Prevention of Abuse and Evasion of Taxing Statutes


“Tax can be evaded by breaking the law or avoided in terms of the law” remarked the Supreme Court in its decision of Punjab Distilling Industries v. CIT. The word evasion may mean either of two things. It may mean an evasion of the Act by something while it evades the Act, is within the sense of it, or it may mean an evading of the Act by doing something to which the Act doesn’t apply.

The word dealing is capable of being used in two senses: one which suggests under-hand dealing and another which means nothing more than the intentional avoidance of something disagreeable. This facet was affirmed by the Court in Simms v. Registrar of Probates.

To say what was done is an evasion of the law is idle, unless it means that, though in apparent accordance with it, it really was in contravention of the law. This paper explores the avenues of prevention of abuse and evasion and meticulously analyses the same in the light of relevant case laws.


The history of evasion can be traced back to 1860 in Fisher v Brierly. Further, in Bullivant v AG in 1900 the distinction was noted as two meanings of the word “evade” was emphasized. The technical use of the term in its modern sense spreads its roots in USA. It can be traced to Oliver Wendell Holmes in Bullen v. Wisconsin.

The acceptance of the same in United Kingdom was comparatively slow. By the 1950s, knowledgeable and careful writers in the UK had come to distinguish the term “tax evasion” from “avoidance”. However in the UK at least, “evasion” was regularly used (by modern standards, misused) in the sense of avoidance, in law reports and elsewhere, at least up to the 1970s.  Now that the terminology has received official approval in the UK since the case of Craven v White this usage should be regarded as erroneous. But even now it is often helpful to use the expressions “legal avoidance” and “illegal evasion”, to make the meaning clearer.


It was observed by the Court in Maclay v. Dixon that the only duty of citizens to Parliament is to obey its laws: to beg the question by such a phrase as ‘evading the Act’ is to indulge in confusion of thought. If the Act of the Parliament doesn’t forbid, it allows.

To quote further, in the case of Union of India v. Azadi Bachao Andolan it was explicated that unless wastes and other ostentiousness in Government’s spending are avoided, or eschewed, no amount of moral sermons will change people’s attitude to tax avoidance.


The Supreme Court decision of CIT v. Sivakshi Match exporting Co.  depicts that when a genuine transaction not prohibited by law reduces tax liability, it is not an attempt to evade tax but only a ‘legal device to reduce tax liability’ to which every tax payer is entitled.


CIT v. A Raman and Co.  elaborates that the effectiveness of a method or device adopted to reduce tax liability depends not upon considerations of morality but on the operation of the taxing Act; “legislative injunction in taxing statute may not except on peril of penalty, violated but it may lawfully be circumvented.”


A prominent case that gathers momentum at this point is the verdict in Newstead (Inspector of Taxes) v. Frost. In this case the tax-payer who was a television entertainer by entering into a partnership with a foreign company for exploiting the tax payer’s talent outside the United Kingdom was able to avoid tax liability in respect of his overseas’ income although the tax-payer’s share in partnership profits was 95% and his share in assets 99% and the motive in formation of the partnership was clearly tax avoidance.


A meticulous analysis of Ensign Tankers (Leasing) Ltd. v. Stokes accentuated the legal position and the line of demarcation between the two facets of acceptable tax mitigation and unacceptable tax avoidance.

There is a fundamental difference between acceptable tax mitigation and unacceptable tax avoidance. The former are cases in which the tax-payer takes advantage of the law to plan his affairs so as to minimize the incidence of tax.

Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by wave of a magic wand the tax payer conjures out of the air a loss or a gain or expenditure or whatever it may be which otherwise would never have existed. The structures are designed to achieve an adventitious tax benefit for the tax payer in truth are no more than raids on the public funds at the expense of the General Body of the tax-payer, and as such are unacceptable. Taxation is the price which we pay for civilization.


It is the two landmark decisions of the House of Lords that came to be popularly known as the Ramsay Principle. The aforementioned two cases are:

1. W. T. Ramsay Ltd. v. Inland Revenue Commissioners, Eilbeck (Inspector of Taxes) v. Rawling

2. Inland Revenue Commissioners v. Burmah Oil Co. Ltd.

To brief in a nutshell, companies that had made substantial capital gains had entered into complex and self-cancelling series of transactions that had generated artificial capital losses, for the purpose of avoiding capital gains tax. The House of Lords decided that where a transaction has pre-arranged artificial steps that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole. The decision is not limited to capital gains tax, but applies to all forms of direct taxation, and is an important restraint on the ability of taxpayers to engage in creative tax planning.


In tune with the decision in Craven (Inspector of Taxes) v. White, a series of transactions which contained in an intermediate tax saving would be held to be liable to tax under new approach only if,

1.         The series of transactions was preordained at the time when the tax saving transaction was entered into

2.         The transaction had no other purpose except tax avoidance

3.         There was no likelihood that the series of transactions as planned would not take place so that tax saving transaction had no independent life

4.         The preordained taxes did in fact take place

The test is therefore, whether the tax saving step was part of a preordained series of transactions, so as to constitute them a single indivisible whole and not whether the tax saving step was effected for the purpose of avoiding tax on a contemplated subsequent transaction.

MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd.

It was held in this case that the Ramsay Principle is applicable in cases where the statutory language on proper construction is to be given a commercial meaning capable of transcending the juristic individuality of its component parts and that it has no application where the statutory language refers to purely legal concepts which have no broader commercial meaning.

In this case the tax payer company borrowed capital and paid it back as interest. The sole purpose of the transaction was to produce an allowable deduction of interest paid under Section 338 of the Income and Corporation Taxes Act, 1988. The Ramsay Principle was   not applied and the deduction was allowed for the word paid was held to be a purely a legal concept.

Justice Kapadia has extra judicially expressed the view that the Ramsay Principle was “watered down” in MacNiven.

Inland Commissioners v. Scottish Provident Fund Institution

In this case the Ramsay Principle appears to have been widened to cover anti-Ramsay devices. In a joint judgment delived by five Lords, it was observed that since the decision in Ramsay ‘it has been accepted that the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows the Court to have regard to the whole of a series of transactions which were intended to have a commercial unity.’

It was further observed in the judgment that ‘it would destroy the value of Ramsay Principle construing provisions as referring to the effect of composite transactions if their composite effect has to be disregarded simply because the parties has deliberately included a commercially irrelevant contingency creating an acceptable risk that the scheme might not work as planned. The Compromise without regard to the possibility that contrary to the intention and expectation of the parties, it might not work as planned.’


State of Tamil Nadu v. Sri Srinivas Sales Tax Circulation

It was righty underlined by the Supreme Court of India in this case that the tax on sale of goods cannot be evaded by entering into the transaction through transfer of coupons and adopting a circuitous device to bring about sale.

State of Madhya Pradesh v. Home Decorators and Finance (P) Ltd

A tax on entertainments cannot be evaded by falsely alleging that the programme was being held to encourage savings and by collecting Rs.12 for admission to and subscription from non-existing organization at the time of admitting persons to the programme.

Union of India v. V. D. Dvivedi

The bar for any further employment under Government, which applies to the member of a Public Service Commission after he demits his office, under Article 319(1)(e) of the Constitution of India, cannot be evaded by labeling the employment as ‘full time non official consultant’ and by giving a contract in place of a letter of employment.

A.G. Securities v. Vaughan

The Courts are astute to detect and frustrate sham devices and artificial transactions whose only subject is to disguise the grant of a tenancy and to evade the Rents Accts; and so the critical question in every case is not simply how the arrangement is presented to the outside world in relevant documentation, but what is the true nature of the arrangement.

Bhagwandas v. Rajdeo Singh

A statutory provision enabling a Landlord to evict his tenant on the ground that he sublet the same, cannot be evaded by camouflaging sub-tenancy in the form of agency.


With reference to all the above mentioned cases it is evident that evasion and abuse of laws are a common vice which subsists in the current era. The Ramsay principle embodied in the decisions of UK House of Lords have been accepted as well as rejected by the Indian Courts after due consideration to that of the factual and legal background of each case.

To add a note of criticism to this aspect, it can be put forth that apart from the existence of stringent laws, its lacunae are well exploited and are used by the violators to shield themselves from the legal accountability. A law codified is just a corpse. It attains flesh and blood only when it is effectively and efficiently implemented. Similarly there is a severe tendency in the present day scenario to evade the obligations bestowed under law and also abuse of the same. Hence the strict implementation of the law is necessary at this point. In a long line of cases it is evincible that Court has always been cautious enough to interpret the laws in the light of factual circumstances of each case such that no illegality or unreasonable evasion and abuse of law are whittled down.


                     BBA LL.B (HONS)

                     SEM 9TH 



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