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PETITIONER: Mc DOWELL & COMPANY LIMITED

       Vs.

RESPONDENT: THE COMMERCIAL TAX OFFICER

DATE OF JUDGMENT17/04/1985

BENCH: REDDY, O. CHINNAPPA (J) BENCH: REDDY, O. CHINNAPPA (J) MISRA RANGNATH CHANDRACHUD, Y.V. ((CJ) DESAI, D.A. VENKATARAMIAH, E.S. (J)

CITATION:  1986 AIR  649            1985 SCR  (3) 791  1985 SCC  (3) 230        1985 SCALE  (1)788  CITATOR INFO :  D          1988 SC1824  (12)  RF         1990 SC 202  (11)

ACT:      Concepts of  Tax Evasion  and Tax Avoidance, difference in-Tax Planning Colorable device within the framework of law cannot be allowed to be a part of Tax Planning.      New plea-Constitution  of India, 1950-Appeal by Special Leave under  Article 136-Supreme  Court cannot  entertain  a plea not taken in the High Court.      Andhra Pradesh General Sales Tax Act, 1947-"Turn over", scope of-Test  for determining  whether an  excise duty is a part of  "turn over," under the Sales Tax Act- The incidence of, excise  duty being  directly relatable  to  manufacture, validity of  the decision  In McDowell’s  case  reported  in [1977] 1 SCR 914 reconsidered:

HEADNOTE:      "Excise duty"  as defined  in section 2(10) of the A.P. Excise Act,  1968 is  leviable on  the manufacture of liquor and  the  manufacturer  cannot  remove  the  same  from  the distillery unless  the duty imposed under the Excise Act has been paid.  Buyers of  Indian liquor  from  the  appellant’s distillery obtain  distillery passes  for release  of liquor after making  payment of excise duty and present the same at the distillery  there upon  the bill  of sale  or invoice is prepared by  the distillery  showing the price of liquor but excluding excise duty. The appellant’s books of account also did not  contain any  reference to  excise duty  paid by the purchaser. The  appellant, there-ore,  paid sales  tax under the Andhra  Pradesh General Sales Tax Act, 1957 on the basis of turnover  which excluded  excise duty.  This position was not accepted  by the Sale Tax Authorities and the matter was contested right upto the Supreme Court. The Supreme Court in Mc Dowell  & Company  Ltd. etc.  v. Commercial  Tax  Officer VIIth Circle,  Hyderabad, etc.  reported in [1977] 1 SCR 914 held that  the Sales  Tax Authorities  were not competent to include in  the "turnover" of the appellant, the excise duty which was  not charged  by it,  but was paid directly to the

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Excise 792 Authorities the buyers of the liquor, inasmuch as the excise duty did  not go  into the  common till of the appellant and did not become a part of the circulating capital.      After the  judgment of  the Supreme  Court Rules 76 and 79(1) of  the A.P.  Distillery Rules  were suitably  amended with effect from August 4, 1981. Amended Rule 76(a) provides that "No  spirit of  liquor" manufactured or stored shall be removed unless  the Excise duty specified in rule 6 has been paid by  a holder of D-2 licence before such removal and the amended rule  79(1) provides  that on  payment of the excise duty by  the holder of D-2 licence a distillery pass for the removal of  spirit fit for human compensation may be granted in favour of any of the named persons therein.      The appellant,  being a  D-2 licence  holder was served with a  notice, on  the basis  of the amended provisions, by the  respondent   proposing  to   include  a   sum  of   Rs. 4,49,09,532.40 representing the excise duty paid directly by buyers of appellants’ liquor in the appellants, turnover for a part  of the  year 1982-83, Thereupon, the appellant again moved the  High Court for quashing the said notice. The High Court considered  the effect  of the  amended Rules and held that  the   primary  liability   to  pay   excise  duty  was indisputably of  the holder  of the  D-2 licence.  The  High Court dismissed  the writ  petition on the findings (a) that the turnover related to liquor; and (b) that the excise duty which was  payable by  the appellant  but  had  by  amicable arrangement been  paid by  the buyer  was actually a part of the turnover  of the appellant and was, therefore, liable to be so included for determining liability for sales tax. When leave was  granted by  a Division Bench of the Supreme Court to appeal  against the  judgment  of  the  High  Court,  the correctness of  the decision in appellants’ case reported in [1977] 1 SCR 914, was doubted and the matter was referred to a larger Bench.      Dismissing the appeal, the Court, ^      HELD: (Per Chinnappa Reddy, J. (concurring)      1.1 Much  legal sophistry  and Judicial exposition both in  England   and  India  have  gone  into  the  attempt  to differentiate the  concepts of tax evasion and tax avoidance and to  discover the  invisible line supposed to exist which distinguishes one  from the  other. Tax avoidance, it seems, is legal;  tax evasion  is illegal. Though initially the law was, and law still is, there is no equity about a tax. There is no  presumption as  to a  tax. Nothing  is to be read in, nothings to  be implied",  during the period between the two world wars  the 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. In the wake of World War II  huge profiteering  and racketeering became the order of the  day, something  which persists  till today  but on a much larger  scale. Therefore,  the attitude  of the  entire English Courts  towards avoidance of tax perceptibly changed and hardened,  The march  of the  law against  Tax avoidance schemes des- 793 cribed  as  magic  performance  by  lawyer  turned  magician continued and  then came  a significant  departure from  the West-mininister and  the Fisher  Executors principle in 1982 and finally  "the ghost of West-minister" has been exercised in England.  Thus, in  the very  country of  its birth,  the principle of  West-minister has  been given  a decent burial and in  that very  country where  the phrase "tax avoidance"

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originated the  judicial attitude  towards tax avoidance has changed and  the smile,  cynical or even affectionate though it might  have been  at one time, has now frozen into a deep frown. The  courts are concerning themselves not merely with the genuineness  of a  transaction, but  with  the  intended effect of  it for  fiscal purposes.  No man now can get away with a  tax avoidance  project with  the mere statement that there is nothing illegal about it.                             [797 G-H, 798 F, 801 C, 807 A-D]      Inland  Revenue  Commissioners  v.  Fishers  Executors, [1926] AC 395; Inland Revenue Commissioners v. Duke of West- minister, [19361  AC 1;  Lord Howard  De  Waldan  v.  Inland Revenue Commissioners,  [1942] 1  KB 389;  Latilla v. Inland Revenue Commissioners,  [1943] AC  377:  Griffiths  v.  J.P. Harrizan  Ltd.   [1963]  AC  1;  Morgan  v.  Inland  Revenue Commissioners, [1963]  Chancery  438;  Public  Trustee    v. Inland Revenue  Commissioners, [1965] Chancery 286; Campbell v.  Inland   Revenue  Commissioners,  [1967]  Chancery  651; Greenberg v. Inland Revenue Commissioners, [1971] 3 All E.R. 136; W.T.  Ramsay v. Inland Revenue Commissioners, 11982] AC 300: Inland Revenue Commissioners v. Burmah Oil Company Ltd, 1982 STC  30: Furniss  v. Dawson,  [1984] 1  All  E.R.  530; Commissioner of  Income tax,  Gujarat v.  A.  Raman  &  Co., [1968]1 SCR  10; Commissioner  of  Income  tax.  Gujarat  v. Kharwar, 72 ITR 603 referred to.      2. The  evil consequence of tax avoidance are manifold: (i) there  is substantial loss of much needed public revenue particularly in a welfare State like ours; (ii) there is the serious disturbance  caused to the economy of the country by the piling  up of  mountains of  blackmoney directly causing inflation; (iii)  there is  "the large  hidden loss"  to the community 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 the side  and  the  tax-gathered  and  his  perhaps  not  so skillful, advisers  on the  other side;  (iv) 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";  and (v) last but not least is the ethics (to be  precise, the  lack of it) of transferring the burden of tax  liability to  the shoulders  of the  guideless, good citizens from  those of the "artful doggers". [808 H, 809 A- C]      3. 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. [809 E-F]      Wood Polymer  Ltd. v. Bengal Hotels Limited, 40 Company Cases 597 referred to. 794      4. It  is neither  fair nor  desirable  to  expect  the legislature to  intervene and  take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine  the nature  of the new and sophisticated legal devices to  avoid tax  and consider  whether  the  situation created by  the devices  could be  related to  the  existing legislation with  the aid of ’emerging’ techniques of inter- pretation, to  expose the  devices for  what they really are and to refuse to give Judicial benediction. [809 G-H 810 A]      W.T. Ramsay  v. Inland Revenue Commissioners, [1982] AC 300; Inland Revenue Commissioners v. Burmah Oil Company Ltd. 1982 STC 30; Furniss v. Dawson, [1984] I All E.R. 530 quoted

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with approval.      HELD: (Per Ranganath Misra, J.)      1. Tax planning may be legitimate provided lt 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. [823 H, 824 A]      Commissioner of  Income tax v. A. Raman & Co. (1968) 67 ITR II  SC J  Commissioner of Income-tax, Gujarat II v. B.M. Kharwar, (1969)  72 ITR  603 SC;  Bank of  Chettinad Ltd. v. Commissioner  of   Income-tax,  (1940)   8  ITR   522  (PC); Jiyajeerao Cotton Mills Ltd. v. Commission of Income Tax and Excess  Profits   Tax,  Bombay,   (1958)  34  ITR  388  (SC) Commissioner of  Income Tax  v. Sakarlal  Balabhai (1972) 86 ITR 2 (SC) referred to.      Latilla v. I.R. 25 T.C. 107 quoted with approval.      2.1 The  incidence of excise duty is directly relatable to manufacture but its collection can be deferred to a later stage as a measure of convenience or expediency. [815 A-B]      The Province  of Madras  v. M/s.  Boddu Paidanna & Sons [1942] ECR  90 R.C.  Jall v. Union of India, [1962] Suppl. 3 SCR 436;  Re.  Sea  Custom  Act,  [1964)  3  SCR  787;  M/s- Guruswamy & Co. etc. v. State of Mysore & Ors., [1967] 1 SCR 548; Jullundur  Rubber Goods  Manufacturers’ Association  v. Union of  India &  Anr. [1970]  2 SCR 68; A.B. Abdul Kadir & Anr. v. State of Kerala, [1976] 3 SCR 219 referred to.      2.2 On  an examination  of the  provisions of  the A.P. Excise  Act,  the  Rules  were  framed  thereunder  and  the pronouncements of  the Supreme  Court, it is clear, that the conclusion of the Court in Mc Dowells & Company Ltd. etc. v. Commercial Tax Officer, Vllth Circle, Hyderabad etc., [1977] 1 SCR  914 at  page 921  of [1973]  1  SCR,  that  intending purchasers  of   the  Indian  liquors  who  seek  to  obtain distillery passes  are also  legally responsible for payment of the  excise duty  is too  broadly stated.  The "duty  wag primarily a burden which the 795 manufacturer had to bear and even if the purchasers paid the same under  the Distillery Rules, the provisions were merely enabling and  did not  give rise to any legal responsibility or obligation for meeting the burden. [815 B-D]      The change  in Rule  76 of  the AP Distillery Rules has clearly affirmed  the position that liability for payment of excise duty  is of  the manufacturer  and the  provisions of rules 80  to 84  do not  militate against it. These rules do not detract from the position that payment of excise duty is the primary and exclusive obligation of the manufacturer and if payment  be made  under a  contract or arrangement by any other person it would amount to meeting of the obligation of the manufacturer and nothing more. [815 D-F]      2.3 The  definition of  "turnover", in  section 2(s) of the A.P.  General Sales  Tax Act,  which is  to the  effect. namely ’the  total amount set out in the bill of sale (or if there is  no bill  of sale, the total amount charged) as the consideration for  the sale  or purchase  of goods  (whether such consideration  be cash,  deferred payment  or any other thing or value) Including any sums charged by the dealer for anything done  in respect  of goods  sold at  the time of or before the  delivery of the goods and any other sums charged by the  dealer, whatever  be the description, name or object thereof" clearly  indicates that the total amount charged as the consideration  for the  sale is to be taken into account for determining  the turnover. Where a bin of sale is issued

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(and obviously  the bill  has  to  state  the  total  amount charged as  consideration), the total amount set out therein is to  be taken  into account. In every transaction of sale, there is  bound to be a seller at one end and a buyer at the other and  transfer of  title in the goods takes place for a consideration. [815 H,816 A-C]      2.4 Excise  duty though  paid by  the purchaser to meet the  liability   of  the   appellant,  is   a  part  of  the consideration for the sale and is includible in the turnover of the appellant. The purchaser has paid the tax because the law asks  him to pay it on behalf of the manufacturer. Here, admittedly, the  bills  issued  by  the  appellant  did  not include the  excise duty;  Payment of excise duty is a legal liability of  the manufacture,  its payment  is a  condition precedent to  the removal  of the liquor from the distillery and  payment   by  the   purchaser  is  on  account  of  the manufacturer.  According   to  normal  commercial  practice, excise duty should have been reflected in the bill either as merged in price or being shown separately. As a fact, in the hands of  the buyer the cost of liquor is what is charged by the appellant under its bill together with excise duty which the  buyer  has  directly  paid  on  seller’s  account.  The consideration for the sale is thus the total amount not what is reflected in the bill. [818 C-F]      2.5 True,  the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to  reimburse him  in respect  of the excise duty already paid by him on the manufacture of the goods. But even so, it would be part of the sale price because it forms a component of the  consideration for  the sale  of the  goods that  the amount representing  excise duty  would be  payable  by  the purchaser, There  is no other manner of liability, statutory or 796 otherwise, under  which the purchaser would be liable to pay the amount  of excise  duty  to  the  dealer.  And  on  this reasoning, it would make no difference whether the amount of excise duty  is included  in the price changed by the dealer or is  shown as a separate item in the bill, The position is not different  when  under  a  prior  agreement,  the  legal liability of  the manufacturer  dealer for payment of excise duty is  satisfied by the purchaser by direct payment to the excise authorities  or to the State exchequer. [816 G-H, 817 A-D]      2.6 The  conclusion reached  in the appellants’ case in [1977] 1  SCR 914 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 deter  mining  whether  such  duty  would constitute "turnover".  The relevant  consideration  is  not whether the  law permits  the incidence  of the  duty to  be passed  on   to  the   purchaser  but  whether  there  is  a prohibition against  passing of  it. If there is no bar, the incidence would  be passed on to the purchaser in accordance with normal commercial practice. [819 A-C 821 B-C]      The Province  of Madras  v. M/s. Boddu Paidanna & Sons, [1942] FCR  90; RC  Jall v.  Union of India, [1962] Suppl. 3 SCR 436;  Re. Sea  Customs  Act,  [1964]  3  SCR  787;  M/s, Guruswamy &  Co. etc. v. State of Mysore & Ors, [1967] 1 SCR 548; jullundur  Rubber Goods  Manufacturers’ Association  v. Union of  India &  Anr. [1970]  2 SCR 68; A.B. Abbul Kadir & Ors. v. State of Kerala, [1976] 3 SCR 219: referred to.      Hindustan Sugar  Mills v. Rajasthan State, [1979] I SCR 276 applied.

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    Paprika Ltd. & Anr. v. Board of Trade, []944] All. E.R. 372; Love v,      Norman Wright  (Builders) Ltd.  [1944] I  All E.R.  618 quoted with approval.      M/s George Oakes(P) Ltd. v. The State of Madras, [1962] 2 SCR 570,      Anand Swarup  Mahesh Kumar v. The Commissioner of Sales Tax, [1981] 1 SCR 707 discussed and distinguished.      3.A stand which has not been taken in the writ petition before the  High Court  cannot be allowed to be taken in the Supreme Court.  Here the  contention based on item 26 of the amended First  Schedule  to  the  Sales  Tax  Act  that  the appellant had  already paid tax on the basis of 50 p. in the rupee on  the fooling  that the consideration for its liquor did not include duty of excise pay able under the Excise Act and the  appellant cannot,  therefore, be  made  liable  for sales tax on a different footing cannot be sustained. Such a stand had  not been  taken in  the writ  petition before the High Court and there has been no 797 factual examination  of  the  position  as  to  whether  the classification indicated is  not intended to cover a totally different situation. Further for resolving the dispute as to whether excise  duty is a part of the turnover, reference to the Schedule is indeed wholly irrelevant. [820 A-D]      George Oakes  (P) Ltd.  & Ors.  v. The State Madras, 13 STC 98, distinguished.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No. 570 of 1983.      From the Judgment and Order dated 6.12.1982 of the High Court of Andhra Pradesh in Writ Petition No. 7985/82.      Soli J.  Sorabjee, Harish N. Salve, Ravinder Narain and Mrs. A.K. Verma for the Appellant.      S.T. Desai,  B. Parthasarthi and T.V.S.N. Chari for the Respondents.      The following Judgments were delivered      CHINNAPPA REDDY,  J. While  I entirely  agree  with  my brother Rangnath  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.  My   excuse  for inflicting this extra opinion is that the ingenious attempts to rationalise  and legitimise  tax  avoidance  have  always fascinated and  amused me  and made  me wonder how ready the minds are  to adapt  themselves and  discover excuses to dip into the treasury.      The shortest  definition of  tax avoidance  that I have come across  is "the art of dodging tax without breaking the law." Much legal sophistry and judicial exposition have gone into the  attempt  to  differentiate  the  concepts  of  tax evasion and tax avoidance and to discover the invisible line supposed to  exist which  distinguishes one  from the other. Tax avoidance, it seems, is legal: tax evasion is illegal.      Though initially  the law  was, and  I suppose  the law still is,  "there is  no equity  about a  tax. There  is  no presumption as  to a  tax. Nothing is to be read in, nothing is to be implied", during 798 the period between the two world wars, the theory came to be propounded and  developed that  it was  perfectly  open  for persons to  evade (avoid)  income tax  if they  could do  so

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legally. For  some time  it looked  as if  tax avoidance was even viewed  with affection.  Lord Sumner  in Inland Revenue Commissioners v. Fishers Executors(l) said: ‘           "My Lords  the  highest  authorities  have  always      recognised that  the subject  is entitled so to arrange      his affairs  as not  to attract  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 term  or of  any emotions that he can find in      his favour in taxing Acts. In so doing he neither comes      under liability nor incurs blame."      Lord Tomlin  echoing what Lord Sumner had said observed in Inland  Revenue Commissioners v. Duke of West Minister(2) follows type  filing  the  prevalent  attitude  towards  tax avoidance at that time:           "Every man  is entitled  if he  can to  order  his      affairs so that the tax attaching under the appropriate      Acts is less than if otherwise would be. If he succeeds      in ordering  them so  as to  secure this  result, then,      however, unappreciative  the  Commissioners  of  Inland      Revenue  or  his  fellow  tax  payers  may  be  of  his      ingenuity. he  cannot be  compelled to pay on increased      tax."      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 and  in Lord  Howard De  Waldan v.  Inland  Revenue Commissioners(a) Greene, M.R., dealing with the construction of an anti-avoidance section said:           "For years  a battle  of manoeuvre  has been waged      between the  legislature and  those who  are minded  to      throw the (1) [1926] A.C. 395. (2) [1936] A.C, 1, (3) [1942] I,KB 389. 799      burden of  taxation off their own shoulders on to those      Of     their  fellow   subjects.  In  that  battle  the      legislature   has    been   worsted   by   the   skill,      determination and  resourcefulness of  its opponents of      whom the  present appellant  has  not  been  the  least      successful. It  would not shock us in the least to find      that the  legislature has  determined to  put an and to      the struggle  by imposing  the severest  penalities. It      scarcely lies  in the  mouth of the tax payer who plays      with fire to complain of burnt fingers."      Expressing the  same sentiment  and dissertating on the moral aspects  of tax  avoidance Lord  Simon in  Latilla  v. Inland Revenue Commissioners(1) said,           "My Lords, of recent years much ingenuity has been      expended in  certain quarters  in attempting  to devise      met hods  of disposition  of income  by which those who      were prepared to adopt them might enjoy the benefits of      residents  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  may be,  those who  adopt      them are  ’entitled’ to  do 60. 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

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    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 manoeuvres."      In several  cases, Griffith  v.  JP  Harrizan  Ltd.(2), Morgan v. Inland Revenue Commissioners’(3) Public Trustee v. Inland Revenue  Commissioners(4),  Lord  Denning  repeatedly referred to tax avoidance schemes      (1) [1943] A.C. 377.      (2) [1963] A.C. 1.      (3) [1963] Chancery 438.      (4) [1965] Chancery 286. 800 and described  them as  magic performance  by lawyer-turned- magicians. Lord  Harman, almost  in the  same words  as Lord Denning described  a tax  avoidance  scheme  as  one  ’which smells a  little of  the lamp"  and said  ’ it is a splendid scheme-it is  almost too  good to  be true. In law quite too good to  be true.  It won’t do." (Campbell v. Inland Revenue Commissioners(1), Stamp J. In re Western’s Settlements observed-           "...There must  be some limit to the devices which      this Court  ought to countenance in order to defeat the      fiscal intentions  of the  legislature. In  my judgment      these  proposals   overstep  that   limit...I  am   not      pursuaded with  this application represents more than a      cheap exercise  in tax  avoidance which  r ought not to      sanction as  distinct from  a legitimate  avoidance  of      liability to taxation.      In Greenberg  v. Inland  Revenue Commissioners(2), Lord Reid dealing  with a  scheme for  tax avoidance  by  forward dividend stripping observed,           " ....  We seem  to have travelled a long way from      the general  and salutary  rule that the subject is not      be taxed  except by  plain words.  But I must recognise      that plain  words are seldom adequate to anticipate and      forestall the  multiplicity of  ingenious schemes which      are  constantly   being  devised   to  evade  taxation.      Parliament is  very properly determined to prevent this      kind  of  tax  evasion  and,  if  the  courts  find  it      impossible  to  give  very  wide  meanings  to  general      phrases, the  only alternative may be for Parliament to      do as  some other  countries have  done  and  introduce      legislation of a more sweeping character which will put      the ordinary  well-intentioned person  at much  greater      risk than  is created  by a wide interpretation of such      provisions as those which we are now considering."      (1) [1967] Chancery, 651.      (2) 1971(3) All ER. 135. 801           "I am  inclined to think that the real explanation      of     these  verbal   difficulties  may  be  that,  in      legislation of such extreme complexity as we have here,      it is  not humanly possible for a draftsman to preserve      that consistency  in  the  use  of  language  which  we      generally look  for. Indeed,  l sometimes  suspect that      our normal meticulous methods of statutory construction      tend to  lead us  astray by concentrating too much 1 on      verbal niceties  and paying too little attention to the      provisions read as a whole."      The march  of the  law against  tax  avoidance  schemes continued and  came a  significant departure  from the West- minister and the Fisher Executor. principle. In W.I.. Ramsay v. Inland  Revenue Commissioners(1),  the House of Lords had

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to consider  a scheme  of tax avoidance which consisted of a series or  a combination  of transactions  each of which was individually genuine  but the  result of all of which was an avoidance  of  tax.  Lord  Wilberforce,  with  great  force, observed,           "Given that  a document or transaction is genuine,      the  court   cannot  go  behind  it  to  some  supposed      underlying substance.  This is the well-known principle      of   Inland    Revenue   Commissioners   v.   Duke   of      Westminister. This  is a cardinal principle but it must      not be  overstated or  overextended. While obliging the      court to  accept documents or transactions, found to be      genuine, as  such, it does not compel the court to look      at a  document or  a transaction  in blinkers, isolated      from any  context to  which it  properly belongs. If it      can be seen that a document or transaction was intended      to have  effect  as  part  of  a  nexus  or  series  of      transactions,  or   as  an   ingredient  of   a   wider      transaction intended  as a  whole, there  is nothing in      the doctrine  to prevent it being so regarded: to do so      is not  to prefer  form to  sub stance, or substance to      form. It  is the  task of  the court  to ascertain  the      legal nature  of any  transaction to which it is sought      to attach  a tax  or a  tax  consequence  and  if  that      emerges from  a series  or combination of transactions,      in tended  to operate  as such,  it is  that series  or      combination which  may be  regarded. For  this there is      authority in the      (1) 11982] AB 300. 802      law relating  to income  tax and capital gains tax: See      Chinn  v.  Hochstrasser  [1981]  A.C.  533  and  Inland      Revenue Com missioners v. Plummer [1980] A.C. 896."           "For the  commissioners considering  a  particular      case it is wrong and an unnecessary self limitation, to      regard themselves  as precluded  by their  own  finding      that documents  or transactions  are not  "shams", from      considering  what,   as  evidenced   by  the  documents      themselves or  by  the  manifested  intentions  of  the      parties, the  relevant transaction  is. They  are  not,      under the Westminister doctrine or any other authority,      bound to  consider individually each separate step in a      composite transaction intended to be carried through as      a whole."      Later again he observed,           ".....For the taxpayers it was said that to accept      the revenue’s  wide contention  involved a rejection of      accepted and established canons and that, if so general      an attack upon schemes for tax avoidance as the revenue      suggest is  to be  validated,  that  is  a  matter  for      Parliament. The  function of  the courts  is  to  apply      strictly and correctly the legislation which Parliament      has enacted:  if the taxpayer escapes the charge, it is      for Parliament,  if it  disapproves of  the result,  to      close the gap. General principles against tax avoidance      are, it  was claimed,  for Parliament  to lay  down. We      were referred,  at our  request, in  this connection to      the various  enactments by  which Parliament  has  from      time to  time tried  to counter  tax avoidance  by some      general prescription.  The most  extensive of  these is      Income and  Corporation Taxes Act 1970, sections 460 et      seq. We  were referred  also to  well known sections in      Australia  and   New  Zealand  (Australia,  Income  Tax      Assesment Act  1936  -51,  section  260,  New  Zealand,      Income Tax  Act 1976,  section  99,  replacing  earlier

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    legislation). Further  it  was  pointed  out  that  the      capital  gains   tax  legislation  (starting  with  the      Finance  Act  1965)  does  not  contain  any  provision      corresponding to section 460. The intention should be 803      deduced therefore,  it was said, to leave capital gains      tax to  be dealt  with by "hole and plug" methods: that      such schemes  as the present could be so dealt with has      been con  firmed by  later  legislation  as  to  "value      shifting": Capital  Gains Tax  Act 1979,  section 25 et      seq. These  arguments merit  serious consideration.  In      substance they  appealed to  Barwick C.J. in the recent      case of  Federal Commissioner of Taxation v. Westraders      Pty. Ltd. [1980] 30 A.L.R. 353, 354-355, "      "I have  a full  respect for  the principles which have      been stated  but I  do not  consider that  they  should      exclude the approach for which the Crown contends. That      does not  introduce a  new principle:  it would  be  to      apply  to  new  and  sophisticated  legal  devices  the      undoubted power  and duty  of the  courts to  determine      their nature  in law  and to  relate them  to  existing      legislation. While  the  techniques  of  tax  avoidance      progress and  are technically  improved, the courts are      not obliged to stand still. Such immobility must result      either in  loss of  tax,  to  the  prejudice  of  other      taxpayers  or  to  Parliamentary  congestion  or  (most      likely) to  both. To  force the  courts  to  adopt,  in      relation to  closely integrated  situations, a  step by      step,  dissecting,   approach  which   the  par-   ties      themselves may  have negated,  would be a denial rather      than an  affirmation of  the true  judicial process. In      each case  the facts  must be  established, and a legal      analysis made:  legislation cannot  be required or even      be desirable  to enable  the  courts  to  arrive  at  a      conclusion which  corresponds  with  the  parties’  own      intentions."      "The capital  gains tax  was created  to operate in the      real world, not that of make-belief.      The significance  of Ramsay  as a  turning point in the interpretation of tax laws in England and the departure from the strings of Westminister were explained in Inland Revenue Commissioners v.  Burmah Oil  Company  Ltd.,(1)  where  Lord Diplock said,      "It would be disingenuous to suggest, and dangerous (1) [1982] S.T.C. 30 804      on the  part of  those who  advise  on  elaborate  tax-      avoidance schemes to assume, that Ramsay’s case did not      mark a  significant change  in the  approach adopted by      this House  in its  judicial  role  to  a  pre-ordained      series of transactions (whether or not they include the      achievement of  a legitimate commercial end) into which      there  are  inserted  steps  that  have  no  commercial      purpose apart  from the avoidance of a liability to tax      which in  the absence  of those  particular steps would      have been  payable. The  difference is  in approach. It      does not  necessitate the  overruling  of  any  earlier      decisions  of   this  House;   hut  it   does   involve      recognising that Lord Hamlin’s oft-quoted dictum in IRC      v. Duke of Westminister(1) "Every man is entitled if he      can to  order his  affairs so as that the tax attaching      under the  appropriate Acts  is less  then it otherwise      would be", tell us little or nothing as to what methods      of ordering  one’s affairs  will be  recognised by  the      courts as effective to lesson the tax what would attach

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    to them  if business  transactions were  conducted in a      straight-forward way."      Lord Scarman said,      "First,  it  is  of  the  utmost  importance  that  the      business  community   (and  others,   including   their      advisers) should  appreciate, as  my noble  and learned      friend Lord  Diplock has emphasised, 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 winds  of change  continued  to  blow  and  in      Furniss  v.   Dawson(2)  Ramsay  was  reiterated.  Lord      Brightman observed,           "The fact  that the  court accepted that each step      in a  transaction was  a  genuine  step  producing  its      intended legal      (1) [1936] AC. 1(@)19=[1935] All ER. Rep. 259 (at) 267.      (2) [1984] 1 Ali E.R. 530, 805      results did  not confine  the court to considering each      step in  h. isolation  for the purpose of assessing the      fiscal results."      He further said,      "My Lords,  in my  opinion the  rationale  of  the  new      approach is this. In a preplanned tax saving scheme, no      distinction is to be drawn for fiscal purposes, because      none exists  in reality,  between (i) a series of steps      which are  followed through by virtue of an arrangement      which falls  short of  a binding  contract, and  (ii) a      like series of steps which and followed through because      the participants  are contractually  bound to take each      step  seriatim.   In  a  contractual  case  the  fiscal      consequences will  naturally fall to be assessed in the      light of the contractually agreed results."      In the same case Lord Fraser explained the principle of Ramsay as follows:-        ". . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ __           The true  principle of decision in Ramsay was that      the fiscal  consequences of  a  preordained  series  of      transactions,  intended   to  operate   as  such,   are      generally to be asertained by considering the result of      the series  as a whin, and not by dissecting the scheme      and considering each individual transaction separately.      "      Lord Scarman in his characteristic style observed,      "The  law   will  develop   from  case  to  case.  Lord      Wilberforcc in  W.T. Ramsay Ltd. v. IRC [1981] 1 All ER      865 at  872, [1982]  AC 300  at 324  referred  to  ’the      emerging  principle’   of  the   law.  What   has  been      established with  certainty by  the House  in  Ramsay’s      case is  that the  determination of what does, and what      does not,  constitute unacceptable  tax  evasion  is  a      subject suited  to development by judicial process. The      best chart  that we have for the way forward appears to      me, with great respect to all engaged on the map-making      process, to  be the  words of  Lord Diplock  in IRC  v.      Burmah Oil  Co. Ltd. [1982] STC 30 at 32 which my noble      and learned friend Lord Brightman quotes in his speech.      These words 806      have space  in the  law for the principle enunciated by      Lord Tomlin  in IRC v. Duke of Westminister [1936] AC I

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    at 19,  [1935] All ER Rep. 259 at 267 that every man is      entitled if  he can  to order  his  affairs  so  as  to      diminish the  burden of  tax. 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 this area of      judge-made law that our elusive journey’s end will be a      found. "      Lord Roskill put it even more forcefully:           "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.      They  do  not  appear  to  have  appreciated  the  true      significance  of   the  passages  in  the  speeches  in      Ramsay’s case  [1981] 1  All ER  865 at  872-873,  881,      [1982] AC  300 at 325, 337 of Lord Wilberforce and Lord      Fraser, and,  even more  important, of  the warnings in      the Burmah  Oil Case  [1982] STC  30 at 32, 39 given by      Lord Diplock  and Lord Scarman in the passages to which      my noble  and learned  friend Lord Brightman refers and      which I  will not repeat. It is perhaps worth recalling      the warning  given, albeit  in another  content by Lord      Atkin,  who   himself  dissented   in   the   Duke   af      Westminister’s  case,   in  United  Australia  Ltd.  v.      Barclays Bank  Ltd.(1) ’  When these ghosts of the past      stand in  the path of justice, clanking their mediaeval      chains, the  proper course  for the  judge is  to  pass      through them  undeterred.’ 1936,  a bare  half  century      ago, cannot be described as part of the Middle Ages but      the ghost  of the  Duke  of  Westminister  and  of  his      transaction, be  it noted  a single and not a composite      transaction, with  his gardener  and with other members      of his  staff has  haunted the  ad ministration of this      branch of  the law  for too  long. I confess that I had      hoped that  ghost might  have found  quietude with  the      decisions in Ramsay and in Burmah. Unhappily it (1) [1940] 4 All E.R. 20 @ 37=[1941] A.C. I @ 29. 807      has not.  Perhaps the  decision of  this House in these      appeals , will now suffice as exorcism."      Thus the  ghost of  Westminister (in  the words of Lord Roskill) has been exercised in England. Should it be allowed to rear its head in India?      I have  referred to  the English  cases at some length, only to  show that  in the  very country  of its  birth, the principle of Westminister has been given a decent burial and in that  very  country  where  the  phrase  ’tax  avoidance’ originated the  judicial attitude  towards tax avoidance has changed and  the smile,  cynical or even affectionate though it might have been at one time, has now frozen into a deep C frown. The  courts are  now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of  it for  fiscal purposes.  No one can now get away with a  tax avoidance  project with  the mere statement that there is nothing illegal about it.      Some years  ago, a  diverting attempt  was  made  by  a Correspondent to the London ’Times’ to defend tax avoidance. He said,           "The taxpayer  is morally  bound to  obey the law,      but is not bound beyond the law, for apart from the law      taxation would  be blackmail  or racketeering. There is      not behind taxing laws, as there is behind laws against

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    crime, an in dependent moral obligation. When therefore      the tax-payer  has obeyed the law, he had done all that      morality requires" He had further said,           "It is  said that  by avoiding  a tax  he throws a      load on  to some  other taxpayer. But this is not quite      accurate, for - the deficiency might be met by reducing      expenditure.. is  it not a good thing that there should      be this  last lawful remedy against oppressive taxation      by a  majority, that  human ingenuity can always find a      way by  which the  minority can  escape from tyrannical      imposts."      The   correspondent    was   answered    by   another’s correspondent who  described the  former’s  defence  of  tax avoidance as ’an amusing 808 attempt to raise the art of tax avoidance to the moral level of political  martyrdom and  to make  Hampdens of our modern tax dodgers’.  Nor, may we say, are our tax dodgers Gandhiji is on the Dandi March to protest against the Salt Tax.      In Commissioner  of Income  tax, Gujarat  v. A. Raman & Co.,(1) JC  Shah, JJ.  speaking for  himself and  Sikri  and Ramaswami, JJ  repeating almost verbatim the observations in Westminister and Fishers Executors observed:           "Avoidance  of   tax  liability  by  80  arranging      commercial affairs that charge of tax is distributed is      not prohibited.A  taxpayer may  resort to  a device  to      divert the  income before  it accrues or arises to him.      Effectiveness  of   the   device   depends   not   upon      considerations of  morality,  but  on  the  Legislative      injunction in taking statutes may not, except on period      of  penalty,  be  violated,  but  it  may  lawfully  be      cumvented."      The same  Judge, speaking  for himself,  Ramaswami  and Grover  JJ   in  Commissioner  of  income  tax,  Gujarat  v. Kharwar(2) expressely followed Westminister and observed:           "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 taking  authorities to  unravel the  device and  to      determine the  true character  of relationship. But the      legal effect  of a  transaction cannot  be displaced by      probing into the "substance of the transaction".      We think  that time  has come for us to depart from the Westminister principle as emphatically as the British Courts have done  and to dissociate ourselves from the observations of Shah,  J. and  similar observations  made elsewhere.  The evil consequences of tax avoidance are manifold. First there is  substantial   loss  of   much  needed   public  revenue, particularly in a welfare state like ours. Next there (1) [1968]1 S.C.R 10. (2) 72 ITR 603. 809 is the  serious disturbance  caused to  the economy  of  the country  by  the  piling  up  of  mountains  of  blackmoney, directly causing  inflation. Then there is "the large hidden loss" to  the community (as pointed out by Master Sheatcraft in 18  Modern 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 skilful, advisers on the other side. Then again there  is the ’sense of injustice and inequality which tax avoidance  arouses in  the  breasts  of  those  who  are unwilling or unable to profit by it’. Last but not the least

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is  the   ethics  (to   be  precise,  the  lack  of  it)  of transferring the burden of tax liability to the shoulders of the guideless  good  citizens  from  those  of  the  ’artful dodgers’. It may, indeed, be difficult for lesser mortals to attain the  state of  mind of  Mr. Justice Holmes, who said, "Taxes are  what we pay for civilized society. I like to pay taxes. With  them I  buy civilization."  But, surely,  it is high time  for tho  judiciary in  India too to part its ways from the principle of Westminister and the alluring logic of tax  avoidance.  We  now  live  In  a  welfare  state  whose financial needs,  if backed by the law, have to be respected and met.  We must  recognise that  there is  behind taxation laws as  much moral  sanction as  behind any  other  welfare legislation and  it is  a pretence  to say that avoidance of taxation is  not unethical  and that  It stands  on no  less moral plane  than honest  payment of  taxation. In our view, the  proper   way  to   construe  a  taking  statute,  while considering a device to avoid tax, is not to ask whether the provisions should  be construed literally, or liberally, nor whether the  transaction is not unreal and not prohibited by the statute,  but whether  the transaction  is a  device  to avoid tax,  and whether  the transaction  is such  that  the judicial process  may accord  its approval  to it.A  hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer  Ltd. v.  Bengal Hotels  Limited(1)  where  the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.      It  is   neither  fair  nor  desirable  to  expect  the legislature to  intervene and  take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine  the nature  of the new and sophisticated legal devices to  avoid tax  and consider  whether  the  situation created by  the devices  could be  related to  the  existing legislation  with   the  aid  of  ’emerging’  techniques  of interpretation as  was done in Ramsay, Burma Oil and Dawson, to expose the devices      (1) 40 Company Cases, 597. 810 for what  they really  are and  to refuse  to give  judicial benediction.      We agree  with Ranganath  Misra,  J.  that  the  appeal should be dismissed.      RANGANATH MISRA,  J. The  appellant company, a licensed manufacturer of  Indian liquor at Hyderabad, is in appeal by special leave questioning the dismissal of its writ petition by the High Court.      Manufacture, sale-wholesale  and retail-as also storage and transport  of liquor are regulated by the Andhra Pradesh Excise Act,  1968 (’Excise  Act’ for  short) and  the Andhra Pradesh Distillery  Rules the  Andhra Pradesh  Indian Liquor (Storage in  Bond) Rules  and  the  Andhra  Pradesh  Foreign Liquor Rules,  and Indian  liquor Rules  all made  under the Excise Act. ’Excise duty’ as defined in section 2(10) of the Excise Act  is leviable on the manufacture of liquor and the manufacturer cannot  remove the  same  from  the  distillery unless the  duty imposed under the Excise Act has been paid. Buyers of  Indian liquor  from the appellant’s distillery as alleged by  it, obtain  distillery  passes  for  release  of liquor after  making payment  of excise duty and present the same at the distillery whereupon the bill of sale or invoice is prepared  by the  distillery showing  the price of liquor but excluding  the excise  duty. The  appellant’s  books  of account also  did not  contain any  reference to excise duty paid by  the purchaser. The appellant paid Sales Tax payable by it  under the Andhra Pradesh General Sales Tax Act, 1957,

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(’Sales Tax  Act’ for  short), on  the basis of its turnover which excluded  excise duty.  The Company  was  assessed  to sales tax  on  the  basis  of  its  returns  but  later  the Commercial Tax  Officer was of the view that the Company had failed to include the excise duty paid on the liquor sold by it to  wholesalers. The  taking authority accordingly called upon the  Company to show cause why assessments made may not be reopened. The appellant moved the High Court for quashing of such  notice and  having failed,  carried the  matter  in appeal to  this Court.A  Division Bench  of this Court in Mc Dowell &  Company Ltd.  etc. v.  Commercial Tax Officer, Vll Circle, Hyderabad, etc., (1) (1) [1977] 1 S.C.R. 914. 811 examined the  provision of the Excise Act and the Rules made there under  as also  the provisions  of the  Sales Tax Act. This Court took the view:           "We hold  that intending  purchasers of the Indian      liquor who  seek to  obtain distillery  passes are also      legally responsible  for payment  of  the  excise  duty      which is  collected from them by the authorities of the      excise department.      This Court  then proceeded  to determine whether excise duty paid  directly to  the Excise  authorities or deposited directly in  the State Exchequer in respect of Indian liquor by the buyers before - removing the same from the distillery could be  said to  form part  of the taxable turnover of the appellant distillery.  Precedents w  ere referred to and the Court came  to the  conclusion that  excise duty  did not go into the  common till  of the appellant and did not become a part of  the circulating  capital. Therefore,  the Sales Tax authorities were not competent to include in the turnover of the appellant  the excise  duty which  was not charged by it but was  paid directly  to the  excise  authorities  by  the buyers of  the liquor.  The appellant,  therefore, succeeded before this  Court and  the notices  issued by the Sales Tax authorities were quashed.      The judgment of this Court was delivered on October 25, 1976. Rules  76 and  79 of the Distillery Rules were amended with effect  from August  4, 1981.  Rule 76(a) now provides: "No spirit or liquor manufactured or stored shall be removed unless the  excise duty specified in rule 6 has been paid by a holder  of D-2  licence before  such removal."  It is  not disputed that appellant is the holder of a D-2 licence under the law. Amended rule 79 (1) provides:           "76 (1).  On payment  of the  excise duty  by  the      holder of D-2 licence a distillery pass for the removal      of spirit  fit for  human consumption may be granted in      favour of any of the following persons only, namely:-      (a)  a person  holding a  licence in the Andhra Pradesh           or in other States for sale of spirit by wholesale           or retail and when the spirit is to be transported           or exported  beyond the  limits of the district in           which the distillery is situ 812      ated to  a person holding a permit signed by the Excise      Superintendent of  the district  of destination  or  an      officer of that district authorised in this behalf.      (b)  A person holding a permit signed by the Officer of           any other  State referred  to in  clause (a) above           for the  export of  such spirit  from  the  Andhra           Pradesh into that State.      (c)  A person  holding a  permit   signed by an Officer           duly authorised  in that behalf for export of such           spirit to an Union Territory-

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    (d)  A  person   holding  a   permit  from  the  Excise           Superintendent of  any district  in Andhra Pradesh           or from officer referred to in clause (a) above of           any other  State to  transport or export rectified           spirits or wine, to such district or State."      On the  basis of the amended provisions, the respondent Officer issued  a  notice  to  the  appellant  proposing  to include a  sum of  Rs.4,49,09,552.40 representing the excise duty paid  directly   by buyers of appellant’s liquor in the appellant’s  turnover  for  a  part  of  the  year  1982-83. Thereupon, the  appellant again  moved the  High  Court  for quashing of  the notice.  Reliance was placed on the earlier decision of  this Court.  The High  Court very appropriately felt bound  by the decision of this Court and considered the effect of  the amended  Rules  and  held  that  the  primary liability to  pay excise duty was indisputably of the holder of the  D-2 licence.  It further  found  that  the  turnover related to  liquor, excise  duty which  was payable  by  the appellant but  had by  amicable arrangement been paid by the buyer was  actually a  part of the turnover of the appellant and was, therefore, liable to be so included for determining liability for  sales tax.  On these  findings the High Court dismissed the  writ petition.  When leave  was granted  by a Division Bench  of this Court to appeal against the Judgment of the  High Court,  the  correctness  of  the  decision  in appellant’s case  reported  in  (1977)  1  S.C.R.  914,  was doubted and  the matter was referred to a larger Bench. That is how the appeal came to be heard by us. 813      Mr. Sorabji,  appearing in support of the appeal at the very commencement  of his  submissions stated that there was no constitutional  question involved  in the appeal. He also fairly stated that the vires of the Excise Act and the Rules was not  under challenge.  Nor was the amendment of Rules in 1981 in dispute.      The Federal  Court In The Province of Madras v. Messrs. Boddu Paidanna & Sons,(1) held:           "There is in theory nothing to prevent the Central      Legislature  from  imposing  a  duty  of  excise  on  a      commodity as soon as it comes into existence, no matter      what happens  to it  afterwards. whether  it  be  sold,      consumed, destroyed,  or given  away.A taking authority      will not  ordinarily Impose  such a duty, because it is      much more  convenient administratively  to collect  the      duty tax in the case of most of the Indian Excise Acts)      when the  commodity leaves  the factory  for the  first      time, and  also because  the duty  is intended to be an      indirect duty  which the  manufacture or producer is to      pass on to the ultimate consumer, which he could not do      if the  commodity had,  for example,  been destroyed in      the factory itself. It is the fact of manufacture which      attracts the  duty, even  though it  may  be  collected      later; .. "      This view  has been  followed by  this  Court  and  the position has been put beyond doubt by a series of decisions. In R.C. Jall v. Union of India,(2) it has been observed:           "The Excise  duty  is  primarily  a  duty  on  the      production  or   manufacture  of   goods  produced   or      manufactured within  the country. Subject always to the      legislative competence  of the  taking  authority,  the      said tax can be levied at a convenient stage so long as      the character  of the impost is not lost. The method of      collection does  not affect the essence of the duty but      only  relates   to  the  machinery  of  collection  for      administrative convenience."

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(1) [1942] F.C.R. 90. (2) [1962] Suppl. 3 S.C.R. 436. 814      In Re. Sea Customs Act, (1) this Court said:           "With great respect, we accept the principles laid      down by  the said three decisions (1939 F.C.R. 18; 1942      F.C.R. 90 and 1945 F.G.R. 179) in the matter of levy of      an  excise   duty  and  the  machinery  for  collection      thereof."      In M/S.  Guruswamy &  Co. etc. v. State of Mysore & ors (2) Sikri,  J. (as  he then was), spoke for the majority and stated the ratio thus:           "These cases  establish that  in order  to  be  an      excise duty  (a) the  levy must be upon ’goods’ and (b)      the taxable event must be the manufacture or production      of goods.  Further the  levy need not be imposed at the      stage of  production or  manufacture but may be imposed      later. "      In Jullundur Rubber Goods Manufacturers’ Association v. Union of  India &  Anr., (3)  Grover, J.  after extracting a part of  the Judgment  in Jall’s  case (supra) spoke for the Court thus:           "The above statement of law in no way supports the      argument that  excise duty cannot be collected from per      sons who  are neither  producers nor manufacturers. Its      incidence certainly falls directly on the production or      manufacture of  goods but the method of collection will      not affect the essence of the duty."      In A.B. Abdul Kadir & Ors. v. State of Kerala, (4) this Court restated the position thus:           "Excise duty,  it is now well settled, is a tax on      articles  produced   or  manufactured   in  the  taxing      country,  Generally   speaking,  the   tax  is  on  the      manufacturer on  the producer, yet laws are to be found      which impose  a duty  of excise at stages subsequent to      the manufacture or production." (2) (1964] 3 S.C.R. 787. (3) [1967] 1 S.C.R. 548. (4) [1970] 2 S.C.R. 68. (1) [1976] 3 S.C.R. 219. 815      Thus,  the   incidence  of   excise  duty  is  directly relatable to  manufacture but its collection can be deferred to a later stage as a measure of convenience or expediency.      On an  examination of the provisions of the Excise Act, the Rules  framed thereunder and the pronouncements referred to above,)  we are  of the  view that the conclusion of this Court at  page 921  of the Reports that intending purchasers of the  Indian liquors  who seek to obtain distillery passes are also  legally responsible for payment of the excise duty is too  broadly stated.  The "duty"  was primarily  a burden which the  manufacturer had  to bear  and even if purchasers paid the  same under  the Distillery  Rules, the  provisions were merely  enabling and  did not  give rise  to any  legal responsibility or  obligation for  meeting the burden. We do not propose, however, to examine this aspect any further for the change  in Rule  76 of  the Distillery Rules has clearly affirmed the  position that  liability for payment of excise duty is of the manufacturer. Provisions of rules 80, 81, 82, 83 and  84 do  not militate  against the conclusion that the payment of  excise duty  is a  liability exclusively  of the manufacturer. In  these rules  detailed provisions have been made  regarding   obtaining  of   distillery  pass,  correct calculation and  full payment  of excise duty, the manner of depositing such  duty and  ultimately issue  of  the  spirit

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under the  pass from the distillery. These rules, therefore, do not detract from the position that payment excise duty is the primary and exclusive obligation of the manufacturer and if- payment  be made  under a contract or arrangement by any other person it would amount to meeting of the obligation of the manufacturer and nothing more.      It was the stand of the appellant before the High Court that it  makes a  condition precedent  for the  buyer of its finished goods  that he  (the buyer) pays the excise duty to the excise  authorise directly and only on production of the receipted challan,  liquor is  issued from the distillery by way of sale under the supervision of the excise authorities. In view  of such an arrangement, the excise duty paid by the buyer does  not  become  a  part  of  the  turnover  of  the appellant.      ’Turnover’ is  defined in  s. 2(s) of the Sales Tax Act to mean  "the total amount set out in the bill of sale or if there is  no bill  of sale, the total amount charged) as the consideration for the sale 816 or purchase  of goods  (whether such  consideration be cash, deferred payment  of any other thing or value) including any sums charged  by the  dealer for anything done in respect of goods sold  at the  time of  or before  the delivery  of the goods and  any other sums charged by the dealer, whatever be the description, name or object thereof."      The definition  clearly indicates that the total amount charged as  the consideration  for the  sale is  to be taken into account  for determining  the turnover. Where a bill of sale is  Issued (and  obviously the  bill has  to state  the total amount charged as consideration), the total amount set out  therein   is  to   be  taken  into  account.  In  every transaction of  sale, there  is bound  to be a seller at one end and  a buyer  at the  other and transfer or title in the goods takes place for a consideration.      In Hindustan  Sugar Mills  v. Rajasthan State, (1) this Court observed:           "The test  is, what  is the  consideration passing      from the  purchaser to  the dealer  for the sale of the      goods. It is immaterial to enquire as to how the amount      of consideration is made up, whether it includes excise      duty  or  sales  tax  or  freight.  The  only  relevant      question to  ask is as to what is the amount payable by      the purchaser  to the  dealer as  consideration for the      sale...." The Court proceeded to say:           "take for example, excise duty payable by a dealer      who is a manufacturer. When he sells goods manufactured      by him,  he always  passes on  the excise  duty to  the      purchaser. Ordinarily  it is  not shown  as a  separate      item in  the bill,  but it  is included  in  the  price      charged by  him. The sale Price in such a case could be      the entire  price inclusive of excise duty because that      would be the consideration payable by the purchaser for      the sale  of the goods. True, the excise duty component      of the price would not be an addition to the coffers of      the dealer. as it would go to reimburse him (1) [1979] I S.C.R. 276. 817      in respect  of the  excise duty  already paid by him on      the manufacture  of the goods. But even so, it would be      part of  the sale price because it forms a component of      the consideration  for the  sale of  the goods that the      amount representing excise duty would be payable by the      purchaser. There  is  no  other  manner  of  liability,

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    statutory or  other wise,  under  which  the  purchaser      would be liable to pay the amount of excise duty to the      dealer.  And  on  this  reasoning,  it  would  make  no      difference  whether   the  amount  of  excise  duty  is      included in the price charged by the dealer or is shown      as a separate item in the bill."      We  would  like  to  add,  that  the  position  is  not different when  under a prior agreement, the legal liability of the  manufacturer-dealer for  payment of  excise duty  is satisfied by  the purchaser  by  direct  payment  to  excise authorities or  to the  state exchequer.  In Paprica  Ltd. & Anr. v. Board of Trade, (1) Lawrence, J. stated:           "Whenever a  sale attracts  purchase tax, that tax      presumably affects  the price  which the  seller who is      liable to  pay the tax demands but it does not cease to      be the  price which  the buyer  has to  pay even if the      price is expressed as ’X’ plus purchase tax."      This Court  in Messrs.  George Oakes  (P) Ltd.  v.  The State of  Madras, (2)  quoted this extract with approval and also referred  to the  following passage  in the Judgment of Goddard, L.J. in Low v. Norman Wright (Builders) Ltd (3):           "Where an  article is  taxed, whether  by purchase      tax, customs  duty, or excise duty the tax becomes part      of the  price which  ordinarily the  buyer will have to      pay. The  price of  an ounce  of tobacco  is what it is      because of the rate of tax, but on a sale there is only      one consideration  though made  up, of cost plus profit      plus tax. So if a seller offers goods (1) [1944] All E.R. 372. (2) [1962] 2 S.C.R. 570. (3) [1944] 1 All E.R. 618. 818      for sale, it is for him to quote a price which includes      the tax  if he  desires to  pass it on to the buyer. If      the buyer  agrees to  the price,  it is  not for him to      consider how  it is  made up or whether that seller has      included  tax  or  not  So  far  as  the  purchaser  is      concerned, he  pays  for  the  goods  what  the  seller      demands, namely,  the price  even though it may include      tax. That  is the  whole consideration for the sale and      there is  no reason  why the  whole amount  paid to the      seller by  the purchaser  should not  be treated as the      consideration  for   the  sale   and  included  in  the      turnover. "      Admittedly, the  bills issued  by the appellant did not include the excise duty. As already found, payment of excise duty is  a legal  liability of the manufacturer; its payment ii a  condition precedent  to the removal of the liquor from the distillery and payment by the purchaser is on account of the manufacturer.  According to  normal commercial practice, excise duty should have been reflected in the bill either as merged in price or being shown separately. As a fact, in the hands of  the buyer the cost of liquor is what is charged by the appellant under its bill together with excise duty which the  buyer  has  directly  paid  on  seller’s  account.  The consideration for  the sale is thus the total amount and not what is reflected in the bill. We are, therefore, clearly of the opinion that excise duty though paid by the purchaser to meet the  liability of  the appellant,  is  a  part  of  the consideration for the sale and is includible in the turnover of the appellant. The purchaser has paid the tax because the law asks him to pay it on behalf of the manufacturer.      Mr. Sorabji in the course of his submission relied on a Division Bench decision of this Court in Anand Swarup Mahesh Kumar v.  The commissioner  of Sales Tax. (1) This Court was

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considering  the   liability  for   Sales  Tax   under   the corresponding U.P.  Act in  respect of  a dealer carrying on business at  Mandi Anandganj,  Baraut  in  the  District  of Merrut. The  Sales  Tax  authorities  had  included  in  the dealer’s purchase  turnover ’market  fee’ and the commission payable to  the commission agent operating within the market area for the purpose of computing sales tax. The decision (1) [1981] 1 S.CR. 707 819 turned on  the definition  of ’turnover  of purchase’ in the U.P. Act  and the  provision of  the Adhiniyam and the Rules made thereunder.  Market fee  and commission  payable to  an agent are  very  different  from  excise  duty  and  a  very different position  emerges in  law in  regard to  them.  No support is  available from that decision for the appellant’s case.  We   would  like  to  point  out  that  the  relevant consideration is  not whether  the law permits the incidence of the  duty to  be passed  on to  the purchaser but whether there is  a prohibition  against the passing of it. If there is no bar, the incidence would be passed on to the purchaser in accordance with normal commercial practice.      Mr. Sorabji  built up  an argument  in support  of  the appellant’s stand by referring to the amendment to the First Schedule to  the Sales  Tax Act.  The relevant  part of  the Schedule provides thus : Item No   Description of      Point of levy. Rate of tax           goods 26.       All liquors, other  At the point           than country liquor of the first sale           2 (but including    in the State.           Vodka) (1026)           (a) not covered by                 3 (50 paise)           item (b) below                     in the rupee,           (b) Where the                      3 (25 paise)           consideration for           in the rupee. the           sale or purchase of           liquor includes the           duties of excise           payable under the           Andhra Pradesh Excise           Act, 1968.      Apparently this  amendment was  brought about after the Judgment of this Court in the appellant’s appeal in 1976 and the position  has been further altered by amendment in 1984. Sale of  liquor has  now been  made exigible to tax at every point other than the point of last 820 sale in  the State.  The argument advanced before this Court is that  the appellant  had already paid tax on the basis of 50p. in  the rupee on the footing that the consideration for sale of  its liquor  did not  include duty of excise payable under the Excise Act and the appellant cannot, therefore, be made liable  for sales  tax on  a  different  footing.  This contention too has no force. Such a stand had not been taken in the  writ petition  before the  High Court  and there has been no  factual examination  of the  position as to whether the classification  indicated is  not intended  to  cover  a totally different situation. For resolving the dispute as to whether excise  duty is a part of the turnover, reference to the Schedule ii indeed wholly irrelevant.      Mr. Sorabji  relied  heavily  on  the  observations  of Hidayatullah, J.  (as he then was) speaking for the Court in the case  of George Oakes (Private) Ltd. & Ors. v. The State of Madras, (1) where it was said:

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         "It was pointed out by this Court  (in 12 STC 476)      that the  word ’price’  in so  far as  the purchaser is      concerned includes  the tax  also,  and  that  in  laws      dealing with  sales-tax, turnover  has, in  England and      America also,  been held to include the tax. The reason      for such  inclusion is  stated to  be   that dealer who      realises the  tax does  not hand  it over forth with to      Government but  keeps it with him, and turns it over in      his business  before   the parts with it. Thus, the tax      becomes, for  the time being, a part of the circulating      capital  of  the  tradesman,  and  is  turned  over  in      business. Again  it was said that the price paid by the      purchaser was  not so  much money  for the article plus      tax but  a composite sum. Therefore, in calculating the      total turnover,  there is nothing wrong in treating the      tax as  part of  the turnover, because ’turnover’ means      the amount  of  money  which  is  turned  over  in  the      business."      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 obser- (1) 13 S.T.C. 98. 821 vations 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 prejudical 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 S.C.R. 914 on the second aspect of the matter, namely, when the excise duty does not go into the common  till of  the assesses  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.      A further contention was advanced by Mr. Sorabji as his last submission  that it  is open to every one to so arrange his affairs  as to  reduce the  brunt  of  taxation  to  the minimum and  such a process does not constitute tax evasion; nor  does   it  carry  any  ignominy.  In  support  of  this submission  he  relied  on  the  observations  of  Shah,  J. speaking for  this Court  in Commissioner  of Income-tax  v. Raman and Co.,(1) where it was said:           "The law  does not  oblige a  trader to  make  the      maximum  profit   that  he.  can  out  of  his  trading      transactions. Income  which  accrues  to  a  trader  is      taxable in  his hands:  income which he could have, but      has not  earned, is  not made taxable as income accrues      to him  . Avoidance  of tax  liability by  so arranging      commercial affairs that charge of tax is distributed is      not prohibited.A  taxpayer may  resort to  a device  to      divert the  income before  it accrues or arises to him.      Effectiveness  of   the   device   depends   not   upon      considerations of morality, but on the operation of the      Income  tax   Act.  Legislative  injunction  in  taxing      statutes  may  not  except  on  peril  of  penalty,  by      violated, but may lawfully be circumvented."      Support was  also sought  from the  observations of the same  learned  Judge  (as  he  then  was)  in  the  case  of

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Commissioner of Income- (1) [1968] 67 I.T.R. 11. 822 tax Gujarat  II v.  B.M. Kharwar.(1) After quoting a passage from the  judgment of  the Privy Council in the case of Bank of Chettinad  Ltd. v.  Commissioner of  Income tax  (2) this Court stated:           "The taxing  authority is  entitled and  is indeed      bound to  determine the  true legal  relation resulting      from a  trans action.  If the  parties have  chosen  to      conceal by  a device the legal relation, it 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.      In Jiyajeerao  Cotton Mills  Ltd.  v.  Commissioner  of Income tax  and Excise  Profits Tax  Bombay (3)  this  Court observed:           "Every  person  is  entitled  so  to  arrange  his      affairs as  to avoid  taxation but the arrangement must      be real and genuine and not a sham or make-believe,..."      The Gujarat  High Court  in the case of Commissioner of Income tax v. Sakarlal Balabhai (4) said:           "Tax avoidance  postulates that the assessee is in      receipt of  amount which  is really  and in  truth  his      income liable  to tax but on which he avoids payment of      tax by some artifice or device. Such artifice or device      may apparently  show the  income as accruing to another      person, at  the same  time making  it available for use      and enjoyment  to the  assessee as  in a  case  falling      within section  44D or  mask the  true character of the      income by  disguising it  as a  capital receipt as in a      case falling within section 44E or assume diverse other      forms ....  But there  must be  some artifice or device      enabling the  assessee to  avoid payment of tax on what      is really  and in  truth his  income. If  the  assessee      parts with  his income  producing asset,  so  that  the      right to (1) [1969] 72 I.T.R. 603. (2) [1940] 8 I.T.R. 522. (3) [1958] 34 I.T.R. 888. (4) [1968] 69 I.T.R. 186. 823      receive income arising from the asset which theretofore      belonged to  the assessee  is transferred to and vested      in some  other person,  there is  no avoidance  of  tax      liability: no  part of  the income  from the asset goes      into the  hands of  the assessee in the shape of income      or under any guise.-’      This decision  has  been  affirmed  by  this  Court  in Commissioner of Income-tax v. Sakarlal Balabhai.(1)      We may  also recall  the observations of Viscount Simon in Latilla v. I. R. (2)           "Of recent  years much ingenuity has been expended      in certain  quarters in attempting to device methods of      deposition 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      incomes, without  sharing in  the appropriate burden of      British taxation.  Judicial dicta  may be  cited  which      point out  that, however  elaborate and artificial such      methods may  be, 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

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    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 tento 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 manoeuvres. Another      consequence is that the Legislature has made amendments      to our  Income Tax  Code which  aim at  nullifying  the      affectiveness of such schemes."      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 (2) [1972] 86 I.T.R. 2 (3) 25 T.C. 107. 824 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 separate and detailed opinion with which we agree.      In our view, therefore, there is no merit in the appeal and the  same is  liable to be dismissed with costs. Hearing fee is  assessed at Rs. 5,000. We would like to add that now that a  clear picture of the situation has emerged the State of Andhra  Pradesh  should  relationalise  the  law  on  the subject,  if   necessary,  by  making  other  a  appropriate amendments.      While granting  leave and allowing stay of proceedings, this Court had directed that bank guarantee be furnished for the tax  to the  satisfaction of the assessing authority and in the event of the respondent succeeding in the appeal, the appellant do  pay interest  at 12% per annum. The respondent may now  proceed  to  collect  the  dues  of  the  State  in accordance with law. S.R.                                       Appeal dismissed. 825