Of judges and their philosophies:
V. VENKATESAN
Interview with Prof. Mohan Gopal, director, Rajiv Gandhi Institute for Contemporary Studies, New Delhi.
PROFESSOR Mohan Gopal, director of the Rajiv Gandhi Institute for Contemporary Studies, (RGICS), New Delhi, is concerned about the implications of the Vodafone judgment for governance. He is well known for his scholarship in constitutional, and his previous tenures, as the head of the National Law School, Bangalore, and the National Judicial Academy, Bhopal, have been inspiring to both students and practitioners of law. Excerpts from an interview he gave Frontline:
What, according to you, are the legal flaws in the Vodafone judgment?
The issue is not whether the judgment is legally flawed. A sound legal argument can be canvassed in support of the two opposing contentions in this case – as is seen in the quite brilliant judgment of Justice Dhananjay Chandrachud in the Bombay High Court on the one hand, and in the erudite, succinct and tightly reasoned judgment of the Chief Justice of India on the other – both excellent judgments although they reach opposite conclusions.
What distinguishes the two judgments is in fact the bona fide differences in judicial approaches of the two judges as individuals, not the state of the law or the facts of the case. Justice Chandrachud's judgment is acutely concerned about judicial deference to the legislature in a democracy. He writes:
“Judicial doctrine which is designedly intended by the Constitution to be isolated from the rough and tumble of democratic accountability to electoral colleges must, therefore, be structured so as not to intrude upon the field of legislative policies which lies within the domain of Parliament.”
Justice Kapadia's judgment takes careful account of the business environment and foreign direct investment needs.
Justice [K.S.] Radhakrishnan, in his concurring judgment, writes, “FDI… is indispensable for growing economy like India [ sic]”.
The fact of the matter, well recognised in the jurisprudential school called legal realism, is that the individual approach of the judge is even more decisive in judicial decisions than the law or the facts.
What would have happened if, hypothetically, in this case, Justice Chandrachud had been in the Supreme Court and Justice Kapadia and Justice Radhakrishnan in the High Court? The consequences for the country would have been enormous. We may have been able, for example, to receive billions of dollars of additional tax revenue and bridge a part of the affordability gap for universal coverage in the food security policy.
If this is the case, has not the time now come in India for us also to engage with the issue of the personal approach and philosophy of judges more openly and directly – as other democracies do? How long will we stick to the legal fiction that the personal background and the social, economic and political philosophies of judges do not enter their judicial decision-making?
Judges should be firmly committed to the values and philosophy of our Constitution (not to the government or party of the day) because they have assumed for themselves the role of guardians of the Constitution.
V. VENKATESAN
Interview with Prof. Mohan Gopal, director, Rajiv Gandhi Institute for Contemporary Studies, New Delhi.
PROFESSOR Mohan Gopal, director of the Rajiv Gandhi Institute for Contemporary Studies, (RGICS), New Delhi, is concerned about the implications of the Vodafone judgment for governance. He is well known for his scholarship in constitutional, and his previous tenures, as the head of the National Law School, Bangalore, and the National Judicial Academy, Bhopal, have been inspiring to both students and practitioners of law. Excerpts from an interview he gave Frontline:
What, according to you, are the legal flaws in the Vodafone judgment?
The issue is not whether the judgment is legally flawed. A sound legal argument can be canvassed in support of the two opposing contentions in this case – as is seen in the quite brilliant judgment of Justice Dhananjay Chandrachud in the Bombay High Court on the one hand, and in the erudite, succinct and tightly reasoned judgment of the Chief Justice of India on the other – both excellent judgments although they reach opposite conclusions.
What distinguishes the two judgments is in fact the bona fide differences in judicial approaches of the two judges as individuals, not the state of the law or the facts of the case. Justice Chandrachud's judgment is acutely concerned about judicial deference to the legislature in a democracy. He writes:
“Judicial doctrine which is designedly intended by the Constitution to be isolated from the rough and tumble of democratic accountability to electoral colleges must, therefore, be structured so as not to intrude upon the field of legislative policies which lies within the domain of Parliament.”
Justice Kapadia's judgment takes careful account of the business environment and foreign direct investment needs.
Justice [K.S.] Radhakrishnan, in his concurring judgment, writes, “FDI… is indispensable for growing economy like India [ sic]”.
The fact of the matter, well recognised in the jurisprudential school called legal realism, is that the individual approach of the judge is even more decisive in judicial decisions than the law or the facts.
What would have happened if, hypothetically, in this case, Justice Chandrachud had been in the Supreme Court and Justice Kapadia and Justice Radhakrishnan in the High Court? The consequences for the country would have been enormous. We may have been able, for example, to receive billions of dollars of additional tax revenue and bridge a part of the affordability gap for universal coverage in the food security policy.
If this is the case, has not the time now come in India for us also to engage with the issue of the personal approach and philosophy of judges more openly and directly – as other democracies do? How long will we stick to the legal fiction that the personal background and the social, economic and political philosophies of judges do not enter their judicial decision-making?
Judges should be firmly committed to the values and philosophy of our Constitution (not to the government or party of the day) because they have assumed for themselves the role of guardians of the Constitution.
ATUL YADAV/PTI
CHIEF JUSTICE OF INDIA S.H. Kapadia and (below) Justice Dhananjay Y. Chandrachud of the Bombay High Court.
What is the relevance of the constitutional philosophy to this judgment? I would argue that the Bombay High Court judgment is more in line with the constitutional philosophy than the Supreme Court judgment for two reasons. First, the passage from Chandrachud shows a conscious judicial deference to the legislature, based explicitly on the constitutional vision. Second, the Bombay High Court judgment is more in line with the constitutional scheme of the role of the state as a proactive guardian of the public interest (rather than a state that yields excessively to the market). It provides greater latitude for the state to safeguard public interest in collecting taxes (badly needed for development) by “looking through” rather than merely “looking at” complex financial arrangements in a globalised world in which not only investment and growth but crime and embezzlement are also on the rise.
The Supreme Court judgment, on the other hand, reveals an approach that is concerned about limiting tax investigation and encouraging investment flows into the country.
SHASHI ASHIWAL
Neither judgment, in my view, adequately reflects the constitutional philosophy towards the obligation of citizens and corporates in a poor country to pay taxes to the fullest extent required by law, rather than plan to avoid or evade them.
What are the consequences of the judgment for tax revenue and development?
The Supreme Court judgment places important limitations on the revenue authorities. The “look at/look through” framework is in my view, neither valid nor justifiable, and as the Supreme Court itself suggests, this is a matter of legislative policy. This should be corrected. Equally, the excessively narrow interpretation of the tax nexus with India will also have to be corrected. Unless this is done, the consequences for revenue and development will be negative without any prospect of commensurate growth in investment – except perhaps growth in the number of well-disguised fraudulent tax schemes that will hide coyly behind “look at” limits!
It is pointed out that the principle of recusal is not relevant in this case because the Chief Justice's son, Hoshnar Kapadia, joined Ernst & Young – a firm which advised Vodafone on its tax dispute – after the February 2007 deal, and that he joined E&Y India and not E&Y U.K. It is also pointed out that the Income Tax Department used E&Y U.K.'s report as evidence against Vodafone.
I do not know the facts. From what I have seen in the media, the conflict of interest argument seems far-fetched in terms of currently accepted judicial standards for recusal. Chief Justice Kapadia has a well-deserved and hard-earned reputation for the highest integrity. We should avoid raising questions about the integrity of public officials so lightly.
The judges seem to have reached the decision by their curious interpretation of the McDowell judgment (Para 64). Is their interpretation of the McDowell judgment, especially Justice O. Chinnappa Reddy's observations on the need to depart from the “Westminster” principle, correct?
I am not persuaded by the Supreme Court's interpretation of McDowell in this case. In my view, Justice Chinnappa Reddy and the majority were equally clear in their decision to depart from the Westminster principle, and the Vodafone judgment erred in not following Justice Chinnappa Reddy's holding in this regard.
Did the Bench miss the subtle distinction between tax planning and tax avoidance and tax avoidance and tax evasion?
Not all tax planning is bona fide. I hope the judgment will not be read as giving a green signal to all tax planning even if the plan is to evade or avoid taxes.
As a matter of political philosophy derived from Gandhian values that underlie our Constitution, I would argue that tax reduction, avoidance and evasion should all be considered illegitimate. The purpose of the Constitution and the state it constitutes is to bring about a social revolution to bring swaraj to the masses. This has been well recognised, including by the Supreme Court of India (see for example the judgment in the S.P. Gupta case). The state has inadequate resources to improve the lot of the poorest, as we are repeatedly told. If this is the case, the policy of the state and the duty of corporates must be to collect, and to contribute, as much tax as possible under the law. Business transactions must be designed to achieve business goals. Tax avoidance, evasion or reduction may be a relevant business goal in rich countries, but not in India. This vision should guide Indian courts. The blind adoption by courts of British tax jurisprudence in this regard without due consideration of the differences in the role and need for taxes in a poor country such as India, and our constitutional values, is unfortunate.
Narrow interpretation
The exclusion of “indirect transfers” from Section 9 of the Income Tax Act and, as a consequence, the refusal to consider it as a “look through” provision was another setback to the I.T. Department. Was the Supreme Court correct in interpreting Section 9 in the manner that it did?
The excessively narrow interpretation of Section 9 is not in my view adequately justified in the judgment. There was no intention on the part of the legislature to exclude indirect transfers. It is not clear how this provision was in effect “read down”. This matter may need to be corrected legislatively.
In Paragraph 73, the Bench seeks to distinguish between preordained transaction (created for tax avoidance purposes) and a transaction which evidences investment to participate. In the latter, a dissecting approach is not warranted. Is the Bench correct in its emphasis on the “look at” approach rather than on the dissecting approach?
It is not clear how the tax authorities would be able to determine whether a transaction is intended for tax avoidance or evasion or for investment to participate unless the transaction is first “looked through” carefully and “dissected”. The Supreme Court judgment itself appears to “dissect” the impugned transaction in some detail, rather than merely “look at” it, before concluding that it was not intended for tax avoidance. After the dissection, the judgment seems to suggest that the transaction should be analysed “as a whole” rather than its individual elements looked at in isolation.
Again, if individual elements clearly show a plan for tax evasion, it is not clear how they can be ignored by the tax authorities. These distinctions appear interesting from a theoretical point of view, but may be very difficult to apply.
Do you think ‘Azadi' was incorrectly decided?
In the relevant part of the Azadi judgment the Supreme Court overturned a Delhi High Court judgment that [to use the Vodafone terminology] upheld a “look through” approach and struck down a “look at” approach that was mandated by an impugned circular. In so doing, the Supreme Court limited the role of the tax authorities, who have duties and responsibilities to investigate the true nature of transactions. However, in that case, the “look at” limit came from the executive itself in the form of the impugned circular, rather than from the judiciary. As a result, the Supreme Court cannot be faulted in the Azadi case for upholding a policy choice – erroneous as it may have been – made by the executive.
The “look at”/“look through” distinction should be removed and the tax authorities should be fully empowered to investigate transactions as needed (with adequate safeguards against harassment and corruption).
Justice Radhakrishnan has held in paragraph 90 of his judgment that the principle of Duke of Westminster is still valid. Your comments.
The concurring judgment does not quite say that the Westminster case is still valid. It simply says, in effect, that it is not fully dead. So we may conclude that the “Duke of Westminster” case is in a deep coma and hence not of any functional relevance.
In any case, the time has come, 65 years after Independence, for us to develop the confidence to decide our tax cases without relying on whether or not old English decisions are dead, alive or in a coma.
'via Blog this'
CHIEF JUSTICE OF INDIA S.H. Kapadia and (below) Justice Dhananjay Y. Chandrachud of the Bombay High Court.
What is the relevance of the constitutional philosophy to this judgment? I would argue that the Bombay High Court judgment is more in line with the constitutional philosophy than the Supreme Court judgment for two reasons. First, the passage from Chandrachud shows a conscious judicial deference to the legislature, based explicitly on the constitutional vision. Second, the Bombay High Court judgment is more in line with the constitutional scheme of the role of the state as a proactive guardian of the public interest (rather than a state that yields excessively to the market). It provides greater latitude for the state to safeguard public interest in collecting taxes (badly needed for development) by “looking through” rather than merely “looking at” complex financial arrangements in a globalised world in which not only investment and growth but crime and embezzlement are also on the rise.
The Supreme Court judgment, on the other hand, reveals an approach that is concerned about limiting tax investigation and encouraging investment flows into the country.
SHASHI ASHIWAL
Neither judgment, in my view, adequately reflects the constitutional philosophy towards the obligation of citizens and corporates in a poor country to pay taxes to the fullest extent required by law, rather than plan to avoid or evade them.
What are the consequences of the judgment for tax revenue and development?
The Supreme Court judgment places important limitations on the revenue authorities. The “look at/look through” framework is in my view, neither valid nor justifiable, and as the Supreme Court itself suggests, this is a matter of legislative policy. This should be corrected. Equally, the excessively narrow interpretation of the tax nexus with India will also have to be corrected. Unless this is done, the consequences for revenue and development will be negative without any prospect of commensurate growth in investment – except perhaps growth in the number of well-disguised fraudulent tax schemes that will hide coyly behind “look at” limits!
It is pointed out that the principle of recusal is not relevant in this case because the Chief Justice's son, Hoshnar Kapadia, joined Ernst & Young – a firm which advised Vodafone on its tax dispute – after the February 2007 deal, and that he joined E&Y India and not E&Y U.K. It is also pointed out that the Income Tax Department used E&Y U.K.'s report as evidence against Vodafone.
I do not know the facts. From what I have seen in the media, the conflict of interest argument seems far-fetched in terms of currently accepted judicial standards for recusal. Chief Justice Kapadia has a well-deserved and hard-earned reputation for the highest integrity. We should avoid raising questions about the integrity of public officials so lightly.
The judges seem to have reached the decision by their curious interpretation of the McDowell judgment (Para 64). Is their interpretation of the McDowell judgment, especially Justice O. Chinnappa Reddy's observations on the need to depart from the “Westminster” principle, correct?
I am not persuaded by the Supreme Court's interpretation of McDowell in this case. In my view, Justice Chinnappa Reddy and the majority were equally clear in their decision to depart from the Westminster principle, and the Vodafone judgment erred in not following Justice Chinnappa Reddy's holding in this regard.
Did the Bench miss the subtle distinction between tax planning and tax avoidance and tax avoidance and tax evasion?
Not all tax planning is bona fide. I hope the judgment will not be read as giving a green signal to all tax planning even if the plan is to evade or avoid taxes.
As a matter of political philosophy derived from Gandhian values that underlie our Constitution, I would argue that tax reduction, avoidance and evasion should all be considered illegitimate. The purpose of the Constitution and the state it constitutes is to bring about a social revolution to bring swaraj to the masses. This has been well recognised, including by the Supreme Court of India (see for example the judgment in the S.P. Gupta case). The state has inadequate resources to improve the lot of the poorest, as we are repeatedly told. If this is the case, the policy of the state and the duty of corporates must be to collect, and to contribute, as much tax as possible under the law. Business transactions must be designed to achieve business goals. Tax avoidance, evasion or reduction may be a relevant business goal in rich countries, but not in India. This vision should guide Indian courts. The blind adoption by courts of British tax jurisprudence in this regard without due consideration of the differences in the role and need for taxes in a poor country such as India, and our constitutional values, is unfortunate.
Narrow interpretation
The exclusion of “indirect transfers” from Section 9 of the Income Tax Act and, as a consequence, the refusal to consider it as a “look through” provision was another setback to the I.T. Department. Was the Supreme Court correct in interpreting Section 9 in the manner that it did?
The excessively narrow interpretation of Section 9 is not in my view adequately justified in the judgment. There was no intention on the part of the legislature to exclude indirect transfers. It is not clear how this provision was in effect “read down”. This matter may need to be corrected legislatively.
In Paragraph 73, the Bench seeks to distinguish between preordained transaction (created for tax avoidance purposes) and a transaction which evidences investment to participate. In the latter, a dissecting approach is not warranted. Is the Bench correct in its emphasis on the “look at” approach rather than on the dissecting approach?
It is not clear how the tax authorities would be able to determine whether a transaction is intended for tax avoidance or evasion or for investment to participate unless the transaction is first “looked through” carefully and “dissected”. The Supreme Court judgment itself appears to “dissect” the impugned transaction in some detail, rather than merely “look at” it, before concluding that it was not intended for tax avoidance. After the dissection, the judgment seems to suggest that the transaction should be analysed “as a whole” rather than its individual elements looked at in isolation.
Again, if individual elements clearly show a plan for tax evasion, it is not clear how they can be ignored by the tax authorities. These distinctions appear interesting from a theoretical point of view, but may be very difficult to apply.
Do you think ‘Azadi' was incorrectly decided?
In the relevant part of the Azadi judgment the Supreme Court overturned a Delhi High Court judgment that [to use the Vodafone terminology] upheld a “look through” approach and struck down a “look at” approach that was mandated by an impugned circular. In so doing, the Supreme Court limited the role of the tax authorities, who have duties and responsibilities to investigate the true nature of transactions. However, in that case, the “look at” limit came from the executive itself in the form of the impugned circular, rather than from the judiciary. As a result, the Supreme Court cannot be faulted in the Azadi case for upholding a policy choice – erroneous as it may have been – made by the executive.
The “look at”/“look through” distinction should be removed and the tax authorities should be fully empowered to investigate transactions as needed (with adequate safeguards against harassment and corruption).
Justice Radhakrishnan has held in paragraph 90 of his judgment that the principle of Duke of Westminster is still valid. Your comments.
The concurring judgment does not quite say that the Westminster case is still valid. It simply says, in effect, that it is not fully dead. So we may conclude that the “Duke of Westminster” case is in a deep coma and hence not of any functional relevance.
In any case, the time has come, 65 years after Independence, for us to develop the confidence to decide our tax cases without relying on whether or not old English decisions are dead, alive or in a coma.
'via Blog this'
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