TAXATION LAW

PROJECT ON
The Mc Dowell Dictum:
Vanishing Point Between Tax Avoidance and
Tax Evasion

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TABLE OF CASES
Calcutta Chromotype Ltd. v. Collector of C.Ex., Calcutta 1998 (99) ELT 202 (SC)...........06
CIT v. A. Raman & Co. (1966) 67 ITR 11 (SC)....................................................................10
CIT v. B.M. Kharwar (1969) 72 ITR 603 (SC)......................................................................10
CIT v. Motors and General Stores (P)Ltd. (1967) 66 ITR 692 (SC).....................................13
CIT v. Sakarlal BalaBhai (1968) 69 ITR 186 (Guj)..............................................................10
CIT v. Vadilal Lullabhai (1973) 3 SCC 17.............................................................................10
CWT v. Arvind Norattam (1988) 4 SCC 113..........................................................................07
Furniss v. Dawson (1984) 1 All ER 530 (HL).......................................................................11
IRC v. Burmah Oil Co. Ltd. 1982 STC 30 (HL)...................................................................13
IRC v. Duke of Westminster (1936) AC 1........................................................................05, 11
Latilla v. IRC (1943)................................................................................................................05
Mc Dowell & Co. Ltd. v. CTO (1977) 1 SCC 441..................................................................08
Mc Dowell & Co. Ltd. v. CTO (1985) 3 SCC 230..................................................................04
UoI v. Playworld Electronics Ltd. 1989 (41) ELT 368 (SC).................................................07
VBC Technologies v. UoI 1999 (114) ELT 376 (AP)............................................................07
W.T. Ramsay v. IRC 1982 AC 300.........................................................................................11

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TABLE OF CONTENTS
INTRODUCTION..................................................................................................................04
TAX EVASION AND TAX AVOIDANCE........................................................................04
CONSEQUENCES OF TAX AVOIDANCE......................................................................07
THE FACTS OF THE CASE...............................................................................................08
THE ISSUES IN THE CASE................................................................................................09
THE VERDICT......................................................................................................................09
THE OBSERVATIONS IN THE CASE..............................................................................10
A CRITICAL REVIEW........................................................................................................14
BIBLIOGRAPHY..................................................................................................................16

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INTRODUCTION
"Taxes are what we pay for a civilized society."
-Justice Holmes
The decision in McDowell & Co. Ltd. v. CTO1 by a Constitution Bench of the Supreme Court
so widened the net under different taxing statutes that several innocent commercial and
financial acts and transactions of the assessees which were till then neither treated nor
supposed to be treated as taxable suddenly found themselves threatened with being dragged
within the pale of taxability and even penalisation. The observations in the judgment,
particularly in the opinion rendered by Chinnappa Reddy, J., against tax avoidance have so
emboldened the assessing and taxing authorities that it results in a lot of unreasonableness
and high-handedness towards the assessees.
In particular, McDowell1 judgment has blurred the line of distinction between reduction of
tax liability by an assessee on account of legally permissible, honest and justified means, on
the one hand, and reduction due to some colourable device, design or subterfuge, on the other
hand. For that reason, it has given rise to sufficient confusion and misunderstanding.

TAX EVASION and TAX AVOIDANCE

Anybody who can avoid taxes is considered to be a wise guy. It is believed that evasion is an
offence while avoidance is an art.
Justice Reddy2 says, "The shortest definition of tax avoidance that I have come across is the
art of dodging tax without breaking the law".
Tax avoidance, it seems, is legal; tax evasion is illegal"
Sometime in the early thirties in England, a theory gained widespread acceptance that it was
perfectly open for persons to evade (avoid) taxes if they could do it legally. Avoidance gained
respectability even from the Courts as a judge remarked "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

1 (1985) 3 SCC 230

2 McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230

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advantage of any expressed 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".
And the most quoted and misquoted, used and abused and the oracle for the avoiders came
from Lord Tomlin3 "Every man is entitled, if he can, to order his affairs, so that the tax
attaching under the appropriate Acts, is less than it otherwise would be. If he succeeds in
ordering them so as to secure this result, then, however unappreciative the Commissioners of
Inland Revenue or his fellow tax gatherers may be of his ingenuity, he cannot be compelled to
pay an increased tax".
Avoidance often takes place because of a lacuna in law.
Lord Greene, M.R., dealing with the construction of an anti-avoidance section, said:
"For years a battle of manoeuvre has been waged between the legislature and those who are
minded to throw the burden of taxation off their own shoulders on those of their fellow
subjects. In that battle, the Legislature has often been worsted by the skill, determination and
resourcefulness of its opponents".
From respect to condemnation the fall was fast as Lord Simon4 said
"There is, of course, no doubt that they are within their legal rights, but that is no reason why
their efforts, or those of the professional gentlemen, who assist them in the matter, should be
regarded as a commendable exercise of ingenuity or as a discharge of the duties of good
citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to
increase the load of tax on the shoulders of the great body of good citizens who do not desire,
or do not know how, to adopt these manoeuvres".
Lord Reid observed, "We seem to have travelled a long way from the general and salutary
rule that the subject is not to be taxed except by plain words. But I must recognise that plain
words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes,
which are constantly being devised to evade taxation"
As soon as a law is enacted people work overtime to look for loopholes and until those are
rectified, should the Courts merrily allow avoidance, as it is legal? A learned judge observed,
"While the techniques of tax avoidance progress and are technically improved, the Courts are
not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of
other tax payers, or to Parliamentary congestion or (most likely) to both."
3 IRC v. Duke of Westminster (1936) AC 1)
4 {Latilla v. IRC (1943)}
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As judges began to frown on avoidance, new concepts of fiscal law interpretation emerged as
another judge observed. "Whatever a statute may provide, it has to be interpreted and applied
by the Courts, and ultimately, it will prove to be in this area of judge-made law that our
elusive journey's end will be found."
Even in England where the concept of tax avoidance was born, judges have ensured that tax
dodgers do not enjoy at the cost of genuine taxpayers.
As Justice Reddy says, "the smile, cynical or even affectionate though it might have been at
one time, has now frozen into a deep frown. The Courts are now concerning themselves not
merely with the genuineness of a transaction, but with the intended effect of it on fiscal
purposes. No one can now get away with a tax avoidance project with the mere statement
that there is nothing illegal about it.
Defence of tax avoidance is an amusing attempt to raise the art of tax avoidance to the moral
level of political martyrdom. Nor, may we say, are our tax dodgers Gandhijis on the Dandi
March to protest against the salt tax.
Quite a few judges in India also subscribed to this school of thought and in several cases held
that it was perfectly honourable to avoid within the framework of law.
But in this landmark case, Justice Reddy emphatically said,
"But, surely, it is high time for the judiciary in India too to part its ways from the principle of
Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose
financial needs, if backed by the law, have to be respected and met. We must recognise that
there is behind taxation laws as much moral sanction as behind any other welfare legislation
and it is pretence to say that avoidance of taxation is not unethical and that it stands on no
less a moral plane than honest payment of taxation. In our view, 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 approval to it."
In Calcutta Chromotype Ltd. v. Collector of C.Ex., Calcutta5; the Hon'ble Supreme Court
observed Colourable devices, however, cannot be part of tax planning. Dubious methods
resorting to artifice or subterfuge to avoid payment of taxes on what really is income can
today no longer be applauded and legitimised as a splendid work by a wise man but has to be
condemned and punished with severest of penalties".
5 1998 (99) E.L.T 202(S.C.)
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In Union of India v. Playworld Electronics Pvt. Ltd6.; the Court declared, "It is the
obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also
true that in order to create the atmosphere of tax compliance, taxes must be reasonably
collected and when collected, should be utilised in proper expenditure and not wasted. It is
too much to expect the legislature to intervene and take care of every device and scheme to
avoid taxation and it is up to the Court sometimes to take stock to determine the nature of the
new and sophisticated legal devices to avoid tax and to expose the devices for what they
really are and to refuse to give judicial benediction"
The Hon'ble High Court of AP in VBC Industries Ltd. v. UOI7; observed,
"Legal ingenuity knows no bounds. It baffles an ordinary person whether the pleas such as
those put forward in the present case would be available at all. The petitioners having got the
refund pursuant to the judgement of this Court, which was later reversed by the Supreme
Court tries to resist the move of the Excise Department to recover back the amount
refunded".

CONSEQUENCES OF TAX AVOIDANCE

The evil consequences of tax avoidance are manifold.
1. First, there is a substantial loss of much needed public revenue, particularly in a welfare
state like ours.
2. Next, there is the serious disturbance caused to the economy of the country by the piling up
of mountains of black money, directly causing inflation.
3. Then there is "the large hidden loss" to the community by some of the best brains in the
country being involved in the perpetual war waged between the tax-avoider and his expert
team of advisers, lawyers and accountants on the one side and the tax-gatherer and his
perhaps not so skilful advisers on the other side.
4. Then again there is the sense of injustice and inequality, which tax avoidance, arouses in
the breasts of those who are unwilling or unable to profit by it.
5. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden
of tax liability to the shoulders of the guideless, good citizens from those of the "artful
dodgers"

6 1989 (41) E.L.T368 (S.C)

7 1999 (114) E.L.T 378 (A.P)
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THE FACTS OF THE CASE

Under the A.P. Excise Act and Rules, the manufacturer was to remove the liquor from the
distillery only upon payment of excise duty. However, the buyers of liquor from the assessee
themselves paid the excise duty before the removal of the goods. The price of the liquor was
collected by the assessee from the buyer but the excise duty paid by the buyer to the Excise
Department was not shown as part of the price received by it from the buyer. The assessee
continued to sell liquor in this manner and paid sales tax under the A.P. Sales Tax Act on the
turnover returned by him which did not, as mentioned, include the amount of the excise duty.
However, the Assessing Authority took the view and held that the assessee had failed to
include in its turnover, the amount of excise duty paid by its buyers to the Excise Department.
The assessee challenged that view but the High Court agreed with the Assessing Authority.
The assessee appealed to the Supreme Court.
A Division Bench of the Supreme Court examined the excise laws as well as the sales tax
laws. The Court took the view that
(i) the buyer was also legally responsible to pay the excise duty, and
(ii) the amount of excise duty never went into the till of the assessee.
On this view of the laws, the Supreme Court held that the excise duty, which had been
directly paid by the buyers to the Excise Department, was not includible in the turnover of the
assessee.
This was in 1977, the first judgment of the Supreme Court on the issue in McDowell & Co.
Ltd. v. CTO8.
Consequent upon this judgment, the Rules were amended. The new Rule provided for
payment of excise duty by the manufacturers, including the assessee, but the excise duty
continued to be paid directly by the buyers as was done earlier.
On the basis of the amendment in the Rules, the Assessing Authority again added the sum of
excise duty to the assessee's turnover. The assessee again moved the High Court for quashing
the notice.
The High Court held that
"the turnover related to liquor; excise duty, which was payable by the (assessee) but, by an
arrangement, had been paid by the buyer, was actually a part of the turnover (of the assessee)
and was, therefore, liable to be so included (in the turnover) for determining (the assessee's)
liability for sales tax".
8 (1977) 1 SCC 441
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The assessee appealed to the Supreme Court wherein the validity of the earlier judgment in
the assessee's case was doubted and the matter was referred to a Constitution Bench of five
Judges.

THE ISSUES IN THE CASE

There were only two basic issues before the Constitution Bench.
1. One, whether the liability to pay excise duty was that of the assessee.
2. And, the other, even if the liability to pay excise duty was of the assessee, whether the
amount of excise duty, directly paid by the buyer, was includible in the turnover of the
assessee for payment of sales tax.

THE VERDICT
Referring to several earlier precedents wherein the concept of excise duty had been
elaborated, the Constitution Bench of the Supreme Court held that
"the incidence of excise duty is directly relatable to manufacture" and its payment "is the
primary and exclusive obligation of the manufacturer ... but (only) its collection can be
deferred to a later stage as a measure of convenience or expediency".
On a fresh appraisal of the law, the highest court found fault with and overruled its own
decision rendered in 1977 in the same assessee's case.
As to the other issue relating to turnover also, the Supreme Court referred to various Indian
and English decisions and held that excise duty is a part of the consideration which a buyer
pays to purchase liquor and is includible in the turnover of the assessee (manufacturer)
although the buyer had directly paid it to the Excise Department. Thus, on this issue also, the
Supreme Court differed from its own earlier view.
The assessee thus lost the case in the Supreme Court. There was no scope for discussing tax
avoidance or tax evasion in the case of the assessee.

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THE OBSERVATIONS IN THE CASE

However, it appears from the judgment of Misra, J. that a "further contention" was made on
behalf of the assessee that "it is open to everyone to so arrange his affairs as to reduce the
brunt of taxation to the minimum and such a process does not constitute tax evasion; nor
does it carry any ignominy9".
This submission was sought to be supported by the observations of Shah, J. in the cases of
CIT v. A. Raman & Co.10 and CIT v. B.M. Kharwar11.
The observation from the latter case reads as follows:
The taxing authority is entitled and is indeed bound to determine the true legal relation
resulting from a transaction. If the parties have chosen to conceal by a device the legal
relation, it is open to the taxing authorities to unravel the device and to determine the true
character of the relationship. But the legal effect of a transaction cannot be displaced by
probing into the 'substance of the transaction.12
It appears that the Supreme Court took notice of the said "further contention" and considered
it proper to lay down the law on the subject.
Misra, J., who delivered judgment on behalf of himself and three other Judges (other than
Reddy, J.), extracted the following observation from the judgment of the Gujarat High Court
in the case of CIT v. Sakarlal Balabhai 13(affirmed by the Supreme Court in CIT v. Vadilal
Lallubhai14):
Tax avoidance postulates that the assessee is in receipt of amount which is really and in
truth his income liable to tax but on which he avoids payment of tax by some artifice or
device. Such artifice or device may apparently show the income as accruing to another
person, at the same time making it available for use and enjoyment to the assessee as in a
case falling within Section 44-D or mask the true character of the income by disguising it as
a capital receipt as in a case falling within Section 44-E or assume diverse other forms.... But
9 (SCC pp. 252-53, para 41)
10 (1968) 67 ITR 11 (SC)
11 (1969) 72 ITR 603 (SC)
12 (ITR p. 607)
13 (1968) 69 ITR 186 (Guj)
14 (1973) 3 SCC 17
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there must be some artifice or device enabling the assessee to avoid payment of tax on what
is really and in truth his income. If the assessee parts with his income producing asset, so
that the right to receive income arising from the asset which theretofore belonged to the
assessee is transferred to and vested in some other person, there is no avoidance of tax
liability: no part of the income from the asset goes into the hands of the assessee in the shape
of income or under any guise.15
Then, Misra, J. responded:
45. 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 dubious methods. It is the
obligation of every citizen to pay the taxes honestly without resorting to subterfuges.16
The appeal was dismissed. The Court did not record any finding that the assessee had adopted
any colourable device or design or dubious method or subterfuge to avoid or evade tax. The
levy of tax on the assessee was not upheld on any such finding. It was upheld, as pointed out
earlier, on a pure interpretation of law.
It is in this background that the observations of the other learned Judge, namely, Reddy, J.,
which have become a handle for the tax authorities, were made. Reddy, J. examined certain
English cases to show how the law relating to the controversy of tax avoidance was changed
even in England.
First, he examined IRC v. Duke of Westminster 17wherein it was ruled thus:
"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 Commissioner of Inland Revenue or his
fellow tax-gatherers may be of his ingenuity, he cannot be compelled to pay an increased
tax."
After citing several other cases highlighting the march of the law against tax avoidance
schemes, the learned Judge adverted to the decision in the case of W.T. Ramsay Ltd. v. IRC 18
which marked a significant departure from the earlier view of law in the case of
15 (SCC pp. 253-54, para 43)
16 (SCC pp. 254-55, para 45)
17 1936 AC 1 : 1935 All ER Rep 259 (HL)
18 1982 AC 300 : (1981) 1 All ER 865 (HL)
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Westminster19, the learned Judge cited extracts from the speeches of the Law Lords in the
case of Furniss v. Dawson 20such as the following one from Lord Scarman:
"What has been established with certainty by the House in Ramsay case21 is that the
determination of what does, and what does not, constitute unacceptable tax evasion is a
subject suited to development by judicial process."22
And borrowing the metaphor of "ghost" from the speech of Lord Roskill, he posed the
question:
"13. Thus the ghost of Westminster23 (in the words of Lord Roskill) has been exorcised in
England. Should it be allowed to rear its head in India?"24
Reddy, J. justified the relevance of English decisions thus:
"14. I have referred to the English cases at some length, only to show that in the very country
of its birth, the principle of Westminster25 has been given a decent burial and in that very
country where the phrase 'tax avoidance' originated the judicial attitude towards tax
avoidance has changed.... The courts are now concerning themselves not merely with the
genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can
now get away with a tax avoidance project with the mere statement that there is nothing
illegal about it."26
Referring with disapproval to the observations of Shah, J. in the cases of CIT v. A. Raman &
Co.27 and CIT v. B.M.Kharwar28, Reddy, J. declared:

19 1936 AC 1 : 1935 All ER Rep 259 (HL)

20 (1984) 1 All ER 530 (HL)
21 1982 AC 300 : (1981) 1 All ER 865 (HL)
22 (All ER p. 533a)

23 1936 AC 1 : 1935 All ER Rep 259 (HL)

24 (SCC p. 241, para 13)
25 1936 AC 1 : 1935 All ER Rep 259 (HL)
26 (SCC p. 241, para 14)
27 (1968) 67 ITR 11 (SC)
28 (1969) 72 ITR 603 (SC)
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"17. We think that time has come for us to depart from the Westminster29 principle as
emphatically as the British courts have done and to dissociate ourselves from the
observations of Shah, J. and similar observations made elsewhere. ... In our view, 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."30
The learned Judge then proceeded to further observe:
"18. It is neither fair nor desirable to expect the legislature to intervene and take care of
every device and scheme to avoid taxation. It is up to the court to take stock to determine the
nature of the new and sophisticated legal devices to avoid tax and to consider whether the
situation created by the devices could be related to the existing legislation with the aid of
'emerging' techniques of interpretation (sic as) was done in Ramsay31, Burmah Oil 32and
Dawson33, to expose the devices for what they really are and to refuse to give judicial
benediction."34
The two cases of Raman35 and Kharwar36 became the central point of criticism in the
judgment of Reddy, J.
In the former case, the case of the Government was that the assessee had sold goods to certain
HUFs and those HUFs had earned substantial profits on the resale of the goods over and
above the margin of profit earned by the assessee and that the creation of the family business
was merely a subterfuge and contrivance by the partners of the assessee for diversion of the
profits. The Supreme Court held:
29 1936 AC 1 : 1935 All ER Rep 259 (HL)
30 (SCC pp. 242-43, para 17)
31 1982 AC 300 : (1981) 1 All ER 865 (HL)
32 IRC v. Burmah Oil Co. Ltd., 1982 STC 30 (HL)
33 (1984) 1 All ER 530 (HL)
34 (SCC p. 243, para 18)
35 (1968) 67 ITR 11 (SC)
36 (1969) 72 ITR 603 (SC)
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"By adopting a device, if it is made to appear that income which belonged to the assessee
had been earned by some other person, that income may be brought to tax in the hands of the
assessee,.... Avoidance of tax liability by so arranging commercial affairs that charge of tax
is distributed is not prohibited. A taxpayer may resort to a device to divert the income before
it accrues or arises to him. Effectiveness of the device depends not upon considerations of
morality, but on the operation of the Income Tax Act. Legislative injunction in taxing statutes
may not, except on peril of penalty, be violated, but it may lawfully be circumvented. If the
goods were nominally transferred to the Hindu undivided families, the latter acting merely as
benamidars for the assessees, and the profits were earned in truth by the assessees, income
earned by sale of the goods by the Hindu undivided families may be held chargeable to tax as
income which has escaped assessment to tax in the hands of the assessees." 37
In the latter case, Kharwar38, though a passage from the case of Westminster39 was quoted by
Shah, J., the learned Judge did rely also on the Supreme Court's decision in CIT v. Motors &
General Stores (P) Ltd.40, wherein the Court had observed thus:
"In the absence of any suggestion of bad faith or fraud the true principle is that the taxing
statute has to be applied in accordance with the legal rights of the parties to the transaction.
When the transaction is embodied in a document the liability to tax depends upon the
meaning and content of the language used in accordance with the ordinary rules of
construction." 41
It was thereafter that Shah, J. held in his own words:
"The taxing authority is entitled and is indeed bound to determine the true legal relation
resulting from a transaction. If the parties have chosen to conceal by a device the legal
relation, it is open to the taxing authorities to unravel the device and to determine the true
character of the relationship. But the legal effect of a transaction cannot be displaced by
probing into the 'substance of the transaction'. This principle applies alike to cases in which

37 (ITR pp. 17-18)

38 (1969) 72 ITR 603 (SC)
39 1936 AC 1 : 1935 All ER Rep 259 (HL)
40 (1967) 66 ITR 692 (SC)
41 (ITR p. 699)
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the legal relation is recorded in a formal document, and to cases where it has to be gathered
from evidence; oral and documentary; and conduct of the parties to the transaction."42

A CRITICAL REVIEW
The judgment in either Raman case 43or Kharwar case 44had not laid down any such
principle which runs contrary to the principles that eventually came to be laid down in
McDowell case.
The observations in the judgment of Reddy, J. In McDowell case45, purporting to dissociate
from the said two judgments, were neither pertinent nor justified. They were so vitriolic and
so strongly worded that, while purporting to be in criticism of the judgments of Shah, J. in the
cases of Raman and Kharwar, they themselves became an excessively aggressive and
indiscriminate indictment against the time-honoured and useful distinction between tax
avoidance and tax evasion.
Ever since then, the tax authorities have been applying Reddy, J.'s opinion, without
understanding its true import and appreciating its true applicability or validity. For instance,
under the Income Tax Act, as soon as the authorities find a situation in which taxable income
could accrue, they apply the opinion of Reddy, J. as a magic wand and treat the income as
having accrued even if it had not actually and legally accrued.
Likewise, under other taxing statutes, even in cases where the tax liability of the assessee
stands reduced as a consequence of an honest, genuine and lawful act, to reduce or even
avoid tax, the taxing net is made wide enough to devour the assessee.
The judgment of Reddy, J. does not contain limitations on its applicability, objective or
otherwise. However, some subsequent judicial opinions have tried to mitigate its rigour and
put limitations thereon by placing healthy riders and restrictions on the unduly wide and
indiscriminate application of the observations of Reddy, J.

42 (ITR pp. 607-08)

43 (1968) 67 ITR 11 (SC)
44 (1969) 72 ITR 603 (SC)
45 (1985) 3 SCC 230
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For instance, in CWT v. Arvind Narottam46, rejecting a plea based on McDowell case,
Mukharji, J. held:
"... where the true effect on the construction of deeds is clear ... the appeal to discourage tax
avoidance is not a relevant consideration."47
As for the moral justification against tax avoidance, Mukharji, J. further observed:
"13. It is true that tax avoidance in an underdeveloped or developing economy should not be
encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy,
J. that one could get the enthusiasm of Justice Holmes that taxes are the price of civilisation
and one would like to pay that price to buy civilisation. But the question which many
ordinary taxpayers very often in a country of shortages with ostentatious consumption and
deprivation for the large masses ask is does he with taxes buy civilisation or does he
facilitate the wastes and ostentatiousness of the few. Unless wastes and ostentatiousness in
government's spendings are avoided or eschewed, no amount of moral sermons would
change people's attitude to tax avoidance."48
Similar discussions are to be found in the Supreme Court decision in Union of India v.
Playworld Electronics (P) Ltd49. and in Shubham Fabrics v. IAC50
The applicability of McDowell case has been restricted by many judgments of High Courts
also, for instance, in CIT v. Modest Enterprises Ltd.51, CIT v. Nandkishore Sakarlal52,
Bhaktimala Beedi Factory v. CIT 53and in CIT v. Joytsna Poddar54.

46 (1988) 4 SCC 113

47 (SCC p. 121, para 14)
48 (SCC p. 121, para 13)

49 (1989) 3 SCC 181

50 (1988) 174 ITR 502 (All)
51 (1994) 207 ITR 618 (Cal)
52 (1994) 208 ITR 14 (Guj)
53 (1996) 219 ITR 6 (AP)
54 (1998) 232 ITR 759 (Cal)
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On the other hand, there are cases which have justified the liability to tax with the support of
the dictum in McDowell case55. The truth of the matter, however, is that in all those cases, the
same results would have been achieved even by following the decision of Shah, J. in Raman
56

and Kharwar 57cases or, for that matter, the rule recognized by the Gujarat High Court in the

case of Sakarlal Balabhai 58(as affirmed by Misra, J. in McDowell case59). Reddy, J.'s
judgment has contributed confusion rather than clarity.

BIBLIOGRAPHY

http://www.ebc-india.com/practicallawyer/index2.php?

option=com_content&itemid=1&do_pdf=1&id=495
http://www.taxindiaonline.com/RC2/inside2.php3?

filename=bnews_detail.php3&newsid=605
http://www.manupatrafast.in/pers/Personalized.aspx

55 (1985) 3 SCC 230

56 (1968) 67 ITR 11 (SC)
57 (1969) 72 ITR 603 (SC)
58 (1968) 69 ITR 186 (Guj)
59 (1985) 3 SCC 230
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