Ethics, The Assessee & The Law
Hon’ble Shri. R. V. Easwar, President
The Hon’ble President of the Tribunal speaks with candour on the sensitive topic of ethics with regard to the tax payer, his advisers as well as the judiciary. While he cautions assessees and tax professionals to beware of the "demon of greed", he strongly advises the Members of the Tribunal to "scrupulously avoid misdemeanor or deviant behaviour". Ethical Behaviour should never be compromised emphasizes the Learned Judge
Respected Shri Ashvin Shah, the Chairman of the Convention, Members of the All Gujarat Federation of Tax Consultants and the West Zone of the All India Federation of Tax Practitioners, other dignitaries present, Members of the Bar and the Accountancy profession, ladies and gentlemen:
I consider it a privilege to be invited as the guest of honour for the valedictory session of the National Convention on Taxation – 2011 organised jointly by the All Gujarat Federation of Tax Consultants and the West Zone of the All India Federation of Tax Practitioners. It is nice to be back in Ahmedabad, though for a short period. I like the city for its warmth and hospitality and for the vibrant and good-natured people. During my brief stay here for about 9 months, we felt at home. The city is one of the few cities in India which still retain the old-world charm and welcome everyone cheerfully.
I seek the pardon of all concerned, but please permit me to say this, that though it is true that any misbehaviour on the part of the authorities should not be tolerated but in case extraneous considerations are established to have prevailed, then the tax professional, if he is found to have played a role, should equally take the blame. Amidst the allegations of conduct unbecoming of the authorities – whether assessing or appellate – the professional, if he is found guilty, should also be brought to book
My interaction with the Tax Bar of Ahmedabad, particularly the ITAT Bar Association here, was very cordial and pleasant. In fact, to me it was a learning experience. I learnt the virtues of humility from the likes of Mr. Kaji, Mr. K.C. Patel and Mr. Manubhai Patel, Mr. J.P. Shah, Mr. Soparkar and others. Forgive me if I have not mentioned the others, for it is quite a long list! I learnt not only the virtues of humility from them, but also was in a position to appreciate their learning and expertise not only in matters relating to tax, but also on subjects ranging from religion to metallurgy. To me, the Ahmedabad ITAT Bar Association is a gathering of dignified gentlemen who stand firm on ethics and morality and who will not hesitate to raise their voice against any breach of these virtues.
The role of taxation as a significant tool of economic growth has been widely recognized by all governments, particularly the developing economies. The social and economic objectives of taxation have traditionally been the reduction of inequalities of income and wealth, acceleration of economic growth and price stability. The tax policies of developing economies are geared to the raising of resources for development. They are so moulded as to strengthen incentives to savings and investment. Dewett and Chand, the learned authors, in their treatise on “Modern Economic Theory” have added to this list a few more canons for developing economies which are: the ability of every person to contribute to economic growth, the mobilization of economic surplus, increasing the incremental saving ratio, ensuring income elasticity of taxation and the canon of equity.
There is no gainsaying that the topics of socio-economic growth, ethics and taxation are inter-connected because of the interface between the implementing agencies and the tax payer. The modern tax legislation cannot be expected to be simple, either in concepts or in language for, the modern business is complex and therefore requires complex laws. The border line between use of the provisions of law which will save tax and impel economic growth and its abuse to evade tax is often found to be thin and obscure. With the opening up of the globe to cross-border commerce, acquisitions, mergers, demergers and the like and the setting up of multi-layered tax vehicles in different parts of the world, including the tax havens, the State is increasingly feeling the difficulty in collecting even its legitimate dues. That is why it is too much to expect the tax law to be simple as it was in balmy days. Complex structures of international transactions, routed through different vehicles can only be dealt with by laws that are geared to deal with them and they cannot be couched in simple language. The scrutiny of such arrangements and the interpretation of the laws designed to deal with them have to keep pace with the ingenuity that has gone behind them. Judicial thinking may like to keep pace with them and this may result in several new concepts being forged.
Taxation indicates inflow of money and wealth. Where money and wealth are involved there is growth no doubt, but the demon of greed is not far behind. He is lurking round the corner. He will egg the honest tax payer to try his luck first in tax planning, then nudge him to tax saving, then encourage him to tax avoidance with the assurance that it is legal and not immoral and finally would push him into tax evasion which is certainly illegal and immoral. The demon vanquishes the ethics, but only if the tax payer is a willing accomplice.
The subject of ethics – especially in relation to taxation – is sensitive and difficult at once. The word “ethics”, according to the dictionary, means: the science of morals, that branch of philosophy which is concerned with human character and conduct, rules of behaviour, a treatise on morals, professional standards of conduct. When we talk of ethics in relation to taxation, we talk of several aspects. The first is the ethics of levying and collecting tax, the second is the ethics of the taxpayer, the third is the ethics of the tax professional who assists the taxpayer and last, but not the least important, the ethics of the adjudicating and the appellate authorities.
Intellectual honesty involves the recording and dealing with all the arguments of both the sides without omitting any fact or legal contention, dealing with all the relevant authorities cited and eschewing the inclination to circumvent binding precedents on flimsy grounds. Judicial ethics demand that the judicial officer reaches the decision to which the facts and law take him, not the other way. One should resist the temptation to “cut and paste” as is said in the language of computer specialist!
Justice Rama Jois in his treatise “Legal and Constitutional History of India” observes that the King’s treasury, constituted by the tax paid by the subjects was to be held in trust and used for the protection and welfare of the subjects. According to Altekar in his book on “State and Government”, if the king misappropriated public funds and diverted them for his personal use he would be guilty of sin and be condemned to hell. Ancient India has always disapproved of the practice of not levying taxes or levying excessive taxes. Manu is known to have said “Let not the king cut his own root by not levying taxes nor the root of the people by levying excessive taxes”. According to Yajnavalkya, a king who enriches his treasury by levying oppressive taxes would before long be deprived of his prosperity and meet with destruction. Kautilya authorized the levy of tax at higher rates during distress or emergency. Thus, from ancient times taxation has always been looked upon as a tool of economic prosperity, provided it is levied in moderate doses and recovered painlessly.
All modern systems or regimes of taxation are regulated strictly by law which provides for the charge of tax (both direct and indirect), the assessment of tax, the collection and recovery of the tax and provisions to deal with the consequences of not obeying the tax law. They provide for penalty and prosecution in cases of tax evasion. The implementation of the tax law is normally entrusted to an autonomous body – such as the Central Board of Direct Taxes in India – under whose jurisdiction function the tax assessors who make assessments of income and wealth and collect the tax. The law provides for appeals to take care of arbitrary assessments and in India a tax payer has 4 appellate forums before whom he can successively air his grievance. Article 265 of the Constitution of India guarantees that no tax shall be levied or collected except with the authority of law. The power to assess and collect the tax shall both be in accordance with law. It is necessary to understand properly the statement attributed to Justice John Marshall of the US Supreme Court. He said that the power to tax involves the power to destroy, but he qualified it by saying that it would do so only if such power is exercised in such a manner as to ignore the constitutional measures that have to be adopted. Further clarification of the statement came from the words of Stanley Reed who emphatically stated that “the power to tax is the power to destroy only in the sense that those who have power can misuse it”. Justice Oliver Wendell Holmes Jr., judge of the US Supreme Court qualified it further by saying that “the power to tax is not the power to destroy while this court sits”. This great judge was the one who liked to pay taxes as he thought that with taxes he bought civilization.
All the above statements coming from men of wisdom and learning, and in the early stages of the idea of taxes, are a caution to the State that wields the power to tax. I have already referred to Article 265 of the Indian Constitution which dispels any idea that taxes can be arbitrarily imposed. The safety and protection guaranteed by the Articles constitutes a fundamental ring fence to the Indian taxpayers and it is considered unethical to impose taxes by ordinances, even though they are law.
A controversial subject on levy of taxation is the ethical aspect of amendments made retrospectively so as to take away the beneficial effects of rulings of the Supreme Court. Jurists and tax lawyers of the stature of late Nani Palkhivala, it is well-known, were against such amendments and they saw a breach of ethics in it. On the other side, the proponents stoutly defend such amendments as an establishment of the supremacy of the object and real intention of the legislature which, according to them, have not been properly appreciated and understood in the rulings. Such amendments, they argue, are also necessary when the rulings are misused to evade taxes.
How does the administration of tax fare in the eyes of the courts? Normally courts refrain from expressing any opinion about the tax administration for the simple reason that in a judgment there is no room or scope for the same. But in CWT vs. Arvind Narottam (1988) 173 ITR 479 Justice Sabyasachi Mukherjee, when presented with the argument based on evasion of taxes, had this to say:
“It is true that tax avoidance in an under-developed/developing economy should not be encouraged on practical as well as ideological grounds. But the question which many ordinary taxpayers very often in a country of shortages with ostentatious consumption and deprivation for the large masses ask, is does he with taxes buy civilization or does he facilitate the wastes and ostentatiousness of the few. Unless wastes and ostentatiousness in the government’s spendings are avoided or eschewed, no amount of moral sermons would change people’s attitude to tax avoidance”.
On balance, it seems to me that the statement of Justice Rufus W. Peckham who adorned the US Supreme Court for thirteen years till 1905, aptly describes the ethical part of the levy of taxes and shows how indispensable taxes are. He said:
“The power to tax is the one great power upon which the whole national fabric is based. It is as necessary to the existence and prosperity of a nation as is the air he breathes to the natural man. It is not only the power to destroy, but it is also the power to keep alive”.
I now turn to the ethics to be adopted by a taxpayer. I do not know how far the idea that one should “like” to pay taxes, an idea which was voiced by Justice Holmes, is shared by others. Whatever it is, one would certainly like to avail of as many tax benefits as are permissible under the law. That is certainly ethical practice and no fault can be found. Justice Learned Hand of the US Supreme Court did say that any one may so arrange his affairs that he pays the minimum tax and there is no patriotic duty to increase one’s taxes. In the case of Aruna Group of Estates vs. State of Madras, Justice Jagadisan of the Madras High Court observed that there was no ignominy, certainly no immorality attached to it if a person so arranges his affairs that he pays the least tax. All this is well but the line is crossed when the taxpayer makes a transaction appear what it is in fact not. The responsibility not to cross the line is more heavily on the corporate sector of the modern times. It would be beyond the scope of this speech to dwell upon the legal niceties about tax planning, tax evasion, tax avoidance and so on and the view the courts in India and abroad have taken about the same. What I have understood from the rulings – to my limited capacity – is that it is ethical to plan your affairs within the legal framework and thus reduce your tax burden, but it is unethical to evade taxes by subterfuges, colourable devices and smokescreens.
Again the US Internal Revenue Service brings it out clearly in the following words:
“One who avoids the tax does not conceal or misrepresent. He shapes events to minimize or eliminate tax liability and upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to colour or obscure events, or making things seem other than what they are”.
Martin J. McMahon Jr., a professor in the University of Florida, Levin College of Law puts it in a high-sounding fashion. According to him, “tax planning may benefit the tax-payer whose taxes are reduced, but the social product is not increased”. This statement may be frowned upon by many and may even draw cynical smiles, but all the same the statement, in my humble view, carries conviction if instead of the words “tax planning” the words “tax evasion” are substituted. I think what the professor meant was only “tax evasion”. The social costs of concealment of income and tax evasion are too high to be ignored. It is a question of morality in business, in families, in countries and ultimately that of the mankind as a whole. The Internal Revenue Service of the US advised the taxpayers to pay their legitimate taxes honestly. They cautioned the taxpayers that the advice of such professionals has “led to the financial ruin of innocent taxpayers deceived by false information”. Even Lord Clyde, who was the Lord President of the Court of Sessions in England advocated only honest means of paying less taxes and did not advise dishonest means or evasion of taxes.
It is interesting to note a statement of President Franklin D. Roosevelt, which strikes a discordant note from the above statement of the Internal Revenue Service. He did not think that there was any difference between the three expressions. According to him, they are all alike in that “they are definitely contrary to the spirit of the law. All are alike in that they represent a determined effort on the part of those who use them to dodge the payment of taxes which congress based on ability to pay. All are alike in that failure to pay results in shifting the tax load to the shoulders of others less able to pay, and in mulcting the treasury of the Government’s just dues”. It is a different matter that when he became President he is said to have repeatedly claimed that he was exempt from the high tax rates on personal income that congress had enacted when he himself was President!
The tax professional who assists the taxpayer in planning his affairs has a significant role to play in ensuring that the ethics of taxation are observed. As far as he is concerned, his duty is not only to remain well-versed about the income-tax law and procedure, but also to ensure that the assessee claims all the tax benefits to which he is entitled. The just taxes are to be paid. In actual practice, difficulties could arise in determining whether the assessee falls within the language and spirit of the beneficial or concessional provisions. There could be genuine differences in interpretation of the language of the provisions, consistent with several authoritative rulings. The tax professional cannot probably be faulted if he advises his client on the basis of such rulings; in fact, it would be his duty to do so. However, it would be ethical for the professionals to take care to inform the client that a particular claim for relief made in the return is based on his own interpretation of the law, or the interpretation placed by a tax tribunal or court and in such a case he should also take care to advise the client as to what could be the possible objections to such claim. The choice can be left to the client after he is fully informed of the different possible views. In Cement Distributors’ case (124 ITR 6) Justice Bhagwati speaking for the Supreme Court observed that it is not fair to expect the assessee to err on the side of the revenue, pay tax even on receipts which he bona fide believes do not constitute income and wait for refunds. It is generally accepted that some elbow room shall be given where there is genuine ambiguity in the provisions or where they have been interpreted by courts or tax tribunals in different ways. But this position, in my humble opinion, should not be extended to unreasonable or unacceptable limits. Ethics demand that artificial or perverse ambiguities should not be introduced into the provisions for these may place the taxpayer, who has reposed faith and trust on the professional, in difficult situations. It would be advisable for the tax professional to place himself in the shoes of the taxpayer before any such advice is given.
In the matter of representation before the assessing authorities the tax professional, be it a legal practitioner or an accountancy professional, there is a heavy burden on him. At every stage of the proceedings he needs to keep in mind the interests of his client consistent with the tax obligations. A dignified and fair representation may go a long way in building confidence and trust. An important lesson on the representation before the assessing authority was given by the Supreme Court in Calcutta Discount Co.’s case and I believe it is still relevant. It is the duty of the taxpayer to furnish all particulars necessary for the assessment fully and truly and I would add that it is the duty of the tax professional to assist the assessee by all means to ensure that this duty is discharged. It is always better to give all relevant information and take a stand, whether it is accepted or not. The trend of judicial decisions, as is well known, is that where full facts are given and nothing is held back, the mere fact that the revenue authorities do not accept the stand taken by the taxpayer based on those facts does not invite penal action. The relationship between the assessee and the revenue authorities is likely to be long-standing and mutual confidence and trust are important inputs that govern and embellish the relationship. Giving of all the facts without holding back anything helps build a positive image of the assessee that could earn respect and fair treatment. Thus there is a lot to be gained in the long-run. All this is possible only if the assessee is assisted by a tax professional who looks upon the task more as a national duty and less as an income-earning activity.
I must now touch upon a sensitive topic – somewhat reluctantly – while on the relationship between the tax professional and the taxpayer on the one side and the revenue authorities on the other. I seek the pardon of all concerned, but please permit me to say this, that though it is true that any misbehaviour on the part of the authorities should not be tolerated but in case extraneous considerations are established to have prevailed, then the tax professional, if he is found to have played a role, should equally take the blame. Amidst the allegations of conduct unbecoming of the authorities – whether assessing or appellate – the professional, if he is found guilty, should also be brought to book. In this, the professional associations are required to act as watchdog and if after an impartial enquiry the role of the professional is established beyond all reasonable doubt, action ought to be taken against him. That will ensure the purity of conduct not only of the authorities but also of the professionals. It needs no emphasis that both sides of the coin have to be looked into. I appeal to you to give this a serious thought.
A professional carries an additional responsibility in situations connected to his field than the lay public because of the specialized knowledge and informed decisions which he can take in his field of specialization. It is therefore expected of a tax professional to remain more alert than the assessees in all situations and all stages of the assessment and appellate proceedings and look for suspicious signals against which he should be able to guard both the client and himself. Many a times his clients may be misguided on account of possible short-term benefits, but it is the duty of the tax professional to look for such signs shown by his client and he should immediately take corrective measures by examining the cause. At the same time, he should desist from becoming a willing accomplice in the tax evasion schemes adopted by his clients. This may appear to be beneficial to him in the short run and if he is young he may find it difficult to resist the temptation, but by adherence to discipline and strong fundamental values it should be possible for him to deny himself such unjust enrichment. In the long run, it will keep him in good stead.
Respect, dignity and honesty are the three major components of professional ethics. Conflict of interest should be scrupulously avoided. I also consider it to be part of the professional ethics that the senior members of the legal and accountancy professions should function as role models to their junior colleagues; so that the sterling qualities which they possess and which have earned them the reputation are imbibed by the juniors.
Judicial ethics come next. They consist not only of the appellate authorities – including of course, the Members of the ITAT – scrupulously avoiding misdemeanour or deviant behaviour, but they also include an unbiased approach without taking sides, intellectual honesty and avoiding a tendency to decide cases on the basis of face-value of the counsel. Intellectual honesty involves the recording and dealing with all the arguments of both the sides without omitting any fact or legal contention, dealing with all the relevant authorities cited and eschewing the inclination to circumvent binding precedents on flimsy grounds. Judicial ethics demand that the judicial officer reaches the decision to which the facts and law take him, not the other way. There has to be full realization on our part that taking a decision is serious business and every step in the decision-making process is gone through with absolute dedication. One should resist the temptation to “cut and paste” as is said in the language of computer specialist! Unless we adopt these judicial ethics in actual practice, we will have no moral authority to insist on the parties before us following their respective ethics.
Economic growth and prosperity and taxation are inter-connected and both impel each other. The growth and prosperity of society as a whole is dependent on the character and values of each member of the society. It is not enough to enjoy the fruits of economic prosperity and wealth; it has to be done responsibly. Such responsibility can only come out of the ethical values which every individual member of the society undertakes to imbibe. If the fruits of the economic prosperity are to sustain, the only way it can be ensured is to practise – not merely to preach – those ethics which conform to our convenience. It can even be said that ethics are the bridge which connect taxation and socio-economic growth.
I am thankful to the organisers of this Convention for giving me this opportunity of sharing my thought with you. I must congratulate them – Mr. Kaji and Mr. Aswin Shah in particular – For having chosen a most relevant topic. This Convention is a gentle but firm reminder that in our hurry to be an economic super power let us not sacrifice the basics of human conduct and character. I
I thank you all for the patient indulgence!
This speech was delivered by Hon’ble Shri R.V. Easwar, President, ITAT, on the occasion of his felicitation on his elevation as President, ITAT at National Convention on Taxation held on 9-1-2011 at Ahmedabad.
For other articles by the Hon’ble President see The Art Of Advocacy and Effective Dispensation Of Justice: Role Of The Tribunal