AVOIDANCE OF INFRACTOUS SCN AND EVIDENCE PRIOR TO ISSUE OF SCN

TAX JURISPRUDENCE

D N PANDA1It is impossible even for the most imaginative Legislature to forestall exhaustively situations and circumstances that may be called for. The intention of the legislature assimilates two aspects viz. Concept of meaning and concept of purpose and object of the statute. Process of construction combines both literal and purposive approaches. 2In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied.

(Rowlatt, J.)3The words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning, unless tht leads to some absurdity or unless there is something in the context, or in the object of the statute to suggest the contrary. 4Legal fictions are limited to the purpose for which they are created and should be taken to their logical end in applications of the fiction to the facts the Court has to consider.

Chidambaram Mulraj & Co. Pvt. Ltd. VsCIT 58 ITR 206(Bom)5A fiscal statute is to be interpreted on the basis of the language used their and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation.6The Court is to ascribe natural and ordinary meaning to the words used by the legislature and the court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions.Orissa State warehousing Corpn.Vs CIT(SC) 237 ITR 5897The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the legislature, which is to make a levy of charge effective.8TAXES ARE SOURCE TO FUND PUBLIC WELFARE

9Maintaining transparency by Tax Administrationensures fair play

Tax Administration is not exceptionTo follow course of Natural Justice

1010 IMPORTANCE OF FAIRNESSFair procedure and the principles of natural justice are in built into the law. A noticee is always entitled to satisfy the Adjudicating Authority that those very documents upon which reliance has been placed do not make out even a prima facie case requiring any further inquiry. In such view of the matter, all such documents relied on by the Authority are required to be furnished to the noticee enabling him to show a proper cause as to why an adjudication shall not be against him11 GOLDEN RULE OF TAX ADMINISTRATIONGolden rule of law is that quasi judicial decision making process should be transparent .The independence of Tax Administration should remain unimpaired as well as judicial decision uninfluenced. Fair play and transparency are sine qua non in judicial decision making processIf the functioning of a quasi-judicial authority has to inspire confidence in the minds of those subjected to its jurisdiction, such authority must act with utmost fairness.

12Transparency is necessity of Administrative Justice DeliveryTransparency in decision making not only makes the judges and decision makers less prone to errors but also makes them subject to broader scrutiny

13Delivery of Administrative Justiceby Taxing Authorities must notonly be apparent but alsovisible from conduct

14Tax Administration is not exceptionTo follow course of Natural Justice15BASIC PRINCIPLES OF JUSTICEJudicial proceedings always require: (i) no man shall be a judge in his own cause and (ii) justice should not only be done but manifestly and undoubtedly seem to be done.

16Right to DefenceThe right to defence and fair hearing is a guaranteed right.If relevant material is not disclosed to a party, there is prima facie unfairness irrespective of whether the material in question arose before, during or after the hearing.

17Revenue AdministrationShould be free from interferenceLaw regulates exercise of judicial powers but does not interfere to the independence in decision making in any manner.

18Stating of Reasons of Decision is sine qua nonThe hallmark of order and exercise of judicial power by a judicial forum is for the forum to disclose its reasons by itself And giving of reasons has always been insisted upon as one of the fundamentals of sound administration of the justice delivery system, to make it known that there had been proper and due application of mind to the issue before the Court and also as an essential requisite of the principles of natural justice.19Reasoned & SpeakingThe absence of reasons renders an order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum. Recording of reasons is principle of natural justice and every judicial order must be supported by reasons recorded in writing.20Bias and extraneous considerationsas well as prejudging issues by empty ceremony are sworn enemies ofAdministration of Justice21LACK OF JURISDICTION MAKES A PROCEEDING FATAL 22LACK OF JURISDICTIONIf an authority which has jurisdiction in regard to one aspect takes upon itself to make enquiry into a matter in respect of which it had no jurisdiction then merely because in regard to one aspect it has jurisdiction, the Court cannot ignore the fact of lack of jurisdiction and allow the Tribunal to proceed with the matter in respect of which it has no jurisdiction to make inquiry 23FATAL FLAWIf the show cause notice is totally vague and does not disclose any material against allegation therein for the proposed action then such a show cause notice cannot be said to be validly issued

24SCN-A FOUNDATIONShow cause notice is the basic document to grant opportunity to a noticee to meet allegations. It is foundation in the matter of levy and recovery of duty, penalty and interest on which the Department has to build up its case.25WHAT IS APPARENTMAY NOT BE REAL

26IMPORTANCE OF INTENTIONIntention plays an important role in matters in which there is an allegation of duty evasion. If any device is evolved by assessee to show that a transaction which is apparent is not real causing subterfuge to Revenue an in depth enquiry into the transaction from origin to termination cannot be avoided.All documents relied upon should be provided to noticee under proper acknowledgement and in case of non-receipt thereof should be immediately addressed without delay to result in proper adjudication.27DUTY OF ADEQUATE DISCLOSUREA reasonable opportunity of being heard is to be provided by the authority at the SCN stage and in the manner prescribed for the purpose of adjudication as provided for in the Act and not at the stage Adjudication. Requirement of providing a reasonable opportunity of defence should commence from SCN stage. The minimum requirement of a SCN and consideration of cause shown would meet the ends of justice.

28DUTY OF DISCLOSUREExpress mention of allegation in the SCN notices or at least whisper therein as to short-levy or no-levy or any erroneous refund by reason of collusion or any wilful mis-statement or suppression of facts by the noticee shall not make the proceeding fatal nor invoke the larger period void.

29EXTENDED PERIOD-CONDITIONS PRECEDENT FOR INVOKATION30EXTENDED PERIOD-PRECONDITIONSSCN invoking extended period can only be issued only upon the basis that the assessee was guilty of fraud or of collusion or of willful mis-statement or suppression of facts or of contravention of the provisions of the Act or the Rules with intent to evade payment of tax/duty. That should not suffer to set out any particulars in respect of fraud or collusion or willful mis-statement or suppression of facts or contravention with intention to evade the payment of tax/duty.

31Which ground is alleged against the assessee, that must be made known to him, and there is no scope for assuming that the ground is implicit in the issuance of the show cause noticeIn order to attract the proviso it must be shown that the tax escaped payment by reason of fraud, collusion or willful mis-statement or suppression of fact or contravention of any provision of the Act or of the Rules made there under with intent to evade payment of duty. In that case the period of one year would stand extended to 5 years as provided by the said proviso32INTENTIONThe evidence that surfaces in the course of investigation and statements recorded play a vital role for an effective proceeding.Details in the reply to SCN needs through scrutiny to avoid subsequent plea of violation of natural justice. Mere suspicion not being substitute of evidence, endeavour should be act on cogent evidence.

33FRAUD-DEFINITIONAny conduct involving deceit resulting in injury, los or damage to some one is fraud. Any wilful attempt to defeat the provisions of a statute or illegally evade ones liability to pay taxes/duties will be evasion of such taxes/duties which would amount to fraud

34 FRAUDThe shape of each fraud depends upon the fertile imagination and cleverness of who conceives and perpetrates the fraud. Any conduct involving deceit resulting in injury, los or damage to some one is fraud. Any wilful attempt to defeat the provisions of a statute or illegally evade ones liability to pay taxes/duties will be evasion of such taxes/duties which would amount to fraud35FRAUD UNRAVELS EVERYTHINGIf a fraud is detected by the Court of law, it can pierce the corporate structure since fraud unravels every thing, even a statutory provision, if it is a stumbling block because the Legislature never intents to guard fraud. Lifting the corporate veil doctrine is readily applied once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of Revenue.

36TAXEVASION-A MENACELaw does not grant premium to illegal and criminal activities. It is a basic common sense that no person will maintain authentic records of the illegal activities being done by him. Material facts, evidence and surrounding circumstances only bring such activities for scrutiny of law and the wrong doer has burden of proof to come out with clean hands to prove that he is innocent. 37LIFTING THE CORPORATE VEILIn certain exceptional case Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind legal faade. Court may disregard the corporate entity if it is used to for tax evasion or to circumvent tax obligation38TAX AVOIDANCE V. TAX EVASIONTo create the atmosphere of tax compliance taxes must be reasonably collected and when collected, should be utilized in proper expenditure and not wastedIt is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methodsCourt sometimes takes 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 benediction39FALSE ENTRIES IN BOOKSWilful and intentional recording of facts in statutory records, books of account or other document relevant to or useful in any proceedings, knowingly that to be false or not believable to be true, that results in evasion of tax/duty. The books of accounts and documents considered as relevant and useful evidence for any tax proceeding if containing false entries or statements known to the perpetrator thereof becomes is to foil collection of Revenue which should meet penal consequence of law. 40Ill intention of the perpetrator with or without collusion needs serious scrutiny pondering live link and nexus between the evasion plotted and the ill will of doer or abettor. Intention of the designer of the fraud needs to be probed to find direct evidence and probabilities. Guilt of perpetrator and abettor depends of the nature of the infraction of law committed. Active assistance of the falsifier of documents, papers and records needs to thorough investigation. Such assistance may be in the form of advices or communications41Wilful and intentional recording of facts in statutory records, books of account or other document relevant to or useful in any proceedings, knowingly that to be false or not believable to be true, that results in evasion of tax/duty. The books of accounts and documents considered as relevant and useful evidence for any tax proceeding if containing false entries or statements known to the perpetrator thereof becomes is to foil collection of Revenue which should meet penal consequence of law.

42Deliberate non compliance to law, wilful avoidance to submit information to Revenue, failure to seek registration and file returns under law, filing of false returns, creation of fictitious concerns to take undue advantage of fiscal incentives, circumvention of law by dubious practices and unauthorised claim of notification benefits under law, mis-declarations, suppressions, falsification of books of account or other documents wilfully some of the modus operandi of causing loss to Revenue by evaders.43EXEMPTION NOTIFICATIONSUnless otherwise established, the courts presume that action of the Central Government to be necessary for giving effect to its policy (underlying the notification) on the basis of the working of the said notification was necessary to prevent persons from taking unfair advantage of the concession.44PRINCIPLES OF INTERPRETATIONA provision especially a fiscal statute providing for an exemption, concession or exception has to be construed strictly. An exemption notification has to be interpreted in the light of the words employed by it and not on any other basis. A person who claims exemption or concession must establish clearly that he is covered by the provision(s) concerned and, in case of doubt or ambiguity, the benefit of it must go to the State.45PRINCIPLES OF INTERPRETATIONA notification requires to be interpreted in the light of the words employed by it and not on any other basis. There cannot be any addition or subtraction from the notification for the reason the exemption notification requires to be strictly construed by the Courts. An exemption notification has to be construed strictly but that does not mean that the object and purpose of the notification is to be lost sight of and the wording used therein ignored. Where the wording of the notification is clear and unambiguous, it has to be given effect to. Exemption cannot be denied by giving a construction not justified by the wording of the notification.

46PRINCIPLES OF INTERPRETATIONIt is settled law that exemption notifications have to be strictly construed. They must be interpreted on their own wording. Wordings of some other notification are of no benefit in construing a particular notification.When the wordings of the notifications are clear and unambiguous they must be given effect to. By a strained reasoning benefit cannot be given when it is clearly not available.47PRINCIPLES OF INTERPRETATIONThe notification has to be construed in terms of the language used therein. It is well settled that unless literal meaning given to a document leads to anomaly or absurdity, the golden rule of literal interpretation shall be adhered to.It is settled law that in order to claim benefit of a notification, a party must strictly comply with the terms of the notification. If on wording of the notification the benefit is not available then by stretching the words of the notification or by adding words to the notification benefit cannot be conferred.

48PRINCIPLES OF INTERPRETATIONThe terminologies used in the notification would have an important role to play. Where the exemption notification ex facie applies, there is no reason as to why the purport thereof would be limited by giving a strict construction thereto.The object for grant of notification shall be considered in a broad based manner. The wordings used therein have to be given their natural meaning. The purpose must be allowed to be achieved. The rule regarding exemptions is that exemptions should generally be strictly interpreted but beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted.

49PRINCIPLES OF INTERPRETATIONProvision granting incentive for promoting economic growth and development in taxing statutes should be liberally construed and restriction placed on it by way of exception should be construed in a reasonable and purposive manner so as to advance the objective of the provision.No violence is done to the language employed.

50A lawyer without history or literature is a mere mechanic a mere working mansion. 51The sparks of al the sciences in the world are taken up in the ashes of the law. 52Belief only one-half that a client tells you. Let him produce proof of the other half. His Zeal and self interest will deceive hm. Dont let it deceive you before hard. See the witnesses before you plan your cases. It will help you to know that what the proof is like (Judge Donovan).53He must not merely look to principles, but must have them in readiness to act upon them: not as if they had been taught him, but as if they had been born in him.54 JUSTICE FOR ALLSword of law should never fall but on those whose guilt is so apparent and is appreciated by their friends and foes Justice Krishna Iyer

55FINAL WORDThe Arc of the Moral Universe Is Long, but It Bends Toward Justice Martin Luther King Junior56