Sukumar Mukhopadhyay: Interpretation should not encourage evasion

There is a prevalent belief that it is the job of tax consultants to advise the clients to evade taxes. In fact, in some of the Law Universities a course that is taught is called tax planning which is the euphemism for tax evasion. In that context, a  recent judgment of the Supreme Court has now focused attention on the hitherto settled issue on whether an interpretation should be given to a statute, which would encourage evasion of tax.

There is a murmur amongst the legal analysts that with this there has been a regress in this time-honoured theory of interpretation that interpretation should not be to encourage evasion . I am writing this treatise to put at rest that this is a  misconception. The old theory enunciated in Mc Dowell’s judgment, AIR 1986 SC 649, that no interpretation should be for encouraging evasion, still holds sway. [McDowell Co.v.Commercial Tax Officer- AIR 1986 SC 649].While giving a judgment under the Andhra Pradesh General Sales Tax Act, the Supreme Court said :

“The proper way to construe a taxing statute while considering a device to avoid tax is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it.

“Sometimes I suspect that our normal meticulous methods of statutory construction tend to lead us astray by concentrating too much on verbal niceties and paying too little attention to the provisions read as a whole.”

The nuances of this theory is best understood if it is contrasted with the other norm, which is oft-quoted that benefit of doubt must be given to the accused. But many judgments soon reflected the social wisdom that such a pro-accused theory often leads to a hunt for loopholes with the ultimate intention of asking for the benefit of the concocted doubt. In any case it does not fit in with the fiscal laws, even it does to some extent in criminal cases. Decisions soon started asserting that provisions of fiscal statutes should not be allowed to be interpreted to permit or encourage evasion. The observation in Maxwell on Interpretation of Statutes 12th edition p 137 is a sort of  first clear exposition of this idea. It goes as below, “There is no doubt that the office of the Judge is to make such construction as will suppress all evasions. When the Courts find an attempt at concealment, they will brush away the cobweb varnish, and show the transactions in their true light. ..” Justice Krishna Iyer made a pointed reference to the cult of evading tax in the name of legal avoidance in the income tax case of C.I.T. v. Arabinda Reddy - 1979 (4) SCC 721 in the following words :

“A passing reference to avoidance and evasion of tax was made at the bar, a dubious reference of a dated legal culture sanctified, though by judicial dicta. The Court is not the mint of virtue and one day in our welfare state geared to social justice, this clever concept of `avoidance’ against ‘evasion’ may have to be exposed. Enough unto this day is the evil thereof.”

The principle enunciated by the  most legendary judgment in Mc Dowell’s case mentioned above which in very clear terms held that tax planning may be legitimate provided it is within the framework of the law was reaffirmed by the Supreme Court in the case of UOI vs Plywood Electronics, 1989 (41) ELT 368 (SC).

In another judgment in the case of UOI vs Azadi Bachao Andolan , (2000) 263 ITR 706Z , the Supreme Court has once again examined the meaning of “device” in the context of Indo –Mauritius Double Taxation Avoidance Convention 1983 and observed quoting the Mc Dowell`s judgment that the principle enunciated in this judgment is strictly not applicable to the present case . The reason is that the principle adopted for interpretation of statute is not the same as the principle adopted for interpretation of treaties. Treaties are political documents and not just legal. So this enunciation in this latest judgment is not against the principle enunciated in Mc Dowell’s case. In fact it is complementary to the earlier judgement and makes the theory even stronger that in a case of statutory interpretation there is no scope for taking a view, which would encourage evasion. We can conclude by saying there is a progress and not a regress in this theory. It has only been further refined. Tax evasion is a social crime and all interpretations are to be given that type of meaning which do not encourage evasion. 

                There are many  judgments which confirm this view but we cannot mention all here. They enunciate the view in unequivocal terms that the benefit of doubt cannot be extended to those cases where it would amount to evasion of tax. Benefit cannot be given where it is a case of deliberate evasion. All taxes can be lawfully evaded but interpretation of the statute should not be such that it helps the tax payer to get out of the tax liability by taking advantage of the loopholes. While the legislature has to come forward to plug the loopholes, at the same time the Courts are not supposed to look for the loopholes. The Courts should not be astute to hunt out the ambiguities by an unnatural construction. That sort of attitude will sabotage the national economy. The rule of interpretation should not be to permit or encourage circumvention of fiscal laws. The provisions of a fiscal statute are not to be so construed as to furnish a chance of escape and a means of evasion. In the commercial world of modern times and in particular in India where tax evasion is rampant, the early Victorian approach that the taxing statutes must invariably be tilted in favour of the assessee has to be given a go-by. The approach of the Courts in interpreting statutes should not be to concentrate too much on verbal niceties paying too little attention to the provisions read as a whole. The Courts have now asserted that tax planning should not amount to a colourable exercise in avoiding the payment of tax. Such dubious devices cannot be allowed to go on as tax planning and the law should certainly not be interpreted to accommodate such devices to avoid tax. The construction of tax law should be such that ingenious methods to avoid tax get eliminated. It is now more or less settled that it is the duty of the Court to construe the statutes in a manner which will suppress the evasion of tax.

                    The conclusion is that the proper approach now is not merely to decide if the interpretation should be literal or liberal but also to ascertain if the device adopted by the tax payer is a design to evade tax. And the Court should not bestow its approval to such an interpretation which would encourage evasion.