1985 (4) TMI 64 - SC - VAT and Sales Tax

Court clarifies tax avoidance vs. evasion, upholds manufacturer's liability for excise duty, stresses honest tax payment

McDowell And Co. Limited Versus Commercial Tax Officer

The court emphasized the distinction between tax avoidance and tax evasion, condemning the use of colorable devices to avoid tax. It held that excise ... 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? Held that:- 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 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 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. The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Appeal dismissed. Issues Involved:1. Tax Avoidance vs. Tax Evasion2. Inclusion of Excise Duty in Turnover for Sales Tax Calculation3. Legal Liability for Payment of Excise Duty4. Interpretation of Taxing Statutes and Judicial ApproachDetailed Analysis:1. Tax Avoidance vs. Tax EvasionChinnappa Reddy J. emphasized the distinction between tax avoidance and tax evasion, noting that tax avoidance is the art of dodging tax without breaking the law, while tax evasion is illegal. The judgment highlighted the historical judicial attitudes towards tax avoidance, which have evolved from acceptance to rejection. The court referred to various English cases, including IRC v. Fisher's Executors, IRC v. Duke of Westminster, and W.T. Ramsay Ltd. v. IRC, to illustrate the shift in judicial perspective. The judgment concluded that the principle of Westminster has been given a decent burial in England and should not be allowed to rear its head in India. The court stressed the need for the judiciary to dissociate from the alluring logic of tax avoidance, recognizing the moral sanction behind taxation laws and the detrimental effects of tax avoidance on public revenue and economic stability.2. Inclusion of Excise Duty in Turnover for Sales Tax CalculationThe appellant, a licensed manufacturer of Indian liquor, argued that excise duty paid by buyers directly to the excise authorities should not be included in its turnover for sales tax purposes. The court referred to its earlier decision in McDowell & Company Ltd. v. Commercial Tax Officer, which held that excise duty paid by buyers did not form part of the manufacturer's turnover. However, the court noted that the Distillery Rules were amended in 1981, making the manufacturer primarily liable for the payment of excise duty. The court found that excise duty, though paid by the purchaser, is part of the consideration for the sale and should be included in the turnover for sales tax calculation. The court relied on the definition of 'turnover' in the Sales Tax Act and previous judgments, including Hindustan Sugar Mills v. State of Rajasthan and George Oakes (P.) Ltd. v. State of Madras, to support its conclusion.3. Legal Liability for Payment of Excise DutyThe court examined the provisions of the Andhra Pradesh Excise Act and the Distillery Rules, concluding that the primary and exclusive obligation for the payment of excise duty lies with the manufacturer. The court rejected the appellant's argument that the payment of excise duty by the buyer under an arrangement does not make it part of the turnover. The court emphasized that the payment of excise duty is a condition precedent for the removal of liquor from the distillery and is on account of the manufacturer. The court clarified that the legal liability for excise duty remains with the manufacturer, even if the duty is paid by the buyer.4. Interpretation of Taxing Statutes and Judicial ApproachThe court discussed the proper approach to interpreting taxing statutes, particularly in the context of tax avoidance schemes. The judgment highlighted the need for the judiciary to adopt emerging techniques of interpretation to expose tax avoidance devices and refuse judicial approval. The court referred to the principles laid down in English cases, including Ramsay, Burmah Oil, and Dawson, to support its stance. The court emphasized that tax planning must be within the framework of the law and condemned the use of colourable devices to avoid tax. The judgment concluded that it is the obligation of every citizen to pay taxes honestly without resorting to subterfuges.Conclusion:The appeal was dismissed with costs, and the court directed the respondent to collect the dues of the State in accordance with the law. The court also suggested that the State of Andhra Pradesh should rationalize the law on the subject, if necessary, by making appropriate amendments.