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8. Aggrieved by the order of assessment, the assessee filed appeal before the learned CIT(Appeals). The assessee submitted that units of mutual funds were regulated by an independent body constituted under the Act of Parliament, viz., SEBI. The assessee had followed the prescribed procedure and the transactions with the mutual funds were at arms length. The assessee argued that the transactions were not pre-ordained because of high volatility in the assessees line of trade. Loss had arisen on account of fall in NAV. As the assessee had not adopted any colorable device, the decision of Honble Supreme Court in the case of Mcdowell & Co. Ltd. was not applicable. The learned CIT(Appeals) held that the transaction entered into by the assessee was popularly known as dividend stripping or a bed and breakfast scheme. In such scheme shares were purchased pregnant with dividend, thereafter dividend was received and shares were sold minus dividend. Resultant loss was claimed against other taxable income. The learned CIT(Appeals) referred to the judgment of House of Lords in the case of Griffiths v. J.P. Harrison, 58 ITR 328 (P.C) In that case the assessee purchased shares of a company. That company had at that time no business but considerable accumulated profits. After the company declared dividend, the assessee sold the shares minus dividend at loss. In the process there was difference between purchase price and sale price resulting into loss of Pounds 15900. The assessee set off that loss against dividend income of Pounds 15901. At the same time the assessee sought refund of taxes paid by the company in relation to the dividend payments under the provisions of section 341 of the Act. On those facts divergent views were expressed by their Lordships. The learned CIT(Appeals) referred to the minority view in that judgment and extracted at length from the judgment of Lord Denning, who propounded that the motive behind the transaction should also be considered while deciding particular transaction. Learned CIT(A) then referred to another judgment of House of Lords in the case of Finsbury Securities Ltd. v. Bishop (Inspector of Taxes) 43 Tax Cases 591 (H.L). In that judgment Lord Morris of Borth-Y-Gest, who had held the transactions as trading transaction in the case of Griffiths v. J.P. Harrison (supra) held different view of the matter. He held that the transactions were no more than devices which were planned and contrived to effect the avowed purpose of tax avoidance. He further held that the arrangements under consideration could not be regarded as within the trade of share- dealing. The view of Lord Morris was endorsed fully by other law lords. Thus, there was visible shift in the thinking of House of Lords. Thereafter another path breaking judgment came in the form of Lupton v. F.A. & A.B. Ltd. 47 Tax cases 580 (HL). The case of Lupton marked a water shed in tax avoidance cases. Their Lordships noted the earlier judgments in the cases of Griffiths v. J.P. Harrison Ltd. and Finsbury Securities Ltd. v. Inland Revenue Commissioner. It was held that if upon analysis it was found that the greater part of the transaction is explicable only on fiscal grounds, the mere presence of element of trading will not suffice to translate the transaction into the realms of trading. The learned CIT (Appeals) noted that subsequent judgments in the case of Ramsay Ltd. v. Inland Revenue Commissioner 1982 A.C. 300 (HL); Inland Revenue Commissioner v. Burmah Oil Co. Ltd. 1982 STC 30 (HL) and Furniss v. Dawson 1984 1 All England Reporter 530 (HL) added new dimension to the legal interpretation of the tax avoidance transactions. The contents and the nature of the principles established in those three cases were dealt with extensively in the case of Craven v. White 183 ITR 216 (H.L). It was laid down that an artificial avoidance scheme did not alter the incidence of tax. According to the learned CIT (Appeals), the principle of form over substance which was commonly referred to as Westminster principle with reference to the judgment in the case of Duke of Westminster 1936 A.C. 1 (H.L.) was overwhelmed by the judgments in the cases of Ramsay, Burmah Oil and Furniss, which stood by substance. In India also the doctrine of Duke of Westminster was visible from the cases, such as Jiyaji Rao v. CIT, 34 ITR 888; CIT v. Raman & Co., 67 ITR 11 (SC) and CIT v. Kharwar, 72 ITR 693 (SC). However, the doctrine came under full scrutiny of the Full Bench of Supreme Court in the case of Mcdowell & Co. Ltd. v. CTO, 154 ITR 148 (SC), which was thereafter followed in the case of Workmen v. Associated Rubber Industries, 157 ITR 77 (SC). In that judgment it was observed, "The time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to disassociate ourselves from the observations of Shah J. and similar observations made elsewhere." The learned CIT(Appeals) then quoted at length from the judgment in the case of Mcdowell & Co. He also relied upon the judgment of Honble Bombay High Court in the case of Twinstar Holdings Ltd. v. Anand Kedia , Dy. CIT, 260 ITR6 (Bom.)
21. The learned counsel for the assessee argued that it was not disputed by lower authorities that the transactions entered into by the assessee were perfectly in accordance with law. The main basis of the departments argument was that there was no commercial purpose involved in the transaction and, therefore, the loss should be ignored. It was held that the motive or intention of the assessee for entering into the transactions in question was tax avoidance. The learned assessing officer had argued that there were several judicial pronouncements to support the view that the loss claimed should not be allowed as it was artificially created. The learned CIT(Appeals) had heavily relied upon the judgments of the English courts in W.T. Ramsay Ltd. v. IRC 1982 A.C. 300 (House of Lords); IRC v. Burmah Oil Co. 1982 STC 30 (House of Lords) and Furniss v. Dawson 1984 1 All England Reporter 530 (House of Lords) as also the judgment of Honble Supreme Court in the case of McDowell & Co. Ltd. v. CTO, 154 ITR 148 (SC). The learned counsel argued that the reliance placed by the revenue on these authorities was not correct for two reasons. The first reason was that even by the majority decision in Mcdowell & Co. Ltd. (supra) what was prevented was colourable transactions by way of a device or a subterfuge. It was emphasized in the majority decision, "Tax planning may be legitimate provided it is within the framework of the law." It was not the revenues case that the transactions entered into by the assessee were not in accordance with the framework of the law. The second reason was that after Mcdowell, 154 ITR 148 (SC), a five judge constitution Bench of the Supreme Court had, in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, followed the principle laid down in Duke of Westminster, 1936 A.C. 1 (which according to Chinnappa Readdy J had been buried in the country of its origin) and bank of Chettinad Ltd. v. CIT, 8 ITR 522 (SC) and held that an assessee cannot be taxed on the basis of the so-called substance of the transactions but that one has to go by the plain language of the statute. The same principle had been followed by the Supreme Court in Azadi Bachao Andolan (supra), wherein the decision in Mcdowell & Co. Ltd. was considered in great detail. The learned counsel invited our attention to a large number of observations made in Azadi Bachao Andolan. The learned counsel argued that the reliance on the English decisions in W.T. Ramsay Limited v. IRC 1982 AC 300; IRC v. Burmah Oil Co. Ltd. 1982 STC 30 and Furniss v. Dawson 1984 1 All ER 530 was not proper because the English Courts had themselves taken a contrary view in Craven v. White and MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd. (2001) 1 All England Reporter 865 (HL), as noted by the Supreme Court in Azadi Bachao Andolan at pages 756 and 757 of 263 ITR. The ITAT Special Bench had also accepted that the English courts have taken a different view in Mid East Portfolio, 87 ITD 537 (Mum)SB), paragraph 29. The transactions with the mutual funds were genuine transactions and could not be regarded as a sham, subterfuge or a colourable device as the transactions had actually taken place with an actual flow of funds. It had been consistently held in India and England that motives with which a transaction was entered into were irrelevant and could not in that way affect the legality of the transaction. Even where it was intended to avoid tax, the intention was irrelevant - one had only to see whether on the facts of a case the charge of tax was attracted.

54. The learned CIT, DR argued that before the Honble Supreme Court it was argued that "any tax planning" must be struck down by the court. In the ensuing paragraphs in the judgment of Honble Supreme Court the word "any" occurs again and again. The Honble court were disapproving the interpretation of the judgment of McDowell that "any tax planning", "any step", "any device" resulting into reduction of tax had to be disregarded. Honble Supreme Court in the case of Azadi Bachao Andolan denounced indiscriminate application of McDowell principle and it would be a complete mis-reading of the judgment of Honble Supreme Court in the case of Azadi Bachao Andolan that McDowell principle as a whole had been denounced.

76. The learned counsel for the assessee argued that much could not be made of the fact that the judgment in the case of McDowell & Co. was delivered by a bench comprising of five judges. If the judgment of Honble Supreme Court in the case of McDowell & Co. had not been noticed at all in the judgment in the case of Azadi Bachao Andolan, then it could be argued that McDowell should prevail being the judgment of a larger bench. But in the case of Azadi Bachao Andolan the subsequent Bench of Supreme Court had considered the earlier judgment in the case of McDowell & Co. at considerable length. It was, therefore, not open to argue that the judgment in the case of McDowell should take precedence. The learned counsel pointed out that the petitioners in the case of Azadi Bachao Andolan had also filed a curative petition in relation to the judgment in the case of Azadi Bachao Andolan. That curative petition having been dismissed by a bench comprising of five judges, the judgment in the case of Azadi Bachao Andolan had the seal of five judges.