Holding

The DTAC, notified under Section 90, validly overrides inconsistent provisions of the Income‑Tax Act and the CBDT Circular 789 issued under Section 119 is a lawful exercise of delegated authority, so the circular stands.

Summary

The Supreme Court examined whether the Central Board of Direct Taxes' Circular No. 789, issued under Section 119 of the Income‑Tax Act, was ultra vires the Act and whether the Indo‑Mauritius Double Taxation Avoidance Convention (DTAC), notified under Section 90, could override inconsistent provisions of the Income‑Tax Act. The Court held that Section 90 was expressly intended to empower the Government to implement DTAC provisions even if they conflict with Sections 4 and 5 of the Act, and that the DTAC is valid and not ultra vires. It further ruled that the circular is a lawful exercise of delegated legislative power, does not curtail the assessing officer’s jurisdiction, and that the concepts of "resident" and "liable to taxation" under the DTAC include entities granted tax exemption. Consequently, the High Court’s order quashing the circular was set aside and the circular was upheld.

Issues considered

The validity of CBDT Circular No. 789 under Section 119 of the Income‑Tax Act
Whether Section 90 enables the DTAC to override inconsistent provisions of the Income‑Tax Act
Whether the Indo‑Mauritius DTAC is ultra vires the powers of the Central Government
The interpretation of "resident" and "liable to taxation" under Article 4 of the DTAC
Whether "treaty shopping" by third‑country entities can be barred under the DTAC
The applicability of the principle of piercing the corporate veil in the context of the DTAC
The effect of Mauritius offshore company legislation (MOBA) on DTAC benefits

Legislation cited

Companies (Profits) Surtax Act, 1964s. 24A
Income Tax Act, 1922s. 49A
Income Tax Act, 1961s. 119, s. 4, s. 5, s. 90

Subjects

double taxation avoidance treatySection 90Section 119CBDT circulartreaty shoppingresident definitionliable to taxationcorporate veildelegated legislationMauritiuscapital gains tax

Judgment

A UNION OF INDIA AND ANR.
v.
AZADI BACHAO ANDOLAN AND ANR.

OCTOBER 7, 2003
B
[RUMA PAL AND B.N. SRIKRISHNA, JJ.]

Constitution of India-Articles 73 and 265-Fncome Tax Act, 1961-
Sections 4, 5 & 90-Indo-Mauritius Direct Tax Avoidance Convention
(DTAC) dated 1.4.1983-Articles 3, 4 and 13(4)-Exemption to assessees
c under DTAC on capital gains on sale of shares of Indian companies-
Power of Central Government to grant exemption-Validity of-Held,
valid DTAC notified under Section 90 of the Income Tax Act-It can
override the provisions of the Income Tax Act and hence, the principle of
piercing the corporate veil cannot be applied-DTAC cannot be held ultra
D vires on suscepiibility of 'treaty shopping' by third party countries-
Income Tax Act, 1922-Section 49A.

Section 90-CBDT Circular No. 789 dated 13.4.2000 issuing
instructions to Revenue to treat an assessee with a 'Certificate ofResidence'
E issued by Mauritius authorities as 'resident' of Mauritius-Validity of-
Held, valid even if inconsistent with the provisions of the Income Tax Act
for implementation of DTAC-Circular does not amount to impermissible
delegation of power.

Section 119-CBDT Circular No. 789 dated 13.4.2000-Validity of-
F Held, valid-Non-indication of the source of power does not render the
Circular ultra vires-Circular intended to avoid wastage of time and
energy of the assessing officers and not issued to crib, cabin or confine
the powers of the assessing officer in particular assessment.

G Income Tax Act, I961-Liability to taxation-Grant to exemption
under the Mauritius Income Tax Act, 1995-Entitlement of benefit under
DTAC-Held, they are 'liable to tax' under the latter Act even though
granted exemption-Hence, they are entitled to benefit under DTAC being
liable to tax under the former Act-Mauritius Offshore Business Activity
H Act, 1992 (MOBA)-Sections 26 & 27.
222
U.0.I. v. AZADI BA CHAO ANDO LAN 223

'Treaty Shopping '-Etitlement of third party nation taking the benefit A
of DTAC-Held, is entitled since there are no disabling or disentitling
conditions under the DTAC-Motive of taking benefit under the DTAC is
irrelevant.

Doctrine of stare decisis-Applicability of
B
The Government of India and the Government of Mauritius
entered into a Double Taxation Avoidance Convention (DTAC) on
1.4.1983 for the avoidance of double taxation and prevention of fiscal
evasion with respect to taxes on income and capital gains and for the
encouragement of mutual trade and investment. The DTAC was C
notified under Section 90 of the Income Tax Act, 1961 on 6.12.1983.
According to Article 13(4) of the DTAC, the capital gains derived by
a 'resident' of a Contractng State from the alienation of any property
other than those mentioned in Article 13(1), (2) and (3) shall be taxable
only in that State. The Central Board of Direct Taxes (CBDT) issued D
a Circular No. 682 dated 30th March, 1994 clarifying Article 13(4) of
the DTAC that the income derived by a 'resident' of Mauritius by
alienation of shares of India companies will be liable to capital gains
tax only in Mauritius as per Mauritius tax law and will not have any
..
tax liability under the Indian Income Tax Act. Relying on the Circular, E
a large number of assessees, mainly Foreign Institutional Investors
(Fiis) and claiming to be' residents' of Mauritius, invested huge capital
in the shares of Indian companies with a view to make profits without
attracting capital gains tax in India.

The Revenue issued show cause notices to some Flis functioning F
in India for taxing profits and dividends accrued to them by sale/
holding of shares under the Income Tax Act holding that the Flis are
not eligible for the benefits under the DTAC since they are not true
'residents' of Mauritius and are 'shell companies' incorporated in
Mauritius, controlled and managed by third party countries. The show G
cause notices issued by the Revenue created panic in the Indian stock
market and consequent hasty withdrawal of funds by the Flis. CBDT
issued Circular No. 789 dated 13.4.2000 clarifying to the assessing
officers that wherever a 'Certificate of Residence' is issued to an
assessee by the Mauritius Authorities, such assessee can claim to be a H
224 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.

A 'resident' of Mauritius and avail the benefits under the DTAC.

Two Writ Petitions, by way of Public Interest Litigation, were
itkd before High Court of quashing the CBDT Circular No. 789
(impugned circular), as being ultra vires under the Income Tax Act,
B 196-.. Besides, appropriate directions were also sought for to revise,
modify or terminate the terms of the DT AC to prevent the Flis and
Ni!ls to maraud the resources of the country; to declare and delim'it
the powers of the Central Government under Section 90 of the Income
Tax Act in entering into agreements with the Government of any
country; and to declare and delimit the powers of the CBDT in issuance
C of instructions to the statutory authorities under the Income Tax Act
which are beneficial to certain individual tax payers and injurious to
Public Interest. The petitioners further sought appropriate directions
to the Central Government to take all remedial actions to undo the
actions done to the prejudice of the Revenue in pursuance of the
D impugned Circular.

High Court allowed the Writ Petitions and quashed the impugned
Circular holding it ultra vires on the grounds that it does not specify
that the same was issued under Section 119 of the Income Tax Act and
E hence is not legally binding on the Revenue; that the CBDT cannot
. issue a Circular ultravires the provisions of the Act; that it curtails the
quasi-judicial function of the Revenue to lift the corporate veil of the
assessee contrary to the Act; that the 'Certificate of Residence' is not
contemplated under the DT AC or the Act; that it encourages "Treaty
Shopping" whereby a resident of a third country taking advantage of
F ~he DTAC which is illegal and must be forbidden; that the essential
legislative function cannot be delegated to CBDT for issuance of the
Circular under Section 119 of the Act; that rolitical expediency cannot
be a ground for not fulfilling the constitutional obligations inherent in
the Constitution of India; and that it enables the assessee not liable tO
G tax in both the countries.

In appeal to this Court, the Union oflndia contended that several
tax treaties with similar terms entered into with various foreign
Governments and notified under the Income Tax Act and since
H different High Courts interpreted the terms of the agreements in a
U.O.I. v. AZADI BACHAO ANDOLAN 225
uniform manner, by application of the doctrine of stare decisis, no A
interference is warranted.

The respondents contended that DTAC, being a fiscal treaty, is
governed by Article 265 of the Constitution of India and hence, it
cannot be contrary to the provisions of the Income Tax Act, 1961; that B
the Central Government, being delegatee of legislative power under
Section 90 of the Act, cannot grant exemption in contravention of the
Income Tax Act; that the DTAC is ultra vires the powers of the Central
Government under Section 90 of the Act since it encourages 'treaty
·shopping', which is unethical and illegal and amounts to a fraud on the C
DT AC; that the assessees are granted exemption under the Mauritius
Income Tax Act, 1995 and are not liable to tax under the Mauritius
Act and hence they should be made liable to tax under the Indian
Income Tax Act 1961; that the avoidance of double taxation can arise
only when tax is actually paid in one of the Contracting States; that
the assessees, incorporated and registered under the Mauritius Offshore D
Busin_ess Activity Act, 1992 (MOBA), are not 'liable to taxation' in
Mauritius and hence are not 'residents' of Mauritius under the DTAC;
that the assessees, incorporated under the Mauritius laws, are 'shell'
companies, a 'sham' or a 'device' incorporated only with the motive
of taking undue advantage of the DTAC; and that the DT AC is for the E
benefit of the Contracting States and hence, the Central Government
cannot claim the absence of anti-abuse provisions by the third party
countries in the DTAC.

The Union of India contended that the exemption to assessees F
from income tax on capital gains on alienation of shares does not mean
that they are not 'liable to tax' undr;r the Mauritius Income Tax Act,
1995 and, hence, not 'resident' in Mauritius; that by grant of exemption
under the Mauritius Income Tax Act, it cannot be said that the
assessees are not entitled to benefits of the DT AC; that there are no
disabling or disentitling conditions in the DT AC prohibiting the G
resident of a third nation from deriving benefits thereunder; and that
the motives with which the residents had been incorporated in Mauritius
. are wholly irrelevant and could not affect the legality of the transactions.

Allowing the appeals, the Court H
226 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A HELD : 1.1. A special procedure was evolved by enacting Section
90 of the Income Tax Act, 1961 to avoid time consuming and
cumbersome procedure of translating the double taxation avoidance
treaties into an Act of Parliament. Section 90 of the Act is specifically
intended to enable and empower the Central Government to issue a
B notification for implementation of the terms of a double ·taxation
avoidance agreement. The provisions of such an agreement with
respect to cases to which they apply, would operate even if inconsistent
with the provisions of the Income Tax Act. If it was not the intention
of the legislature to make a departure from the general principle of
C chargeability to tax under Section 4 and the general principle of
ascertainment of total income under section 5 of the Act, then there
was no purpose in making those Sections "subjecfto the provisions of
the Act". The very object of grafting the said two sections with the said
clause is to enable the Central Government to issue a notification under
Section 90 of the Act towards implementation of the terms of the
D DT ACs which would automatically override the provisions of the
Income Tax Act in the matter of ascertainment of chargeability to
income tax and ascertainment of total income, to the extent of
inconsistency with the terms of DTAC. (250-C-F)

E 1.2. Section 90 of the Act was enacted precisely to enable the
Executive to negotiate a DTAC and quickly implement it. The powers
exercised by the Central Government under Section 90 of the Act are ·
delegated powers of legislation. A delegate of legislative p«;>wer has
power to grant exemption. There are provisions galore in statutes
made by Parliament and State legislatures wherein the power of
F conditional or unconditional exemption from the provisions of the
statutes are expressly delegated to the Executive. (251-E-F)

1.3. Section 90 of the Act, which delegates power to the Central
Government, has not been challenged. Section 90 enables the Central
G Government to enter into a DT AC with a foreign Government. When
the requisite notification has been issued thereunder, the provisions of
sub-section (2) of Section 90 spring into operation and an assessee, who
is covered by the provisions of the DT AC, is entitled to seek benefits
thereunder, even if the provisions of the DT AC are inconsistent with
H the provisions of the Income Tax Act, 1961. (252-C-DJ
U.O.I. v. AZADI BACHAO ANDOLAN 227
Mc!ganbhai lshwarbhai Patel & Ors. v. Union ofIndia & Anr., (1970) A
3 sec 400, referred to.

Commissioner of Income Tax v. Visakhapatnam Port Trust, (1983)
144 ITR 146 AP; Commissioner of Income Tax v. Davy Ashmore India
Ltd., (1991) 190 ITR 626 (Cal.); Leonhardt Andhra Und Partner, Gmbh
v. Commissioner ofIncome Tax, (2001) 249 ITR 418 (Cal.); Commissioner B
ofIncome Tax v. R.M Muthaiah, (1993) 202 ITR 508 (Ker.) and Arabian
Express Line Ltd. of United Kindom & Ors. v. Union of India, (1995) 212
ITR 31 (Guj.), approved.

1.4. The validity and the vires of the legislation, primary or C
delegated, has to be tested on the anvil of the law making power. If
an authority lacks the power, then the legislation is bad. On the
contrary, if the authority is clothed with the requisite power, then
irrespective of whether the legislation fails in its object or not, the vi res
of the legislation is not liable to be questioned. Hence, it cannot be said
that the DT AC is ultra vires the powers of the Central Government D
under Section 90 of the Act on account of its susceptibility to 'treaty
shopping' on behalf of the residents of third countries. (261-F-H]

1.5. The Courts are empowered to lift the veil of the incorporation
while applying the domestic law. In the situation where the terms of E
the DTAC have been made applicable by reason of Section 90 of the
Income Tax Act, 1961, even if they derogate from the provisions of the
Income TauAct, it is not possible to say that this principle of lifting
the veil of incorporation should be applied by the Court. The whole
purpose of the DTAC is to ensure that the benefits are available even
if they are inconsistent with the provisions of the Income Tax Act. The F
principle of piercing the veil of incorporation can hardly apply to a
situation in this case. (279-G-H, 280-A)

Re F.G. Films Ltd. (53) 1 WLR 483, referred to.

2. The impugned circular is a circular within the meaning of G
Section 90 of the Act. Therefore, it must have the legal consequences
contemplated by sub-section (2) of Section 90 of the Act. In other
words, the circular shall prevail even if inconsistent with the provisions
of the Income Tax Act in so far as the provisions of the DTAC are
concerned. The impugned Circular does not amount to impermissible H
228 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A delegation of legislative power. r
Maharashtra State Board of Seconda1y and Higher Seconda1y
Education & Anr. v. Paritosh Bhupesh Kumar Sheth & Ors., [1984] 4 SCC
27, relied on.

B Harishankar Bag/a & Anr. v. The State of Madhya Pradesh, (1955)
1 SCR 380 (CB) and Kishan Prakash Sharma & Ors. v. Union of India
& Ors., (2001) 5 SCC 212 (CB), referred to.

3.1. The CBDT under Section 119 of the Income Tax Act is
empowered to issue orders, instructions· and directions to other income
C tax authorities. The circulars and instructions issued by the CBDT under
the Section are binding on the tax authorities and are also in the nature
of contemporanea expositio furnishing legitimate aid to the construction
of the Act. It is trite law that as long as an authority has power, which is
traceable to a source, the mere fact that source of the power is not indicated
D in impugned Circular does not render the Circular invalid. As long as
the Circular emanates from the CBDT and contains orders, instructions
or directions pertaining to proper administration of the Act, it is relatable
to the source of power under Section 119 of the Act irrespective ~fits
nomenclature. The High Court was not justified in reading the Circular
E as not complying.with the provisions of the Act. The Circular falls within
the parameters of the powers exercisable by the CBDT under Section
119 of the Act. [256-G, 257-A)

3.2. The CBDT Circular No. 682 dated 30.4.1994 was a clear
enunciation of the porvisions contained in the DTAC, which would have
F overriding effect over the provisions of Section 4 and 5 of the Income
Tax Act by virtue of Section 90(1) of the Act. If, in the teeth of this
clarification, the assessing officers chose to ignore the guidelines and
spent their time, talent and energy on inconsequential matters, the CBDT
is justified in issuing 'appropriate' directions videCircular No. 789 under
G its powers under Section 119 to set things on course by eliminating
avoidable wastage of time, talent and energy of the assessing officers
discharging the onerous p,ublic duty of collection of revenue. The
impugned Circular does not, in any way, crib, cabin or confine the powers
of the assessing officer with regard to any particular assessment. It merely
formulates broad guidelines to be applied in the matter of assessment of
H assessees covered by the provisions of the DTAC. The impugned Circular
u.o.r. V. AZADI BACHAO ANDOLAN 229
does not in any way take away or curtail the jurisdiction of the assessing A
· officer to assess income of the assessees before him. It is erroneous to say
the impugned Circular is ultra vires the provisions of Section 119 of
the Act. The powers conferred upon the CBDT, by sub-sections (1) and
(2) of Section 119 of the Act are wide enough to accommodate such a
Circular. [259-D, E] B
Navnit Lal C. Javeri v. K.K. Sen, (1965) 56 ITR 198 CB; Afzal Ullah
v. State of UP., [1964] 4 SCR 991 CB; K.P. Varghese v. Income Tax
Officer, Ernakulam & Anr., (1981) 131 ITR 597 SC; Deshbandhu Gupta
& Company & Ors. v. Delhi Stock Exchange Association Ltd, [1979] 4
SCC 565; Ellerman Lines ltd. v. CIT, WB-I, (1971) 82 ITR 913 SC; UCO C
Bank v. Commissioner of Income Tax, (1999) 237 ITR 889 SC;
• Commissioner ofIncome Tax v. Anjum MH. Ghaswala & Ors., (2001) 252
ITR 1 SC; Collector of Central Excise Vadodra v. Dhiren Chemical
Industries, [2002] 2 SCC 127; State of Sikkim v. Dorjee Tshering Bhutia
& Ors., (1991] 4 SCC 243; NB. Sanjana, Assistant Collector of Central D
Excise, Bombay & Ors. v. Elphinstone Spinning and Weaving Mills Co.
ltd., [1971] 1 SCC 337 and P. Balakotaiah v. Union of India & Ors.,
(1958] SCR 1052; AIR (1958) SC 232, referred to.

Baleshwar Bagarti v. Bhagirathi Dass, (1908) ILR 35 Cal. 701,
~~~ E
Crawfrod on Statutory Construction (1940 Ed.) referred to.

4.1. A perusal of the provisions of the Mauritius Income Tin: Act,
1995 does not lead to the conclusion that tax incentive companies are
not liable to taxation although they have been granted exemption from F
income tax in respect of a specified head of income, namely, gains from
transactions in shares and securities. Merely because exemption has
been granted in respect of taxability of a particular source of income
under the Mauritius Income Tax Act, 1995, it cannot be postulated that
the entity is not 'liable to tax' under the Act. [266-H, 267-A, DJ G
K. V. AL. M Ramanathan Chettiar v. Commissioner of Income Tax
Madras (1973) 88 ITR 169 SC; Wallace Flour Mills Co. Ltd. v. Collector
of Central Excise, Bombay Division III, [1989] 4 SCC 592; Kasinka
Trading & Anr. v. Union of India & Anr., [1995] 1 SCC 274, referred
~ H
230 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A Tamil Nadu (Madras State) Handloom Weavers Co-operative Society
Ltd. v. Assistant Collector of Central Excise, Erode, (1978) ELT J57
Mad., referred to.

Ingemar Johansson et. al. v. United States ofAmerica, 336F.2d 809,
. B referred to .

Jean Marie Rivi/er, Cahiers De Droit Fiscal International Vol.
LXXITa, referred to.

4.2. 'Liability to taxation' is a legal situation and 'payment of tax'
C is a fiscal act. For the purpose of Article 4 of the DTAC, the legal
situation, namely the liability to taxation is relevant and not the fiscal
act of actual payment of tax. If this were not so, tlie DT AC would not
have used the words 'liable to taxation' but would have used some
appropriate words like 'pays tax'. On the language of the DT AC, it
D cannot be said that offshore companies incorporated and registered
under Mauritius Offshore Business Activity Act, 1992 are neither
'liable to taxation' under the Mauritius Income Tax Act nor that such
companies would not be 'resident' in Mauritius within the meaning of
Article 3 read with Article 4 of the DTAC. [270-H, 271-A-B)

E 4.3. The expression 'resident' is employed in DTAC as a term of
limitation. Otherwise, a person who may not be 'liable to tax' in a
Contracting State by reason of domicile, residence, place of management
or any other criterion of a similar nature may also claim the benefit
of the DTAC. Since the purpose of the DTAC is to eliminate double
F taxation, the treaty takes into account only persons who are 'liable to
taxation' in the Contracting States. Consequently, the benefits
thereunder are not available to persons who are not liable to taxation
and the words 'liable to taxation' are intended to act as words of
limitation. The contention of the respondents that avoidance of double
taxation can arise only when tax is actually paid in one of the
G Contracting States is not accepted. [272-E-G, 275-B, CJ

Commissioner of Income Tax, Nagpur v. Sutlej Cotton Mills Supply
Agency Limited, (1975) 100 ITR 706 CB; Mohsinally Alimohammed Rafik, · .,
Jn re. (1994) 213 ITR 317 (A.A.R.) ; Cyril Eugene Pereira, Jn re. (1999)
H 239 ITR 650 (A.A.R.), referred to.
U.0.1. v. AZAD! BACHAO ANDOLAN 231

John N. Gladden v. Her Majesty the Queen, (85 OTC 5188); A
Commissioner of Taxation v. Lamesa Holdings, (1997) 785 FCA; Chong
v. Commissioner of Tawtion, (2000) FCA 635; The Estate of Michel
Hausmann v. Her Majesty The Queen, (1998) Can. Tax Ct. LEXIS 11401
referred to.

A Manual on the OECD Model Tax Convention on Income and on B
Capital; Klaus Vogel, Double Taxation Convention (3rd Ed.), referred
to.

5.1. If it was intended that a national of a third State should be
precluded from the benefits of the DT AC, then a suitable term of C
limitation to the effect should have been incorporated therein. In the
absence of a limitation clause, there are no disabling or disentitling
.. conditions under the lndo-Mauritius Treaty prohibiting the resident of
third nation from deriving benefits thereunder. The motive, with which
the residents have been incorporated in Mauritius, are wholly irrelevant D
and cannot in any way affect the legality of the transaction. There is
nothing like equity in a fiscal statute. Either the statute applies proprio
vigore, or it does not. There is no question of applying a fiscal statute
by intendment, if the expressed words do not apply. [279-B, D, E)

Inda-US Double Taxation Avoidance Convention (Article 24), E
referred to.'

Lord McNaiJ·, The Law of Treaties (Oxford, at the Calendran
Press, 1961), referred to.

5.2. It is an accademic approach to the problem as \:o how a State F
should modulate its laws or incorporate suita·ble terms in tax conventions
to which it is party so that the possibility of a resident of third State
deriving benefits thereunder is totally eliminated. The maxim "Judicis
est }us dicere, non dare:" pithily expounds the duty of the Court. It is
to decide what the law is and apply it and not to make it. The various G
reports are about what the law ought to be and pointers to the
Parliament and the Executive for incorporating suitable limitation
provisions in the treaty itself or by domestic legislation. This per se does
not render an attempt by resident of a third party to take advantage
of the existing provisions of the DT AC illegal. It is neither possible for H
232 SUPREME COURT REPORTS (2003) SUPP. 4 S.C.R.

A th~ Court_to ~ay that the DTACor the impugned circular are contrary ·
to la~ nor_p~ssible to in.terfere,with either oHhem on the'basis of the·
Reports. 1280-_<;, 28l~A) ,_. - ,-_ - ,. , i. • i .- · ·, ,_.r · i ·' ·

• ·~ !t.f,1'~ ~-.' 1 ·... ,:~ ft"i ?· 1-..d,~., , ...... :,·r' i~j.•n/, i · t·" • -1. ;.

~~P.~'?1 • pf .!?e,, Wo_r~iflg,,G/,oup on~Non-Residen" Taxation,.dated
B 3.1..20R31; 1 ~?J;1~fprliq1?1<;rt,<;011H11ittee 1 Repo_rt on the Stock,Mar_ket&am
arid Af/fl~(p:~/f~lq_~ing thereto dated,,l~.p,.f-OQ~;•refen:ed1to. , . · •.
l r l • "' 71 ; • '~ • l I
0
i : j . ., ,~l • ' 1 ,., .

v;~;l.na"c;h~e~tion on the-La{vs of l;reaties, {969, referred to.. '
, • ; ~- } i 1 : : J l · ~ I · '"' -
I' ("
w • • ' j '! ' • • • •

t ·! ...
~ ~ l .._r Jtl_joq l•pJ4fj.," ),ft• o ... ' l1l
L. Oppenheim,· Oppenheim 's Internatzonal Law, Article 626 (9th
C Ed.~; f J:flfP._if?:q~er, J?,ouble Taxatiqn ,Conv_~ntjpn ancf}11ternational Law,
(l994.2rd ,~d.), referred to: . , - :'. ' :-

5.3. The principles adopted in interpretation of treaties are not
the same as those in interpretation of statutory legislation. An important
principle in the interpretation .of the provisions of an international
D treaty, including one for dou_ble taxation. relief, is that treaties are
negotiated and entered into at a political level an~ have several
considerations as their bases._ The 'treaty shopping' may have been
intended at the time·when DTAC was entered into. Whether it should
continue, and, if so, for how long, is a matter which is best left .to the
E discretion of the executive as it is independent upon several economic
and political considerations. Th.is Court cannot judge the legality of
treaty shopping merely because one section of thought considers it
improper. A holistic view has to be taken to adjudge what is perhaps
regarded in contemporary thinking as a necessary evil in a developing
F economy. [284-A, F, 286-F-G]

Francis Bennion, Statutory Interpretation (Butterworths 1992
(2nd Ed.); David R. Davis, Principles of International Double Taxation
Relief (London Sweet & Maxwell, 1985); Roy Rohtagi, Basic International
Taxation (Kluwer Law International), referred to.
G
5.4. The words 'sham' and 'device', which were loosely used in
connection with the incorporation under the Ma~ritian law, are not
intended to be used as magic mantras or catchall phrases to defeat or
nullify the effect of a legal situation. If the Court finds that
H notwithstanding a series of legal steps taken by an assessee, the
.,.,
U.0.1. v. AZADI BACHAO ANDOLAN 2 .).)

intended legal result has not been achieved, the Court might be A
justified in overlooking the intermediate steps, but it would not be
permissible for the Court to treat the intervening legal steps as non-
est based upon some hypothetical assessment of the 'real motive' of the
assessee. The Court must deal with what is tangible in an objedive
manner and cannot afford to chase a will-o'-the-wisp. This court is B
unable to agree with the ·submission that an act, which is otherwise
valid in law, can be treated as no-est merely on the basis of some
underlying motive suppos~dly resulting in some economic detriment or
prejudice to the national interests. [297-E, F, 299-A-B, F]

Mcdowell and Company Ltd. v. Commercial Tax.Officer, (1985) 154 C
ITR 148 CB; Mathuram Agrawal. v. State of Madhya Pradesh, [1999] 8
SCC 667 CB; Waman Rao & Ors. v. Union ofIndia & Ors., (1981) 2 SCR
1 ; Minerva Mills Ltd. & Ors. v. Union of India & Ors., [1981) 1 SCR
206; CIT, Gujarat v. A. Raman and Co., (1968) 67 ITR 11 SC;
Commissioner of Wealth r"ax-11, Ahmedabad v. Arvind Narottam, (1988) D.
173 ITR 479 SC; M V. Valliappan & Ors. v. JTO & Ors., (1988) 170 ITR
238 Mad.; Banyan and Berry v. Commissioner ofIncome Tax, (1996) 222
ITR 831 Guj and Bank of Chettinad Ltd. v. CIT, (1940) 8 ITR 522 PC,
referred to.

!RC v. Fisher's Executors, (1926) AC 395 HL; !RC v. Duke of E
Westminster, (1936) AC l; 19 TC 490; W.T. Ramsay Ltd. v. IRC, (1982)
AC 300; (1981) 2 WLR 449 HL; !RC v. Burmah Oil Company Ltd.,
(1982) Simon's Tax Cases 30; Furniss v. Dawson, (1984) 1 All ER. 530;
2 WLR 226 HL; Craven v. White, (1983) 3 All ER .495; MacNiven
(Inspector of Taxes) v. Westmoreland Investments Ltd., (2001) 1 All ER F
865; !RC v. Challenge Corporation Ltd., (1987) 2 WLR 24 (PC); Russell
v. Scott., (1948) .2 All ER IS; Ingemar Johanson et al. v. United States
ofAmerica, (336F. 2d. 809); Gregory v. Helvering 293 US 465; 55 S.Ct.
226 L.ed. 566; 97 ALR 1335; Helvering v. St. Louis Trust Company 296
US 48; 56 S. Ct. 78; Becker v. St. Louis Union Trust Company 296 US
48; 56 set. 78 80L; Perry R. Bas v. Commissioner of Internal Revenue G
(108) US 50 TC 595; Barber-Greene Americas Inc. v. Commissioner of
Internal Revenue (1960) 35 TC 365; Snook v. London and West Riding
Investments Ltd., (1967) All ER 518, referred to.

American Jurisprudence (1973) 2nd Ed. Vol. 71, referred to. H

.-
234 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A 6. Different High Courts have consistently taken an uniform view
on Section 90 of the Act. Hence, by adopting the d'octrine of Stare
decisis, it would be worthwhile to let the matter rest since large number
of parties have modulated their legal relationship based on this sdtled
position on law. 1253-B, q
B
Muktul v. Mst. Manbhari & Ors., [1959J SCR 1099; Mishri Lal (Dd)
by Lrs. v. Dhirendra Nath (Dead) by lrs. & Ors., [1999) 4 SCC 11,
referred to.

CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 8161-
C 8162 of 2003.

From the Judgment and Order dated 31.5.2002 of the Delhi High
Court in C.W.P. Nos. 2802 and 5646 of 2000.

D WITH

C.A. Nos. 8163-8164 of 2003.

Soli J. Sorabjee, Attorney General, S. Ganesh, H.N. Salve, Preetish
E Kapur, B.V. Balaram Das, P.H. Parekh, Nishith Desai, Ms. Bijal Ajinkya,
Sameer Parekh, Ms. Sonali Basu Parekh, Lalit Chauhan, Ashim Sood,
Sunil Mathews, Aman Sinha, Anand Misra and Sandeep Parekh for the
Appellants.

F Prashant Bhushan, Vishal Gupta, Narinder Verma, Sanjai Pathak, B.
Balaji, Anil Kumar Mittal and Shiva Kant Jha Caveator-in-person for the
Re~pondents.

The Judgment of the Court was delivered:

G SRIKRISHNA, J. : Leave granted.

These appeals by special leave arise out of the judgment of the
Division Bench of Delhi High Court allowing Civil Writ Petition -.;-:
(PIL)No.5646/2000 and Civil Writ Petition No.2802/2000. The High Court
H by its judgment impugned in these appeals quashed and set aside the •
U.0.1. v. AZADI BACHAO ANDOLAN (SRIKRISHNA, J.] 235

circular No.789 dated 13.4.2000 issued by the Central Board of Direct A
Taxes (hereinafter referred to as "CBDT") by which certain instructions
were given to the Chief Commissioners/Directors General of Income-tax
with regard to the assessment of cases in which the Indo-Mauritius Double
Taxation Avoidance Convention, 1983 (hereinafter referred to as 'DTAC')
applied. The High Court accepted the contention before it that the said B
circular is ultra vires the provisions of Section 90 and Section 119 of the
Income-tax Act, 1961 (hereinafter referred to as 'the Act') and also
otherwise bad and illegal.

It would be necessary to recount some salient facts m order to
appreciate the plethora of legal contentions urged. C
FACTS:

A: The Agreement

The Government of India has entered into various Agreements (also D
called Conventions or Treaties) with Governments of different countries
for the avoidance of double taxation and for prevention of fiscal evasion.
One such Agreement between the Government oflndia and the Government
of Mauritius dated April 1, 1983, is the subject matter of the present
controversy. The purpose of this Agreement, as specified in the preamble, E
is "avoidance of double taxation and the prevention of fiscal evasion with
respect to taxes on income and capital gains and for the encouragement
of mutual trade and investment". After completing the formalities prescribed
in Article 28 this agreement was brought into force by a Notification dated
6.12.1983 issued in exercise of the powers of the Government of India F
under Section 90 of the Act read with Section 24A of the Companies
(Profits) Surtax Act, 1964. As stated in the Agreement, its purpose is to
avoid double taxation and to encourage mutual trade and investment
between the two countries, as also to bring an environment of certainty in

- the matters of tax affairs in both countries.

Some of the salient provisions of the Agreement need to be noticed
at this juncture. The Agreement defines a number of terms used therein
G

and also contains a residuary clause. In the application of the provisions
of the Agreement by the contracting States any term not defined therein
shall, unless the context otherwise requires, have the meaning which it has H
236 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A under the laws in for~e in that contracting State, relating to the words which
are the subject of the convention. Article l(e) defines 'person' so as to.
include an individual, a company and any other entity, corporate or non-
corporate "which is treated as a taxable unit under the taxation Jaws in force
in the respective contracting States". The Central Government in the
B Ministry of Finance (Department of Revenue), in the case oflndia," and the
Commissioner of Income Tax in the case of Mauritius, are defined as the
"competent authority". Article 4 provides the scope of application of the
Agreement. The applicability of the Agreement is determined by Article
4 which reads as under;

.c "Article 4 Residents

1. For the purposes of the Convention, the term "resident of a
Contracting State" means any person who under the laws of that
State, is liable to taxation therein by reason of his domicile,
residence, place or management or any other criterion of similar
D nature. The terms "resident of India" and "resident of Mauritius"
shall be construed accordingly.

2. Wher;e by reason of the provisions of paragraph 1, an .
individual is 'a resident of both Contracting States, then his
E residential status for the purposes of this Convention shall be
determined in accordance with the following rules:

(a) he shall be deemed to be a resident of the Contracting State
in which he has a permane11t home available to him; if he
has a permanent home available to him in both Contracting
F States, he shall be deemed to. be a resident of the Contracting
State with which his personal and economic relations are
closer (hereinafter referred to as his "centre of vital interests");

(b) if the Contracting State in which he has his centre of vital
interest cannot be determined, or if he does not have a
G
permanent home available to him in either Contracting State
he shall be deemed to be a resident of the Contracting State
in which he has an habitual abode;

(c) if he has an habitual abode in both Contracting States or in
H neither of them, he shall be deemed to be a resident of the
U.O.I. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA, J.] 237

Contracting State of which he is a national; A

(d) if he is a national of both Contracting States or of neither
of them, the competent authorities of the Contracting States
shall settle the question by mutual agreement.
B
3. Where by reason of the provision of paragraph 1, a person
other than an individual is a resident of both the Contracting
States, then it shall be deemed to be a resident of the Contracting
State in which its place of effective management is situated."

The Agreement provides for allocation of taxing jurisdiction to C
different contracting parties in respect of different heads of income.
Detailed rules are stipulated with regard to taxing of Dividends under
Article 10, interest under Article 11, Royalties under Article 12, Capital
Gains under Article 13, income derived from Independent Personal
Services in Article 14, income from Dependent Personal Services in Article D
15,'Directors' Fees in Article 16, income of Artists and Athletes in Article
17, Governmental Functions in Article 18, income of students and
Apprentices in Article 20, income of Professors, Teachers and Research
Scholars in Article 21, and other income in Article 22.
E
Article 13 deals with the manner of taxation of capital gains. It
provides that gains from the alienation of immovable property may be
taxed in the Contracting State in which such property is situated. Gains
derived by a resident ofa Contracting State from the alieriation of movable
prope11y, forming part of the business property of a permanent establishment F
which an enterprise of a Contracting State has in the other Contracting
State, or of movable property pertaining to a fixed base available to a
resident of a Contracting State in the other Contracting State for the
purpose of performing independent personal services, including such gains
from the alienation of such a permanent establishment, may be taxed in
that other State. Gains from the alienation of ships and aircraft operated G
in international traffic and movable property pertaining to the operation of
such ships and aircraft, shall be taxable only in the Contracting State in ·
which the place of effective management is situated. With respect to capital
gain derived by a resident in the Contracting State from the alienation of
any property other than the aforesaid is concerned, it is taxable only in the H
238 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A State in which such a person is a 'resident'.
Article 25 lays down the Mutual Agreement Procedure. It provides
that where a resident of a Contracting State considers that the actions of
one or both of the Contracting State result or will result for him in taxation
B not in accordance with this Convention, he may, notwithstanding the
r~medies provided by the national laws of those States, present his case
to the competent. authority of the Contracting State of which he is a
resident. This case must be presented within three years of the date of
receipt of notice of the action which gives rise to taxation not in accordance
with the Convention. Thereupon, if the objection appears to be justified,
C the competent authority shall attempt to resolve the case by mutual
agreement with the competent authority of the other Contracting State so
as to avoid a situation of taxation not in accordance with the convention.
This Article also provides for endeavour by the competent authorities of
the Contracting States to resolve by mutual agreement any difficulties or
D doubts arising as the interpretation or application of the convention. For
this purpose, the convention contemplates continuous or periodical
communication between the competent authoriti~s of the Contracting
States and exchange of views and opinions.

E B : The Circulars
By a Circular No. 682 dated 30.3.1994 issued by the CBDT in
exercise of its powers under Section 90 of the Act, the Government of India
clarified that capital gains of any resident of Mauritius by alienation of
shares of an Indian company shall be taxable only in Mauritius according
F to Mauritius taxation laws and will not be liable to tax in India. Relying
on this, a large number of Foreign Institutional Investors s (hereinafter
referred to as "the FIIs"), wh.ich were resident in Mauritius, invested large
amounts of capital in shares of Indian companies with expectations of
making profits by sale of such shares without being subjected to tax in
G India. Sometime in the year 2000, some of the income tax authorities issued
show cause notices to some FIIs functioning in India calling upon them
to show cause as to why they should· not be taxed for profits and for
dividends accrued to them in India. The basis on which the show cause
notice was issued was that the recipients of the show cause notice were
H mostly 'shell companies' incorporated in Mauritius, operating through
U.O.l. v. AZADI BACHAO ANDOLAN [SRJKRJSHNA, J.] 239

Mauritius, whose main purpose was investment of funds in India. rt was A
alleged that these companies were controlled and managed from countries
other than India or Mauritius and as such they were not "residents" of
Mauriti11s so as to derive the benefits of the OT AC. These show cause
notices resulted in panic and consequent hasty withdrawal of funds by the
Fils. The Indian Finance Minister issued a Press note dated April 4, 2000 B
clarifying that the views taken by some of the income-tax officers pertained
to specific cases of assessment and did not represent or reflect the policy
of the Government of India with regard to denial of tax benefits to such
Flls.

Thereafter, to further clarify the situation, the CBDT issued a Circular C
No.789 dated 13.4.2000. Since this is the crucial Circular, it would be
worthwhile reproducing its full text. The Circular reads as under:

"Circular No. 789
D
F.No.500/60/2000-FTD
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
E
New Delhi, the 13th April, 2000

To

All the Chief Commissioners/ Directors
F
General of Income-tax

Sub: Clarification regarding t<ixation of income from dividends
and capital gains under the Indo-Mauritius Double Tax

• Avoidance Convention (DTAC)-Reg .

The provisions of the Indo-Mauritius DTAC of 1983 apply
G

to 'residents' of both India and Mauritius. Article 4 of the DTAC
defines a resident of one State to mean any person who, under the
laws of that State is liable to taxation therein by reason of his
domicile, residence, place of management or any other criterion H
240 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A of a similar nature. For~ign Institutional Investors and other
investment funds etc. which are operating from Mauritius are
invariably incorporated in that country. These enrities are 'liable
to tax' under the Mauritius Tax law and are therefore to be
considered as residents of Mauritius in accordance with the
DTAC.
B
Prior to 1st June, 1997, dividends distributed by domestic
companies were taxable in the hands ·of the shareholder and tax
was deductible at source under the Income-tax Act, 196 I. Under
the DTAC, tax was deductible at source on the gross dividend paid
c out at the rate of 5% or 15% depending upon the extent of
shareholding of the Mauritius resident. Under the Income-tax Act,
I 961, tax was deductible at source at the rates specified under
Section l l 5A etc. Doubts have been raised regarding the taxation
of dividends in the hands of investors from Mauritius. It is hereby
D clarified that wherever a Certificate of Residence is issued by the
Mauritian Authorities, such Certificate will constitute sufficient ...
'
evidence for accepting the status ofresidence as well as beneficial
ownership for applying the DTAC accordingly.

The test of residence mentioned above would also apply in
E respect of income from capital gains on sale of shares. Accordingly,
Flis etc., which are resident in Mauritius would not be taxable in
India on income from capital gains arising in India on sale of
shares as per paragraph 4 of article 13,.

F The aforesaid clarification shall apply to all proceedings
which are pending at various levels."

C: The Writ Petitions

Circular No. 789 was challenged before the High Court of Delhi by
G two writ petitions, both said to be by way of Public Interest Litigation. The
petitioner in CWP 2802 of 2000 (Azadi Bachao Andolan) prayed for
quashing and declaring as illegal and void Circular No.789 dated 13.4.2000
issued by the CBDT. The petitioner in CWP 5646 of 2000 sought an
appropriate direction/order or writ to the Central Government and made
H the following prayers:
U.O.L v. AZAD! BA CHAO ANDOLAN (SRI KRISHNA, J.] 24 J

"(a) issue such appropriate direction/order/writ as the Court deem A
proper, under the circumstances brought to the knowledge of the
Hon'ble Court, to the Central Government to initiate a process
whereby the terms of the Indo-Mauritius Double Taxation
Avoidance Agreement are revised, modified, or terminated
and/or effective steps taken by the High Contracting Parties so that B
the NRls and Flis and such other interlopers do not maraud the
resources of the State.

(b) declare and delimit the powers of the Central Government
under Section 90 of the Income Tax Act, 1961 in the matter of
entering into an agreement with the Government of any country C
outside India;

(c) declare and delimit the powers of the Central Board of Direct
Taxes in the matter of the issuance of instructions through
circulars to the statutory authorities under the Income tax Act, D
specially through such circulars which are beneficial to certain
individual taxpayers but injudous to Public Interest.

(d) declare the illegality of Circular No.789 of April 13, 2000
issued by the Central Board of Direct Taxes and to quash it as a E
matter of consequence;

(e) issue mandamus so that the respondents discharge their
statutory duties of conducting investigation and collection of tax
as per law;
F
(f) issue appropriate direction/ order or writ of the nature of
mandamus, as the Court deem fit, so that all remedial actions to
undo the effects of the acts done to the prejudice or Revenue in
pursuance of Circular No.789 are taken by the authorities under
the Income tax Act, 1961" G

D : High Court's findings

The High Court has quashed the circular on the following broad
grounds: H
242 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A (A) Prima facie, by reason of the impugned circular no direction has
been issued. The circular does not show that it has been issued under
Section I 19 of the Income-tax Act, 1961 and as such it would not be legally
binding on the Revenue;

B (B) The Central Board of Direct Taxes cannot issue any instruction,
which would be ultra vires the provisions of the Income-tax Act, 1961.
Inasmuch as the impugned circular directs the income-tax authorities to
accept a certificate of residence issued by the authorities of Mauritius as
sufficient evidence as regards status of resident and beneficial ownership,
it is ultra vires the powers of the CBDT;
c
(C) The Income-tax Officer is entitled to lift the corporate veil in
order to see whether a company is actually a resident of Mauritius or not
and whether the company is paying income-tax in Mauritius or not and this
function of the Income-tax Officer is quasi-judicial. Any attempt by the
D CBDT to interfere with the exercise of this quasi-judicial power is contrary
to intendment of the Income-tax Act.

(D) Conclusivenes5 of a certificate of residence issued by the
Mauritius Tax Authorities is neither contemplated under the DTAC, nor
under the Income-tax Act; whether a statement is conclusive or not, must
E be provided under a legislative enactment such as the Indian Evidence Act I-
;-.
and cannot be determined by a mere circular issued by the CBDT;

(E) "Treaty Shopping", by which the resident of a third country takes
advantage of the provisions of the Agreement, is illegal and thus necessarily
F forbidden;

(F) Section 119 of the Income-tax Act, 1961 enables the issuance of
a circular for a strictly limited purpose. By a circular issued thereunder,
neither can the essential legislative function be delegated, nor arbitrary,
uncanalized or naked power be conferred;
G
(G) Political expediency cannot be a ground for not fulfilling the
.. 'l
·.
constitutional obligations inherent in the Constitution ofindia and reflected
in Section 90 of the Act. The circular confers power to lay down a law
which is not contemplated under the Act on the ground of political
H expediency, which cannot but be ultra vires.
U.0.1. v. AZAD! BACHAOANDOLAN (SRJKRJSHNA, J.] 243

(H) Any purpose other than the purpose contemplated by Section 90 A
of the Act, however bona fide it be, would be ultra vires the provisions
of Section 90 of the Income tax Act.

(I) While political expediency will have a role to play in terms of
Article 73 of the Constitution, the same is not true \vhen a Treaty is entered B
into under the statutory provision like Section 90 of the Act.

(J) Avoidance of double taxation is a term of art and means that a
person has to pay tax at least in one country; avoidance of double taxation
would not mean that a person does not have to pay tax in any country
whatsoever. c
(K) Having regard to the law laid down by the Supreme Court in
McDowell & Company v C. T0. 1 , it is open to the Income-tax Officer in
a given case to lift the corporate veil for finding out whether the purpose
of the corporate veil is avoidance of tax or not. It is one of the functions D
of the assessing officer to ensure that there is no conscious avoidance of
tax by an assessee, and such function being quasi-judicial in nature, cannot
be interfered with or prohibited. The impugned circular is ultra vires as
it interferes with this quasi judicial function of the assessing officer.

(L) By reason of the impugned circular the power of the assessing E
authority to pass appropriate orders in this connection to show that the
assessee is a resident of a third country having only paper existence in
Mauritius, without any economic impact, only with a view to take
advantage of the double taxation avoidance agreement, has been taken
away.
F
THE SUBMISSlONS

The learned Attorney General and Mr. Salve, for the appellants, have
assailed the judgment of the Delhi High Court on a number of grounds,
while the respondents through Mr. Bhushan, and in person, reiterated their G
submissions made before the High Court and prayed for dismissal of these
appeals.

Purpose and consequence of Double Taxation Avoidance Convention

l. (1985) 154 ITR 148. H
244 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A To appreciate the contentions urged, it would be necessary to
understand the purpose and necessity of a Double Taxation Treaty,
Convention or Agreement, as diversely called. The Income-tax Act, 1961,
contains a special Chapter IX which is devoted to the subject of 'Double
Taxation Relief'.

B Section 90, with which we are primarily concerned, provides as
under:

"90. Agreement with foreign countries.

c (I) The Central Government may enter into an agreement with
the Government of any country outside India-

(a) for the granting of relief in respect of income on which have
been paid both income-tax under this Act and income-tax in that
country, or
D
(b) for the avoidance of double taxation of income under this Act
and under the corresponding law in force in that country, or

(c) for exchange of information for the prevention of evasion or
E avoidance of income-tax chargeable under this Act or under the
corresponding law in force in that country, or investigat!on of
cases of such evasion or avoidance, or

( d) for recovery of income-tax under this Act and under the
corresponding law in force in that country,
F
and may, by notification in the Official Gazette, make provisions
as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement
G with the Government of any country outside India under sub-
section (I) for granting relief of tax, or as the case may be,
avoidance of double taxation, theil, in relation to the assessee to
whom such agreement applies, the provisions of this Act shall
apply to the extent they are more beneficial to that assessee."
H (Explanation omitted as not relevant)
U.0.1. v. AZADI BACHAO ANDOLAN (SRIKRISHNA, J.] 245

Section 4 provides for Charge of Income-tax. Section 5 provides that A
the total income of a resident includes all income which : (a) is received,
deemed to be received in India or (b) accrues, arises or deemed to accrue
or arise in India, or (c) accrues or arises outside India, during the previous
year. In the case of a non-resident, the total income includes "all income
from whatever source derived" which (a) is received or is deemed to be B
received or, (b) accrues or is deemed to accrue in India, during such year.
A person 'resident' in India would be liable to income-tax on the basis of
his global income unless he is a person who is 'not ordinarily' resident
within the meaning of Section 6(b). The concept of residence in India is
indicated in Section 6. Speaking broadly, and with reference to a company, C
which is of concern here, a company is said to be 'resident' in India in
any previous year, if it is an Indian company or if during that year the
control and management of its affairs is situated wholly in India.

Every country seeks to· tax the income generated within its territory
on the basis of one or more connecting factors such as location of the D
source, residence of the taxatM entity, maintenance of a permanent
establishment, and so on. A country might choose to emphasise one or the
other of the aforesaid factors for exercising fiscal jurisdiction to tax the
entity. Depending on which of the factors is considered to be the
connecting factor in different countries, the same income of the same entity E
might become liable to taxation in different countries_. This would give rise
to harsh consequences and impair economic development. In order to avoid
such an anomalous and incongruous situation, the Governments of different
countries enter into bilateral treaties, Conventions or agreeme1,ts for
granting relief against double taxation. Such treaties, conventions or
agreements are called double taxation avoidance treaties, conventions or. F
agreements.

The power of entering into a treaty is an inherent part of the sovereign
power of the State. By article 73, subject to the provisions of the
Constitution, the executive power of the Union extends to the matters with G
respect to which the Parliament has power to make laws. Our Constitution
makes no provision making legislation a condition for the entry into an
international treaty in time either of war or peace. The executive ·power
of the Union is vested in the President and is exercisable in accordance
with the Constitution. The Executive is qua the State competent to H
246 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A represent the State in all matters international and may by agreement,
convention or treaty incur obligations which in international law are
binding upon the State. But the obligations arising under the agreement or
treaties are not by their own force binding upon Indian nationals. The
power to legislate in respect of treaties lies with the Parliament under
B entries 10 and 14 of List I of the Seventh Schedule. But making of law
under that authority is necessary when the treaty or agreement operates to
restrict the rights of citizens or others or modifies the law of the State. If
the rights of the citizens or others which are justiciable are not affected,
no legislative measure is needed to give effect to the agreemen~ or treaty 2 •

C When it comes to fiscal treaties dealing with double taxation avoidance,
different countries have varying procedures. In the United States such a
treaty becomes a part of municipal law upon ratification by the Senate. In
the United Kingdom such a treaty would have to be endorsed by an order
made by the Queen in Council. Since in India such a treaty would have
D to be translated into an Act of Parliament, a procedure which would be time
consuming and cumbersome, a special procedure was evolved by enacting
Section 90 of the Act.

The purpose of Section 90 becomes clear by reference to its legislative
E history. Section 49A of the Income-tax Act, 1922 enabled the Central
Government to enter into an agreement with the government of any country
outside India for the granting of relief in respect of income on which, both
income-tax (including super-tax) under the Act and income-tax in that
country, under the Income-tax Act and the corresponding law in force in
that country, had been paid. The Central Government could make such
F provisions as necessary for implementing the agreement by notification in
the Official Gazette. When the Income-tax Act, 1961 was introduced,
Section 90 contained therein initially was a reproduction of Section 49A
of I 922 Act. The Finance Act, 1972 (Act 16 of 1972) modified Section
90 and brought it into force with effect from 1.4.1972. The object and scope
G of the substitution was explained by a circular of the Central Board of
Taxes (No.108 dated 20.3.1973) as to empower the Central Government
to enter into agreements with foreign countries, not only for the purpose
of avoidance of double taxation of income, but also for enabling the tax

2. See in this connection Maganbhai Jslmarbhai Patel & Others v. Union of India & Anr..
H [I9iOJ 3 sec 400.
U.0.1. v. AZADI BACHAO ANDOLAN (SRIKRISHNA, J.] 247

authorities to exchange infonnation for the prevention of evasion or A
avoidance of taxes on income or for investigation of cases involving tax
evasion or avoidance or for recovery of taxes in foreign countries on a
reciprocal basis. In 1991, the existing Section 90 was renumbered as sub-
section (I) and sub-section (2) was inserted by Finance Act, 1991 with
retrospectiye ·effect from April I, 1972. CBDT Circular No. 621 dated B
19 .12.1991 explains its purpose as follows:

"Taxation of foreign companies and other non-resident
taxpayers -

43. Tax treaties generally contain a provision to the effect that the C
laws of the two· contracting States will govern the taxation of
income in the respective State except when express provision to
the contrary is made in the treaty. It may so happen that the tax
treaty with a foreign country may contain a provision giving
concessional treatment to any income as compared to the position D
under the Indian law existing at that point of time. However, the
Indian law may subsequently be amended, reducing the incidence
of tax to a level lower than what has been provided in the tax
treaty.

43. I. Since the tax treaties are intended to grant tax relief and not E
put residents of a contracting country at a disadvantage vis-a-vis
other taxpayers, Section 90 of the Income tax Act has been
amended to clarify that any beneficial provision in the law will
not be denied to a resident of a contracting country ..1erely
because the corresponding provision in the tax treaty is less F
beneficial."

The provisions of Sections 4 and 5 of the Act are expressly made
"subject to the provisions of this Act", which would include Section 90
of the Act. As to what would happen in the event of a conflict between
the provision of the Income-tax Act and a Notification issued under Section G
90, is no longer res-integra.

The Andhra Pradesh High Court in Commissioner of Income Tax v.
Visakhapatnam Port Trust3, held that provisions of Sections 4 and 5 of
3. [1988] 144 ITR 146. H
248 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A Income-tax Act are expressly made 'subject to the provisions of the Act'
which means that they are subject to provisions of Section 90. By necessary
implication, they are subject to the terms of the Double Taxation Avoidance
Agreement, if any, entered into by the Government oflndia. Therefore, the
total income specified in Sections 4 and 5 chargeable to income tax is also
B subject to the provisions of the agreement to the contrary, if any.

In Commissioner of Income Tax v. Davy Ashmore India Ltd. 4,while
dealing with the correctness of a circular no. 333 dated April 2, 1982, it
was held that the conclusion is inescapable that in case of inconsistency ·
between the terms of the Agreement and the taxation statute, the Agreement
C alone would prevail. The Calcutta High Court expressly approved the
correctness of the CBDT circular No. 333 dated April 2, 1982 on the
question as to what the assessing officers would have to do when they
found that the provision of the Double Taxation was not in conformity with
the Income-tax Act, 1961. The said circular provided as follows (quoted
D at p. 632):

"The correct legal position is that where a specific provision
is made in the Double Taxation Avoidance Agreement, that
provision will prevail over the general provisions contained in the
Income-tax Act, 1961. In fact the Double Taxation Avoidance
E Agreements which have been entered into by the Central
Government under Section 90 of the Income-tax Act, 1961, also
provide that the laws in force in either country will continue to
govern the assessment and taxation of income in the respective
country except where provisions to the contrary have been made
F in the Agreement.

Thus, where a Double Taxation Avoidance Agreement provided
for a particular mode of computation of income, the same should
be followed, irrespective of the provisions in the Income-tax Act.
Where there is no specific provision in the Agreement, it is the
G basic Jaw, i.e., the Income-tax Act, that will govern the taxation
of income."

The Calcutta High Court held that the circular reflected the correct
legal position inasmuch as the convention or agreement is arrived at by the
H 4. [1991] 190 !TR 626
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA. J.] 249

two Contracting States "in deviation from the general principles of taxation A
applicable to the Contracting States". Otherwise. the double taxation
avoidance agreement will have no meaning at all5.

In Co111missioner of lnco111e Tax v. R.M. Muthaiah 6 the Karnataka
High Court was concerned with the DTAT between Governm~nt of India
and Government of Malaysia. The High Cou1t held that under the terms B
of agreement, if there was a recognition of the power of taxation with the
Malaysian Government, by implication it takes away the corresponding
power of the Indian Government. The Agreement was thus held to operate
as a bar on the power of the Indian Government to tax and that the bar
would operate on Sections 4 and 5 of the Income Tax Act, 196 I, and take C
away the power of the Indian Government to levy tax on the income in
respect of certain categories as referred to in certain Articles of the
Agreement. The High Court summed up the situation by observing (at p.
512-513):

"The effect of an "agreement" entered into by virtue of Section D
90 of the Act would be : (I) If no tax liability is imposed under
this Act, the question of resorting to the agreement would not
arise. No provision of the agreement can possibly fasten a tax
liability where the liability is not imposed by this Act; (ii) if a tax
liability is imposed by this Act, the agreement may be resorted E
to for negativing or reducing it; (iii) in case of difference between
the provisions of the Act and of the agreement, the provisions of
the agreement prevail over the provisions of this Act and can be
enforced by the appellate authorities and the court."

It also approved of the correctness of the Circular No. 333 dated April F
2, 1982 issued by the Central Board of Direct Taxes on the subject.

In Arabian Express Line Ltd. of United Kingdom and Others v. Union
of lndia7, the Gujarat High Court, interpreting Section 90, in the light of
circular No. 333 dated April 2, 1982 issued by the CBDT, held that the G
procedure of assessing the income of a NRI because of his occasional
activities in establishing business in India would not be applicable in a case
5. See also in this connection Leonhardt Andra Und Partner, Gmbh v. Commissioner
of Income Tax, [2001] 249 !TR 418.
6. [1993] 202 !TR 508.
7. [1995] 212 !TR 31. H
250 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A where there is a convention between the Government of India and the
foreign country as provided under Section 90 of the Income-tax Act, 1961.
In case of such an agreement, Section 90 would have an overriding effect.
Interestingly, in this case a certificate issued by the H.M. Inspector of Taxes
certifying that the company was a resident of the United Kingdom for
B purposes of tax and that it had paid advance corporate tax in the office of
the English Revenue Accounts Office, was held to be sufficient to take
away the jurisdiction of the Income-tax Officer.

A survey of the aforesaid cases makes it clear that the judicial
consensus in India has been that Section 90 is specifically intended to
C enable and empower the Central Government to issue a notification for
implementation of the terms of a double taxation avoidance agreement.
When that happens, the provisions of such an agreement, with respect to
cases to which where they apply, would operate even if inconsistent with
the provisions of the Income-tax Act. We approve of the reasoning in the
D decisions which we have noticed. If it was not the intention of the
legislature to make a departure from the general principle of chargeability
to tax under Section 4 and the general principle of ascertainment of total
income under Section 5 of the Act, then there was no purpose in making
those sections "subject to the provisions" of the Act". The very object of
E grafting the said two sections with the said clause is to enable the Central
Government to issue a notification under Section 90 towards implementation
of the tenns of the OTAs which would automatically override the
provisions of the Income-tax Act in the matter of ascertainment of
chargeability to income tax and ascertainment of total income, to the extent
of inconsistency with the terms of the OTAC.
F
The contention of the respondents, which weighed with the High
Court viz. that the impugned circular No. 789 is inconsistent with the
provisions of the Act, is a total non-sequitur. As we have pointed out,
Circular No. 789 is a circular within the meaning of Section 90; therefore,
G it must have the legal consequences contemplated by sub-section (2) of
Section 90. In other words, the circular shall prevail even if inconsistent
with the provisions of Income-tax Act, 1961 insofar as assessees covered
by the provisions of the OTAC are concerned.

Though a number of interconnected and diffused arguments were
H addressed, broadly the argument of the respondents appears to be as
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 251

follows: By reason of Article 265 of the Constitution, no tax can be levied A
or collected except by authority of law. The authority to levy tax or grant
exemption therefrom vests absolutely in the Parliament and no other body,
howsoever high, can exercise such power. Once Parliament has enacted the
Income-tax Act, taxes must be levied and collected in accordance therewith
and no person has power to grant any exemption therefrom. The treaty B
making power under Article 73 is confined only to such matters as would
. not fall within the province of Articie 265. With respect to fiscal treaties,
the contention is that they cannot be enforced in contravention of the
provisions of the Income-tax Act, unless Parliament has made an enabling
law in support. The respondents highlighted the provisions of the OECD
models with regard to tax treaties and how tax treaties were enunciated, C
signed and implemented in America, Britain and other countries. Placing
reliance on the observations of Kier and Lawson 8, it was contended that
in England it has been recognised that "there are, however, two limits to
its capacity; it cannot legislate and it cannot tax without the concurrence
of the Parliament". It is urged that the situation is the same in India; that D
unless there is a specific exemption granted by the Parliament, it is not open
for the Central Government to grant any exemption from the tax payable
under the Ir.come-tax Act.

·In our view, the contention is wholly misconceived. Section 90, as
we have already noticed (including its precursor under the 1922 Act), was E
brought on the statute book precisely to enable the executive to negotiate
a DTAC and quickly implement it. Even accepting the contention of the
respondents that the powers exercised by the Central Government under
Section 90 are delegated powers of legislation, we are unable to see as to
why a delegatee of legislative power in all cases has no power to grant F
exemption. There are provisions galore in statutes made by Parliament and
State legislatures wherein the power of conditional or unconditional
exemption from the provisions of the statutes are expressly delegated to
the executive. For example, even in fiscal legislation like the Central Excise
Act and Sales Tax Act, there are provisions for exemption from the levy
of tax. 9 Therefore we are unable to accept the contention that the delegate G
of a legislative power cannot exercise the power of exemption in a fiscal
-1 statute.
8. Cases in Constitutional Law, D.L. Kier and F.H. Lawson. Pg.53-54, 159-163 (ELBS
& Oxford University Press 5th Ed.).
9. See Section SA of Central Excise Act, 1944 and Section 8(5) of the Central Sales
Tax Act, 1956. H
252 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.

A The niceties of the OECD model of tax treaties or the report of the
Joint Parliamentary Committee on the State Market Scam and Matters
Relating thereto, on which considerable time was spent by Mr. Jha, who
appeared in person, need not detain us for too long, though we shall advert
to them later. This Court is not concerned with the manner in which tax
B treaties are negotiated or enunciated; nor is it concerned with the wisdom
of any particular treaty. Whether the lndo-Mauritius DTAC ought to have
been enunciated in the present fonn, or in any other particular form, is none
of our concern.· Whether Section 90 ought to have been placed on the
statute book, is also not our concern. Section 90, which delegates powers
tQ the Central Government, has not been challenged before us, and,
C therefore, we must proceed on the footing that the Section is constitutionally
valid. The challenge being only to the exercise of the power emanating
from the Section, we are of the view that Section 90 enables the Central
Government to enter into a DTAC with the foreign Government. When the
requisite notification has been issued thereunder, the provisions of sub-
D section (2) of Section 90 spring into operation and an assessee who is
covered by the provisions of the DTAC is entitled to seek benefits
thereunder, even if the provisions of the DTAC are inconsistent with the
provisions of Income-tax Act, 1961.

STARE DEC/SIS
E
The learned Attorney General justifiably relie'd on the observations
of this Court in Mishri Lal v. Dhirendra Nath (Dead) by Lrs. and Others 10 ,
in which this Court referred to its earlier decision in Muktul v. Manbhc.ri 11 ,
on the scope of the doctrine of stare dee is is with reference to Halsbury' s
F Law of England and Corpus Juris Secundum, pointing out that a decision
which has been followed for a long period of time, and has been acted upon
by persons in the fonnation of contracts or in the disposition of their
property, or in the general conduct of affairs, or in legal procedure or in
other ways, will generally be followed by courts of higher authority other
than the court est~blishing the rule, even though the court before whom
G the matter arises afterwards might be of a different view. The learned
Attorney General contended that the interpretation given to Section 90 of
the Income-tax Act, a Central Act, by several High Courts without dissent
has been uniformally followed; several transactions have been entered into
10. [1999] 4 SCC I I. para 14 to 22.
H 11. [1959] SCR 1099.
U.0.1. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA, J.] 253

based upon the said exposition of the law; that several tax treaties have A
been entered into with different foreign Governments based upon this law,
hence, the doctrine of stare decisis should apply or else it will result in
chaos and open up a Pandora's box of uncertainty.

We think that this submission is sound and needs to be accepted. It
is not possible for us to say that the judgments of the different High Courts B
noticed have been wrongly decided by reason of the arguments presented
by the respondents. As observed in Mishrila/ 12 even ifthe High Courts have
consistently taken an erroneous view, (though we do not say that the view
is erroneous) it would be worthwhile to let the matter rest, since large
numbers of parties have modulated their legal relationship based on this C
settled position of law.

Effect of circular under Section 119

Much of the argument centred around the effect of the circular issued D
by the CBDT under Section 119 of the Act and its binding nature.

Section 119, strategically placed in Chapter XIII which deals with
'Income-Tax Authorities' is an enabling power of the CBDT, which is
recognised as an authority under the Income-tax Act under Section I l 6(a).
The CBDT under this Section is empowered to issue such orders instructions E
and directions to other income-tax authorities "as it may deem fit for proper
administration of this Act''. Such authorities and all other persons employed
in the execution of this Act are bound to observe and follow such orders,
instructions and directions of the CBDT. The proviso to sub-section (I) of
Section 119 recognises two exceptions to this power. First, that the CBDT F
cannot require any income-tax authority to make a particular assessment
or to dispose of a particular case in a particular manner. Second, is with
regard to interference with the discretion of the Commissioner (Appeals)
in exercise of his appellate functions. Sub-section(2) of Section 119
provides for the exercise of power in certain speciai ca3es and en;ihk:; the G
CBDT, if it considers it necessary or expedient so to do for th.: purpose
of proper and efficient management of the work of assessment and
collection of revenue, to issue general or special orders in respect of any
class of incomes of class of cases, setting forth directions or instructions
as to the guidelines, principles or procedures to be followed by other
12. Supre note IO. H
254 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.

A income-tax authorities in the discharge of their work relating to assessment
or initiating proceedings for imposition of penalties. The powers of the
CBDT are wide enough to enable it to grant relaxation from the provisions
of several Sections enumerated in clause (a). Such orders may be published
in the Official Gazette in the prescribed manner, if the CBDT is of the
B opinion that it is so necessary. The onl_y bar on the exercise of power is
that it is not prejudicial to the assessee. We are not concerned with the
provisions in clauses (b) and (c) in the present appeals.

In KP. Varghese v. Income-Tax Officer, Ernakulam 13, it was pointed
out by this Court that not only are the circulars and instructions, issued by
C the CBDT in exercise of the power under Section 119, binding on the
authorities administering the tax department, but they are also clearly in
the nature of contemporanea expositio furnishing legitimate aid to the
construction of the Act.

~,. D The Rule of contemporanea expositio is that "administrative
construction (i.e. contemporaneous construction placed by administrative
or executive officers) generally should be clearly wrong before it is
overturned; such a construction commonly referred to as practical
construction, although non-controlling, is nevertheless entitled to
E considerable weight, it is highly persuasive.'*

The validity of this principle was recognised in Baleshwar Bagarti
v. Bhagirathi Dass 15 where the Calcutta High Court stated the rule in the
following words :

F "It is a well-settled principle of interpretation that courts in
construing a statute will give much weight to the interpretation put
upon it, at the time of its enactment and since, by those whose
duty it has been to construe, execute and apply it."

G The statement of this rule has also been quoted with approval by this
Court in Deshbandhu Gupta & Company v. Delhi Stock Exchange
Association ad 16 .

13. [1981] 131 !TR 597.
14. Crawford on Statutory Construction, 1940 Ed, as in S•Jprc note 13.
15 .. {l.908] lLR 35 Cal 701, 713.
H 16. [1979] 4 sec 565.
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 255

In KP. Varghese 17 this Court held that the circulars of the CBDT A
issued in exercise of its power under Section I 19 are legally binding on
the revenue and that this binding character attaches to the circulars "even
if they be found not in accordance with the correct interpretation of sub-
section (2) and they depart or deviate from such construction."
B.
Navnit Lal C. Javeri v. K.K.Sen 18 and Ellerman Lines Ltd v. C/T' 9
clearly establish the principle that circulars issued by the CBDT under
Section I 19 of the Act are binding on all officers and employees employed
in the execution of the Act, even if they deviate from the provisions of the
Act.

In UCO Bank v. Commissioner of Jncom-Tax 20 at 896, dealing with
c
the legal status of such circulars, this Court observed:

"Such instructions may be by way of relaxation of any of the
provisions of the sections specified there or otherwise. The Board
thus has power, inter alia, to tone down the rigour of the law and D
ensure a fair enforcement of its provisions, by issuing circulars
in exercise of its statutory powers under Section 119 of the
Income-tax Act which are binding on the authorities in the
administration of the Act. Under Section 119(2) however, the
circuiars as contemplated therein cannot be adverse to the assessee. E
Thus the authority which wields the power for its own advantage
under the Act is given the right to forgo the advantage when
required to wield it in a manner it considers just by relaxing the
rigour of the law or in other permissible manners as laid down
in Section I 19. The power is given for the purpose of just, proper F
and efficient management of the work of assessment and in public
interest. It is a beneficial power given to the Board for proper
administration of fiscal law so that undue hardship may not be
caused to the assessee and the fiscal laws may be correctly
applied. Hard cases which can be properly categorised as belonging G
to a class, can thus be given the benefit of relaxation of law by
issuing circulars binding on the taxing authorities."

17. Supre note 13.
18. [1965] 56 ITR 198.
19. [
20. [1999] 23 7 ITR 889 at 896. H
256 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.

A In Commissioner ofIncome-Tax v. Anjum MH.Ghaswala and Others 21
it was pointed out that the circulars issued by CBDT under Section 119
of the Act have statutory force and would be binding on every income-
tax authority although such may not be the case with regard to press
releases issue by the CBDT for information of the public.

B In Collector ofCentral Excise Vadodra v. Dhiren Chemical lndustries22
this Court, interpreting the phrase 'appropriate', observed :

"We need to make it clear that, regardless of the interpretation that
we have placed on the said phrase, if there are circulars which
c have been issued by the Central Board of Excise and Customs
which place a different interpretation upon the said phrase, that·
interpretation will be binding upon the Revenue."

While commenting adversely upon the validity of the impugned
circular, the High Court says "that the circular itself does not show that
D the same has been issued under Section 119 of the Income-tax Act. Only
in a case where the circular is issued under Section 119 of the Income-
tax Act, the same would be legally binding on the revenue. The circular
does not deal with the power of the ITO to consider the question as to
whether although apparently a company is incorporated in Mauritius but
E whether the company is also a resident of India and/or not a resident of
Mauritius at all." It is trite law that as long as an authority has power, which
is traceable to a source, the mere fact that source of power is not indicated
in an instrument does not render the instrument invalid 23 •

Is the impugned circular ultra-vires Section 119?
F
It was contended successfully before the High Court that the circular
is ultra vires the provisions of Section l_J 9. Sub-section(!) of Section 119
is deliberately worded in general manner so that the CBDT is enabled to
issue appropriate orders, instruttion or direction to the subordinate authorities
G "as it ma~' deem fit for the proper administration of the Act". As long as

21. [2001] 252 JTR I.
22. [2002] 2 sec 127 at para 11.
13. See in this connection State of Sikkim v. Dorjee Tshering Bhutia and Others [1991]
4 SCC 243 at para 16; N.B. Sanjana, Assistant Collector of Central Excise, Bombay
and Others v. Elphinshone Spinning and Weaving Mills ro. Ltd.. [1971] 1 SCC 337;.
B. Balakotaiah v. Union of India & Others, [1968] SCR I 052 and Afzal Ullah v. State
H of U.P., [1964] 4 SCR 991.
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 257

the circular emanates from the CBDT and contains orders, instructions or A
directions pertaining to proper administration of the Act, it is relatable to
the source of power under Section 119 irrespective of its nomenclature.
Apart from sub-section(!), sub-section(2) of Section 119 also enables the
CBDT "for the purpose of proper and efficient m:magement of the work
of assessment and collection of revenue, to· issue appropriate orders, B
general or special in respect of any class of income or class of cases, setting
forth directions or instructions (not being prejudicial to a$sessees) as to the
guidelines, principles or procedures to be followed by ot.her income tax
authorities in the work relating to asse~sment or collection of revenue or
the initiation of proceedings for the imposition of penalties". In our view,
.the High Court was not justified in reading the circular as not complying C
with the provisions of Section 119. The circular falls well within the
parameters of the powers exercisable by the CBDT under Section 119 of
the Act.

The High Court persuaded itself to hold that the circular is ultra vires D
the powers of the CBDT on completely erroneous grounds. The impugned
circular provides that whenever a certificate of residence is issued by the
Mauritius Authorities, such certificate will constitute sufficient evidence
for. accepting the status of residence as well as beneficial ownership for
applying the DTAC accordingly. It also provides that the test of residence
mentioned above would also apply in respect of income from capital gains E
on sale of shares. Accordingly, Fiis etc., which are resident in Mauritius
would not be taxable in India on income from capital gains arising in India
on sale of shares as per paragraph 4 of Article 13. This, the High Court
thought amounts to issuing instructions "de hors the provisions of the Act".

In our view, this thinking of the High Court is erroneous. The only F
restriction on the power of the CBDT is to prevent it from interfering with
the course of assessment of any particular assessee or the discretion of the
Commissioner of Income-Tax (Appeals). It would be useful to recall the
background against which this circular was issued.
G
The Income-tax authorities were seeking to examine as to whether the
assessees were actually residents of a third country on the basis of alleged
control of management therefrom.

We have already extracted the relevant provisions of Article 4 which
provide that, for the purposes of the agree:nent, the term 'resident of a H
258 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A contracting State' means any person who under the laws of that State is
liable to taxation therein by reason of his domicile, residence, place of
management or any other criterion of similar nature. The tem1 'resident of
India' and 'the resident of Mauritius' are to be construed accordingly.
Article 13 of the DTAC lays down detailed rules with regard to taxation
B of capital gains. As far as capital gains resulting from· alienation of shares
are concerned, Article 13(4) provides that the gains derived by a 'resident'
of a contracting State shall be taxable only in that State. In the instant case,
such capital gains derived by a resident of Mauritius shall be taxable only
in Mauritius. Article 4, which we have already referred to, declares that
the term resident of Mauritius' means any person who under the laws of
C Mauritius is 'liable to taxation' therein by reason, inter alia, of his
residence. Clause (2) of Article 4 enumerates detailed rules as to how the
residential status of an individual residtnt in both contracting States has
to be detennined for the purposes ofDTAC. Clause(3) of Article 4 provides
that if, after application of the detailed rules provided in Article 4, it is
D found that a person other than an individual is a resident of both the
contracting States, then it shall be deemed to be a resident of the contracting
State in which its place of effective management is situated. The DTAC
requires the test of 'place of effective management' to be applied only for
the purposes of the tie-breaker clause in Article 4(3) which could be applied
E only when it is found that a person other than an individual is a resident
both of India and Mauritius. We see no purpose or justification in the
DTAC for application of this test in any other situation.

The High Court has held, and the respondents so contend, that the
assessing officer under the Income-tax Act is entitled to lift the corporate
veil, but the circular effectively bars the exercise of this quasi-judicial
function by reason of a presumption with regard to the certificate issued
by the competent authority in Mauritius; conclusiveness of such a certificate
of residence granted by the Mauritius tax authorities is neither contemplated
under the DTAC, nor under the Income-tax Act a provision as to
G conclusiveness of a certificate is a matter of legislative action and cannot
form the subject matter of a circular issued by a delegate of legislative
power.

As early as on March 30, 1994, the CBDT had issued circular no. 682
H in which it had been emphasised that any resident of Mauritius deriving (-
u.o.r. v. AZAD! BACHAO ANDOLAN (SRIKRISHNA, J.] 259

income from alienation of shares of an Indian company would be liable A
to capital gains tax only in Mauritius as per Mauritius tax law and would
not have any capital gains tax liability in India. This circular was a .clear
enunciation of the provisions contained in the DTAC, which would have
overriding effect over the provisions of Sections 4 and 5 of the Income-
tax Act, 1961 by virtue of Section 90(1) of the Act. If, in the teeth of this B
clarification, the assessing officers chose to ignore the guidelines and spent
their time, talent and energy on inconsequtial matters, we think that the
CBDT was justified in issuing 'appropriate' directions vide circular no.
789, under its powers under Section 119, to set things on course by·
eliminating avoidable wastage of time, talent and energy of the assessing
officers discharging the onerous public duty of collection of revenue. The C
circular no. 789 does not in any way crib, cabin or confine the powers of
the assessing officer with regard to any particular assessment. It merely
formulates broad guidelines to be applied in the matter of assessment of
assessees covered by the provisions of the DTAC.
D
We do not think the circular in any way takes away or curtails the
jurisdiction of the assessing officer to assess the income of the assessee
before him. In our view, therefore, it is erroneous to say that the impugned
circular No. 789 dated 13.4.2000 is ultra vires the provisions of Section
119 of the Act. In our judgment, the powers conferred upon the CBDT by
sub-sections (1) and (2) of Section I 19 are wide enough to accommodate E
such a circular.

Is the DTAC bad for excessive delegation?

The respondents contend that a tax treaty entered into within the
umbrella of Section 90 of the Act is essentially delegated legislation; if it F
involves granting of exemption from tax, it would amount to delegation
of legislative powers, which is bad. The legislature must declare the policy
of the law and the legal principles which are to control any given case and
must provide a procedure to execute the law 24 •

The question whether a particular delegated legislation is in excess G
of the power of the supporting legislation conferred on the delegate, has
to be detennined with regard not only to specific provisions contained in
24. See in this connection the observations of this Court in Harishankar Bag/a and
Another v. The State of Madhya Pradesh, (1955] SCR 380 and Kishan Prakash Sharma
v. Union of India and Others. (2001] 5 sec 212. H
260 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A the relevant statute conferring the power to make rule or regulation, but
also the object and purpose of the Act as can be gathered from the various
provisions of the enactment. It would be wholly wrong for the Court to
substitute its own opinion as to what principle or policy would best serve
the objects and purposes of the Act, nor is it open to the Court to sit in
B judgment of the wisdom, the effectiveness or otherwise of the policy, so
as to declare a regulation to be ultra vires merely on the ground that, in
the view of the Court, the impugned provision will not help to carry
through the object and purposes of the Act. This court reiterated the
legal position, well established by a long series of decisions, in
Maharashtra State Board of Secondwy and Higher Secondary Education
C and anot~er v. Paritosh Bhupeshkumar Sheth and Others 25 •

"So long as the bod)'. entrusted with the task of framing the rules
or regulations acts within the scope of the authority conferred on
it, in the sense that the rules or regulations made by it have a
rational nexus with the object and purpose of the statute, the court
D
should not concern itself with the wisdom or efficaciousness of
such rules or regulations. It is exclusively within the province of
the legislature and its delegate to determine, as a matter of policy,
how the provisions of the statute can best be implemented and
what measures, substantive as well as procedural would have to
E be incorporated in the rules or regulations for the efficacious
achievement of the objects and purposes of the Act. It is not for
the Court to examine the merits or demerits of such a policy
because its scrutiny has to be limited to the question as to whether
the impugned regulations fall within the scope of the regulation-
F making power conferred on the delegate by the statute."

Applying this test, we are unable to hold that the impugned circular
amounts to impermissible delegation of legislative power. That the
amendment made in Section 90 was intended to empower the Government
to enter into agreement with foreign Government, if necessary, for relief
G from or avoidance of double taxation, is also made clear by the Finance
Minister in his Budget Speech, 1953-54

Is the Double Taxation Avoidance Convention 'DTAC') illegal and ultra
vires the powers of the Central Government uls 90
H 2s. ll9&4J 4 sec 21 at para 14.
U.O.I. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 261

Although the High court has not made any finding of this nature, the A
respondents have strenuously contended before us that the Indo-Mauritius
Double Taxation Avoidance Convention, 1983 is itself ultra vires the
powers of the Government under Section 90 of the Act. This argument
deserves short shrift.

Section 90 empowers the Central Government to enter into agreement B
with the Government of any other country outside India for the purposes
enumerated in clauses (a) to (d) of sub-section (I) . While clause (a) talks
of granting relief in respect of income on which income-tax has been paid
in India as well as in the foreign country, clause (b) is wider and deals with
'avoidance of double taxation of income' under the Act and under the C
corresponding law in force in the foreign country. We are not concerned
with clauses (c) and (d).

There are two hurdles against accepting the arguments presented on
behalf of the respondents. Even if we accept the argument of the respondent
that the OTAC is delegated legislation, the test of its validity is to be D
determined, not by its efficacy, but by the fact that it is within the
parameters of the legislative provision delegating the power. That the
purpose of the DTAC is to effectuate the objectives in clauses (a) and (b)
of sub-section (1) of Section 90, is evident upon a reasonable construction
of the terms of the DTAC. As long as these two objectives are sought to E
be effectuated, it is not possible to say that the power vested in the Central
Government, under Section 90, even if it is delegated power of legislation,
has been used for a purpose ultra vires the intendment of the Section. The
respondents tried to highlight a number of unintended deleterious
consequences which, according to them, have arisen as a resuh of F
implementation of the DTAC. Even if they be true, it would not enable
this Court to strike down the delegated legislation as ultra vires. The
validity and the vires of the legislation, primary, or delegated, has to be
tested on the anvil of the law making power. If an authority lacks the
power, then the legislation is bad. On the contrary, if the authority is
clothed with the requisite power, then irrespective of"".,hether the legislation G
fails in its object or not, the vires of the legislation is not liable to be
questioned. We are, therefore, unable to accept the contention of the
respondents that the OTAC is ultra vires the powers of the Central
Government under Section 90 on account of its susceptibility to 'treaty
shopping' on behalf of the residents of third countries. H
262 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A The High Court seems to have heavily relied on an assessment order
made by the assessing officer in the case of Cox and Kings Ltd. drawing
inspiration therefrom. We are afraid that it was impermissible for the High
Court to do so. An assessment made in the case of a particular assessee
is liable to be challenged by the Revenue or by the assessee by the
B procedure available under the Act. In a Public Interest Litigation it would
be most unfair to comment on the correctness of the assessment order made
in the case of a particular assessee, especially when the assessee is not a
party before the High Court. Any observation made by the Court would
result in prejudice to one or the other party to the litigation. For this reason,
we refrain from making any observations about the correctness or otherwise
C of the assessment order made in Cox and Kings Ltd. Needless to say, we
decline to draw inspiration therefrom, for our inspiration is drawn from
principles of law as gathered from statutes and precedents.

What is "liable to taxation"
D Fiscal Residence

The concept of 'fiscal residence' of a company assumes importance
in the application and interpretation of double taxJtion avoidance treaties.

E In Cahiers De Droit Fiscal lnternationa/2 6 it is said that under the
OECD and UNO Model Convention, 'fiscal residence' is a place where a
person amongst others a corporation is subjected to unlimited fiscal
liability and subjected to taxation for the worldwide profit of the resident
company. At para 2.2 it is pointed out :

F "The UNO Model Convention takes these two different concepts
into account. It has not embodied the second sentence of article
4, paragraph l of the OECD Model Convention, which provides
that the term 'resident' does not include any person who is liable
to tax in that State in respect only of income from sources in that
G State. In fact, if one adhered to a strict interpretation of this text,
there would be no resident in the meaning of the convention in
those States that apply the principle of territoriality."

Again in paragraph 3.5 it is said :

H 26. Jean-Maic Rivier, Cahiers de droit fiscal international, Vol. LXXIia at pp.47-76.
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 263

"The existence of a company from a company law standpoint is A
usually determined under the law of the State of incorporation or
of the country where the real seat is located. On the other hand,
the tax status of a corporation is determined under the law of each
of the countries where it carries on business, be it as resident or
non-resident."
B
In paragraph 4.1 it is observed that the principle of universality of
taxation i.e. the principle of worldwide taxation, has been adopted by a
majority of States. One has to consider the worldwide income ofa company
to determine its taxable profit. In this system it is crucial to define the fiscal
residence of a company very accurately. The State of residence is the one C
entitled to levy tax on the corporation's worldwide profit. The company
is subject to unlimited fiscal liability in that State. In the case of a company,
however, several factors enter the picture and render the decision difficult.
First, the company is necessarily incorporated and usually registered under
the tax law of a State that grants it corporate- status. A corporation has D
administrative activities, directors and managers who reside, meet and take
decisions in one or several places. It has activities and carries on business.
Finally, it has shareholders who control it. Hence, it is opined :

"When all these elements coexist in the same country, no
complications arise. As soon as they are dissociated and "scattered" E
in different States, each country may want to subject the company
to taxation on the basis of an element to which it gives preference;
incorporation procedure, management functions, running of the
business, shareholders' controlling power. Depending on the
criterion adopted, fiscal residence will abide in one or the o~hcr F
country.

All the European countries concerned, except France, levy tax on
the worldwide profit at the place of residence of the company
considered. ·

South Korea, India and Japan in Asia, Australia and New Zealand
G
in Oceania follow this principle."

In paragraph 4.2.1 it is pointed out that the Anglo-Saxon concept of
a company's 'incorporation test', which is applied in the United States, has
not been adopted by other countries like Australia, Canada, Denmark, New H
264 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A Zealand and· India and instead the criterion of incorporation amongst other
tests has. been adopted by the~.
'• . - '

th~ Judginerit i1,1 I;~g~mar Johanssop et al. v. United State of
An1erica21, on whi~h the respondent place reliance, is easily distinguishable.
B In this case. the.appellant,.Johansson, was a citizen of Switzerland and a
·hea'ffWeight boxing champion by profession. He had earned some money
by boxing,in the United States for which he was called upon to pay tax.
Joh!lnsson floated .a .company in Switzerland of which he became an
employee and contended that all professional fee. paid for his boxing bouts
were rec~iv.~.d by his ,employer company in Switzerland for which he was
C remunerated as an employee of the said company. He sought to take
advantage of the DTAT between USA and Switzerland which provided "an
individual resident of Switzerland shall be exempt from United States Tax
upon compensation for labour personal services performed in the United
States .... if he is temporarily present in the United States for a period or
D periods not exceeding a total of 183 during the taxable year ... " There was
no doubt that the appellant was not present in the United States for more
than 183 days and that he had floated the Swiss company motivated with
the desire to minimise his tax burden. As conclusive proof of residence he
relied upon a determination by the Swiss Tax Autliority that he had become
E a resident of Switzerland on a particular date. The United States Court of
Appeal rejected the claim of the appellant pointing out that the term
"resident" had not been defined in the US-Swiss treaty, but under article
II(2) each country was authorised to apply its own definition to terms not
expressly defined 'unless the context othenvise requires'. The Court,
therefore, held that the determination of the appellant's residence statues
F by the Swiss tax authority, according to Swiss law, was not conclusive and
that the U.S. tax authorities were entitled to decide it in accordance with
the US laws under the treaty. Hence, it was held that Johansson was not
a resident of Switzerland during the period in question and that the tax
exemption in the treaty was not available to him.
G
In our view, this judgment, though relied upon very heavily by the
ri>spondents, is of no avail. The Indo-Mauritius DTAC, Article 3, clearly
defines the term 'residence' in a 'Contracting State'. Interestingly, even in
this judgment, the Court observed : "Of course, the fact that Johansson was

H 27. 336F.2d.809.
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.) 265

motivated in his actions by the desire to minimize his tax burden can in A
no way be taken to deprive him of an exemption to which an applicable
treaty entitles him", which will have some relevance to the contention of
the respondents with regard to the motivation to avoid tax.

The respondents contend that the Fiis incorporated and registered
under the provisions of the law in Mauritius are carrying on no business B
there; they are, in fact, prevented from earning any income there; they are
not liable to income tax on capital gains under the Mauritius Income-tax
Act. They are liable to pay income-tax under Indian Income-tax Act, 196 l,
since they do not pay any income-tax on capital gains in Mauritius, hence,
they are not entitled to the benefit of avoidance of double taxation under C
the DTAC.

Some of the assumptions underlying this contention, which prevailed
with the High Court, need greater critical appraisal.

Article 13(4) of the DTAC provides that gains derived by a resident D
of a Contracting State from alienation of any property, other than those
specified in the paragraphs I, 2 and 3 of the Article, shall be taxable only
in that State. Since most of the arguments centred around capital gains
made on transactions in shares on the stock exchange in India, we may
leave out of consideration capital gains on the type of properties contemplated E
in paras I, 2 and 3 of Article 13 of the DTAC. The residuary clause in
para 4 of Article I 3 is relevant. It provides that capital gains made on sale
of shares shall be taxable only in the State of which the prrson is a
'resident' taking us back to the meaning of the tenn 'resident' of a
contracting State. According to Article 4, this expression means any person
who under the laws of that State is "liable to taxation" therein by reason F
of his domicile, residence, place of management or any other criterion of
a similar nature. The terms 'resident of India' and 'resident of Mauritius'
are required to be construed accordingly. This takes us to the test to
detennine when a company is 'liable to taxation' in Mauritius.
G
Mauritian Income Tax Act, 1995

Section 4 of the Income Tax Act, 1995 (Mauritian Income-tax Act)
provides that, subject to the provisions of the Act, income-tax shall be paid
to the Commissioner of Income-tax by every person on all income other
than exempt income derived by him during the preceding year and be H
266 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A calculated on the chargeable income of the person at the appropriate rate
specified in the First Schedule. Section 5 defines as to when income is
deemed to be derived.
·.
Section 7 provides that the income specified in the Second Schedule
shall be exempt from income-tax.
B
Part IV of the Mauritian Income Tax Act deals with Corporate
Taxation.

Section 44 of the Act provides that every company shall be liable to
C income tax on its 'chargeable income' at the rate specified in Part II, Part
III or Part IV of the First Schedule, as the case may be.

Section 51 defines the 'gross income' of a company as inclusive of
income referred to in Sections IO(l)(b) (income derived from business),
IO(l)(c) (any income from rent, premium or other income derived from
D property), IO(l)(d) (any dividend, interest, charges, annuity or pension
other than a pension referred to in paragraph a(ii)) and IO(l)(e) (any other
income derived from any other source).

Section 73 (b) provides that for the purposes of the Act the expression
'resident', when applied to a 'company', means a company which is
E incorporated in Mauritius or has its central management and control in
Mauritius.

Part II of the First Schedule prescribes the rate of tax on chargeable
income at 15% in the case of Tax Incentive companies and at other rates
for other types of companies. Pait V of the First schedule enumerates the
F list of tax incentive companies and item 16 is : "a corporation certified to
be engaged in international business activity by the Mauritius Offshore
Business Activities Authority established under the Mauritius Offshore
Business Activities Act, 1992". The second Schedule to the Mauritius
Income-tax Act in Part IV enumerates miscellaneous income exempt from
G income-tax. Item I reads "gains or profits derived from the sale of units
or of securities quoted on the Official List or on such Stock Exchanges or
other exchanges and capital markets as may be approved by the Minister".

A perusal of the aforesaid provisions of the Income Tax Act in
H Mauritius does not lead to the result that tax incentive companies are not
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 267

liable to taxation, although they have been granted exemption from A
inc6me-tax in respect of a specified head of income, namely, gains from
transactions in shares an-d securities. The respondents contend that the Flis
are not "liable to taxation" in Mauritius; hence they are not 'residents' of
Mauritius within the meaning of Article 4 of the DTAC. Consequently, it
is open to the assessing officers under the Indian Income-tax Act, 1961 to B
determine where the taxable entities are really resident by investigating the
centre of their management and thereafter to apply the provisions of
Income-tax Act, 1961 to the global income earned by them by reason of
Sections 4 and 5 of the Income-tax Act, 1961.

It is urged by the learned Attorney General and Shri Salve for the C
appellants that the phrase 'liable to taxation' is not the same as 'pays tax'.
The test of liability for taxation is not to be determined on the basis of an
exemption granted in respect of any particular source of income, but by
taking into consideration the totality of the provisions of the income-tax
law that prevails in either of the Contracting States28 • Merely because, at D
a given time, there may be an exemption from income-tax in respect of
any particular head of income, it cannot be contended that the taxable entity
is not liable to taxation. They urge that upon a proper construction of the
provisions of Mauritian Income Tax Act it is clear that the Flis incorporated
under Mauritius laws are liable to taxation; therefore, they are 'residents' E

- in Mauritius within the meaning of the DTAC.

For the appellants reliance is placed on the judgment of this Court
in Wallace Flour Mills Contracting State. Ltd. v. Collector of Central
Excise, Bombay Division II 29, a case under the Central Excise Act. This
Court held that though the taxable event for levy of excise duty is the F
manufacture or production, the realisation of the duty my be postponed for
administrative convenience to the date of removal of the goods from the
factory. It was held that excisable goods do not become non-excisable
merely because of an exemption given under a notification. The exemption
merely prevents the excise authorities from collecting tax when the G
exemption is in operation 30 •
28. See in this connection Ramanathan Chettiar v. Commissioner of Income Tax, Madras.
(1973] 88 ITR 169.
29. [19891 4 sec 592.
30. See also in this connection the judgment of Madras High Court in Tamil Nadu (Madras
State), Handloom Weavers Contracting State-operative Society ltd. v. Assistant H
Collector of Central Excise 1978 EL T 57 (Mad HC).
268 SUPREME COURT REPORTS [2003) SUPP. 4 S.C.R.
A In Kasinka Trading and Another v. Union ofIndia and Another31, this
principle was reiterated in connection with an exemption under the
Customs Act. This Court observed : "The exemption notification issued
under Section 25 of the Act had the effect of suspending the collection of
customs duty. It does not make items which are subject to levy of customs
B duty etc. as items not leviable to such duty. Jt only suspends the levy and
collection of customs duty, wholly or partially, and subject to such
conditions as may be laid down in the notification by the Government in
'public interest'. Such an exemption by its very nature is susceptible of
being revoked or modified or subjected to other conditions."

C We &re inclined to agree with the submission of the appellants that,
merely because exemption has been granted in respect of taxability of a
particular source of income, it cannot be postulated that the entity is not
'liable to tax' as contended by the respondents.

D Effect of MOBA, 1992
The respondents, shifted ground to contend that the fact that a
company incorporated in Mauritius is liable to ta:xation under the Income
Tax Act there may be true only in respect of certain class of companies
incorporated there. However, with respect to companies which are
E incorporated within the meaning of the Mauritius Offshore Business
Activities Act, 1992 (hereinafter referred to as "MOBA''), this would be
wholly incorrect.

MOBA was enacted "to provide for the establishment and management
. of the MOBA Authority to regulate offshore business activities from within
F Mauritius and for the issue of offshore certificates, and to provide for other
ancillary or incidental matters", as its preamble suggests. 'Offshore
business activity' is defined as the business or other activity referred to in
Section 33 and includes activity conducted by an international company.
'Offshore company' is defined as a corporation in relation to which there
G is a valid certificate and which carries on offshore business activity.
In part II, MOBA establishes an Offshore Business Activity Authority
entrusted, inter a/ia, with the duty of overseeing offshore business
activities and also issuing permits, licences or any other certificate as may

H 31. [I995J 1 sec 274.
U.0.1. v. AZADI BACHAO ANDOLAN [SRlKRISHNA, J.] 269

be required, and other authorisation which may be required by an offshore A
company through which they may communicate with any of the public
sector companies.

Section 16 of MOBA prescribes the procedure for issuing of a
certificate. Section 15 requires maintenance of confidentiality and non-
disclosure of information contained in applications and documents filed B
with it except where such information is bona fide required for the purpose
of any enquiry or trial into or relating to the trafficking of narcotics and
dangerous drugs, arms, trafficking or money laundering under the Economic
Crime and Anti Money Laundering Act, 2000. Part II of MOBA contains
the statutory provisions applicable to offshore companies. Section 26 C
provides that an offshore company shall not hold immovable property in
Mauritius and shall not hold any share or any interest in any company
incorporated under the Companies Act, 1984, other than in a foreign
company or in another offshore company or in an offshore trust_ or an
international company. An offshore company shall not hold any ac_count D
in a domestic bank in Mauritian Rupees, except for the purpose of its day
to day transactions arising from its ordinary operations in Mauritius.

Sections 26 and 27 of MOBA are important and read as under:

"26. Property of an offshore company E
(I) Subject to sub-section(2), an offshore company shall not
hold -

(a) immovable property in Mauritius;
F
(b) any share, or any interest in any company incorporated
under the Comranies Act, 1984 other than in a foreign
company or in another offshore company or m an
offshore trust or an international company;
G
(c) any account in a domestic bank in Mauritian Rupee.

(2) An offshore company may -

(a) open and maintain with a domestic bank an account in
Mauritian rupees for the purpose of its day to day H
270 SUPREME COURT REPORTS [2003) SUPP. 4 S.C.R.

A transactions arising from its ordinary operations in
Mauritius;

(b) open and maintain with a domestic bank an account
in foreign currencies ·with the approval of the Bank of
Mauritius;
B
(c) where authorised by the terms of its certificate, or where
otherwise permitted under any other enactment, lease, hold,
acquire or dispose of an immovable property ~r .any interest
in immovable property situated in Mauritius;
c
( d) invest in any securities listed in the stock Exchange established
under the Stock Exchange Act 1988 and in other debentures.

27. Dealings with residents
D
Notwithstanding any other enactment, the Minister, on the
recommendation of the Authority may authorise any offshore
company engaged in any offshore business activities to deal or
transact with residents on such tenns and conditions as it thinks
fit."
E
On the basis of these provisions, it is urged by the respondents that
any company which is registered as an offshore company under MOBA
can hardly carry out any business activity in Mauritius, since it cannot hold
any immovable property or any shares or interest in any company
F registered in Mauritius other than a foreign company or another offshore
company and cannot open an account in a domestic bank in Mauritius. The
respondents urge that such a company cannot transact any business
whatsoever within Mauritius as the purpose of such a company would be
to-carry out offshore business activities and nothing more. The respondents
contend that when the possibility of such a company earning income within
G Mauritius is almost nil, there is hardly any possibility of its paying tax in
Mauritius, whatever be the provisions of the Mauritian Income-Tax Act.

In our view, the contention of the respondents proceeds on the
fallacious premise that liability to taxation is the same as payment of tax.
H Liability to taxation is a legal situation; payment of tax is a fiscal fact. For
U.0.1. v. AZADl BACHAO ANDOLAN (SRIKRISHNA, J.] 271

the purpose of application of Article 4 of the DTAC, what is relevant is A
the legal situation, namely, liability to taxation, and not the fiscal fact of
actual payment of tax. If this were not so, the DTAC would not have used
the words 'liable to taxation', but would have used some appropriate words
like 'pays tax'. On the language of the DTAC, it is not possible to accept
the contention of the respondents that offshore companies incorporated and B
registered under MOBA are not 'liable to taxation' under the Mauritius
Income-tax Act; nor is it possible to accept the contention that such
companies would not be 'resident' in Mauritius within the meaning of
Article 3 read with Article 4 of the OTAC.

There is a further reason in support of our view. The expression C
'liable to taxation' has been adopted from the Organisation for Economic
Co-operation and Development Council (OECD) Model Convention 1977.
The OECD commentary on article 4, defining 'resident', says: "Conventions
for the avoidance of double taxation do not normally concern themselves
with the domestic laws of the Contracting States laying down the conditions D
under which a person is to be treated fiscally as "resident" and, consequently,
is fully liable to tax in that State". The expression used is 'liable to tax
therein', by reasons of various factors. This definition has been carried over
even in Article 4 dealing with 'resident' in the OECD Model Convention
1992.
E
In A Manual on the OECD Model Tax Convention on Income and
On Capital, at paragraph 4B.05, while commenting on Article 4 of the
OECD Double Tax Convention, Philip Baker points out that the phrase
'liable to tax' used in the first sentence of Article 4.1 of the Model
Convention has raised a number of issues, and observes:
F
"It seems clear that a person does not have to be actually paying
tax'1o be "liabl~ to tax"- otherwise a person who had deductible
losses or all@wances, which reduced his tax bill to zero would find
himself unabltt to enjoy the benefits of the convention. It also
seems ckar th:Jt a person who would otherwise be subject to G
comprehensive. taxing but who enjoys a specific exemption from
tax is nevertheless liable to tax, if the exemption were repealed,
or the person no longer qualified for the exemption, the person
would be liable to comprehensive taxation."

Interestingiy, Baker refers to the decision of the Indian Authority for H
272 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.

A Advance Ruling in Mohsinally Alimohammed Rajik. 32 An assessee, who '
resided in Dubai and claimed the benefits of UAE~India Convention of
April 29, 1992, even though there was no personal income-tax iri Di.Ibai
to which he might be liable. The Authority concluded that he was entitled
to the benefits of the convention. The Authority subsequently reversed this
B position iri the case of Cyril Eugene Pereira33 where a contrary view was
taken.

The respondents placed great reliance on the decision by the Authority
for Advance Rulings constituted under Section 245-0 of the Income-Tax
Act, 1961 in Cyril Eugene Pereira 's case 34 • Section 245S of the Act
C provides that the Advance Ruling pronounce? by the Authority under
Section 245R shall be binding only :

"(a) on the applicant who had sought it;

(b) in respect of the transaction in relation to which the ruling had
D been sought; and

( c) on the Commissioner, and the income-tax authorities subordinate
to him, in respect of the applicant and the said transaction."

E It is therefore obvious that, apart from whatever its persuasive value,
it would be of no help to us. Having perused the order of the Advance
Rulings Authority, we regret that we are not persuaded.

There is substance in the contention of Mr. Salve learned counsel for
F one of the appellants, that the expression 'resident' is employed in the
DTAC as a term of limitation, for otherwise a person who may not be
'liable to tax' in a Contracting State by reason of domicile, residence, place
of management or any other criterion of a similar nature may also claim
the benefit of the DTAC. Since the purpose of the DTAC is to eliminate
double taxation, the treaty takes into account only persons who are 'liable
G to taxation' in the Contracting States. Consequently, the benefits thereunder
are not available to persons who are not liable to taxation and the words
'liable to taxation' are intended to act as words of limitation.

32. [1994) 213 !TR 317.
33. [1999) 239 !TR 650.
H 34. Ibid.
U.O.I. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA, J.] 273

In John N. Gladden v. Her Majesty the Queen35, at the principle of A
liberal interpretation of tax treaties was reiterated by the Federal Court,
which observed :

"Contrary to an ordinary taxing statute a tax treaty or convention
must be given a liberal interpretation with a view to implementing
the true intentions of the parti~s. A literal or legalistic interpretation B
must be avoided when the basic object of the treaty might be
defeated or frustrated insofar as the particular item under
consideration is concerned."

Gladden36 was a case where an American citizen resident in U.S.A. C
owned shares in two privately controlled Canadian companies. Upon his
death, the question arose as to the capital gains which would arise as a result
of the deemed disposition of the said shares. The Canadian Revenue took
the position that there was a deemed disposition of the shares on the death
of the tax payer and capital gains tax was chargeable on account of the
deemed disposition. This view of the Revenue was upheld in appeal by the D
·Tax Court of Canada. Upon further appeal to the Federal Court it was held
that capital gains were exempt from tax under the Canada-U.S.A. Tax
Treaty as Canada had no capital gains tax when it entered the treaty and
it could not unilaterally amend its legislation. The argument which
prevailed with the trial court in this case was similar to the one which E
prevailed with the High Court in the matter before us. Interpreting .the
relevant Article of the Double Taxation Avoidance Treaty the trial court
held : "The parties could not have negotiated to avoid double taxation on
a tax which did not exist in Canada". The Federal Court emphasised that
in interpreting and applying treaties the Courts should be prepared to F
extend "a liberal and extended construction" to avoid an anomaly which
a contrary construction would lead to. The Court recognized that "we
cannot expect to find the same nicety or strict definition as in modem
documents, such as deeds, or Acts of Parliament; it has never been the habit
of those engaged in diplomacy to use legal accuracy but rather to adopt
more liberal terms". G
Interpreting the Article of the Treaty against avoidance of double
taxation, the Federal Court said (at p.5):

35. 85 D.T.C. 5188.
36. Ibid. H
274 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A "The non-resident can benefit from the exemption regardless of
whether or not he is taxable on that capital gain in his own
country. If Canada or the U.S. were to abolish capital gains
completely, while the other country did not, a resident of the
country which had abolished capital gains would still be exempt
from capital gains in the other country."'
B
The appellants rely on this judgment to contend that, irrespective of
the exemption from income-tax on capital gains upon alienation of shares
under the Mauritius Income-tax Act, the benefits of the DTAC would
apply.
c
The appellants contend that, acceptance of the respondents' submission
that double taxation avoidance is not permissible unless tax is paid in both
countries is contrary to the intendment of Section 90. It is urged that clause
(b) of sub-section(!) of Section 90 applies to a situation to grant relief
D where income tax has been paid in both countries, but clause (b) deals with
a situation of avoidance of double taxation of income. Inasmuch as
Parliament has distinguished between the two situations, it is not open to
a Court of law to interpret clause (b) of Section 90 sub-section(!) as if it
were the same as the situation contemplated under clause (a).

E According to Klaus Vogel "Double-Taxation Convention establishes
an independent mechanism to avoid double taxation through restriction of .,
tax claims in areas where overlapping tax-claims are expected; or at least
theoretically possible. In other words, the Contracting States mutually bind
themselves not to levy taxes or to tax only to a limited extent in cases when
F the treaty reserves taxation for the other contracting States either entirely
or in part. Contracting States are said to 'waive' tax claims or more
illustratively to divide 'tax sources', the 'taxable objects', amongst
themselves." Double taxation avoidance treaties were in vogue even from
the time of the League ofNations. The experts appointed in the early 1920s
by the League of Nations describe this method of classification of items
G and their assignments to the Contracting States. While the English lawyers
called it 'classification and assignment rules', the German jurists called it
'the distributive rule' (Verteilungsnorm). To the extent that an exemption
is agreed to, its effect is in principle independent of both whether the other
contracting State imposes a tax in the situation to which the exemption
H applies, and of whether that State actually levies the tax. Commenting
U.0.1. v. AZAD! BACHAO ANDOLAN (SRIKRJSHNA, J.] 275

particularly on German Double Taxation Convention with the United A
States, Vogel comments: "Thus, it is said that the treaty prevents not only
'current', but also merely ·potential' double taxation". Further, according
to Vogel. "only in exceptional cases, and only when expressly agreed to
by the parties, is exemption in one contracting State dependent upon
whether the income or capital is taxable in the other contracting state, or B
upon whether it is actually taxed there." 37

It is, therefore, not possible for us to accept the contentions so
strenuously urged on behalf of the respondents that avoidance of double
taxation can arise only when tax is actually paid in one of the Contracting
&~s. C
The decision of Federal Court of Australia in Commissioner of
Taxation v. Lamesa Holdings 38 is illuminating. The issue before the Federal
Court was whether a Netherlands company was liable to income-tax under
the Australian Income Tax Act on profits from the sale of shares in an
Australian company and whether such profits fell within Article 13 D
(alienation of property) of the Netherlands-Australia Double Taxation
Agreement, so as to be excluded from Article 7 (business profits) of that
Agreement. One Leonard Green, a principal of Leonard Green and
Associates a limited partnership established in the United States, became
aware of a potential investment opportunity in Australia. A rim co Resources E
and Mining Company NL ('Annico'), a company listed on the Australian
Stock Exchange, which had a subsidiary called Armico Mining Pty.
Limited engaged in gold mining activities, was the subject of a hostile
takeover bid, at a price which Green was advised was Jess than the real
value of the Armico. With this knowledge Green decided to mount a F
takeover offer for the subsidiary company. Then followed a series of steps
of formation of a number of companies with interlocking share holdings
where each company owned 1005 shares of a different subsidiary company.
Lamesa Holdings was one such intermediary company of which I 00%
shares were held by Green Equity Investments Ltd. The share transactions
brought about a profit to Lamesa Holdings which would be assessable to G
tax under the Australian Income Tax Act. Lamesa, however, relied on the
provisions of the Article 13(2) Of the Double Taxable Avoidance Convention
('DTAC') between Netherlands and Australia and claimed thafthe income

37. See in this connection Klaus r·ogel. Double Taxation Convention. Pg.26-29 (3rd ed).
38. (1997) 785 FCA. H
276 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A was not taxable in Australia by reason thereof. This income was wholly
exempt from tax in Netherlands by reason of the Income Tax Law
applicable therein. The Federal Court found that under Article 13(2) (a)
(ii) of the OT AC shares in a company were treated as personalty, that since
the place of incorporation of a company or the place of situs of a share
B may be the subject of choice, the place of incorporation or the register upon
which shares were registered would not form a particularly close connection
with shares to ground the jurisdiction to tax share profits. It was held:

"It happens to be the case, because of unilateral relief granted
by the law of the Netherlands, that no tax will be payable in the
c Netherlands. That of itself can not affect the interpretation of the
Agreement. If the relevant mining prope1ty had happened to be
in the Netherlands so that the issue was between taxation there
on Jhe one hand and taxation in Australia on the other, the
situation would have been one where tax would clearly have been
payable on the alienation of the shares in Australia without the
D
benefit of any exemption. Yet the Agreement must operate
uniformly, whether the realty is in the Netherlands or in Australia."

In this view of the matter, it was held that there was no tax payable
in Australia.
E
Chong v. Commissioner of Taxation 39 holds similarly. Australia and
Malaysia have an agreement to avoid double taxation. An Australian
resident was paid pension by Malaysian Government for services rendered
to Malaysian Government while he was in service there. This pension was
taxed in Malaysia and the issue was whether the right to tax Government
F pensions under the Agreement could be exercised by the Australian
Government and the effect of the domestic law on the agreement. Article
18 of the double taxation avoidance agreement provided that pension paid
to a resident of a contracting State shall be taxable only in that State. Upon
a proper construction of Article 18(2) of the Treaty it was held that pension
G paid by Malaysia is taxable in Australia inasmuch as the said Article did
not provide that Malaysia alone was to have the power to tax Government
pension, nor did it restrict Australia from doing so. Rather it provided for
the Contracting State paying the pension to have the power to tax the
pension if it so desired and did not limit or restrict the taxing power of the l ,-

H 39. (2000) FCA 635.
U.0.1. v. AZADI BACHAO ANDOLAN [SRJKRISHNA, J.] 277
other Contracting State in that respect. The Federal Court pointed out A
"Whether one uses the language of allocation of power or the language of
limitation of power, the result is the same; there is designated or agreed
who shall have the right under the agreement to impose taxation in the
particular area".

The Estate of Michel Hausmann v. Her Majesty The Queen 40 is B
another Canadian judgment which throws light on the principle that the
benefits of a double taxation agreement would be available even if the other
contracting State in which a particular head of income is to be taxed,
chooses not to impose tax on the same.

The central question in this case was whether the pension received
c
by Mr. Hausmann from the pension office of the Belgium Government was
taxable in Canada. The facts indicated that there was no tax withheld at
source in Belgium. The argument of the Canadian Tax Authority was that
if Belgium was not going to tax the pension, Canada should. Otherwise,
the unthinkable might occur and the amount might not be taxed by anyone. D
This would be anathema. The facts indicated that the payment received by
Mr. Hausmann fell below the prescribed threshold and therefore was not
taxed in Belgium. The Canadian Court rejected the argument that if
Belgium did not tax the payment, it must be taxed by the Canada as plainly
wrong by relying on the terms of the treaty. On the basis of the material E
available, the Federal Court came to the inference that in negotiating the
Belgium treaty both Canada and Belgium unquestionably regarded pensions
paid under their social security legislation, such as the CPP or the
corresponding Belgian statutory scheme, to be taxable only in the ..:ountry
from which they emanated and not the country ofresidence of the recipient. F
Hence, it was held that the pension payments received by Mr. Hausmann
from the office of Belgium were social security pension and such allowances
could be taxable only in Belgium. The fact that Belgium did not choose
to tax them was held to be totally irrelevant.

Mr. Salve contended that a profit made by sale of shares may not G
invariably amount to capital gains, as for example if the shares were part
of the trading assets of the company. If such be the case, the gains may
amount to trading income of such a company. He also relied on the
observations of this Court in Commissioner ofIncome Tax Nagpur v. Sutlej

40. 1998 Can. Tax Ct.LEXIS 1140. H
278 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A Cotton Mills Supply Agency Limited. 41 • It is not necessary for us to go into
this question as it would depend upon as to whether the shares are held
by a company as an investment or as a trading asset. The possibility urged
by the learned counsel certainly exists and cannot be ruled out without
examination of facts.

B Treaty Shopping-ls it illegal ?

· The respondents vehemently urge that the offshore companies have
been incorporated under the laws of Mauritius only as shell companies,
which carry on no business therein, and are incorporated only with the
C motive of taking undue advantage of the DTAC between India and
Mauritius. They also urged that 'treaty shopping' is both unethical and
illegal and amounts to a fraud on the treaty and that this Court must be
astute to interdict all attempts at treaty shopping.

'Treaty shopping' is a graphic expression used to describe the act of
D a resident of a third country taking advantage of a fiscal treaty between
two Contracting States. According to Lord McNair, "provided that any
necessary implementation by municipal law bas been carried out, there is
nothing to prevent the nationals of "third States", in the absence of any
expressed or implied provision to the contrary, from claiming the right or
E becoming subject to the obligation created by a treaty" 42 •

Reliance is also placed on the following observations of Lord
McNair43 :

"that any necessary implementation by municipal law has been
F carried out, there is nothing to prevent the nationals of 'third
States', in the absence of any express or implied provision to the
contrary, from claiming the rights, or becoming subject to the
obligations, created by a treaty; for instance, if an Anglo-
American Convention provided that professors on the staff of the
universities of each country were exempt from taxation in respect
G offees earned for lecturing in the other country, and any necessary
changes in the tax laws were made, that privilege could be claimed
by, or on behalf of, professors of those universities who were the

41. [1975] 100 !TR 706.
42. Lord McNair, The law of Treaties, Pg.336 (Oxford, at the Clarendan Press, 1961).
H 43. Ibid.
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 279

nationals of 'third States'." A
It is urged by the learned counsel for the appellants, and rightly in
our view, that if it was intended that a national of a third State should be
precluded from the benefits of the DTAC, then a suitable term of limitation
to that effect should have been incorporated therein. As a contrast, our B
attention was drawn to the Article 24 of the Indo-US Treaty on Avoidance
of Double Taxation which specifically provides the limitations subject to
which the benefits under the Treaty can be availed of. One of the limitations
is that more than 50% of the beneficial interest, or in the case of a company
more than 50% of the number of shares of each class of the company, be
owned directly or indirectly by one or more individual residents of one of C
the contracting States. Article 24 of the Indo-U.S. DTAC is in marked
contrast with the Inda-Mauritius DTAC. The appellants rightly contend
that in the absence of a limitation clause, such as the one contained in
Article 24 of the lndo-U.S. Treaty, there are no disabling or disentitling
conditions under the Inda-Mauritius Treaty prohibiting the resident of a D
third nation from deriving benefits thereunder. They also urge that motives
with which the residents have been incorporated in Mauritius are wholly
irrelevant and cannot in any way affect the legality of the transaction. They
urge that there is nothing like equity in a fiscal statute. Either the statute
applies proprio vigore or it does not. There is no question of applying a
fiscal statute by intendment, if the expressed words do not apply. In our E
view, this contention of the appellants has merit and deserves acceptance.
We shall have occasion to examine the argument based on motive a little
later.

The decision of the Chancery Division in Re F.G. Films Ltd. 44 was F
pressed into service as an example of the mask of corporate entity being
lifted and account be taken of what lies behind in order to prevent 'fraud'.
This decision only emphasises the doctrine of piercing the veil of
incorporation. There is no doubt that, where necessary, the Courts are
empowered to lift the veil of incorporation while applying the domestic
law. In the situation where the tenns of the DTAC have been made G
applicable by reason of Section 90 of the Income-Tax Act, 1961, even if
they derogate from the provisions of the Income-tax Act, it is not possible
to say that this principle of lifting the veil of incorporation should be
applied by the court. As we have already emphasised, the whole purpose
44. 53 (I) WLR 483 H
280 SUPREME COURT REPORTS (2003) SUPP. 4 S.C.R.
A of the DTAC is to ensure that the benefits thereunder are available even
if they are inconsistent with the provisions of the Indian Income-tax Act.
In our view, therefore, the principle of piercing the veil of incorporation
can hardly apply to a situation as the one before us.

The respondents banked on certain observations made in Oppenheim 's
B International Law 45 • All that is stated therein is a reiteration of the general
rule in municipal law that contractual obligations bind the parties to their
contracts and not a third party to the contract. In international law also,
it has been pointed out that the Vienna Convention on the Laws of Treaties
, 1969 reaffirms the general rule that a treaty does not create either
C obligations or rights for a third party state without its consent, based on
the general principle pacta tertiis nee nocent nee prosunt. it is true that an
international treaty between States A & B is neither intended to confer
benefits nor impose obligations on the residents of State C, but, here we
are not concerned with this question at all. The question posed for our -
D consideration is: If the residents of State C qualify for a benefit under the
treaty, can they be denied the benefit on some theoretical ground that
'treaty shopping' is unethical and illegal ? We find no support for this
proposition in the passage cited from Oppenheim.

The respondents then relied on observations of Philip Baker46 regarding
E a seminar at the IFI Barcelona in 1991, wherein a paper was presented on
"Limitation of treaty benefits for companies" (treaty shopping). He points
out that the Committee on Fiscal Affairs of the OECD in its report styled
as "Conduit Companies Report 1987" recognised that a conduit company
would generally be able to claim treaty benefits.

F There is elaborate discussion in Baker's treatise on the anti abuse
provisions in the OECD model and the approach of different countries to
the issue of 'treaty shopping'. True that several countries like the USA,
Germany, Netherlands; Switze~Iand and United Kingdom have taken
suitable steps, either by way of incorporation of appropriate provisions in
G the international conventions as to double taxation avoidance, or by
domestic legislation, to ensure that the benefits of a treaty/convention are
not available to residents of a third State. Doubtless, the treatise by Philip
Baker is an excellent guide as to how a state should modulate its laws or
45. L. Oppenheim, Oppenheim's International Law, Article 626 (9th Ed.)
46. Philips baker,Double Taxation Convention and International Law, Pg.91 ((1994) 2nd
H Ed.)
U.0.1. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA, J.] 281

incorporate suitable terms in tax conventions to which it is party so that A
the possibility of a resident of a third State deriving benefits thereunder
is totally eliminated. That may be an academic approach to the problem
to say how the law should be. The maxim "Judicis estjus dicere, non dare"
pithily expounds the duty of the Court. It is to decide what the law is, and
apply it; not to make it. B
Report of the working group on non-resident taxation

The respondents contend that anti-abuse provisions need not be
incorporated in the treaty since it is assumed that the treaty would only be
used for the benefit of the parties. C

They also strongly rely on the 'Report of the working group on Non-
Resident Taxation' dated 3rd January, 2003. In Chapter 3, para 3.2 of the
. report it is stated:
D
"3.2 Entitlement to avail DTAA benefit:

Presently a person is entitled to claim application of DTAA
if he is 'liable to tax' in the other Contracting State. The scope
of liability to tax is not defined. The term "liable to tax" should
be defined to say that there should be tax laws in force in the other E
State, which provides for taxation of such person, irrespective that
such tax fully or partly exempts such persons from charge of tax
on any income in any manner."

In para 3.3.1, after noticing the growing practice amongst certain F
entities, who are not residents of either of the two Contracting States, to
try and avail of the beneficial provisions of the DTAAs and indulge in what
is popularly known as 'treaty shopping', the report says :

"3.3.1 .... there is a need to incorporate suitable provisions in the G
chapter on interpretation ofDTAAs, to deal with treaty shopping,
conduit companies and thin capitalization. These may be based on
UN/OECD model or other best global practices."

In para 3.3.2, the working group recommended introduction of anti-
abuse provisions in the domestic law. H
282 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A Finally, in paragraph 3.3.3 it is stated "The Working Group
recommends that in future negotiations, provisions relating to anti-abuse/
limitation 'Of benefit may be incorporated in the DTAAs also."

We -are afraid that the weighty recommendations of the Working
Group on Non-Resident Taxation are again about what the law ou_ght to
B be, and a pointer to the Padiament and the Executive for incorporating
suitable limitation provisions in the treaty itself or by domestic legislation.
This per se does not render an attempt by resident of a third party to take
advantage of the existing provisions of the DTAC illegal.

C J.P.C. Report
, Strong reliance is placed by the respondents on the report of the Joint
Parliamentary Committee (hereinafter referred to as "JPC") on the Stock
Market Scam and Matters Relating thereto which was presented in the Lok
D Sabha and Rajya Sabha on December 19, 2002.

While considering the causes which led to the Stock Market scam,
the JPC had occasion to consider the working of the Inda-Mauritius DTAC.
It noticed that area-wise foreign direct investment inflow from Mauritius
increased from 37.5 million Rupees in 1993 to 61672.8 million Rupees in
E the year 2001. The CBDT had approached the Indian High Commissioner
at Mauritius to take up the matter with the Mauritian authorities to ensure
that benefit of the bilateral tax treaty were not allowed to be misused, by
suitable amendment in Article 13 of the agreement. The Mauritian
authorities, however, were of the view that, though the beneficiaries of such
p capital funds domiciled in Mauritius may be residing in third countries,
these funds had been invested in the Indian stock market in accordance
with SEBI norms and regulations and that the Finance Minister of India
had himself encouraged such Fiis as a channel for promoting capital flow
to India in a meeting between himself and the Finance Minister of
Mauritius. The Ministry of finance was willing to have regular joint
G monitoring of the situation to avoid possible misuse of the tax treaty by
unscrupulous elements. It was pointed out by the Mauritian authorities that
DTAC between the two countries "had played a positive role in covering
'the higher cost of investing in what was then assessed as 'high risk security'
and being decisive in making possible public offerings in U.S.A. and
H Europe of funds investing in India". In the absence of such a facility, as
I
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 283

afforded by the Inda-Mauritius DTAC, the cost of raising such investment A
would have been capital prohibitive. The JPC report points out that the
negotiations between the Government of India and Government of Mauritius
resulted in a situation in which the Mauritius Government felt that any
change in the provisions of the DTAC would adversely affect the perception
of potential investors and would prejudicially affect their financial interests. B

The issue still appears to be the subject matter of negotiations between
the two Governments, though no final decision has been taken thereupon.
The JPC took notice of the facts that MOBA has since been repealed by
Mauritius and Financial Services Development Act has been promulgated
with effect from l.12.2001, which has to some extent removed the C
drawback of MOBA, and led to greater transparency and facility for
obtaining information under the DTAC, which was hitherto not available.

Taking notice of the facts, and the reluctance of the Government of
Mauritius in ·the matter to renegotiate the terms of treaty, the Committee D
recommended as under (vide para 12.205):

"The Committee find that though the exact amount ofrevenue loss
due to the 'residency clause' of the treaty cannot be quantified,
but taking into account the huge inflows/outflows, it could be
assumed to be substantial. They therefore recommend that E
Companies investing in Indian through Mauritius, should be
required to file details of ownership with RBI and declare that all
the Directors and effective management is in Mauritius. The
Committee suggest that all the contentious issues should be
resolved by the Government with the Government of Mauritius F
urgently through dialogue."

In our view, the recommendations of the Working Group of the JPC
are intended for Parliament to take appropriate action. The JPC might have
noticed certain consequences, intended or unintended, flowing from the
DTAC and has made appropriate recommendations. Based on them, it is G
not possible .for us to say that the DTAC or the impugned circular are
contrary to law, nor would it be possible to interfere with either of them
on the basis of the report of the JPC.

Interpretation of Treaties
H
284 SUPREME COURT REPORTS (2003] SU?P. 4 S.C.R.

A The principles adopted in interpretation of treaties are not the same
as those in interpretation of statutory legislation. While commenting on the
interpretation of a treaty impo1ied into a municipal law, Francis Bennion
observes:

"With indirect enactment, instead of the substantive legislation
B taking the well-known form of an Act of Parliament, it has the
form of a treaty. In other words the form and language found
suitable for embodying an international agreement become, at the
stroke of a pen, also the form and language of a municipal
legislative instrument. It is rather like saying that, by Act of
c Parliament, a woman shall be a man. Inconveniences may ensue.
One inconvenience is that the interpreter is likely to be required
to cope with disorganised composition instead of precision drafting.
The drafting of treaties is notoriously sloppy usually for very good
reason. To get agreement, politic uncertainty is calle.d for.

D .... .The interpretation of a treaty imported into municipal law by
indirect enactment was described by Lord Wilberforce as being
'unconstrained by technical rules of English law, or by English
legal precedent, but conducted on broad principles of general
acceptation. This echoes the optimistic dictum of Lord Widgery
E CJ that the words 'are to be given their general meaning, general
to lawyer and layman alike ... the meaning of the diplomat rather
than the lawyer." 47

An important principle which needs to be kept in mind in the
interpretation of the provisions of an international treaty, including one for
F double taxation relief, is that treaties are negotiated and entered into at a
political level and have several considerations as their bases. Commenting
on this aspect of the matter, David R. Davis in Principles of International
Double Taxation Relief 48 , points out that the main function of a Double
Taxation Avoidance Treaty should be seen in the context of aiding
G commercial relations between treaty partners and as being essentially a
bargain between two treaty countries as to the division of tax revenues
between them in respect of income falling to be taxed in both jurisdictions.
It is observed (vide para 1.06):
47. Francis Bennion, Statutory Interpretation, Pg. 461 [Butterworths, 1992 (2nd Ed.)].
48. David R. Davis, Principles of International Double Taxation Relief, Pg.4 (London
H Sweet & MaxwelL 1985).
U.0.I. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA, J.] 285
"The benefits and detriments of a double tax treaty will probably A
only be truly reciprocal where the flow of trade and investment
between treaty partners is generally in balance. Where this is not
the case, the benefits of the treaty may be weighted more in favour
of one treaty partner than the other, even though the provisions
of the treaty are expressed in reciprocal terms. This has been B
identified as occurring in relation to tax treaties between developed
and developing countries, where the flow of trade and investment
is largely one way.

Because treaty negotiations are largely a bargaining process
with each side seeking concessions from the other, the final C
agreement will often represent a number of compromises, and it
may be uncertain as to whether a full and sufficient quid pro quo
is obtained by both sides."

And, finally, in paragraph 1.08:
D
"Apart from the allocation of tax between the treaty partners, tax
treaties can also help to resolve problems and can obtain benefits
which cannot be achieved unilaterally."

Based on these observations, counsel for the appellants contended
that the preamble of the Indo-Mauritius DTAC recites that it is for the E
"encouragement of mutual trade and investment" and this aspect of the
matter cannot be lost sight of while interpreting the treaty.

Many developed countries tolerate or encourage treaty shopping,
even if it is unintended, improper or unjustified, for other non-tax reasons, F
unless it leads to a significant loss of tax revenues. Moreover, several of
them allow the use of their treaty network to attract foreign enterprises and
offshore activities. Some of them favour treaty shopping for outbound
investment to reduce the foreign taxes of their tax residents but dislike their
own loss of tax revenues on inbound investment or trade of non-residents.
In developing countries, treaty shopping is often regarded as a tax incentive G
to attract scarce foreign capital or technology. They are able to grant tax
concessions exclusively to foreign investors over and above the domestic
tax law provisions. In this respect, it does not differ much from other
similar tax incentives given by them, such as tax holidays, grants, etc. 49
49. Roy Rcihtagi, Basic International Taxation! Pg.373-374 (Kluwer Law International). H
286 SUPREME COURT REPORTS {2003] SUPP. 4 S.C.R.

A Developing countries need foreign investments, and the treaty shopping
opportunities can be an additional factor to attract them. The use of Cyprus
as a treaty haven has helped capital inflows into eastern Europe. Madeira
(Portugal) is attractive for investments into the European Union. Singapore
is developing itself as a base for investments in South East Asia and China.
B Mauritius today provides a suitable treaty conduit for South Asia and South
Africa. In recent years, India has been the beneficiary of significant foreign
funds through the "Mauritius conduit". Although the Indian economic
reforms since 1991 permitted such capital transfers, the amount would have
been much lower without the India-Mauritius tax treaty. 50

C Overall, countries need to take, and clo take, a holistic view. The
developing countries allow treaty shopping to encourage capital and
technology inflows, which developed countries ·are keen to provide to
them. The loss of tax revenues could be insignificant compared to the other
non-tax benefits to their economy: Many of them do not appear to be too
D concerned unless the revenue losses are significant compared to the other
tax and non-tax benefits from the treaty, or the treaty shopping leads to
other tax abuses. 51

There are many principles in fiscal economy which, though at first
E blush might appear to be evil, are tolerated in a developing economy, in
the interest of long term development. Deficit financing, for example, is
one; treaty shopping, in our view, is another. Despite the sound and fury
of the respondents over the so called 'abuse' of 'treaty shopping', perhaps,
it may have been intended at the time when Indo-Mauritius DTAC was
entered into. Whether it should continue, and, if so, for how long, is a
F matter which is best left to the discretion of the executive as it is dependent
upon several economic and political considerations. This Court cannot
judge the legality of treaty shopping merely because one Section of thought
considers it improper. A holistic view has to be taken to adjudge what is
perhaps regarded in contemporary thinking as a necessary evil in a
G developing economy.

Rule in McDowell

The respondents strenuously criticized the act of incorporation by Flis
50. Ibid.
H Sl. Ibid.
U.O.I. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 287

under the Mauritian Act as a 'sham' and 'a device' actuated by improper A
motives. They contend that this Court should interdict such arrangements
and, as if by waving a magic wand, bring about a situation where the
incorporation becomes non est. For this they heavily rely on the judgment
of the Constitution Bench of this Court in McDowell and Company Ltd.
v. Commercial Tax Officer52 • Placing strong reliance on McDowel/53 it is B
argued that McDowel/54 has changed the concept of fiscal jurisprudence in
this country and any tax planning which is intended to and results in
avoidance of tax must be struck down by the Court. Considering the
seminal nature of the contention, it is necessary to consider in some detail
as to why McDowel/55 , what it says, and what it does not say.
c
In the classic words of Lord Sumner in IRC V Fisher's Executors56 •

"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 D
terms or any omissions that he can find in his favour in taxing
Acts. In so doing, he neither comes under liability nor incurs
blame."

Similar views were expressed by Lord Tomlin in IRC v. Duke of E
Westminster5 1 which reflected the prevalent attitude towards tax avoidance:
--...
'

"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 oflnland F
Revenue or :his fellow taxgatherers may be of his ingenuity, he
cannot be compelled to pay an increased tax."

These were the pre second world war sentiments expressed by the
British Courts. It is urged that McDowel/5 8 has taken a new look at fiscal G
52. Supra note I.
53. Ibid.
54. Ibid.
55. Ibid.
56. (1926) AC 395 at 412.
57. (1936) AC l; 19 TC 490.
58. Supra note I. H
288 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.
A jurisprudence and "the ghost of Fisherf'9 (supra) and Westminster"° have -·
been exorcised in the country of its origin". It is also urged thatMcDowell's61
radical departure was in tune with the changed thinking on fiscal
jurisprudence by the English Courts, as evidenced in WT. Ramsay Ltd v.
IRC6 2, Inland Revenue Commissioners v. Burman Oil Company Ltd. 63 , and
B Furniss v. Dawson64 •

As we shall show presently, far from being exorcised in its country
of origin, Duke of Westminster6 5 continues to. be alive and kicking in
England. Interestingly, even in McDowe//66 , though Chinnappa Reddy, J.,
dismissed the observation of J.C. Shah,J. in CIT v. A. Raman and
C Compan;P based on Westminster6 8 and Fisher's Executors69 , by saying ·~we
think that the time has come for us to depart from the Westminster principle
as emphatically as the British courts have done and to dissociate ourselves
from the observations of Shah J., and similar observations made elsewhere",
it does not appear that the rest of the learned Judges :of ,the Constitutional
Bench contributed to this radical thinking. Speaking for the majority,
D Ranganath Mishra, 'J, (as he then was) says in McDowell70 : •

"Tax planning may be legitimate provided it is within the
framework of law. Colourable devices cannot be part of tax
planning and it is wrong to encourage or entertain the belief that
it is honourable to avoid the payment of tax by resorting to
E
dubious methods. It is the obligation of every citizen to pay the
taxes honestly without resorting to subterfuges."
(Emphasis supplied)

This opinion of the majority is a far cry from the view of p!iinnappa
F Reddy, J. : "In our view the proper way to construe a ta}{ing statute, while
considering a device to avoid tax, is not to ask whether a provision should
be construed liberally or principally, nor whether the transaction is not
59. Supra note 56.
60. Supra note 57.
61. Supra note I.
G 62. (1982) AC 300.
63. (1982) STC 30.
64. [1984] I All ER 530.
65. Supra note 57.
66. Supra note I.
67. [1968] 67 ITR 11.
68. Supra note 57.
69. Supra note 56.
H 70. Supra note I at Pg. 171.
_, U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 289
' unreal and not prohibited by the statute, but whether the transacti,on is a A
device to avoid tax, and whether the transaction is such that the judicial
process may accord its approval to it." We are afraid that we are unable
to read or comprehend the majority judgment in McDowelf 1as having
endorsed this extreme view of Chinnappa Reddy, J. which, in our
considered opinion, actually militates against the observations of the B
majority of the Judges which we have just extracted from the leading
judgment of Ranganath Mishra, J. (as he then was).

The basic assumption made in the judgment of Chinnappa Reddy,J.
in McDowelf 2 that the principle in Duke of Westminster 73 has been departed
- from subsequently by the House of Lords in England, with respect, is not C
correct. In Craven v. White 74 the House of Lords pointedly considered the
impact of Furniss 75 , Burma Oif6 and Ramsay77 • The Law Lords were at
great pains to explain away each of these judgments. Lord Keith of Kinkel
says, with reference to the trilogy of these cases, (at p. 500):

"My Lords, in my opinion the nature of the principle to be derived D
from the three cases is this : the court must first construe the
relevant enactment in order to ascertain its meaning; it must then
analyse the series of transactions in question, regarded as a whole,
so as to ascertain its true effect in law; and finally it must apply
the enactment as construed to the true effect of the series of E
transactions and so decide whether or not the enactment was
intended to cover it. The most important feature of the principle
is that the series of transactions is to be regarded as a whole. In
ascertaining the true legal effect of the series it is relevant to take
into account, if it be the case, that all the steps in it were
contractually agreed in advance or had been determined on in F
advance by a guiding will which was in a position, for all practical
purposes, to secure that all of them were carried through to
completion. It is also relevant to take into account, if it be the case,
that one or more of the steps was introduced into the series with
no business purpose other than the avoidance of tax. G
71. Supra note I.
72. Ibid.
73. Supra note 57.
74. [1988] 3 All ER 495.
75. Supra not~ 64.
76. Supra note 63.
77. Supni note 62. H
290 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
,~-
A The principle does not involve, in my opinion, that it is part
of the judicial function to treat as nugatory any step whatever
which a taxpayer may take with a view to the avoidance or
mitigation or tax. It remains true in general that the taxpayer,
where he is in a position to carry through a transaction in two
alternative ways, one of which will result in liability to tax and
B the other of which will not, is at liberty to choose the latter and
to do so effectively in the absence of any specific tax avoidance
provision such as s.460 of the Income and Corporation Taxes Act,
1970.

In Ramsay and in Burmah the result of application of the
c principle was to demonstrate that the true legal effect of the series
of transactions entered into, regarded as a whole, was precisely
nil."

Lord Oliver (at p. 5 I 8- I 9) says:
(

D "It is equally important to bear in mind what the case did not
decide. It did not decide that a transaction entered into with the
motive of minimising the subject's burden of tax is, for that
reason, to be ignored or struck down. Lord Wilberforce Was at
pains to stress that the fact that the motive for a transaction may
be to avoid tax does not invalidate it unless a particular enactment
E so provides [see [1981] 1 All ER 865, (1982) AC 300 at 323].
;
Nor did it decide that the court is entitled, because of the subject's
motive in entering into a genuine transaction, to attribute to it a
legal effect which it did not have. Both Lord Wilberforce and Lord
Fraser emphasise the continued validity and application of the
F principle of IRCv. Duke of Westminster, (1936) AC I (1935) All
ER Rep. 259, a principle which Lord Wilberforce d~scribed as a
'cardinal principle'. What it did decide was that that cardinal
principle does not, where it is plain that a particular transaction
is but one step in a connected series of interdependent steps
designed to produce a single composite overall result, compel the
G court to regard it as otherwise than what it is, that is to say merely
a part of the composite whole."

Lord Oliver (at p.523) observes:

"My Lords, for my part I find myself unable to accept that
H Dawson either established or can properly be used to support a
U.0.1. v. AZAD! BACHAO ANDOLAN [SRlKRISHNA, J.] 291
general proposition that any transaction which is effected for the A
purpose of avoiding tax on a contemplated subsequent transaction
and is therefore 'planned' is, for that reason, necessarily to be
treated as one with that subsequent transaction and as having no
independent effect even where that is realistically and logically
impossible."
B
Continuing, (at page 524) Lord Oliver observes:
•"
a·
"Essentially, Dawson was concerned with question which is
common to all successive transactions where an actual transfer of
property has taken place to a corporate entity which subsequently C
carries out a further disposition to an ultimate disponee. The
question is : when is a disposal not a disposal within the terms
of the statute ? To give to that question the answer 'when, on an
analysis of the facts, it is seen in reality to be a different
transaction altogether' is well within the accepted canons of
construction. To answer it 'when it is effected with a view to D
avoiding tax on another contemplated transaction' is to do more
than simply to place a gloss on the words of the statute. It is to
add a limitation or qualification which the legislature itself has not
sought to express and for which there is no context in the statute.
That, however, desirable it may seem, is to legislate, not to E
construe, and that is something which is not within judicial
competence. r can find nothing in Dawson or in the cases which
preceded it which causes me to suppose that that was what this
House, was seeking to do."

Thus we see that even in the year i 988 the House of Lords F
emphasised the continued validity and application of the principle in Duke
of Westminster 78

While Chinnappa Reddy, J. took the view that Ramsay79 was an
authoritative rejection of principle in the Duke of Westminster8°, the House
of Lords, in the year 200 I, does not seem to consider it to be so, as seen G
from MacNiven (Inspector of Taxes) v. Westmoreland Investments ltd. 81
Lord Hoffmann observes:
78. Supra note 57.
79. Supra note 62.
80. Supra note 57.
81. [2001] I All ER 865 at 877-878. H
292 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A "In the Ramsay case both Lord Wilberforce and Lord Fraser of
Tullybelton, who gave the other principal speech, were careful to
stress that the House was not departing from the principle in !RC
v. Duke of Westminster, (1936) AC I, (1935) All ER Rep. 259.
There has nevertheless been a good deal of discussion about how
the two cases are to be reconciled. How, if the various juristically
B discrete acquisitions. and disposals which made up the scheme
were genuine, could the Hous_e collapse them into a composite
self-cancelling trai:i~action witho~t being guilty of ignoring the
legal position and l.ooking at t.he substance of the matter?

c My Lords,'! venture to' suggest thaf scime of the difficulty which
may have been felt in reconciling the Ramsay case with the Duke
of Westminster's case arises out of an ambiguity in Lord Tomlin's
statement that the courts cannot ignore 'the legal position' and
have regard to 'the substance of the matter'. If 'the legal position'
is that the tax is imposed by reference to a legally defined concept,
D such as stamp duty payable on a document which constitutes a
conveyanct: on sale, the court cannot tax a transaction which uses
no such document on the ground that it achieves the same
economic effect. On the other hand, if the legal position is that
tax is imposed by reference to a commercial concept, then to have
E regard to the business 'substance' of the matter is not to ignore
the legal position but to give effect to it.

The speeches in the Ramsay case and subsequent cases contain
numerous references to the 'real' nature of the transaction and to
what happens in 'the real world'. These expressions are illuminating
F in their context, but you have to be careful about the sense in
which they are being used. Otherwise you land in all kinds of
unnecessary philosophical difficulties about the nature of reality
and, in particular, about how a transaction can be said not to be
a 'sham' and yet be 'disregarded' for the purpose of deciding what
happened in 'the real world'. The point to hold on to is that
G something may be real for one purpose but not for another. When
people speak of something being a 'real' something, they mean
that it falls within some concept which they have in mind, by
contrast with something else which might have been thought to
do so, but does not. When an economist says that real incomes
H have fallen, he is not intending to contrast real incomes with
U.0.1. v. AZADI BACHAO ANDOLAN [SRIKRISHNA. J.] 293

imaginary incomes. The contrast is specifically between incomes A
which have been adjusted for inflation and those which have not.
In order to know what he means by 'real', one must first identify
the concept (inflation adjustment) by reference to which he is
using the word.

Thus in saying that the transactions in the Ramsay case were not B
sham transactions, one is accepting the juristic categorisation of
the transactions as individual and discrete and saying that each of
them involved no pretence. They were intended to do precisely
what they purpotted to do. They had a legal reality. But in saying
that they did not constitute a 'real' disposal giving rise to a 'real' C
loss, one is rejecting the juristic categorisation as not being
necessarily detenninative for the purposes of the statutory concepts
of 'disposal' and 'loss' as properly interpreted. The contrast here
is with a commercial meaning of these concepts. And in saying
that the income tax legislation was intended to operate 'in the real
world', one is again referring to the commercial context which D
should influence the construction of the concepts used by
Parliament."

With respect, therefore, we are unable to agree with the view that
Duke of Westminster8 2 is dead, or that its ghost has been exorcised in E
England. The House of Lords does not seem to think so, and we agree,
with respect. In our view, the principle in Duke of Westminster83 is very
much alive and kicking in the country of its birth. And as far as this country
is concerned, the observations of Shah,J., in CIT v. Raman84 are ver" much
relevant even today.
F
We may in this connection usefully refer to the judgment of the
Madras High Court in M V. Vallipappan and Ors. v. JTG8 5, which has
rightly concluded that the decision in McDowel/8 6 cannot be read as laying
down that every attempt at tax planning is illegitimate and must be ignored,
or that every transaction or arrangement which is perfectly permissible
under law, which has the effect of reducing the tax burden of the assessee, G
must be looked upon with disfavour. Though the Madras High Court had
82. Supra note 57.
83. Ibid.
84. Supra note 67.
85. (1988) 170 ITR 238.
86. Supra note I. H
294 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A occasion to refer to the judgment of the Privy Council in !RC v. Challenge
Corporation Ltd. 87 and did not have the benefit of the House of Lords's
:.: .
pronouncement in Craven 88 , the view taken by the Madras High Court
appears to be correct and we are inclined· to agree with it.

We may also refer 'to the judgment of Gujarat High Court in Banyan
B and Beny v. Commissioner ofIncome-Tax 89 where referring to McDowe/!9°,
the Court observed:

"The court nowhere said that every action or inaction on the part
of the taxpayer which results in reduction of tax liability to which
he may be subjected in future, is to be viewed with suspicion and
c be treated as a device for avoidance of tax irrespective of
legitimacy or genuineness of the act; an inference which
unfortunately, in our opinion, the Tribunal apparently appears to
have drawn from the enunciation made in McDowell case (1985)
154 ITR 148 (SC). The ratio of any decision has to be understood
D in the context it has been made. The facts and circumstances
which lead to McDowell's decision leave us in no doubt that the
principle enunciated in the above ~ase has not affected the
freedom of the citizen to .act in a manner according to his
requirements, his wishes in the manner of doing any trade, activity
or planning his affairs with circumspection, within the framework
E of law, unless the same fall in the category of colourable device
which may properly be called a device or a dubious method or
a subterfuge clothed with apparent dignity."

This accords with our own view of the matter.

F In CWTv. Arvind Narottam 91 , a case under the Wealth Tax Act, three
trust deeds for the benefit of the assessee, his wife and children in identical
terms were prepared under Section 21(2) of the Wealth Tax Act. Revenue
placed reliance on McDowell9 2 • Both the learned Judges of the Bench of
this Court gave separate opinions.
G Chief Justice Pathak, in his opinion said (at p. 486):
87. [1987] 2 WLR 24.
88. Supra note 74.
89. (1996) 222 ITR 831 at 850.
90. Supra note I.
91. (1988) 173 ITR 479.
H 92. Supra note I.
u.o.r. v. AZAD! BACHAO ANDOLAN [SRIKRISHNA. J.] 295

"Reliance was also placed by learned counsel for the Revenue on A
McDowell and Company Ltd. v. CTO. (1985) 154 ITR 148 SC.
That decision cannot advance the case of the Revenue because the
language of the deeds of settlement is plain and admits of no
ambiguity."

Justice S. Mukherjee said, after noticing McDowell's case, (at page B
487):

"Where the true effect on the construction of ~e deeds is clear,
as in this case, the appeal to discourage tax avoidance is not a
relevant consideration. But since it was made, it has to be noted
and rejected." C
In Mathuram Agrawal v. State of Madhya Pradesh 93 another
Constitution Bench had occasion to consider the issue. The Bench observed:

"The intention of the legislature in a taxation statute is to be
gathered from the language of the provisions particularly where D
the language is plain and unambiguous. In a taxing Act it is not
possible to assume any intention or governing purpose of the
statute more than what is stated in the plain language. It is not the
economic results sought to be obtained by making the provision
which is relevant in interpreting a fiscal statute. Equally E
impermissible is an interpretation which does not follow from the
plain, unambiguous language of the statute. Words cannot be
added to or substituted so as to give a meaning to the statute which
will serve the spirit and intention of the legislature."

The Constitution Bench reiterated the observations in Bank of F
Chettinad Ltd v. CIT94, quoting with approval the observations of Lord
Russell of Killowen in !RC v. Duke of Westminster95 and the observations
of Lord Simonds in Russell v. Scott96 •

It thus appears to us that not only is the principle in Duke of
Westminster 91 alive and kicking in England, but it also seems to have G
acquired judicial benediction of the Constitutional Bench in India,
93. [1999] 8 sec 667 at para 12.
94. (1940) 8 !TR 522 (PC).
95. Supra note 57.
96. [1948] 2 All ER 15.
97. Supra note 57. H
296 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A notwithstanding the temporary turbulence created in the wake of McDowel?.8 •
Hence, reliance on Furniss 99 , Ramsay'°0 and· Burmah 0;1io 1 by the
respondents in support of their submission is of no avail.

The situation is no different in United States and other jurisdictions
B too.
The situation in the United State is reflected in the following passage
.,,
from American Jurisprudence 102 :

"The legal right of a taxpayer to decrease the amount of what
otherwise would be his taxes, or altogether to avoid them, by
c means which the law permits, cannot be doubted. A tax-saving
motivation does not justify the taxing authorities or the courts in
nullifying or disregarding a taxpayer's otherwise proper and bona
fide choice among courses of action, and the state cannot complain,
when a taxpayer resorts to a legal method available to him to
D compute his tax liability, that the result is more beneficial to the
taxpayer ·than was intended. It has even been said that it is
common knowledge that not infrequently changes in the basic
facts affecting liability to taxation are made for the purpose of
avoiding taxation, but that where such changes are actual and not
merely simulated, although made for the purpose of avoiding
E
taxation, they do not constitute evasion of taxation. Thus, a man
may chan~e his residence to avoid taxation, or change the form
of his property by putting his money into non-taxable securities,
or in the form of property which would be taxed less, and not be
guilty of fraud. On the other hand, if a taxpayer at assessment time
F converts taxable property into non-taxable property for the purpose
of avoiding taxation, without intending a permanent change, and
shortly after the time for assessment has passed, reconverts the
property to its original form, it is a discreditable evasion of the
taxing laws, a fraud, and will not be sustained."
G Several judgments of the US Courts were cited in respect of the
proposition that motive of fax avoidance is irrelevant in consideration
98. Supra note 1.
99. Supra note 64.
100. Supra note 62.
IOI. Supra.note 63.
H 102. American Jurisp.rudence (1973 2nd Ed. Vol.71).
U.O.I. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 297

of the legal efficacy of a transactional· situation. 103 A
We may recapitulate the observations of the Federal Court in
Johanssonw 4 as to the irrelevance of the motive for Johansson. To similar
effect are the observations of the US Court in Peny R. Bas v. Commissioner
of Internal Revenue 105 :
B
"we infer that Stantus was created by petitioners with a view to
reducing their taxes through qualification of the corporation under
the convention. The test, however, is not the personal purpose of
a taxpayer in creating a corporation. Rather, it is whether that •
purpose is intended to be accomplished through a corporation
carrying out substantive business functions. If the purpose of the C
corporation is to carry out substantive business functions, or if it
in fact engages in substantive business activity, it will not be
disregarded for Federal tax purposes."

In Barber-Greene Americas, Inc. v. Commissioner of Internal D
Revenue 106 it was observed that a corporation will not be denied Western
Hemisphere trade corporation tax benefits merely because it was purposely
created and operated in such way as to obtain such benefits. Similarly, a
corporation otherwise qualified should not be disregarded merely because
it was purposely created and operated to obtain the benefits of the United
States-Swiss Confederation Income Tax Convention. E
Though the words 'sham', and 'device' were loosely used in connection
with the incorporation under the Mauritius Jaw, we deem it fit to enter a
caveat here. These words are not intended to be used as magic mantras or
catchall phrases to defeat or nullify the effect of a legal situation. As Lord F
Atkin pointed out in Duke of Westminster 107 :

"I do not use the word device in any sinister sense; for it has to
be recognised that the subject, whether poor and humble or
wealthy and noble, has the legal right so to dispose of his capital
and income as to attract upon himself the least amount of tax. The G
103. See in this connection Grego1y v. Helvering 293 US465, 469 55 S.Ct. 226, 267, 7S;
L.ed.566, 97 ALR 1335; Helvering v. St. Louis Tnist Company 296 US 48, 56 S. Ct.
7S, SOL; Becker v. St.Louis Union Trust Company 296 US 4S, 56 S.Ct. 7S, SOL.
104. Supra note 27.
105. (196S) US 50 TC 595.
106. (1960) 35 T.C. 365, 3S3, 384.
107. Supra note 57. H
298 SUPREME COURT REPORTS (2003) SUPP. 4 S.C.R.

A only function of a court of law is to determine the legal result of
his dispositions so far as they affect tax."

Lord Tomlin said :

"There may, of course, be cases where documents are not bona
B fide nor intended to be acted upon, but are only used as a cloak
to conceal a different transaction."

In Snook v. London and West Riding Investments Ltd. 108 Lord Diplock
L.J., explained the use of the word 'sham' as a legal concept in the
following words:
c "it is, I think, necessary to consider what; if any, legal
concept is involved in the use of this popular and pejorative word.
I apprehend that, if it has any meaning in law, it means acts done
or documents executed by the parties to the 'sham' which are
intended by them to give to third parties or to the court the
D appearance of creating between the parties legal rights and
obligations different from the actual legal rights and obligations
(if any) which the parties intend to create. One thing I think,
however, is clear in legal principle, morality and the authorities
(see Yorkshire Railway Wagon Contracting State. v. Maclure,
E (1882) 21 Ch.D.309; Stoneleigh Finance, Ltd. v. Phillips, (1965)
l All ER 5 l 3 that for acts or documents to be a "sham'', with
whatever legal consequences follow from this, all the parties
thereto must have a common intention that the acts or documents
are not to create the legal rights and obligations which they give
the appearance of creating. No unexpressed intentions of a
F "shammer" affect the rights of a party whom he deceived."

In Waman Rao and Ors. v. Union of India & Ors. 109 and Minerva
. Mills Ltd. and Ors. v. Union of India and Ors. 110 this Court considered
the import of the word "device' with reference to Article 3 IB which
G provided that the Acts and Regulations specified Ninth Schedule shall not
be deemed to be void or even to have become void on the ground that they
are inconsistent with the Fundamental Rights. The use 6fthe word 'device'
here was not pejorative, but to describe a provision of law intended to
108. [1967) All ER 518 at 528.
109. [1981) 2 sec 362 at para 45.
H 110. [1980] 3 sec 625 at para 91.
_U:O.I. v. AZADI BACHAO ANDOLAN [SRIKRISHNA, J.] 299

produce a certain legal result. • A
If the Court finds that notwithstanding a series of legal steps taken
by an assessee, the intended legal result has not been achieved, the Court
might be justified in overlooking the intennediate steps, but it would not
be permissible for the Court to treat the intervening legal steps as non~est
based upon some hypothetical assessment of the 'real motive' of the B
assessee. In our view, the court must deal with what is tangible in an
objective manner and cannot afford to chase a will-o'-the-wisp.

The judgment of the Privy Council in Bank of Chettinadm,
wholeheartedly approving the dicta in the passage from the opinion of Lord
Russel in Westminster 112 , was the law in this country when the Constitution C
came into force. This was the law in force then, which continued by reason
of Article 372. Unless abrogated by an Act of Parliament, or by a clear
pronouncement of this Court, we think that this legal principle would
continue to hold good. Having anxiously scanned McDowell113 , we find no
reference therein to having dissented from or overruled the decision of the D
Privy Council in Bank of Chettinad1 14 • If any, the principle appears to have
been reiterated with approval by the Constitutional Bench of this Court in
Mathuram 115 • We are, therefore, unable to accept the contention of the
respondents that there has been a very drastic change in the fiscal
jurisprudence, in India, as would entail a departure. In our judgment, from E
Westminster116 to Bank of Chettinad1 17 to Mathuram 118 , despite the hiccups
of McDowel/ 119 , the law has remained the same.

We are unable to agree with the submission that an act which is
otherwise valid in law can be treated as non-est merely on the basis of some
underlying motive supposedly resulting in some economic detriment or F
prejudice to the national interests, as perceived by the respondents.

In the result, we are of the view that Delhi High Court erred on all
counts in quashing the impugned circular. The judgment under appeal is
111. Supra note 94.
ll2. Supra note 57. G
113. Supra note I
114. Supra note 94.
115. Supra note 93.
116. Supra note 57.
117. Supra note 94.
118. Supra note 93.
119. Supra note I. H
300 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A•. set aside and it is held and declared that the circular No. 789 dated
13.4.2000 is valid and efficacious.

We cannot part with this judgment without expressing our grateful
appreciation to the Learned Attorney General, Mr. Harish Salve, Mr.
Prashant Bhushan as also the pa1ty in person, Mr. S.K. Jha, all of whom
B by their industrious research produced a wealth of material and by their
meticulous arguments rendered immense assistance.

B.S. Appeals allowed.