Friday, April 22, 2011

WHAT IS MONEY LAUNDERING?

WHAT IS MONEY LAUNDERING?
_______________________________________________________________________
By K P C Rao.,
LLB., FCS., FICWA
Kpcrao.india@gmail.com

Money laundering allows crime to pay by permitting criminals to hide and legitimize proceeds derived from illegal activities. According to one recent estimate, worldwide money laundering activity amounts to roughly $1 trillion a year. These illicit funds allow criminals to finance a range of additional criminal activities. Moreover, money laundering abets corruption, distorts economic decision-making, aggravates social ills, and threatens the integrity of financial institutions.

Money launderers now have access to the speed and ease of modern electronic finance. Given the staggering volume of this crime, broad international cooperation between law enforcement and regulatory agencies is essential in order to identify the source of illegal proceeds, trace the funds to specific criminal activities, and confiscate criminals’ financial assets.

Money laundering means different things in different places. This is because only proceeds of crime (or criminal conduct) can be laundered. Many countries have restricted the classification of crimes that are regarded as underlying crimes for money laundering purposes such as drug trafficking. In some countries any conduct which, if a person were convicted, would lead to a sentence of imprisonment will be regarded as a predicate crime. The final point here is that in most countries having countermoney laundering laws, a person can be guilty of the offence of laundering the proceeds of someone else’s criminal conduct.

There are various definitions available which describe the phrase ‘money laundering’. The conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime. Powis (1992) asserts that money laundering is the use of money derived from illegal activity by concealing the identity of the individual who obtained the money and converted it to assets that appear to have been derived from the legitimate source. However, probably, the simplest definition is the washing of dirty money to make it appear to be legitimate.

Criminals commit three basic types of crime – crimes of passion or honour, crimes of violence or vandalism and economic crimes. Ignoring minor vandalism, most crime is economic crime – that is this crime is committed to make money. They commit crime for two reasons – one is for kicks – to prove that they can get away with it; the other is because they think they can make more money from the crime than they can make from the same amount of legitimate endeavour.

Simply stated, the process of money laundering basically implies cleansing of money earned through illegal activities like extortion, drug trafficking and gun running etc. The tainted money is projected as clean money through intricate processes of placement, layering and laundering. In Black’s Law of Lexicon the term ‘laundering’ is referred to as being used to describe investment or other transfer of money flowing from racketeering, drug transactions and other illegal sources into legitimate channels so that its original source cannot be traced.

When they make money from crime, criminals use it for one of three purposes – to invest in another crime, to hide to use later or to spend now.

One of the most tried, tested and successful methods of investigating crime is to follow the money. So criminals want to move the money further and faster than investigators can follow it – and from time to time they want to put it into a black hole so that investigators simply cannot follow it. Also, investigators who think that someone may have been involved in a crime may start with that person’s known finances and work backwards. So, the criminal needs to get the money out of the black hole in such a way that he can explain where he got it.

Tax evaders launder money so that they can lie about where money and assets came from in order to evade tax. Or they hide money in bank accounts that they think the revenue authorities think will not be found out sometimes in the names of children or elderly relatives. Or they simply operate outside that part of the economy where records are kept. How often have you been offered a discount for cash, provided you don’t want a receipt? According to some estimates, some 80% of property crime, for example, theft, is committed to fund drugs habits. But in financial crime, increasingly, there is no physical representation of the crime. The money is no more than information on a computer screen, or to be more precise it is bits and bytes stored in a computer’s memory. So, no one handles stolen goods because there is nothing to touch. The result of this is that criminal laws that were framed to address the physical holding of something that had been stolen did not apply (or courts found it did not apply) to non-physical money or other “dematerialized” assets. There is a phrase often used by those who draw up laws or have to enforce them – they say that one way of reducing crime is to “take the profit out of crime.” This means to identify assets that represent proceeds of crime and to seize them under a Court Order or administrative power.

All this means that if money laundering could be made an unrewarding or as risky as handling stolen goods, then there would be an impact upon financial crime. Financial crime affects everyone. It results in higher costs to businesses, which means a combination of less profits and higher prices to consumers and it means the vulnerable such as the elderly are at risk from frauds such as doorstep frauds. It means shopping on the Internet or even at your local supermarket is more risky because the trader may be fraudster and it means that money flows into the hands of corrupt politicians and businessmen, including those engaged in trafficking in drugs, arms and people. Money laundering also was developed in order to facilitate trade. Nigeria is the money-laundering centre of Africa and that Nigerians around the world are engaged in large-scale crime and laundering. Money laundering techniques are restricted only by the imagination of the criminals – and there are a lot of criminals trying to find ways to launder.

Who launders money?

Criminals launder money. Money launderers are to be found in all walks of life, many acting entirely innocently. However, anyone who helps a criminal to launder the proceeds of his crime is, in most jurisdictions, also a money launderer. This means bankers, lawyers, accountants, car dealers and others are money launderers if they allow their businesses to be used by someone else to launder the proceeds of a crime. Generally, the only defence is that the businessman was unaware of what was happening. This defence will not stand as the burden of proving innocence will be on the defendants.

Persons possessing assets out of the proceeds of crime are also money launderers. A girlfriend of a criminal who knows that her boyfriend used proceeds of criminal conduct to buy her a car is a striking example in this regard. So an accountant who recommends a tax evasion scheme is himself a money launderer. Tax evaders launder money and hide it in banks’ numbered and ‘benami’ accounts. Banks are regarded as safe hiding places for slush funds.

How does money laundering help to fight crime?

1)     Money laundering is anarchical in nature. Good governance is the death warrant of criminal activity.
2)     A close scrutiny of financial transaction records leads not only to the discovery of hidden assets but also unmasks the criminals and their groups.
3)     The criminally generated funds can be forfeited. This will hit the criminal hard and break the cycle of criminal activity.

The governments should:

1)     Enforce the money laundering Laws effectively.
2)      Enact laws for search, seizure and confiscation of criminally derived assets.
3)     Should share information about criminals.
4)     Bring the law enforcement and financial authorities together.

Money launderers are highly imaginative criminals and circumvent governments’ counter-measure. A dynamic detection system must be in place. Money laundering is the process by which large amount of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source.

If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, the tax evader as well as many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any assets forfeiture laws. Attacking money laundering attacks the proceeds of crime; it also has the advantage of forcing those who are behind the trade in illicit drugs to fight in the open, on the same ground as the forces of law and order.

Money laundering is necessitated by the requirement for criminals, be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers, to disguise the origin of their criminal money so that they can use it more easily. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use the funds. These transactions typically fall into three stages:

1)     Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions.
2)     Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions
3)     Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.



Money laundering is the crime of the ‘90s. Money laundering is sleight of hand… a magic trick for wealth creation… the lifeblood of drug dealers, fraudsters, smugglers, arms dealers, terrorists, extortionists and taxevaders. It is also the world’s third largest business. Though a relatively new and in vogue subject, it (money laundering) has in fact been around for centuries. Criminals throughout history have had to hide the source of newly acquired wealth in order to escape prosecution for the predicate crime. However, the scale of the problem has escalated out of all proportion.

“Today’s criminals make the Al-Capone and the old Mafia look like small time crooks.” Money laundering is one of the major problems facing international economy. Technology has offered a very sophisticated and circuitous means to convert ill-gotten proceeds into legal tender and assets. Measures need to ensure that legislation keeps abreast of technology in order to understand and pick up on any new techniques that professional money launderers may come up with.

Money laundering is interlinked with crime. The allurement of huge profits from drug trafficking, international frauds, arms deals, trafficking in human organs, casinos and prostitution will facilitate the offence – leading to huge accumulation of wealth, prestige and respectability of those in control of criminal business. Drug trafficking is the largest single generator of illegal proceeds. Robinson (1994) stated that more money is spent worldwide on illicit drugs than on food.

The characteristics of organized crime are evident in money laundering. According to Billy Steel these characteristics are as below:
1)        It is a group activity, in that it is carried out often by more  than one person;
2)        It is a criminal activity which is long-term and continuing;
3)        It is a criminal activity which is carried out irrespective of national boundaries;
4)        It is large-scale; and
5)        It generates proceeds, which are often made available for licit use.

The serious criminal activity is highly complex and sophisticated. It is operated on a large scale and influences the legitimate business activity all over the world. A large number of conventions like the FATF have emerged to combat this growing menace.

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          [Published in Circuit Magazine (Monthly), ICWAI, February & March, 2011]

Sunday, March 06, 2011

CAVEAT

CAVEAT
By K P C RAO.,
LL.B., FCS.,FICWA.,
Practising Company Secretary
kpcrao.india@gmail.com
MEANING

 The word caveat has been derived from Latin which means “beware”. “A Caveat is an entry made in the books of the offices of a register or court to prevent a certain step being taken without previous notice to the person entering the caveat”.[1] In other words, a caveat is a caution or warning given by a party to the court not to take any action or grant any relief to the applicant without notice being given to the party lodging the caveat. It is very common in testamentary proceedings. It is a precautionary measure taken against the grant of probate or letters of administration, as the case may be, by the person lodging the caveat.  Section 148-A of the code of civil procedure  provides for lodging of a caveat.
 
RIGHT TO LODGE A CAVEAT (Sec 148-A)

(1)        Where an application is expected to be made, or has been made, in a suit or proceedings instituted, or about to be instituted, in a Court, any person claiming a right to appear before the Court on the hearing of such application may lodge a caveat in respect thereof.

(2)        Where a caveat has been lodged under sub-section (1), the person by whom the caveat has been lodged (hereinafter referred to as the caveator) shall serve a notice of the caveat by registered post, acknowledgement due, on the person by whom the application has been or is expected to be, made, under sub-section (1).

(3)        Where, after a caveat has been lodged under sub-section (1), any application is filed in any suit or proceeding, the Court, shall serve a notice of the application on the caveator.

(4)        Where a notice of any caveat has been served on the applicant, he shall forthwith furnish the caveator at the caveator's expense, with a copy of the application made by him and also with copies of any paper or document which has been, or may be, filed by him in support of the application.

(5)        Where a caveat has been lodged under sub-section (1), such caveat shall not remain in force after the expiry of ninety days from the date on which it was lodged unless the application referred to in sub-section (1) has been made before the expiry of the said period.

OBJECT 

The underlying object of a caveat is twofold:

(i)                to safeguard the interest of a person against an order that may be passed on an application filed by a party in a suit or proceeding instituted or about to be instituted.  Such a person lodging a caveat may not be a necessary party to such an application, but he may be affected by an order that may be passed on such application. Thus Section 148-A affords an opportunity to such party of being heard before an ex parte order is made; and

(ii)             to avoid multiplicity of proceedings.

In the absence of such a provision, a person who is not a party to such an application and is adversely affected by the order has to take appropriate legal proceedings to get rid of such order.  Such a provision is found in the Supreme Court Rules.  The Law Commission, therefore, recommended insertion of such a provision in the Code of Civil Procedure also.  Accordingly, Section 148-A has been inserted by the Amendment Act of 1976.  
 
NATURE AND SCOPE 

A caveat can be lodged in a suit or proceeding. In Ramachandra v State of UP[2], the expression “Civil Proceedings” in Section 141 of the Code includes all proceedings which are not original proceedings.

WHO MAY FILE
A caveat may be filed by any person who is going to be affected by an interim order likely to be passed on an application which is expected to be made in a suit or proceeding instituted or about to be instituted in a court[3]. Generally, a caveat can be filed after the judgment is pronounced.  In exceptional cases, however, a caveat may be filed even before the pronouncement of the judgment.[4] 

FORM 

 No form is prescribed for the caveat. The caveator may file a caveat in the form of an application or a petition before the court submitting the cause of action giving the name and description of the opponent.

RIGHT OF THE CAVEATOR

A caveat protects the interests of caveator.  The court must give a notice to the caveator or to his advocates. If the opponent  party files proceedings/application for the interim order, the court shall not give any ex parte interim order to the opponent party without hearing the caveator.

FAILURE TO HEAR CAVEATOR

The intention of the legislature in enacting the provision of caveat is to enable the caveator to be heard before any orders are passed and no orders are passed by the court ex parte.  It is, therefore, clear that once a caveat is filed, it is a condition precedent for passing an interim order to serve a notice of the application on the caveator who is going to be affected by the interim order.  Unless that condition precedent is satisfied, it is not permissible for the court to pass an interim order affecting the caveator, as otherwise it will defeat the very object of Section 148-A.[5]  

VALIDITY

The caveat will remain in force for 90 days from the date of filing and can be extended for a similar period by making an application / a petition referred to in sub-section (1) of sec 148-A before the expiry of 90 days.  
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    [Published in Corporate Secretary of ICSI, August, 2010]


[1]  The Dictionary of English Law
[2]  AIR 1996 SC 1888:1966 Supp SCR 393
[3]  Nirmal Chandra v Girindra Narayan, AIR 1978 Cal 492(494): 82 Cal WN 1026
[4]  Pashupatinath v Registrar, Coop socities, AIR 1986 Cal 74
[5]  Siddalingappa v. veeranna AIR 1981 Kant 242 (243); Seethaiah v. Govt. of AP., AIR 1983 AP 443

DOCTRINE OF SEPARATION OF POWERS

DOCTRINE OF SEPARATION OF POWERS- HOLISTIC APPROACH NEEDED IN THE PUBLIC INTEREST

By K P C RAO.,B.Sc.,LL.B., FICWA.,FCS.,
Practising Company Secretary
kpcrao.india@gmail.com

Introduction

The Separation of Powers, is a model for the governance of democratic states. The model was first developed in ancient Greece and came into widespread use by the Roman Republic as part of the un-codified Constitution of the Roman Republic. Under this model, the state is divided into branches, each with separate and independent powers and areas of responsibility so that no one branch has more power than the other branches . The normal division of branches is into an executive, a legislature, and a judiciary.
Different Models
Constitutions with a high degree of separation of powers are found worldwide. The UK system is distinguished by a particular entwining of powers. In Italy the powers are completely separated, even if Council of Ministers needs the vote of confidence from both chambers of Parliament, that's however formed by a wide number of members. A number of Latin American countries have electoral branches of government.

Countries with little separation of power include New Zealand and Canada. Canada makes limited use of separation of powers in practice, although in theory it distinguishes between branches of government.

Complete separation-of-powers systems are almost always presidential, although theoretically this need not be the case. There are a few historical exceptions, such as the  ‘Directoire’  system of revolutionary France. Switzerland offers an example of non-Presidential separation of powers today: It is run by a seven-member executive branch, the Federal Council. However, some might argue that Switzerland does not have a strong separation of powers system, as the Federal Council is appointed by parliament (but not dependent on parliament), and the judiciary has no power of review.

Theory of Classification of powers

The theory of separation of powers signifies three formulations of structural classification of governmental powers:

(i)       The same person should not form part of more than one of the three organs of the government. For example, ministers should not sit in Parliament.
(ii)    One organ of the government should not interfere with any other organ of the government.
(iii)  One organ of the government should not exercise the functions assigned to any other organ.

In the Indian Context

In a welfare State, the State performs important functions as a Provider, Entrepreneur and Economic Controller, and the objective of the rule of law should be to see that these multifarious and diverse encounters are fair, just and free from arbitrariness. Therefore, it is important to structure and restrict the power of the executive government so as to prevent its arbitrary application or exercise. The rule of law which runs like a golden thread, through every provision of the Constitution and indisputably constitutes one of its basic features requires that every organ of the State must act within the powers conferred upon it by the Constitution and the law.

In India, the doctrine of separation of powers has not been accorded a constitutional status. Apart from the directive principle laid down in Article 50 which enjoins separation of judiciary from the executive, the constitutional scheme does not embody nay formalistic and dogmatic division of powers. The Supreme Court in Ram Jawaya Kapur v. State of Punjab[1], held.

Indian Constitution has not indeed recognized the doctrine of separation of powers in its absolute rigidity but the functions of the different parts or branches of the government have been sufficiently differentiated and consequently it can be very well said that our Constitution does not contemplate assumption by one organ or part of the State of functions that essentially belong to another.”

In Indira Nehru Gandhi v. Raj Narain[2], Ray C.J. observed that in the Indian Constitution there is separation of powers in a broad sense only. A rigid separation of powers as under the American Constitution or under the Australian Constitution does not apply to India. However, the court held that though the constituent power is independent of the doctrine of separation of powers to implant the theory of basic structure as developed in the case of Kesavananda Bharati v. State of Kerala[3] on the ordinary legislative powers will be an encroachment on the theory of separation of powers. Nevertheless, Beg, J. added that separation of powers is a part of the basic structure of the Constitution. None of the three separate organs of the Republic can take over the functions assigned to the other. This scheme of the Constitution cannot be changed even by resorting to Article 368 of the Constitution.

Overlapping

In India, not only is there a ‘functional overlapping’ but there is ‘personnel overlapping’ also. The Supreme Court has the power to declare void the laws passed by the legislature and the actions taken by the executive if they violate any provision of the Constitution or the law passed by the legislature in case of executive actions. Even the power to amend the constitution by Parliament is subject to the scrutiny of the Court. The Court can declare any amendment void if it changes the basic structure of the Constitution[4]. The President of India in whom the executive authority of India is vested exercises law-making power in the shape of ordinance-making power and also the judicial powers under Article 103(1) and Article 217(3), to mention only a few. The council of Ministers is selected from the legislature and is responsible to the legislature. The legislature besides exercising law-making powers exercises judicial powers in cases of breach of its privilege, impeachment of the president and the removal of the judges. The executive may further affect the functioning of the judiciary by making appointments to the office of chief Justice and other judge. One can go on listing such examples yet the list would not be exhaustive.  
   
Check and Balance

The separation of powers is a doctrine which provides a separate authority, which makes it possible for the authorities to check each other’s checks and balances. The Supreme Court in Indira Nehru Gandhi v. Raj Narain, it held that adjudication of a specific dispute is a judicial function which Parliament, even acting under a constitutional amending power, cannot exercise.

The Constitution has invested the constitutional courts with the power to invalidated laws made by parliament and State Legislature transgressing constitutional limitations. Where an Act made by the legislature is invalidated by the courts on the ground of legislative incompetence, the legislature cannot enact a law declaring that the judgment of the court shall not operate; it cannot overrule or annual the decision of the court. This is what is meant by “check and balance” inherent in a system of government incorporating separation of powers[5].

If the doctrine of separation of powers in its classical sense, which is now considered as a high school textbook interpretation of this doctrine, cannot be applied to any modern government, this does not mean that the doctrine has no relevance in the world of today. The logic behind this doctrine is still valid. Therefore, not impassable barriers and unalterable frontiers but mutual restraint in the exercise of power by the three organs of the State is the soul of the doctrine of separation of powers. Hence the doctrine can be better appreciated as a ‘doctrine of check and balance’ and in this sense administrative process is not an antithesis of the ‘doctrine of separation of powers’.

In Indira Nehru Gandhi v. Raj Narain[6], Chandrachud, J. (as he then was) also observed that the “…political usefulness of the ‘doctrine of separation of powers’ is now widely recognised…” No Constitution can survive without a conscious adherence to its fine checks and balances. “Just as courts ought not to enter into problems entwined in the ‘political thicket’, Parliament must also respect the preserve of the courts. The principle of separation of powers is a principle of restraint which ‘has in it the precept, innate in the prudence of self-preservation…that discretion is the better part of valour’.

Conclusion

Therefore, the “Doctrine of separation of Powers” in today’s context of Liberalisation, privatisation and globalisation cannot be interpreted to mean either ‘separation of powers’ or ‘check and balance’ or ‘principle of restraint’ but community of powers exercised in the spirit of cooperation by various organs of the State in the best interest of the people.


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              [Published in Corporate Secretary, September, 2010] 



[1] Ram Jawaya Kapur v. State of Punjab;1955 SC 549;
[2] Indira Nehru Gandhi v. Raj Narain; 1975 Supp SCC 1
[3] Kesavananda Bharati v. State of Kerala; (1973) 4 SCC 225
[4]  Kesavananda Bharathi v. State of Kerala, (1973) 4 SCC 225: AIR 1973 sc 1461
[5]  P . Kannadasan v. State of T N, (1996) 5 SCC 670.
[6] Indira Nehru Gandhi v. Raj Narain; (1975) Supp SCC 1, 260

INTERPRETATION OF TAXING STATUTES

TECHNIQUE OF INTERPRETATION OF TAXING STATUTES - NO ROOM FOR ANY INTENDMENT
By K P C Rao. ,
B.Sc.,LL.B.,FCS., FICWA
PRACTISING COMPANY SECRETARY
kpcrao.india@gmail.com
Taxing Power

Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted; i.e., by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the Constitution. The tax in question must be authorised by such valid law. Taxation, in order to be valid, must not only be authorised by a statute but, must also be levied or collected in strict conformity with the statute, which authorises it. No tax can be imposed by any bye-law rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax”.

The ‘tax’, ‘duty’, ‘cess’ or ‘fee’ constituting a class denotes to various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. This power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as envisaged under Article 265 which uses only expression that no ‘tax’ shall be levied and collect except authorised by law. It in its elementary meaning conveys that to support a tax legislative action is essential, it cannot be levied and collected in the absence of any legislative sanction by exercise of executive power of State under Article 73 by the Union or Article 162 by the State Under Article 266(28) “taxation” has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. “Impost” means compulsory levy.

The well known and well settled characteristic of ‘tax’ in its wider sense includes all imposts. Imposts in the context have following characteristics: (I) The power to tax is an incident of sovereignty; (ii) ‘Law’ in the context of Art, 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority; (iii) The term ‘tax’ under Article 265 read with Article 266(28) includes imposts of every kind viz., tax, cess or fees; (iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a ‘tax’ in its technical sense as an impost, general, local or special.

Article 246 deals with the distribution of legislative powers as between the Union and the State legislatures, with reference to the different lists in the Seventh Schedule. The gist of the article, in short is, that the Union Parliament has fully and exclusive power to legislate with respect to matters in List I and has also power to legislate in respect to matters in list III. The State legislatures, on the other hand, has exclusive power to legislate with respect to matters in List II, minus matters falling in Lists I and III and has a concurrent power with respect to matters included in List III. The Parliament and the State legislature can legislate only in respect to the matters contained relating to tax in such List. One cannot travel beyond the power conferred under the said Article.

Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.

 Rules of Interpretation

In every treatise upon interpretation of statutes, different attitudes are attributed to the subject matter or nature of the statute so as to consider as to the effect of the object of the particular statute which is sought to be achieved. For such purpose the expressions “shall” or “may” or laying down an affirmative procedure etc. used in the statute frequently came for judicial consideration. Having regard to the subject matter of statute such in as beneficial or welfare legislature the word “may” which generally confer a discretion upon the authority exercising the power is very often construed as a discretion coupled with duty so as to construe the expression “may” as a mandatory provision in that what was not explicitly stated in the statute is construed as mandatory, as if this is implicit in the statute.

Mandatory and Directory

The question as to whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The meaning and intention of the Legislature must govern, and these are to be ascertained not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other. The use of the word shall in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. In the setting in which the word “may” has been used need consideration and given due weightage.

Sec 154 of IT Act 1961, is to ensure that injustice to the assessee or to the revenue may be avoided. It is implicit in the nature of the power and its entrustment to the authority invested ,with quasi-judicial functions under the Act, that to do justice it shall be exercised when a mistake apparent from the record is brought to his notice by a person concerned with or interested in the proceeding. That power is not discretionary and the Income-tax Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise it as held by the Supreme Court in L. Hirday Narain vs. I.T.O[1].

The use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such unless there is something in the context in which the word is used which would justify a departure from this meaning. Where the assessee seek to claim the benefit under the statutory scheme, they are bound to comply strictly with the condition under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to the assessee.

It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and Others vs. Filip Tiago De Gama of Vedem Vasco De Gama[2]. In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising there from. The ‘Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statute or read something into it which is not there. It cannot re-write or recast legislation.

It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.

In India, however, the Courts of law in construing a taxing statute lean on the ratio of the case of Cape Brandy Syndicate and goes by the words used in the statute without searching for any intendment of use of such expressions as they often do in construing different nature of statute such as beneficial statute, welfare statute more particularly the legislation relating to protection of the rights of industrial workers. However, an exception to this rule has been made by the Supreme Court in the case of State of Orissa vs. M. A. Tullock & Co[3].  In that case while the statute namely sec. 5 (2)(a)(ii) of the Orissa Sales Tax Act, 1947 did not make it mandatory for a dealer that he must produce a true declaration in writing by the purchasing dealer or by such responsible person as may be authorised in writing in this behalf by dealer that the goods in question are specified in that purchasing dealer’s certificate of registration being required for resale by him or in the execution of a contract the rule made by the rule making authority made it mandatory. The Supreme Court held in the case of Kedarnath Jute Manufacturing Co. vs. CTO[4]  that the said mandatory provision in the Orissa Sales Tax Rule was inconsistent with sec. 5(2)(a)(ii) of the Orissa Sales Tax Act and to avoid that conflict that notwithstanding the use of the expression “shall produce a true declaration” that the rule was only directory and therefore it would be enough if it was substantially complied.

Revenue Statute

In a revenue statute where by the legislature by an enactment imposes a tax or charge the rule of construction or interpretation of such statute has been more or less unanimously construed by Courts in England as also in India in a simpler manner.

In the words of Lord Thankerton in the case of I R C vs. Ross and Coulter[5] observed “counsel are apt to use the adjective ‘Penal’ in describing the harsh consequences the taxing provisions, but if the meaning of the provisions, is reasonably clear, the Courts have no jurisdiction to mitigate such harshness. On the other hand, if the provision is capable of two alternative meanings, the Courts will prefer that meaning more favourable to the subject. If the provision is so wanting in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect.”

These fundamental principles have been accepted by Supreme Court in a number of cases. To illustrate  Bhagawati  J. stated the principle as follows:

“In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of law. If the revenue satisfies the court that the case falls strictly with the provisions of the law, the subject can be taxed, If, on the other hand, the case is not covered within the four corners of the provisions of the statute, no tax can be imposed by inference or by analogy or by trying to prove into the intentions of the legislature and by considering what was the substance of the matter”.

Long days back the House of Lord expressly affirmed the cardinal principles of Duke of Westminster vs. I.R[6].  in applying the principle of construction implicit in a revenue statute that the citizen has the legal right to dispose of his capital and income so as to attract upon himself the least amount of tax. Avoidance of tax is not a tax evasion and it carries no ignominy with it anybody can so arrange his affairs so as to reduce the burden of tax to minimum. In the case of Duke of Westminster the House of Lords so observed that “given that a document of transaction is genuine the Court cannot go behind it to some supposed underlying substance”.

However, the Supreme Court in a Sales Tax case in McDowell vs. CTO[7] took the view that the legal position in case of tax avoidance should be taken as altered in the light of three judgments of the House of Lords (i) Ramsay vs I R[8]  (ii) I R vs. Burmah Oil[9]  (iii) Furniss vs Dawon[10].

The eminent jurist Mr. N. A. Palkhivala in one of his books “We The Nation, The Lost Decades” in an illuminating article have analysed the judgment of Supreme Court in McDowell vs. CTO and considered the validity of ruling of the Supreme Court blurring the distinction between tax avoidance which is legitimate and tax evasion. By an in depth analysing the said judgment in McDowell’s case, Mr. Palkhivala observed that the Courts’ pronouncement obliterating such distinction is patently incorrect and proceeds on a total misreading of three decisions of the House of Lords. In the said article he also observed “the whole object is that in a taxing statute the courts have little scope to find out the underlying intention of the legislature beyond what is stated in the plain language of the statute” is relevant in this context.

Conclusion

I conclude this Article by quoting a classic passage of words of the Late Rowlatt J  who explained the rule of interpretation of revenue statute in the case of Cape Brandy Syndicate vs. I R C[11]:

“In a taxing enactment, one has to look 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 a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”






The Author of this article is a co-author of the book titled ‘The Principles of Interpretation of Statutes’.
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[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]



[1] L. Hirday Narain vs. I.T.O; (1970) 78 I.T.R. 26 (S.C.)
[2] Union of India and Others vs. Filip Tiago De Gama of Vedem Vasco De Gama; (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336)
[3] State of Orissa vs. M. A. Tullock & Co; 1964 (15) STC 641 (SC)
[4] Kedarnath Jute Manufacturing Co. vs. CTO; AIR 1966 SC 12
[5] I R C vs. Ross and Coulter; 1948 (1) All E.R. 616 at 625 (H.L.)
[6] Duke of Westminster vs. I.R; 19 TC 490, 520, 524
[7] McDowell vs. CTO; (1985) (154 ITR 148 (SC)
[8] Ramsay vs I R; 54 T C 101
[9] I R vs. Burmah Oil; 54 T C 200
[10] Furniss vs Dawon; 55 T C 324
[11] Cape Brandy Syndicate vs. I R C; 1921 (1) KD 64, 71F