EXISTENCE AND RELEVANCE OF THE MCDOWELL RULE:

USE OF THE CORPORATION AS A VEHICLE OF TAX

PLANNING IN LIGHT OF VODAFONE AND THE DIRECT
TAXES CODE
Sanjit R. Rajayer*

This paper seeks to ascertain the existence of a rule of law emerging from the
McDowell case and to place it in the context of the developing jurisprudence on
tax avoidance in India. In doing so, the author also seeks to analyse the effect of
the ‘rule’ on recent developments such as the decision of the Bombay High
Court in the Vodafone case and the Direct Tax Code Bill, 2009, set to come
into force in April 2011. Having examined the essence of the ‘rule’ in McDowell,
it is sought to be argued that the rule is in fact merely a rule in relation to the
nature of analysis to be undertaken by the court and not a specific determination
or test to ascertain which transactions are permissible and which are not, in the
context of tax avoidance. Having established this, it is further suggested that
the relevance of the McDowell judgment as a whole must be seen in light of
the landscape of tax governance in India. In doing so, two conflicting approaches
emerge; the ‘textualist’ approach and the ‘purposivist’ approach. This paper
seeks to demonstrate that while the concurring judgment in McDowell and the
DTC fall squarely within the purposivist approach, the textualist approach is
evinced in the classical formulation of the Westminster case. However, both
these approaches are flawed and have been invoked, from time to time, by the
judiciary and the legislature, as a reaction to one another. Therefore, there is a
need for a median approach, which is to be found in the ‘purposive textualism’
applied in two landmark English cases. On an analysis of Vodafone and the
Azadi Bachao Andolan cases, this paper concludes that these cases follow this
new approach, and in fact, the development of this approach can be traced back
to cases succeeding McDowell, as well as the ‘rule’ in McDowell as enunciated
herein. Therefore, all these cases can be seen as part of a common thread, which
is useful for courts and the legislature to apply. This approach merits serious
consideration not only because it lays down clear standards for courts to follow,
but also for lawyers, which will have a significant positive impact on the very
behaviour of corporations.

* IV Year, National Law School of India University, Bangalore.

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The rule in McDowell’s Case1 [hereinafter “McDowell”] has been the source of
significant controversy in the area of tax governance. While on one hand, it may
seem to have completely changed the face of fiscal jurisprudence and tax planning
in India, some writers are of the opinion that it has in fact had no such result and is
merely a judicial aberration in the otherwise cogent exposition of fiscal principles
by the Supreme Court.2 Indeed, judicial pronouncements after McDowell have also
contributed to the confusion surrounding the position of law on tax planning, and
have resulted in significantly divergent views on what is as well as what should be
permissible in the determination of tax liability through transactions undertaken
by the assessee. Therefore, it is submitted that in order to ascertain the exact effect
of the judicial pronouncements in question, it is imperative that much of the gloss
that surrounds them be stripped away to reveal the answer to two questions;
what the court sought to do and what the court in fact did.

It is with this view that this paper seeks to analyse some of the epochal
judgments of the Supreme Court in the area of tax governance and to study the
effects of these judgments, as well as those of the Direct Taxes Code Bill, 2009
[hereinafter “DTC”], on the position of the corporation as a vehicle of tax planning.
The first part of this paper examines the true essence of the rule in McDowell and
seeks to contextualize the court’s anxiety to evolve such a rule. The second part
discusses the relevance of the rule and seeks to provide a contextual framework
for the subsequent discussion, locating the judicial pronouncements in the
McDowell, Union of India v. Azadi Bachao Andolan,3 [hereinafter “Azadi”] and Vodafone
International Holdings v. Union of India4 [hereinafter “Vodafone”] cases within the
abovementioned contextual matrix. The third part of this paper examines judicial
and legislative responses to tax evasion and suggests that ‘purposive textualism’
may be the most desirable approach to address the question. By extending the
logic of this approach, in conclusion, the author makes two propositions; firstly,
that while McDowell, Azadi and Vodafone seem divergent in their approach, a proper
reading of the McDowell rule does not evince such divergence in approach and
secondly, that the DTC ought to adopt a similar approach to that emerging from

1
McDowell & Co. Ltd. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court
of India).
2
See NANI PALKHIVALA ET AL., THE LAW AND PRACTICE OF INCOME TAX 66 (9th edn., Dinesh Vyas
ed., 2004) [hereinafter “PALKHIVALA”].
3
Union of India v. Azadi Bachao Andolan, [2003] 263 ITR 706 (Supreme Court of
India).
4
Vodafone International Holdings v. Union of India, [2009] 311 ITR 46 (High Court of
Bombay).

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 Existence and Relevance of the McDowell Rule: Use of the Corporation as a Vehicle of Tax

the foregoing discussion to avoid the problem of over-breadth, which it currently

suffers from.

The first thing that is noticeable on a reading of the McDowell judgment is

that the controversial opinion of Reddy J. is not the binding majority opinion, but
rather a concurring judgment. This fact is significant to ascertain the ‘rule’ in
McDowell and must be kept in mind while considering its true effect. The second
noticeable point is that the question before the court in that case was simply
whether Excise Duty paid by the wholesale buyers of liquor should be considered
as part of the ‘turnover’, chargeable to Sales Tax in the hands of the manufacturer.
The court answered this question by applying the fundamental principle that
“…it is immaterial to enquire how the total amount charged as consideration is
made up and whether it consists of excise duty or sales tax or freight…”5 and on
a plain reading of the definition of ‘turnover’ under the Sales Tax Act. Therefore,
the ratio of the case was simply that the Excise duty paid by the buyers could be
considered as a part of the turnover and hence should be chargeable to Sales Tax
under the relevant provisions of the Act.

Now, it was in response to two contentions forwarded by the appellants

that the majority made some observations about the question of tax evasion.
First, the Court rejected the ‘common till theory’, holding it inapplicable as a
general rule to the question of what must be included within ‘turnover’ and
observed that if this theory was accepted, the buyer and seller could enter into an
agreement to keep out of the ‘common till’ (and therefore the turnover chargeable
to tax) any amount which would ordinarily constitute ‘consideration proper’,
and thereby reduce their tax liability. Secondly, and which is central to the theme
of this paper, the Court addressed the ‘legitimacy’ argument, commenting that
while tax planning is a legitimate exercise of prudence, it cannot be carried out
through the use of ‘colourable devices’ or ‘subterfuges’ and that it is wrong to
encourage a belief in the legitimacy of such methods.6 It is evident from the words
of the judgment7 that the Court, in fact, merely sought to respond the appellant’s
argument, and relied on a number of cases for this purpose. It was not a definitive
pronouncement on the specific delineation of what is and is not permissible in
seeking to reduce one’s tax liability.

5
See McDowell, supra note 1, at ¶ 15.
6
The Court considered a number of judgments in support of the Appellant’s
contention. However, it found no support for the proposition that every instance of
tax planning or avoidance was permissible and that any analysis of the device
used for the reduction of tax liability, despite its legal validity, is beyond the scope
of the court. See McDowell, supra note 1, at ¶ 23-25.

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Indeed, it is submitted, the observation implies that the Court was referring
not to a determination of the merits of any method of tax planning etc., but to the
desirable line of analysis that courts must undertake in order to make such a
determination. Therefore, the ‘rule’8 in McDowell, properly understood, was that
the nature of the analysis to be undertaken by the Court in order to determine whether
a transaction is permissible as a measure to reduce one’s tax liability is to examine
whether the device used for such reduction is ‘colourable’ or ‘dubious’ or amounts
to a ‘subterfuge’. To elaborate, the Court did not make any determination of what
kind of transactions would be permissible or impermissible, but answered the
question how a court must go about making such a determination.

However, it is also necessary to address the observations of Reddy J. and

ascertain their relevance to tax governance. The main thrust of the opinion was
that although traditional legal doctrine has given wide berth to the various
methods of reducing tax liability, the law in England, where this doctrine was
first evolved, has changed and therefore it is necessary for courts to go beyond a
formal analysis of transactions and ascertain whether the transaction is intended
to serve as a tax-avoidance measure. If it is so intended, then it must be disregarded
and its effect must not be allowed to confer any advantage on the assessee. Any
measure taken with intent to reduce tax liability, and having this effect, is unlawful
and cannot be given effect by the courts. While this position was sought to be
supported by the change in the position of law in England, purportedly brought
about by the increasing instances of tax evasion, eminent jurist N.A. Palkhivala
makes a compelling argument that in fact, no such change occurred in England.9
Palkhivala points that not only is the opinion based on an incorrect reading and
application of English case law, but that in any event the traditional position has
now been restored in England.10 To this end, he points out that in fact, Azadi may
be considered a ‘parallel’ development in India as that of Macniven v. Westmoreland
Investments Ltd.11 [hereinafter “Macniven”] in England and therefore, neither the
observations of Reddy J. nor the cases cited by him are relevant anymore.

7
See McDowell, supra note 1, at ¶ 26.
8
The term ‘rule’ is not used to refer to the ratio decidendi of the case. The ‘rule’ in
McDowell is merely meant to signify the position of law, observed in that case,
insofar as it is relevant to address the question of tax evasion.
9
See PALKHIVALA, supra note 2, at 65.
10
The learned authors refer to the decisions in Craven v. White, (1988) 3 All ER 495
(H.L.) (U.K.) and Macniven v. Westmoreland Investments Ltd., (2001) 1 All ER 865 (H.L.)
(U.K.) to demonstrate this point. See PALKHIVALA, supra note 2, at 65.
11
Macniven v. Westmoreland Investments Ltd., (2001) 1 All ER 865 (H.L.) (U.K.).

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 Existence and Relevance of the McDowell Rule: Use of the Corporation as a Vehicle of Tax

Therefore, it becomes evident that the observations of Reddy J. are perhaps

not only unsound and irrelevant in the context of the position of law today, but
do not make any contribution to the law on the question of tax avoidance and
evasion, because of their non-authoritative legal effect as a concurring
judgment. Indeed, the lack of relevance of his observations received judicial
recognition in Azadi, where it was conclusively stated that the concurring
opinion was not entirely consistent with the majority and therefore not relevant
for consideration.12

Now, the natural question arises as to why McDowell is relevant at all; if the
rule in McDowell is only a guide for courts to proceed and if the concurring
judgment is irrelevant, then why must it be considered significant at all? The
answer, it is submitted, lies in the broad contours of the debate on tax governance
and the emerging legislative and judicial measures to address the question of tax
evasion. The relevance of McDowell may be in the fact that courts considering the
merits of the different lines of approach that may be taken to delineate the
permissible from the impermissible will require to consider the opinion of Reddy,
J. and the ‘transaction purpose’ analysis espoused by it. Furthermore, the McDowell
rule as explained in this paper is relevant to contextualize seemingly divergent
judgments such as those of Vodafone and Azadi and to characterize them in a
common light, as will be discussed subsequently.

Having stated that McDowell is relevant, inter-alia, as an important marker

in the treatment of tax-reducing transactions, it is now pertinent to examine the
delineations that inform the tax evasion debate with a view to understanding
the location of McDowell, Azadi, Vodafone and the DTC in the landscape of the debate.
At the outset, it may be pointed out that while the analysis undertaken by courts
has revolved around the interpretation of the purpose or the legal and economic
effect of the transaction in question, such analysis cannot meaningfully proceed
in a vacuum, i.e., without consideration of the yardstick to which such transaction
must conform. While courts have not expressly addressed the question of the
interpretation of the statute as a relevant consideration to determine whether
the offending transaction is to be disregarded, this analysis, it is submitted, is
central to such determination. Although courts have, in arriving at their decision,
sought to understand the position of law laid down by the relevant statute, it is
submitted that this aspect requires more serious consideration to reach any

12
See Azadi, supra note 3, at ¶ 130.

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meaningful finding on the validity of questionable transactions and, furthermore,

that courts ought to clearly articulate this aspect so as not to obscure its significance
in arriving at the ultimate decision.13

From this perspective, there are broadly two conflicting approaches that
may be adopted; the textualist and the purposivist approach.14 In essence, the
textualist approach requires that the true nature of any transaction be examined
in relation to the permissible standard laid down by the express words of the
relevant taxing statute. In other words, as long as a transaction falls within the
words of the statute, it should be regarded as a wholesome transaction and the
law confers the full benefit of such a transaction to the assessee. This approach is
embodied in the traditional treatment of questionable transactions, as seen in a
number of cases following the Duke of Westminster v. Inland Revenue15 [hereinafter
“Westminster””] and the Fischers Executors16 [hereinafter “Fischers”] reasoning. It is
submitted that the most striking feature in all these cases seems to be their
emphasis on the commercial freedom of parties to transact in any manner
permissible by the letter of the law and thereby avoid or reduce their tax liability
by availing of the benefits conferred by the law. This approach has even been
taken to allow parties the freedom to take advantage of the inadequacies in the
letter of the law with a view to reducing their tax liability.17

The purposivist approach, on the other hand, requires taxing statutes to be

interpreted in light of their avowed purpose, whereby courts may depart from
the express words of the statute to determine the ‘spirit’ of the law, which is then
enforced as the legal standard to judge the transaction in question. The purposivist
approach is often informed by an attempt to answer the question as to what was
the true purpose of the transaction. If the purpose of the transaction falls beyond
the spirit of the statute, i.e., beyond the pale of legitimate purposes that the statute
was created to serve, then it cannot be given effect and must be disregarded as an

13
Indeed, writers have emphatically drawn attention to the interpretation of the
statute as the central consideration in determining whether a transaction must be
disregarded for the purpose of taxation. For instance, see K.B. Brown, Substance Over
Form Theory in U.S. and U.K. Tax Law, 15 HASTINGS INT’L & COMP. L. REV. 169, 173 (1992).
14
See generally J. Freeman, Interpreting Tax Statutes: Tax Avoidance and The Intention of
Parliament, 123 L. Q. REV. 53 (2007); C. Evans, Barriers to Avoidance: Recent Legislative
and Judicial Developments in Common Law Jurisdictions, 37 H. K .L. J. 103 (2007); A.D.
Madison, The Tension Between Textualism and Substance-Over-Form Doctrines in Tax Law,
43 SANTA CLARA L. REV. 699 (2003).
15
Duke of Westminster v. Inland Revenue, 19 T.C. 490 (H.L.) (U.K.).
16
Inland Revenue Comissioners v. Fischer’s Executors, 1926 AC 395 (H.L.) (U.K.).
17
See McDowell, supra note 1, at ¶ 32-33.

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 Existence and Relevance of the McDowell Rule: Use of the Corporation as a Vehicle of Tax

attempt to circumvent the law. Another significant aspect of the purposivist

approach is that its analysis is often accompanied by an invocation to a sense of
moral sanction purportedly entrenched within taxing statutes.18

Clearly, therefore, the opinion of Reddy J. in McDowell would fall within the
purposivist approach. Similarly, the dicta of Lord Wilberforce in Ramsay19 as well
as those of Lord Diplock, Lord Scarman and Lord Roskill in Burmah Oil20 and other
often-cited cases entail an analysis of the intended effect of the transaction on the
tax liability of the assessees and its comparison with the purpose of the statute as
interpreted by their Lordships.

Now, the DTC contains specific tax evasion provisions and imposes a ‘general
anti-avoidance rule’. Section 112 of the DTC provides for the declaration of any
‘arrangement’ as an ‘impermissible avoidance arrangement’ and allows the
Revenue to determine the consequences of such an arrangement by disregarding
or re-characterizing it or altogether considering it void. Section 113(14) defines
‘impermissible avoidance arrangement’ in relation to its purpose, as well as its
effect.21 Clearly, therefore, the DTC also adopts a firmly purposivist approach,
providing that any arrangement entered into with a view to obtaining a tax
benefit and having an ‘atypical’ effect, is liable to be disregarded.

It must be noted, at this juncture, that one of the main problems with the
application of this dichotomy between textualism and purposivism is that each
approach emerges as a knee-jerk reaction to the other. It is submitted that tax
evasion is unquestionably a major concern in tax governance; neither courts nor
the legislature can afford to ignore it. However, in an effort to find the ‘silver
bullet’,22 courts and the legislature seem to have a tendency to adhere to either

18
See Viscount Simon LC, Latilla v. Inland Revenue Commissioners, (1943) T.C. 107
(H.L.) (U.K.), Cf. McDowell, supra note 1, at ¶ 25.
19
W.T. Ramsay v. IR, 54 T.C. 101 (H.L.) (U.K.).
20
Inland Revenue Commissioners v. Burmah Oil Co. Ltd., 54 T.C. 200 (H.L.) (U.K.).
21
The sub-section provides that if the purpose of the arrangement is to obtain some
tax benefit and its effect is wither the creation of rights or obligations not normally
entered into in ‘arms-length’ transactions, or lacking ‘commercial substance’, or
the carrying out of such an arrangement in a manner resulting in ‘abuse of the
provisions’ of the Code or not bona fide, then it shall be treated as an ‘impermissible
avoidance agreement’.
22
See M.A. Chirelstein and L.A. Zelenak, Tax Shelters and the Search for the Silver Bullet,
105 COLUM. L. REV. 1939 (2005). The authors discuss the continual legislative and
administrative efforts to curtail the rampant use of tax shelters in the U.S., and
conclude that the ‘silver bullet’ may not be found in narrowly tailored legislative
responses to specific tax shelter, but in the ‘disallowance of non-economic loss’
approach suggested by them.

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one of these approaches in response to the failure of the other. For instance, it may
be observed that courts in the U.S. are seeking to move towards a narrow approach
in order to mitigate the ill effects of wide purposivism,23 and the traditional rule
of textualism in India and the U.K. has, in recent times, faced strong opposition in
the form of judicial and legislative developments such as McDowell and the DTC.
Indeed, this effect is evident even in the writings of scholars who have gone to the
extent of characterizing fiscal statutes as ‘beneficial’ or ‘welfare’ legislation and
have argued that a correspondingly suitable interpretation must be place upon
them.24 Therefore, there seems to be a need for a more tempered approach to
enable courts and the legislature to take effective measures against tax evasion,
rather than the extreme approach hitherto adopted.

It is this context that the author seeks to analyse the approach of the Supreme
Court in Vodafone and Azadi. It must be remembered that Azadi can be considered
as the bulwark of the current position on tax evasion, and has been given the
distinction of having “set the law in the right perspective” in India.25 Now, in
Vodafone, the Bombay High Court, upholding the show-cause notice issued to the
petitioners, made a determination on the nature of the transaction, for the limited
purpose of determining that the notice was not altogether non-est,26 on two grounds.
First, the transaction was not merely a transfer of shares resulting in a transfer of
the controlling interest of the Cayman Islands entity in its Indian subsidiary, but
was in fact a transfer of the underlying assets of that subsidiary. Any profit arising
from the business of the subsidiary would be considered as the profit of the transferee
and not merely the profit of the ‘shell company’, and would therefore be liable to

23
See Learned Hand J., Helvering v. Gregory, 69 F.2d 809, 810 (2nd Cir. 1934). The
dictum of the Learned Judge in this case expressly narrowed down the scope of
analysis to exclude consideration of “a desire to avoid or evade taxes”, to “…whether
what was done…was the thing which the statute intended”. Cf. G.W. Miller, Corporate
Tax Shelters and Economic Substance: An Analysis of the Problem and its Common Law
Solution, 34 TEX. TECH. L. REV. 1015 (2003). While the judgment of Hand J. is considered
epoch-making for its evolution of the ‘economic substance’ doctrine, it is plainly
evident that the Learned Judge wished to minimize the consideration of the legitimacy
of the taxpayer’s purpose and attached importance to legislative intent.
24
H.R. Saviprasad, Evasion of Taxes and the Judiciary, 110 TAXMAN 57, 60 (2000) [hereinafter
“Saviprasad”]. The author brings out the fallacious argument that fiscal statutes
must be interpreted in light of their purpose, as envisaged by the Directive
Principles, which accords them the position of welfare legislation. The fallacy in
the argument is that it completely ignores the fundamental principle of strict
interpretation of fiscal statutes, which does not allow for any such treatment.
25
PALKHIVALA, supra note 2, at 65.
26
Therefore, the determination of the true nature of the transaction is not a binding ratio,
as it was merely incidental to the decision on the validity of the show-cause notice.

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 Existence and Relevance of the McDowell Rule: Use of the Corporation as a Vehicle of Tax

tax as ‘capital gains’ in India. Secondly, the Court held that even without ‘piercing
the veil’ and considering the assets of the subsidiary as the subject of the transfer, a
mere transfer of the controlling interest implied a transfer of a number of valuable
intangible assets such as the right to carry on business and operate mobile telephony
in India, which transfer was taxable in India.

In arriving at these findings, the Court was largely influenced by two

considerations; the legal substance of the transaction 27 and the scope of
transactions intended to be covered by the statute.28 In Azadi again, the Court
proceeded on an analysis of the ‘purpose and consequence’ of the Double Taxation
Avoidance Convention, along with a reading of the provisions of the Income Tax
Act, relevant to the subject of Double Taxation Relief.29 Therefore, in both the
above cases, the court read the provisions of the relevant statutes, interpreting
them in the context of the meaning of the words intended by Parliament, and
applied such interpretation to the substance of the transaction in question to arrive
at a conclusion as to whether the transaction fell foul of the statute so interpreted.
It is submitted that this approach, which has been called ‘purposive textualism’
in the context of similar U.K. and U.S. cases,30 provides the much needed ‘midway
path’ approach to be adopted by courts in the analysis of transactions for the
purpose of determining their wholesomeness in the context of tax evasion.

In fact, Srikrishna J. specifically brought out this line of reasoning in Azadi,

while rejecting the observations of Reddy J. in McDowell as an “extreme view
which…militates against the observations of the majority.”31 Citing the dictum
of Lord Keith in Craven v. White, he observed that the analysis does not involve
any determination on the basis of the intention of the taxpayer in undertaking
the transaction in question, but must involve a determination of the ‘real’ nature
of the transaction on a construction of the relevant provision of the statute.32 This
proposition is best explained by Lord Hoffman in the landmark Macniven decision,

27
See Vodafone, supra note 4, at ¶ 159.
28
See Vodafone, supra note 4, at ¶ 151-153, 159.
29
The Supreme Court determined that section 90 of the Income Tax Act was
introduced with the intention of allowing the Central Government to enter into
agreements with foreign countries for the purpose of the avoidance of double
taxation and that the provisions of the Convention and the Act must be read in this
context. See Azadi, supra note 3, at ¶ 13-26.
30
See S.S. Schumacher, Macniven and Tax Advice: Using Purposive Textualism to Deal
With Tax Shelters and Promote Legitimate Income Tax Advice, 92 MARQ. L. REV. 33 (2008).
31
Azadi, supra note 3, at ¶ 130.
32
See Craven v. White, (1988) 3 All ER 495 (H.L.) (U.K.), at 524.

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which he later elaborated upon in his scholarly piece.33 His Lordship observed
that in the determination of a transaction as a ‘real’ transaction, the court must
stay clear of “unnecessary philosophical difficulties about the nature of reality”
and that the ‘reality’ of transactions must be viewed solely in the context of the
statute.34

Hence, it is submitted that the analysis brought to light in Azadi and Vodafone
is neither purely purposive nor strictly textualist in approach; it seeks to construe
the provisions of the statute in light of their intended meaning by the legislature,
and apply that standard to interpret the transaction. It is pertinent, at this juncture,
to revert to Palkhivala’s observation on the current state of the law on tax evasion.
While observing that Azadi has set the record straight from the “temporary
turbulence created in the wake of McDowell,”35 the learned authors make the crucial
observation that the judicial reaction to McDowell was to reject the sweeping
observations of the concurring opinion in that case and to distance the Court’s
position from those observations.36 They further observe that the spate of judgments
delivered in opposition to McDowell “make the time extremely ripe for an Indian
parallel to Macniven”,37 which has in fact consummated in the form of Azadi.

33
L. Hoffman, Tax Avoidance, 2 B.T. R. 197 (2005).
34
To elaborate, his Lordship used the example of ‘real income’ and observed that in
labelling transactions as ‘sham’ transactions, the court accepts certain ‘juristic
categorizations’ as intended to be converted by the statute, and that subsequently
holding that although the transaction is not a ‘sham’, it is still not a ‘real’ transaction
results in a rejection of the accepted juristic categorization and misleads the court to
rely on alternative categorizations of what is ‘real’. See Azadi, supra note 3, at ¶ 132.
35
PALKHIVALA, supra note 2, at 66.
36
For instance, Sabyasachi Mukherjee J., in two judgments following McDowell,
namely, CWT v. Arvind Narottam, 173 ITR 479 (Supreme Court of India) and Union of
India v. Playworld Electronics, 184 ITR 308 (Supreme Court of India) forcefully
dismissed the observations of Reddy J. as ‘moral sermons’ and warned that “one
should avoid subverting the rule of law”. Cf. PALKHIVALA, supra note 2, at 64. It is
interesting to note that this, and similar reactions in Valiappan v. ITO, 170 ITR 238
(High Court of Madras), at 280 and Banyan and Berry v. CIT, 222 ITR 831 (High Court
of Gujarat), at 850, bear an uncanny resemblance to the reaction to the strongly
‘anti-tax avoidance’ dissent of Viscount Simon, LC in Latilla v. IRC, [1943] 1 All ER
265 (H.L.) (U.K.), where for instance Jordan, C.J. in the Australian case of B. Vicars,
[1944] 45 SCR (NSW) 85, attacked the opinion of Viscount Simon, observing that
“The courts should… not be concerned with the morality or desirability of the
course taken but only in the legal position and the legal consequences”. Cf.
Saviprasad, supra note 24, at 59. It is submitted that this resemblance points to the
inevitable phenomenon of knee-jerk reactions against both extreme views as pointed
out earlier, and is perhaps indicative of the desirability of moving towards a median
standard, as, it will be argued, is being done by the courts in India.
37
PALKHIVALA, supra note 2, at 65.

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 Existence and Relevance of the McDowell Rule: Use of the Corporation as a Vehicle of Tax

Now, therefore, it is submitted that the movement of judicial opinion away

from the purposivist position of Reddy J. in McDowell must not be seen as merely
a cumulative reaction to the extreme view taken in that case, but must be seen as
a steady movement towards the more desirable ‘purposive textualist’ approach,
clearly adopted by Azadi as well as Macniven. Thus, reading the progression of
cases as a single line of development towards this approach beginning from the
actual ‘rule in McDowell’ as enunciated in this paper,38 resulting in the Azadi
approach and continuing through Vodafone, courts may find a useful pattern to be
applied in subsequent cases. This reading, it is submitted, will enable courts to
find ample support for the proposition that the approach of ‘purposive textualism’
is indeed a desirable one and has in fact been developing in the reasoning
underlying a series of cases, including Vodafone.

Indeed, it is submitted that not only does this serve as a guiding principle
for courts, but must also be given serious consideration by the legislature. The
current position adopted by the DTC is yet another example of the knee-jerk
reaction against a perceived relaxation of standards in Azadi. What must be kept
in mind is that Azadi is not merely a reversion to the strict textualist approach of
Westminster, but entails a more nuanced and, it is submitted, more desirable
approach. It may be noted that the distinction between ‘rules’ and ‘standards’ is
relevant for the legislature; while rules lay down specific modes of acceptable
behaviour, standards prescribe ‘ends’ which may be achieved through any mode
of conduct.39 Tax governance, it is submitted, requires both rules and standards
and to this end, the adoption of the suggested approach by the DTC will serve to
bring its objective to fruition.

In conclusion, some observations may be made about the merits of the

approach suggested in this paper. In the foregoing discussion, it has been argued
that the line of cases from McDowell to Azadi and continuing up to Vodafone must
be read in light of the principle of ‘purposive textualism’ as an instrument of
analysis, and that the same must be adopted by the DTC. Now, it is submitted
that this approach has two merits. Firstly, it provides a valuable compass for

38
The author refers to the rule laid down by the court in relation to the nature of
analysis to which the transaction must be subject, i.e., to the extent that it is not a
‘dubious’ or ‘colourable’ exercise, and removed from any consideration of the
‘purpose’ of the transaction. This ‘rule’, as sought to be enunciated by the author
not be confused with the ratio of the case, or the sweeping observations made in
the concurring opinion of Reddy J.
39
See E.P. Fitzgerald, The Economic Substance Doctrine: Rules and Standards, 17 FED. CIR. B.
REV. 529, 531 (2008).

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judicial analysis and, in addition to being based on sound reasoning,40 completely

avoids dangerous reactions associated with textualism and purposivism.
Secondly, and more importantly, it provides a clear standard for lawyers while
advising clients. To elaborate, it has been observed that the standard of conduct
prescribed for tax lawyers in advising clients on tax planning strategies is closely
related to the applicable legal standards which their stratagems may be subject
to. Their standard of conduct, in turn, is closely related to the amount of reliance
corporations are willing to place on the strategies suggested by their lawyers,
and therefore, is a significant determinant in the behaviour of corporations. If,
therefore, the purpose of tax governance is, in some sense, “to change people’s
attitude towards tax avoidance”, as suggested by Sabhyasachi Mukherjee J.,41
then perhaps the approach suggested in this paper will go a long way in achieving
this purpose.

40
The author refers to the reasoning of the court in Craven v. White and that of Lord
Hoffman in Macniven, which can be considered as the theoretical origins of the
principle.
41
CWT v. Arvind Narottam, 173 ITR 749 (Supreme Court of India) (Per Sabhyasachi
Mukherjee, J.). Cf. PALKHIVALA, supra note 2, at 64.

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