High Court Of Delhi
Shiva Kant Jha vs. Union Of India & Ors.
Sections 2(17), 5(2), 6(3), 90, 119, DTAA BETWEEN INDIA & MAURITIUS Art. 4(3), DTAA BETWEEN INDIA & MAURITIUS Art. 13
S.B. Sinha, C.J. & A.K. Sikri, JJ.
Civil Writ Petn. No. 5646 of 2000
31st May, 2002
Counsel Appeared : Shiva Kant Jha (in person) and Prashant Bhushan, for the Petitioners : Harish Salve with Sanjiv Khanna, R.D. Jolly & Ajay Jha, for the Respondents
JUDGMENT
S.B. SINHA, C.J
Purported flaws in the avoidance of double taxation treaty with Mauritius is the subject-matter of these two public interest ligitations. The petitioner in Civil Writ Petition No. 2802 of 2000 is said to be a voluntary organization working for various social causes such as removal of corruption, campaigning against the threat of thesovereignty, of the country from multi-national companies and multi-lateral funding agencies such as IMF, World Bank, etc. The petitioner in Civil Writ Petition No. 5646 of 2000 is a former Member of Indian Revenue Services having retired as Chief CIT in March ,1998. In both these writ petitions, the validity of a circular issued by the Central Board of Direct Taxes (in short, the ‘CBDT’) bearing No. 789 of 13th April, 2000, [published at (2000) 160 CTR (St) 5] is in question. Facts :
2. Several hundred foreign institutional investors (in short ‘FIIs’) had been trading in the share market in India many of which are said to be post box companies based in Mauritius; although in effect and substance, they are managed and controlled from India or from their parent countries. The Indian IT Act, 1961 (hereinafter referred to as ‘the Act’), although postulates that all assessees, whether resident in India or not, are chargeable to income-tax in respect of income accrued, arisen or received, or deemed to accrue, arise or to be received in India, while residents alone are chargeable in respect of income, which accrues or arises or to be received in India or abroad. The scheme of the Act, however, is that if the FIIs are effectively managed and controlled from India, they are treated as residents of India, while if they are managed and controlled out of India, they are treated as non- residents. With a view to avoid double taxation of income, the Central Government is empowered to enter into agreement(s) in terms of s. 90 of Act; pursuant whereto the Government of Republic of India and the Government of Mauritus entered into a Double Taxation Avoidance Convention (hereinafter referred to as ‘the Convention’) for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains.
3. Having regard to the globalisation of economic policy adopted by India, relaxation on regulations and controls on direct foreign investment took place in 1992 wherefor guidelines have been announced. The said Convention, as would appear from its preamble, was entered into ‘for the encouragement of mutual trade and investment in India and Mauritius’. Allegedly Mauritius became a tax haven, as a result whereof, the treaty shoppers from
Luxemburg and other western countries commenced the process of using Mauritus route for investment in India solely to avoid incidence of lawful tax. Allegedly conduit companies were set up in Mauritius through which they made investment in Indian share market purported to be for taking benefit under para 4 of art. 13 of the Convention. It is alleged that as in Mauritius, no capital gains tax is payable and thus the question of avoidance of payment of double tax in relation thereto does not arise. Taking benefit of the scheme, however, devices were adopted to avoid payment of tax in utter violation of the spirit of the said Convention as a result whereof wrongful gain accrued by the said non-resident Indian companies and caused wrongful loss to the country.
4. Allegedly in relation to one company, the Income-tax Officer (in short, ‘the ITO’) showing how sharp practices are adopted for taking benefit of the said scheme made a detailed study and passed a detailed order of assessment whereafter the impugned circular letter was issued, which is in the following term : “Circular No. 789 F. No. 500/60/2000-FTD Ministry of Finance Department of Revenue, Central Board of Direct Taxes New Delhi, 13th April, 2000 To All the Chief Comissioners/Directors General of Income-tax Subject : Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritus Double Taxation Avoidance Convention (DTAC). The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and Mauritius, Article 4 of the DTAC defines a resident of one State to mean “any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature” Foreign Institutional Investors and other investment funds etc. which are operating from Mauritius are invariably incorporated in that country. These entities are ‘liable to tax’ under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. Prior to 1st June, 1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the IT Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5 per cent or 15 per cent depending upon the extent of shareholding of the Mauritius resident. Under the IT Act, 1961, tax was deductible at source at the rates specified under s. 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a certificate of residence is issued by the Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.
The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per para 4 of art. 13.” The aforesaid clarification shall apply to all proceedings which are pending at various levels. The contents of this Circular may be brought to the notice of all the CIT and AOs in your region. Sd/- (Rajat Bansal) OSD (FTD), Central Board of Direct Taxes Copy to : The Chairman Members and all other officers in CBDT of the rank of Under Secretary and above. The Comptroller & Auditor General of India (40 copies). The DIT (RS & PR) for printing in the quarterly tax bulletin and for circulation as per his usual mailing list. All Directorates of Income-yax. The DCIT (Inspection Div.) Mayur Bhawan, New Delhi. Secretary, Settlement Commission, CIT (WT), 3rd floor, Lok Nayak Bhawan, Khan Market, New Delhi-3. ITCC Section, CBDT. Sd/- (Rajat Bansal) OSD (FTD), Central Board of Direct Taxes Hindi version will follow.” Submissions :
5. Mr. Prashant Bhushan and Mr. S.K. Jha appearing on behalf of the petitioners inter alia, submitted that the aforementioned circular has been issued in violation of the Convention itself, which in turn was issued in terms of s. 90 of the Act and not in terms of art. 73 of the Constitution of India (in short, ‘the Constitution’). It was contended that mere issuance of a certificate is not determinative and encourages treaty shopping in a case where the company has no base in Mauritius, the non-resident company should not be allowed to take benefit thereof as thereby a fraud would be encouraged. It is urged that the said circular is illegal and contrary to the provisions of the statute and must be held to be wholly applicable where sub-s. (3) of s. 4 is attracted. In any event, the same is ultra vires s. 119 of the Act in terms whereof the Central Board of Direct Taxes (in short ‘the CBDT’) could not have issued the impugned circular. The burden of proof, having regard to the applicability of the Act, is upon the assessee to show that the exemptions are being claimed within the meaning of s. 10 of the Act and same are within the purview of the treaty itself. It was contended that by reasons of the aforementioned circular the CBDT effectively asked the ITO to ignore the provisions of the IT Act. In a case, the learned counsel would contend even if ITO on the basis of the material on record come to the conclusion that a particular company was in fact is not a resident of Mauritius, he has to accept him as such only on the ground that he has obtained a certificate from the authorities in this behalf. Observance of the provisions of Indo-Mauritus Treaty, it was submitted, is subject to the provisions of Indian IT Act and thus it may not be. possible to take any certificate on its face value as the authorities in exercise of statutory powers may be convinced that from the facts of the matter and other circumstances attending thereto certificate of residence does not fulfill the requirements of the Indian IT Act. In any event, in a given case, a company may be found to be resident of India apart from being a resident of Mauritius and thus it would be contrary to cl. 4(3) of the treaty itself. Place of business of the company, learned counsel would urge, would be the determining factor of the residence in terms of Art. 4 By reason of the said circular even the power of the ITOs to lift the corporate veil has been taken away Reliance in this connection has been placed on New Horizons Ltd. & Anr. vs. Union of India & Ors. 1995 (1) SCC 478 and LIC vs. Escorts AIR
1986 SC 1370. Learned counsel would contend that as has been found in the assessment order that the company got itself registered for avoiding tax and in the event it is held that by reason of such a circular ITO even is precluded from going into such a question. The same would be violative of the decisions of the Supreme Court, e.g. McDowell & Co. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). It was contended that having regard to the effect that there is no capital gain in Mauritius the question of avoidance of double taxation would not arise at all.
6. The learned Solicitor General appearing on behalf of the respondents, on the other hand, submitted that by reason of the impugned circular, no embargo has been placed on the ITO to go into the question if any dispute arises as to whether the assessee is a resident of Mauritius or not. In the event, it is found that the effective place of management of the company is in India, the benefit of the said circular may not be given. It is further contended that capital gains tax is also chargeable in Mauritius, and the same has nothing to do with avoidance of double taxation. The CBDT having regard to the requisite jurisdiction to issue the circular, the same cannot be said to be wholly without jurisdiction warranting interference of this Court in exercise of its powers under art. 226 of the Constitution of India.
7. Learned Solicitor General would contend that necessity to issue such a circular arose having regard to the fact that it was found that in a number of cases although admittedly some companies were incorporated in Mauritius probe is being made by the AOs without any rhyme or reason. Such an enquiry, learned counsel would contend, is contrary to letter and spirit of the treaty between the two countries and created unpleasantness. It was contended that some clarification had been issued as regards legal position that where a company incorporated was in Mauritius it was to betreated as a resident of Mauritius. However, in a case where the company is also a resident of India by applying the test of place of business, domiciles, etc. it was open to the ITO to make necessary enquiries. In other words, the Solicitor General would contend that the said circulars would not apply to a case where art. 4 would be applicable. Counsel would urge that s. 90 of the IT Act contemplates various kinds of treaties, including the treaty in respect of avoidance of double taxation including income-tax which is a tax in both the countries. He would urge that different heads of income are not relevant for the purpose of enforcing the treaty inasmuch as in one country income from one head may be exempted, whereas in another the income from another head may be so exempted but that does not mean that income-tax is not payable at all. Submissions have also been made to the effect that legality of such a treaty is beyond the pale of judicial review as the said power is a sovereign function. The reason for entering into such a treaty may be for various reasons including political and economical and thus this Court in exercise of its jurisdiction under Art. 226 cannot interfere therewith. Relevant provisions of the statute
8. Sec. 2(17) of the Act defines a ‘company’ to mean not only an Indian company, but also a body corporate incorporated by or under the laws of a country outside India. Sec. 5(2) of the Act defines ‘scope of total income’ and reads thus : “Sec. 5 : Scope of total income ….. ….. ….. ….. ….. ….. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which : (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1 : Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.Explanation 2 : For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.” In terms of the aforementioned provisions, even capital gain would be taxable. Sec. 6 of the Act specifies as who is a “resident” of India for the purpose of the said Act. Sub-s. (3) of s. 6 of the Act stipulates that a ‘company’ said to be a ‘resident’ in India in any previous year, in every case except if inter alia, during that year, the control and management of its affairs is situated wholly outside India. Sec. 10 of the Act provides for the ‘incomes’, which do not form (part) of total income. Sec. 90 of the Act, which is relevant for the purpose of this case, reads thus : “Sec. 90. Agreement with foreign countries—(1) The Central Government may entry into an agreement with the Government of any country outside India : (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-s. (1) for granting relief of tax, or, as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Explanation : For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India.” Sec. 119 of the Act makes a provision for ‘instructions to subordinate authorities’ as under : “Sec. 119. Instructions to subordinate authorities—(1) The Board may, from time to time, issue such order, instructions and directions to other IT authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board :
Provided that no such orders, instructions or directions shall be issued : (a) so as to require any IT authority to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the CIT(A) in the exercise of his appellate functions. (2) Without prejudice to the generality of the foregoing power : (a) the Board may, if it considers it necessary or expedient so to do, for the purpose of proper and efficient management of the work of assessment and collection of revenue, issue, from time to time (whether by way of relaxation of any of the provisions of ss. 139, 143, 144, 147, 148, 154, 155, (sub-s. (1A) of s. 201, ss. 210, 211, 234A, 234B, 234C] 271 and 273 or otherwise), general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions (not being prejudicial to assessee) as to the guidelines, principles or procedures to be followed by other IT authorities in the work relating to assessment or collection of revenue or the initiation of proceedings for the imposition of penalties and any such order may, if the Board is of opinion that it is necessary in the public interest so to do, be published and circulated in the prescribed manner for general information; (b) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order, authorise any IT authority, not being a CIT (A) to admit an application or claim for any exemption, deduction, refund or any other relief under this Act after the expiry of the period specified by or under this Act for making such application or claim and deal with the same on merits in accordance with law. (c) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order for reasons to be specified therein, relax any requirement contained in any of the provisions of Chapter IV or Chapter VI-A, where the assessee has failed to comply with any requirement specified in such provision for claiming deduction thereunder, subject to the following conditions, namely : (i) the default in complying with such requirement was due to circumstances beyond the control of the assessee, and (ii) the assessee has complied with such requirement before the completion of assessment in relation to the previous year in which such deduction is claimed: Provided that the Central Government shall cause every order issued under this clause to be laid before each House of Parliament.”
The impugned Circular, dt. 13th April, 2000, is in the following terms :”The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and Mauritius. Art. 4 of the DTAC defines a resident of one State to mean “any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature” foreign institutional investors and other investment funds etc. which are operating from Mauritius are invariably incorporated in that country. These entities are liable to tax under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. Prior to 1st June, 1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the IT Act, 1961. Under the DTAC tax was deductible at source on the gross dividend paid out at the rate of 5 per cent or 15 per cent depending upon the extent of shareholding of the Mauritius resident. Under the IT Act, 1961, tax was deductible at source at the rates specified under s. 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a certificate of residence is issued by the Mauritius authorities such certificate will constitute sufficient evidence for accepting the status of resident as well as beneficial ownership for applying the DTAC accordingly. The test of residence mentioned above would also apply inrespect of income from capital gains on sale of shares. Accordingly, FIIs, etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per para. 4 of Art. 13″. [Emphasis, italicised in print, supplied]
9. The treaty dt. 6th Dec., 1983 [published at (1984) 40 CTR (TLT) 4], was issued under Notification No. GSR 920(E), dt. dt. 6th Dec., 1983. The convention was entered into between India and the Government of Mauritius for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains and for encouragement of mutual trade and investment with Mauritius. Art. 3 of the said treaty contains interpretation clause./ Art. 3(1)(d) defines the term “tax” to mean Indian tax or Mauritius tax as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this convention applies or which represents a penalty imposed relating to those taxes; Art. 4(3) defines a ‘person’ thus “Where by reason of the provision of para (1) a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated” The term competent authority is defined by Art. 2(h) to mean “in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative and in the case of Mauritius the CIT or his authorised representative. Art. 13 deals with capital gains. It reads thus : “(1) Gains from the alienation of immovable property, as defined in para. (2) of Art. 6, may be taxed in the Contracting State in which such property is situated. (2) Gains from the alienation of movable property pertaining to a fixed bases available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal service including gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. Findings
10. One of the questions which would arise for consideration is as to whether the impugned circular is within the parameter of s. 119 of the IT Act. CBDT may issue circulars which may or may not be binding on the authorities Recently in CIT vs. Anjum M.H. Ghaswala & Ors. (2001) 171 CTR (SC) 1 : 2001 (9) JT (SC) 61, the law is stated thus : “32….It is true that by this press release the board had interpreted the provisions of the Act in a particular manner. Be that as it may, we would like to make it clear that every clarificatory note or press release issued by the board does not have the statutory force like the circulars issued by the board under s. 119 of the Act. It is only those circulars issued by the board under the provisions of s. 119 of the Act will have the statutory force and will be binding on every IT authorities. Therefore, the press release relied upon by Shri Ramamurti not being a circular issued under s. 119 of the Act will not be of any assistance to the respondents in support of their contentions.”
11. Prima facie by reason of the said circular no direction has been issued. A clarification has been sought to be made as regards taxation from dividends and capital gains in Indo Mauritius Double Taxation Convention. The circular itself does not show that the same has been issued under s. 119 of the IT Act. Only in case where the circular is issued under s. 119 of the IT Act, the same would be legally binding on the Revenue. The circular does not deal with the power of the ITO to consider the question as to whether although apparently a company is incorporated in Mauritius but whether the company is also a resident of India and/or not a resident of Mauritius at all. If the said circular is considered to be issued by the CBDT in terms of s. 119 of the Act, it is trite that the Central Government by reason of affidavit or otherwise neither can supplement the reasons contained therein nor explain the same. We may however, notice that the Central Government in its affidavit states : “The determination of the country of residence of a taxpayer is necessary for the purposes of the Double Taxation Avoidance convention as it applies to persons who are residents of one or both the States. Further, as per the DTAC in relation to certain items of income, the country of source of income completely foregoes the right to levy tax (e.g., art. 8 and para 4 of art. 13). In respect of other items of income, the country of residence of the taxpayer waives the primary right to levy tax and gives a credit for the tax paid in the source country (e.g. arts. 10,
11 and 12). It is for the AO, on the facts of every case to determine whether the assessee is a resident of India or Mauritius. For determining the residence in India, the powers of the AO are untrammelled since it would principally be for him to determine whether an assessee is resident in India. When an assessee claims to beresident of Mauritius the certificate to this effect issued by the authorities of that Government would beconclusive. However, this conclusiveness would be in relation to its residence in Mauritius”. Where, however, an assessee, who is a resident of Mauritius, is also found to be resident of India in accordance with the para 1 of art. 4 the provisions of para 3 of the DTAC have to be applied.” From the said circular, three situations arise (a) the assessee is a resident of Mauritius; (b) a tiebreaker clause may apply an assessee may be a resident of Mauritius and India, (c) an assessee is a company incorporated in Mauritius although it is in effect and substance a resident of a third country.
In terms of the affidavit the ITO would determine whether the assessee is a resident of India but only because the assessee claims himself to be a resident of Mauritius, a certificate issued by the authorities of the Mauritius would be conclusive. The circular does not say so. It is now well settled that when a statutory authority exercises its jurisdiction under the provisions of statute such an order has to be interpreted on its own and no affidavit by way of explanation can be offered in the counter-affidavit. Furthermore, the effect and purport of a statutory order cannot be enlarged nor diluted by way of an affidavit otherwise. The power of the CBDT to issue instructions to subordinate authorities is limited. Such an instructions can be issued only for proper administration of the provisions of the IT Act and not otherwise. It cannot issue any instructions which would be de hors the provisions of the said Act. By reason of the impugned circular for all intent and purport, the CBDT had directed the IT authorities to accept the certificate of residence issued by the authorities of Mauritius as sufficient evidence as regards its status of residence and ownership of the companies. The said circular, purports to direct all the authorities to accept the certificate of residence without further questioning the correctness or legality thereof whenever a benefit is claimed under double taxation treaty. It further directs that the individuals and companies would not be taxed as capital gains in India if the companies are declared to be residents of Mauritius in terms of such certificate. For the purpose of disposal of these writ petitions, it is also necessary to look to the provisions of Indian IT Act. Sec. 5 of the Act provides that total income from whatever source whether in India or outside. Under sub-s. (2) of s. 5 provides that so far a non-resident is concerned its total income would be the sum which is received by him in India which arises or is deemed to accrue to him in India in a relevant year. Sub-s. (3) of s. 6 provides that a company is said to be a resident in India in any previous year, if (i) it is an Indian company, or (ii) during that year except in a case where the control and management of its affairs is situated wholly outside India. Sec. 9 of the IT Act reads thus : “9(1) The following incomes shall be deemed to accrue or arise in India— (i) all income accruing or arising whether directly or indirectly through or from any business connection in India or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India.”
The function of an ITO is quasi judicial in nature. It for the purpose of finding out as to whether an assessee can take shelter under double taxation avoidance treaty or not is entitled to make such enquiries which are permissible in law. For the said purpose it not only is entitled to lift the corporate veil but also is entitled to find out not only as to whether a company is actually a resident of Mauritius or not and/or whether it is paying income-tax in Mauritius or not or in fact the company is not a resident of Mauritius at all. In revenue and taxation matters the Courts have very often lifted the corporate veil. Even a corporate entity is disregarded when it was used for tax evasion or to circumvent tax obligation or to perpetuate fraud. It is also lifted for determining whether a transaction is sham or illusory or a device or ruse. IT authorities are entitled to penetrate the veil covering it and ascertain the truth and ascertain reality behind the legal facade. Assessing authority can go into the genuineness or validity of a document or to see as to whether a transaction is collusive or fraudulent.
14. Conclusiveness of a certificate of residence granted by the Mauritius tax authorities is not contemplated under the treaty or under the IT Act. Whether a statement shall be conclusive or not must be provided for under a legislative Act e.g., Indian Evidence Act. When evidence in relation to a matter under issue is produced before the authorities exercising judicial function by reason of a circular issued by CBDT it cannot be prescribed that such evidence shall be conclusive. Such a provision as regards conclusiveness of a certificate must find place in the statute itself, as for example we may notice that such a certificate of citizenship having regard to the provisions of s. 9 (2) of the Citizenship Act r/w r. 30 of the Citizenship Rules speaks of such a contingency.
15. An absuse of the treaty or treaty shopping is illeal and thus necessarily forbidden. The said Convention was entered into, as noticed hereinabove, between the Government of Republic of India and the Government of Mauritius for avoidance of double taxation and the prevention of fiscal evasion with regard to tax on income and capital gains and for encouragement of mutual trade and investment. In terms of art. 28 thereof notification bearing No. GSR 920(E), dt. 6th Dec., 1983, was issued.
16. Power of issuance of a circular in terms of s. 119 of the IT Act has been delegated to the CBDT for a limited purpose. By reason of such a circular neither the essential legislative function can be delegated nor arbitrary thereby uncanalised or naked power can be conferred. Delegated authority, if trite must act within four corners of delegated legislation. It is not only to act having regard to the purpose and object for which the power has been delegated, it must act having regard to the provisions of the statute as also the delegated legislation. It is now trite that by reason of any power conferred upon any statutory authority to issue any circular, the jurisdiction of a quasi-judicial authority in relation thereto cannot be taken away. In Orient Paper Mills Ltd. vs. Union of India AIR 1969 SC 48, it has been held as follows : “7. This leaves us with the question of the directions issued by the Board. The question whether “M.G. poster paper” is “printing and writing paper” or “packing and wrapping paper” is essentially a question of fact. That had to be decided by the authorities under the Act. It was not denied before us that the Collector and the Central Government while deciding the appeals and the revision applications respectively functioned as quasi judicial authorities. So far as the nature of power exercised by Central Government under s. 36 of the Act (revisional powers) is concerned, the matter is concluded by the decision of this Court in Aluminium Corporation of India Ltd. vs. Union of India, Civil Appeal No. 635 of 1964, dt. 22nd Sept., 1965. Therein this Court held that the said power is a quasi-judicial power. There is hardly any doubt that the power exercised by the appellate authority, i.e., the Collector, under s. 35 is also a quasi judicial power. He is designated as an appellate authority; before him there was a lis between the appellant which had paid the duty and the revenue; and his order is subject to revision by the Central Government. Therefore, it is obvious that the power exercised by him is a quasi judicial power. Dr. Syed Mohammed, appearing for the respondent, did not contend- and we think rightly-that the power exercised by the Collector was not a quasi-judicial power.”
17. In Sirpur Paper Mills Ltd. vs. CWT (1970) 77 ITR 6 (SC) : 1970 (1) SCC 795 : TC 67R.731, the apex Court held : “4. Sec. 25 of the WT Act provides insofar as it is material : (1) The CWT may, either of his own motion or on application made by an assessee in this behalf, call for the record of any proceeding under this Act in which an order has been passed by any authority subordinate to him and may make such inquiry, or cause such inquiry to be made, and subject to the provisions of this Act, pass such order thereon, not being order prejudicial to theassessee, as the CWT thinks fit.’ The power conferred by s. 25 is not administrative, it is quasi-judicial. The expression “may make such inquiry and pass such order thereon’ does not confer any absolute discretion on the CWT. In exercise of the power the CWT must bring to bear an unbiased mind, consider impartially the objections raised by the aggrieved party, and decide the dispute according to procedure consistent with the principles of natural,justice, he cannot permit his judgment to be influenced by matters not disclosed to the assessee, nor by dictation ofanother authority. Sec. 13 of the WT Act provides that all officers and other persons employed in the execution of this Act shall observe and follow the orders, instructions and directions of the Board. These instructions may control the exercise of the power of the officers of the Department in matters administrative but not quasi-judicial. The proviso to s. 13 is somewhat obscure in its import. It enacts that no orders, instructions or directions shall be given by the Board so as to interfere with the discretion of AAC of Wealth Tax in the exercise of his appellate functions. It does not, however, imply that the Board may give any directions or instructions to the WTO or to the CWT in exercise of his quasi-judical function. Such an interpretation would be plainly contrary to the scheme of the Act and the nature of the power conferred upon the authorities invested with quasi-judicial power.”
18. In Orient Paper Mills Ltd. vs. Union of India (supra) apex Court observed as follows : “4. Now it is common ground, it being admitted in the statement of case filed on behalf of the respondent that the paper was assessed to duty in accordance with the instructions from the Collector. The main question is whether an assessment made by a subordinate officer in accordance with the instructions issued by the Collector to whom an appeal lay against the order of that subordinate officer can be called a valid assessment in the eye of law. As has been pointed out in Orient Paper Mills Ltd. vs. Union of India (1969) 1 SCR 245 : AIR 1969 SC 48, in which the parties were the same as before us now no authority, however high, can control the decision of a judicial or a quasi-judicial authority that being the essence of our judicial system. In the present case, when the assessment is to be made by the Deputy Superintendent or the Asstt. Collector, the Collector, to whom an appeal lies against his order of assessment, cannot control or fetter his judgment in the matter of assessment. If the Collector issues directions by which the Deputy Superintendent or the Asstt. Collector is bound, no room is left for the exercise of his own independent judgment.
5. According to the learned Attorney-General the assessment proceedings are not of a quasi-judicial nature nor is the assessing authority a quasi-judicial authority. We are unable to agree. It is apparent from the judgment referred to above and numerous other decisions of this Court delivered in respect of various taxation laws that the assessing authorities exercise quasi-judicial functions and they have duty cast on them to act in a judicial and independent manner. If their judgment is controlled by the directions given by the Collector it cannot be said to be their independent judgment in any sense of the word. An appeal then to the Collector becomes an emptyformality. In the previous decision of this Court mentioned above the appeal and the revision had been rejected by the Collector and the Central Government on the ground that a direction had been issued by the Central Board of Revenue to the effect that the paper in question be treated as belonging to a particular classification. This Court entertained no doubt that the direction given by the Board was invalid and it vitiated the proceedings before the Collector as well as the Government. Similarly in the present appeal the direction given by the Collector was invalid and the proceedings before the Deputy Superintendent or the Asstt. Collector were vitiated. This position obtains in all the appeals although the type and quality of paper are different. The Central Government merely affirmed the order made by the Collector in each case and did not give any independent reasons for upholding the levy of duty made in accordance with the directions of the Collector.”
It is contended by the learned Solicitor General that by reason of the said treaty a political arrangement has been made. The same, in our opinion, would run counter to the provisions of s. 90 of the Indian IT Act. Political expediency cannot be a ground for fulfilling the constitutional obligation. In S.R. Chaudhary vs. State of Punjab & Ors. 2001 (7) SCC 126, the apex Court while interpreting the provisions of Art. 164 of the Constitution of India, stated the law thus : “33. Constitutional provisions are required to be understood and interpreted with an object oriented approach. A Constitution must not be construed in a narrow and pedantic sense. The words used may be general in terms but, their full import and true meaning, has to be appreciated considering the true context in which the same are used and the purpose which they seek to achieve. Debates in the Constituent Assembly referred to in an earlier part of this judgment clearly indicate that a non-member’s inclusion in the Cabinet was considered to be a ‘privilege’ that extends only for six months during which period the member must get elected, otherwise he would ceases to be a minister. It is settled position that debates in the Constituent Assembly may be relied upon as an aid to interpret a constitutional provision because it is the function of the Court to find out the intention of the framers of the Constitution. We must remember that a Constitution is not just a document in solemn from, but a living framework for the Government of the people exhibiting a sufficient degree of cohesion and its successful working depends upon the democratic spirit underlying it being respected in letter and in spirit.
The debates clearly indicate the ‘privilege’ to extend ‘only’ for six months.” It was held : “40. Chief Ministers or the Governors, as the case may be, must for ever remain conscious of their constitutional obligations and not sacrifice either political responsibility or parliamentary conventions at the alter of political expediency. Prof. B.O. Nawabueze in his book Constitutionalism in the Emergent States (1973 Edn. P. 139) almost thirty years ago warned : ‘Experience has amply demonstrated that the greatest danger to constitutional Government in emergent States arises from the human factor in politics, from the capacity of politicians to distort and vitiate whatever Governmental forms may be devised. Institutional forms are of course important, since they can guide for better or for worse the behaviour of the individuals who operate them. Yet, however, carefully the institutional forms may have been constructed, in the final analysis much more will turn upon the actual behaviour of these individuals upon their willingness to observe the rules, upon a statesmanlike acceptance that the integrity of the whole Governmental framework and the regularity of its procedures should transcend any personal aggrandizement. The successful working of any Constitution depends upon what has aptly been called the ‘democratic spirit’ that is, a spirit of fairplay, of self-restraint and of mutual accommodation of differing interests and opinions. There can be no constitutional Government unless the wielders of power are prepared to observe the limits upon Governmental powers.’ 41. Prof Nwabueze’s warning has great relevance today in the context under our consideration. For parliamentary democracy to evolve and grow, certain principles and policies of public ethics must form its functioning base. Actions such as in the present case pose grave danger to foundations and principles of constitutionalism and the same must be warded off by developing right attitude towards constitutional provisions. Constitutional restraints must not be ignored or bypassed if found inconvenient or bent to suit “political expediency”. We should not allow erosion of principles of constitutionalism.”
21. Yet again in Kishan Prakash Sharma vs. Union of India 2001 (5) SCC 212, Rajinder Babu, J. speaking for the Constitutional Bench stated the law thus : “So far as the delegated legislation is concerned, the case-law will throw light as to the manner in which the same has to be understood and in each given case we have to understand the scope of the provisions and no uniform rule could be laid down. The legislatures in India have been held to possess wide power of legislation subject, however, to certain limitations such as the legislature cannot delegate essential legislative functions which consist in the determination or choosing of the legislative policy and of formally enacting that policy into a binding rule of conduct. The legislature cannot delegate uncanalised and uncontrolled power. The legislature must set the limits of the power delegated by declaring the policy of the law and by laying down standards for guidance of those on whom the power to execute the law is conferred. Thus the delegation is valid only when the legislative policy and guidelines to implement it are adequately laid down and the delegate is only empowered to carry out the policy within the guidelines laid down by the legislature. The legislature may, after laying down the legislative policy, confer discretion on an administrative agency as to the execution of the policy and leave it to the agency to work out the details within the framework of the policy. When the Constitution entrusts the duty of law-making to Parliament and the legislatures of States, it impliedly prohibits them to throw away that responsibility on the shoulders of some other authority. An area of compromise is struck that Parliament cannot work in detail the various requirements of giving effect to the enactment and therefore, that area will be left to be filed in the delegatee. Thus, the question is whether any particular legislation suffers from excessive delegation and in ascertaining the same, the scheme, the provisions of the statute including its preamble, and the facts and circumstances in the background of which the statute is enacted, the history of the legislation, the complexity of the problems which a modern State has to face will have to be taken note of and if on a liberal construction given to a statute, a legislative policy and guidelines for its execution are brought out, the statute, even if skeletal, will be upheld to be valid but this rule of liberal construction should not be carried by the Court to the extent of always trying to discover a dormant or latent legislative policy to sustain an arbitrary power conferred on the executive. These very tests were adopted in Ajoy Kumar Banerjee case (1984) 3 SCC 127 also to examine whether there is excessive delegation in framing schemes and reading the preamble, the scheme and the other provisions of the enactment taking note of the general economic situation in the country, the authorities concerned had to frame appropriate schemes. Therefore, it is not open to the petitioners to contend that there is excessive delegation in relation to the enactment to frame schemes.”
22. By reason of the circular a power is conferred to lay down a law which is not contemplated under the Act or for the purpose of political expediency. The same cannot be ultra vires. What prompted the Government of India and the Government of Mauritius in the said treaty is not known. Submission of the Solicitor General that this treaty must have been entered into looking to the large population of Indians in the said country and also for future support of the said country might have been taken into consideration. Any other purpose would not only be ultra vires the same would be contrary to the purpose circular had been issued bona fide, the question which has to be posed and answered by this Court is as to whether the same is in consonance with the provisions of s. 90 of the IT Act or is in public interest. The validity of the impugned circular must be judged having regard to the limitations contained in s. 90 of the Act and not otherwise. It would not be correct to contend that s. 90 of the IT Act. confers a very wide power in terms whereof conferment of an unguided or unbridled power is not contemplated. The very purpose of entering into such a treaty is avoidance of double taxation. The power in terms of s. 90 has to be considered having regard thereto. The expression double taxation has definite and precise meaning. In Black Law Dictionary the concept has been defined to mean : “The imposition of comparable taxes in two or more States on the same tax-payer, for the same subject-matter or identical goods.”
23. The bilateral treaty can be entered into by two independent Governments but bilateral treaties for political expediency and bilateral treaty in terms of a statute stand on different footing. A treaty which is entered into in terms of Art. 73 of the Constitution of India the political expediency may have a role to play but not when the same is done under a statutory provisions. Powers, functions and duties of the adjudicating authority cannot be taken away under a treaty for loss by a circular. By reason of an international treaty, a Government, less than CBDT can be allowed to lay down a procedure or evidentiary value of a document which would be de hors the provision of Indian IT Act. A statutory authority, it is well known must act within the four corners of the statute. It must follow the procedure laid down therein and all other action are necessarily forbidden. In Ramchandra vs. Govind AIR 1975 SC 915 it is stated : “25. A century ago in Taylor vs. Taylor (1875) 1 Ch. D. 426 Jessel M.R. adopted the rule that where a power is given to do a certain thing in a certain way the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden. The rule has stood the test of time. It was applied by the Privy Council in Nazir Ahmed vs. Emperior 63 Ind App 372….”
24. So far as submission of the learned Solicitor General to the effect that Mauritius route may be taken recourse to for gaining benefit as is done by the industrialist setting up industries in M.P. or some other place in the country where tax benefit are given are concerned, the same is stated to be rejected. Economic activities in different states by grant of exemption to the industries are done in terms of the provisions of the statutes. Such exemptions are granted in furtherance of the legislative policy so as not only to put the local resources including human resources to optimum use but also for development of the country. Such benefits and exemptions are granted by way of payment of sales-tax and electricity subsidy, etc. but the same principle cannot be said to be applicable for the purpose of double taxation avoidance scheme. In any event, taking undue advantage of a scheme only for the purpose of avoidance of tax cannot but be deprecated. Treaty shopping which amounts to abuse of the Indo Mauritius Bilateral Treaty, may amount to fraudulent practice and cannot be encouraged. Philip Baker on Double Taxation Convention and International Law, comments : “General subject to provisions provides that treaty benefits in the State of source are granted only if the respective income is subject to tax in the State of residence. This corresponds basically to the aim of tax treaties, namely to avoid double taxation.” There may not be any doubt that s. 90 talks of income generally, However, income in fiscal legislative practice has a specific meaning and the avoidance of double taxation is a term of art.
25. Avoidance of double taxation would mean that a person has to pay tax at least in one country. Avoidance of double taxation would not mean that a person do not have to pay tax in any country whatsoever. In Mauritius in terms of statute that a foreign company is not entitled to owe any property, open any bank account, do any business. Several restrictions have been imposed in that country as a result whereof no income may be generated in Mauritius and no income-tax may be payable therein. Does double taxation treaty envisage such a situation. In our opinion it is not. Petitioner has annexed a copy of the order of the assessing authority in the case of Cox and Kings. A bare perusal of the said order shows that therein it was found that the company although had obtained residential certificate in Mauritius but had nothing to do therewith and factually it got itself registered only for the purpose of tax avoidance so as to obtain benefit of the treaty.
26. Apex Court in McDowell & Co. Ltd. vs. CTO (supra) stated that the law laid down in Westminster was no longer a good law and that the judicial attitude towards tax avoidance has changed. The apex Court stated : “I have referred to the English cases at some length, only to show that in the very country of its birth, the principle of Westminster has been given a decent burial, and in that very country, where the phrase “tax avoidance” has originated, the judicial attitude towards tax avoidance has changed and the simile, cynical of even affectionate through it might have been at one time, has now frozen into a deep frown. The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effected of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it…….In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid-tax, and whether the transaction is such that the judicial process may accord its approval to it”. In Furniss (Inspector of Taxes) vs. Dawson and related Appeals (1984) All ER 530 House of Lords stated thus : “In determining the fiscal consequences of a preplanned tax saving scheme no distinction was to be made between a series of steps which were followed through by virtue of an arrangement which fell short of a binding contract and a like series of steps which were followed through because the participants were contractually bound to take each step. Accordingly, where a tax avoidance or tax deferment scheme consisted of a series of prearranged steps, some of which had no commercial purpose other than the avoidance or deferment of tax, liability to tax was to be determined according to the substance of the scheme as a whole an its end result, notwithstanding (a) that the arrangement was noncontractual or (b) that each particular step had commercial effect or enduring legal consequences, or (c) that the arrangement was not a self-cancelling scheme designed to produce neither a loss nor a gain. Applying those principles since the intervention of G. Ltd had no commercial purpose other than deferment of the taxpayer’s tax liability, the transactions concerning G Ltd. were to be disregarded and the transaction treated simply as the sale of the taxpayer’s share in X Ltd and Y Ltd. direct to the purchaser. On that basis the taxpayers were accordingly liable to capital gains tax.” Furthermore having regard to the decision of the apex Court in New Horizons Ltd. vs. Union of India (supra), and Life Insurance Corporation vs. Escorts & Ors. (supra) there cannot be any doubt whatsoever that in a given case the ITO is entitled to lift the corporate veil for the purpose of finding out as to whether the purpose of the corporate veil is avoidance of tax or not. Passing of an appropriate order of assessment is primary duty of the AO which would include conscious evasion of tax by an assessee. Such a function which is judicial in nature can be regulated but cannot altogether be prohibited. If on mere production of a purported residential certificate by an authority (which again it would be a repetition to state is not the subject-matter of the treaty), the assessing authority has to put off their hands. The same would render the circular ultra vires. The suggestion to the effect that in such cases the attention of the Central Government can be drawn and the matter can be taken up at the Government level is not contemplated in the statute. No law encourages opaque system to prevail.
27. The core issue is as to what should be done when on investigation it is found that the assessee is a resident of a third country having only paper existence in Mauritius without any economic impact with a view to take advantage of the double taxation avoidance scheme. No attempt has been made to answer the question on behalf of the Central Government inasmuch as it merely stated in the counter that power of the assessing authority under s. 4(3) of the treaty has not been taken away. By reason of the impugned circular even such a power has been taken away inasmuch as a certificate of residence has been made conclusive. In any event, having regard to the facts and circumstances of the case, only by production of a residential certificate, an assessee cannot be held to be entitled to take benefit of the treaty although it neither pays income-tax in India nor in Mauritius. Such an action would be ultra vires the IT Act.
28. From the discussions made hereinbefore we are of the opinion that the statutory power of the assessing authority cannot be taken away be reason of the impugned circular. Be it recorded that counsel for the parties have argued before us at great length and raised before us a large number of questions which have been noticed hereinbefore to but keeping in view the fact that only an interpretation of the statute vis-a-vis the impugned circular. We are of the opinion that we need not go further and leave the other contentions for being determined in an appropriate case. We would however like to make an observation that the Central Government will be well advised to consider the question raised by Shri Shiva Kant Jha who has done a noble job in bringing into focus as to how the Government of India had been losing crores and crores of rupees by allowing opaque system tooperate. For the reasons aforementioned this writ petition is allowed and the impugned circular is quashed. Consequently if the assessing authorities intend to reopen any proceedings they would be entitled to take recourse to such proceedings as are open to them in law. The petitioners are also entitled to cost which is assessed at Rs. 10,000.
[Citation : 256 ITR 563]
