITR) OBSERVE S : 'MY LORDS, FOR MY PART I FIND MYSELF UNABLE TO ACCE PT THAT DAWSON EITHER ESTABLISHED OR CAN PROPERLY BE USED TO SUPPORT A GE NERAL PROPOSITION THAT ANY TRANSACTION WHICH IS EFFECTED FOR THE PURPOSE OF AV OIDING TAX ON A CONTEMPLATED SUBSEQUENT TRANSACTION AND IS THEREFORE 'PLANNED' I S, FOR THAT REASON, NECESSARILY TO BE TREATED AS ONE WITH THAT SUBSEQUENT TRANSACTI ON AND AS HAVING NO INDEPENDENT EFFECT EVEN WHERE THAT IS REALISTICALLY AND LOGICALLY IMPOSSIBLE.' CONTINUING (AT PAGE 260 OF [1990] 183 ITR), LORD OL IVER OBSERVES : 'ESSENTIALLY, DAWSON WAS CONCERNED WITH A QUESTION WHICH IS COMMON TO ALL SUCCESSIVE TRANSACTIONS WHERE AN ACTUAL TRANSFER OF PROPERTY HAS TAKEN PLACE TO A CORPORATE ENTITY WHICH SUBSEQUENTLY CARRIES OUT A F URTHER DISPOSITION TO AN ULTIMATE DISPONEE. THE QUESTION IS : WHEN IS A DISP OSAL NOT A DISPOSAL WITHIN THE TERMS OF THE STATUTE ? TO GIVE TO THAT QUESTION THE ANSWER 'WHEN, ON AN ANALYSIS OF THE FACTS, IT IS SEEN IN REALITY TO BE A DIFFERENT TRANSACTION ALTOGETHER' IS WELL WITHIN THE ACCEPTED CANONS OF CONSTRUCTION. TO ANSWER IT ' WHEN IT IS EFFECTED WITH A VIEW TO AVOIDING TAX ON ANOTHER CONTEMPLATED TRANSACTION ' IS TO DO MORE THAN SIMPLY TO PLACE A GLOSS ON THE WORDS OF THE STATUTE. IT IS TO ADD A LIMITATION OR QUALIFICATION WHICH THE LEGISLATURE ITSELF HAS NOT SOUGHT TO EXPR ESS AND FOR WHICH THERE IS NO CONTEXT IN THE STATUTE. THAT, HOWEVER, DESIRABLE IT MAY SEEM, IS TO LEGISLATE, NOT TO CONSTRUE, AND THAT IS SOMETHING WHICH IS NOT WITHIN JUDICIAL COMPETENCE. I CAN FIND ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 9 NOTHING IN DAWSON OR IN THE CASES WHICH PRECEDED IT WHICH CAUSES ME TO SUPPOSE THAT THAT WAS WHAT THIS HOUSE, WAS SEEKING TO DO.' THUS WE SEE THAT EVEN IN THE YEAR 1988 THE HOUSE OF LORDS EMPHASISED THE CONTINUED VALIDITY AND APPLICATION OF THE PRINCIPLE IN DUKE OF WESTMINSTER'S CASE [1936J AC 1 (HL). WHILE CHINNAPPA REDDY J. TOOK THE VIEW THAT RAMSAY' S CASE [1982] AC 300 (HL), WAS AN AUTHORITATIVE REJECTION OF THE PRINCIPLE IN THE DUKE OF WESTMINSTER'S CASE [1936] AC 1 (HL); 19 TC 490, THE HOUSE OF LORDS, IN THE YEAR 2001, DOES NOT SEEM TO CONSIDER IT TO BE SO, AS SEEN FROM MACNIVEN (H. M. INSPECTOR OF TAXES) V. WESTMORLAND INVESTMENTS LTD [2001] 1 ALL ER 865 AT 877-878 ; [2001] 2 WLR 377, 389 ; [2002] 255 ITR 612 ; LORD HOFFMANN OBSER VES : 'IN THE RAMSAY CASE [1982] AC 300 BOTH LORD WILBERF ORCE AND LORD FRASER OF TULLYBELTON, WHO GAVE THE OTHER PRINCIPAL SPEECH, W ERE CAREFUL TO STRESS THAT THE HOUSE WAS NOT DEPARTING FROM THE PRINCIPLE IN IRC V . DUKE OF WESTMINSTER [1936] AC 1; [1935] ALL ER REP. 259. THERE HAS NEVERTHELES S BEEN A GOOD DEAL OF DISCUSSION ABOUT HOW THE TWO CASES ARE TO BE RECONC ILED. HOW, IF THE VARIOUS JURISTICALLY DISCRETE ACQUISITIONS AND DISPOSALS WH ICH MADE UP THE SCHEME WERE GENUINE, COULD THE HOUSE COLLAPSE THEM INTO A COMPO SITE SELF-CANCELLING TRANSACTION WITHOUT BEING GUILTY OF IGNORING THE LE GAL POSITION AND LOOKING AT THE SUBSTANCE OF THE MATTER ? MY LORDS, I VENTURE TO SUGGEST THAT SOME OF THE DIF FICULTY WHICH MAY HAVE BEEN FELT IN RECONCILING THE RAMSAY CASE WITH THE DUKE OF WES TMINSTER CASE ARISES OUT OF AN AMBIGUITY IN LORD TOMLIN'S STATEMENT THAT THE COURT S 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 D EFINED CONCEPT, SUCH AS STAMP DUTY PAYABLE ON A DOCUMENT WHICH CONSTITUTES A CONV EYANCE ON SALE, THE COURT CANNOT TAX A TRANSACTION WHICH USES NO SUCH DOCUMEN T ON THE GROUND THAT IT ACHIEVES THE SAME ECONOMIC EFFECT. ON THE OTHER HAN D, 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. THE SPEECHES IN THE RAMSAY CASE [1982] AC 300 AND S UBSEQUENT CASES CONTAIN NUMEROUS REFERENCES TO THE 'REAL' NATURE OF THE TRA NSACTION AND TO WHAT HAPPENS IN 'THE REAL WORLD'. THESE EXPRESSIONS ARE ILLUMINATIN G IN THEIR CONTEXT, BUT YOU HAVE TO BE CAREFUL ABOUT THE SENSE IN WHICH THEY ARE BEI NG USED. OTHERWISE YOU LAND IN ALL KINDS OF UNNECESSARY PHILOSOPHICAL DIFFICULTIES ABOUT THE NATURE OF REALITY AND, IN PARTICULAR, ABOUT HOW A TRANSACTION CAN BE SAID NOT TO BE A 'SHAM' AND YET BE 'DISREGARDED' FOR THE PURPOSE OF DECIDING WHAT HAPP ENED IN 'THE REAL WORLD'. THE POINT TO HOLD ON TO IS THAT SOMETHING MAY BE REAL F OR ONE PURPOSE BUT NOT FOR ANOTHER. WHEN PEOPLE SPEAK OF SOMETHING BEING A 'RE AL' SOMETHING, THEY MEAN THAT ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 10 IT FALLS WITHIN SOME CONCEPT WHICH THEY HAVE IN MIN D, BY CONTRAST WITH SOMETHING ELSE WHICH MIGHT HAVE BEEN THOUGHT TO DO SO, BUT DO ES NOT. WHEN AN ECONOMIST SAYS THAT REAL INCOMES HAVE FALLEN, HE IS NOT INTEN DING TO CONTRAST REAL INCOMES WITH IMAGINARY INCOMES. THE CONTRAST IS SPECIFICALL Y BETWEEN INCOMES WHICH HAVE BEEN ADJUSTED FOR INFLATION AND THOSE WHICH HAVE NO T. IN ORDER TO KNOW WHAT HE MEANS BY 'REAL', ONE MUST FIRST IDENTIFY THE CONCEP T (INFLATION ADJUSTMENT) BY REFERENCE TO WHICH HE IS USING THE WORD. THUS IN SAYING THAT THE TRANSACTIONS IN THE RAMSAY CASE WERE NOT SHAM TRANSACTIONS, ONE IS ACCEPTING THE JURISTIC CATEGOR ISATION OF THE TRANSACTIONS AS INDIVIDUAL AND DISCRETE AND SAYING THAT EACH OF THE M INVOLVED NO PRETENCE. THEY WERE INTENDED TO DO PRECISELY WHAT THEY PURPORTED T O DO. THEY HAD A LEGAL REALITY. BUT IN SAYING THAT THEY DID NOT CONSTITUTE A 'REAL' DISPOSAL GIVING RISE TO A 'REAL' LOSS, ONE IS REJECTING THE JURISTIC CATEGORISATION AS NOT BEING NECESSARILY DETERMINATIVE FOR THE PURPOSES OF THE STATUTORY CON CEPTS OF 'DISPOSAL' AND TOSS' AS PROPERLY INTERPRETED. THE CONTRAST HERE IS WITH A C OMMERCIAL MEANING OF THESE CONCEPTS. AND IN SAYING THAT THE INCOME TAX LEGISLA TION WAS INTENDED TO OPERATE 'IN THE REAL WORLD', ONE IS AGAIN REFERRING TO THE COMM ERCIAL CONTEXT WHICH SHOULD INFLUENCE THE CONSTRUCTION OF THE CONCEPTS USED BY PARLIAMENT.' WITH RESPECT, THEREFORE, WE ARE UNABLE TO AGREE WIT H THE VIEW THAT DUKE OF WESTMINSTER'S CASE [1936] AC 1 (HL); 19 TC 490 IS D EAD, OR THAT ITS GHOST HAS BEEN EXORCISED IN ENGLAND. THE HOUSE OF LORDS DOES NOT SEEM TO THINK SO, AND WE AGREE, WITH RESPECT. IN OUR VIEW, THE PRINCIPLE IN DUKE OF WESTMINSTER'S CASE [1936] AC 1 (HL); 19 TC 490 IS VERY MUCH ALIVE AND KICKING IN THE COUNTRY OF ITS BIRTH. AND AS FAR AS THIS COUNTRY IS CONCERNED, THE OBSERVATIONS OF SHAH J. IN CIT V. ROMAN [1968] 67 ITR 11 (SC) ARE VERY MUCH RELEVA NT EVEN TODAY. WE MAY IN THIS CONNECTION USEFULLY REFER TO THE JUD GMENT OF THE MADRAS HIGH COURT IN M. V. VALLIAPPAN V. ITO [1988] 170 ITR 238 , WHICH HAS RIGHTLY CONCLUDED THAT THE DECISION IN MCDOWELL [1985] 154 ITR 148 (SC) CANNOT BE READ AS LAYING DOWN THAT EVERY ATTEMPT AT TAX PLANN ING IS ILLEGITIMATE AND MUST BE IGNORED, OR THAT EVERY TRANSACTION OR ARRANGEMENT W HICH IS PERFECTLY PERMISSIBLE UNDER LAW, WHICH HAS THE EFFECT OF REDUCING THE TAX BURDEN OF THE ASSESSEE, MUST BE LOOKED UPON WITH DISFAVOUR. THOUGH THE MADRAS HI GH COURT HAD OCCASION TO REFER TO THE JUDGMENT OF THE PRIVY COUNCIL IN IRC V . CHALLENGE CORPORATION LTD. [1987] 2 WLR 24, AND DID NOT HAVE THE BENEFIT OF TH E HOUSE OF LORDS' PRONOUNCEMENT IN CRAVEN'S CASE [1988] 3 ALL ER 495 (HL); [1990] 183 ITR 216 (HL), THE VIEW TAKEN BY THE MADRAS HIGH COURT APPEA RS TO BE CORRECT AND WE ARE INCLINED TO AGREE WITH IT. WE MAY ALSO REFER TO THE JUDGMENT OF THE GUJARAT HI GH COURT IN BANYAN AND BERRY V. COMMISSIONER OF INCOME-TAX [1996] 222 ITR 831 AT 850 WHERE REFERRING TO MCDOWELL'S CASE [1985] 154 ITR 148 (SC), THE COU RT OBSERVED : ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 11 'THE COURT NOWHERE SAID THAT EVERY ACTION OR INACTI ON ON THE PART OF THE TAXPAYER WHICH RESULTS IN REDUCTION OF TAX LIABILITY TO WHIC H HE MAY BE SUBJECTED IN FUTURE, IS TO BE VIEWED WITH SUSPICION AND BE TREATED AS A DEVICE FOR AVOIDANCE OF TAX IRRESPECTIVE OF LEGITIMACY OR GENUINENESS OF THE AC T; AN INFERENCE WHICH UNFORTUNATELY, IN OUR OPINION, THE TRIBUNAL APPAREN TLY APPEARS TO HAVE DRAWN FROM THE ENUNCIATION MADE IN MCDOWELL'S CASE [1958] 154 ITR 148 (SC). THE RATIO OF ANY DECISION HAS TO BE UNDERSTOOD IN THE C ONTEXT IT HAS BEEN MADE. THE FACTS AND CIRCUMSTANCES WHICH LEAD TO MCDOWELL'S DE CISION LEAVE US IN NO DOUBT THAT THE PRINCIPLE ENUNCIATED IN THE ABOVE CASE HAS NOT AFFECTED THE FREEDOM OF THE CITIZEN TO ACT IN A MANNER ACCORDING TO HIS REQUIRE MENTS, HIS WISHES IN THE MANNER OF DOING ANY TRADE, ACTIVITY OR PLANNING HIS AFFAIR S WITH CIRCUMSPECTION, WITHIN THE FRAMEWORK OF LAW, UNLESS THE SAME FALL IN THE CATEG ORY OF COLOURABLE DEVICE WHICH MAY PROPERLY BE CALLED A DEVICE OR A DUBIOUS METHOD OR A SUBTERFUGE CLOTHED WITH APPARENT DIGNITY.' THIS ACCORDS WITH OUR OWN VIEW OF THE MATTER. IN CWT V. ARVIND NAROTTAM [1988] 173 ITR 479 (SC), A CASE UNDER THE WEALTH- TAX ACT, THREE TRUST DEEDS FOR THE BENEFIT OF THE A SSESSEE, HIS WIFE AND CHILDREN IN IDENTICAL TERMS WERE PREPARED UNDER SECTION 21(2) O F THE WEALTH-TAX ACT. THE REVENUE PLACED RELIANCE ON MCDOWELL'S CASE [1985] 1 54 ITR 148 (SC). BOTH THE LEARNED JUDGES OF THE BENCH OF THIS COURT GAVE SEPA RATE OPINIONS. CHIEF JUSTICE PATHAK, IN HIS OPINION SAID (AT P AGE 486) : 'RELIANCE WAS ALSO PLACED BY LEARNED COUNSEL FOR TH E REVENUE ON MCDOWELL AND CO. LTD. V. CTO [1985] 154 ITR 148 (SC). THAT DECIS ION CANNOT ADVANCE THE CASE OF THE REVENUE BECAUSE THE LANGUAGE OF THE DEEDS OF SETTLEMENT IS PLAIN AND ADMITS OF NO AMBIGUITY.' JUSTICE S. MUKHARJI SAID, AFTER NOTICING MCDOWELL'S [1985] 154 ITR 148 (SC) CASE (AT PAGE 487) : 'WHERE THE TRUE EFFECT ON THE CONSTRUCTION OF THE D EEDS IS CLEAR, AS IN THIS CASE, THE APPEAL TO DISCOURAGE TAX AVOIDANCE IS NOT A RELEVAN T CONSIDERATION. BUT SINCE IT WAS MADE, IT HAS TO BE NOTED AND REJECTED.' IN MATHURAM AGRAWAL V. STATE OFMADHYA PRADESH [1999 ] 8 SCC 667 AT PARA. 12 ANOTHER CONSTITUTION BENCH HAD OCCASION TO CONSIDER THE ISSUE. THE BENCH OBSERVED (PAGE 673) : 'THE INTENTION OF THE LEGISLATURE IN A TAXATION STA TUTE IS TO BE GATHERED FROM THE LANGUAGE OF THE PROVISIONS PARTICULARLY WHERE THE L ANGUAGE IS PLAIN AND UNAMBIGUOUS. IN A TAXING ACT IT IS NOT POSSIBLE TO ASSUME ANY INTENTION OR GOVERNING PURPOSE OF THE STATUTE MORE THAN WHAT IS STATED IN THE PLAIN LANGUAGE. IT IS NOT THE ECONOMIC RESULTS SOUGHT TO BE OBTAINED B Y MAKING THE PROVISION WHICH IS RELEVANT IN INTERPRETING A FISCAL STATUTE. EQUALLY IMPERMISSIBLE IS AN INTERPRETATION WHICH DOES NOT FOLLOW FROM THE PLAIN, UNAMBIGUOUS L ANGUAGE OF THE STATUTE. ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 12 WORDS CANNOT BE ADDED TO OR SUBSTITUTED SO AS TO GI VE A MEANING TO THE STATUTE WHICH WILL SERVE THE SPIRIT AND INTENTION OF THE LE GISLATURE. THE CONSTITUTION BENCH REITERATED THE OBSERVATIONS IN BANK OF CHETTINAD LTD. V. CIT [1940] 8 ITR 522 (PC), QUOTING WITH APPROVAL TH E OBSERVATIONS OF LORD RUSSELL OF KILLOWEN IN IRC V. DUKE OF WESTMINSTER [ 1936] AC 1 (HL); [1936] 19 TC 490 AND THE OBSERVATIONS OF LORD SIMONDS IN RUSS ELL V. SCOTT [1948] 2 ALL ER15. IT THUS APPEARS TO US THAT NOT ONLY IS THE PRINCIPL E IN DUKE OF WESTMINSTER'S CASE [1936] AC 1 (HL) ; 19 TC 490 ALIVE AND KICKING IN E NGLAND, BUT IT ALSO SEEMS TO HAVE ACQUIRED JUDICIAL BENEDICTION OF THE CONSTITUT IONAL BENCH IN INDIA, NOTWITHSTANDING THE TEMPORARY TURBULENCE CREATED IN THE WAKE OF MCDOWELL'S CASE [1985] 154 ITR 148 (SC). 13. THE HONBLE SUPREME COURT IN ANOTHER CASE OF CIT VS . WALFORT SHARE AND STOCK BROKERS P. LTD. IN 326 ITR 1 HAS MADE THE FOL LOWING OBSERVATIONS:- THE REAL OBJECTION OF THE DEPARTMENT APPEARS TO BE THAT THE ASSESSEE IS GETTING TAX-FREE DIVIDEND ; THAT AT THE SAME TIME IT IS CLA IMING LOSS ON THE SALE OF THE UNITS ; THAT THE ASSESSEE HAD PURPOSELY AND IN A PLANNED MANNER ENTERED INTO A PRE- MEDITATED TRANSACTION OF BUYING AND SELLING UNITS Y IELDING EXEMPTED DIVIDENDS WITH FULL KNOWLEDGE ABOUT THE FALL IN THE NAV AFTER THE RECORD DATE AND THE PAYMENT OF TAX-FREE DIVIDEND AND, THEREFORE, THE LO SS ON SALE WAS NOT GENUINE. WE FIND NO MERIT IN THE ABOVE ARGUMENT OF THE DEPARTME NT. AT THE OUTSET, WE MAY STATE THAT WE HAVE TWO SETS OF CASES BEFORE US. THE LEAD MATTER COVERS ASSESSMENT YEARS BEFORE INSERTION OF SECTION 94(7) VIDE THE FI NANCE ACT, 2001 WITH EFFECT FROM APRIL 1, 2002. WITH REGARD TO SUCH CASES WE MAY STA TE THAT ON THE FACTS IT IS ESTABLISHED THAT THERE WAS A 'SALE'. THE SALE PRICE WAS RECEIVED BY THE ASSESSEE. THAT, THE ASSESSEE DID RECEIVE DIVIDEND. THE FACT T HAT THE DIVIDEND RECEIVED WAS TAX FREE IS THE POSITION RECOGNIZED UNDER SECTION 1 0(33) OF THE ACT. THE ASSESSEE HAD MADE USE OF THE SAID PROVISION OF THE ACT. THAT SUCH USE CANNOT BE CALLED 'ABUSE OF LAW'. EVEN ASSUMING THAT THE TRANSACTION WAS PRE-PLANNED THERE IS NOTHING TO IMPEACH THE GENUINENESS OF THE TRANSACTI ON. WITH REGARD TO THE RULING IN MCDOWELL AND CO. LTD. V. CTO [1985] 154: ITR 148 (SC), IT MAY BE STATED THAT IN THE LATER DECISION OF THIS COURT IN UNION OF IND IA V. AZADI BACHAO ANDOLAN ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 13 [2003] 263 ITR 706 IT HAS BEEN HELD THAT A CITIZEN IS FREE TO CARRY ON ITS BUSINESS WITHIN THE FOUR CORNERS OF THE LAW. THAT, MERE TAX PLANNING, WITHOUT ANY MOTIVE TO EVADE TAXES THROUGH COLOURABLE DEVICES IS NOT FROWN ED UPON EVEN BY THE JUDGMENT OF THIS COURT IN MCDOWELL AND CO. LTD.'S CASE (SUP RA). 14. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MRS. S ARITA P. SHIRKE IN 281 ITR 373 HAD THE OCCASION TO CONSIDER A TRANSACTION ALLEGED TO BE A COLOURABLE DEVICE AND THE RELEVANT OBSERVATIONS OF THE HONBLE BOMBAY HIGH COURT READS AS UNDER:- A CONCURRENT FINDING HAS BEEN RECORDED BY BOTH THE LOWER AUTHORITIES THAT THE AMOUNT LYING IN THE ACCOUNT OF RESPONDENT NO. 1/ASS ESSEE IN VASCO WAS TRANSFERRED BY DEMAND DRAFT TO HER ACCOUNT IN KASHM IR AND THERE SHE HAD MADE A GIFT TO 5 TRUSTS IN KASHMIR. RESPONDENT NO. 1 BEING A NON-RESIDENT OF INDIA AND PERMANENTLY RESIDING IN DUBAI WOULD HAVE VERY WELL GIVEN THE GIFT IN DUBAI WHERE THE GIFT IS NOT TAXABLE. IT IS, THEREFORE, NOT POSS IBLE TO COME TO A CONCLUSION THAT THIS WAS A COLOURABLE DEVICE FOR AVOIDING TAX. IN A NY CASE, EVEN OTHERWISE, IF A PERSON IS ENTITLED TO AN EXEMPTION IN LAW AND ACCOR DINGLY MAKES A PLAN TO AVOID THE TAX LIABILITY WHICH HE IS OTHERWISE LEGALLY ENT ITLED TO IT WOULD NOT AMOUNT TO A TAX EVASION. THE SUPREME COURT IN A RECENT CASE IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN [2003] 263 ITR 706 HAS TO A VE RY LARGE EXTENT WATERED DOWN THE RATIO LAID DOWN IN MCDOWELL AND CO. LTD. V . CTO [1985] 154 ITR 148 (SC) AND HAS OBSERVED THAT THE OBSERVATIONS MADE BY CHINNAPPA REDDY, J. IN THE SAID JUDGMENT DO NOT NECESSARILY REFLECT THE OBSERV ATIONS OF THE OTHER HON'BLE JUDGES. THE SUPREME COURT IN THIS JUDGMENT HAS CONS IDERED THE MAJORITY VIEW AND THE VIEW TAKEN BY CHINNAPPA REDDY J. AND HAS OBSERV ED THAT THE MAJORITY JUDGMENT IN MCDOWELL AND CO. LTD. V. CTO [1985] 154 ITR 148 (SC) HAD NOT ENDORSED THE VIEW OF CHINNAPPA REDDY J. THE .APEX C OURT HAS OBSERVED AS UNDER (PAGE 754) : 'AS WE SHALL SHOW PRESENTLY, FAR FROM BEING EXORCIS ED IN ITS COUNTRY OF ORIGIN, DUKE OF WESTMINSTER'S CASE [1936] AC 1 (HL); [1935] 19 TC 490 CONTINUES TO BE ALIVE AND KICKING IN ENGLAND. INTERESTINGLY, EVEN I N MCDOWELL'S CASE [1985] 154 ITR 148 (SC), THOUGH CHINNAPPA REDDY J. DISMISSED T HE OBSERVATION OF J. C. SHAH J. IN CIT V. A. RAMAN AND CO. [1968] 67 ITR 11 (SC) BASED ON WESTMINSTER'S CASE [1936] AC 1 (HL); 19 TC 490 [68] AND FISHER'S EXECUTORS CASE [1926] AC 395 AT 412 (HL), BY SAYING (PAGE 160 OF [1985] 154 ITR) 'WE THINK THAT THE TIME HAS COME FOR US TO DEPART FROM THE WESTMINSTER PRIN CIPLE AS EMPHATICALLY AS THE ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 14 BRITISH COURTS HAVE DONE AND TO DISSOCIATE OURSELVE S FROM THE OBSERVATIONS OF SHAH J., AND SIMILAR OBSERVATIONS MADE ELSEWHERE', IT DOES NOT APPEAR THAT THE REST OF THE LEARNED JUDGES OF THE CONSTITUTIONAL BE NCH CONTRIBUTED TO THIS RADICAL THINKING. SPEAKING FOR THE MAJORITY, RANGANATH MISH RA J. (AS HE THEN WAS) SAYS IN MCDOWELL'S CASE [1985] 154 ITR 148, 171 (SC) : TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHI N THE FRAMEWORK OF LAW. COLOURABLE DEVICES CANNOT BE PART OF TAX PLANNING A ND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOURABLE TO AV OID 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/EMPHASIS 1 SUPPLIED) THIS OPINION OF THE MAJORITY IS A FAR CRY FROM THE VIEW OF CHINNAPPA REDDY J. (PAGE 160) : 'IN OUR VIEW THE PROPER WAY TO CONSTRU E A TAXING STATUTE, WHILE CONSIDERING A DEVICE TO AVOID TAX, IS NOT TO ASK WH ETHER A PROVISION SHOULD BE CONSTRUED LITERALLY OR LIBERALLY NOR WHETHER THE TR ANSACTION IS NOT UNREAL AND NOT PROHIBITED BY THE STATUTE, BUT WHETHER THE TRANSACT ION IS A DEVICE TO AVOID TAX, AND WHETHER THE TRANSACTION IS SUCH THAT THE JUDICIAL P ROCESS MAY ACCORD ITS APPROVAL TO IT/ WE ARE AFRAID THAT WE ARE UNABLE TO READ OR COMPREHEND THE MAJORITY JUDGMENT IN MCDOWELL'S CASE [1985] 154 ITR 148 (SC) AS HAVING ENDORSED THIS EXTREME VIEW OF CHINNAPPA REDDY J., WHICH, IN OUR C ONSIDERED OPINION, ACTUALLY MILITATES AGAINST THE OBSERVATIONS OF THE MAJORITY OF THE JUDGES WHICH WE HAVE JUST EXTRACTED FROM THE LEADING JUDGMENT OF RANGANATH MI SHRA J. (AS HE THEN WAS).' THE SUPREME COURT, THEREFORE, BY THE SAID JUDGMENT HAS CLEARLY WATERED DOWN THE VIEW TAKEN BY CHINNAPPA REDDY J. IN MCDOWELL AN D CO. LTD. V. CTO [1985] 154 ITR 148 (SC). THE SUBMISSION OF LEARNED COUNSEL APPEARING ON BEHALF OF THE REVENUE THAT THE RATIO OF MCDOWELL AND CO. LTD. V. CTO [1985] 154 ITR 148 (SC) IS APPLICABLE TO THE FACTS OF THE PRESENT CASE THEREFORE CANNOT BE ACCEPTED. 15. THE HONBLE HIGH COURT OF CALCUTTA IN OBEROI HOTELS P. LTD. IN 334 ITR 293 HAS MADE FOLLOWING RELEVANT OBSERVATIONS:- IN OUR OPINION, SO LONG THE DECISION IN THE CASE O FAZADI BACHAO ANDOLAN [2003] 263 ITR 706 (SC) IS NOT HELD TO BE PER- INCURIAM BY A L ARGER BENCH DECISION OF THE SUPREME COURT AS DONE IN THE CASE OF OFFICIAL LIQUI DATOR V. DAYANAND [2008] 10 SCC 1 RELIED UPON BY MR. SARAF, THE HIGH COURTS SHO ULD BE BOUND BY THE EXPLANATION OF THAT BENCH GIVEN TO THE DECISION IN THE CASE OF MCDOWELL AND CO. LTD. V. CTO [1985] 154 ITR 148 (SC). EVEN ON THE MERITS, WE ALSO DO NOT APPRECIATE THE R EASON OF THE ASSESSING OFFICER THAT THE ASSESSEE-COMPANY COULD HAVE EASILY WAITED FOR A REASONABLE PERIOD OF TIME FOR WATCHING THE MARKET AND COULD ALSO HAVE INVESTED A FURTHER AMOUNT OF RS. 9 TO 10 ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 15 CRORES TO REVIVE THE BUSINESS OF M/S. 8KB. IT IS NO T WITHIN THE PROVINCE OF THE ASSESSING OFFICER TO IGNORE AN OTHERWISE GENUINE TR ANSACTION AND TO BRAND IT AS A COLOURABLE ONE ON THE GROUND THAT IT WAS THE DUTY O F THE COMPANY TO INVEST FURTHER AMOUNT OR IT SHOULD HAVE WAITED FOR A REASONABLE PE RIOD. WE, THEREFORE, FIND THAT THE VIEW OF THE TRIBUNAL AND THE COMMISSIONER OF IN COME-TAX (APPEALS) AS REGARDS THE NATURE OF THE TRANSACTION IS QUITE IN C ONFORMITY WITH THE LAW OF THE LAND. 16. A CONSPECTUS READING OF THE AFOREMENTIONED JUDGMENT S OF THE HONBLE SUPREME COURT AND THE HIGH COURTS WOULD SUGGEST THA T EVERY ARRANGEMENT CANNOT BE CONSIDERED AS A COLOURABLE DEVICE FOR TAX AVOIDANCE. 17. COMING BACK TO THE FACTS OF THE CASE IN HAND, THE A LLEGATION OF THE REVENUE THAT THE APPELLANT COULD NOT HAVE INVESTED DIRECTLY IN AFIG OTHERWISE IT WOULD HAVE LOST ITS EXEMPTION DUE TO VIOLATION OF S ECTION 11(5) R.W.S. 13(1)(D) OF THE ACT DOES NOT HOLD ANY WATER BECAUSE THE MFA WHICH WAS EARLIER CARRIED ON BY THE APPELLANT TRUST WAS NOW C ARRIED OUT BY IFIG THROUGH AFIG. 18. THE HONBLE HIGH COURT OF GUJARAT IN THE CASE OF SA RLADEVI SARABHAI TRUST 40 TAXMANN.COM 388 WHEREIN ON IDENTICAL FACTS AND A FTER CONSIDERING THE CBDT INSTRUCTION NO. 1132 DATED 05.01.1978 OBSERVED AS UNDER:- 'A QUESTION HAS BEEN RAISED REGARDING THE AVAILABIL ITY OF EXEMPTION IN THE HANDS OF CHARITABLE TRUSTS OF AMOUNTS PAID AS DONATION TO OTHER CHARITABLE TRUSTS. THE ISSUE HAS BEEN CONSIDERED BY THE BOARD AND IT HAS B EEN DECIDED THAT AS THE LAW STANDS AT PRESENT, THE PAYMENT OF A SUM BY ONE CHAR ITABLE TRUST TO ANOTHER FOR UTILIZATION BY THE DONEE-TRUST TOWARDS ITS CHARITAB LE OBJECTS IS PROPER APPLICATION OF INCOME FOR CHARITABLE PURPOSE IN THE HANDS OF TH E DONEE-TRUST, AND THE DONOR TRUST WILL NOT LOSE EXEMPTION UNDER SECTION 11 OF T HE INCOME TAX ACT, 1961 MERELY BECAUSE THE DONEE-TRUST DID NOT SPEND THE DONATION DURING THE YEAR OF RECEIPT ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 16 ITSELF. THE ABOVE POSITION MAY KINDLY BE BROUGHT TO THE NOTICE OF ALL OFFICERS WORKING IN YOUR CHARGE.' ADVERTING TO THESE INSTRUCTIONS, THE HON'BLE GUJARA T HIGH COURT IN PARA-10 OF THE DECISION HELD AS UNDER: '10, MR. SOPARKAR FOR THE REVENUE SUBMITTED THAT TH E AFORESAID INSTRUCTION WILL NOT APPLY TO THE FACTS OF THE PRESENT CASE AS THE CIRCULAR NOWHERE CONTEMPLATES A DONATION WHEREIN THE DONEE-TRUST IS NOT ALLOWED TO SPEND THE DONATED AMOUNT WHOLEHOG FOR ITS CHARITABLE OR R ELIGIOUS PURPOSE BUT HAS TO KEEP IT INTACT AS CORPUS AND HAS TO UTILIZE ONLY THE INCOME THEREOF. IT IS NOT POSSIBLE TO AGREE WITH THE AFORESAID FINE DI STINCTION SOUGHT TO BE DRAWN BY THE LEARNED ADVOCATE FOR THE REVENUE IN TH E LIGHT OF THE WORDING OF INSTRUCTION NO. 1132. EVEN THE LAST SENTENCE OF PARAGRAPH 2 INDICATES THAT WHETHER IN THE GIVEN YEAR, THE DONEE-TRUST HAS SPENT DONATION OR NOT, WOULD BE TOTALLY IRRELEVANT CONSIDERATION. WHAT THE DONOR TRUST DOES IS THE ONLY RELEVANT MATTER.UTILIZATION BY DONEE-TRUST IN ANY YEAR WOULD NOT BE RELEVANT FOR THE PURPOSE OF DECIDING WHETHER THE DONOR TRUST GETS EXEMPTION UNDER SECTION 11 OR NOT. THIS IS AN ADDITIONAL ASPECT OF THE MATTER, THEREFORE, WHICH ENABLES THE ASSESSES TO SU CCEED. THESE INSTRUCTIONS ARE BINDING TO ALL THE OFFICERS UNDER THE ACT AND, THEREFORE, EVEN APART FROM THE LEGAL POSITION WHICH WE HAVE DI SCUSSED EARLIER, THE FIRST CONTENTION CANVASSED BY THE REVENUE WILL HAVE TO BE HELD TO HAVE BEEN SQUARELY COVERED AGAINST IT BY INSTRUCTION NO. 1132 ITSELF.' 19. THUS, THE HONBLE JURISDICTIONAL HIGH COURT OF GUJA RAT HAS ALSO EMPHATICALLY SAID THAT WHAT THE DONOR TRUST DOES IS THE ONLY REL EVANT FACTOR. UTILIZATION BY THE DONEE TRUST IN ANY YEAR WOULD NOT BE RELEVAN T FOR THE PURPOSE OF DECIDING WHETHER THE DONOR TRUST GETS EXEMPTION U/S . 11 OF NOT. 20. THE FIRST APPELLANT AUTHORITY HAS FURTHER ALLEGED T HAT THE SECOND OBJECT IS TO BUILD, PROMOTE, AND OWN THROUGH DIRECTLY OR THR OUGH EQUITY CONTRIBUTION TO MFI WITH VIEW TO EXPAND MICRO FINANCE SERVICES A T THE GRASS ROOT LEVEL ALL OVER INDIA CANNOT BE CONSIDERED AS A CHARITABLE PURPOSE. WE A RE NOT INCLINED TO ACCEPT THIS ALLEGATION FOR THE REASON T HAT THE SAME ACTIVITY WAS ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 17 CONSIDERED AS A CHARITABLE ACTIVITY WHEN THE APPELL ANT TRUST WAS CARRYING OUT AND WAS ALLOWED EXEMPTION BY THE REVENUE. MEREL Y BECAUSE NOW THIS ACTIVITY IS CARRIED OUT BY IFIG THROUGH AFIG THE SA ME ACTIVITY CANNOT LOSE ITS CHARACTER. 21. CONSIDERING THE NATURE OF TRANSACTION AS EXPLAINED ELSEWHERE, IN OUR CONSIDERED OPINION AND UNDERSTANDING OF LAW, THE CO RPUS DONATION OF RS. 45 CRORES DESERVES TO BE ALLOWED AS AN APPLICATION OF INCOME OF THE APPELLANT TRUST U/S. 11 OF THE ACT. WE, ACCORDINGLY, SET ASID E THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE A.O. TO ALLOW THE CORPUS DONA TION AS APPLICATION OF INCOME OF THE APPELLANT TRUST. 22. WITH THIS DIRECTION AND OUR FINDING, ALL OTHER ISSU ES RAISED BY THE ASSESSEE IN THE PRESENT APPEAL BECOME INFRUCTUOUS. 23. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 24. BEFORE PARTING, THE LD. D.R. HAS RELIED UPON THE FO LLOWING DECISIONS:- (I) GRAMA VIDIYAL TURST VS. ACIT 180 TTJ 579 (CHENN AI-TRIB) (II) ICAI VS. DGIT 347 ITR 99 (III) AUDA VS. ACIT 69 TAXMANN.COM 381. 25. ALL THESE DECISIONS ARE MISPLACED ON THE FACTS OF T HE CASE IN HAND AS ALL THESE DECISIONS RELATE TO BUSINESS ACTIVITIES IN TH E GUISE OF CHARITABLE ACTIVITY. WE HAVE MENTIONED ELSEWHERE THAT THE ACTI VITIES OF THE ASSESSEE ITA NO. 1927/AH D/16 & S.P. NO. 64/A/17 . A.Y. 2011-12 18 TRUST WERE ACCEPTED AS CHARITABLE ACTIVITIES WHEN T HE SAME WERE CARRIED ON BY THE APPELLANT TRUST. S.P. NO. 64/AHD/2017 (IN ITA NO. 1927/AHD/2016) FOR A.Y 2011-12 26. WITH THIS STAY PETITION, THE ASSESSEE HAS PRAYED FO R THE EXTENSION OF THE STAY GRANTED BY THE TRIBUNAL IN S.P. NO. 87/AHD/201 6 VIDE ORDER DATED 02.09.2016. SINCE THE APPEAL HAS BEEN DECIDED ON ME RIT (SUPRA), THIS STAY PETITION IS ACCORDINGLY DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 09 - 03- 20 17 SD/- SD/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER TRUE COPY ACCOUNTANT MEMBER AHMEDABAD: DATED 09 /03/2017 RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD