INTRODUCTION
Tax planning v. Tax evasion has been a point of debate for a long time now. Taxes, meant to provide for the state’s expenditure for a better living for its subjects, were earlier levied arbitrarily and used for wasteful purposes during the times of monarch and this led to an instance of advent of Magna Carta to limit the unlimited power to levy taxes.1 Now, taxes are imposed by a group of elected individuals instead of a sovereign, yet prevails the absence of quid pro quo. Since tax is a compulsory extraction, courts have always maintained that in a taxing law “it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language.2 In particular, Indian courts are of the view that tax cannot be imposed by any inference, analogy or by probing into the intentions of legislations and considering the substance of the matter (held in A.V. Fernandez v. State of Kerala3).
A well-known predecessor to this stance in tax law is Inland Revenue Commissioners v. Duke of Westminster4, widely known as the Duke of Westminster case, a United Kingdom House of Lords case, decided in 1936. The case established the Westminster principle which states that a taxpayer can lawfully adjust and arrange his/her affairs to minimize tax payments, provided that the arrangements are lawful. It is a practice in law where opposite rules of interpretations like liberal and stricter sense are used together despite having not legislated explicitly. One such case is Westminster case in the land of UK.
“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.” – Lord Tomlin
The principle emphasizes courts to uphold legal form of transactions and not to disregard them in the view of assumed ‘substance’ for taxation purposes. Focusing on legitimacy of tax avoidance has slowly been subjected to change in applicability due to modern anti-avoidance rules. Therefore this project ventures to understand the current legal standing of the principle in UK and also its relevancy in India. The project will also examine the origins, development, and present relevance of the Westminster principle in its parent country, The UK and in India. In addition, whether the principle still offers an effective defense for taxpayers or has become obsolete due to advances in current law will also be considered.
EVOLUTION OF WESTMINSTER PRINCIPLE IN UK
The Duke of Westminster, a reputed and wealthy man in The UK, entered into a covenant with his gardener*, Frank Allman, whereby it was acknowledged that the Duke would in his employment would pay a yearly sum of certain amount through weekly payments. It was to be paid for a period of seven years or during the joint lives of the parties, and it was agreed that the payments were without prejudice to the remuneration to which Allman should be entitled for services, if any, thereafter rendered.5 The then Income Tax Act, 1918 and Finance Act, 1927 did not allow payments of salary, wages or fees as deductions from total income liable to surtax but Schedule D of Rule I of the Income Tax Act provided the payer to be entitled to deductions in cases of annual sum payments. Plainly reading the covenant deed, the Duke was entitled to deductions but problem arose when the appellants (The Commissioners of Inland Revenue) mentioned about a written acknowledgment of Allman that the deed was merely a method of paying salary or wages in whole or in part.6 The respondents argued that deductions permissible in assessing income tax are also applicable in assessing an income to surtax. This was followed by arguments such as ‘these were annual payments payable by virtue of any deed……or as a personal debt or obligation by virtue of any contract.’
The issue found its structure as framed by the judges that if the payments had been for remuneration of services then the respondent would be chargeable. Lord Atkin even in the early parts of his part of the judgment states that:
“I do not use the word device (avoid burden of surtax) in any sinister sense, for it has to be recognized that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a Court of law is to determine the legal result of his dispositions so far as they affect tax.”7
Lord Atkin also stated that on the footing of the deed, the employee of the Duke were actually entitled to a certain sum in addition to their wages. He also held that the acknowledgement letter was with respect to the covenant deed and held the respondent to be entitled to deductions. Focusing on Lord Tomlin’s view, his views can be simplified into three parts, namely:
a) Taxable Income: Lord Tomlin pointed out that for every deed of covenant, annuity constitutes part of the taxable income of the person receiving it, rather than the person paying it. This implies that the payer is allowed to set off such payments on their total income as a surtax. He pointed out that this category conforms to the requirements of the Income Tax Act, 1918.
b) Annuity: For Mr. Detmar Jennings Blow*, he specifically addressed that for the tax treatment of the annuity payable to Mr. Detmar, there were no legal or factual factors that could affect the tax treatment of that annuity. As a result, he decided that the appeal in relation to this annuity have been failed.
c) Tax Avoidance as a legal right: Lord Tomlin realized that the deeds were made to help avoid surtax, and that anyone and everyone is lawfully entitled to arrange his or her capital and income to minimize tax expenses. He also stated that the court plays the role of settling the legal consequences of such arrangements.
In the end the three other judges, Lord Russell of Killowen, Lord Macmillan and Lord Wright, held a similar view which lead to a) the deeds of covenant held valid and b) the payments were deemed deductible for the payer of surtax. The juridical ground of the case focuses on the difference between form and substance of tax arrangements. These sums were yearly payments and a significant fact is that they were not drawn as ordinary contractual wages to continue service. The Inland Revenue argued that, in fact, these payments were payments made in consideration of services performed and that the court must not consider the form of the transaction but look to the substance of the transaction basically stating them as de facto wage payments.
This approach towards doctrine of substance was rejected by the House of Lords and held that the court should not ignore the legal rights and obligations established by the arrangements made by the taxpayer and cannot defeat them by mere virtue of the fact that the transaction works to give a tax benefit.8 The deeds payments were determined to be actual payment done on a yearly basis an deductible for the Duke as taxable income, despite the underlying business fact that they substituted it for what otherwise would have been wages. Lord Tomlin wrote that every tax payer is entitled to make their affairs as tax efficient as possible and they cannot be requested to pay tax in excess of the amounts required by law. This case practically legalized tax avoidance following the letter of the law but not the spirit of the law. The Westminster principle provided that the legal effect of transactions as opposed to their commercial or economic effect is determinative of tax liability.
As the case of Westminster showed up, UK jurisprudence on tax avoidance changed with numerous important cases introducing a limitation on it and a reversal of the form-over-substance principle.
a) Ramsay Ltd v Inland Revenue Commissioners9(1982) is one of the few cases to alter the Westminster principle radically, permitting courts to treat a series of transactions as one and to ignore artificial steps that were inserted purely with the aim of evading taxation. The principle of substance over form was equated with an arrangement being a pre-ordained series with the sole aim of evading tax.
b) This more refined view of tax avoidance was further enshrined in the cases of Burmah Oil Co Ltd v Lord Advocate10 (1965) and Furniss v Dawson11 (1984) which made it clear that courts should consider more than merely the form of transactions, but also their reality.
Overall, though the Duke of Westminster case has created a significant base on the law of tax avoidance in the form of the law of formality and legal rights, it has been massively limited by the current judicial principles of reliance on commercial reality and substance to deter aggressive tax avoidance transactions.
RELEVANCY AND GAAR IN INDIAN TAX LAW
A large part of the work and income of the so-called huge five accountancy and consultancy firms in the world is derived from devising this kind of innovative tax avoidance schemes and devices which flourish in the name of tax planning.12 As the colony of the Britain, India followed the Westminster principle for quite some time and after independence the very first case to go against this view was in 1985 through the case of McDowell and Co. v. CTO13 J. Mishra wrote that
“Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”14
And J. Reddy stated:
“I have referred to the English cases, at some length, only to show that in the very country of its birth, the principle of Westminster has been given a decent burial and in that very country where the phrase ‘tax avoidance’ originated the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep frown. The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes….We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done”15
The court noted that the moral justification of tax laws is no different than that of any other benefit legislation and the argument that evading taxes is immoral and that it is as moral as acting in a morally upright way by paying the taxes is a lie. To some extent this approach can be seen in the decision of Desai, J. in Wood Polymer Ltd. and Bengal Hotels Limited16, in which the learned judge refused the merger of businesses on the grounds that it would amount to tax evasion. It is neither appropriate nor right to assume that the legislature will intervene and deal with all the tax-avoidance schemes. The Court in Ramsay17, Burma Oil18 and Dawson19, relied on the emerging methods of interpretation to evaluate the character of the newly introduced and advanced legal devices “to expose the devices for what they really are and to refuse to give judicial benediction”.
Though the five-judge bench held the principle to be dead in India as it in The UK, there were few smaller bench cases of the Supreme Court of India providing an opposite opinion in the tracks of the ‘dead’ principle. These two judgments – Azaadi Bachao Andolan and Vodafone case – have tried to overturn McDowell by winking at such artificial tax avoidance devices and calling them legitimate tax planning.20 In the case of Azaadi Bachao Andolan21, foreign institutional investors (FIIs) in 2000 were making huge profits, especially capital gains and still managed not to pay taxes by taking advantage of the Double Taxation Avoidance Treaty with Mauritius. The 1983 treaty applied to residents of India and Mauritius to provide that a company would only be taxed in its domicile country. But these FIIs claimed to be Mauritius domiciled under Mauritius Offshore Business Activities Act under which the company is not allowed to conduct business in Mauritius. When an income tax officer cited Supreme Court judgments to state that tax authorities should frown on tax evasion and lifted the corporate veil to tax these companies with actual domicile of European countries and The USA.
With lot of political play, the very next day Central Board of Direct Taxes (CBDT) issued a circular to all tax authorities that in India, once a company obtains tax residence from Mauritius, it will not be taxed in India. On PIL filed by Azaadi Bachao Andolan and S K Jha, the division bench of Delhi High Court quashed the circular and called it treaty shopping and tax evasion. But on appeal in-front of Supreme Court, J. Srikrishna and J. Ruma Pal called the act of FIIs as act of legitimate tax planning to attract foreign investments. The judgment read as “With respect, therefore, we are unable to agree with the view that Duke of Westminster is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in CIT v. A. Raman and Co. are very much relevant even today.22”
RELEVANCY AS TO GAAR
Moving our focus into General Anti-Avoidance Rule (GAAR), time arose when internationally tax avoidance was considered as an area of concern leading to nations strengthening their legislations and legislating the doctrine of General Anti-Avoidance Regulations. The GAAR (General Anti-Avoidance Rule) is a legislative framework of India that seeks to inhibit aggressive tax avoidance and provide a true commercial substance in transactions, and judicial ruling has embraced its prevailing character to the other anti-avoidance regulations.23 GAAR aims to overcome the arrangements that only aim at getting a tax benefit, by analyzing the authenticity of the transactions, the business nature and the primary rationale.
The GAAR in India was brought into operation in 2012 and implemented in 2017 in consideration of Chapter X-A of the Income Tax Act, 1961. It is to be noted that GAAR has considerable strength in empowering tax authorities and also ensuring transparency. However, it also has uncertainties in the terminologies such as ‘commercial substance’ and ‘main purpose’. In comparison to the regimes of UK, Australia and Canada, India gives limited guidance and therefore does not always enforce it consistently and creates legal uncertainty. Scholars underline the necessity to balance the curbing of abuse and legal certainty to the taxpayer.24
The 2024 ruling of the Hyderabad High Court of Ayodhya Rami Reddy Alla v. PCIT25 confirmed the precedence of GAAR over Specific Anti-Avoidance Rules (SAAR). The ruling was that a non-obstante clause in support of GAAR has the power to set aside certain provisions and even valid arrangements, provided that they prove to be impermissible. The introduction of GAAR proceedings in India has caused an increased burden of proof to be placed on the taxpayer. The Westminster principle, where tax is minimized by lawful structuring, has been found to have reduced application in Indian law with the adoption of the doctrine of substance over form by GAAR and the emerging judicial strict approach to artificial tax avoidance schemes.
The Westminster principle allowed Indian taxpayers to structure their affairs in a manner that minimized tax in the past as long as the transactions were not fraudulent or sham. The decision of the Indian Supreme Court Azadi Bachao Andolan granted that the principle was legitimate, but noted the accumulating jurisprudential stress, particularly following McDowell and Co. v. CTO, which stressed the importance of substance over form and criticized mere artificial structures to evade taxation.26 Legally, GAAR gave effect to the substance over form rule and to the same effect enabled tax authorities to ignore arrangements that had no commercial substance and were primarily geared towards tax advantages thereby effectively weakening Westminster in anti-avoidance cases.
Under GAAR, the real purpose and effect of transactions are considered and not their legal form. Recent Supreme Court and High Court decisions (Vodafone International27and Ayodhya Rami Reddy Alla) explain that not every tax planning is unlawful, but in a case where there is no substance or in which the commercial purpose is under suspicion, GAAR takes precedence over the Westminster approach. Although taxpayers are perfectly permitted to strategise to minimise tax, GAAR establishes strong boundaries, preventing abusive tax avoidance and reducing Westminster to cases involving only bona fide arrangements, not impermissible ones.28
CONCLUSION
The Westminster principle that justified tax avoidance by using legal form has been highly watered down in India. Judicial and legislative tendencies are substance-over-form, as in McDowell and in the implementation of GAAR. Whereas Westminster allowed legal tax avoidance, the Indian courts and statutory doctrine now concentrate on the commercial substance and intent of arrangements, and not on their form. The case McDowell of the Supreme Court, and further implementation of GAAR shows a clear denial of a pure artificial structuring on the basis of taxes. But in some instances like Azadi Bachao Andolan and Vodafone, there is a more subtle approach: bona fide tax planning is not disallowed, but a scheme in which the so-called no substance arrangements exist purely to seek tax advantages may be disallowed under GAAR. And GAAR is a radical statutory change, putting India on a par with international best practice and restricting the defence tax payer that previously was available at Westminster.
The project can be concluded that although the Westminster principle continues to serve as a cornerstone principle in the international tax law, the principle has ceased to be a strong defence of aggressive tax avoidance in its place of origin – UK and also India. The rulings of cases, changes in law and the introduction of GAAR have clearly brought the emphasis to the essence and true commercial intent of transactions. Indian taxpayers still have the option of planning their affairs to genuine tax planning but the door is strongly shut against schemes which have no bona fide business purpose. GAAR gives the tax authorities the ability to address such avoidance, and the Westminster approach is literally killed in practice. This change of doctrine will help to provide increased equity and fairness in the Indian tax system in accordance with both international anti-abuse principles and judicial policy of favouring substance, transparency and economic reality over legal form alone.
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Footnotes
1. Dr.P.R.L.Rajavenkatesan and Dr.A.Shanmuga Sundaram, “Westminster Principles and the Twin Ghosts of McDowell and Retrospective Laws in Taxation in India”
2. Ibid.
3. A.V. Fernandez v. State of Kerala, AIR 1957 SC 657
4. Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 (U.K. H.L.)
5. Ibid.
6. Ibid. Appellant arguments * From 1930, the Duke executed a series of deeds with several people who worked for him like laundry man, architect, etc.
7. Ibid. at 4 * One of the employees with whom the Duke executed similar deed.
8. M. K. Pithisaria, “A Tale of Ever-Evolving Principles – Westminster v. Ramsay”, available at: https://www.scribd.com/document/789493981/2022-03-04T00-00-A-Tale-of-Ever-Evolving-Principles-Westminster-v-Ramsay-A-Tale-of-Ever-Evolving-Princip (last visited Dec 26, 2025).
9. Ramsay Ltd v. Inland Revenue Commissioners (1982) A.C. 300, H.L.(E.)
10. Burmah Oil Co Ltd v. Lord Advocate (1965) A.C. 75
11. Furniss v. Dawson [1984] A.C. 474
12. Prashant Bhushan, “Legitimising Tax Avoidance” 47 Economic and Political Weekly 37 (2012).
13. McDowell and Co. v. CTO (1985) 3 SCC 230
14. Ibid.
15. Ibid.
16. Wood Polymer Ltd. and Bengal Hotels Limited (1977) 47 Com Cas 597 (Guj)
17. Ramsay Ltd v. Inland Revenue Commissioners (1982) A.C. 300, H.L.(E.)
18. Burmah Oil Co Ltd v. Lord Advocate (1965) A.C. 75
19. Furniss v. Dawson [1984] A.C. 474
20. Prashant Bhushan, “Legitimising Tax Avoidance” 47 Economic and Political Weekly 39 (2012).
21. Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1
22. Ibid.
23. Arshu John and Linesh Lalwani, “GENERAL ANTI-AVOIDANCE RULE (GAAR): AN INDIAN AND INTERNATIONAL PERSPECTIVE” 4 NLIU Law Review (2014).
24. Shatik Dhawan and Dr. Kritika Nagpal, “The Role of GAAR In Combating Corporate Tax Avoidance In India: Legal Framework, Judicial Interpretation, And Comparative Insights” 13 International Journal of Creative Research Thoughts (2025).
25. Ayodhya Rami Reddy Alla v. PCIT WRIT PETITION Nos.46510 and 46467 of 2022
26. Tarun Jain, “‘GAAR’ AND CORPORATE GOVERNANCE: WILL THE STICK DO THE TRICK?” 1 Journal on Governance (2012).
27. Vodafone International Holdings B. V. v. Union of India (2010) 329 ITR 126
28. Sayed Qudrat Hashimy, “A Tale of Two Tax Systems: A Comparative Analysis of General Anti-Avoidance Rules Provisions in India and Australia” 9 Journal for Legal Studies and Research (2023).