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15. The two questions that call for probing at this juncture are whether on the premises aforesaid can reasonably lead to conclusion in law that the dissolution of the firm was not real but was a device to avoid tax, and secondly what is true scope of applicability of principle enunciated in McDowell's case (supra).

16. In McDowell's case (supra), the assessee was a manufacturer of Indian liquor under the Andhra Pradesh Excise Act. Excise duty was levied on the manufacture of liquor and the manufacturer was not entitled to remove the same from distillery unless the duty imposed under the Excise Act had been paid. According to the assessee, the buyers of Indian liquor from the distillery obtained distillery passes for release of liquor after making payment of excise duty directly to State exchequer and present the same at the distillery whereupon the bill of sale or invoice was prepared by the distillery showing the price of liquor, but excluding the excise duty. The assessee in its turnover of sales had included only that part of the price as was received by it as per invoice/bill but did not include the excise duty which was payable by it but was paid by the buyer at the time of obtaining permit. The tax authorities desired to include the excise duty which was payable by the manufacturer by treating the excise duty so paid as part of the sale price, constituting its taxable turnover. It may further be noticed that prior to its amendment, under the Rules under Excise Act in 1981, there was no provision prohibiting the removal of liquor from the store unless the excise duty has been paid by the holder of D-2 licence before such removal. Prior to the aforesaid amendment in the rules when excise duty levied in the circumstances stated above was sought to be included in taxable turnover. When the matter reached the Supreme Court, the Court opined in its judgment in the case of McDowell & Co. Ltd. vs. CTO (supra) : "that intending purchasers of the Indian liquor who seek to obtain distillery passes are also legally responsible for payment of the excise duty which is collected from them by the authorities of the Excise Department" and the Court further came to the conclusion that the excise duty did not go into the hands of assessee and did not become part of the circulating capital. Therefore, the sales-tax authorities were not competent to include in the turnover of the appellant the excise duty which was not charged by it but was paid directly to the excise authorities by the buyers. When the assessee had again agitated after the amendment and when the matter reached to the Supreme Court, as aforesaid, the correctness of the decision in its earlier case referred to above has been referred to a larger Bench.

In final conclusion after referring to number of decisions English as well as Indian, it was said :

"In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it." 20. From the aforesaid, it is apparent that on the factual aspect the Court was considering the case where in a going business a liability to pay duty which was legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part of its selling price to the buyers, was as a result of arrangement between the seller and buyer split into two, namely - duty so far paid separately directly to the tax authorities and the balance so paid to the seller; the arrangement was existing solely for the purpose of not paying the tax and it is not a transaction in reality of receiving less price than the one on which it was marketing. The Court no where said, that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case (supra). Ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision (supra) leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the frame work of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.

While the planning adopted as a device to avoid tax had been deprecated, principle cannot be read as laying down the law that a person is to arrange his affairs so as to attract maximum tax liability, and every act which results in tax reduction, exemption of tax or not attracting tax authorised by law is to be treated as device of tax avoidance.

The decision in McDowell's case (supra) came to be considered by their Lordships of the Supreme Court in the case of CWT vs. Arvind Narottam (supra). That was a case which arose under the WT Act. One Narottam Lalbhai, Executive executed three trust deeds for the benefit of the assessee, his wife and his children and grandchildren. All the three trust deeds are couched in identical terms, except in regard to the minimum amounts payable to the beneficiaries out of the income of each year. However, there was one further difference in detail, while the first two deeds specified a period of 18 years from the date of execution as the period during which the net income could be distributed to the beneficiaries, while the third specified a period of 30 years. Under each of the trust deeds, the settlor specified the interest of the beneficiaries in the trusts. The WTO made the assessment orders for the relevant assessment years by including the entire value of the assets held by the trusts as the wealth of the assessee under s. 22 (sic) of the WT Act. On appeal, the liability of the assessee to wealth-tax was confined only to the value of the minimum amounts payable under the trust deeds for his maintenance. Reliance was placed by the Revenue on McDowell's case (supra) to discard the legal consequences flowing from the construction of the trust. Both the learned Judges constituting the Bench have given their separate opinions.

Chief Justice Pathak, in his opinion said :

"Reliance was also placed by learned counsel for the Revenue on McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC). That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity." Justice S. Mukherjee said, after noticing McDowell (supra) :

"Where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected."