Holding

Excise duty, even when paid by the purchaser, constitutes part of the consideration for the sale and must be included in the turnover, making the appellant liable to sales tax on that amount.

Summary

McDowell & Company Ltd., a licensed liquor manufacturer in Hyderabad, paid sales tax on its turnover excluding the excise duty that buyers paid directly to the excise authorities. The Commercial Tax Officer issued a notice to include that excise duty in the company's turnover for sales tax purposes, relying on amendments to the Andhra Pradesh Distillery Rules. The High Court upheld the notice, holding that the excise duty formed part of turnover, and the company appealed. The Supreme Court examined the definition of "turnover" under the Andhra Pradesh General Sales Tax Act, the nature of excise duty under the Excise Act, and the effect of the rule amendments, concluding that excise duty, though paid by buyers, is part of the consideration and must be included in turnover. The Court also rejected the distinction between tax avoidance and colourable tax planning, stating that such devices cannot be part of legitimate tax planning. Consequently, the appeal was dismissed and the company was held liable for sales tax on the excise duty amount.

Issues considered

Whether excise duty paid by buyers of liquor is part of the appellant's turnover for purposes of the Andhra Pradesh General Sales Tax Act, 1957.
Whether the amendment to Andhra Pradesh Distillery Rules (Rule 76 and 79) alters the liability of the manufacturer for excise duty.
Whether the earlier Supreme Court decision in McDowell & Co. Ltd. (1977) 1 SCR 914 remains good law in the present context.
Whether the distinction between tax avoidance and tax evasion precludes the use of colourable devices in tax planning.
Whether the High Court's decision can be revisited in light of the statutory definitions and legislative intent.

Legislation cited

Andhra Pradesh Distillery Ruless. Rule 76(a), s. Rule 79(1)
Andhra Pradesh Excise Act, 1968s. 2(10)
Andhra Pradesh General Sales Tax Act, 1957s. 2(s)

Subjects

turnoverexcise dutysales taxtax avoidancetax evasioncolourable devicetax planningstatutory interpretationSupreme Court of IndiaAndhra Pradesh

Judgment

791

A

Mc DOWELL & COMPANY LIMITED

• v.
's
THE COMMERCIAL TAX OFFICER

April 17, 1985

[Y.V. CHANDRACHUD, C.J., D.A. DESAI, 0. CttiNNAPPA REDDY c
E..S. VENKATARAMIAH AND RANGANATH MISRA, JJ.J

Concept! of Tax Evasio11 and Tax Avoidance, difference in-Tax Planning
-Colourable device within the framework of law cannot be allowed to be a part of
Tax Planning.
D
New plea-Constitution of India, 1950-Appea/ by Special Leave under
Article 136-Supreme Court cannot entertain a plea not taken in the High
Court.

Andhro Pradesh General Sales Tax Act, 1947-"Turn over", scope of-
Test for determining whether an excise duty is a part ofuturn over," under the E
Sales Tax Act-The Incidence of excise duty being directly relatable to manufac·
ture, validity of the decision in McDowell's case reported in (1977} 1 SCR 914
reconsidered:

"Excise duty" as defined in section 2(10) or the A.P. Excise Act, 1968
is l~viable on the manufacture of.liquor and the manufacturer cannot remove the F
• same from the distillery unless the duty imposed under the Excise Act has been
paid. Buyers of Indian liquor from the appellant's distillery obtain distillery
passes for release of liquor after making payment of exci~e duty 8.nd present
the" same at the distillery thereupon the bilJ of sale or invoice is prepared by
, the distillery showing the price of liquor but excluding excise duty. The appeJ.
lant's books or account also did not contain any reference to excise duty paid
by the purchaser. The appellan~. tbereforo, paid sales tax under the Andhra G
Pradesh General Sales Tax Act, 1957 on tho basis of turnover which excluded
.excise duty. This position w~s not accepted by the Sales Tax Authorities ~and
the matter was contested right upto the Supreme Court. The Supreme Coor~
in Mc Dowell & Company Ltd. etc, v. Commercial Tax Officer Vllth Circle,
Hyderabad, etc. reported in [1?77] 1 SCR 914 held that the Sales Tax Autho·
rities were not competent to include fn the "turnover'' of the appellant, the
excise dutr which was not char$ed by it b.ut was paid directly to the Excise ff
792 SUPRBME COURT REPORTS · (1985] 3 S.C.R.
Authorities by the buyers of the liquor, inasmuch as the excise duty did not
A
go into the common till of the appellant and did not become a part of the cir·
culating capital.

After the judgment of the Supreme Court Rules 76 and 79(1) of the A.P.
Distillery Rules were suitably amended with effect from August 4, 1981. Amen-
ded Rule 76(a) provides that "No spirit of liquor" manufactured or stored shall
8 be removed unless the excise duty specified in rule 6 has been paid by a holder
of 0 ..2 licence before such removal and the amended ruli' 79(1) provides that
on payment of the excise duty by the bolder of D·2 licence a distillery pass for
the removal of spirit fit for human compensation may be granted in favour of
any of the named persons therein.

0
The appellant, being a D-2 licerice holder was served with a·notice, on
the basis of the amended provisions, by the respondent proposing to include a
sum of Rs. 4,49,09,532.40 representing the excis~ duty paid. directly by buyers of
appellants' liquor in the appellants, t~rnover for a part of the year 1982·83,
Thereupon, the appellant again moved the High Court Tor quashing the said
notice. The High Court considered the effect of the amended Rules and held
that the prlmary liability to pay excise duty was indisputably of the holder of
D the D-2 licence. The High Court dismissed the writ p.:tition on the fin(lings
(a) that the turnover related to liquor; and (b) that the excise duty which was
payable by the appellant but had by amicable arrangement been paid by the
buyer was actually a part of the turnover of the appellant and was, therefore,
liable to be soJncluded for determining liability for sales tax. When leave was
granted by a Division Bench of the Supreme Court to appeal against the judg-
ment of the High Court, the correctness of the decision in appellants' case
E reported in [1977) I SCR 914, was doubted and the matter was referred to
a larger Bench.

Dismissing the appeal, the Court,

HELD: (Per Chinnappa Reddy, J. (concurring)
F
I.I Much legal sophistry and Judicial exposition both in England and
India have gone into the attempt to.differentiate the concepts of tax evasion
and tax avoidance and to discover the invisible line ~apposed to exist :wliicb
distinguishes one from the other. Tax avoidance, it seems, is legal; tax evasion
is illegal. Though initially the law was, and law still is, "there is no equity
about a tax. There is no presumption as to a tax. Nothing is to be re3.d in,
G nothing is to be implied", during; the period between the two world wars the
theory came to be propounded and developed that it was perfectly open for
persons to evade (avoid) income tax if they could do so legally. In the wake of.
World War II huge profiteering and racketeering becarae the order of the day.
something which persists till today but on a much larger scale. Therefore, the
attitude of the entire English Courts towards avoidance of tax perceptibly chan-
H ged and hardened. The march of the law against tax avoidance schemes des..
MC. DOWELL & CO. V. COMMERCIAL TAX OFFICER 793
cribed as magic performance by lawyer turned magician continued and then A
came a significant departure from the West-minister and the Fisher Executors
principle in 1982 and finally "the ghost of West-ministe~" has been exercised in
England. Thus, in the very country of its birth, the principle of West-minister
has been given a decent burial and in that very country where the phrase "tax
avoidance" originated the judicial attitude towar'ds tax avoidance has changed
and the smile, cynical or even atfectionate though it migh.t have been at one B
time, has now frozen into a deep frown. The courts are concerning themselves
not merely with the g~nuineness of a transaction, but with the intended effect of
it for fiscal purposes. No man now can get away with a tax avoidance project
with the mere statement that there is nothing illegal about it.
[797 G-H, 798 F, 80I C, 807 A-DJ

Inland Revenue Cornmissioners v. Fishers Executors, [1_926] AC 395; c
Inland Revenue Commissioners v. Duke of West-minister, (1936] AC l; Lord
Howard De Waidan v. Inland Revenue Commissioners, [194211 KB 389; Latilla
v. Inland Revenue Commissioners, (1943] AC 377: Griffiths v. J.P. Harrizan Ltd.
[1963] AC 1; Morgan v. Inland Revenue Commissioners, (1963] Chancery 438 ;
Pt1b/ic TrusteeJ v. Inland Revenue Commissioners, [1965] Chancery 286; Camp-
bel/ v. ln!and Revenue Commissioners, [1967] Chancery 651 ; Greenberg v. Inland
Revenue Commissioners, [1971] 3 All E.R. 136 ; W.T. Ramsay v. Inland Revenue
Commissioners, [1982] AC 300: Inland Revenue Commissioners v. Burmah Oil D
Company Ltd., 1982 STC 30 ; Furniss v; Dawson, [1984] I All E.R. 530 ; Com-
missioner oi Income tax, Gujarat v. A. Raman & Co., [1968] 1 SCR 10 ; Com-
missioner ~I Income tax. Gujarat v. Kharwar, 12 ITR 603 referred to.

2. The evil consequence of tax avoidance are manifold : (i) there iS sub-
stantial loss of much needed public revenue particularly in a welfare State Hke
ours ; (ii) there is the serious disturhfl,.nce caused to the economy of the E
country by the piling up of mountain.s of blackmoney directly causing inflation ;
(iii) there is "the large hidden J6ss" to the community by some of the best brains
in the country being involved in the perpetual war waged between the tax-
avoider and his eicpert team of advisers, lawyers and accountants on the side
and the tax-gathered and his perhaps not so skillful, advisers on the other side;
(iv) there is the ''sense of injustice and inequalitY which tax avoidance arouses
in the breasts of those who are unwilling or unable to profit by it"; and (v) last F
but not least is the ethics (to be precise, the lack of it) of trans Ierring the burden
of tax liability to the shoulders of the guideless, good citizens from those of the
"artful doggers". [808 H, 8C9 A-CJ

3. The proper way to construe a taxing statute, while considering a
device to avoid tax, is not to ask whether the provisions should be construed
literally or liberally, nor whether the transaction is not unreal and not prohibi- G
ted by the statute, but whether the trans·action is a device to avoid tax, and
whether the transaction is such that the' judicial process may accord its approval
to it. [809 E-F]

Wood Polymer Ltd. v. Bengal Hotels Limited, 40 Company Cases 597
fl:ferred to. H
794 . SUPREME COURT REPORTS (1985] 3 s.c.R.

A 4. It is neither fair nor desirable to expect the legislature to intervene. and
take care of every device and scheme to avoid taxation. It is upto the Court to
take stock to determine tbe nature of the new and sophi!ticated legal devices
to avoid tax and consider whether the situation created by the devices could be
related to the existing legislation with the aid of 'emerging' techniques of intere
pretation, to expose the devices for what they really are and Jo refuse to give r
judicial benediction. (809 G-H 810 Al
B
W.T. Ram•ay v. Inland Revenue Commissioners, [1982] AC 300 ; Inland
Revenue Commi1sioners v. Burmah Oil Company Ltd, 1982 STC 30 ; Furniss v.
Dawson, [1984] 1 All B.R. 530 quoted with approval,

HELD.: (Per Ranganath Misra, J.)
c
1. Tax planning may be legitimate provided It is within the framework of
Jaw, Colourable devices cannot be part of tax planning and it is wrong to en·
courage or entertain the belief that it is honourable to avoid the payment of tax
by resorting to dubious methods. It is the obligation of every citizen to pay
the taxes honestly without resortin.a to subterfuges. (823 G-H, 824 A]
D
Commissioner of Income tax v. A. Raman & Co. (1968) 67 !TR II SC;
Commissioner of Income-tax, Gujarat II v. B.M. Kharwar, (1969) 72 !TR 603 SC;
Bank ofChettinad Ltd, v. Commi,.Joner of Income-tax, (1940) 8 !TR 522 {PC);
Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax and Excess fro./its
Tax, Bombay, (1958) 34 !TR 388 (SC) Commissioner of Income Tax v. Silkar/a/
Balabhal (1972) 86 !TR 2 (SC) referred to.
E
Lat/Ila v. I.R. 25 T.C. 107 quOted with approval.

2.1 The incidence of excise duty is directly relatable to manufacture but
its collection can be deferred to a Jater stage as a measure of convenience or
expediency. [815 A-BJ

F The Province of Madra• v. M/J. Boddu Paidanna & Sons [1942] ECR 90 ;
..
R.C. Jal/ v. Union of India, [1962] Suppl. 3 SCR 4J;6 : Re. Sea Cnstoins Act,
[1964) 3 SCR 787 ; M/s. Guruswamy &: Co. etc. v •. State of Mysore & Ors.,
(1967] 1 SCR 548: Ju//undur Rubber Goods Manufacturers• Association v. Union
o/lndia & Anr. [1970] 2 SCR 68 ; A.B. Abdul Kadir & Anr. v. State of'Kera/a,
[1976] 3 SCR 219 referred to.
G
2.2 On an examination of the prov1s1ons of the A .P. Excise Act, the
Rules were framed thereunder and the pronouncement·; of the Supreme. Court,
it is clear, that the conclusion of the Court in Mc Dowells & Company Ltd. etc.
v. Commmia/ Tax Officer, Vllth Circle, Hyderabad <'!C., [1977] 1 SCll. 914 at
page 921 of [1973] 1 SCR, that intending purchasers of the Indian liquors who
seek to obtain distillery passes are also legally responsible for payment of the
H excise duty is too broadly stated. The "duty was primarily a burden which the
Mc. DOWELL & CO. V. COMMERCIAL TAX OFFICER 795
manufacturer.had to bear and even if the purchasers paid the same under the
Distillery Rules, the provisions were merely enabling and did. not give rise to any
A
legal responsibility or obli~ation for meeting the burden. [815 B-Dl

The change in Rule 76 of the AP Distillery Rules has clearly affirmed the
position that liability for payment of excise duty is of the manufacturer and the
provisions of rules 80 to 84 do not militate against it. These iules do not detract
from the position that payment of excise duty is the primary and exclusive obli- B
gation of the manufacturer and if payment be made under a contraCt or arrange-
ment by any other person it would amouat to meeting of the obligation of the
manufacturer and nothing more. [815 D~F]

2.3 The definition of"turnover". in section 2(s) of the A.P. General Sales
Tax Act, which is to the effect. namely 'the total amount set _out in the bill of
sale (or if there is no bill of sale, the total amount charged) as the consideration
c
for the sale or purchase of goods (whether such consideration be cash, deferred
payment or any 'other thing or value) including any sums charged by the dealer
for anything dolle in respect of goods sold at the time of or before the delivery
of the goods and any other sums charged by the dealer. whatever be the des·
ctiptioo. name or object thereof" clearly indicates that the total amount charged
as the consideration for the sale is to be taken into account for determining the D
turnover. Where a bill of sale is issued (and obviously the bill has to state the
total amount charged as consideration), the total amount set out therein is to be
taken into account. In every transaction of sale, there is bound to be a seller at
one end and a buyer at the other and transfer of title in the goods takes Place
for a considt'ration. (815 H,816 A~C]

E
2.4 Excise duty though paid by the purchaser to meet the liability of the
appellant, is a part of the consideration for th~ sale and is in'cludible in the .
turnover of the appellant. The purchaser has paid the tax becau)e the Jaw asks
him to pay it on behalf of the manufacturer. Here, admittedly, the bills issued
by the appellant did not include the excise duty; Pay1nent of ~xcise dUty is a
legal liability of the manufacture, its payment is a condition precedent to the
removal of the liquor from the distillery and payment by the purchaser is on
F
account of the manufacturer. According to normal commercial practice:,. excise
duty should have been reflected in the bill either as merged in price or being
shown separately. As a fact, in the hands of the buyer the cost of liquor is what
is charged by the appellant under its hill together with excise duty which the
buyer has directly paid on seller's account. The consideration for· the sale iS
thus the total amount not what is reflected in the bill. [818 C.F]
G
2.5 True, the excise duty component of the price would not be an addi-
tion to the coffers of the dealer, as it would go to reimburse him in respect of the
excise duty already paid by him on the manufacture of the goods. But even sO,
it would be part of the sale price·because it forms a component of the considera-
tion for the sale of the goods that the amount representing excise duty would
be·payable by the purchaser, There is no other manner of liability, statutory or
H
si:n>REME coullt REPORTS [t98SJ ~ s.c.ft.
otherwise, under which the purchaser would be liable to pay the amount of
A
excise duty to the dealer. And on this reasoning, it would make no difference
• whether the amount of excise duty is included in the price charged by the dealer
or is shown as a separate item in the bill, The po5ition is ont different when
under a prior agreement, the legal liability of the manufacturer dealer for pay-
m1>nt of excise duty is satisfied by the purchaser by direct payment to the excise
authorities or to the State exchequer. {816 G-H, 817 A-DJ
B
2.6 The conclusion reached in the appellants' case in [19'17] 1 SCR 914
on the second aspect of the matter namely, when the excise duty does not go
into the common till of the assessee and it does not become a part of the circu-
lating capital, it does not constitute turnover, is not the decisive test for deter-
mining whether such duty wollld constitute "turnover". The relevant conSid~ra
tion is not whether the law permits the incidence of the duty to be passed oq to
c the purchaser but whether there is a prohibition against passing of it. If there . ?(
is no bar, the incidence would be passed on to the purchaser in accordance "'ith '
normal commercial practice. (819 A-C ' 821 B·C]

The Province of Madras v. M/s. Boddu Paidanna &: Sons, [1942] FCR 90;
RC Jail v. Union of India, (1962] Suppl. 3 SCR 436 ; Re. Sea Customs Act, [1964]
D 3 SCR 787 ; M/s, Guruswamy & Co. etc. v. State of Mysore & Ors., (1967] 1
SCR 548 ; Jullundur Rubber Goods Manufacturers' Association v. [Jn/on of India
& Anr. [1970] 2 SCR 68 ; A.B. Abbul Kadir & Ors. v. Stare of Kl!ra/a, [1976] 3
SCR 219; referred to.

Hindustan Sugar Mills v. Rafasthan State, (1979] l SCR 276 applied.
E
Paprika Ltd. & Anr. v, Boar<l of Trade, (1944] All. E.R, 372; Love v,

Norman Wright (Builders) Ltd. (1944] I All E.R. 618 quoted with 'approval ..

M/s. George Oakes (P) Ltd. v. The State of Madras, [1962] 2 SCR 570,
F followed.

Anand Swarup Mahesh Kumar v. The Com1nissioner of Sales Tax, {1981] l
SCR 707 discussed and distinguished.

3. A stand which has not been taken in the writ petition before the High
G Court cannot be allowed to be taken in the Supreme Court. Herc the conten-
tion based on item 26 of the amended First Schedule to the Sales Tax Act that
the appellant had already paid tax on the basis of 50 p. in the rupee oq the
footing that the consideration for its liquor did not include duty of excise pay-
able under the Exche Act and ..... the appellant cannot, therefore, be made liable
for sales tax on a different footing cannot be sustained. Such a stand had not
been taken in the writ petition before the HighC_ ·ouri and there has been no
H
MC. DOWELL & co. v. COMMERCIAL TAX OFFICER (c. Reddy i.) 797
factual examination of the position as to whether the classification indicated is A
not intended to cover a totally different situation. Further for resolving the
dispute as to whether excise duty is a part of the turnover, reference to the
Schedule is indeed wholly irrelevant. [820 A-DJ -

George Oakes (P) Ltd. & Ors. v. The State of Madras, i3 STC 98, distin·
guished. B

CIVIL APPELLATE JURISDiCTION : Civil Appeal No. 570 of
1983.

Fr.om the Judgment and Order dated 6.12.1982 of the High
Court of Andhra Pradesh in Writ Petition No. 7985/82. c
Soli J. Sorabjee, Barish N. Salve, Ravinder Narain and Mrs.
A.K. Verma for the Appellant.

S.T. Desai, B. Parthasarthi and T. V.S.N. Chari for the Res-
D
pondents.

The following Judgments were delivered

CHINNAPPA REDDY, J. While I entirely agree with my brother
Ral'ganath Misra, J. in the judgment p~oposed to be delivered by E
him, I wish to add a few paragraphs, particularly to supplement
what he has said on the "fashionable" topic of tax avoidance. My
excuse for infticting this extra opinion is that the ingenious attempts
to rationalise and legitimise tax avoidance have always fascinated
and amused me and made, me wonder how ready the minds are to
adapt themselves and discover excuses to dip into the treasury; F
..
The shortest definition of tax avoidance that I have come
across is "the art of dodging tax without breaking the law." Much
legal sophistry and judicial exposition have gone into the attempt
to differentiate the concepts of tax evasion and . tax avoidance and
to disc0ver the invisible line supposed to exist which distinguishes G
one from the other. Tax avoidance, it seems, is legal : tax evasion
is illegal.

Though initially the law was, and I suppose the law still is,
"there is no equity about a tax. There is no presumption as to a H
tax. Nothing is to be read in, nothing is to be. implied'', during
798 SUPREME couiir REPoii1s [ 1985] 3s.c.it
A the period between the two world wars, the theory came to he oro-
pounded and developed that it was perfectly open for persons to
evade (avoid) income tax if they could do so legally. For some time
it looked as if tax avoidance was even viewed with affection. Lord
Sumner in fnland Revenue Commissioners v. Fishers Executors(')
said:
B
"My Lords the highest authorities have always recog-
nised 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 be may legitimately claim
c the advantage of any expressed term or of any emotions
that be can find in his favour in taxing Acts. In so doing
he neither comes under liability nor incurs blame."

Lord Tomlin echoing what Lord Sumner bad said observed fo
Inland Revenue Commissioners v. Duke of West Minister(~) follows
'

D typefiing the prevalent attitude towards tax avoidance at that
time:

"Every man is entitled if he can to order bis affairs
so that the tax attaching under the appropriate Acts is less
than if otherwise would be. If he suceeeds in ordering them
E so as to secure this result, then, however, unappreciative
the Commi11sioners of Inland Revenue or his fellow tax
payers may be of bis ingenuity. he cannot be compelled to
pay on increased tax."

F Then came World War II and in its wake huge profite~ring
and racketeering, something which persists till today, but on a much -··
larger scale. The attitude of the Courts towar<ls avoidance of tax
perceptibly changed and hardened and in Lord Howard De W:aldan
v-:Tn/and Revenue Commissioners<'> Greene, M.R., dealing witll the
construction of an anti-avoidance section said :
G
"For years a battle of manoeuvre has been waged bet-
ween the legislature and those who are minded to throw the

(I) [1926] A.C. 39S.
(2) (1936] A.C. 1.
H (3) [1942] I,KB 389.
!.ic. boWELL &co. v. coMMERclAL 'tAX 0FF1CER (C. Reddy, ).) 799
burden of taxation off their own shoulders on to those of A
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 nol shock us in the least to
find that the legislature has determined to put an and to
the struggle by imposing the severest penalities. It scarcely
lies in the mouth of the tax payer who plays with fire to
complain of burnt fingers.'.'

Expressing the same sentiment and dissertating on the moral
aspects of tax avoidance Lord Siinon in 'Latilla v~ Inland Revenue
Corn1nissioners(1) said,
c

"My Lords, of recent years much ingenuity has been
expended in certain quarters in attempting to devise met-
hods of· disposition of income by which those who were
prepared to adopf them might enjoy the benefits of resi- D
dents in this country while receiving the equivalent of such ·
income without sharing in the appropriate burden of British
·taxation. Judicial dicta may be cited which point out
that, however, elaborate and artificial such methods may
be, those who adopt them are 'entitled' to do so. There
is, of cours.e, no doubt that. they are within their legal E
rights but that is no reason why their efforts, or those of
the professional gentlemen .who assist them in the matter,
should be regarded as a commendable exercise of ingenuity
or as a discharge of the duties of good citizenship. On the
contrary, one result of such methods, if they succeed, is of
.. course to increase pro tanto the load of tax oti the shoul- F
'ders of the great body of good citizens who do not desire
or do not know how, to adopt these manoeuvres."

Jn several cases, Griffiths v. JP Harrizan Ltd.('), Morgan v. Inland
Revenue Commissioners'(3 ) Public Trustee v. Inland Revenue Commls- G
sloners('), Lord Denning repeatedly ~eferred to tax avoidance schemes

(1) [1943] A.C. 377.
(2) [1963] A.C. 1.
(3) [1963] Chancery 438.
(4) U96Sl Chancery 286- H
•
aoo b9n5J 3s.c.it.
-
SUPREME COURT RFPOllTS

and described them as magic performance by fawyer-turned-magi-
A
cians. Lord Harman, almost in the same words as Lord Denning
described a tax avoidance scheme as one ''which smells a little of
the I.mp" and said ''it is a splendid scheme ...... it is almost too good
to be true. In law quite too good to be true. It won't do." (Camp-
be/l v. Inland Revenue Commissioners(l), Stamp J. In re Westem's
B Settlements observed-

" ... There must be some limit to the devices which this
Court ought to countenance in order to defeat the fiscal
intentions of the legislature. In my judgment these propo-
sals overstep that limit ... ! am not pursuaded with this appli-
c cation represents more than a cheap exercise in tax avoidance
which I ought not to sanction as distinct from a legitimate
avoidance of liability to taxation."

In Greenberg v. Inland Revenue Commissiuners( 2), Lord Reid
dealing with a scheme for tax avoidance by forward dividend sttip-
D
ping observed,

" .... We seem to have travelled a long way from the
general and salutary rule that the subject is not be taxed
except by plain words. But I \1'USt recognise that plain
E words are seldom adequate to anticipate and forestall the
multiplicity of ingenious schemes which are constantly
being devised to evade taxation. Parliament is very pro-.
perly determined to prevent this kind of tax evasion and,
if the courts find it impossible to give very wide meanings
to general phrases, the only alternative may be for Parlia-
ment to do as some other countries have done and intro- ..
duce legislation of a more sweeping character which will
put the ordinary well-intentioned person at much greater
risk than is created by a wide interpretation of such provi·
sions as those which we are now considering."
.G.,-,
........................

(1) [!9671 Chancery, 651.
H (2) 1971(3) All ER. 135.
'
iJc. DOWELL &CO. v. COMr-iERClA.t TA.Ji OFFIC~R. (C. Reddy,"J.) SOi
"I am inclined to think that the real explanation of A
these verbal difficulties may be that, in legislation of such
extreme complexity as we have here, it is not humanly pos-
sible for a draftsman to preserve that consistency in the nse
of language which we generally look for. Indeed, I some·
times suspect that our normal meticulous methods of statutory
construction tend to lead u' astray by concentrating too much II
on verbal niceties and paying too little attention to the provi-
sions read as a whole.'"

The march of the law against tax avoidance schemes continned
and cam; a significant departure from the West-minister and the
f'isha Executors principle. In W.l. Ramsay v. Inland Revenue
c
Commissioners(1), the House of Lords had to consider a scheme of
tax avoidance which consisted of a series or a combination of tran-
sactions each of which was individually genuine but the result of all
of which was· an avoidance of tax. Lord Wilberforce, with great
force, observed, D

"Given that a document or transaction is genuine, the
court cannot go behind it to some supposed underlying
substance. This is the well-known principle of Inland
Revenue Commissioners v. Duke of .Westminister. This is a
cardinal principle but it must not be overstated or overex- E
tended. While obliging the court to accept documents or
transactions, found to be genuine, as such, it does not com-
pel the court to look at a document or a transaction in blin-
kers, isolated from any context to which it properly belongs.
If it can be seen that a document or transaction was inten-
.. ded to have effect as part of a nexus or series of transac-
tions, or as an ingredient of a wider transaction intended
F

as a whole, there is nothing i~ the doctrine to prevent it
being so regarded : to do so is not to prefer form to sub-
stance, or substance to form. ft is the task of the court to
ascertain the legal nature of any transaction to which it is G
sought to attach a tax or a tax consequence and if that
emerges from a series or combination of transactions, in-
tended to operate as such, it is that series or combination
which may be regarded. For this there is authority in the

H
(I) (1982] AB 300.
802 SUPREME COURT RBPORts f19SSJ 3 S.C.R.

A law relating to income tax and capital gains tax : See Chinn
v. Hochstrasser [1981] A.C. 533 and Inland Revenue Com-
missioners v. Plummer (1980] A.C. 896."

"For the commissioners considering a particular case
B it is wrong and an unnecessary self limitation, to regard
themselves as precluded by their own finding that docu-
ments or transactions are not "shams", from considering
what, as evidenced by the documents themselves or by the
manifested intentions of the parties, the relevant transac-
c tion is. They are not, under the Wes/minister doctrine or any
other authority, bound to consider individually each separate
step in a composite transaction intended to be carried ?
through as a whole." /

Later again he observed,
D

"··· ... For the taxpayers it was said that to accept the
revenue's wide contention involved a rejection of accepted·
and established canons and that, if so general an attack
upon schemes for tax avoidance as the revenue suggest is·
E to be validated, that is a matter for Parliament. The func-
·tion of the courts is to apply strictly and correctly the legis-.
lation which Parliament has enacted : if the taxpayer
' escapes the charge, it is for Parliament, if it disapproves of
the result, to close the gap. General principles against'
F tax avoidance are, it was claimed, for Pnliament to lay
down. We were referred, at our request, in this connec-·
tion to the various enactments by which Parliament bas '-
from time to time tried to 9ounter ta~ avoidance by some
general prescription. The most extensive of these is Income
and Corporation Taxes Act 1970, sections 460 et seq. We
were referred also t<l well known sections in Australia and
G
New Zealand (Australia, Income Tax Assessment Act 193~
-51, section 260; New Zealand, Income Tax. Act 1976, sec,
tion 99, replacing earlier legislation). Further it was
pointed out that the capital gains tax legislation (starting
with the Finance Act 1965) does not contain any provision
corresponding to section 460. The intention should be
H
MC~ DOWBLL & CO. v. COMMERCIAL TAX OFFICER (C. Reddy, J.) 803

deduced jherefore, it was said, to leave capital gains tax A
· to be dealt with by "hole and plug" methods : that such
schemes as the present could be so dealt with has been con-
firmed by later legislation as to "value shifting": Capital
Gains Tax Act 1979, section 25 et seq. These arguments
merit serious consideration. In substance they appealed
to Barwick C.J. in the recent case of Federal Commisslo·
nerofTaxation v. Westraders Pty. Ltd. [1980] 30 A.L.R.
B
353, 354-355."

"I have a full respect for the principles which have
been stated but I do not consider that they should exclude
the approach for which the Crown contends. That does
not introduce a new principle: it would be to apply to new c
and sophisticated legal devices ihe undoubted power and
duty of the courts to determine their nature in law and to
relate them to existing legislation. While the techniques of
tax avoidance progress and are technically improved, the
courts are not obliged to stand still. ·Such immobility must
result either in loss of tax, to the prejudice of other taxpayers
or to Parliamentary congestion or (mo.it likely) to both. To
force the courts to adopt, in relation to closely integrated
situations, a step by step, dissecting, approach which the par·
E
ties themselves may have negated, would be a denial rather
than an affirmation of the true judicial process. In each case
the facts must be established, and a iegal analysis made':
legislation cannot be required or even be desirable to ena-
ble the courts to arriv·e at a conclusion which corresponds
with the parties' own intentions."
p

"The capital gains tax was creat~d to operate in the
real world, not that of make-belief.

The significance of Ramsay as a turning point in the intei pre-
tation of tax laws in England and the departure from the, strings of G
Westminister were explained in Jn/and ·Revenue Commissioners v.
Burmah Oil Company Ltd.,(') where Lord Dip lock said,

"It would be disingenuous to suggest, and dangerous
,
(I) [1982JiS.T.C. 30
H
804 SUPREME CUOR T REPORTS (1985) 3 S.C.R.

A on the part of those who advise on elaborate tax-avoidance
schemes to assume, that Ramsay's case did not mark a sig-
nificant change in the approach adopted by this House in
its judicial role to a pre-ordained series of transactions
(whether or not they include the achievement of a legiti-
mate commercial end) into which there are inserted steps
B that have no commercial purpose apart from the avoi-
dance of a liabi!Hy to tax which in the absence of those
particular steps would have been payable. The difference
is in approach. It does not necessitate the overruling of
any earlier decisions of this House ; but it does involve re-
cognising that Lord Hamlin's oft-quoted dictum in !RC v.
c Duke of West minister(') "Every man is entitk:d if he can to
order his affairs so as that the tax attaching under the ap-
propriate Acts h less then it otherwise would be", tell us
Ii/Ile or nothing as to what methods of ordering one's affairs
will be recognised by the courts as effective to lesson the
D tax what would attach to them if business transactions
were conducted in a straight-forward way."

Lord Scarman said,

"First, it is of the utmost importance that the business
E community (and others, including their advisers) should
appreciate, as my noble and learned friend Lord Diplock
has emphasised, that Ramsay's case marks "a significant
change .in the approach adopted by this House in its judicial
role" towards tax avoidance schemes. Secondly, it is now cru-
cial when considering any such scheme to take the analysis
F far enough to determine where the profit, gain or loss is really
to be found,''

The winds of change continued to blow and in Furniss
v. Dawson(2) Ramsay was reiterated. Lord Brightman obser-
ved,
G
"The fact that the court accepted that each step in a
transaction was a genuine step producing its intended legal

(1) [19361 AC. I(@) 19~[19351 All ER. Rep. 259 (al) 267,
(2) [198411 Ali E.R. 530..
H
MC. DOWELL & CO. v. COMMERCIAL TAX OFFICER (C. Reddy,/, 805

results did not confine the court to considering each s,tep in 'A
isolation for the purpose of assessing the fiscal results."

He further said,

"My Lords, in my opinion 'the rationale of the new
approach is this. In a preplanned tax saving scheme, no u
distinction is to he drawn for fiscal purposes, because none
exists in reality, between (i) a series of steps which are
followed through by virtue of an arrangement which falls
. short of a binding contract, and (ii) a like series of steps
which and followed through because the participants are
contractually bound to take each step seriatim. In a con- c'
tractual case the fiscal consequenees will naturally fall to be
assessed in the light of the contractually agreed results."

In the same case Lord Fraser explained the principle of Ramsay
as follows:- p

''-------------------------
------The true principle of decision in Ramsay was
that the fiscal consequences of a preordained series of tran-
sactions, intended tu operate as such, are generally to be
asertained by considering the result of the series as a whnJ,-, E
.and not by dissecting the scheme and considering each indi-
vidual transaction separately."

Lord Scarman in his characteristic style observed,

"The Jaw will develop from case to case. Lord Wilberforce
in W.T. Ramsay Ltd. v. !RC [1981] I All ER 865
at 872, [1982] AC 300 at 324 referred to 'the emerging prin -
ciple' of the law. What has been established with certainty
by the House in Ramsay's case is that the determination of
what does, and what does not, constitute unacceptable tax eva- G
sion is a subject suited to deve/Jpment by judicial process. The
best chart that we have for the way forward appears to me,
with great respect to all engaged on the map-making pro-
cess, to be the words of Lord Diplock in !RCv. Burmah Oil
Co. Ltd. [1982] STC 30 at 32 which my noble and learned
friend Lord Brightman quotes in his speech. These words H.
806 SUPREME COURT REPORTS [1985] 3 S.d.R.
A
have space in the law for the principle enunciated by Lord
Tomlin in !RC v. Duke of Wes/minister [1936] AC 1 at 19,
[1935] All ER Rep. 259 at 267 that every man is entitled ifhe
can to order his affairs so as to diminish the burden of tax ..
The limits within which this principle is to operate remain
B to be probed and determined judicially. Difficult though
the task may be for judges, it is one which is beyond the
power of the blunt instrument of legislation. Whatever a
statute may provide, it has to be interpreted and applied by
the courts ; and ultimately it will prove to be this area of
judge-made Jaw that our elusive journey's end will be
0 found."

Lord Rosklll put it even more forcefully :

"The error, if I may venture to use that word, into which
the courts below have fallen b that they have looked back to
D 1936 and not forward from 1982. They do nof appear to
have appreciated the true significance of the passages in the
speeches in Ramsay's case [1981] 1 All ER 865 at 872-873,
881, [1982] AC 300 at 325, 337 of Lord Wilberforce and
Lord Fraser, and, even more important, of the warnings in
the Burmah Oil Case [1982] STC 30 at 32, 39 given by Lord
E
Diplock and Lord Scarman in the passages to which ll\Y
noble and learned friend Lord Brightman rnfers and which I
will not repeat. It is perhaps worth recalli.ng the warning
given, albeit in another context by Lord Atldn, who himself
dissented in the Duke af Westminister's case,· in· United
F Australia Ltd. v. Barclays Bank Ltd.( 1) 'When these ghosts of
the past stand in the path of justice, clanking their mediaevt1l
chains, the proper course for the judge is to pass through
them undeterred.' 1936, a bare half century ago, cannot l)e
described as part of the Middle Ages but the ghost of the
Duke of Westminister and of his transaction, be it noted a
single and not a composite transaction, with his gardener
G
and with other members of his staff has haunted the ad-
ministration of this branch of the law for too long. I con-
fess that I had hoped that ghost might have found quietude
with the decisions in Ramsay and in Burmab. Unhappily it

H (I) [l94Q) 4 All E.R. 20@ 37=[19411 A.C. 1 @ 29.
MC."DOWELL & CO. v. COMMERCIAL TAX OFFICER (C. Reddy, J.) 807

has not. Perhaps the dedtston of this House in these appeals A
will now suffice as exorcism."

Thus the ghost of Westminister (in the words of Lord Roskill)
has been exercised in England. Should it be allowed to rear its
head in India?
t . B
1' have referred to the English cases at some length, only to show
that In the very country of its birth, the principle of Westminister
has been given a decent burial and in that very country where the
phrase 'tax avoidance' originated the judicial attitude towards tax
avoidance .has changed and the smile, cynical or even affectionate
though'· if might have been at one time, has now frozen into a de.ep c
frown .. •The courts are now concerning themselves not merely with
the genuineness of a transaction, but with the intended effect of it
for fiscal purposes. No one can now get away with a tax avoidance
project with the mere statement that there is nothing illegal
about it. D
Some years ago, a diverting attempt was made by a Corres-
pondent' lo the London 'Times' to defend tax avoidance. He
said;

- "The taxpayer is morally bound to obey the law, but is
not bound beyond the law, for apari from the law taxation
E

would be blackmail or racketeering. There is not behind·
taxing laws, as then is behind laws against crime, an in-
dependent
. .
moral obligation. When therefore the tax-payer
.
has obeyed the law, he had done all that morality requires"
He had further s.aid, · F
.,
"It is said that by avoiding a tax he throws a load on
to some other taxpayer. But this is not quite accurate, for
the deficiency might be met by reducing exp.enditure ...... is
it not a goOd thing that there should be this last lawful
G
remedy against oppressive taxation by a majority, that
• human ingi:nuity can always find a way by which the
minority can escape from tyrannical imposts."

The correspondent was answered by another's correspondent
wbo described the fonner's defence of tax avoidance as .'an ainusin!J ff
808 SUPREME COURT REPORTS [1985] 3 s.c.a.
A attempt to raise the art of tax avoidance to the moral level of
political martyrdom and to make Hampdens of our moder!! .tax
dodgers'. Nor, may we say, are our tax dodgem Gandhijis on the
Dandi Mar~h to protest against the Salt Tax.

B In Commissioner of Income tax, Gujarat\', A. Raman Ci'Co~,(l)'•
JC Shah, JJ. speaking for himself and Sikri and Ramaswami, JJ
repeating almost verbatim the observations in Westminister and
Fishers Executors observed :

"Avoidance of tax liability byso arranging commetcial
'
c · affairs that charge of tax is distributed is not prohibited.' 'A·
taxpayer may resort to a device to divert the lnco~e before" ''"" · ,,./I
it accrues or arises to him. Effectiveness of the device '"'. "
depends not upon considerations· of morality, but on the·,., "
Legislative injunction in taxing statutes may not~ (:xcept oi{ . . '
D
period of penality, be violated, but it may lawfully be cir!
cumvented." '

The same Judge, speaking for himself, Ramaswaml and Grover
JJ in Commissioner of Income tax, Gujarat v. Kharwar(') expr~ssely, ·
followed Westminister and observed:

"The taxing authority is entitled and is indeed bound
to determine the true legal relation resulting from a tran-
saction. If the parties have chosen. to conceal by a device
the legal relation, It Is open to the taxing authorities to
F unravel the device ·and to determine the true character of
relationship. But the legal effect of a transaction cannot<
be displaced by probing into the "substance of the tran-
saction".

We think that time has comelfor us to depart from the Wcst-
minister principle as emphatically as the British Courts have done
' and to dissociate ourselves from the observations . of Shah;. 1. and
similar observations made elsewhere. The evil consequences:or'tax
avoidance are manifold. First there Is substantial loss ofmuch needed
public revenue, particularly in a welfare state like ours. Ne~t there

1 (I) [1968] 1 S.C.R 10.
H (2) 72 !TR 603.
MC. :DOWELL & CO. v. C0.11/olBRCiAL TAX OFFICER (C. Reddy, J.) 809 ·

is the serious disturbance·caused to the economy of the country by A
the piling up of mountains of backmoney, directly causing inflation.
Then there i1 "the large hidden toss" to the community (as pointed
out by Master Sheatcraft in 18 Modern Law Review 209) by some
of the best brains in the country being involved in the perpetual war
waged between the tax-avoider and his expert team of advisers, law-
yers and accountants on one side and the tax-gatherer and his per- B'
haps .not 10 skilful, advisers on the other side. Then again there is the
'sense of Injustice and inequality which tax avoidance arouses in the
breasta 1 of· those who are unwilling or unable to.profit by it'. Last
but not the least is the ethics (to be precise: the lack of it) of trans-
ferring the burden of tax liability to the shoulders of the guideless
good citizens from those of the 'artful dodgers'. It may, indeed, be e
difficult for lesser mortals to attain the state of mind .of Mr. Justice
Holme~;·,who·aald, '.'Taxes·are what we pay for civili;zed society. I
like. to pay taxes. With them I buy civilization." But, surely, it
Is high .time for the judiciary. in India too to part its ways from the
principle or'Westmlnister and ihe alluring' logic of tax avoidance. D·
We now.live In.a welfare·state whose financial. needs, if. backed by
the, law;· have to , be-_respected and met.; We must recognise that
ther.e ls·behlnd taxation laws as inuch moral sanction as behind any
_ other welfare ,Ieglslatio~ ·and It ls a pretence to .say that aYoldance of
taxation ls not unethical and that It stands. on no less. moral ·plane
than honest. payment of taxation. In our view, the proper way to
construe ·a taxing statu,te, ,while considering a device to avoid tax, is
not.to· a~k whether the provisions should be .construed literally, or
liberally. :nor.· whe.ther 1the transaction is not unreal and not. prol)ibi-
ted.by :the 1tat1,1te, but whether. the transaction .is a device to avoid
taxc, ·and whether the transaction Is such that thejudicial process may
accord •i.t•· appronl to it. A hint of this approach
~ .
is, to
.
beI found in
the-judgment of Desai, J. in Wood Polymer Ltd. v. Bengal Hotels
Limited(!) where· the learned judge refused to accord sanction to the _
'- • . I - ·. . . '

amalgamation·
. -
of companies
'
as it would lead
'
to avoidance ~ L•
of tax.
t - 1 f - . .
' It is nelthedair nor desirable to expect the legislature to inter-'
,Yenc ~nd,tate care of every device and scheme to avoid taxation. If
Is up(o the Court· to take stock to determine the nature of the new and '
1ophisticated 'legal devices· to· avoid tax and· consider whether the.
aitu~tio~ created by the ciev!ces could be ·related to the existing legis-
lation with• the aid of 'emerging' techniques of interpretation as
was done in Ramsay, Burma Oil and Dawson, tQ expose the devices
(I) 40 Company Cases, 597. H
810 SVPRBMB COVRT REPORTS [1985] 3 s.c.R.

A for what tbey really are and to refuse to give judicial benediction.

We agree with Ranganath Misra, J. that the appeal should be
dismissed,

B
RANGANATH MISRA, J, The appellant company, .a lice1!sed
manufacturer of Indian liquor at Hyderabad, is in appeal by special
leave questioning the dismissal of its writ petition by the High '
Court. ·
c
Manufacture, sale-wholesale and retail-as also. storage and
transport of liquor are regulated by the Andhra Pradesh Excise Act,
1968 ('Excise Act' for short) and the Andhra Pradesh Distillery Rules,
the Andhra Pradesh Indian Liquor (Storage in Bond) Rules and the
Andhra Pradesh Foreign Liquor Rules, and Indian liquor Rules' all
D made under the Excise Act. 'Excise duty' as defined in section 2(10) or"
the Excise Act is leviable on the manufacture ofliquor and the m'a.nufa- ··
cturer cannot remove the same from the distilleryunless the duty im·
posed under the Excise Act has been paid. Buyers of Indian liquor
from the appellant's distillery as alleged by it, obtain distillery passes
for release of liquor after making payment of excise duty and present
E.
the same at the distillery whereupon the bill of sale ·or. invoice is
prepared by the distillery showing the price of liquor but ·· excluding
the excise duty. The appellant's books of account also did not
contain any reference to excise duty paid by the· purchaser. The
appellant paid Sales Tax payable by it under the And hr a Pradesh~
F General Sales Tax Act, 1957, ('Sales Tax Act' for short), on the
basis of its turnover which excluded excise duty; The·· Company '.
was assessed to sales tax on the basis of its returns but lat.er the
Commercial Tax Officer was of the view that the Company had
failed to include the excise duty paid on the liquor sold by it to
wholesalers. The taxing authority accordingly called up.on the
Company to show cause why assessments made may not be re-
G"
opened. The appellant moved the High Court for quashing of
such notice and having failed, carried the matter in appeal to this
Court. A Division Bench of this Court in McDowell & Company
Ltd. etc. v. Commercial Tax Officer, Vil Circle, Hyderabad, etc., c1>

H, (I) [1977] I S.C.R. 914.
Mc. fiOWELL &co. v. COMMElicIAL TAX OFFICER (R. Misra, J.)" [sii
examined the provision of the Exice Act and the Rules made there- A
under as also the provisions of the Sales Tax Act. This Court
took the view :

"We hold that intending purchasers of the Indian
liquor who seek to obtain distillery passes are also legally n
responsible for payment of the excise duty which is collec-
ted from them by the authorities of the excise department."

This Court then proceeded to determine whether excise duty
paid directly to the Excise authorities or deposited directly in the
State Exshequer in respect of Indian liquor by the buyers before c
removing the same from the distillery could be said to form part
of th• taxable turnover of the- appellant distillery. Precedents
were referred to and the Court came to the conclusion that excise
duty did not go into the common till of the appellant and did not
become a part of the circulating capital. Therefore, the Sales Tax '. D
authorities were not competent to include in the turn.over of the
appellant the excise duty which was not, charged by it but was paid
directly to the Excise authorities by the buyers of the liquor. The
appellant, therefore, succeeded before this Court and the notices
issued by the Sales Tax authorities were quashed.
F
The judgment of this Court was delivered on October 25, 1976.
Rules 76 and 79 of the Distillery Rules were amended with effect from
August 4, 1981. Rule 76(a) now provides : "No spirit or liquor manu-
factured or stored shall be removed unless the excise duty specified
in rule 6 has been paid by a holder of D-2 licence before such
removal." . It is not disputed that appellant is the holder· of a D-2 E
licence under the law. Amended rule 79 (I) provides :

"76 (1). On payment of the excise duty by the holder
of 0-2 licence a di•tillery pass for the removal of spirit fit
for human consumption may be granted fo favour of any
of the following persons only, namely :-
"G
(a) a person holding a licence in the Andhra Pradesh or in
other States for sale of spirit by wholesakor retail and
when the spirit is to be transported or exported beyond
the limits of the district in which the distillery is situ- H
sh SUPREME COtiRT REPORTS [i98SJ j s.c.a;
A ated to a person holding a permit signed by the Excise
Superintendent of the district of destination or ·an
officer of that district authorised in this behalf.

(b) A person holding a permit signed by the Officer of
n any other State referred to in clause (a) above for the
export of such spirit from the Andhra Pradesh into
that State.

(c) A person holding a permit signed by an Officer dµly
authorised in that behalf for export of such spirit to an
c Union Territory.

(d) A person holding a permit from the Excise Superinten-·
dent of any district in Andhra Pradesh or from 'officer
referred to in clause (a) above of . any other State to
D transport or export rectified spirits or wine, to such
district or State."

On the basis of the amended provmons, the respondent
Officer issued a notice to the appellant proposing to include a .sum
.
),
of Rs.4,49,09,552.40 representing the excise duty paid directly
by buyers of appellant's liquor in the appellant's turnover for a ·part
of the year 1982-83. Thereupon, the appellant again moved the
High Court for quashing of the notice. Reliance was placed on the
earlier decision of this Court. The High Court very appropriately
felt bound by the decision of this Court and. considered the effect
of the amended Rules and held that the primary liability to pay
,F excise duty was indisputably of the holder of•the D-2 licence. •It
further found that the turnover related to liquor, excise duty .which
was payable by the appellant but had by amicable arra11gemeµt been
paid by the buyer was actually a.part of the turnover of the appel-
lant and was, therefore, liable to be so included for determining
G liability for sales tax. On these findings the High Court dismissed
the writ petition. When leave was granted by a Division Bench of
this Court to appeal against the Judgment of the High Court, the
correctness of the decision in appellant's case reported in (1977) I
S.C.R. 914, was doubted and the matter was referred to a larger
Bench. That is how the appeal came to be heard by us.
H
MC. DOWELL&: co. v. COMMBRCiAi. IAX OFFICER (R. Misra, i.) 81:\
> Mr. Sorabji, appearing in support of the appeal at the very
A
commencement of his submissions stated that there was no consti-
tutional question involved in the appeal. He also fairly stated that
the vires of the Excise Act a'nd the Rules.was not under challenge.
Nor was the amendment of Rules in 1981 in' dispute.

The Federal Court in The Province of Madras v. Messrs. B
· Boddu Patdanna & Sons, (1) held :
'f ,, •.

"There is in theory nothing to prevent the Central
Legislature 'from imposing a duty of excise on a commodity
as soon as it comes into existence, no matter what happens (
to it afterwards whether it be sold, conaumed, destroyed,
or ginn away. A taxing authority will not ordinarily
lmpcise such a duty, because it is much more convenient
administratively to collect the duty (as in the 'case of .most
of the ·Indian Excise Acts) when the commodity
leaves the factory for the first time, and also because
the duty is ·intended to . be an indirect duty .which D
the manufacture or producer is to ·pass on to ·the·"
ultimate consumer, which he could not do if the com-
modity had, for example, been destroyed in the factory
itself. It is the fact of manufacture which attracts the duty,
· even though it may be collected later ; ... "
. '
E.

'This view has been followed by this Court' and the position
has been put beyond doubt by a series of decision's. In R.C. Jail
v. Union of lfldia,<•> it, has been observed :
! , • ,I.I 1 Ii 1
,. , r vi ,, , F
"The Excise duty is primarily a duty on the production
· or manufacture of goods produced or ·manufactured within
u the country, Subject always to the legislative competence
of the taxing ·authority, the said tax can be levied at a
convenient stage so long as the character of the impost is
not lost. The method of collection does not affect the
. G
essence of the duty but only relates to the machinery of
collection for administrative convenience."

(I) [1942] F.C.R. 90. t
(2) (19621 Suppl. 3 S.C.R. 436. h
.
814 SUPREME•duoRT REPORTS (1985] 3 ~.c.k.
lirH~<~i:d
ar;)i: ..f,f l~fil:li;i.'.i
In Re. Sea Customs Act, (1) this Court said :
A
"With great respect, we accept the principles laid down
by the said three decisions (1939 F.C.R. 18 ; 1942 F.C.R.
90 and 1945 F.G.R. 179) in the matter of levy of an excise
duty and the machinery for collection thereof.''.
B
. , -,
In M/S. Guruswamy & Co. etc. v. State of Mysore & ors(')
Sikri, J. (as he then was), spoke for the majority and stated the ratio
thus:

c "These cases establish that in order to be an excise duty
(a) the levy must be upon 'goods' and (b) the taxable event
must be the manufacture or production of goods. Further
the levy need not be imposed at tho sta:• of production or
manufacture but may be imposed later."
D
In Jullundur Rubber Goods Manufacturers' Association v. Union
a
of India & Anr., (3 ) Grover, J. after extracting part of the Judg-
ment in Jail's case (supra) spoke for the Court thus :

"The above statement of law in no way supports the
E argument that excise duty cannot be collected from per-
sons who are neither producers nor manufacturers. Its inci-
dence certainly falls directly on the production or manu·
facture of goods but the method of collection will not affect
the essence of the duty."
.\
F In A.B. Abdul Kadir & Ors. v. State of Kera/a, <'l!this Court
restated the position thus :

"Excise duty, it is now well settled, is a tax on articles
produced or manufactured in the taxing country, G~nerally
speaking, the tax is on the manufacturer on the producer,
G yet laws are to be found which impose a duty of excise at
stages subsequent to the manufacture or production.''

(2) 11964) 3 S.C.R, 787.
(3) (1967] I S.C.R. S48.
(4) [1970] 2 S.C.R. 68,
H (I) [1976] 3 S.C.R. 219.
Mc, DOWELL &co. v. coMMBRdiAL TAX OFFICER (R. Misra, }.) 8iS
Thus, the incidence of excise duty is directly relatable to A
manufacture but its collection can be deferred to a later stage as a
me~s ure of convenience or expediency.

On an examination of the provisions of the Excise Act, the
Rules framed thereundor and the pronouncements referre'd to B
above,) we are of the yiew that the. conclusion of this Court at
·page 92( of the Reports that intending purchasers of the Indian
liquors who seek to obtain distillery passes are also legally respon-
sible for payment of the excise duty is too broadly stated. The
"duty'' was primarily a burden which the manufacturer had to bear
and even if purchasers paid the same under the Distillery Rules," c
the provisions were merely enabling .and did not give rise to any,.
legal responsibility or obligation for meeting the burden. We do
not propose, however, to examine this aspect any further for the
change in Rule .76 of the Distillery Rules has clearly affirmed the
position that liability for payment of excise duty is of the manu- D
facturer. Provisions of rules 80, 81, 82, 83 and 84 do not militate
against the conclusion that the payment of excise duty is a liability
exclusively of the manufacturer. In these rules detailed provisions
have· been made regarding obtaining of distillery pass, · correct
calculation and full payment of excise duty, the manner of deposi·
ting such duty and ultimately issue of the spirit under the pass from E
the distillery. These. rules, therefore, do not detract from the· posi-
tion 'that payment excise duty is the primary and exclusive obligation
of the manufacturer and if payment be made under a contract or
arrangement by any other person it would amount to meeting of the
obligation of the manufacturer and nothing more.
F
It was the stand of the appellant before the High Coor! that
it makes a condition precedent for the buyer of its finished goods
that he _(the buyer)' pays the excise duty to the excise authorties
directly and only on production of the r~ceipted challan, liquor is
issued from the distillery by way of sale under the supervision of
the excise authorities. Io view of such an arrangement, the excise~ G
duty paid by· the buyer does not become a part of the turnover of
the appellant. ·

· 'Turnover' is defined in s. 2(s) of the Sales Tax Act to mean
"the total amount set out in the bill of sale or if there is no bill
of sale, the total amount charged) as the ~oosideratioo for the sale H
816 SUPRBMB cotiRT RBPOR TS (1985} 3 s.c.R.
•A or purchase of goods (whether such consideration be cash, deferred
payment of ariy other thing or value) including any sums charged
by the dealer ,for anything done in respect of goods sold at the time
of or before the delivery of the goods and any other sums charged
by the dealer, whatever be the description, name or object there-
of."
B
The definition clearly indicates that the total amou~t charged
as the consideration for the sale is to be taken into account for '
determining the turnover. Where a bill of sale is issued (and obvi-
ously the bill has to state the total amount charged as considera-
c tion), the total amount set out therein is to be taken into account.
In every transaction of sale, there is bound to be a seller at one
end and a buyer at the other and transfer of title in the goods takes
place for a consideration.

• In Hindustan Sugar Mills v. Rajasthan State, (') this Court
D observed:
'·
•I ._,,
','The test is, what is the consideration passing from
... the purchaser to the dealer for the sale of tho goJd;. It
is immaterial to enquire as to how the amount of con.sidera·
tion is made up, whether it includes excise duty or sales
E
t.
tax
-
or'f~eight.
. l
The only
t
relevant
;
question to ask is as' to .
what is the amount payable by the purchaser to .!lie dealer
as c0nsideration for the sale .... " '
Th~ Court proceeded to say'; " 1
., I . 1 it' • •, r t· ,

11 . •:take for ·example, .excise duty .payable by a dealer who
.. "' is.a1manufacturer. Whenrhe sells· goods manufactured ,by, ,
llhim, he always passes.qn the excise duty to ,the purchaser.
q,Ordi.narily it'is not shown as a separate item in the bill, but
. 'it is included in the price charged by him. The sale ·Price
in such a case could be the entire price inclusive . of excise ,
G ·<duty because that would be the consideration paya.ble by
the purchaser for the sale of the goods. True, the •.excise
duty component of the price would not be an addition to
the cof'fers of the dealer, as it would go to reimburse.him

o> '[t979l 1 s.c.R. 276.
MC. DOWELL & co. v. COMMERCIAL TAX oFFIECR (k. Mir;a, 1.) 811
· in respect of the excise duty already paid by him on the A
manufacture of the goods. But even so, it would be part
. of the sale price ·because it forms a component of the con-
•sideration for the sale of the goods that the amount repre-
sentfog excise duty would be payable by the purchaser.
• There is no other manner 'of 'liability, Istatutory or other-
wise, under which the purchaser would be liable to pay the B
l .;'\
- amount of excise duty to the dealer. And oil this reason-
ing, it would make no difference whether the amount of
· excise-duty is included in :the price ··charged by the dealer
or is shown as a separate item in the bill."
• ' '!"" t -f" c
" , We would like to add, .that.the position is not different when
. under .a prior agreement, the legel .liability of the manufacturer-
. dealer for payment of excise duty is• satisfied by the purchaser-by
-1 direct payment to excise authorities or t.o the state exchequer.
In Paprica Ltd. &' Anr. v. Board of Trade, (1) Lawrence,
J,;,_stated : -~ .,. ,.n
. ~

;, "Whenever a sale attracts purchase tax, that tax pre-
sumably affects the price which the seller who is liable to
pay the tax demands but it' does not cease to be the price
which the buyer has to pay even 'If the price is expressed E
· • as·•x• plus purchase tax.'" '
. . .. . .l
This Court in Messrs: George Oakes (P) Ltd. v. The State of
"Madras, (1l quoted this extract with approval .and also referred to
the following passage in the Judgment of Goddard, L.J. in Love v.
Norma11 Wright (Builders) Ltd.(8 ): F
'J I '·I

~ "Where an article is taxed,• whether by·purchase tax, cus-
. , ' , . ,,toms duty, or excise duty 'the tax' becomes part of the price
- f .'which ordinarily:the buyer will have to pay. The price of
an'ounce Of tobacco is what it is because of the rate of tax,
1- · ·but on a sale there is only one consideration though made
.up, of cost .plus profit ·plus tax. So if a ·Seller offers ·goods

(I) [1944] All B.R. 312.
(2) [1962] 2 S.C.R. 510.
(3) [194411 All B .R. 618. vH
8is sbPREM~ COURT kErORts (1985] 3 s.c.il.
for sale, it is for him to quote a price which includes the
A
tax if he desires to pass it on to the buyer. If the buyer
agrees to the price, it is not for him to consider how it is
made up or whether that seller has included tax or not ...
So far as the purchaser is concerned, he pays for the goods
what the seller demands, namely, the price even though it
B may include tax. That is the whole consideration for the
sale and there is no reason why the whole amount paid to
the seller by the purchaser should not be treated as the
consideration for the sale and included in the turnover."

c Admittedly, the bills issued by the appellant did not include
the excise duty. As already found, payment of excise duty is a
legal liability of the manufacturer ; its payment is a condition
precedent to the removal of the liquor from the distillery and pay-
ment by the purchaser is on accont of the manufacturer. According
to normal commercial practice, excise duty should have been re-
D ficcted in the bill either as merged in price or being shown separa-
tely. As a fact, in the hands of the buyer the cost of liquor is
what is charged by the appellant under its bill together with excise
duty which the buyer has directly paid on seller's ac~ount. The
consideration for the sale is thus the total. amount and not what is
refiected in the bill. We are, therefore, clearly of the opinion that
E excise duty though paid by the purchaser to meet the liability of
the appellant, is a part of the consideration for the sale a)ld is inclu-
dible in the turnover of the appellant. The purchaser bas paid
the tax because the law asks him to pay it on behalf of the manu-
facturer.

F
Mr. Sorabji in the course of his submission relied on a Divi-
' '
sion Bench decision of this Court in Anand Swarup Mahesh Kumar
v. The Commissioner of Sales Tax. <'> This Court was oonsidering
the liability for Sales Tax under the corresponding ~J.P. Act in
respect of a dealer carrying on business at Mandi Anandganj,
G Baraut in the District of Merrut. The Sales Tax authorities had
included in the dealer's purchase turnover 'market fee' and the.
commission payable to the commission agent operating within the
market area for the purpose of computing sales tax. The decision

'.
(I) (1981] 1 S.C-R. 707
H
MC. DOWELL'& co. v. COMMERCIAL TAX QFFICER (R. Misra, J.) 819

turned on the definition of 'turnover of purchase' in the lJ.P., Act A
and the provision of the Adhiniyam and the Rules made thereunder.
Market fee and commision payable to an agent are very different
from excise duty and a very different position emerges in law· in
regard to them. No support is available from that decision for the
appellant's case. We would like to point out that the relevant
B
consideration is not whether the law permits the incidence of the
duty to be passed on to the purchaser but whether there is a prohi·
bition against the passing of it. If there is no bar, the incidence
would be passed on to the purchaser in accordance with ·normal
commercial practice.
c
Mr. Sorabji built up an argument in support of the appellant's
stand ''by referring to tlie amendment to the First Schedule to
the Sales Tax Act. The relevant part of the Schedule provides
thus :·

Item No.
i
. ( , Description
. . .
of. · Point of levy, Rate of tax.
,goods.

26.
"
. All liquors, other At the point
than country liquor of the first sale
2 (but including in the State. . E .
. Vodka) (1026)

(a) not covered by 3 (50 paise)
item (b) below in the rupee,

(b) Where the 3 (25 paise) E
consderation for in the rupee.
the sale or purchas·e
of I iquor includes
the duties of excise
payable under the
Andhra Pradesh Excise c
Act, 1968.

Apparently this amendment was brought about after the Judg·
ment of this Court in the appellant's appeal in 1976 and the position
has been further altered by amendment in 1984. Sale of liquor has now H
lbeen made exigible to tax at every point 0th.er than.the point of last
820 SUPREME COURT REPORTS [1985] 3, S.C.R •.
A sale in the State. The argument advanced before this Court is that ..
the appellant bad already paid tax on the basis of 50p. in the rupee .
on the footing that the consideration for sale of its liquor did not ,
include duty of excise payable under the Excise Act and the appellant .
. cannot, therefore, be made liable · fo~ ·sales tax ,on ··a different..
B footing, This contention too has no force .. S~ch; sta~d.. had: 1.not'.
been taken in the writ petition before the High Court and there has ·.
been no factual examination of the position as to whether the 'class!~.
ficalion indicated is not intended to cover a totally different situa·
tion. For resolving the dispute as to whether excise duty.is .a ,'
part of the turnover, reference to the Schedule is indeed wholly,,
C. irrelevant. · ··•

Mr. Sorabji relied heavily on the observations of Hidayatullah, .
J. (as he then was) speaking for the Court in the case of George
Oakes (Private) Ltd. & Ors. v. The State of Madras, (1) where it was .
said:

"It was pointed out by this Court (in 12 STC 476) that
the word 'price' in so far as the purchaser is concerned in·
eludes the tax also, and that in laws dealing with lsale$-tax,
turnover has, in England and America also, been held to
include the tax. The reason for such inclusion Is stated lo be
.Ef that dealer who realises the lax does not hand it over forth-
with to Government but keeps it with him, and turns it
over in his business before he parts with it. Thus, the tax
becomes, for the time being, a part or the circulating capi-
tal of the tradesman, and is turned over in business. Again
it was said that the price paid by the purchaser was not so
II much money for the article plus tax but a composite sum.
Therefore, in calculating the total turnover, there is noth-
ing wrong in treating the tax as part of the turnover,
because 'turnover' means the amount of money which is
turned over in the business."

G According to Mr. Sorabji the excise duty had never come into
the hands of the appellant and the Company had no occasion or
opportunity to turn it over in its hands, and, therefore, the same
could never be"considered as a part of its turnover. The obser7

8 (I) 13 S.T.C. 98.
MC. DQWELL & CO. v. COMMERCIAL TAX QF!'ICER (R. Misra, J.) 82\.

vations .. made by this Court were in a very' different setting and what A
was beina·considered was whether the additional . tax levied under
the Madras Act formed a part of the turnover. If we accept the
observations of Hidayatullah, J. as laying down the test for general
application.,it would be very prejudical to the Revenue as between
r I, ' · •• ' , , ,, t-. , I
the seller .. and' the· buyer, by special arrangement, a part of
' · _ f'· · " l ' ·· I
what ordinarily would constitute consideration proper could even .l
be kept out and the turnover'could lie reduced and 'tax liability
avoided. :We are· of the view that the conclusion reached' in the
appellant's C'ase in (1977) I' S.C.R. 9i4 on the second aspect of the
matter, namely, when the excise duty does not·go into.the common
a
till of the assessee and it does not become part' of' the .~irculating c
capital, it does not constitute turnover, is not the decisive· test
for determining whether such duty would constitute turnover.
..... t "' . "l f

A furtlier conte.ntion was advanced by Mi. Sorabji as his' lait
submission that it is open to every one to so arrange his affairs as
to reduce the' brunt of taxation to the minimum' and such 'a process D
docs not constitute tax evasion;,nor does ii brry any ignominy.' In
1upport of this submission he relied 'on tb'e'observati6ns of Shah, 1.
apeaking for this Court in Commissioner of Income-tax v. A Raman
and Co.,(1) where it was said : " " ·1
E
"The law does not oblige a trader to make the maxi-
mum profit that be can out· of his trading transactions.
Income which accrues to a trader is taxable in his hands :
income ·which he could have, but has not earned, is not
made taxable as income accrues to him ... Avoidance of tax
liability by so arranging commercial affairs that charge of F
tax is distributed is not prohibited. A taxpayer may· resort
to ·a device to divert the income ·before it accrues or arises
to him. Effectiveness of the device depends not upon con-
siderations of moralitv, but on the operation of the lncome-
tax Act. Legislative injun'ction in taxing statutes may not
except on peril of penalty, by violated, but may lawfully G
be ·circumvented."

Support was also sought from the observations of the same lear-
ned Judge (as he then was) in the case of Commissioner of Income-

(I) [1968] 67 J.T.R. 11. H •t
822 SUPREME COURT REPORTS (1985] 3 S.C.R.

A tax, Gujarat II v. B.M. Kharwar.( 1) After quoting a passage from
the judgment of the Privy Council in the case of Bank of Chettinad
Ltd. v. Commissioner of fncome ·tax, (')this Court stated:

"The taxing authority is entitled and is indeed bound
tn determine the true legal relation resulting froin a trans·
B action. If the parties have chosen to conceal by a device
the legal relation, it open to the taxing authorities to unra·
vel 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 'substanc~ of the tians·
c action'."

In Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income·
tax and Excise Profits Tax, Bombay, (8) this Court observed :

"Every person is entitled so to arrange his affairs as
D to avoid taxation but the arrangement must be real and
genuine and not a sham or make-believe, ... "

The Gujarat High Court in the case of Commissio'ner of Income·
tax v. Sakar/a/ Ba/abhai,~) said :
E
"Tax avoidance postulates that the assessee is in re·
ceipt of amount which is really and in truth his income
liable to tax but on which he a.voids payment of tax by
some artifice or device. Such artifice or device may appa·
rently show the income as accruing to another person, at
F the same time making it available for use and enjoyment to.
the assessee as in a case falling within section 440 or mask
the true character of the income by disguising it as a capi-
tal receipt as in a case falling within section 4.4E or assume
diverse other forms .... But there must be some artifice or
device enabling the assessee to avoid payment of tax on
G what is really and in truth his income. If the assessee
parts with his income producing asset, so that the right to

(I) (1969] 72 J.T.R. 603.
(2) (1940] 8 I.T.R. 522.
(3) [1958] 34;1.T.R. 888.
H
(4) [1968] 69_1.T.R. 186.
0

MC. DOWELL '&·co. v. COMMERCIAL TAX OFFICBR (R. Misra, J.) 823
)
receive income arising from the asset which theretofore . A
belonged to the assessee is transferred. to and vested in .
some other person, there is no. avoidance of tax liability :
no part of the income from the asset goes into the hands
of the assessee in the shape of income or under any
guise .... "
B
This decision has been affirmed by this Court in Cammissioner
of Income-tax v. Sakar/al Balabhai.(1)
We may also recall the observations of Viscount Simon in
Latif/a v. l. R. :(')
c
"Of recent years much ingenuity has been expended
in c~rtain quarters in attempting to device method> of de-
position of income by which those who were prepared to
adopt them might enjoy the benefits of residence in this
country while receiving the equivalant of such incom,,
without sharing in the appropriate burden of British taxa- c
tion .. Judicial dicta may be cited which point out that,
•
however elaborate and artificial such methods may 'be,
those who adopt them are "entitled" to do so. There is,
of course, no doubt that they are within their legal rights,
but that is no reason why their efforts; or those of the pro- E
fessional gentlemen who assist them in the matter, should
be regarded as a commendable exercise of ingenuity or as a
discharge of the duties of good citizenship. On the contrary
one result of such methods, if they succeed, is of course to
increase pro' ten to the load ·of tax on the shoulders of the
great body of good citizens who do not desire, or do not c
know how, to adopt these manoeuvres. Another conse-
quence is that the Legislature has made amendments to
our Income Tax Code which aim at nullifying the affecti-
veness of such schemes."

Tax planning may he legitimate provided it is within the G
framework of law. Colourable devices cannot be part of
tax planning and it is wrong to encourage or entertain the
belief that it is honourable to avoid the payment of tax by

(2) (19721 86 I.T.R. 2
(3) 25 T.C. 107.
824 SUPREME COURT REPORTS [1985) 3 S.C.R •.
A resorting to dubious methods. It is the· obligation of every
citizen to pay the. taxes honestly ·without resorting to subterfuges.

On this aspect one of us, Chinnappa Reddy, J ., has proposed
separate and detailed opinion with which we agree.
B
, In our view, therefore, there is no merit in the appeal.and the
same is liable to be dismissed with costs. Hearing fee is assessed
at Rs. 5,000. We would like to add that now that a clear picture
of the situation has emerged the State of Andhra Pradesh should.
relationalise the law on the subject, if necessary, by making other
0 . appropriate amendments.

While granting leave and allowing stay of proceedings, this
Court had directed that bank guarantee be furnished for the tax to
the satisfaction of the assessing authority and in the · event of the
respondent succeeding in the appeal, the appellant do pay interest at
D 123 per annum ..The respondent may now proceed to collect the
dues of the State in accordance with law.

E
S.R. Appeal dismissed.

. '