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  • Writer's pictureLAWGIC STRATUM

Union of India Vs Azadi Bachao Andolan

Author: Sarada Rasagnya

Citation:Appeal (civil) 8161-8162 of 2003, Appeal (civil) 8163-8164 of 2003

Court: Supreme Court

Date of Judgment: 07-10-2003

Bench: Justice Ruma Pal and Justice B.N. Srikrishna


The decision of the court in the case Union of India Vs Azadi Bachao Andolan has played a very substantial role in framing the law in terms of legality and to avoid double taxation agreements and application of fiscal statutes.

The implementation of the law with regards to Double Tax and the powers of Income Tax and other administrative authorities has evolved from this case. DTAA is a very useful tool for avoiding double taxation and providing relief to entities engaged in earning income from one or more countries so it is necessary to understand and analyze who are the proper authorities and what is power of those authorities, this case has given apt decision regarding the power of authorities and legality of agreements.


The government of India has entered into various agreements with governments of different countries for the avoidance of double taxation and for the prevention of fiscal evasion.

One such agreement between the government of India and the government of Mauritius dated April 1, 1983, is the subject matter of the present controversy.

As specified in the preamble the purpose of this agreement is to avoid double taxation and to preventfiscal evasion with respect to capital gains, taxes on income, and for the encouragement of mutual trade investment.

By a circular issued by Central Board of Direct Taxes (CBDT), government of India clarified that capital gains of any resident of Mauritius by alienation of shares of an Indian company shall be taxable only in Mauritius according to Mauritius taxation laws will not be liable to tax in India.

This was further substantiated by circular issued by CBDT on 13th April, 2000. Some income tax authorities issued show cause notice to those companies that operated in India and Mauritius to justify why they should not be taxed which created panic amongst such FIIs and led to withdrawal of funds by foreign institutional investors.

Issues / Questions of Law:

The court has considered the following questions of law

1. Whether or not when there is an inconsistency, the provisions of the income tax act 1961 prevail over the provisions of double tax avoidance agreement (special reference to relief of Double Tax Avoidance Agreement)?

2. Whether or not under sec 90 of Income Tax Act, 1961 the Double Taxation Agreement Convention between India and Mauritius is illegal and ultra vires the power of central government?

3. Whether or not the Central Board of Direct Taxes – CBDT’s circular 789 valid?

a. Whether or not the power for issuance of instructions through circulars to statutory authorities under Income Tax Act, 1961 lies in the Central Board of Direct Taxes?

b. Whether or not the CBDT’s circular 789 violates sec 119 of Income Tax Act and is it a legally valid circular?


Section 90, Income Tax Act[1] – Agreement with foreign countries. This section gives the power to central government to enter into treaties in fiscal and taxation matters along with agreements for double taxation avoidance with other foreign countries.

Section 119, Income Tax Act[2] – This section empowers the Central Board of Direct Taxes to issue orders, instructions and directions to other income tax authorities as it deems fit for proper administration of this act and implementation of relief to be granted under Double Tax Avoidance Agreements

Doctrine of Contemporanea Expositio – this is a rule of interpretation, especially in concern with taxation statutes that says that the while interpreting a statute in contemporary usage, perspective of the authority that formulated the law at the time has to be taken into consideration.

Challenge in High Court:

The respondents challenged circulars and also DTAA in the Delhi high court through special leave petitions, they prayed

  1. For issuing appropriate guidelines to the central government for initiating a process to revise the conditions of Indo-Mauritius DTAA

  2. For declaring and restricting the powers of central government under section 90 of the Income Tax Act, 1961

  3. Declare and restrict the powers of the central board of Direct Taxes concerned with issuance of instructions through circulars to the statutory authorities and

  4. To issue mandamus against Income Tax authorities for compelling them to undertake revenue collection in a legal manner



The appellants had contented the purpose and consequence of Double Taxation Avoidance Agreement and it is necessary to understand the purpose and need of the agreement. The Income Tax, 1961 itself contains a chapter devoted to Double Taxation Relief and under Art 73[3] of the constitution the government has power to enter into treaties.

Every country on the basis of various connecting factors such as location of the source, residence of the taxable entity, maintenance of a permanent establishment seeks to tax the income generated within their territory. A country can choose to emphasise one or the other aforesaid factors for exercising fiscal jurisdiction to tax the entity. Depending on the factors which are considered to be connecting factors in different countries the same income of the same company might be liable to taxation in different countries. This willimpair economic development. So, the governments of different countries enter into agreements with each other to avoid such double taxation.

Based on various cases the appellants made it clear that the judicial consensus in India has been that sec 90 is specifically intended to empower the central government to issue a notification for implementation of the terms of double tax avoidance agreement.

They also contended that if it was not the intention of the legislature to make a departure from the general principle of tax chargeability under sec 4[4] and the general principle of ascertainment of total income under sec 5[5] of the acts then there was no purpose in making those sections subject to provisions of the act and cases to which where they apply there would be inconsistency.


The respondents contended that the impugned circular no. 789 is inconsistent with the provisions of the Income Tax Act. By reason of Article 265[6] of the constitution, no tax can be levied or collected except by authority of law. The authority to levy tax or grant exemptionvests only in the parliament and no other body. Once parliament has enacted the income tax act, taxes must be levied and collected in accordance with the same and no other body howsoever high can exercise such power or no person has power to grant exemption.

The treaty making power under article 73 is confined only to such matters that would not fall under the scope of article 265.

In respect of fiscal treaties, they contended that unless the parliament has made an enabling law in support, they cannot be enforced in contravention of the income tax act.

Judgment of High Court:

The high court on the basis of the grounds challenge by Azadi Bachao Andolan decided to quash the circular no. 789 on several grounds

i. It was held that the said circular was not explicitly issued under power of authorities under section 119, thus making it not binding.

ii. The court also opined that the provisions of the agreement enunciated further in the circular in question make the Indo-Mauritius investments prone to unethical use of “Treaty shopping”.

iii. Also, circular no. 789 was ultra vires the powers of both central government and income tax authorities and provides for excessive delegation of legislative power.

Appeal in Supreme Court:

The respondents appealed to supreme court against the judgment of the high court and the supreme court reversed the judgment of the high court in the present case Union of India Vs Azadi Bachao Andolan.


The court held that where a specific provision is made in Double tax avoidance Agreement that provision will prevail over the general provisions contained in the Income Tax Act, 1961. It is a prominent rule of interpretation where an inconsistency arises between any general and specific provisions or laws of two statutes, the specific rule shall prevail over the general rule.

Therefore,in any case of inconsistency between provisions of the Indo-Mauritian DTAA and section 90 of the Income Tax Act, 1961 the provisions of DTAA being the specific provisions for providing tax relief in case of double taxation will override the provisions of the Income Tax Act.

The court held, in concern with the legality of the Double Taxation Avoidance Agreement between India and Mauritius there are two important considerations

1. Firstly, what are the powers does sec 90 grant to the central government

2. secondly in exercise of powers under section 90 granted to central government, did the central government go beyond the scope of powers granted to it or was the central government according to terms established in such DTAA empowered to enter into Double Taxation Agreement with Mauritius

Sec 90 – Agreement with foreign countries

(1) The central government may enter into an agreement with any country’s government

the provisions of this act shall apply to the extent they are more beneficial to that assessee.

According to section 90 the central government is empowered to enter into agreement or convention with the government of any other country for any purpose listed in clauses (a) to (d) of sub-section (1).

(a) Granting relief or benefit in respect of income on which income-tax has been paid in India as well as in the foreign country

(b) Avoidance of double taxation income under the act and under the law in force in the foreign country.

(c) and (d) are irrelevant to the present case.

In the contention whether under circular 789, CBDT was the appropriate authority to issue such instructions specifically the foreign institutional investors which are residents of Mauritius, as per paragraph 4 of article 13 of the Double Tax Agreement between the two countries, would not be taxable in India on income from capital gains arising in India on sale of.

The court laid emphasis on sub section(2) of section 119, this provides for the exercise of power in certain special cases and enables the central board of direct taxes if it considers necessary so to do for the purpose of adequate management of the work of assessment and collection of revenue, to issue general or special orders in respect class of incomes of class of cases, to set forth directions or instructions as to the guidelines, principles to be followed for the discharge of work relating to assessment or initiating proceedings for imposition of penalties by other income tax authorities.

Therefore, it has been held that as in definition of section 119 of the Income Tax Act, 1961, CBDT in fact had the power to issue such instructions and also holds the competency to issue instructions such as instructions in circular no 789.

The judgement was affirmed with reference to the case of UCO Bank vs Commissioner of Income Tax[7], the court pointed out that the circulars issued under sec 119 of the act, by CBDT have statutory force and would be binding on every income tax authority although such may not be the case with regard to press releases issue by the CBDT for information of the public.


In terms of the first question of law when an inconsistency arises between provisions income tax act and any provisions of the Double Tax Avoidance Agreement the later will prevail over the former. This was a pure question of law that the court had to answer.

In the light of this case, in a situation where two sets of different modes are specified for computation of income in a double tax avoidance agreement and the income tax for a person having residency of one of the two countries between whom the agreement exists. In such case the rule of the interpretation mentioned above would imply that the mode of computation of income should be the onewhich is mentioned in the specific agreement between the two countriesand not the general provisions for computation in the income tax.

The second question of law is related with the first question of law. The question before the court was the legality of the Double Taxation Avoidance Agreement and whether it was ultra vires as under sec 90 of the Income Tax Act, 1961 the court has relied on prior judgments and some judicial interpretations in answering the same.

The court has relied on sec 90 of the act and said that it is not ultra vires, central government has not exceeded the scope of limits given to them under the provisions of this act and the government has powers to enter into agreement with any other government under the scope of this section.

In concern with the third question of law, which is regarding the circular no 789 issued by the Central Board of Direct Taxes, which gave to rise to two sub issues namely,

  • whether CBDT was the appropriate authority to issue such instructions?

  • whether circular 789 is legally valid as per sec 119 of Income Tax Act, 1961?

The court laid emphasis on sub clause (2) of sec 119 and said that the CBDT has the power to issue such instructions and has affirmed the judgment with prior judgments which speak about the statutory force and binding of such instructions.

Other Contentions of Respondents:

The other contentions of respondents were that the circular 789 has granted excessive power to the Central Board for Direct Taxes and also gave the income tax authorities the power to lift the corporate veil of the entity to decide in order to decide if they should be awarded the benefit of double taxation under the Income Tax Act, 1961.

In the light of such power the contention was that the income tax authorities have been excessively delegated with such quasi-judicial powers and hence it is a case of excessive delegation. The Delhi High court have accepted the Contention and based on the grounds the circular 789 has been quashed.

The supreme court held that the decision of high court to quash circular no 789 as ultra vires was unacceptable. The circular provides that whenever a certificate of residence is issued by the authorities of Mauritius that certificate will constitute sufficient evidence for accepting the status of residence and also beneficial ownership for applying DTAA.

Relied Cases:

1. Kasturi and son’s Ltd vs Union of India[8]

For the respondents in Union of India vs. Azadi Bachao Andolan [(2004) 10 SCC 1] The judgment relied upon by the learned counsel was in the context of the circular issued in violation of section 119 of the Income-tax Act relating to the residence nature of a Company which was sought to be assessed and it was held that the powers of Central Board of Direct Taxes in issuing directions in the form of circular under section 119 of the Income-tax Act to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collecting revenue and that is not the case on hand.

In the judgment of this Court in W.P.No.9835 of 2010, the reliance placed by the learned counsel for the respondents is of no help to the case of the respondents. They were all cases where individual show-cause notices and summons were issued to individual assessee based on the circular. In such circumstances, finding that individual assessee can file their objections and against the decision the appeal remedy is available, the writ petitions came to be dismissed. But the challenge to the circular in this case cannot be compared to the circumstances that existed in the above-mentioned writ petitions.


[1],%22value%22:%22act%22,%22searchoperand%22:2%7D,%7B%22crawledpropertykey%22:0,%22value%22:%22income#:~:text=Explanation%201.,respect%20of%20such%20foreign%20company. [2] [3]The Constitution of India , [4]Income Tax Act,[{%22CrawledPropertyKey%22:1,%22Value%22:%22Act%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:0,%22Value%22:%22Income-tax%20Act,%201961%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:29,%22Value%22:%222021%22,%22SearchOperand%22:2}]&k=&IsDlg=0 [5]Income Tax Act,[{%22CrawledPropertyKey%22:1,%22Value%22:%22Act%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:0,%22Value%22:%22Income-tax%20Act,%201961%22,%22SearchOperand%22:2},{%22CrawledPropertyKey%22:29,%22Value%22:%222021%22,%22SearchOperand%22:2}]&k=&IsDlg=0 [6]The Constitution of India, [7]Civil Appeal No. 235 of 1996, 13 May 1999 at SC of India [8]Writ Petition No. 5534 of 2006 and WPMP No. 5976 of 2008, 24 FEB 2011 at Madras High Court.

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