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

- **Citation:** [2003] Supp. 4 S.C.R. 222
- **Court:** Supreme Court of India
- **Decided:** 2003-10-07
- **Case number:** Civil Appeal Nos. 8161C 8162 of 2003
- **Bench:** Ruma Pal, B.N. Srikrishna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-and-anr-v-azadi-bachao-andolan-and-anr-19509
- **Pages:** 79

## Headnote

Constitution of India-Articles 73 and 265-Fncome Tax Act, 1961Sections 4, 5 & 90-Indo-Mauritius Direct Tax Avoidance Convention
(DTAC) dated 1.4.1983-Articles 3, 4 and 13(4)-Exemption to assessees
under DTAC on capital gains on sale of shares of Indian companiesPower 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 countriesIncome 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 of Residence'
E issued by Mauritius authorities as 'resident' of Mauritius-Validity ofHeld, 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.
F
Section 119-CBDT Circular No. 789 dated 13.4.2000-Validity ofHeld, 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 a

## Text

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A
B
c
UNION OF INDIA AND ANR.
v.
AZADI BACHAO ANDOLAN AND ANR.
OCTOBER 7, 2003
[RUMA PAL AND B.N. SRIKRISHNA, JJ.]
Constitution of India-Articles 73 and 265-Fncome Tax Act, 1961Sections 4, 5 & 90-Indo-Mauritius Direct Tax Avoidance Convention
(DTAC) dated 1.4.1983-Articles 3, 4 and 13(4)-Exemption to assessees
under DTAC on capital gains on sale of shares of Indian companiesPower 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 countriesIncome 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 of Residence'
E issued by Mauritius authorities as 'resident' of Mauritius-Validity ofHeld, 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.
F
Section 119-CBDT Circular No. 789 dated 13.4.2000-Validity ofHeld, 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 A Cs 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 of India & 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 of Income Tax, (2001) 249 ITR 418 (Cal.); Commissioner B
of Income 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 of Income 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
. B
Ltd. v. Assistant Collector of Central Excise, Erode, (1978) ELT J57
Mad., referred to.
Ingemar Johansson et. al. v. United States of America, 336F.2d 809,
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)
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·! ... Jtl_joq l•pJ4fj.,"
),ft• o
... '
l1l
L. Oppenheim,· Oppenheim 's Internatzonal Law, Article 626 (9th
C
Ed.~; f J:f lf P._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]
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.
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 nonest 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 of India & 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 of Income 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
of America, (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
B
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
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. 8161C 8162 of 2003.
D
From the Judgment and Order dated 31.5.2002 of the Delhi High
Court in C.W.P. Nos. 2802 and 5646 of 2000.
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
•
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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
and also contains a residuary clause. In the application of the provisions
G
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 noncorporate "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
D
E
F
G
H
"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
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
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
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
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
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.
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."
B
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
To
F.No.500/60/2000-FTD
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
New Delhi, the 13th April, 2000
All the Chief Commissioners/ Directors
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
D
E
F
G
to 'residents' of both India and Mauritius.