JUDGMENT
D.N. Chowdhury, J.
1. These three appeals are preferred by the Revenue assailing the judgment and order of the learned Single Judge dated 16.2.1995 passed in Civil Rule Nos. 650, 856 and 1072 of 1987. The learned Single Judge disposed of the Civil Rules by a common judgment and order. The three appeals were therefore taken up together for disposal since the appeals involve the common question of law.
2. In all the three writ petitions, the respondents writ petitioners assailed the show-cause notices issued under Rule 233-A of the Central Excise Rules, 1944 for recovery of duties” short-levied or short-paid vide notice dated 9.10.1985 in Civil Rule No. 856 of 1987, notice dated 9.10.1985 in Civil Rule No. 1072 of 1987 and notice dated 9.4.1985 in Civil Rule No. 650 of 1987.
3. Since the facts are alike, for the sake of convenience, we shall hereafter only advert to the facts chronicled in the Civil Rule No. 856 of 1987.
4. By notice bearing No. V-16B/3/Adj/85/73966-76 (B) dated 9th October, 1985 the writ petitioners were called upon to show cause to the Collector of Central Excise, Shillong for the following reasons:–
(a) Central excise duty amounting to Rs. 1,63,922.50 (Rupees one lakh sixty three thousand nine hundred twenty two & fifty paise) being the differential duty as detailed in Annexure-‘A’ should not be demanded from and paid by the said company under Rule 9(2) of the said Rules read with Section 11A of the said Act since the said company had charged and realised additional amount of prices in the name of consolidated amount over and above the basic prices from different independent buyers against ex factory sales for the period from January, 1981 to March, 1982.
(b) Central excise duty amounting to Rs. 35,11,816.00 (Rupees thirty five lakhs eleven thousand eight hundred and sixteen) being the differential duty as detailed in Annexure-‘B’ should not be demanded from and paid by the said company under Rule 9(2) of the said rules read with Section 11A of the said Act since the said company had charged and realised additional amount in the name of different heads such as forwarding, handling, packing and consolidated amount over and above the basic price in respect of stock transfer quantities sent to their branches, consignment sale agents, and marketing agents for the period from January 1981 to March, 1982.
(c) Central excise duty amounting to Rs. 2,92,062.80 (Rupees two lakhs ninety two thousand sixty two and eighty paise) being the differential duty involved on the ex factory sales in between the ex factory price (assessable value) and the region-wise applicable, rates as per internal price lists issued secretly by the said company’s Calcutta Office, as detailed in Annexure-‘C’ should not be demanded from and paid by the said company under Rule 9(2) of. the said Rules read with Section 11A of the said Act since the said company had effected some token ex factory sales on fictitious assessable values declared to the department, to the local buyers and to the buyers outside Assam for the purpose of procuring some invoices to that effect with a view to substantiating those values during the period from April, 1982 to February, 1984.
(d) Central excise duty amounting to Rs. 42,32,224.00 (Rupees forty two lakhs thirty two thousand two hundred and twenty four) being the differential duty:” detailed in Annexure-‘D’ should, not be demanded from and paid by the said company under Rule 9(2) of the said Rules read with Section 11A of the said Act since the said company/had removed large, quantity-of, their production to the extent of 98% (approx.) on stock transfer basis-to their branches,’ consignment sale agents’ and marketing agents on payment of duty on fake assessable values who in turn sold the entire goods received under stock transfer basis at the prices incorporated in the said company’s internal price lists published’ and circulated secretly to their branch offices and sale agents for the: period ff 6m’April, 1982 to February, 1984.
(e) Central excise duty amounting to Rs. 42,889.00 (Rupees forty two thousand eight hundred and eighty nine) being the differential duty as detailed in Annexure-‘E’ should not be demanded from and paid by the said company under Rule 9(2) of the said Rules read with Section 11A of the said Act since the said company had suppressed the material facts while declaring the “defective” grades of marine plywood to the department for appropriate classification of the products under tariff head for the period from January, 1981 to February, 1984.
(f) Central excise duty amounting to Rs. 45,68,295.85 (Rupees forty five lakhs sixty eight thousand two hundred ninety five and eighty five paise) being the differential duty as detailed in Annexure-‘F’ should not be demanded from and paid by the said company under Rule 9(2) of Central Excise Rules read with Section 11A of the said Act since the said company had declared the so called brand “Kitply Marine” grade to the department as classifiable under marine grade plywood by deliberate suppression of material facts and got approval of their Kit Ply Marine grade as marine plywood for the purpose of duly liability as per SI. No. 4 of the table appended in notification No. 55/79-CE dt. 1.3.1979 as amended by notification No. 60/82-CE dt. 28.2.1982 and accordingly they availed of exemption of duty at the rate applicable on marine plywood, despite the fact that Kitply conformed the specification of commercial plywood during period from January, 1981 to February, 1984.
(g) Central excise duty amounting to Rs. 66,13,379.80 (Rupees sixty six lakhs thirteen thousand three hundred seventy nine and eighty paise) being the differential duty as detailed in Annexure-‘G’ should not be demanded from and paid by the said company under Rule 9(2) of Central Excise Rules read with Section 11A: of the said Act since the said company had removed the grade concrete shuttering plywood under the garb of marine plywood deliberately by availing of concessional rate of duty applicable on marine plywood for the period from January, 1981 to February, 1984.
(h) Central excise duty amounting to Rs. 47,20,604.00 (Rupees forty seven lakhs twenty thousand six hundred and four) being the differential duties as detailed in Annexure-‘H’ should not be demanded from and paid by the said company under Rule 9(2) of Central Excise Rules read with Section 11A of the said Act since the said company had removed ex factory, the prime quality of commercial plywood under the garb of defective grades deliberately by misclassification as was evident from the duplicate invoices bearing same number and date and other corresponding documents forwarded through banks and collection of amounts thereon for the period from April, 1982 to February, 1984.
5. The notice indicated, about the simultaneous searches conducted at the factories, registered office, central office/head office, godowns and residences of the directors, managers and branch offices/consignment sale agents, offices at Tinsukia, Margherita of the petitioners company and the collection of records and documents in those searches. According to the Revenue the company was resorting to the devious method of realising additional amount from the wholesale buyers over and above the prices declared to the department through under-valuation and also the prime quality of the plywood were cleared. the factory under; the garb of defective grades paying lower rate of duty and subsequent sale under different nomenclature at higher price.
According to the department the duty of excise was not levied/short-levied or short-paid because of fraud collusion or wilful misstatement or suppression of facts, etc., arid accordingly the impugned notices were issued. The notices contained [details?] about The alleged instances of non-levy/short-Ievy.
6. The thematic contents of the allegations as cited, in the notices were about the alleged deceit perpetrated on the Revenue with a view to evade the excise duties. A number of alleged instances were specified to establish that the bills submitted to the, Department by the assessee for substantiating the assessable value were procured from the buyers after much persuasion and the differential amount in between the prices indicated in the price list and the assessable value were adjusted through deception. Illustrations were also cited in the notices about the alleged fraud, those were committed in the transactions relating to the classification of the goods. The notices contained the instances of alleged dubious method of removal of high rated products under different trade names for availing of exemption of duty. The Revenue copiously enumerated the instances of alleged fraud and wilful misrepresentation committed by the assessee by citing documentary evidence.
7. According to the Department the excise duty was not levied/short-levied/short-paid by reason of fraud, collusion or wilful misstatement or suppression of facts and accordingly the aforesaid notices were issued. As narrated earlier, the said notices were assailed in the Civil Rules and the learned Single Judge upon hearing the parties and on consideration of the materials on record quashed the notices and allowed the Civil Rules. The learned Single Judge accordingly came to the following findings:–
(i) Once the price list is approved and it is subjected to adjudication by a judicial authority, the same cannot be revised and/or modified without following the due process of law. In issuing the show-cause notice in the instant case, the due process (sic) was not followed by the authority.
(ii) In order to entitle the department to issue the show-cause notice in the absence of any amendment in law, the department can issue notice only when it finds that the person concerned is guilty of suppression of material facts or misstatement or misrepresentation.
(iii) When the factory gate sale is admitted, the department is duty-bound to assess the tax on the basis of the factory gate sale as provided under Section 4(1)(a) of the Act.
Hence, the appeals.
8. It was contended on behalf of the Revenue that whether on the basis of factual materials there was any fraud, collusion or wilful misstatement or suppression or contravention of the provisions of the Act can only be determined on evaluation of the facts and the learned Single Judge fell into serious error in quashing the notices without adjudicating those disputed factual issues. According to the Revenue when on the face of it there were sufficient materials for initiating a recovery proceeding under Section 11A of the Central Excises and Salt Act, 1944 read with the Rules made there under, there was no valid reason for the learned Single Judge to quash the proceeding without adjudicating the facts, that too of disputed nature instead of allowing the fact finding authority to adjudge the same on evaluation of the factual elements.
9. Mr. K.N. Chowdhury, the learned Counsel appearing on behalf of the appellants submitted that the Legislature authorised the Revenue for the recovery of the duties not levied or not .paid of short-levied or short-paid. When the Legislature authorised the; Revenue with a machinery section for recovery of the duties not levied or short-levied, there was no justification for. not permitting the Revenue authority to adhere to the procedure prescribed by law. Mr. Chowdhury submitted that the conclusion No. (i) at paragraph 21 is perse perverse on the face of the lawful procedure adopted by the Revenue under Section 11A of the Act read with, Rule 233-A of the Central Excise Rules. Mr. Chowdhury further, submitted, that the learned Single Judge on its own held that the authority at all relevant time has had the competence to issue notice on the ground of suppression of material facts or misstatement, in the absence of any “finding arrived by the learned Single Judge that there was no misstatement or suppression of facts, the question of setting aside or quashing the impugned notices did not arise. The learned Counsel further submitted that the finding of the learned Single Judge in reaching his conclusion in sub-paragraph (iii) of paragraph 21 was vitiated by non-application of mind; Mr. M.L. Lahoty, the learned Counsel appearing for the respondents (petitioners) supported the judgment with his persuasive argument. According to Mr. Lahoty. In the face of adjudication of classification and valuation the impugned notices were without jurisdiction. According to the learned Counsel on a true construction of the provisions contained in Section 4 of the Act read with the adjudication of classification and the valuation, the Revenue has had no jurisdiction to initiate the impugned proceeding. Mr. Lahoty, the learned Counsel appearing for the respondents writ petitioners strenuously submitted that once the price list and classifications were approved and finalised under Rules 173-B and 173-C after a due adjudication, the question of issuing the purported show-cause notices did not arise. Mr. Lahoty took the pain in placing all the material facts and brought to our attention to the catena of decisions of the Supreme Court, various High Courts including this Court and some of the decisions of the Customs, Excise and Gold (Control) Appellate Tribunal, which would be referred in due course.
10. The scheme for determination of real value of an excisable article is provided in Section 4 of the Act. The said provision contains the machinery provision for valuation of excisable goods for purposes of charging of duty of excise. The value of excisable article is to be computed with reference to the price charged by the manufacturer and the computation is to be made as per the scheme of (sic) tained in Section 4. The price at which the goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal is the normal price mentioned in Section 4(1)(a) of the Act where the buyer is not a related person and the price is the sole consideration for the sale. The value of excisable goods determined under Section 4(1)(a) are likely to vary according to circumstances as evident from
Clauses (i), (ii), (iii) of Section 4(1)(a) of the Act. The deductions as described in Section 4 are not wholly exhaustive. The Supreme Court in Union of India v. Bombay Tyre
International Ltd. (1984) 1 SCC 467 reiterated that the Parliament by enacting new Section 4 did not intend to bring into existence a scheme of valuation different from that embodied in the old Section 4. According to the-Supreme Court the new Section 4 embodies a much more comprehensive and clearly enunciated scheme for determination of the real value of an excisable article. The purport of Section 4 both old and new
was summarised by the Supreme Court at para 47 pp. 503-04 (ECC page 107):
(i) The price at which the excisable goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal as defined in Sub-section (4)(b) of Section 4 is the basis for determination of excisable value provided, of course, the buyer is not a related person within the meaning of Sub-section (4)(c) of Section 4 and the price is the sole consideration for the sale. This proposition is subject to the terms of three provisos to Sub-section (1)(a) of Section 4;
(ii) Where the price of excisable goods in the course of, wholesale trade for delivery at the time and place of removal cannot be ascertained for the reason that such goods are not sold or. for any other reason, the nearest ascertainable equivalent thereof determined in the manner prescribed by the Central Excise (Valuation) Rules, 1975, should be taken as representation the excisable value of the goods;
(iii) Where wholesale price of any excisable goods for delivery at the place of removal is hot known and the value thereof is determined with reference to the wholesale price for delivery at a place other than the place of removal, the cost of transportation from the place of removal to the place of delivery should be excluded from such price;
(iv) Of course, these principles cannot apply where the tariff value has been fixed in respect of any excisable goods under Sub-section (2) of Section 3.
11. In the aforesaid decision the Supreme Court pronounced in categorical terms that the value of the article can be determined from the price for sale in, course of wholesale, trade of an article for delivery at the time and place of removal, i.e., the factory gate. If the price under Section 4(1)(a) is not ascertainable, the price in that event will be determined under Section 4(1)(b). The expenses incurred on account of several factors which arc added to the increase of the value till the date of sale which would be the date of delivery are liable to be included where the sale is effected at the factory gate, the expenses incurred by the assessee up to the date of delivery on account of storage charges, outward handling charges, interest on inventories, charges for other services after delivery to the buyer, namely, after-sales service and marketing and selling organisation expenses including advertisement expenses cannot be deducted. In Government of
India and Ors. v. Madras Rubber Factory Ltd. and Ors. reported in (1995) SCC 349, the .Supreme Court while explaining the observations made by the Supreme Court in paragraphs 49 and50 in Bombay. Tyre International (supra) observed that the relevant paragraph enumerated two propositions, viz., (i) where the sale is effected at the factory gate, the several expenses mentioned including charges for other services after delivery to the buyer, viz., after-sales service and marketing and selling organisation expenses cannot be deducted from the price, and (ii) where the sale is effected through the assessee’s sales organization at a place or places outside the factory gate, even there the aforesaid expenses cannot be deducted. The Supreme Court in Madras Rubber Factory (supra) accordingly made the following observations:
We agree that it is for each assessee to decide where to sell his goods. He can choose to sell his goods at the gate, i.e., at the place of removal or he may choose to sell his goods through his selling organisation, as in the case of Madras Rubber Factory. Where the goods are sold in the course of wholesale trade through depots outside the place of removal, the assessee does no doubt incur expenses not only for transporting the goods from the place of removal to the depots but also on maintenance and running of depots but these expenses, according to Bombay Tyres International are on the same par as after-sale service charges and advertisement charges and hence cannot be deducted. Where, however, the freight charges are equalised in the manner indicated in the preceding paragraph, such charges can be deducted from the normal price; it is obvious that such deduction will be common to the price at the gate and at the depots outside the gave–because of the equalisation, the price will equally be uniform at the gate as well as at the depots. This aspect will become clearer once we deal with the permissibility of the deductions claimed.
12. This aspect of the matter regarding valuation since decided by the Supreme Court and the principles of law are definitively delineated, this matter should not detain us any further. In this proceeding we are directly concerned with the powers conferred under Section 11A. The provision is introduced by the Legislature for recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded. When any duty of excise has not been levied or paid or hag been short-levied or short-paid or erroneously refunded, a Central Excise Officer may, within six months from the relevant date, serve notice on the person chargeable with the duty which has not been levied or paid or which has been short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice. The proviso to Section 11A empowered the authority concerned to initiate proceeding for recovery of duties not levied or not paid or short-levied, etc., by reason of fraud, collusion or wilful misstatement or suppression, of facts or contravention of any of the .provisions of the Act and the,. Rules made there under with the intent to evade payment of duty and in such cases the proceeding may be initiated beyond six months and before five years.
13. The Legislature by enacting the proviso extended the period of limitation from six months to five years for initiating a proceeding where duty has not been levied or short-levied due to fraud, collusion or wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act or the Rules made there under with the intent to evade payment of duty. The gist of exercising the proviso is fraud, collusion or wilful misstatement or suppression of facts with the intent to evade payment of duty. The limitation for recovery of duties under Section 11A is prescribed by the main provision and the said limitation can be extended to five years only in the exceptional cases specified in the proviso in the cases of fraud, collusion, etc. An order or determination will not be conclusive and binding if the same decision is obtained by fraud or dishonesty–fraud will be the vitiating factor. “No judgment of a Court, no order of a Minister can be allowed to stand if it has been obtained by fraud. Fraud unravels everything,” [quoted from R. v. Wolverhampton Crown Court exp. Crofts (1983) 1 W R 204]. For an act of fraud, collusion or wilful misstatement or suppression of facts or contravention of any provisions of the Act or of the Rules with the intent to evade payment of duty, the authority may initiate a proceeding within the period prescribed in the proviso. Whether the excise duty has not been levied or has been short-levied or short-paid, etc., by reason of fraud, collusion or wilful misstatement or suppression of facts or contravention of any provision of the Act or Rules with the intent to evade payment of duty is a question of fact and can only be decided upon investigation of those facts. The intent to evade payment of duty is the requirement of law for exercising of the said power. The word “evade” means to escape from by trickery or cleverness with a view to defeat the legal o’ ” Ration of payment of duty, deliberately to evade the payment of duty. The dominant motive of the assessee to evade the tax with a view to defeat the provision of law is the essence of the proviso to Section 11A of the Act. Mere failure to pay duty shall not attract the rigour of the proviso. Something positive other than mere inaction or failure on the part of the manufacturer or producer, conscious or deliberate withholding of information, when the manufacturer knew it otherwise, is the essential requisite of law for initiation of a proceeding under the proviso. The legal position in this regard is crystallised in Collector of Central Excise, Hyderabad v. Chemphar Drugs and Liniments, Hyderabad, reported in (1989) 2 SCC 127, Padmini Products v. Collector of Central Excise, Bangalore, reported in (1989) 4 SCC 275 and Tamil Nadu Housing Board v. Collector of Central Excise, Madras and Anr. reported in 1995 Supp (1) SCC 50:
14. The learned Single Judge though addressed itself to the applicability of the provisions of Section 11A did not come to any finding as to whether the notice ex facie disclosed grounds for exercise of power under Section 11A read with Rule 233-A. According to the learned Single Judge since the price lists were submitted and approved under the Rules, the same cannot be reopened and revised. According to the learned Single Judge, once approval was given and finalised, the same cannot be reopened without the same being set aside on appeal. The learned Single Judge, therefore, held that once the price list is approved and subjected to adjudication by judicial authority, the same cannot be revised or modified without following the due process of law. The learned Single Judge, therefore, accepted the position that even after a price list is approved and was subjected to adjudication, the same can be reopened by due process of law. The legislature as a matter of fact has clothed the authority with the powers under Section 11A and the procedure was also prescribed by the Rules. The reasoning of the learned Single Judge that the due process of law was not followed by the authority in issuing show-cause notice is, however, difficult to comprehend. The learned Single Judge in his judgment did not also reach any conclusion on the analysis of the facts that the writ petitioners-respondents were not responsible for any of those situations as visualised in Section 11A, even prima facie. The learned Single Judge while arriving at the aforesaid conclusion also took note of the fact that in order to entitle the Department to issue the show-cause notice in the absence of any amendment in law, the Department can issue notice only when it finds that the person concerned is guilty of suppression of material facts or misstatement or misrepresentation. In fact the very notice in question was based on the aforesaid allegations.
15. The other reason for setting aside the impugned notices is that when the factory gate sale was admitted, the Department was duty-bound to assess the tax on the basis of factory gate sale as provided under Section 4(1)(a) of the Act. As alluded earlier, the value of the article can be determined from (he price for sale in course of wholesale trade of an article for delivery at the time and place of removal, i.e., the factory gate. If the price under Section 4(1)(a) is not ascertainable, the price in that event will be determined under Section 4(1)(b). In the event of fraud or misstatement, it is open for the Revenue to reopen the matter in accordance with law.
16. Mr. Lahoty, the learned Counsel appearing for the respondents brought our attention to the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, reported in AIR 1961 SC 372 in support of his contention as to whether the condition precedent for exercising jurisdiction under Section 11A can be investigated by the Supreme Court in an application under article 226 of the Constitution of India. We have given our anxious consideration on this issue. The impugned notices prima facie disclose grounds for exercising of power under Section 11A. The allegations contained therein require adjudication on investigation of the disputed facts. The materials on record cannot lead to an inference that the allegations referred to in the show-cause notices are wholly non-existent and that there is no foundation or basis of the allegations of fraud, collusion, misstatement or suppression of facts. In the writ petitions there was no challenge as to the vires of the statutory provisions governing the matter nor there was any question regarding violation of fundamental rights involved in the said proceedings. On examination of the materials on record we could not convince ourselves on the question that the notices are ex facie nullity and without jurisdiction. The basic facts on the basis of which the Additional Collector of Customs and Central Excise, Shillong assumed jurisdiction on the subject-matter to initiate and continue the proceeding, in our considered view, requires investigation and adjudication. The initiation of proceeding cannot, under the circumstances, be said to be unauthorised and without jurisdiction.
17. In M/s. Chemphar Drugs, M/s. Padmini Products and Tamil Nadu Housing Board (supra), relied on [by] the counsel for the respondents, observed that whether in a particular set of facts and circumstances there was any fraud, collusion or wilful misstatement or contravention of any provisions of the Act is a question of fact depending upon the facts and circumstances of a particular case. Rainbow Industries (P) Ltd. v. Collector of Central Excise, Vadoddra,
reported in (1994) 6 SCC 563 cited by Mr. Lahoty is not applicable in the facts and circumstances of the case. In the aforesaid decision, which was an appeal before the Supreme Court against the judgment and. order of the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi, was: relating to the classification and the price list that was accepted by the Department and acted upon which was subsequently found to be erroneous. On facts the Supreme Court found that there was no intention to evade payment of duty.
18. In Union of India v. Metal Box Co. of India Ltd., reported in (1996) 11 (sic) SCC 122 the Supreme Court made the following scathing observations in: the matter of entertaining of the writ petition-in such matter:
We find it difficult to sustain the judgment of the learned Single Judge and of the Division Bench, for more than, one reason. But first we ‘must mention that the filing of, and entertaining, tie writ petition straightaway against a notice of demand issued by a Central Excise Officer (Superintendent of Central Excise) in a matter involving valuation was inadvisable, ft has been repeatedly deprecated by this Court the latest decision being Executive Engineer, Bihar State Housing Board v. Ramesh Kumar Singh, which decision refers to and affirms the ratio of the earlier decisions of this Court.
19. Before concluding let us dwell upon the genteel subject of “tax avoidance,” as was referred to by the learned Single Judge. At some point of time tax dodging without contravening the law was taken kindly as will be apparent from the following opinion of Lord Sumner in I.R. v. Fisher’s Executors, reported in 1929 AC 195–“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 emotions that he can find in his favour in taxing Acts. In so doing he neither comes under any liability nor incurs blame.” The opinion of Lord Sumner was reverbated in the observation of Lord Tomlin in I.R.C. v. Duke of Westminster reported in 1935 All ER 239–“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. 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 an increased tax.” However a perceptible shift of the paradigm with change of front became perceivable since the early forties of this century. Lord Green, M.R. in Lord Howard De Waldan v. I.R.C. reported in (1942) 1 KB 389 held,–“For years a battle of manoeuvre has been waged between the Legislature and those who are minded to throw the burden of taxation off their 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 end to the struggle, by imposing the severest penalties. It scarcely lies in the mouth of the tax payer who plays with the fire to complain of burnt fingers”. The view expressed above is echoed in Latilla v. I.R.C. (1943) 1 All ER 265, Griffiths v. J.P. Hamzan Ltd. (1963) AC 1, Morgan v. I.R.C. (1963) 1 All ER 481, Greenberg v. I.R.C. (1971) 3 All ER 136. The most significant change in the approach of the House of Lords towards the tax avoidance is discernible in W.T. Ramsay v. I.R.C. reported in (1981) 1 All ER 863. Lord Wilberforce cogently observed:–
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 tax payers, 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 parties themselves may have negated would be denial rather than an affirmation of the true judicial process.
Ramsay (supra) is reiterated with force in Furniss v. Dawson reported in (1984) 1 All ER 530 Lord Roskill forcefully observed:–
The error, if I may venture to use that word, into which the courts below have fallen is that they have looked back to 1936 and not forward from 1982. They do not appear to have appreciated the true significance of the passages in the speeches in Ramsay’s case of Lord Wilberforce and Lord Fraser, and, even more important, of the warnings in the Bunnah Oil case given by Lord Diplock arid 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 context by Lord Atkin, who himself dissented in the Duke of Westminster’s case, in United Australia Ltd. v. Barclays Bank Ltd. 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 there undeterred. 1936, a bare half century ago, cannot be described as part of the Middle Ages but the ghost of the Duke of Westminster 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 administration of this branch of the law for top long. I confess that I had hoped that that ghost might have found quietude with the decisions in Ramsay and in Burnah. Unhappily it has not. Perhaps the decision of this House in these appeals will now suffice as exorcism.’
20. The observations made in Westminster and Fisher’s Executors (supra) were echoed in the earlier decisions of the Supreme Court in C.I.T. v. A. Raman & Co. reported in 67 ITR 11 and C.I.T. v. B.M. Kharwar reported in 72 ITR 603. In B.M. Kliarwar, the Supreme Court observed as follows:
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’.
21. The Indian Supreme Court, however, made positive departure from the aforesaid principle which will reveal from the views expressed by the Supreme Court in McDowell and Co. Ltd. v. Commercial Tax Officer, reported in (1985) 3 SCC 230. The Court observed, inter alia,–(ECC page 277) “Tax planning may be legitimate provided (if) 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 (sic) by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
22. In the facts situation and for the foregoing reasons we are, therefore, of the view that the learned Single Judge fell into error in quashing the impugned notices as being without jurisdiction and accordingly the appeals are allowed. The writ petitions accordingly stand dismissed. There shall, however, be no order as to costs.
