COMMISSIONER INLAND REVENUE, ZONE-III VS IGI INSURANCE COMPANY LTD., 2018 PTD-KARACHI-HIGH-COURT-SINDH 114 (2017)

2018 P T D 114

[Sindh]

Before Munib Akhtar and Zulfiqar Ahmad Khan, JJ

COMMISSIONER INLAND REVENUE, ZONE-III

Versus

Messrs IGI INSURANCE COMPANY LTD.

I.T.R.A. No.6 of 2013, decided on 18/04/2017.

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss. 109, 99, Fourth Sched. Rr.5 & 6A---Scope and application of S.109 Income Tax Ordinance, 2001---Anti-tax avoidance---Recharacterisation of income and deductions---Section 109 of the Income Ordinance, 2001 as a General Anti-[tax]avoidance Provision ("GAAR")---Special provisions relating to insurance business---Exemption of Capital Gains from the sale of shares---Application of S. 109 of the Income Tax Ordinance, 2001 in cases where provisions of the Fourth Schedule to the Income Tax Ordinance, 2001 regarding Rules for The Computation of the Profits and Gains of Insurance Business and exemption from capital gains from sale and purchase of shares are invoked by the Department---Scope---Section 109 of the Income Tax Ordinance, 2001 could apply in suitable circumstances to a situation where one or more clauses of R.5 of the Fourth Schedule to the Income Tax Ordinance, 2001 were sought to be invoked as neither S. 99 nor the Fourth Schedule to the Income Tax Ordinance, 2001 contained a non-obstante clause; said section had no equivalent in earlier legislation and was a brand new concept as far as tax jurisprudence of Pakistan was concerned---Section 109 sought to apply, as expressly provided therein, to determination of all tax liability "under this Ordinance" and absent a non-obstante clause, it would certainly include (at the least) an application of the said section to the situation in which one of the Clauses of R.5 of the Fourth Schedule to the Income Tax Ordinance, were sought to be invoked.

(b) Income Tax Ordinance (XLIX of 2001)---

----S. 109---Anti-tax avoidance---Recharacterisation of income and deductions---Section 109 of the Income Ordinance, 2001 as a General Anti-[tax]avoidance Provision ("GAAR")---Genesis and rationale for anti-tax avoidance measures---Concept of tax avoidance, tax evasion, tax planning, and tax mitigation---Acceptable and unacceptable tax planning---Invocation, application and limits of General Anti-tax avoidance provisions---Interpretation of GAAR provisions , generally and with specific reference to S. 109 of the Income Tax Ordinance, 2001---GAAR provisions to be interpreted purposively and not otherwise---Importance of alignment between purposive approach to interpretation of GAAR provisions in its interaction with the specific provision(s) of the Tax Code ---Application of S. 109 of the Income Tax Ordinance, 2001, construed purposively to a transaction viewed realistically---Comparable statutory provisions and judicially evolved rules from various jurisdictions, extensively examined and analyzed.

Case law referred.

(c) Income Tax Ordinance (XLIX of 2001)---

----S. 109---Anti-tax avoidance---Recharacterisation of income and deductions---Section 109 of the Income Ordinance, 2001 as a General Anti-[tax]avoidance Provision ("GAAR")---Interpretation of S. 109 of the Income Tax Ordinance, 2001---Meaning and scope of the words "transaction", purpose" and tax avoidance scheme" used in S. 109 of the Income Tax Ordinance, 2001---Limits of the application of S. 109 of the Income Tax Ordinance, 2001 and recognition of the principle that the same was intended not to operate on all types of tax planning but only against certain types of transactions that amounted to tax avoidance---"Purpose and effect" in GAAR provisions---Effect of the qualification of the word "purpose" with the word "main" used in S. 109 of the Income Tax Ordinance, 2001---Concept, scope and meaning of the word transaction" , "purpose" and "tax avoidance scheme" in the context of S. 109 of the Income Tax Ordinance, 2001 examined with regard to judicially evolved principles and comparable statutory provisions from various jurisdictions.

Case-law referred.

(d) Income Tax Ordinance (XLIX of 2001)---

----S. 109---Anti-tax avoidance---Recharacterisation of income and deductions---Section 109 of the Income Tax Ordinance, 2001 as a General Anti-[tax]avoidance Provision ("GAAR")---Interpretation of S.109 of the Income Tax Ordinance, 2001---Application of S.109 of the Income Tax Ordinance, 2001 to only certain kinds of transactions---Factors or characteristics that may indicate or establish tax avoidance within the Legislative intent behind S. 109 of the Income Tax Ordinance, listed.

Case-law referred.

(e) Income Tax Ordinance (XLIX of 2001)---

----S. 109---Anti-tax avoidance---Recharacterisation of income and deductions---Section 109 of the Income Tax Ordinance, 2001 as a General Anti-[tax]avoidance Provision ("GAAR")---Interpretative approach for, and application of, S. 109 of the Income Tax Ordinance, 2001---Summary of the extended judicial analysis on GAAR provisions, generally and with specific regard to the scope and applicability of S. 109 of the Income Tax Ordinance, 2001.

(f) Income Tax Ordinance (XLIX of 2001)---

----Ss.109, 99, 133 & Fourth Sched., Rr.5 & 6A ---Anti-tax avoidance---Recharacterisation of income and deductions---Section 109 of the Income Tax Ordinance, 2001 as a General Anti-[tax]avoidance Provision ("GAAR")---Application of S. 109 of the Income Tax Ordinance, 2001 where provisions of the Fourth Schedule to the Income Tax Ordinance, 2001 regarding Rules For The Computation of the Profits and Gains of Insurance Business are invoked by the Department to establish a tax avoidance scheme---Main and actuating purpose of a transaction---Exemption for Insurance Companies on Capital Gains from the sale of shares---Scope ---Question before High Court related to the applicability of S. 109 of the Income Tax Ordinance, 2001 to transactions made by the taxpayer, which was an Insurance Company---Contention of the Department, inter alia, was that the said transactions constituted a tax avoidance scheme under S. 109 read with R. 5(b) of the Fourth Schedule to the Income Tax Ordinance, 2001 since the same involved sale and purchase of shares by the associated undertaking of the taxpayer, involving an appreciation of investment which should be recharacterised as an appreciation of investment within the meaning of S.109 read with R. 5(b) of the Fourth Schedule to the Income Tax Ordinance, 2001---Held, that transactions in question had a non-tax avoidance purpose, which was its main purpose---Main purpose, for application of S. 109 of the Income Tax Ordinance, 2001 was tax avoidance if for the person in entering into a transaction, such avoidance was a significant or actuating purpose which had been or could have been pursued as a goal in itself---When the totality of facts and circumstances were considered from such perspective, it could not be concluded that tax avoidance was a significant or actuating purpose of the taxpayer in the present case---Taxpayer was primarily concerned with capturing the market value of the shares on its books, and the same was the main non-tax-avoidance purpose and by entering into the said transactions, the taxpayer was not actuated by the purpose of avoiding taking credit for the appreciation in investments nor could it be regarded as a significant purpose and the same was not a goal that the taxpayer would have pursued in and of itself---High Court observed that while S. 109 of the Income Tax Ordinance, 2001 was to be interpreted purposively, the specific provision with which the said section must interact was to be interpreted and applied in terms of orthodox and established tax jurisprudence---Rule 5(b) of the Fourth Schedule to the Income Tax Ordinance, 2001 was to be construed in a strict formalistic and literal approach and when the said approach was applied, the taxpayer had not taken credit in its accounts for any appreciation in the portfolio as a result of the transactions in question---High Court further observed that in a literal sense, it had only done what it claimed to have done, which was that it showed the value of the portfolio at all times at the acquisition cost and R.5(b) of the Fourth Schedule to the Income Tax Ordinance, 2001 could therefore not be applied to the facts and circumstances of the present case even when the said transactions were cast in terms of S. 109 of the Income Tax Ordinance, 2001---Reference was answered, accordingly.

Amjad Javed Hashmi for Applicant.

Arshad Siraj for Respondent.

Dates of hearing: 18th, 25th November, 2011, 1st, 8th, 10th, 17th December of 2012, 18th December, 2015, 2nd May, 26th September, 2016 and 30th March, 2017.

JUDGMENT

MUNIB AKHTAR, J.---This reference application has been filed by the Department impugning the order of the Tribunal dated 08.10.2012. The questions of law said by the Department to arise out of the impugned order (as amended by learned counsel vide statement dated 01.11.2013) are as follows:--

(1)Whether in the facts and circumstances of the case, the learned Tribunal was justified in law that the impugned share transactions with associated companies and pressed as a claim of an exempt capital gain of Rs. 7,081,205,000/- under Rule 6A of the Fourth Schedule to the Income Tax Ordinance, 2001 ("2001 Ordinance") did not constitute, for the tax year 2007, a tax avoidance scheme under section 109 read with Rule 5(b) of the said Fourth Schedule?

(2)Whether in the facts and circumstances of the case, the learned Tribunal was correct in holding that for the tax year 2007, the taxpayer had correctly imputed income in accordance with the dictates of the Fourth Schedule to the 2001 Ordinance read with the principles laid down by the Supreme Court in Central Insurance Co. and others v. Central Board of Revenue and others 1993 SCMR 1232?

(3)Whether in the facts and circumstances of the case, the learned Tribunal was justified in law to hold that the Fourth Schedule to the 2001 Ordinance being a special provision overrode the provisions of section 67, which was therefore not applicable in the case of an insurance business?

(In this judgment, "Department" is used interchangeably with the term that appears in the statute, "Commissioner", unless otherwise indicated.)

2.The respondent taxpayer is a company engaged in non-life insurance business. The present dispute relates to the tax year 2007, which for the taxpayer corresponded to the income/financial period 01.01.2006 to 31.12.2006. The principal issues, which have required a lengthy and detailed consideration, are encapsulated in essentially the first question (to which the second is but ancillary), and we are essentially concerned with these. The third question can be dealt with swiftly and briefly (see para.92 below).

3.By way of broad overview, the dispute that requires resolution can be stated as follows. The Department sought to amend the taxpayer's income tax return by applying section 109 of the 2001 Ordinance to certain share transactions undertaken during the aforementioned financial period. These transactions involved the sale and repurchase of certain blocks of shares held by the taxpayer in 10 listed companies. Section 109, as explained in more detail below, is what is known as GAAR, i.e. a "general anti-[tax] avoidance rule". Since the taxpayer is an insurance company its income is computed according to certain special rules, by reason of section 99 read with the Fourth Schedule to the 2001 Ordinance. By applying section 109, the Department sought to re-characterize the share transactions as an appreciation of investment within the meaning of Rule 5(b) of the Fourth Schedule, and thereby bring the appreciation to tax. The taxpayer resisted the Department's claim by arguing firstly, that section 109 did not apply at all to insurance companies as their incomes are determined according to the special rules (which have the effect of excluding this section), secondly, that the share transactions enjoyed the benefit of Rule 6A of the Fourth Schedule that was then in force (and was an exemption provision) and thirdly, that on any view of the matter Rule 5(b) did not in any case apply to the facts and circumstances at hand.

4.Learned counsel for the Department submitted that in its return filed for the tax year 2007 (which was a deemed assessment order under section 120) the taxpayer showed capital gains on the disposal of shares in the amount of Rs. 7,081,1205,000/-. It was claimed by the taxpayer that these gains were exempt by reason of Rule 6A of the Fourth Schedule. The taxpayer's case had been selected for audit and further inquiry revealed that the taxpayer had held a total of 22,899,792 shares in ten blue chip listed associated companies which were sold in 63 transactions between July 2006 and December 2006. All of these transactions were routed through the taxpayer's associated brokerage house. What was peculiar about these transactions was that in each case, the taxpayer repurchased the shares almost immediately, within a period of 24 to 72 hours. Thus, in all the, taxpayer entered into 126 transactions, being essentially back-to-back sales/repurchases, the result of which was that its share portfolio (as presently relevant) did not change at all. These shares were held by the taxpayer as shares not ordinarily intended for trading purposes, had been held for considerable periods, and were carried in the taxpayer's accounts/books on cost (i.e., acquired value) basis. The market value of the shares subsequently rose considerably, and at the time that the transactions at hand were entered into was many times greater than the acquired value. Thus, in each transaction when the shares were ostensibly sold, the taxpayer recorded a capital gain. However, when they were almost immediately reacquired, they reappeared in its books at the (now much higher) "acquisition" value. Learned counsel submitted that these were sham transactions and "wash sales" without any real or substantive content or purpose. There was never any intent to dispose off the shares. Rather, the aim was to enjoy the benefit of the increase in market value without having to pay tax on the gain. The taxpayer was not entitled to the benefit of Rule 6A, since the shares were not, and never intended to be, disposed off. The Department therefore treated the transactions as a tax avoidance scheme within the meaning of section 109. It re-characterized the transactions as an appreciation in investment within the meaning of Rule 5(b) of the Fourth Schedule and brought to the gains to tax accordingly.

5.Learned counsel submitted that all 126 transactions had been routed through a sister concern (i.e., the group brokerage house) and were quite contrary to the taxpayer's past practice. Thus, although there had been disposals of shares in the previous years (and of other shares even during the calendar year 2006), the magnitude was many times lower and there had then been no reacquisition. In the facts and circumstances at hand, the relevant shares had been almost immediately reacquired, which showed that there was never at all any real intent to dispose them off.

6.Learned counsel further submitted that section 109 was a wholly new provision and had no equivalent in the earlier legislation, i.e., the Income Tax Act, 1922 ("1922 Act") or the Income Tax Ordinance, 1979 ("1979 Ordinance"). It had made a fundamental change in the law applicable to tax avoidance. It was a "general" anti-tax avoidance provision, i.e., a GAAR. Learned counsel linked the section to other sections, such as sections 4 and 37 and submitted that it applied across the board and throughout the 2001 Ordinance. It was submitted that no doubt the determination of income of insurance companies was subject to the special rules contained in the Fourth Schedule, as provided for in section 99. In fact, this had always been the case, and special rules had also applied to insurance companies in the 1922 Act and the 1979 Ordinance. However, there was a significant difference. In the two predecessor laws, there had been non-obstante clauses, which had overridden the other provisions of the statute. Neither section 99 nor the Fourth Schedule however contained any non-obstante clause. Thus, the law had been materially altered. Section 109 was a provision that applied for determination of liability to tax "under" the 2001 Ordinance, i.e., applied generally across the whole of the statute, and that obviously included the Fourth Schedule. Thus, the combined effect of the absence of a non-obstante clause in section 99 and the scope of section 109 was that the latter applied even to the special rules set out in the Fourth Schedule.

7.Referring to Rule 5(b), learned counsel submitted that it had two components, one relating to deductions and the other to additions. It was only the latter that was relevant in the present context. It provided that "any sums taken credit for in the accounts on account of appreciation, or gains on the realization of investments shall be treated as part of the profits and gains". In the present case, the "investments" (i.e., the shares subjected to the 126 transactions referred to above) had not been "realized" since the shares had been almost immediately reacquired after each "sale" transaction. But, and this was precisely the purpose behind the transactions, after the reacquisition of the shares at the higher value, the accounts reflected the "appreciation" in the investments. The attempt to shield the transactions from tax by purported recourse to Rule 6A was a patently impermissible device to avoid tax. The Department was fully justified in applying section 109 in the facts and circumstances of the case. The increase in value was not a capital gain protected by Rule 6A, but an appreciation to be added in terms of Rule 5(b), and the taxpayer was liable to pay tax accordingly.

8.Learned counsel analyzed in some detail the specific parts of section 109, highlighting its various components, and the terms used therein. Learned counsel also made extensive reference to other jurisdictions (such as Canada, New Zealand, Australia, South Africa and Belgium) where the tax legislation also contained a GAAR provision and to the judicial interpretation and application of those provisions. Reference was also made to other jurisdictions (principally the United Kingdom and the USA) where there was no GAAR provision, but the courts had developed detailed rules, concepts and principles relating to tax avoidance schemes and measures.

9.Learned counsel submitted that the facts and circumstances at hand brought the case squarely within the scope of clauses (a) and (c) of section 109. It was submitted (with reference to clause (c)) that the facts showed that the "form" of the share transactions did not reflect the "substance" thereof. Even if the "form" was a "sale" of the shares (which, as claimed by the taxpayer, resulted in it obtaining the benefit of Rule 6A) the "substance" was materially different. The almost immediate and back-to-back reacquisition of the shares, repeated more than five dozen times, wholly negated the claim as to "sale". The substance was to enjoy the benefit of the appreciation in value without any exposure or liability to tax. Since one of the main purposes of the transactions was to avoid tax, they also constituted a "scheme" for tax avoidance within the scope of clause (a). Learned counsel submitted that the learned Appellate Tribunal had erred in its understanding and application of sections 99 and 109 and the Fourth Schedule. The questions raised ought to have been answered in favour of the Department and against the taxpayer.

10.Learned counsel for the taxpayer strongly controverted the case sought to be made by the Department. Learned counsel submitted that insurance companies placed the shares held by them in different categories, which included shares "held to maturity", "available for sale" and "held for trading". It was only the shares in the last category that were part of the active trading portfolio. These were shares held on short-term basis. All the shares that were relevant for present purposes were held in the middle category, i.e., "available for sale". These were shares held on a long term basis and were not part of the active trading portfolio. However, they could be sold off from time to time and/or as and when any (special or specific) need or occasion arose. Referring in detail to the relevant sections of the Insurance Ordinance, 2000 and the rules framed thereunder, learned counsel submitted that the law required the shares "available for sale" be held in the insurance company's books at cost, or the acquisition value. Learned counsel emphasized that this was a mandatory requirement, which bound all insurance companies. If the market value of the shares "available for sale" was higher, it had to be disclosed in the notes, but it could not otherwise appear as such in the accounts.

11.Learned counsel submitted that all the share transactions at hand were genuine bona fide transactions. The respondent sold off the shares, and since the market value was much greater than the acquisition value, made a substantial capital gain on each transaction. It was a sale transaction both in law and substantive effect and hence the respondent was entitled to the benefit of Rule 6A. The respondent was also perfectly entitled in law to reacquire the shares, which it did in each case. It was emphasized that in each case, the shares moved from the respondent's CDC account to that of the broker and vice versa on reacquisition, and funds flowed correspondingly. All applicable taxes were paid on the transactions. Thus, they could not be characterized as sham transactions, or those that had any effect other than what was reflected on the face of it. In other words, learned counsel contended that the form and the substance were the same. Referring to the show-cause notice that was issued for purposes of amending the assessment, learned counsel submitted that there was no allegation therein of any collusion or other malfeasance in respect of the sale/repurchase transactions. Furthermore, it was submitted, the tax turn (i.e., deemed assessment order) could only be amended if there was "definite information", and there was none such in the facts and circumstances of the case.

12.Learned counsel submitted that section 109 had no application since the income of insurance companies was admittedly determined in terms of the special rules contained in the Fourth Schedule. This had always been the case. Learned counsel submitted that it was well settled that the "one unit" or "one basket" concept applied to insurance companies and the Department had to take the profits and gains as laid out in the accounts submitted by the companies to the insurance regulator. It could not go behind such accounts. The general or ordinary provisions of the 2001 Ordinance did not apply. The tax liability had to be worked out strictly and only within the framework of the special rules (as contained in the Schedule), and not otherwise. This had also been the position under the 1922 Act and the 1979 Ordinance and reference was made to many of the cases decided under those statutes. Learned counsel also relied, in particular, on a decision of a learned Division Bench of this Court reported as Commissioner (Legal) Inland Revenue v. EFU General Insurance Ltd. 2011 PTD 2042 in which section 99 and the Fourth Schedule had been considered. Learned counsel submitted that the learned Division Bench had held that exactly the same position obtained under these provisions as had been the case under the previous statutes. It had been held that the lack of a non-obstante clause was of no moment. The "one unit" or "one basket" concept continued to apply, and in the same terms as under the predecessor legislation. Thus, section 109 did not and could not apply to the case of an insurance company.

13.Referring to Rule 5(b), learned counsel submitted that the respondent did not at all take credit in its accounts for any "appreciation" in the "investments". At all times, its books showed the value of the investments at the acquisition cost, as was required by law. When the shares were sold, that generated a capital gain, which was duly recorded in the books but was exempt from tax by reason of Rule 6A. When the shares were reacquired, the books showed the acquisition value. It was of course the case that this value was (much) higher than the one recorded previously, but learned counsel emphasized that the reacquisition was a separate transaction in its own right, which was recorded, and had to be regarded for all purposes, as such. It was submitted that these were not back-to-back transactions as was being claimed. Rather, there were separate share transactions, each of which had to be recorded and dealt with, both in law and in fact, on its own terms. The linkage sought to be established by the Department was spurious and impermissible. Referring to section 109, learned counsel submitted that there was never any tax liability on the respondent and hence there could be no question of the respondent needing, and therefore acting, to "avoid" the same. Thus, on any view of the matter, there could be no application of section 109 to the facts and circumstances of the case at hand. Learned counsel for the Department exercised his right of reply.

14.At the conclusion of the hearing, we had asked learned counsel to file written synopses and both filed detailed submissions, running in each case to around 40 pages of closely argued material. We would like to record our appreciation of the very fine synopses that were filed, and acknowledge the valuable assistance that we derived from the same. Both synopses merited, and repaid, close and careful study and we would like to note that it would have been all the more difficult to give judgment in this Reference without the very welcome assistance provided by learned counsel in this manner.

15.We have heard learned counsel as above, considered the case law and material relied upon and written synopses filed on behalf of the parties. As will become clear as this judgment progresses, we have referred to and relied on a large mass of material, both in terms of case law and statutory provisions. Much of that material is from jurisdictions other than our own. For ease of reference the material (including from our own jurisdiction) is, in the case of the statutory provisions set out, and in respect of the case law referenced, in an Annex to the judgment. The Annex also contains a comparative table setting out the relevant provisions of the 1922 Act, the 1979 Ordinance and the 2001 Ordinance. The short form manner in which cases are cited below is also stated in the Annex and since many of the Pakistani cases are printed in more than one law report, an attempt has been made to refer to all citations in the Annex. (Cases cited only once are generally not referenced in the Annex.)

16.The first question is whether section 109 can at all apply in view of, and in relation to, the special rules that govern the determination of the profits and gains of insurance companies. If, as submitted by learned counsel for the taxpayer, this question is answered in the negative then the Department's case must necessarily fail at the outset. Learned counsel for the Department of course seeks an answer in the affirmative. We begin consideration of this question by examining the cases relied upon by learned counsel for the taxpayer.

17.The first case, decided under the 1922 Act, is Commissioner of Income Tax, Central, Karachi v. Alpha Insurance Co. Ltd. and another PLD 1981 SC 293 ("Alpha Insurance"). (The relevant provisions of the 1922 Act are set out in the comparative table given in the Annex.) The facts were that the insurance companies (the judgment disposed off more than one appeal) filed tax returns which showed certain management expenses. There was no dispute that such expenses were expenses within the meaning of section 10. However, the expenses shown were in excess of what was permissible under rules framed under the Insurance Act, 1938 ("1938 Act"). The Income Tax Officer (ITO) disallowed the expenses in excess of the limit prescribed under the 1938 Act. Upon appeal by the taxpayer, the Department failed to satisfy the Appellate Tribunal and then, on reference made by the Department, the High Court that this was, in law, the correct approach. The Department's appeal to the Supreme Court also failed. As regards the First Schedule, it was observed as follows: "The First Schedule of the Income-tax Act takes over and governs the computation of the profits and Gains of Insurance Business and is exhaustive of the subject" (pg. 296). It was observed that the 1938 Act and the rules framed under it required the balance sheet submitted to the Controller of Insurance (i.e., the insurance regulator) by insurance companies to set out the management expenses in full as actually incurred, regardless of whether they exceeded the prescribed limit. However, it was also noted that the Controller had the power to condone any excess over the prescribed limit. As regards the jurisdiction of the ITO, it was held as follows (pp. 298-99):--

"10. The jurisdiction of the Income-tax Officer under rule 6 of the First Schedule to the Income-tax Act is confined to the taking of the profits and gains of any business of insurance other than life insurance "to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938 to be furnished to the Controller of Insurance." This presents the Assessing Authority with a fait accompli, over which he exercises no control. If the law requires such excess to be excluded from the balance-sheet the Assessing Authority cannot reintroduce it. If the law, as in these cases requires such expenses to be included in the balance-sheet, the Assessing Authority cannot exclude it on any principle not made a part of the First Schedule to the Income-tax Act. This brings us back to the starting point, namely, that the Income tax Officer has no power to do anything not contained in the First Schedule to the Income-tax Act."

It was also held as follows (pg. 300):

"12. The next question concerns the third part of the argument of the learned counsel for the appellant that the excess in management expense involves contravention of law, and any expenses incurred in contravention of law cannot qualify as expense "wholly and exclusively for the purpose of such business." A power has been expressly conferred on the Assessing Authority under rule 6 of the First Schedule of the Income-tax Act to readjust the balance disclosed in the Annual Accounts by excluding therefrom expenditure other than that "which may under the provisions of section 10" of the Income-tax Act "be allowed for in computing the profits and gains of a business." TO this extent alone and on a finding that the expense could not qualify as a legitimate deduction under section 10, it could be excluded from the balance sheet. None of the authorities have held it to be an expense other than that admissible under section 10. On the contrary, the findings proceed on the assumption that such an expenditure, even though in excess, was "wholly and exclusively for the purpose of such business." Section 40-C [of the 1938 Act] itself shows that the prohibition is not absolute and the expenses dealt with therein and limited thereby would ordinarily, and by and large, be expenses incurred wholly and exclusively for that business."

Thus, the Supreme Court held that in the facts and circumstances before it, the jurisdiction of the ITO was confined only to determining whether an expense appearing in the balance sheet presented to the Controller was an expense within the meaning of section 10. If so, then the ITO had to accept the profits and gains disclosed in such balance sheet as it stood. It was outside his jurisdiction to consider whether any part of such expense was beyond the scope of the 1938 Act or its rules or impermissible in terms thereof. Finally, while concluding it was inter-alia observed as follows (pg. 301, emphasis supplied):--

"14. Our conclusions therefore are that:

(i) the rules contained in the First Schedule to the Income-tax Act completely, exhaustively and to the exclusion of every other provision not expressly incorporated, govern the computation of the Profits and Gains of insurance business, ...."

18.We pause to respectfully note that if the facts and circumstances of Alpha Insurance were to recur under the 2001 Ordinance, the Commissioner would have the jurisdiction to exclude the excess. This is so because clause (c) of Rule 5 of the Fourth Schedule now expressly provides that any deduction by way of expense, allowance etc. in excess of any limit laid down in the Insurance Ordinance, 2000 is to be excluded unless such excess has been allowed by the regulator (now the SECP) and is incurred in deriving income liable to tax. In fact, this provision was also to be found in the corresponding rule under the 1979 Ordinance.

19.The next case is also a Supreme Court decision, Commissioner of Income Tax, Zone A Karachi v. Phoenix Assurance Co. Ltd. 1991 PTD 1028 ("Phoenix Assurance"), and it too arose under the 1922 Act. The facts were that the insurance company submitted its return in terms of the balance sheet and accounts drawn up and filed under the 1938 Act. That profit and loss account contained, on the expenditure side, a reserve for taxation. This reserve was disallowed by the ITO in terms of Rule 6 of the First Schedule, on the ground that it was not expenditure within the meaning of section 10. The Supreme Court referred to its earlier decision in Alpha Insurance, citing the passages extracted above. Reference was also made to Habib Insurance Co Ltd. v. Commissioner of Income Tax (Central) Karachi PLD 1985 SC 109. It was held as follows (pg. 1037; emphasis supplied):

"From the authoritative pronouncements of this Court, the law seems to be settled that finality attaches to the accounts submitted by the assessee insurance company under the Insurance Act to the Controller of Insurance, and the limited jurisdiction vesting in the Income Tax Officer is only to exclude expenditure from the balance of profits in such accounts which is not permissible under section 10 of the Act. Under subsection (7) of section 10 of the Act the profits and gains of any business of Insurance and the tax payable thereon, is required to be computed in accordance with the rules contained in the First Schedule to the Act. However, it is important to note, that the enacting part of this subsection is subjected to the non obstante clause excluding the application of section 8, 9, 10, 12 or 18 of the Act. Therefore, it is quite apparent that the main provisions with regard to computation of profits and gains in the Act have been excluded including section 10. It is only by virtue of Rule 6 of the First Schedule that section 10 has been brought back for the limited purpose of adding back expenditure not permissible under that section. Therefore, the Income Tax Officer, in the face of these statutory provisions, is not competent to upset the integrity of the accounts submitted by the assessee under the Insurance Act, by applying the ordinary rules for computation of profits and gains and for assessment of tax thereon, in the light of provisions of the Income Tax Act in respect of the income in regard to the head 'business'. The contention of the learned counsel, therefore, that the return filed by the assessee was not in accordance with Regulation 1 of Part 1 of the Second Schedule to the Insurance Act is untenable. Similarly his submission that 'reserve' cannot become expenditure even though it may be mentioned on the debit side, because the money is not paid out irretrievably, is also irrelevant. On the contrary if the item in question did not in substance and essence constitute expenditure, it would be out of the power of the Income Tax Officer to apply the provisions of Rule 6 to exclude and addback the same to the balance of profits in order to bring it within the tax net."

Thus, the Supreme Court laid out the principle that subsequently became known as the "one basket" or "one unit" concept of assessment of tax on insurance companies. The accounts submitted to the Controller constituted a "basket" or "unit" of profits and gains, which attained "finality" and "integrity", and this could not be disturbed or upset by the ITO except in the limited circumstances set out in the First Schedule itself. It is pertinent to note that the Supreme Court expressly referred to the non-obstante clause that opened section 10(7) and specifically attached importance to it, holding that the "main provisions" with regard to the computation of profits and gains stood excluded thereby, including section 10 itself.

20.We again pause to respectfully note that if the facts and circumstances of Phoenix Assurance were to recur under the 2001 Ordinance, the Commissioner would have the jurisdiction to exclude, in appropriate circumstances, the reserve created for taxation. This is so because clause (a) of Rule 5 of the Fourth Schedule is not limited, to "expenditure". It now expressly includes any allowance, reserve or provision for any expenditure, and provides that if the same is not deductible in computing income under the head "Income from Business", it is to be excluded. In fact, a similar provision was also to be found in the corresponding rule under the 1979 Ordinance, which was duly noted in Phoenix Assurance by Naimuddin, J. in his concurring judgment. (The main judgment was written by Zafar Hussain Mirza, J., who also agreed with the concurring opinion.) Naimuddin, J. observed that there was a "lacuna" in Rule 6 of the First Schedule to the 1922 Act, which had been "plugged" by Rule 5 of the Fourth Schedule to the 1979 Ordinance (pg. 1040). Of course, since the case before the Court arose under the 1922 Act, it was the taxpayer, and not the Department, that prevailed.

21.The next case is Central Insurance Co. and others v. Central Board of Revenue and others 1993 SCMR 1232 ("Central Insurance"), which arose under the 1979 Ordinance. (The relevant provisions are set out in the comparative table given in the Annex.) The judgment was on appeal against a decision of this Court reported as Adamjee Insurance Co. Ltd. v. Central Board of Revenue and others 1989 PTD 1090 (DB) ("Adamjee Insurance"). It will be noted that the non-obstante clause in the 1979 Ordinance (s 26) was broader than that in the 1922 Act. The latter only excluded a few specified sections; the former excluded the whole of the Ordinance. Indeed, the non obstante provision in the Fourth Schedule (Rule 8) went even further inasmuch as it not merely repeated the exclusion of the entire Ordinance but also extended it to all other legislation.

22.The facts were that the insurance companies filed their returns based on the profits and gains as disclosed in the accounts submitted to the insurance regulator. Those gains included profits derived from Khas Deposit Certificates. Now, such profits were exempt from tax in terms of clause (72) of Part I of the Second Schedule. The insurance companies claimed the benefit of this clause. This was initially accepted, and the assessments were framed on this basis. But then the Central Board of Revenue (CBR) issued a circular in which it opined that since special rules applied for determining the income of insurance companies (i.e., Rule 5 of the Fourth Schedule), and the profits and gains as disclosed in the accounts submitted to the insurance regulator had to be accepted as a whole, that disentitled the insurance companies from the benefit of clause (72). On such basis, the companies were issued notices under section 65 seeking to re-open the assessments. The companies filed petitions in this Court challenging the notices as without jurisdiction on two grounds. Firstly, it was contended that the insurance companies, like any other taxpayer, were entitled to the benefit of the exemptions contained in the Second Schedule, and hence to the relief given by clause (72). Secondly, it was contended that the CBR circular was merely a change of opinion as to the interpretation of law, and that could not constitute "definite information" within the meaning of section 65.

23.In this Court, both grounds failed and the petitions were dismissed. As to the first ground (which of course is the one relevant for present purposes), it was observed by the learned Division Bench as follows (at pp. 1104-5; emphasis supplied):--

"From the above discussion it clearly emerges that in determining the profits and gains of an insurance business and the tax payable thereon under the Ordinance only section 26 and Rules contained in the Fourth Schedule ibid are applicable and other provisions of the Ordinance do not apply. It therefore, follows that the balance of profit declared by an Insurance company in its annual account which is submitted to Controller of Insurance under the Insurance Act, 1938, is to be accepted by the Income Tax Officer as the profits and gains of insurance business for the relevant year without any further probe or enquiry, except to the extent permitted by sub-clauses (a) and (b) of Rule 5 ibid. Accordingly, the interest income on securities derived by an insurance company which is included in the balance of profit declared by it in its annual account submitted to Controller of insurance under the Insurance Act, 1938, losses its character as 'interest income on securities' and becomes part of profits and gains of insurance business, and as such is liable to charge of the tax under the Ordinance accordingly. In our view as soon as the profits and gains of insurance business are computed in accordance with the provision of section 26 read with rule 5 of the IV Sched ibid, it becomes one unit of income which is not capable of being bifurcated for the purposes of charging to tax into different heads of income categorised in section 15 of the Ordinance. We, accordingly, hold that the interest received by the petitioners in the above cases on investments made by them in Khas Deposit Certificates which was included in the annual accounts submitted by them to Controller of Insurance under the Insurance Act of 1938, and was shown in the balance of profit was not exempted from tax under the Ordinance."

As to the second ground, it was held that a circular issued by CBR did constitute "definite information" within the meaning of section 65. It followed that the impugned notices were within jurisdiction and the petitions therefore failed.

24.The insurance companies appealed to the Supreme Court. In its judgment reported as Central Insurance the Supreme Court upheld the decision of this Court on the first ground. It was held as follows (pp. 1251-2; emphasis supplied):--

"11. The ratio of the above judgments of this Court seems to be that profit and loss accounts submitted by an insurance company under the Insurance Act, 1938, to the Controller of Insurance, are to be accepted and to be made basis for the purposes of computing profits and gains of insurance business and the amount of tax payable thereon in terms of section 10(7) read with Rule 6 of the First Schedule to the [1922] Act. The above provisions have been treated as complete, self-contained and exhaustive to the exclusion of every other provision not expressly incorporated, and therefore, the other provisions relating to the working out of profits and gains and the amount of tax payable contained inter alia in sections 8, 9, 10, 12 or 18 of the late Act, are not applicable in case of an insurance company except that by virtue of above rule 6, section 10 of the above Act has been brought back for limited purpose of adding back expenditure not permissible under the above section. The Income Tax Officer, in face of the above statutory provisions, is not competent to undermine the authenticity/ finality of the accounts submitted by the assessee under the Insurance Act by ordinary rules for computation of profits and gains and for assessment of tax thereon in the light of other provisions of the late Act. But, his jurisdiction is limited to addback items of expenditure not admissible as above.

12. It may be stated that section 26(a) and Rule 5 of the Fourth Schedule to the Ordinance correspond with above section 10(7) and Rule 6 of the First Schedule to the Act as stated above and, therefore, the ratio of the above cases can be pressed into service while construing the above provisions of the Ordinance. In the present case, it is an admitted position that the appellants, while submitting their accounts to the Controller of Insurance in Form B in terms of the Insurance Act, 1938, had shown the interest earned by them on Khas Deposit Certificates/Defence Saving Certificates during the assessment years in question and, therefore, it was part of profits and gains and, therefore, could be subject to tax. It is true that section 14 as well as section 26 contained non obstante clause, but section 26, being a provision subsequent to section 14 and also being a special provision inter alia dealing with the working out of profits and gains of any business of insurance and the tax payable thereof read with Fourth Schedule; shall prevail."

However, on the second ground (i.e., whether there was any "definite information" within the meaning of section 65), the Supreme Court took a different view. It was held that the CBR circular did not constitute "definite information". Since the existence of such information was a mandatory requirement the notices were without jurisdiction. The appeals were therefore allowed and the notices quashed.

25.The next case, EFU General Insurance Company Ltd. v. Federation of Pakistan and others PLD 1997 SC 700 ("EFU General") is important also because it is a decision of a five member Bench, the other decisions being those of three member Benches. The facts were that the insurance companies declared income on the basis of the profits and gains as disclosed in the accounts submitted to the insurance regulator. However, in respect of a portion of this income, which comprised of dividends received by the insurance companies, they claimed to be taxed at the special (lower) rate applicable to dividend income, rather than at the higher rate that applied generally to the income of companies. It appears that ever since a decision of this Court, Commissioner of Income Tax v. American Life Insurance Co. Ltd. 1967 PTD 427, the dividend income of insurance companies had been so taxed and therefore, in the cases before the Supreme Court, the assessments had been framed accordingly. Then came, however, the judgment of this court in Adamjee Insurance. The Department, applying the decision, and treating it as "definite information", issued notices to re-open the assessments. (It may be noted that the notices were issued before the decision of the Supreme Court in Central Insurance, i.e., the judgment in appeal against Adamjee Insurance.) The notices were challenged in this Court by the insurance companies, but the petitions were dismissed, and they preferred appeals to the Supreme Court. The issue before the Supreme Court was stated as follows (pg. 711):--

"In all these appeals, the question involved is whether the Income Tax Officials could lawfully reopen the assessments, already made, for assessment of tax on dividend income of the appellants on a higher rate than charged during the relevant assessment years bringing the rate at par with the normal rate of tax on other income from general insurance business of the appellants, as the entire balance of profits of the general insurance companies were chargeable to tax as a single unit, on the basis of the decision of the Sindh High Court in the case of Adamjee Insurance Company Ltd. v. Central Board of Revenue (1989 PTD 1090)."

The Department's case was summarized at pp. 713-4:--

"To put it in a nutshell, the stand of the Department is that the judgment in the case of [Adamjee Insurance], where it was, inter alia, observed that in case of a company engaged in general insurance business, income which is included in the balance of profits declared by it in its annual account submitted to the Controller of Insurance looses its original character and becomes part of the profits and gains of such insurance business and thus the whole of it is to be taxed accordingly and, therefore, the entire balance of profits declared by a general insurance company could not be bifurcated under different heads for charging different rates of income-tax and the entire balance of profits was chargeable to tax as a single unit, whereas, prior to the judgment in the case of [Adamjee Insurance], dividend income of the general insurance companies, which was part of their balance of profits, was being taxed separately at a lower rate according to the First Schedule to the Ordinance. It was argued on behalf of the department that in view of the judgment in the case of [Adamjee Insurance], the entire balance of profits is chargeable to tax as a single unit according to the normal rate applicable to all companies mentioned in the First Schedule to the Ordinance, but dividend income of the general insurance companies was being charged to a lower rate of tax as per the provisions contained in the First Schedule, which was not correct. According to the department, the decision in the case of [Adamjee Insurance] amounted to "definite information" ...."

26.The Supreme Court analyzed in some detail the provisions of the 1922 Act and the 1979 Ordinance. (The case before the Court was of course under the 1979 Ordinance.) It was specifically noted (at pg. 717) that under the 1922 Act, the non obstante clause only referred to certain specified sections, whereas the non obstante clause in the 1979 Ordinance ousted the entire Ordinance. Reference was also made to the judgment in Phoenix Assurance. The Supreme Court referred to its decision in Central Insurance and considered this judgment, and the judgments of this Court in Adamjee Insurance and the 1967 decision mentioned above in some detail. It was then concluded as follows (pp. 724-5; emphasis supplied):--

"14. After consideration of the decisions of the High Court and the Supreme Court in the case of [Adamjee Insurance] and [Central Insurance] respectively, it may be observed that the ratio of [Adamjee Insurance] case is that, being part of profits and gains of general insurance business, interest on Khas Deposit Certificates/Defence Saving Certificates could not be exempt from tax under section 14 read with the Second Schedule to the [1979] Ordinance, and this Court affirmed this view in the case of [Central Insurance] by holding that such interest being part of the profits and gains of the assessees could be subject to tax. We reiterate, this view expressed in the case of Central Insurance Company. However, neither of the two decisions is an authority for the proposition that dividend income of general insurance company is liable to tax at the normal rates provided in the First Schedule to the Ordinance and not at the lower rates at which the dividend income is chargeable to tax under the same Schedule. Reliance placed by the department on the said two cases for the aforesaid proposition is, therefore, misplaced."

It was also observed as follows with regard to the non-obstante clauses to be found in the 1922 Act and the 1979 Ordinance (pg. 728):--

"18. Arguments had been addressed by learned counsel for the appellants as well as by Mr. Shaikh Haider representing the Department on the non obstante clause in section 10(7) of the Act as well as section 26(a) of the Ordinance.

A non obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary, in the provision mentioned in such non obstante clause. In case there is any inconsistency between the non obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non obstante clause which would prevail over the other clause...

Both in section 10(7) of the Act as well as in section 26(a) of the Ordinance, there is a non obstante clause. As noted earlier, the difference is that in section 10(7), non obstante clause is confined to four sections of the Act, whereas in section 26(a) it is extended to the entire Ordinance. However, in neither case, the non obstante clause ousts the specified sections of the Act or the whole Ordinance. Mr. Fakhruddin G. Ebrahim, Senior Advocate Supreme Court [appearing for the insurance companies] is correct that the effect of the non obstante clause is that the specified [sections] in the Act or the rest of the Ordinance, to the extent that these are inconsistent with section 10(7) and First Schedule of the Act or section 26 and the Fourth Schedule of the Ordinance, shall not be given effect to. As there is no provision in rule 6 of the First Schedule to the Act or rule 5 of the Fourth Schedule to the Ordinance providing for computation of tax on income from general insurance business, there is no inconsistency between the special provisions relating to general insurance business in the Act or Ordinance and the applicable schedules containing general provisions for computation of tax on business. As observed earlier, such general provisions then apply for computation of tax on income from general insurance business also."

(We may note that in the report, the word "actions" appears in the foregoing passage, which has been substituted with the word "sections" in square brackets since the former is obviously a typographical error.)

It was held that ever since the 1967 decision of this Court (which was expressed affirmed at pg. 729) the dividend income of insurance companies had been consistently taxed at the lower rate and not at the general rate. Since the special rules contained in the Fourth Schedule did not deal with this aspect, the non obstante clause could not be used to deny the companies this benefit (ibid). Finally, it was also observed that while a binding judgment of a Superior Court was "definite information", neither the judgment of this Court in Adamjee Insurance nor of the Supreme Court in Central Insurance "overruled or upset" the 1967 judgment. The appeals were therefore allowed.

27.This review of the earlier case law brings us to the judgment of this Court so strongly relied upon by learned counsel for the respondent taxpayer, Commissioner (Legal) Inland Revenue v. EFU General Insurance Ltd. 2011 PTD 2042 ("EFU General (HC)"). (This decision appears so far to be the only reported judgment of a Superior Court in respect of the 2001 Ordinance that deals directly with the special rules relating to insurance companies.) The facts were that the profits and gains of the insurance company, as per the accounts submitted to the insurance regulator, included capital gains made on the disposal of certain securities. The insurance company claimed exemption from tax on the capital gains by reason of Rule 6A of the Fourth Schedule. This claim was not disputed by the Department. However, the Department sought to apply section 67 to the expenses as disclosed in the accounts submitted to the insurance regulator. This section allows for the apportionment of expenses, and the Department sought to exclude such expenses as were allocable to the capital gains exempt under Rule 6A. The insurance company, relying on the cases referred to herein above, submitted that as per the "one unit" or "one basket" concept, it was impermissible for the Department to exclude anything from the accounts as submitted to the insurance regulator. It is important to keep in mind that the Department did not seek to invoke any of the clauses of Rule 5. Rather, it sought to apply section 67 directly to the accounts as submitted to the insurance regulator. For the Department, it was argued inter alia that neither section 99 nor the Fourth Schedule contained any non obstante clause, and hence the statutory position under the 2001 Ordinance was materially different from the previous legislation under which the earlier cases were decided. The learned Division Bench considered in detail the respective provisions of the 1979 Ordinance and the 2001 Ordinance and also referred to the case law, and observed as follows (pg. 2057):--

"8. After perusal of the above law and the decisions relied upon by the learned counsel representing the respondent we are of the considered view that the taxability of the insurance business has been separated from the taxability of other business concerns that is why in the repealed Ordinance by virtue of section 26 of the Ordinance and in new Ordinance by virtue of section 99 of the Ordinance it has specifically been mentioned that taxability of the insurance business is to be dealt with by special provisions. Under section 26 of the repealed Ordinance it has specifically been mentioned that "Notwithstanding anything contained in this Ordinance (which was a non-obstante clause) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the Fourth Schedule", meaning thereby that lawmakers were of the opinion that the tax of an insurance business has to be separated from the taxability of the other business which were dealt with under the provisions of section 22 of the repealed Ordinance. Had the intention of the legislature was to treat these two businesses i.e. normal business and an insurance business to be of the like nature, section 26 would not have been part of the law depicting the intention of the legislature to give it a separate treatment."

It was also observed as follows (pp. 2061-2):--

"14. We have also examined all the above provisions of law and hardly find any material difference in the repealed Ordinance and the new Ordinance. The gist of section 26 remained same as that of section 99, whereas Fourth Schedule also had almost remained the same both in the old Ordinance and the new Ordinance. We, therefore, do not agree with the contention raised by Mr. Abbasi [learned counsel for the Department] that there is a material difference in the provisions of law of the repealed Ordinance and the new Ordinance. So far as the provisions of section 67 of the new Ordinance are concerned we would like to observe that this section starts with the words "Subject to this Ordinance" meaning thereby that this section appears to be a subservient section as it possess the words "subject to this Ordinance" meaning thereby that if something contrary is provided under the Ordinance the same would prevail over this section 67.

15. Now if a closer look is taken to the Fourth Schedule of the Ordinance it will be seen that it states that the same deals with the rules for the computation of the profits and gains of the insurance business meaning thereby that it is a special provision of law which would prevail over the general provisions of the same Ordinance. There is nothing under the Fourth Schedule of the Ordinance which speaks of proration of any expense, hence, enlarging said provisions of the law and applying the same to the profits and gains computable for the Insurance Company is beyond the spirit of law. The business income of the insurance and computation of its income is governed by the special provisions of section 99 of the Ordinance read with rules contained in Fourth Schedule and cannot be given a meaning to consider it at par with the computation and taxability of the normal business as an Insurance Company is required to maintain its accounts as per the Insurance Ordinance, 2000, which are to be furnished to the Securities and Exchange Commission of Pakistan who is their monitoring head to examine whether the accounts kept by an Insurance Company are in accordance with the Insurance Ordinance, 2000, or not and as per that Ordinance profits of Insurance business are to be computed as one basket income which concept is not a new concept and has been recognized in a number of judgments, mentioned above."

The learned Division Bench relied specifically on the decision of the Supreme Court in Central Insurance. After setting out the facts of that case and what was held therein in para 16, it observed as follows (pg. 2063; emphasis supplied):--

"17. Applying the above principle of law, laid down by the Hon'ble Supreme Court of Pakistan, to the present case it is established beyond doubt that the provisions concerning the computation of profits and gains of the insurance business are special in nature and could not be considered to be the same as that of a normal business. We, therefore, are of the considered view that applying section 67 of the Ordinance to Insurance Companies is a defiance of the law and totally against the concept of working out the profits and gains of an Insurance Company.

18. Reading of section 67 of the Ordinance also reveals that the same relates to proration in the case of Companies earning income under more than one heads and in such cases the lawmakers have provided a mechanism that unidentifiable expenses have to be prorated among the businesses of different heads, whereas in the case of an Insurance Company this concept is totally lacking. The Insurance Companies are taxed as one unit hence the very concept of allocation of unidentifiable expenses is absent. The proration of expense could be valid so far as the business of Companies deriving income from various heads are concerned but in our considered view so far as the Insurance Companies are concerned this is not the case. This appears to be a misconception of law on the part of the T.O. which was rightly disapproved by the CIT(A) and the ITAT."

28.The foregoing analysis of the case law provides the context in which we now turn to consider the question raised by learned counsel for the respondent taxpayer, that section 109 cannot apply at all to insurance companies given that they are governed by the special rules contained in section 99 read with the Fourth Schedule. Clearly, the judgment of the learned Division Bench of this Court in EFU General (HC) in particular requires close consideration since it deals with the 2001 Ordinance, and is even otherwise the latest decision directly in relation to the special rules. Now, it is trite law that in the same High Court, a decision of one Division Bench binds another. However, this formulation is somewhat imprecise. More properly stated the rule is that it is the ratio decidendi of the judgment that is binding. Thus, for example, any obiter dicta are not binding. What then is the ratio decidendi of the judgment in EFU General (HC)? In considering this question, it will do well to recall the familiar words of Lord Halsbury in Quinn v. Lecathem [1901] AC 495, where the learned Lord Chancellor observed as follows (pg. 506, emphasis supplied):--

"... there are two observations of a general character which I wish to make, and one is to repeat what I have very often said before, that every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are no intended to be expositions of the whole law, but goverened and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to follow logically from it. Such a mode of reasoning assumes that the law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all."

These observations, including the portion emphasized, which in our view is directly relevant in the present context, have been expressly approved by the Supreme Court in Trustees of the Port of Karachi v. Muhammad Saleem 1994 SCMR 2213 (at pg. 2220). Reference may also be made to what was said by Chief Justice Marshall in Cohens v. Virginia (1821) 19 US 264 (at pp. 399-400):--

"It is a maxim not to be disregarded that general expressions, in every opinion, are to be taken in connection with the case in which those expressions are used. If they go beyond the case, they may be respected, but ought not to control the judgment in a subsequent suit when the very point is presented for decision. The reason of this maxim is obvious. The question actually before the Court is investigated with care, and considered in its full extent. Other principles which may serve to illustrate it are considered in, their relation to the case decided, but their possible bearing on all other cases is seldom completely investigated."

While considering the ratio decidendi of EFU General (HC), the precedential effect of the observations made by the learned Division Bench must be understood in light of the foregoing principles.

29.The first and foremost point to be kept in mind is fairly obvious but must nonetheless be emphasized: EFU General (HC) did not at all involve any question in relation to section 109. This section was not invoked by the Department in the facts and circumstances of that case and therefore, obviously, there was no consideration, discussion or analysis of it in the judgment. Therefore, in our respectful view, the starting point must be that prima facie, EFU General (HC) provides no guidance with regard to section 109. Considering the facts and circumstances actually before the Court, perhaps the factual situation in the earlier case law closest to EFU General (HC) was that before the Supreme Court in Alpha Insurance. In both cases, the Department sought to disallow what were admittedly expenses. In the earlier case the expenses were in excess of that prescribed under the 1938 Act and the Department sought to exclude the excess on such basis. In the other the Department sought also to exclude an "excess" on the basis of section 67, i.e., the expenses allocable to the exempt capital gains. Thus, in both cases the Department challenged the integrity of the accounts submitted by the insurance company to the insurance regulator. The profits and gains disclosed in those accounts were of course to be taken as the company's income under the special rules. It is important to note that in both cases, it was the expenses disclosed as per the main part of the special rule that were sought to be disturbed. It is this that was held to be impermissible. This is clearly different from the situation at hand, where the question is as to the applicability or otherwise of clause (b) of Rule 5 of the Fourth Schedule. It is also important to keep in mind the reason why, in our respectful view, the learned Division Bench specifically relied upon the Supreme Court judgment in Central Insurance. Income by way of capital gains is a distinct head, separate from income from business (see section 11). The same position obtained under the 1979 Ordinance: see 15. The "one unit" concept developed in the earlier case law obliterated this distinction under the special rules, and lumped all the profits and gains together. This was the point being made by the learned Division Bench in para 18 of its judgment (extracted above in para 27, and in which the portion highlighted is especially relevant). In Adamjee Insurance, this Court had made the same point in relation to the 1979 Ordinance (see the portion extracted herein above in para 23), and the judgment was affirmed on this point by the Supreme Court in Central Insurance. For convenience. the relevant observations from Adamjee Insurance and EFU General (HC) are set out side by side (emphasis supplied):

Adamjee Insurance	EFU General (HC)
In our view as soon as the profits and gains of insurance business are computed in accordance with the provision of section 26 read with rule 5 of the IV Sched ibid, it becomes one unit of income which is not capable of being bifurcated for the purposes of charging to tax into different heads of income categorized in section 15 of the [1979] Ordinance.	The Insurance Companies are taxed as one unit hence the very concept of allocation of unidentifiable expenses is absent. The proration of expense could be valid so far as the business of Companies deriving income from various heads are concerned but in our considered view so far as the Insurance Companies are concerned this is not the case.

In our respectful view, the close correspondence between these passages brings home the reason why, and provides the context in which, the learned Division Bench specifically referred to Central Insurance. What the learned Division Bench sought to highlight was that the "one unit" concept, held applicable also in terms of the 2001 Ordinance, obliterated the distinction between different heads of income and lumped the entire profits and gains together in the accounts as submitted to the insurance regulator. The fact that capital gains were a separate head distinct from income from business, was therefore of no moment. The obliteration of the distinction under the special rules ensured that section 67 could have no application.

30.We would also note, with the utmost respect, that the learned Division Bench did not directly engage with the submission made by learned counsel for the Department, namely that unlike the earlier legislation neither section 99 nor the Fourth Schedule of the 2001 Ordinance contain a non-obstante clause. The closest that the learned Division Bench came to a conclusion in this regard was in paras 14 and 15 of the judgment (extracted in para 27 herein above). It was observed in para 14 that there was "hardly" any "material difference" between the respective provisions of the 1979 Ordinance and the 2001 Ordinance, the "gist" of section 26 of the former being the same as section 99 of the latter, and that the Fourth Schedules of both laws "almost remained the same" (para 14). It was on such basis that the learned Division Bench felt unable to agree with learned counsel for the Department that there was a "material difference" in the two laws. It was also observed in para 14 that section 67 opened with the words "Subject to this Ordinance", which made it a "subservient section". In para 15, it was observed that there was nothing in the Fourth Schedule with regard to the proration of expenses (the subject matter of section 67) and that to apply such a concept to insurance companies would be to "enlarge" it, and be "beyond the spirit of law".

31.In our respectful view, while all of these observations are part of the reasoning adopted by the learned Division Bench in coming to the conclusion that section 67 did not apply to the profits and gains of insurance companies as per the accounts submitted by them to the insurance regulator, they did not (and, we would respectfully submit, were not intended to) address in any larger or broader context the issue raised by learned counsel for the Department, namely as to the effect of the absence of the non-obstante clause in section 99 and the Fourth Schedule. In our view, this is all the more important because it is clear from the earlier cases decided under the 1922 Act and the 1979 Ordinance that the existence of the non-obstante clauses did play a decisive role in the development of the "one unit" or "one basket" concept. The observations in Phoenix Assurance and Central Insurance, extracted herein above, clearly point in this direction. The manner in which the Supreme Court dealt with a submission with regard to section 14 in Central Insurance is particularly relevant. It will be recalled that section 14 of the 1979 Ordinance, which related to the exemptions contained in the Second Schedule, opened with a broad non obstante clause, which ousted the whole of the Ordinance. (This clause was omitted in 1988, but was in the field when the impugned notices were issued.) The insurance companies sought to rely on this non-obstante clause while claiming the benefit of clause (72) of Part I of the Second Schedule. This submission was rejected, the Supreme Court observing that the non-obstante clause in section 26 was "subsequent" to section 14 and also a "special provision" relating to insurance companies. The non-obstante clause in section 26, in other words, trumped the one in section 14. This conclusion serves to highlight the importance of the non-obstante clause in the development of the "one unit" or "one basket" concept. The observations of the Supreme Court in EFU General with regard to the non-obstante clauses (extracted in para 26 herein above) are also important. In our respectful view, the observation made in para 14(i) of Alpha Insurance (extracted above in para 17) must be read in this context and in light of the non obstante clause of the 1922 Act. A "standalone" reading of this observation, we respectfully submit, may well be incorrect and could even be misleading.

32.Taking into consideration all of the foregoing points, in our view what the learned Division Bench was concerned with in EFU General (HC) was the Department's attempt to directly disturb the integrity of the accounts submitted by the insurance company to the insurance regulator, by applying a provision outside the Fourth Schedule (i.e., section 67). This was held to be impermissible because in this context the "one unit" concept developed in the earlier case law was held to apply also in terms of the 2001 Ordinance. The ratio decidendi of EFU General (HC) can therefore, subject to what follows, be stated thus: the integrity of the accounts submitted by an insurance company to an insurance regulator (and in particular of the expenses shown therein) cannot be directly disturbed by the Department. This position, developed in the earlier case law under the previous legislation, continues to be the position under the 2001 Ordinance. In our respectful view, the observations made in EFU General (HC) did not go beyond the foregoing. They must be read in context and not as "expositions of the whole law". In particular, they do not determine the question as to whether section 109 can apply and if so, under what circumstances. But here, a distinction must be made. It must be kept in mind that we are not concerned with the question whether an item of expense as set out in the accounts submitted to the insurance regulator, which form part of the main rule, can be directly disturbed by the Department by applying section 109 to such expenditure. It could well be that the ratio decidendi of EFU General (HC) applies also to such a case. However, this is not the question before us and we leave it open for consideration in a suitable case. The question raised actually before us is whether section 109 can be applied when invoking one of the clauses (here clause (b)) of Rule 5 of the Fourth Schedule. This question was never before the learned Division Bench and, in our respectful view, is definitely not part of the ratio decidendi of its decision. It is therefore a question that is open for us to determine.

33.Having considered this question, in our view section 109 can apply in suitable circumstances to a situation where one or more of the clauses of Rule 5 of the Fourth Schedule are sought to be invoked by the Department. This is so because neither section 99 nor the Fourth Schedule contain a non-obstante clause. Had there been such a clause, then the position under the 2001 Ordinance would have aligned with the previous legations, and the earlier case-aw excluding everything outside the Schedule would have been relevant and applicable. That however is patently not the case. It is also important to remember that section 109 had no equivalent in the earlier legislation. It is, insofar as our tax jurisprudence is concerned, a brand new concept. Furthermore, section 109 seeks to apply, as expressly provided therein, to the determination of all tax liability "under this Ordinance". That, absent a non-obstante clause, would certainly include (at the least) an application of this section to a situation in which one of the clauses of Rule 5 is sought to be invoked. It follows that, with respect, we are unable to agree with learned counsel for the respondent taxpayer as regards the objection taken by him. The submission must be rejected and, at least in the facts and circumstances that are before us, the question posed in para 16 above answered in the affirmative.

34.The foregoing conclusion paves the way for a consideration of section 109 (i.e., the GAAR embodied in our tax legislation) and it is to this that we now turn.

35.The genesis of, and rationale for, anti-tax avoidance measures, whether contained in statutory provisions or the creation of judicially evolved rules (or indeed, some combination of both) lay in the perception and progressively widespread concern that some taxpayers were prone to misuse and abuse their undoubted right to engage in tax planning. The most famous formulation of this right is the well-known observation of Lord Tomlin in Commissioners of Inland Revenue v. Duke of Westminister [1936] AC 1 ("Duke of Westminister"). What is generally cited is the portion emphasized in the extract given below. However, it is important also to note the overall passage in which those words occur (pp. 19-20):--

"... it is said that in Revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called "the substance of the matter," and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled, and the supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting "the uncertain and crooked cord of discretion" for "the golden and straight mete wand of the law." 4 Inst 41

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. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of "the substance" seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable."

Thus, the Duke of Westminister approach not merely recognized the right of the taxpayer to reduce and minimize his tax burden but also married it to what was regarded as a strict or literal or formalist approach to tax legislation. It was the letter of the law that mattered and not its substance. While the right to engage in tax planning (which is the core of the Duke of Westminster approach) has never been doubted or abandoned, as will be seen later in this judgment the literalist or formalistic approach to the interpretation and application of tax legislation is no longer valid in the United Kingdom or indeed, in the other jurisdictions with which we will be concerned. It was abandoned in the UK starting in the almost equally famous case of WT Ramsay Ltd. v. Commissioners of Inland Revenue [1981] 1 All ER 865 ("Ramsay"), when a new approach was developed, which has been explicated and developed in a number of subsequent decisions given by the House of Lords and the UK Supreme Court.

36.Now, as is well known, the law has always drawn a distinction between tax evasion and tax planning. In both cases of course the taxpayer seeks to reduce his tax burden. However, the former has always been beyond the pale, something proscribed that is to be visited with criminal and civil sanctions and penalties. Tax planning however, as just noted, has been acceptable. Initially, there was little, if any, distinction between tax planning and tax avoidance and indeed, it would seem that the expression more usually employed was "tax avoidance". Tax planning and tax avoidance were just different labels describing the same thing, i.e., the tax minimization activity given due recognition in Lord Tomlin's dictum. Thus, in the Madras High Court case of Aruna Group of Estates v. State of Madras [1965] 55 ITR 642, the matter was put in the following terms (pg. 648):--

"Avoidance of tax is not tax evasion and it carries no ignominy with it, for, it is sound law and, certainly, not bad morality, for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum."

Although the Duke of Westminister case was not cited; the close affinity between the two formulations is obvious. However, over time, it came to be recognized that things had gone too far. Under the guise of tax planning or tax avoidance, some taxpayers engaged in activity that could not be countenanced or accepted within the framework of tax legislation. And so, a distinction came to be drawn between tax mitigation on the one hand, and tax avoidance on the other. The former was regarded as legitimate, i.e., was an acceptable form of tax planning. The latter expression, tax avoidance, came to be reserved for activity that, while not amounting to tax evasion, was nonetheless illegitimate and unacceptable. It was to counter tax avoidance in this sense that in many jurisdictions there was legislative intervention in the shape of a general anti-tax avoidance rule, or GAAR, that applied generally across the whole of the tax legislation. A GAAR provision was not intended to apply to tax mitigation but applied only to tax avoidance. Likewise, in many jurisdictions that did not have a GAAR (principally the United Kingdom) there was judicial rethinking, and a resetting of the Court's approach to counter what was regarded as the increasing menace of tax avoidance. (We pause to make two comments before proceeding further. Firstly, the situation in the UK has recently changed. That jurisdiction now also has a GAAR: see Part 5 read with Schedule 43 of their Finance Act, 2013. However, the UK cases considered in this judgment do not relate to the GAAR. Secondly, it must be acknowledged that some of the jurisdictions have had a GAAR provision much prior to the Duke of Westminister case. However, that case provides a convenient starting point for our purposes. Furthermore, a serious and concerted effort in most jurisdictions to combat tax avoidance appears only to have started some decades after that case.)

37.The dichotomy just mentioned, between acceptable and unacceptable tax planning (i.e., mitigation or minimization on the one hand and avoidance on the other), was articulated by Lord Templeman (speaking for the majority) in the Privy Council in an appeal from New Zealand, Challenge Corporation Ltd. v. Commissioner of Income Tax [1986] 2 NZLR 513 ("Challenge"). It was observed as follows (pp.560-1; emphasis supplied):--

"There are, however, discernible distinctions between ... a transaction which effects the evasion of tax, a transaction which mitigates tax and a transaction which avoids tax.

Tax evasion ... occurs when the commissioner is not informed of all the facts relevant to an assessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent evasion may lead to a criminal prosecution as well as re-assessment....

The material distinction in the present case is between tax mitigation and tax avoidance. A taxpayer has always been free to mitigate his liability to tax. In the oft quoted words of Lord Tomlin in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 19, "Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be." In that case, however, the distinction between tax mitigation and tax avoidance was neither considered nor applied.

Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability. Section 99 [the then applicable GAAR under New Zealand income tax legislation] does not apply to tax mitigation because the taxpayer's tax advantage is not derived from an "arrangement" but from the reduction of income which he accepts or the expenditure which he incurs.

Section 99 does not apply to tax mitigation where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability.

Section 99 does apply to tax avoidance. Income tax is avoided and a tax advantage is derived from an arrangement when the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction. The taxpayer engaged in tax avoidance does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains a reduction in his liability to tax as if he had."

The observations of Lord Templeman were subsequently approved by the Privy Council in another appeal from New Zealand, Peterson v. Commissioner of Inland Revenue [2006] 3 NZLR 433 ("Peterson") (at para [37] (majority judgment)). However, it is only proper to note that the New Zealand Supreme Court, in what is now the leading case on tax avoidance in that jurisdiction, Ben Nevis Forestry Ventures Ltd. v. Commissioner of Inland, Revenue [2009] 2 NZLR 289 ("Ben Nevis") has described the distinction between tax mitigation and tax avoidance as "conclusory and unhelpful" (at para [95], pg. 328).

38.Notwithstanding the reservation expressed by the NZ Supreme Court, in our view the description given by Lord Templeman does serve a useful purpose in clarifying that there is a difference between "good" tax planning (tax mitigation or minimization) and "bad" tax planning (tax avoidance). The problem then became, and remains, how to distinguish between the two when applying a GAAR. Where is the line to be drawn? How is the "good", which passes legal muster, to be distinguished and differentiated from the "bad", which must be struck down? This is one of the most acute-and indeed formidable-problems in relation to a GAAR provision, and section 109 of the 2001 Ordinance is certainly no exception. The case law from the other jurisdictions is replete with references to, and consideration of, this problem. Thus, in the New Zealand Court of Appeal, in Commissioner of Inland Revenue v. BNZ Investments Ltd. [2002] 1 NZLR 450 ("BNZ"), the majority judgment (cited with approval in Ben Nevis at para [96]) stated as follows (pp. 463-4: emphasis supplied):--

"[39] For the reasons discussed in the cases (e.g. Challenge Corporation Limited v. Commissioner of Inland Revenue [1986] 2 NZLR 513, 545), S.99 [i.e., the then applicable New Zealand GAAR] ... is perceived legislatively as an essential pillar of the tax system designed to protect the tax base and the general body of taxpayers from what are considered to be unacceptable tax avoidance devices. By contrast with specific anti-avoidance provisions which are directed to particular defined situations, the legislature through s99 has raised a general anti-avoidance yardstick by which the line between legitimate tax planning and improper tax avoidance is to be drawn.

[40] Line drawing and the setting of limits recognise the reality that commerce is legitimately carried out through a range of entities and in a variety of ways; that tax is an important and proper factor in business decision making and family property planning; that something more than the existence of a tax benefit in one hypothetical situation compared with another is required to justify attributing a greater tax liability; that what should reasonably be struck at are artifices and other arrangements which have tax induced features outside the range of acceptable practice - as Lord Templeman put it in Challenge at p562, most tax avoidance involves a pretence; and that certainty and predictability are important but not absolute values.

[41] The function of s99 is to protect the liability for income tax established under other provisions of the legislation. The fundamental difficulty lies in the balancing of different and conflicting objectives. Clearly the legislature could not have intended that section 99 should override all other provisions of the Act so as to deprive the taxpaying community of structural choices, economic incentives, exemptions and allowances provided by the Act itself. Equally the general anti-avoidance provision cannot be subordinated to all the specific provisions of the tax legislation. It, too, is specific in the sense of being specifically directed against tax avoidance; and it is inherent in the section that, but for its provisions, the impugned arrangements would meet all the specific requirements of the income tax legislation. The general anti-avoidance section thus represents an uneasy compromise in the income tax legislation.

[42] Line drawing represents the legislature's balancing of the relevant public interest considerations. In terms of s 99, that line drawing is directed to three elements, each of which contains its own limits. There must be an arrangement coming within the section. The arrangement must have a more than merely incidental purpose or effect of tax avoidance. And where those two ingredients are present, the assessable income of any person affected by the arrangement is adjusted so as to counteract any tax advantage obtained by that person from or under that arrangement."

In Petersen, the following observations are to be found in the minority judgment (pg. 451; emphasis supplied):

"[60] One of the main difficulties, as it seems to us, to which the application of the section [i.e., the GAAR] may give rise .. is the difficulty of distinguishing between those tax advantages which are to be nullified by the Commissioner and those tax advantages which are legitimate and could not have been intended by the legislature to be at risk under section 99. The term "tax advantage" is usually used in order to draw a contrast between, at one extreme, "tax evasion", which is criminal and, at the other extreme, "tax mitigation", which is no more than legitimate tax planning. The line to be drawn between "tax evasion" and "tax avoidance" is clear enough. The former is criminal. The latter is not. It may be socially undesirable but is within the letter of the law. But the line to be drawn between "tax mitigation" and section 99 tax avoidance is by no means clear....

[61] This is a problem about section 99 that was faced in Challenge Corporation Ltd. V. CIR [1986] 2 NZLR 513. Woodhouse J in the Court of Appeal said that -

... it must be kept in mind that the section is concerned not with outright impropriety but with finding a line between what is acceptable and so unaffected by it and what is undeserving and so for tax purposes made void" (p.533)

and Richardson J commented that

"Clearly the legislature could not have intended that section 99 should override all other provisions of the Act so as to deprive the taxpaying community of structural choices, economic incentives, exemptions and allowances provided for by the Act itself' (p.548) ..."

And in Ben Nevis itself, the following view was expressed by the NZ Supreme Court (pg. 332):

"[111] The appellants made a sustained plea that the courts should not deprive commercial and other parties of tax beneficial choices.... [T]axpayers have the freedom to structure transactions to their best tax advantage. They may utilise available tax incentives in whatever way the applicable legislative text, read in the light of its context and purpose, permits. They cannot, however, do so in a way that is proscribed by the general anti-avoidance provision."

39.A similar view has been expressed in Canada, where the leading case on tax avoidance is the judgment of the Supreme Court in Canada Trustco Mortgage Co. v. Canada [2005] 2 SCR 601 ("Trustco"). It was observed as follows (emphasis supplied):--

"1. The [Income Tax] Act continues to permit legitimate tax minimization; traditionally, this has involved determining whether the taxpayer brought itself within the wording of the specific provisions relied on for the tax benefit. Onto this scheme, the GAAR has superimposed a prohibition on abusive tax avoidance, with the effect that the literal application of provisions of the Act may be seen as abusive in light of their context and purpose. The task in this appeal is to unite these two approaches in a framework that reflects the intention of Parliament in enacting the GAAR and achieves consistent, predictable and fair results." (pp. 604-5)

"16. The GAAR draws a line between legitimate tax minimization and abusive tax avoidance. The line is far from bright. The GAAR's purpose is to deny the tax benefits of certain arrangements that comply with a literal interpretation of the provisions of the Act, but amount to an abuse of the provisions of the Act. But precisely what constitutes abusive tax avoidance remains the subject of debate. Hence these appeals." (pg.612)

And in the subsequent case of Copthorne Holdings Ltd. v. Canada [2011] 3 SCR 721 ("Copthorne"), it was observed as follows (though with reference to the specific language of the Canadian GAAR for the text of which see the Annex) (pp. 745-6):

"[65] The most difficult issue in this case is whether the avoidance transaction was an abuse or misuse of the Act. The terms "abuse" or "misuse" might be viewed as implying moral opprobrium regarding the actions of a taxpayer to minimize tax liability utilizing the provisions of the Income Tax Act in a creative way. That would be inappropriate. Taxpayers are entitled to select courses of action or enter into transactions that will minimize their tax liability (see Duke of Westminster)."

40.In our view, it is clear from the foregoing that any analysis and consideration of section 109 must begin with the recognition that it is fundamental to the application of any GAAR that it is intended only to apply to a certain class or category of cases. Section 109 cannot therefore be read in an omnibus manner, taking away completely (perhaps at the will of the Commissioner) the right of the taxpayer to engage in tax planning. "Good" tax planning (i.e., tax mitigation or minimization) was lawful before our tax code saw the advent of the GAAR and remains so even now. To adapt the felicitous words of Richardson P in the NZ Court of Appeal: section 109 was never intended to "override all other provisions of the [2001 Ordinance] so as to deprive the taxpaying community of structural choices, economic incentives, exemptions and allowances provided for by the [Ordinance] itself". It is intended only to catch "bad" tax planning, i.e., tax avoidance. But, as repeatedly asked in the other jurisdictions: where and how is the line to be drawn? Clearly, much will depend on the exact language of the GAAR under consideration. Where exactly the line falls and how bright or dim it is must be referenced to the actual words of the legislation. However, we can be sure of one thing: the line exists in section 109 and must be duly ascertained. A task of this nature is of course peculiarly the province of the Court. It is to this that we now turn.

41.We begin by noting that any transaction, scheme or arrangement that the Revenue in any jurisdiction claims falls foul of the GAAR there applicable is a transaction, etc. that according to the taxpayer enjoys the benefit, or avoids the application, of some specific provision of the tax legislation. More rarely, it may be that according to the Revenue, the transaction, etc. is intended to avoid the application of some such provision. In all cases, the transaction, etc. must be related or relatable to some specific provision(s) of the tax code. Thus, each case where the GAAR is invoked involves its interaction with some specific provision. A proper understanding of how the GAAR is to be interpreted and applied therefore requires an understanding of how the tax legislation is generally interpreted. The reason is that there can be little doubt that a GAAR has to be interpreted purposively, and not otherwise. To conclude otherwise, and to interpret the GAAR in a literal or formalist manner, would thwart and frustrate, if not destroy wholly, the efficacy of the provision. It is clear even from a bare reading of most GAAR provisions that they require a purposive approach. Section 109 is no exception. Thus, e.g., it expressly allows the Commissioner to re-characterize a transaction where the form (i.e., its literal or apparent shape) does not reflect its substance. It also allows a transaction that does not have "substantial economic effect" to be disregarded. These features clearly show that it is the object, purpose and spirit of the provision that must be ascertained and applied. To interpret section 109 in a literal or formalistic manner is to render it redundant. One might as well strike it from the statute book. Now, if the tax jurisprudence of the jurisdiction concerned also takes the same interpretive approach to tax legislation generally then there is no problem. The manner in which the GAAR and the specific provision(s) are to be interpreted is aligned. But if the tax jurisprudence generally takes a strict, formalist or literal interpretive approach to tax legislation, then there is a lack of harmony. The GAAR requires a purposive approach; the specific provision(s) with which it must interact when invoked are to be interpreted in a manner that is at odds with the purposive approach. This poses a considerable difficulty in determining the proper scope application and operation of the GAAR. As will presently become clear, we confront this very problem when determining in which manner section 109 is to be applied.

42.It will be instructive to first consider the position in the other jurisdictions. In all of them, the general interpretive approach to tax legislation has decisively moved away from the formal and literal to the purposive. Thus, in Trustco, the Supreme Court observed with regard to the principles applicable in Canada that while earlier, tax legislation had "received a strict interpretation in an era of more literal statutory interpretation than the present", the position now was different: "There is no doubt today that all statutes, including the Income Tax Act must be interpreted in a textual, contextual and purposive way" (pg. 610, para [11]). In New Zealand, in Terminals (NZ) Ltd. v. Comptroller of Customs [2013] NZSC 139, the Supreme Court held as follows (at para [39]): "Under section 5(1) of the Interpretation Act 1999, the text of a provision is to be construed in light of its purpose. Taxation statutes are construed purposively in the same manner as any other statute...." And in Singapore, a jurisdiction that also has a GAAR and to the leading tax avoidance case from which we will have occasion to refer, the same position obtains. The Court of Appeal (majority judgment) observed in Attorney General v. Ting Choon Meng and another [2017] SGCA 06: "It is also well-established that section 9A of the Interpretation Act ... mandates that the purposive approach be preferred over all other statutory interpretation approaches, and there is no requirement that a provision be ambiguous or inconsistent before a purposive approach can be taken" (para [18]; emphasis in original).

43.The importance, of the alignment between the interpretive approach to be taken in respect of the GAAR and the specific provision(s) with which it is to interact, and that the approach throughout be purposive, emerges clearly when the Canadian cases are considered. In Copthorne, while relying on the earlier decision in Trustco, the Canadian Supreme Court observed as follows (pp. 746-7; emphasis supplied):--

"[66] The GAAR is a legal mechanism whereby Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer. While the taxpayer 's transactions will be in strict compliance with the text of the relevant provisions relied upon, they may not necessarily be in accord with their object, spirit or purpose. In such cases, the GAAR may be invoked by the Minister. The GAAR does create some uncertainty for taxpayers. Courts, however, must remember that section 245 [the Canadian GAAR] was enacted "as a provision of last resort" (Trustco, at para. 21).

[69] In order to determine whether a transaction is an abuse or misuse of the Act, a court must first determine the "object, spirit or purpose of the provisions . . . that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids" (Trustco, at para. 55). The object, spirit or purpose of the provisions has been referred to as the "legislative rationale that underlies specific or interrelated provisions of the Act" (V. Krishna, The Fundamentals of Income Tax Law (2009), at p. 818).

[70] The object, spirit or purpose can be identified by applying the same interpretive approach employed by this Court in all questions of statutory interpretation - a "unified textual, contextual and purposive approach" (Trustco, at para. 47; Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3, at para. 26). While the approach is the same as in all statutory interpretation, the analysis seeks to determine a different aspect of the statute than in other cases. In a traditional statutory interpretation approach the court applies the textual, contextual and purposive analysis to determine what the words of the statute mean. In a GAAR analysis the textual, contextual and purposive analysis is employed to determine the object, spirit or purpose of a provision. Here the meaning of the words of the statute may be clear enough. The search is for the rationale that underlies the words that may not be captured by the bare meaning of the words themselves. However, determining the rationale of the relevant provisions of the Act should not be conflated with a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do."

As these passages indicate, it is the "object, spirit or purpose" of the specific provisions and the GAAR that are to be ascertained and then applied to see whether the transaction is in accord with the former and does not fall foul of the latter. If so, then the GAAR is not to be invoked. If not, it may be applicable.

44.The leading case from New Zealand, Ben Nevis, again shows the importance of that the purposive approach is taken while interpreting both the tax legislation generally (which affects the specific provisions) as well as the GAAR. The NZ Supreme Court (majority judgment) held as follows (pp. 330-2; emphasis supplied and internal citations omitted):--

"[103] We consider Parliament's overall purpose is best served by construing specific tax provisions and the general anti-avoidance provision so as to give appropriate effect to each. They are meant to work in tandem. Each provides a context which assists in determining the meaning and, in particular, the scope of the other. Neither should be regarded as overriding. Rather they work together. The presence in the New Zealand legislation of a general anti-avoidance provision suggests that our Parliament meant it to be the principal vehicle by means of which tax avoidance is addressed. The general anti-avoidance regime is designed for that purpose, whereas individual specific provisions have a focus which is determined primarily by their ordinary meaning, as established through their text in the light of their specific purpose. In short, the purpose of specific provisions must be distinguished from that of the general anti-avoidance provision.

[104] Parliament must have envisaged that the way a specific provision was deployed would, in some circumstances, cross the line and turn what might otherwise have been a permissible arrangement into a tax avoidance arrangement. Ascertaining when that will be so should be firmly grounded in the statutory language of the provisions themselves. Judicial attempts to articulate how the line is to be drawn have in the past too often been seized on as if they were equivalent to statutory language. Judicial glosses and elaborations on the statutory language should be kept to a minimum.

[106] Put at the highest level of generality, a specific provision is designed to give the taxpayer a tax advantage if its use falls within its ordinary meaning. That will be a permissible tax advantage. The general provision is designed to avoid the fiscal effect of tax avoidance arrangements having a more than merely incidental purpose or effect of tax avoidance. Its function is to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act. Such uses give rise to an impermissible tax advantage which the Commissioner may counteract. The general anti-avoidance provision and its associated reconstruction power provide explicit authority for the Commissioner and New Zealand courts to avoid what has been done and to reconstruct tax avoidance arrangements.

[107] When, as here, a case involves reliance by the taxpayer on specific provisions, the first inquiry concerns the application of those provisions. The taxpayer must satisfy the court that the use made of the specific provision is within its intended scope. If that is shown, a further question arises based on the taxpayer's use of the specific provision viewed in the light of the arrangement as a whole. If, when viewed in that light, it is apparent that the taxpayer has used the specific provision, and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement....

[108] The general anti-avoidance provision does not confine the court as to the matters which may be taken into account when considering whether a tax avoidance arrangement exists. Hence the Commissioner and the courts may address a number of relevant factors, the significance of which will depend on the particular facts. The manner in which the arrangement is carried out will often be an important consideration. So will the role of all relevant parties and any relationship they may have with the taxpayer. The economic and commercial effect of documents and transactions may also be significant. Other features that may be relevant include the duration of the arrangement and the nature and extent of the financial consequences that it will have for the taxpayer. As indicated, it will often be the combination of various elements in the arrangement which is significant. A classic indicator of a use that is outside parliamentary contemplation is the structuring of an arrangement so that the taxpayer gains the benefit of the specific provision in an artificial or contrived way. It is not within Parliament 's purpose for specific provisions to be used in that manner.

[109] In considering these matters, the courts are not limited to purely legal considerations. They should also consider the use made of the specific provision in the light of the commercial reality and the economic effect of that use. The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament 's purpose. If that is so, the arrangement will not, by reason of that use, be a tax avoidance arrangement. If the use of the specific provision is beyond parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement."

(We may note that both the majority and minority judgments concluded that the arrangement challenged by the Revenue constituted tax avoidance.) The first point regarding the foregoing passages is that, as observed in para [103], at least in the New Zealand context, the specific provision and the GAAR are to operate together and in tandem, with neither overriding the other. Obviously, this alignment can be achieved harmoniously if the interpretive approach is the same in respect of both, and is purposive, even though the purpose of the two sorts of provisions is different. The point emerges also in the paras that follow, and is highlighted in the last para extracted above. If use of the specific provision is not consistent with "Parliament's purpose", i.e., is "beyond parliamentary contemplation" then the GAAR may be applicable and the arrangement upset as tax avoidance. It is pertinent to note that the approach articulated by the NZ Supreme Court is referred to both as the "parliamentary contemplation" and the "effect and purpose" approach.

45.The leading case on tax avoidance in Singapore is the judgment of the Court of Appeal reported as Comptroller of Income Tax v. AQQ and another [2014] SGCA 15 ("AQQ"). In considering the correct approach to adopt with regard to the Singapore GAAR, the Court of Appeal closely examined and analyzed the approaches taken in Australia and New Zealand. It was held that the approach in the latter jurisdiction (i.e., Ben Nevis) was more appropriate, and it was approved and adopted for Singapore (see paras [106] and [108]-[110]). The Australian approach was regarded as unacceptable as it rendered the GAAR "virtually toothless" (para [107]). We have already noted above that the purposive approach is now firmly entrenched in Singapore and provides the interpretive basis that applies to all legislation. Thus, it was relatively easy for the Singapore Court of Appeal to adapt the New Zealand approach for its own purposes and in relation to the GAAR. We may note the Singapore Court of Appeal's summarization of Ben Nevis (emphasis supplied):

"104 In Ben Nevis, the Supreme Court of New Zealand sought to lay out a comprehensive statement on how the general anti-avoidance provision should be applied. The approach adopted by the minority and majority respectively may be summarised as follows:

(a) The minority, Elias CJ and Anderson J, considered that the specific statutory provision and general anti-avoidance provision should not be seen as potentially conflicting but should be purposively and contextually interpreted. Recourse to the general anti-avoidance provision is not necessary if the taxpayer's use of the specific provision, on its proper construction, falls outside its intended scope as an unauthorised use of the specific provision (at [2]).

(b) The majority, Tipping, McGrath and Gault JJ, in a slant on this held that the legislature's purpose was best served by construing specific tax provisions and, the general anti-avoidance provision to give appropriate effect to each instead of considering one as overriding the other (at [103]). Where the taxpayer relies on specific provisions, the taxpayer must satisfy the court that the use of the specific provision was within its intended scope and that the use of the provision, viewed in the light of the arrangement as a whole, has altered the incidence of tax in a way that was within the contemplation and purpose of the legislature. If it was not, it will be a tax avoidance arrangement for the purposes of the general anti-avoidance provision (at [107]). The court is not confined as to the matters which may be taken into account in deciding whether a tax avoidance arrangement exists, and a classic indicator is when the taxpayer obtains the benefit of the statutory provision in an artificial or contrived way (at [108]). The court is also not limited to purely legal considerations, but may consider whether the impugned arrangement, viewed in a commercially and economically realistic way, uses the specific provision in a manner that is consistent with the legislature's purpose (at [109])."

The purposive approach to be taken, and the importance of taking such an approach, is apparent.

46.We may note incidentally that we have also considered the Australian approach. While we will have occasion later in this judgment to consider the Australian GAAR, we are in agreement with the Singapore Court of Appeal that the Australian approach has proved to be too restrictive. It unnecessarily hampers and to an extent even frustrates the proper application of the GAAR. While the case law relating to the Australian GAAR includes important decisions such as that of the Privy Council in Newton and others v. Commissioner of Taxation of the Commonwealth of Australia [1958] 1 AC 450 ("Newton") which established the "predication" principle or test, subsequent developments were less than satisfactory. (Newton will be considered later in this judgment, though in the context of the New Zealand GAAR.) In particular the "choice principle", as it emerged in the decisions of the High Court of Australia in the 1970s, proved so restrictive that it led to legislative intervention and the replacement of the Australian GAAR with a wholly new provision. The entire matter has been considered in detail by the Singapore Court of Appeal. We are in agreement with that reasoning and the ultimate conclusion already referred to, and so there is no point in burdening this judgment with an independent analysis of the Australian case law. The Australian approach will not therefore be considered here.

47.When we turn our gaze from foreign jurisdictions to our own, we find a rather different legal landscape. As is well known, the general interpretive approach to fiscal legislation in this country is still literal, foinialistic and strict. The bedrock of tax jurisprudence in Pakistan is the well-known words of Rowlatt, J. in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64 ("Cape Brandy"), instantly recognizable by tax lawyers in this country. (We may note that Rowlatt, J. was cited with approval in the House of Lords in Canadian Eagle Oil Co. Ltd. v. R [1945] 2 All ER 499, 507.) What Rowlatt, J famously said was this ([1921] 1 KB at 71):

"... in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

(The foregoing is herein after referred to as the "Rowlatt, J formulation" or the "Cape Brandy formulation".)

48.The Rowlatt, J formulation has been affirmed many times by the Superior Courts of Pakistan and never doubted. It can be safely said that it is woven into the very fabric of our tax jurisprudence. Thus, as early as 1952 the Federal Court, in a judgment reported many years later as Commissioner of Agricultural Income Tax East Bengal v. B.W.M. Abdur Rahman 1973 SCMR 445, held as follows (pg. 452):

"But indeed, in determining whether or not a particular matter, comes within a taxing statute, it is only the letter of the law which must be looked to. There is ample authority for the proposition that in a fiscal case, form is of primary importance, the principle being that if the person sought to be taxed comes within the letter of the law, he must be taxed, however great a hardship may thereby be involved but on the other hand if the Crown cannot bring the subject within the letter of the law he is free, however apparent it may be that his case is within what might be called the spirit of the Law. As was said by Rowlatt, J., in Cape Brandy Syndicate v. Inland Revenue Commissioner [1921] KB 64:

"In a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

In Tenant v. Smith [1892] AC 150 Lord Halsbury said:

"In a Taxing Act it is impossible, I believe to assume any intention, any governing purpose in the Act, to do more than take such tax as the statute imposes cases, therefore, under the Taxing Acts always resolve themselves into the question whether or not the words of the Act have reached the alleged subject of Taxation."

In Government of Pakistan and others v. Hashwani Hotel Ltd. PLD 1990 SC 68 the Supreme Court listed various principles of interpretation, with special reference to fiscal statutes. After setting out the Rowlatt, J formulation, it was observed as follows (pg. 75): "This is an excellent guideline and can be safely utilized for interpreting a taxing statute". Reference may also be made to A&B Food Industries Ltd. v. Commissioner of Income Tax/Sales Karachi 1992 SCMR 663 at 674. More recent examples, from the High Courts, include the decision of the Lahore High Court in Commissioner Inland Revenue Lahore v. Saritow Spinning Mills Ltd. 2016 PTD 786. The learned Division Bench has set out, though without attribution, what is clearly the Rowlatt, J. formulation at pg. 791 (para 11). Indeed, the lack of attribution serves only to emphasize that Cape Brandy is part of the very warp and woof of tax jurisprudence in this country. There is, literally, no need to spell out the source; the formulation is instantly recognizable and, within the fiscal context, generally applicable. Reference may also be made to the decision of the Islamabad High Court in Pakistan Tobacco Co. Ltd. v. Federation of Pakistan and others 2016 PTD 596 (SB), where the Rowlatt, J formulation is cited at pg. 604 (here with attribution). Finally, reference may be made to Commissioner of Inland Revenue, Zone II, Karachi v. Kassim Textile Mills (Pvt.) Ltd. 2013 PTD 1420, where a Division Bench of this Court (of which one of us (Munib Akhtar, J) was a member) set out in general the principles applicable to fiscal legislation (pp.1426-7):--

"9. .. The manner in which charging provisions are to be interpreted and applied is well settled by decisions of the superior Courts. The basic principle was stated in Cape Brandy Syndicate v. Inland Revenue Commissioner [1921] 1 KB 64, which has been reaffirmed many times, and is this: "In a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used" (see, among others, Government of Pakistan and others v. Hashwani Hotels Ltd. PLD 1990 SC 68 and A&B Food Industries Ltd. v. Commissioner of Income Tax 1992 SCMR 663).... An allied principle, also well established, is that whenever two interpretations of a charging provision are reasonably possible, the one favouring the taxpayer is to be adopted. Thus, the Federal Court in Commissioner of Agricultural Income Tax v. B.W.M Abdur Rehman a case decided in 1952 but reported at 1973 SCMR 445, stated as follows: "There is ample authority for the proposition that in a fiscal case, form is of primary importance, the principle being that if the person sought to be taxed comes within the letter of the law, he must be taxed, however great a hardship may thereby be involved but on the other hand if the Crown cannot bring the subject within the letter of the law he is free, however apparent it may be that his case is within what might be called the spirit of the Law" (at pg. 452).

10. The position with regard to any exemption from a tax is different, although the relevant principles are Again well established. These principles may briefly be stated as follows. Firstly, the onus lies on the taxpayer to show that his case comes within the exemption. Secondly, in case two reasonable interpretations are possible, the one against the taxpayer will be adopted. But, thirdly, if the taxpayer's case comes fairly within the scope of the exemption, then he cannot be denied the benefit of it on the basis of any supposed intention to the contrary of the legislature or authority granting it...."

49.Incidentally, we may note that the position in India is essentially the same, as amply demonstrated by two recent decisions of the Supreme Court. In Pradip Nanjee Gala v. Sales Tax Officer and others, C.A. 4542/2007, decided on 29.04.2015, the Supreme Court referred to the Rowlatt, J formulation as a "classic statement" that still held the field (para 17). Even more recently, in Commissioner of Income Tax and another v. Yokogawa India Ltd., C.A. 8496/2013 etc., decided on 16.12.2016, the Court held as follows:--

"8. The cardinal principles of interpretation of taxing statutes centers around the opinion of Rowlatt, J. in Cape Brandy Syndicate v. Inland Revenue Commissioner (1921) 1 KB 64 which has virtually become the locus classicus. The above would dispense with the necessity of any further elaboration of the subject notwithstanding the numerous precedents available inasmuch as the evolution of all such principles are within the four corners of the following opinion of Rowlatt, J. [and then the formulation is set out]."

The tax jurisprudence of the Subcontinent, it seems, continues to remain deeply enamored of, and indeed wedded to, what Rowlatt, J said so many decades ago. There appear to be no signs that a separation (let alone a divorce) is on the horizon.

50.Tellingly, the Cape Brandy formulation has fared less well in its own country. The reason is not difficult to understand. Unlike Pakistan, where the literal, strict and formalistic approach continues to reign supreme, the tax jurisprudence in the United Kingdom has moved sharply and decisively to the purposive approach. As noted above, this change started with the landmark Ramsay decision in 1981. This was a case involving tax avoidance. Since then, there have been a number of decisions considering tax avoidance, both of the House of Lords and the UK Supreme Court, where the purposive approach has been explained and developed. It will be instructive to consider the UK case law both to show (and contrast) the difference between the literal and purposive approaches, and the fate of Cape Brandy once the latter approach took hold. From the tax avoidance cases, we have selected two, and start with the decision of the House of Lords in Inland Revenue Commissioners v. McGuckian [1997] 3 All BR 817 ("McGukian"), where Lord Steyn explained the significance of Ramsay and the new approach launched by that decision. The learned Law Lord observed as follows, and the express reference to Cape Brandy may be noted (pp. 824-5; emphasis supplied):--

"It is necessary to distinguish between two separate questions of law. The first is whether there is a special rule applicable to the construction of fiscal legislation. The second question is whether there is a rule precluding the court from examining the substance of a composite tax avoidance scheme. I consider first the construction of tax statutes.

... During the last 30 years there has been a shift away from literalist to purposive methods of construction. Where there is no obvious meaning of a statutory provision the modern emphasis is on a contextual approach designed to identify the purpose of a statute and to give effect to it. But under the influence of the narrow Duke of Westminster doctrine tax law remained remarkably resistant to the new non formalist methods of interpretation. It was said that the taxpayer was entitled to stand on a literal construction of the words used regardless of the purpose of the statute: ... Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 K.B. 64, 71 .... Tax law was by and large left behind as some island of literal interpretation. The second problem was that in regard to tax avoidance schemes the courts regarded themselves as compelled to adopt a step by step analysis of such schemes, treating each step as a distinct transaction producing its own tax consequences. It was thought that if the steps were genuine, i.e. not sham or simulated documents or arrangements, the court was not entitled to go behind the form of the individual transactions. In combination those two features--literal interpretation of tax statutes and the formalistic insistence on examining steps in a composite scheme separately--allowed tax avoidance schemes to flourish to the detriment of the general body of taxpayers. The result was that the court appeared to be relegated to the role of a spectator concentrating on the individual moves in a highly skilled game: the court was mesmerised by the moves in the game and paid no regard to the strategy of the participants or the end result. The courts became habituated to this narrow view of their role.

On both fronts the intellectual breakthrough came in 1981 in Ramsay, and notably in Lord Wilberforce's seminal speech which carried the agreement of Lord Russell of Killowen, Lord Roskill and Lord Bridge of Harwich. Lord Wilberforce restated the principle of statutory construction that a subject is only to be taxed upon clear words... To the question "what are clear words?" he gave the answer that the court is not confined to a literal interpretation. He added "There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded." This sentence was critical. It marked the rejection by the House of pure literalism in the interpretation of tax statutes.

.

While Lord Tomlin's observations in the Duke of Westminster case [1936] A.C. I still point to a material consideration, namely the general liberty of the citizen to arrange his financial affairs as he thinks fits, they have ceased to be canonical as to the consequence of a tax avoidance scheme. Indeed, as Lord Diplock observed, Lord Tomlin's observations tells us little or nothing as to what method of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would otherwise be payable: Inland Revenue Commissioners v. Burmah Oil Co. Ltd. (1981) T.C. 200, 214-215.

The new Ramsay principle was not invented on a juristic basis independent of statute. That would have been indefensible since a court has no power to amend a tax statute. The principle was developed as a matter of statutory construction. That was made clear by Lord Wilberforce in Ramsay and is also made clear in subsequent decisions in this line of authority... The new development was not based on a linguistic analysis of the meaning of particular words in a statute. It was founded on a broad purposive interpretation, giving effect to the intention of Parliament. The principle enunciated in Ramsay was therefore based on an orthodox form of statutory interpretation. And in asserting the power to examine the substance of a composite transaction the House of Lords was simply rejecting formalism in fiscal matters and choosing a more realistic legal analysis. Given the reasoning underlying the new approach it is wrong to regard the decisions of the House of Lords since Ramsay as necessarily marking the limit of the law on tax avoidance schemes."

51.The second tax avoidance case is the latest decision by the UK Supreme Court, where again there is a review of the earlier case-law and the approach launched by Ramsay. This is the case of UBS AG v. Revenue and Customs Commissioners [2016] 3 All ER 1 ("UBS"). Lord Reed, who gave the judgment of the Court, began by observing that, "In our society, a great deal of intellectual effort is devoted to tax avoidance" (pg. 5). The learned Justice explained the general principles in a section of the judgment titled "The Ramsay approach", from which the following extracts are taken (pp. 19- 20; emphasis supplied):--

"61. As the House of Lords explained in Barclays Mercantile Business Finance Ltd. v. Mawson [2005] 1 All ER 97, [2005] 1 AC 684 in a single opinion of the Appellate Committee delivered by Lord Nicholls, the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in the way which best gives effect to that purpose. Until the case of W T Ramsay Ltd. v. Inland Revenue Comrs, [1981] 1 All ER 865, [1982] AC 300 however, the interpretation of fiscal legislation was based predominantly on a linguistic analysis. Furthermore, the courts treated every element of a composite transaction which had an individual legal identity (such as a payment of money, transfer of property, or creation of a debt) as having its own separate tax consequences, whatever might be the terms of the statute....

62. The significance of the Ramsay case was to do away with both those features. First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute....

63. "Unfortunately", the Committee commented in Barclays Mercantile at para 34, "the novelty for tax lawyers of this exposure to ordinary principles of statutory construction produced a tendency to regard Ramsay as establishing a new jurisprudence governed by special rules of its own". In the Barclays Mercantile case the Committee sought to achieve "some clarity about basic principles" (para 27). It summarised the position at para 32:.

"The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. ... As Lord Nicholls of Birkenhead said in MacNiven v. Westmoreland Investments Ltd., [2001] UKHL 6 at [8], [2001] 1 All ER 865 at [8], [2003] 1 AC 311: "The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case."

As the Committee commented, this is a simple question, however difficult it may be to answer on the facts of a particular case."

Finally, reference may be made to a decision of the Court of Appeal, Eclipse Film Partners No. 35 LLP v. Revenue and Customs Commissioners [2015] EWCA Civ 95, [2015] STC 1429 where it was observed as follows (pg. 1448; emphasis supplied):

"110. There is no special rule for interpreting tax legislation. [Ramsay] marked the end of an unduly literal interpretative approach to tax statutes and a formalistic insistence on examining steps in a composite scheme separately. As Lord Nicholls, giving the judgment of the Judicial Committee, said in Barclays Mercantile Business Finance Ltd. v. Mawson [2004] UKHL, [2005] 1 AC 684 at [32], the essence of the new approach was to give the statutory provision a purposive interpretation in order to determine the nature of the transaction to which it was intended to apply and then to decide, whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. This brought the interpretation of tax statutes into line with general principles of statutory interpretation and required notice to be taken of the reality of the transaction in issue...."

52.As these judgments amply demonstrate, the law in the United Kingdom has moved a long way from the Rowlatt, J formulation. And indeed, attempts to apply Cape Brandy in this "brave new world" have been comprehensively rejected. Thus, in Trustee of BT Pensions and others v. Clark (HM Inspector of Taxes) [2000] EWCA Civ 55, [2000] STC 222 the Court of Appeal started its consideration of the proper interpretation by referring to Cape Brandy, only to immediately brush it aside with the observation that, "The courts have moved on some way from the robust simplicity of Rowlatt J's very well-known statement..." (pg. 231; emphasis supplied). Reliance was placed on McGuckian. And, in the High Court, in Green v. Commissioners of Inland Revenue [2005] EWHC 14 (Ch), [2005] STC 288, the following passage is to be found (pg. 292; emphasis supplied):

"10. Before going further I should deal with one question that arose as to the correct approach to the interpretation of this statute [the Inheritance Tax Act, 1984]. At one point the trustees were arguing that clear words were necessary to tax the subject, and that the only words in this case that were clear were words which clearly reduced the tax -those words were the literal words of section 5(3). There were no clear words the other way. Reliance was placed on Cape Brandy Syndicate v. IRC [1921] 1 KB 64 at 71:

"There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied" (per Rowlatt J).

However, their position changed as a result of citations by Mr. Baldry for the Revenue. In the end it was, I think, accepted by Mr Oakley (and so far as it was not accepted I nevertheless find) that the correct modern approach to taxing statutes is the same as the approach to other statutes - purposive, ordinary methods of construction are available and are applied (see IRC v McGuckian [1997] 1 WLR 991 at page 998-9)."

53.It is clear from the foregoing that any interpretive approach based on the Rowlatt, J formulation, being necessarily formalistic, literal and strict, is incompatible with the purposive approach. As noted above, in our view section 109 must be given a purposive approach that accords with the spirit and object of this provision. And herein the difficulty lies. In each case where it is invoked, the GAAR has to interact with specific provisions of tax legislation which must be interpreted on a basis anchored on the Rowlatt, J formulation. Thus, in our tax jurisprudence the two approaches are not aligned. They tend to pull in different, and perhaps even opposite, directions. As is readily apparent, this dichotomy presents a difficulty-and it could be formidable--in applying section 109. It will certainly have a restrictive effect on the section. The actual (as opposed to the intended) scope of the provision may be sharply circumscribed. Indeed, the dichotomy may frustrate or even cripple the operation of the GAAR. What will actually happen is of course something that only time will tell. As (or rather if) the Department seeks to apply the GAAR in more and more cases, the full effect and consequences of the dichotomy in the two interpretive approaches will become clearer. But one thing is certain: the lack of harmony and alignment does present a formidable challenge to any sensible and meaningful application of section 109. As already noted, section 109 has introduced a brand new concept in our tax code. But, it has dropped a GAAR into a jurisprudential milieu controlled and directed by the Rowlatt, J formulation. Now, it could be asked: can this statutory innovation be regarded as having recalibrated the general interpretive approach? Even more radically, can it be said that the advent of a GAAR in the tax code has had the effect, as it were, of unraveling the fabric of our tax jurisprudence and begun the weaving of a jurisprudence textured differently? To these questions, we can only give an answer in the negative. It is not possible for us, sitting in the High Court, to reevaluate or realign the general interpretive approach that forms the basis of our tax jurisprudence in order to accommodate section 109 in a manner that fully accords with its spirit, object and purpose. As is clear from the foregoing discussion, the Rowlatt, J formulation, approved as it has been so many times by the Superior Courts including most importantly the Supreme Court, is too firmly embedded and deeply entrenched in our tax jurisprudence. Any realignment that resets the general interpretive approach can take place only at the level of the Supreme Court. It may be that, in times to come, that Court will give guidance and clarify how section 109 is to operate within the strict and literalist framework or even, if it so considers appropriate, fundamentally revisit realign and reset that jurisprudence. Perhaps one possible (compromise) solution could be that while ordinarily a specific provision of the tax legislation is to be interpreted according to the orthodox approach mandated by the tax jurisprudence, a different rule should apply when that provision is being considered in proceedings where section 109 has been invoked. In such a setting, the specific provision should also be interpreted purposively. However, it is for the Supreme Court (if of course, it at all chooses to do so) to consider whether this solution (and we must acknowledge that it has certain conceptual difficulties of its own) or something else is to be adopted. We must, in this judgment, sitting as a Division Bench of a High Court, apply the law within the parameters noted above, fully appreciative of the dichotomy between the purposive approach to be taken to section 109 on the one hand, and on the other, the strict and literalist approach required for the specific provisions with which it must interact. We must remain fully alive at all times to the consequences that necessarily and inevitably flow from such a dichotomy.

54.Another consequence of the dichotomy is that it is not possible for us, in determining the correct approach to take as regards section 109, to adopt wholesale the approach taken to GAAR provisions in other jurisdictions. Thus, e.g., we cannot do what the Singapore Court of Appeal did in AQQ, that is, adopt for its own jurisdiction and purposes (subject to some variations) the approach taken by the NZ Supreme Court in Ben Nevis. We cannot adopt wholesale the approach taken by the Canadian Supreme Court in Trustco either. This is a necessary consequence of the dichotomy. While we may (cautiously) borrow elements from the judicial approaches in other jurisdictions, we must keep in mind, and duly account for, the fact that the GAAR and the specific provisions are there interpreted in the same purposive manner. Since a unified interpretive approach is not possible within the framework of our tax jurisprudence, it becomes necessary to examine section 109 as it were in isolation. The first step in this regard is to determine the interpretive approach to take when the section is considered as a whole.

55.Having carefully considered the question just posed, in our view, the best approach to interpreting section 109 at large is to adapt for our purposes what was said by Ribeiro PJ of the Hong Kong Court of Final Appeal in Collector of Stamp Revenue v. Arrowtown Assets Ltd. [2003] HKCFA 46 ("Arrowtown"). The learned Justice was considering fiscal provisions in a non-GAAR setting, and in the context of the Ramsay, approach. After in detail the UK tax avoidance cases, it was concluded as follows (at para [35] emphasis supplied):--

"Accordingly, the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."

The observation highlighted was cited with approval in the House of Lords in Barclays Mercantile Business Finance Ltd. v. Mawson (Inspector of Taxes) [2005] 1 All ER 97 ("BMBF') (at para [35], pg. 110) and again in the UK Supreme Court in UBS (at para [66], pg. 21). Ribeiro PJ's observation was also cited with approval in Ben Nevis (minority judgment, at para [5], pg. 306). The "specific provisions" that Ribeiro PJ referred to were of course those being relied upon by the taxpayer in terms of a scheme challenged by the Revenue as tax avoidance under the Ramsay approach.

56.In our judgment, and adapting for our own purposes what was said by Ribeiro PJ, the correct approach to interpreting section 109 at large is as follows: The question is whether section 109, construed purposively, is intended to apply to the transaction, viewed realistically. This approach provides the broad framework within which the various components and parts of the section are to be understood and applied, which we now turn to consider. Although section 109 is reproduced in the Annex, for ease of reference we set it out here as well:

"109. Recharacterisation of income and deductions.---(1) For the purposes of determining liability to tax under this Ordinance, the Commissioner may -

(a)recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme;

(b)disregard a transaction that does not have substantial economic effect; or

(c)recharacterise a transaction where the form of the transaction does not reflect the substance.

(2) In this section, "tax avoidance scheme" means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person's liability to tax under this Ordinance."

57.The first thing that requires consideration is the term "transaction" since it is one of the most important concepts used in the section. There are two aspects to consider. The first is determining its proper meaning and scope, as used in the section. The second relates to that fundamental aspect of a GAAR provision, already highlighted above, that it is not intended to capture or nullify all sorts of tax planning. Tax mitigation or minimization fall outside the scope of a GAAR, and it is only tax avoidance that is proscribed by it. The line that exists between "good" and "bad" tax planning must be discovered in the context of section 109 and there must therefore be a proper understanding and categorization of the sort of transactions that come within its purview. The second aspect is treated starting in para 62 below. First though, the first aspect.

58.We begin by noting that "transaction" is not defined, either in the section or elsewhere in the 2001 Ordinance. (We may note for completeness that there is a definition of sorts of "transaction" given in section 2(19C), which was added along with some other definitions in 2008. However, these definitions are clearly for purposes of the Electronic Transactions Ordinance, 2002 and not otherwise.) Keeping the purposive approach in mind, it is obvious that the term has to be construed and applied broadly. When the GAARs in the other jurisdictions are considered (see the Annex for the texts), we find that the Canadian legislation (which uses the same term) appears to define "transaction" rather laconically (see section 245(1)). This is a bit misleading because the GAAR also applies to a "series of transactions" (S.245(2)), and when this is read with section 248(10) it is clear that it actually has a broad range (see also Trustco, paras [23] [424]). The New Zealand GAAR uses the term "arrangement" and defines it in broad terms. The NZ Supreme Court observed as follows in relation thereto in Ben Nevis (pg. 331; emphasis supplied):--

"[105] The key statutory concept in the general anti-avoidance provision is of a tax avoidance arrangement, as Parliament has defined it. By means of the definition of "tax avoidance", a tax avoidance arrangement includes an arrangement which directly or indirectly alters the incidence of any income tax. It is arrangements of that and allied kinds which are void against the Commissioner under s BG 1(1). An arrangement includes all steps and transactions by which it is carried out. Thus, tax avoidance can be found in individual steps or, more often, in a combination of steps. Indeed, even if all the steps in an arrangement are unobjectionable in themselves, their combination may give rise to a tax avoidance arrangement."

In Singapore, where the GAAR (s. 33) also uses the term "arrangement" and defines it in a manner somewhat similar to the NZ GAAR, the Court of Appeal in AQQ adopted the approach to be found in the NZ case law. Here, we may note that the definition of "arrangement" used in the present NZ GAAR (s YA 1 of the Income Tax Act, 2007) was also the same as in the previous GAAR (s. 99 of the Income Tax Act, 1976). (For text of both, see the Annex.) The Singapore Court of Appeal observed as follows:

"42 Under section 33(2), the word arrangement "means any scheme, trust, grant, covenant, agreement, disposition, transaction and includes all steps by which it is carried into effect" [emphasis added ]

43 The definition of an arrangement in s 33(2) is in similar terms to that found in s 99(1) of the 1976 New Zealand Act. It is a composite term that means the overarching scheme, agreement or transaction and includes the component steps that carry into an effect an arrangement. Thus, a tax avoidance arrangement may constitute a combination of steps that may be individually unobjectionable: see the decision of the Supreme Court of New Zealand in [Ben Nevis] at [105], addressing the definition of "arrangement" in YA 1 of the 2007 New Zealand Act. In the Privy Council decision of [Peterson], Lord Millett, delivering the judgment for the majority of the Board, observed at [33]:

Their Lordships consider that the Commissioner is entitled at his option to identify the whole or any part or parts of a single composite scheme as the "contract, agreement, plan or understanding" which constitutes the "arrangement" for the purpose of section 99. Whether there was a single "arrangement" or two or more connected but distinct "arrangements" (as there were in [BNZ]) is a question of fact for the [Commissioner]. ..."

(We may note that the observations in the cited passage in relation to the Commissioner's "option" and certain matters being a question of fact for him to decide must be read and understood for our purposes in the context of the 2001 Ordinance, where the position may well be different, and perhaps markedly so.) Finally, looking at the Australian GAAR (for text see the Annex), which uses the term "scheme", the definition is along the same lines but the GAAR makes the important point (see section 177A(3)) that the term includes unilateral action as much as it does bilateral schemes.

59.Looking at and drawing on the experience of the other jurisdictions (both legislative and judicial), in our view the facts and circumstances of a particular case can amount to a "transaction" within the meaning of section 109 if they come within the following description in any material or relevant respect. (We may note that a detailed reference to each and every statutory provision and case from the other jurisdictions has been avoided as that would be both cumbersome and unduly lengthen this already long judgment.) A transaction is any agreement, contract, arrangement, understanding, promise or undertaking, whether express or implied (and whether or not enforceable, or intended to be enforceable, by legal proceedings), or any scheme, plan, proposal, action, course of action or course of conduct (in all cases, whether unilateral, bilateral or multilateral). A transaction is a composite concept and so includes any series or combinations of transactions or events. It includes also all steps and transactions by which the transaction is carried into effect. Thus, the term as used in the section is not limited to a specific transaction or agreement and it can comprise of a multitude of arrangements, understandings, schemes, plans, etc. A transaction does not need a consensus or meeting of minds. Furthermore, as is clear from a reference to "any person" in subsection (2) of section 109, the taxpayer to whom the section is sought to be applied need not be party to the contract, arrangement, scheme, plan etc that constitutes the transaction. All that is required is that he be affected by it. A transaction "may embrace a series of decisions and steps taken which together evidence and constitute an arrangement, by evidencing a plan or understanding". In relation to the meaning and scope of "arrangement", in Petersen, the Privy Council (at para [34], pg. 444) approved of the dissenting judgment of Thomas J in BNZ. Thomas, J had observed as follows (pg. 483; emphasis supplied):--

"[118] Adopting this purposive approach, I believe that the text of s 99 [i.e., the then applicable NZ GAAR] clearly Confirms the following features relevant to the questions in issue:--

The word "arrangement" is to be given a wide meaning;

The scope and effect of an arrangement is to be determined objectively; and

The "innocence" or ignorance of a participant in the arrangement does not exclude liability."

In our view, these observations apply equally in relation to the term "transaction", as used in section 109. (On the observation re objective determination of the "arrangement", the further discussion below with regard to "purpose" should also be kept in mind.) Furthermore, the observations of the NZ Supreme Court in Ben Nevis and the Singapore Court of Appeal in AQQ, quoted in the last preceding paragraph, apply also in relation to "transaction". We may note that the foregoing is not at all intended to be an exhaustive or conclusive description or definition of "transaction" as used in section 109. Finally, we may note that the Australian GAAR provides (see section 177D(5)) that it applies also to a scheme made wholly outside Australia or partly within and partly without the jurisdiction, and it would seem that the same result obtains in New Zealand as a result of case law. In other words, the GAAR has extraterritorial effect. However, we prefer to leave this point open for consideration in an appropriate case.

60.The next point to consider emerges from what we have held regarding the interpretive approach to be taken to section 109 at large: The question is whether the section, construed purposively, is intended to apply to the transaction, viewed realistically. What is entailed in viewing the transaction realistically? It will be recalled that the NZ Supreme Court in Ben Nevis had, in para [109] (extracted above in para 44) observed as follows: "The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament's purpose". Thus, one aid to the question now being considered is that a realistic view of the transaction is to view it in "a commercially and economically realistic way". In Ramsay itself Lord Wilberforce had said, speaking of the tax there in question but in terms generally applicable, that "The Capital Gains Tax was created to operate in the real world, not that of make-belief" ([1981] 1 All ER at 873). And in UBS, the UK Supreme Court cited with approval (at para [64], pg. 20) an observation made in the Court of Appeal in the BMBF case, by Carnwath LJ in his concurring judgment. The whole passage in which the observation appears is worth setting out in full ([2002] EWCA Civ 1853, [2003] STC 66 at 91; emphasis supplied):

"[66] Thus, the "purposive" approach is applied, not just to the construction of the statute, but also to the characterisation of the facts. As Sir Anthony Mason NPJ said (in adopting the Ramsay principle in the Hong Kong Court of Final Appeal) it is "both a rule of statutory construction... and an approach to the analysis of the facts." (Shiu Wing v. Commissioner of Estate Duty [2000] HKFCA 64). As such, it can perhaps be justified as statutory interpretation in the broader sense. It recognises the underlying characteristic of all taxing statutes, as parasitic in nature. They draw their life-blood from real world transactions with real world economic effects to which the Revenue is not a party. To allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic."

These observations provide useful guidance and clarify what is entailed in viewing the transaction realistically.

61.Returning to the formulation adopted by the NZ Supreme Court, that the transaction has to be viewed in "a commercially and economically realistic way", in 2013 the New Zealand Inland Revenue Department ("NZ Department") published an "Interpretation Statement" on "TAX AVOIDANCE AND THE INTERPRETATION OF SECTIONS BG 1 & GA 1 OF THE INCOME TAX ACT 2007" (herein after referred as the "Interpretation Statement"). The Department's explanation of what is meant by "commercially and economically realistic" is also helpful and can usefully be taken into consideration when considering how a transaction is to be viewed realistically in terns of section 109. The NZ Department expressed the following views:--

"264. Understanding what is actually achieved by or under an arrangement requires a complete understanding of the facts and a thorough grasp of the detail and workings of the arrangement as a whole. It requires identifying the real commercial and economic outcomes for the parties under that arrangement over its life that are relevant to the provisions at issue. This inquiry will be guided by the facts, features and attributes Parliament would expect to be present (or absent). In Ben Nevis, the court identified a number of factors that are relevant in this context. These include the manner in which the arrangement is carried out, the role of the parties and the nature and extent of the financial consequences for the taxpayer.

265. When determining the commercial and economic reality of an arrangement, steps in the arrangement that disguise the actual consequences for the parties, particularly steps that seem artificial or that involve pretence or circularity, may be ignored. It is only once the true commercial and economic outcomes of an arrangement that are relevant to the provisions at issue have been identified, that these outcomes can then be tested against Parliament's purpose and contemplation for the relevant provisions.

350. When examining an arrangement to establish the commercial and economic reality, there are several points that, in the Commissioner's opinion, are important but are not always well understood. In brief, they are:

the inquiry is not limited to the legal form;

an arrangement may still be a tax avoidance arrangement even if it hag commercial or other non-tax avoidance purposes;

the relevance of commercial and other non-tax avoidance purposes;

examining the economic effects does not involve identifying arrangements that are economically equivalent."

62.We now revert to the second aspect of the term "transaction", i.e., giving due recognition to the fundamental principle that a GAAR like section 109 is not intended to operate on all types of tax planning, but only against certain types or categories of transactions that amount to tax avoidance. In other words, we turn to consider the acute problem of how the line between tax mitigation ("good" tax planning) and tax avoidance ("bad" tax planning) is to be drawn in relation to section 109. As is clear from the earlier part of this judgment, this question has been (and continues to be) of abiding concern to Courts in all jurisdictions. In our view, the most pragmatic approach to the problem is to draw up a list (taking the benefit of the experience in other jurisdictions, both legislative and judicial) of those factors or characteristics which, if found in or in relation to a transaction, may result in the transaction being regarded as a tax avoidance scheme and hence within the legislative intent behind section 109. The list is certainly not intended to be exhaustive and may be added to from time to time as actual cases keep arising. Ultimately, regard must be had to the facts and circumstances of the case under consideration. Since this is apparently the first time that a Superior Court in this country has had to consider section 109, a listing of the various factors or characteristics also has the advantage of providing a "baseline" with which the start. The factors or characteristics that may indicate or establish tax avoidance include (but, we emphasize, are certainly not to be regarded as being limited to) the following:--

a. The transaction appears to be artificial, which would include (without limitation) the characteristics of being abnormal or uncommon, lacking a business or other non-tax purpose, or deviating from economic reality. In this context, reference can be made to the following observations of the Privy Council (while considering the Jamaica GAAR) in Commissioner of Taxpayer Audit and Assessment v. Cigarette Co. of Jamaica Ltd. (in liq) [2012] UKPC 9, [2012] STC 1045 (at pg. 1053):

"[22] ... [A] transaction is an abstract construct. Every, transaction is in a sense artificial in that it is put together by two or more parties in order to create or alter legal rights and obligations as between them. ... [A] transaction is 'artificial' if it has, as compared with normal transactions of an ostensibly similar type, features that are abhormal and appear to be part of a plan. They are the sort of features of which a well-informed bystander might say, 'This simply would not happen in the real world.' Recognising a transaction as artificial in this sense is an evaluative exercise calling for legal experience and judgment...."

In an earlier case also from Jamaica, Seramco Ltd. Superannuation Fund Trustees v. Income Tax Commissioner [1977] AC 287, Lord Diplock in the Privy Council had observed that "Artificial" is ... not a term of legal art; it is capable of bearing a variety of meanings according to the context in which it is used" (pg. 298).

b. The transaction appears to be contrived, which would include (without limitation) an appearance of unreality.

c. The transaction appears to involve pretence or is an artifice. This factor was specifically mentioned by the NZ Supreme Court in Ben Nevis (at para [97], pg. 329): "whether an arrangement is an artifice or involves a pretence will often be highly relevant to whether there is an arrangement that has a purpose of tax avoidance".

d. The transaction appears to be a sham. Here the term "sham" is used in a technical sense, as explained by Diplock, LJ in the Court of Appeal case of Snook v. London & West Riding Investments Ltd. [1967] 1 All ER 518, 528:

"I apprehend that, if it [i.e., the term "sham"] has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing I think, however, is clear in legal principle, morality and the authorities .. that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating:"

e. The transaction is circular. The factor is explained in the following terms in the Interpretation Statement (para 335, pg. 73): "... in the context of tax avoidance, what is relevant is circularity that leads to the effective neutralisation or distortion of the economic outcomes. The use of circular arrangements may disguise the reality of the absence of genuine economic outlays. Thus, when taking into account form alone, circularity is often encountered in a tax avoidance context when different parts of a circular movement of funds are afforded different tax treatments, such as an arrangement where expenditure is claimed to be deductible but the equivalent receipt is not assessable".

f. The time at which the transaction was entered into and/or the length or duration of the transaction or elements thereof or the period during which it was carried out may indicate or establish a tax avoidance scheme. "Timing aspects include the duration of the arrangement and the intervals between particular events in a transaction" (Interpretation Statement at para 297, pg. 65). In a treatise on the subject, Tax Avoidance Law in New Zealand by James Coleman (2013), the learned author puts the matter thus: "Duration may be an issue not just in the sense of the extraordinary length of some arrangements but also when there is too short a duration for the claimed commercial justification to be credible" (pg. 98).

g. The manner in which the transaction was entered into or carried out may also indicate or establish a tax avoidance scheme. To refer again to the Interpretation Statement (para 284, pg. 62, emphasis in original): "The manner in which the arrangement is carried out refers to the particular way the arrangement has been structured. It will be relevant to consider whether the particular structure chosen differs from usual commercial practice, whether there are unusual features of the arrangement, whether the structuring is hard to understand from a commercial point of view and whether the structure adopted has the effect that sections of the Act apply or do not apply. Examining these aspects will generally help in reaching a view on what is really achieved commercially and economically and whether the provisions have been used in a way Parliament intended "

h. There are steps or elements inserted into the transaction without any business or commercial sense and/or for which no such reasonable explanation or justification can be given.

63.On point needs to be emphasized. In the end, it is the facts and circumstances of the particular case that are crucial and decisive. The apparent existence of any one or more of the factors noted above (and any additional factors that may be added to the list subsequently from time to time) is not necessarily decisive in and of itself. The facts have to be looked as a whole. The generality of the interpretive approach to section 109 at large, that the question is whether the section, construed purposively, is intended to be applied to the transaction, viewed realistically, should not be lost sight of. Merely because a transaction is complex does not of itself put it in the tax avoidance category. And merely because the transaction appears simple and straightforward does not necessarily and always mean that it is permissible tax mitigation. To quote again from the Interpretation Statement:--

"389. The Commissioner recognises that not all uses or non-applications of the Act constitute tax avoidance. Section BG 1 will not apply merely because of a particularly complex or unusual set of facts, undesirable policy outcomes, or very substantial tax advantages compared to alternative structures." (pg. 83)

"316. Undue complexity is also a concept that is sometimes referred to in relation to artificiality or contrivance. However, complexity does not necessarily equate to tax avoidance. An arrangement that is artificially structured so that it uses the Act in a way Parliament did not contemplate may still be a relatively simple transaction. Equally, the fact an arrangement is complex does not necessarily mean the arrangement uses the Act in a way that is outside Parliament's contemplation. It is true, however, that complexity, and particularly complex steps that do not achieve or alter commercial or economic outcomes, will often indicate that the form of the arrangement does not reflect the commercial and economic reality...." (pp. 69-70)

64.With the analysis and discussion of the term "transaction" concluded, we now turn to consider certain other aspects of section 109. It will be noted that subsection (2) contains a definition of "tax avoidance scheme", but this expression is used only in the first of the three clauses that comprise subsection (1). This leads to the question, can the Department apply the other two clauses outside of, and independently from, a tax avoidance scheme? And, there is a corollary. Clauses (a) and (c) both refer to the "recharacterisation" of a transaction, whereas clause (b) refers to a transaction being "disregarded". Is the Department, in considering a tax avoidance scheme limited only to recharacterisation? In other words, is it that in a tax avoidance scheme the Department cannot disregard an element of a transaction that does not have substantial economic effect? In our view, section 109 has to be applied holistically and purposively. In answer to the questions posed above, we come to two conclusions. Firstly, section 109 applies only in respect of a tax avoidance scheme as defined in subsection (2) and not otherwise. Clauses (b) and (c) have no independent operation or effect outside a tax avoidance scheme. Secondly, in respect of a tax avoidance scheme, any one or more of the clauses may be applied. Simply because clauses (b) and (c) do not expressly refer to a tax avoidance scheme is of no moment.

65.We now turn to consider the definition of "tax avoidance scheme" in greater detail. The most important concept here is "purpose". In our view, at least three issues arise in respect of this term: (i) what is meant by "purpose"; (ii) is the "purpose" to be ascertained objectively or subjectively; and (iii) what is meant by "main" purpose? For reasons that will shortly become clear, the first two issues need to be taken up together. Here, we can take the benefit of the case law especially of New Zealand and Singapore. However, as will be seen, the points that arise in the context of the first two issues are of some complexity and require a much closer examination of the actual language used in the GAAR provisions in the foreign jurisdictions than has hitherto been necessary.

66.By way of a preliminary observation, it is to be noted from the GAAR provisions of Australia, New Zealand and Singapore that they use the expression "purpose or effect" (for texts, see the Annex). In Ashton and another v. Inland Revenue Commissioner [1975] 3 All ER 225 ("Ashton"), an appeal from New Zealand, it was observed in the Privy Council that "[I]f an arrangement has a particular purpose, then that will be its intended effect. If it has a particular effect, then that will be its purpose" (pg. 232). Thus, purpose and effect have the same meaning, and according to the learned author whose work has been cited above, the words "represent a tautology rather than separate tests" (pg. 67). And in the Interpretation Statement the NZ Department, after setting out the relevant passage from Ashton has opined that the "interpretation of the words "purpose or effect" remains the same following Ben Nevis" (see paras 175-77). In AQQ, the Singapore Court of Appeal noted (at para [45]) that both the taxpayer and the Revenue accepted the interpretation of "purpose or effect" as given in the High Court decision being appealed against. In the latter Court ([2012] SGHC 249), the foregoing observation from Ashton was set out (at para [73]) and it was concluded: "Hence, "purpose" and "effect" are treated as synonymous". All of this means that, in considering section 109 (where the term "effect" is not used in conjunction with "purpose") in light of the foreign case law, we do not have to be concerned about any distinctions between "purpose" and "effect". However, as we will see, this conclusion remains subject to a point that relates to the second issue. At present the conclusion must therefore be regarded as provisional.

67.Now, the Privy Council in Newton, which it will be recalled was an appeal from Australia, considered the meaning of the expression "purpose or effect" as used in the then applicable Australian GAAR (s. 260; for text, see the Annex). Newton has been accepted in all jurisdictions here considered as laying down the correct meaning of, and approach to, the expression "purpose or effect". In the course of delivering the advice of the Board, Lord Denning inter alia said this (pg. 465):--

"The word "purpose" means, not motive but the effect which it is sought to achieve - the end in view. The word "effect" means the end accomplished or achieved. The whole set of words denotes concerted action to an end - the end of avoiding tax."

So, at first sight it would appear that "purpose" as used in section 109 simply could mean both the effect sought to be achieved, i.e., the end in view, as well as the end actually accomplished or achieved. However, such a conclusion would be based on an incomplete appreciation of Newton. The reason is that a little later in the judgment, Lord Denning said as follows in a passage that has also been much quoted and cited and which came to be known as the "predication test" (pg. 465-66; emphasis italicized in original, underlined added):

"... the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only with the means which they employ to do it. It affects every "contract, agreement or arrangement" (which their Lordships will henceforward refer to compendiously as "arrangement") which has the purpose or effect of avoiding tax. In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect - which it does - irrespective of the motives of the persons who made it....

In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section."

Thus, the motive of the individuals involved was held irrelevant. As the words emphasized by Lord Denning show, the arrangement had to be looked at objectively. It was the purpose or effect of the arrangement itself alone that mattered, and, as the learned Law Lord noted (as Lord Denning then was; of course, later he became a much more famous and celebrated master of the Rolls), this followed from the very words of the GAAR itself (i.e., section 260). Thus, consideration of the arrangement was an objective and not a subjective exercise. This understanding of Newton was applied in Ashton, the appeal to the Privy Council from New Zealand. The then applicable GAAR in that jurisdiction was section 108 (for text see the Annex), and the Privy Council noted ([1975] 3 All ER at 231) that that provision was "very similar" to the Australian GAAR considered in Newton. The relevant passages from Newton were cited and it was held that "[t]hese observations of Lord Denning in relation to s 260 of the Australian Act are equally applicable to s 108" (ibid). The learned author whose work has been cited above has also noted that the "purpose of the arrangement as opposed to the effect of the arrangement is not in fact an issue because the test is objective" (pg. 67). And the Interpretation Statement also makes the same point: "The courts have held that the "purpose or effect" of an arrangement is determined objectively and the motive of the parties is irrelevant" (pg. 39, para 175).

68.The same position obtains in Singapore. In AQQ the Court of Appeal held as follows:--

"45. ... Applying the "predication principle" that emerges from Lord Denning's judgment in [Newton], the words are to be construed conjunctively so as to refer to the objectively ascertained effect of the arrangement in question. ... [emphasis in original]

46. Read as a whole, the "predication principle" is thus concerned with the characterisation of the objective ends of an arrangement, that is, whether it may be predicated from the observable acts by which an arrangement is implemented that it was implemented in that way so as to achieve the ends stated in any of the limbs in s 33(1) [i.e., the Singapore GAAR; for text see the Annex]." [emphasis supplied]

69.To sum up, "purpose" and "effect" have been held to be synonymous in the GAAR provisions of Australia, New Zealand and Singapore. This has resulted in a conjunctive reading of the two terms, and a rendering of their meaning as set out in Newton. However, crucially this is also linked to, and dependent on, the conclusion that the purpose of the arrangement has to be determined objectively and the motive or purpose of the parties is irrelevant. The conjunctive reading and the conclusion as to objectivity go hand in hand. It is for this reason that what we have identified in para 65 above as the first two issues must be conflated. Now, while the first issue is easily determined in terms of Newton, the conclusion as regards the second issue, that the purpose is to be determined objectively and not subjectively, is not so easily reached in respect of section 109. There are two reasons for this difficulty. Firstly, it will be seen from the Australian, New Zealand and Singapore GAAR provisions that they refer to "purpose or effect" solely with reference to the arrangement or scheme itself. Thus, section 260 (the Australian GAAR) applied to any arrangement having or purporting to have the purpose or effect of tax avoidance. In New Zealand all the versions of the GAAR were and are in similar terms. Section 108 spoke of any arrangement that "has or purports to have the purpose or effect", section 99 of any arrangement "the purpose or effect" of which was "tax avoidance", and section YA 1 (the current GAAR) defines a tax avoidance arrangement as an arrangement that has "tax avoidance as its purpose or effect". The Singapore GAAR (s. 33; for text see the Annex), in its subsection (1), refers to the "purpose or effect of any arrangement". In contrast to all of these, our GAAR appears, at least at first sight, to be worded differently. Subsection (2), defines a tax avoidance scheme as "any transaction where one of the main purposes of a person in entering into the transaction" is tax avoidance (emphasis supplied). Thus, the purpose appears expressly linked to the person entering into the transaction. In the other jurisdictions, the GAAR makes no such reference, and the case law excludes the motive or purpose of the person who entered into the arrangement. This difference raises the question whether the determination under section 109(2) is to be objective or subjective.

70.Secondly, when the Singapore GAAR is considered, it will be seen that subsection (3) of section 33 provides that it does not apply to, inter alia, an arrangement that comes within the scope of clause (b) of the subsection. Such an arrangement is thus not tax avoidance. And, when clause (b) is examined, it is found to make reference to the "main purposes" of the transaction. "Main purpose" is of course the very expression used in section 109(2). Now, in AQQ the Singapore Court of Appeal, in a rather complex analysis carried out in paras [69] to [74] (which it would be too burdensome to set out in full here), has concluded that the "main purpose" in section 33(3)(b) is to be determined subjectively, i.e., here it is the taxpayer's subjective purpose that is relevant. Thus, the Singapore GAAR is to be read as providing that the expression "purpose or effect" as used in subsection (1) is to be determined objectively without any reference to or regard for the taxpayer's purpose, while the expression "main purpose" as used in subsection (3)(b) is to be determined subjectively with reference to the taxpayer's purpose. Since it is the latter expression that is expressly used in section 109(2) this dichotomy again raises the question whether the expression "main purpose" as used in our GAAR is to be read objectively or subjectively.

71.We have carefully considered the point. We recall once again our view that it is fundamental for a proper approach to section 109 to interpret and apply it purposively. Keeping this in mind, we conclude firstly, that the fact that subsection (2) specifically relates the purpose of entering into the transaction to the person who has entered into the same does not bar an objective approach or require subjectivity. The purpose of the person in entering into the transaction is to be determined objectively. The subjective approach has no role to play in either subsection (2) or section 109 as a whole. But secondly, since the subsection expressly refers to the person entering into the transaction (unlike the position in the other jurisdictions), this must be given due recognition and accommodation. In our view, the correct approach to the first two issues raised in para 65 above is therefore as follows. The "purpose" of a transaction, as used in section 109, means both or either (as the case may be in respect of the particular transaction being considered) the effect sought to be achieved, i.e., the end in view, as well as the end actually accomplished or achieved. This must be objectively determined and in the first instance the Department would be entitled to do so by referring only to the transaction itself, without regarding the purpose of the person in entering into the transaction. In other words, the Department would be entitled to consider the purpose of the transaction as the purpose of the person in entering into the transaction. However, the Department must in the first instance regard this as a provisional conclusion and issue an appropriate notice to the taxpayer asking him to show-cause why this conclusion should not be confirmed. (Such notice may be part of a broader notice, e.g., one under section 122(9) or section 177.) It would then be open to the taxpayer to show, though only objectively, either that the Department has misconstrued or misunderstood the transaction and/or that the purpose was something other than, and not, tax avoidance. The taxpayer would be entitled to do so also by referring to the purpose of the person in entering into the transaction, but again, only on an objective basis. If the taxpayer is able to do so, then this would trump any conclusion arrived at provisionally by the Department. (We may note that while the inquiry at the departmental level should follow this two-step process, when the question is being considered by a higher forum (such as the High Court or the Appellate Tribunal) there the entire matter can be looked at together.) Of course, it must be remembered that if the transaction has more than one purpose, it is always the "main" purpose that is relevant, and the inquiry must be directed towards this end. What is meant by "main purpose" is considered in a moment. But here we may note that if the transaction has only one purpose, that must be the purpose of a person in entering into the transaction. This clarification is necessary because the way subsection (2) is drafted can, on one possible reading, mean that the definition of "tax avoidance scheme" therein contained only applies if there is more than one (main) purpose. In other words, on this reading, if there is only one purpose, it would be permissible, e.g., to look at only the transaction itself. In our view, such a reading would be incorrect. In order to maintain consistency, the purpose of the transaction must in either case be the purpose of a person in entering into the transaction.

72.We may also note that it must be kept in mind that throughout this judgment, whenever an expression such as "purpose of the transaction" or suchlike is used in the context of or with reference to section 109, that is simply a convenient shorthand way of referring to the "main purpose of a person in entering into the transaction". All such expressions used in this judgment should therefore be read and understood in this manner and not otherwise.

73.Before taking up the third issue, another comment is necessary in relation to the show-cause notice that, in our view, must be issued as explained in para 71 above. If the Department is of the view that there is only one purpose, the notice must so indicate. If the Department is of the view that the tax-avoidance purpose is one of two or more purposes, then the notice should make this clear and also provide, to the extent possible, some indication of what the Department considers to be the other non-tax avoidance purpose(s). If the show-cause notice is silent in any of these respects, the taxpayer would be entitled to assume that the Department's case is that there is only one purpose, as set out in the notice. Furthermore, the taxpayer in his reply would be entitled to show, as the case may be, that there is more than one purpose or that the non-tax avoidance purpose(s) are not as indicated by the Department or that the tax avoidance purpose as claimed by the Department is not a "main" purpose. Of course, we emphasize that the entire exercise is to be on an objective basis, carried out in the manner as explained above.

74.We now turn to consider the third issue, namely what is meant by the "main purpose" of the transaction. The use of the word "main" to qualify "purpose" makes it clear that it is insufficient if one of the purposes of the transaction is tax avoidance. It has to be a "main" purpose. Although, as noted above, the expression "main purpose" is used in the Singapore GAAR, there is no direct discussion as such of what the expression might mean in either the High Court or Court of Appeal judgments in AQQ. In our view, the issue at hand can initially be approached obliquely, by referring to the New Zealand GAAR. In its previous version, section 99 (for text, see the Annex), the GAAR provided in its subsection 2(b) that it applied also to a situation where the arrangement had two or more purposes or effects, and one of those purposes or effects was tax avoidance. But, a purpose or effect that was "merely incidental" was excluded (see the words in brackets). In other words, if an arrangement had two or more purposes or effects and one of those was tax avoidance but was only a purpose or effect "merely incidental", then such an arrangement would not be regarded as tax avoidance. This exception is continued in the current GAAR (see clause (b) of the definition of tax avoidance arrangement in section YA 1). In our view, it would be useful to consider what the New Zealand jurisprudence regards as a "merely incidental" purpose, since such a purpose could not be a "main purpose" and hence would fall outside the scope of section 109(2). This consideration, to which we now turn, will reveal a class or category of purposes that do not fall within section 109 and go some way in helping how the "main purpose" is to be determined.

75.In New Zealand, the correct approach to what is "merely incidental" appears to be the formulation of Woodhouse P in the Court of Appeal in the Challenge case, though the learned Justice gave a dissenting judgment. He observed as follows ([1986] 2 NZLR at 533; emphasis supplied):

"As a matter of construction I think the phrase "merely incidental purpose or effect" in the context of section 99 points to something which is necessarily linked and without contrivance to some other purpose or effect so that it can be regarded as a natural concomitant."

Thus, if a purpose or effect is tax avoidance, but is necessarily linked, without contrivance, to some non-tax avoidance purpose or effect in such manner that the former can be regarded as a natural concomitant of the latter, then it will be a purpose or effect that is "merely incidental". And in Alesco New Zealand Ltd v. Commissioner of Inland Revenue [2013] 2 NZLR 175 ("Alesco"), the Court of Appeal held as follows (pg. 185, internal citations omitted, emphasis supplied):

"[30] In our judgment the use of the phrase "not merely" reinforces a conclusion that a tax avoidance purpose, if found, will offend s BG 1 [the current NZ GAAR] unless it naturally attaches to or is subordinate or subsidiary to a concurrent legitimate purpose or effect. Identification of a business purpose will not necessarily protect a transaction from scrutiny where tax avoidance is viewed as "a significant or actuating purpose which had been pursued as a goal in itself". And, significantly, the case will be rare where use of a specific provision in a manner outside Parliament's contemplation might result in the tax avoidance purpose of the arrangement being merely incidental."

Thus, if the purpose or effect that could or would otherwise constitute tax avoidance naturally attaches to a non-tax avoidance purpose or effect or is subordinate or subsidiary to a concurrent legitimate (i.e., non-tax avoidance) purpose or effect, it will be regarded as "merely incidental" and hence beyond the scope of the GAAR. In our view, these formulations can be usefully adopted for our purposes. Thus, if the purpose of a transaction is shown to come within either Woodhouse P's formulation in Challenge or that of the Court of Appeal in Alesco, then it would be merely incidental to a non-tax avoidance or legitimate purpose and could not therefore be regarded as a "main purpose" within the meaning of section 109(2). It must be kept in mind that even if the Department contends that there is only one purpose, it would be open to the taxpayer to show that there is also a non-tax avoidance purpose and that the purpose contended for by the Department is merely incidental to the latter.

76.Having considered what is "merely incidental" and hence not a "main purpose", we now turn to consider what can come within the scope of the latter expression. In our view, the second portion highlighted in the passage extracted above from Alesco can provide useful guidance. Without at all attempting to be exhaustive or conclusive, a good working description is that the "main purpose" of a person in entering into a transaction is tax avoidance if such avoidance is a significant or actuating purpose which has been, or could have been, pursued as a goal in itself. (Of course, if the transaction is claimed by the Department to have only one purpose, then the above description would apply mutatis mutandis.) Thus, if there is more than one main purpose, and one of those is claimed by the Department to be tax avoidance, then it must be shown (of course objectively, and in the manner, as explained above) that the person in entering into the transaction did or could have pursued the said purpose as a goal in itself, and the purpose was significant or actuating in the person having entered into the transaction. (We may note in passing, though without elaborating, that what has been said in this para is somewhat at variance with the approach apparently taken in the New Zealand case law.)

77.It would be convenient to pause here and summarize the rather extended legal analysis and discussion carried out in paras 35 to 76 above. We emphasize that this summary is not intended to be self-contained, and must be read in the light of, and conformably with, the actual analysis and discussion. Thus, e.g., any view, observation or conclusion not included in the summary is not for that reason to be ignored or regarded as subordinate. All points noted above must be construed and applied appropriately and given their due place, by reading the judgment as a whole. Subject to the foregoing, the analysis may be summarized as follows:--

(A)Generally:

a. A distinction must be drawn between permissible tax planning (i.e., tax mitigation or minimization) and impermissible tax planning (i.e., tax avoidance). A GAAR is concerned only with the latter and not the former. Tax mitigation or minimization is lawful and outside the scope of a GAAR.

b. On account of the foregoing distinction, one major difficulty in applying any particular GAAR is how and where to draw the line between tax mitigation and tax avoidance. This is an acute problem faced by courts in all jurisdictions.

c. A GAAR, must necessarily be given a purposive interpretation. In other words the Court must ascertain its object and spirit and apply the provision accordingly. This is the correct approach to all such provisions, and section 109 is no exception.

d. If the general interpretative approach to tax legislation in the jurisdiction concerned is also purposive, then the two approaches are in harmony and aligned, and the GAAR can be given its due effect. However, if the general interpretive approach is literal, strict and formalistic, then the two approaches are incompatible, may be inconsistent and even clashing. In such a jurisdiction there would be a formidable difficulty in giving the GAAR its due and proper effect, since the GAAR must at some point necessarily interact with specific provisions of the tax code. In such a jurisdiction, the scope and application of the GAAR would be circumscribed and could be compromised, perhaps even fatally so.

e. The general interpretive approach to tax legislation in Pakistan is based on the Rowlatt, J formulation. The tax jurisprudence of this country still adopts the literal, strict and formalist approach in contrast to the other jurisdictions here considered, where a purposive approach has been adopted. Thus, there is a clear difficulty in applying section 109 to the specific pro visions of the 2001 Ordinance, in the former's interaction with the latter. While section 109 must be given a purposive approach, it must always be remembered that the specific provisions with which it interacts in relation to any particular set of facts and circumstances are to be interpreted and applied in terms of the orthodox and established tax jurisprudence, and not otherwise. How this dichotomy is best addressed will emerge gradually, as (or rather if) more cases come before the Court.

(B) With reference to section 109:

f The general interpretive approach to the section at large is as follows: The question is whether section 109, construed purposively, is intended to apply to the transaction, viewed realistically. This aspect is fundamental and must be kept in mind at all times when considering the section, including its various components and parts.

g. The term "transaction" is not defined. It must be construed broadly and its scope and effect determined objectively. The detailed description given in the paras above as to what is meant by "transaction" must be kept in mind, and applied as appropriate, but it is not intended to be exhaustive.

h. In discovering and drawing the line between "good" tax planning (mitigation) and "bad" tax planning (avoidance)---a distinction fundamental to a proper appreciation and application of section 109---the most practical approach is to list (without being exhaustive or conclusive) those factors which, if found in or in relation to a transaction, would indicate that it is the sort of transaction that is sought to be caught by the section. It is only a transaction that falls in such category that can be regarded as tax avoidance. A number of those factors have been listed and considered herein above.

i. The various clauses of subsection (1) of section 109 can only be applied in the context of a tax avoidance scheme. Equally, consideration of such a scheme is not limited to clause (a), but the other two clauses can also be invoked in appropriate cases.

j. The term "purpose" as used in section 109 can mean either or both of (depending on the facts and circumstances of the transaction being considered) the effect sought to be achieved, i.e., the end in view, as well as the end actually accomplished or achieved.

k. "Purpose" has to be determined objectively and not subjectively. However, due recognition must be given to the fact that section 109, unlike the GAAR provisions in the other jurisdictions here considered, refers not simply to the purpose of the transaction, but rather to the purpose of a person in entering into the transaction. Thus, while in the other jurisdictions the motive or purpose of the persons who are party to the arrangement, scheme, etc. has been held to be irrelevant, such a truncation is not possible in the context of section 109.

l. Keeping the foregoing in mind, the proper approach to determining the "purpose" is as follows. (It must be kept in mind that the entire enquiry and exercise is, at all stages, objective and not subjective.) In the first instance, the Department may consider the transaction alone without having regard to the person who entered into the transaction. In other words, the purpose of the former may be equated with the latter. Such a conclusion can only be provisional. The Department must issue a proper show-cause notice in this regard, which can be part of a larger notice. It would then be open to the taxpayer (without limiting his defence) to show, inter alia, any, some or all of the following, whether together or in the alternative. (i) the Department has misconstrued or misunderstood the transaction; (ii) the purpose of the transaction, even while looking at the transaction alone, was something other than, and not, tax avoidance; or (iii) the purpose of the person in entering into the transaction was not tax avoidance. If the taxpayer is able to do so, then this would trump any conclusion arrived at provisionally by the Department.

m. The notice to be issued by the Department must state that the purpose as therein identified is the sole purpose, unless the Department contends that it is one of two or more purposes, in which case some indication, to the extent possible, is to be given of what the Department considers to be the other non-tax avoidance purpose(s). If the notice is silent in any of these respects, the taxpayer would be entitled to assume that the Department's case is that there is only one purpose, as set out therein. The taxpayer would be entitled to show, as the case may be, (i) that there is more than one purpose or (ii) that the non-tax avoidance purpose(s) are not as indicated by the Department or (iii) that the tax avoidance purpose as claimed by the Department is not a "main" purpose.

n. If the taxpayer is able to show that the tax avoidance purpose is "merely incidental", then it is not a "main" purpose of a transaction. If a purpose is necessarily linked, without contrivance, to some non-tax avoidance purpose in such manner that the former can be regarded as a natural concomitant of the latter, then the tax avoidance purpose is "merely incidental". Equally, if a tax avoidance purpose is subordinate or subsidiary to a concurrent legitimate (i.e., non-tax avoidance) purpose, then it is also "merely incidental". The tax avoidance purpose cannot in such circumstances be a "main" purpose.

o. Subject to the foregoing sub-para, and without at all attempting to be exhaustive or conclusive, a good working description of a "main purpose" of a person in entering into a transaction being tax avoidance is as follows. If tax avoidance is a significant or actuating purpose which has been, or could have been, pursued as a goal in itself, then the purpose can be regarded as a "main" purpose.

p. If there is only one purpose which is claimed to be tax avoidance, then the foregoing sub-paras will still apply, though mutatis mutandis.

78.Having concluded the legal analysis and discussion, we now turn to consider the facts and circumstances of the case at hand, and judge whether the Department has been able to make out a case for the application of section 109.

79.It will be recalled that the Department's case revolves around the sale and subsequent re-purchase of shares held by the respondent in 10 listed companies during the year in question. It is the respondent's case that it held this portfolio as "available for sale". The respondent's accounts for the relevant year explain the term as follows:

"The financial assets including investments in associated undertakings where the company does not have significant influence that are intended to be held for an indefinite period or time or may be sold in response to the need for liquidity are classified as available for sale.

Subsequent to initial recognition at cost, these are stated at the lower of cost or market value (market value being taken as lower if the fall is other than temporary) in accordance with the requirements of S.R.O. 938 issued by SECP in December 2002...."

The notification referred to is SRO 938(I)/2002 dated 12.12.2002, issued by the SECP exercising its statutory powers as insurance regulator under the Insurance Ordinance, 2000 ("2000 Ordinance"). The rules so notified are the Securities and Exchange Commission (Insurance) Rules, 2002 ("2002 Rules"). (For the relevant extracts, see the Annex.)

80.For the respondent taxpayer, it was contended that the foregoing provisions made it mandatory for an insurance company to set out the value of shares held as "available for sale" in its books at acquisition or cost basis. Over time, the value of the shares increased manifold, but on account of the statutory requirement, they continued to appear in the respondent's books at the much lower acquisition value. It was to "capture" the increase and take the commercial and business benefit of the same that the respondent entered into a series of sale and repurchase transactions. As presently relevant, there were 63 sale transactions, to which there were 63 corresponding repurchase transactions. However, learned counsel for the taxpayer emphasized that each of these transactions was, legally, a standalone transaction, which had to be treated and dealt with in its own right, independently and irrespective of any other transaction. Thus, according to the taxpayer in respect of each block of shares, there were two separate and distinct transactions which, as again emphasized by learned counsel, were fully and properly documented with actual movement of both the shares and the funds in relation thereto. The shares, both up to the time they were sold and after they were repurchased, were held throughout as "available for sale". The only difference was that after the repurchase, they appeared on the respondent's books at the much higher (i.e., then current) market value but, learned counsel emphasized, this was merely the acquisition cost when the shares were repurchased. The capital gains made on the sale transaction in each case was entitled to the benefit of Rule 6A of the Fourth Schedule to the 2001 Ordinance. Since the result obtaining from the repurchase transactions showed the shares in the books at the acquisition cost (though of course at the then prevailing market value), no credit was ever taken for any "appreciation" in the investments within the meaning of Rule 5(b). On any view of the matter therefore, so it was contended, there was no tax avoidance.

81.The business and commercial reasons that impelled the respondent to undertake the entire exercise were stated by learned counsel for the taxpayer in the following terms in his written synopsis (pg. 40, emphasis in original):

"17. It is respectfully submitted that the transaction of sale and purchase of shares was undertaken obviously not to avoid tax but same have been taken after duly informing all the shareholders by complying with the prescribed particulars of information under the Companies Ordinance, 1984. That the transaction undertaken had sufficient business/economic purpose inter alia:--

a) To improve the financial statements by selling strategic shares available for sale at market price realizing the gain to bring into the books of accounts and financial statements the affect of realization by sale;

b) The financial worth of the company was enhanced. The breakup value of the respondent company's shares increased from Rs. 80 to Rs. 426.

c) The market value of shares of respondent company increased from Rs. 271 to Rs. 399.

d) Since the worth/breakup value and the increase in share price of the company's financial worth increased which attracts the prospective insurers who after examining the balance sheet can feel confident that such company in the event of any loss can compensate them adequately. In addition earning per share also increased from Rs. 14.5 to Rs. 367.92. Simultaneously reserves increased after cash dividend disbursement at 40% whereas bonus shares were issued at 60% against last years 30% bonus shares.

e) It may be respectfully submitted that one of the most important factor may be pleased to be noted by this Hon'ble Court is that actual realization of the capital gains were available as "distributable profits" whereas, appreciation in any form does not result in distributable profits.

It is therefore respectfully submitted that it has business and economic decision and tax was not the fundamental motivating factor. Gain realized of course, was exempted/excluded under Rule 6A of the Fourth Schedule...."

During the hearing, we had asked learned counsel to provide us with the particulars of the share transactions relevant for present purposes, in percentage terms. The following table was annexed to the written synopsis as Annexure "A":

IGI Insurance Company Limited
Percentage Equity Holding in Associated Companies (%)
Company	Before Purchase	After Purchase
Packages Limited	22.07	22.27
Nestle Pakistan Limited	9.52	9.49
Aventis Limited	12.05	12.05
Unilever Pakistan Limited	2.18	2.17
Mitchell's Fruit Farms Limited	3.72	3.72
Siemens Pakistan Engineering Company Limited	0.87	0.88
Treet Corporation	13.01	13.01
Zulfiqar Industries Limited	3.25	3.25
Tri-Pack Films Limited	2.37	2.37
BOC Pakistan Limited	0.15	0.15

The reference to "Before Purchase" is to the shares as held before they were sold. The "After Purchase" percentage is that upon repurchase.

82.In contrast to the foregoing, learned counsel for the Department submitted that the sale and repurchase transactions in respect of each block of shares could not be characterized as separate transactions. In each case, they were back-to-back transactions. This was evidenced by the fact that each set of transactions occurred within 24 to 72 hours. Furthermore, no details or particulars of the third party (or parties) with whom the transactions took place were disclosed. The brokerage house selected was an associated company being a member of the same group. Thus learned counsel submitted, there were no 126 separate sale transactions, but rather only 63 sale-repurchase transactions. The purpose of the whole exercise was patently to avoid having to pay tax on the appreciation of investments. The entire matter fell squarely within the scope of Rule 5(b), which had been correctly applied by recharacterizing the transactions in terms of section 109.

83.We take up the first question that arises whenever section 109 is to be invoked: what is the transaction? Remembering always that the section is to be construed purposively and is intended to be applied to the transaction viewed realistically, we have no hesitation in concluding that the Department was correct in viewing each sale-repurchase as one composite transaction for purposes of the section. The submission on behalf of the respondent that each sale and repurchase was to be viewed separately cannot be accepted. In other words, the Department was correct that there were 63 transactions and the taxpayer was incorrect in asserting that there were 126 transactions. In our view, the facts and circumstances of the case accord with the Department's conclusion. It is not denied that each transaction of sale and repurchase was concluded rapidly, within 24 to 72 hours. It is clear from the table reproduced above that the respondent at all times intended to retain its portfolio and to maintain it in precisely the same terms as it started with. On any realistic view, the taxpayer did not regard the sale of each block of shares as separate and distinct from the repurchase. Each sale and repurchase was inextricably interlinked. Indeed, it would not be wrong to conclude that there was also an overarching "transaction", i.e., that each of the 63 transactions was part of a "global transaction" in terms of which the taxpayer (to the extent presently relevant) turned around its portfolio of shares "available for sale". However, it is not necessary to go so far. It suffices to conclude that the Department, in applying section 109, was entitled to regard each sale and repurchase of a block of shares as a "transaction" within the meaning of that section. In view of this conclusion, it may, be noted that the word "transaction" as herein after used means, unless the context otherwise indicates, to each set of sale-repurchase carried out by the taxpayer. In other words, herein after "transaction" refers to the 63 transactions, claimed and identified by the Department, and not the 126 transactions claimed by the respondent.

84.The next question that arises is whether the transactions as so identified came within any of the categories or had the requisite factors as brought them within the scope of section 109 (see para 62 above). Again, we have no hesitation in concluding that this was so. The transactions on the face of it were artificial and contrived. It boggles the mind to think that the taxpayer, as in effect contended by it, was able 63 times to find one or more parties that were wiling first to purchase a block of share and then almost immediately to sell it back to the taxpayer. For this to have happened even a few times would strain credulity. For any person to claim that it happened over and over again, and dozens of times, is so farfetched that the transactions can be effectively ruled out as real or genuine transactions. To recall the words of the Privy Council reproduced in para 62(a) above, this is the sort of thing of which "a well-informed bystander might say, 'This simply would not happen in the real world". The taxpayer never intended to give up the shares of any of the companies concerned. It ostensibly "sold" and then almost immediately "repurchased" each block. It is difficult to imagine a transaction more contrived. However, we emphasize that we do not conclude that the transactions were a "sham". That term, as has been noted above, is used in the context of tax avoidance in a technical sense. We conclude only that the transactions were contrived and artificial, and amounted to pretence. That finding is sufficient to answer the question now under consideration in favour of the Department.

85.We now come to the next, and more difficult, part of the analysis. That is to consider the question, what was the purpose? This question raised can be divided into more than one sub-question. Was tax avoidance, as claimed by the Department, the sole purpose, or one of two or more main purposes? If there was a non-tax avoidance purpose, was that a main purpose? If so, was the tax avoidance purpose (claimed by the Department) merely incidental to the non-tax avoidance purpose? We identify these sub-questions not to answer them sequentially, but rather to highlight the complexity involved in determining the purpose. And of course, it must be remembered, in the context of section 109 we are concerned with the purpose of a person in entering into the transaction that is claimed to be the tax avoidance scheme.

86.The taxpayer has given its reasons, i.e., its purpose, of engaging in the transactions, as extracted from the written synopsis filed by learned counsel. However, we have held that section 109 applies objectively and subjectivity is to find no place in construing and applying the section. Therefore, the reasons set out in the extract cannot be considered, since they are clearly subjective to the taxpayer. However, even when the matter is viewed objectively, it is clear that the respondent had a non-tax avoidance purpose in entering into the transactions, and that it was a main purpose. Here, the very reasons that led us to accept the Department's view of what constituted the transactions work in the respondent's favour. The very swiftness with which the repurchase limb of each transaction was carried out, and the fact that the respondent ended up with precisely the same portfolio as before, indicates that the taxpayer had some specific purpose in mind. And, given the restrictions imposed by the 2000 Ordinance and the 2002 Rules, that could only be record the increased value of the shares in its books-clearly a non-tax avoidance purpose. We may note here that section 46(1) of the 2000 Ordinance provides that each insurance company is to submit its accounts to the regulator in such form and manner as may be prescribed. Rule 16 of the 2002 Rules provides that the statements set out in Annex II thereof shall be submitted in compliance of the requirements of section 46(1). Part B of the said Annex II applies to non-life insurance companies like the respondent, and paragraph 13 thereof categorically states that "available for sale investments shall be stated at the lower of cost or market value (market value being taken as lower if the fall is other than temporary)". Therefore, learned counsel for the taxpayer was correct in submitting that there was a mandatory statutory constraint operating on the respondent. The only way to "get around" this constraint was to first ostensibly "sell" the shares and then "repurchase" them, i.e., to enter into the transactions. But, we are satisfied that there was a non-tax avoidance purpose involved here and that it was a main purpose. Viewed objectively, the respondent always had the intent of retaining its portfolio of "available for sale" shares, but entered into the transactions with the purpose of "capturing" the enhanced market value in its books.

87.Although the point was never in issue, it is nonetheless interesting to note one aspect of the transactions. Along the way, in the first limb of each transaction, i.e., the "sale" part thereof, the respondent claimed the benefit of Rule 6A of the Fourth Schedule. In our view, had it been in issue that the transaction was entered into as a tax avoidance scheme to obtain the benefit of Rule 6A, the conclusion could well have been that any such tax avoidance was "merely incidental" in the sense as explained above. The first limb of each transaction was integral and essential to the respondent's non-tax avoidance purpose. It was, for very obvious reasons, and simply put, unavoidable. But it was this very first limb that attracted the benefit of Rule 6A. In our view, this benefit was therefore necessarily linked, without contrivance, to the non-tax avoidance purpose in such manner that the former could be regarded as a natural concomitant of the latter.

88.We now come to the nub of the matter. When each transaction was concluded, and the relevant block of shares reappeared in the respondent's books at a much higher acquisition cost (i.e., the then prevailing market value) had the taxpayer, in reality, taken credit for the appreciation in the investment? Was the claim that there was no change-inasmuch as the shares at all times appeared only at acquisition cost, whatever that may have been at any given time-an attempt to disguise what was really happening, thus allowing the Department to re-characterize the transaction in terms of section 109? It is pertinent to Note that the 2002 Rules, in the aforementioned Part B of Annex II, have appended thereto the statements required to be filed by a non-life insurance company. In compliance of these requirements, the respondent filed various statements for the tax year 2007 (with which we are concerned, and which corresponded to the calendar year 2006). One such statement was titled "Classified Summary of Assets in Pakistan" as at 31.12.2006. The entry relating to assets "available for sale" was as follows (amounts in Rupees):

Cost or book value (2006)	Market value (2006)	Cost or book value (2005)	Market value (2005)
8,737,945,000	9,256,946,000	1,653,363,000	8,065,704,000

The difference is at once starkly clear. In 2005, when the respondent did not undertake any activity equivalent to the transactions, there was a huge discrepancy between the book value of the portfolio and the market value, the latter being about five (4.87) times greater than the former. In 2006, once the transactions had been carried out, the picture was quite different. The difference had been essentially eliminated. This was of course because the increased value had been "captured" in the books. It was for this reason that the Department regarded that Rule 5(b) of the Fourth Schedule was applicable. The respondent had taken credit for the "appreciation" in the portfolio but, according to the Department, was attempting to disguise this by claiming that the portfolio was simply and only held, as before, at acquisition cost The Department sought to re-characterize the transactions in terms of section 109. Was it in law right and entitled to do so?

89.We have carefully considered this question. In our view, the answer must be in favour of the taxpayer and against the Department. This is so for two reasons. Firstly, we have held that the transactions had a non-tax avoidance purpose, which was a main purpose. Therefore, the tax avoidance purpose as claimed by the Department had to be one of two main purposes. We have, in para 76 above, held that a "main purpose" is tax avoidance if, for the person in entering into the transaction, such avoidance was a significant or actuating purpose which had been, or could have been, pursued as a goal in itself. When the totality of the facts and circumstances are considered from this perspective, we are unable to conclude that tax avoidance was a significant or actuating purpose of the respondent. The respondent was primarily concerned with "capturing" the market value of the shares on its books, and this was a main non-tax avoidance purpose. In entering into the transactions, and recording the increase in market value in terms that it did, the respondent was not actuated by the purpose of avoiding taking credit for the "appreciation" in the investments. Nor could it be regarded as a significant purpose for the respondent. It was not a goal that the respondent would have pursued in and of itself.

90.Secondly, it to be remembered that while section 109 is to be interpreted purposively, the specific provisions of the 2001 Ordinance with which it must interact are to be interpreted and applied in terms of the orthodox and established tax jurisprudence, which is based on the Rowlatt, J formulation. This fundamental dichotomy has been considered in detail in the paras above. Thus, Rule 5(b) of the Fourth Schedule, with which as per the Department's case section 109 must interact, is to be construed in terms of the strict, literal and formalist approach. Inasmuch as that the relevant portion of Rule 5(b), i.e., "any sums taken credit for in the accounts on account of appreciation, or gains on the realization of investments shall be treated as part of the profits and gains", leads to an increase in tax liability, these words have to be applied strictly and literally. Had a purposive approach been permissible here as well, then perhaps the conclusion could have been different. But that is not permissible. Read literally and strictly, it cannot be denied that the respondent has not taken credit in its accounts for any "appreciation" in the portfolio. In a literal sense, it has only done what it claims to have done: shown the value of the portfolio at all times at the acquisition cost. Rule 5(b) cannot therefore be applied to the facts and circumstances of the present case, even when the matter is cast in terms of section 109 as sought by the Department, in respect of the facts and circumstances at hand, the dichotomy between the interpretive approaches has defeated the case of the Department.

91.In view of the foregoing discussion and consideration, we ultimately conclude that the first question must be answered in favour of the taxpayer and against the Department. In view of this conclusion, it is not necessary to answer the second question.

92.Insofar as the third question is concerned, it comes squarely within the ratio decidendi of the judgment of this Court in EFU General (HC). Perhaps for this reason (and quite understandably) learned counsel hardly devoted any time or attention to this issue. This question is therefore also answered in favour of the taxpayer and against the Department.

93.In view of the foregoing, this Reference fails and is hereby dismissed. The Office is directed to send a copy of this judgment to the learned Appellate Tribunal in terms of section 133(5) of the 2001 Ordinance.

IN THE HIGH COURT OF SINDH, KARACHI

ITRA 6 of 2013

ANNEX

Abbreviations

1992 Act:Income Tax Act, 1922

1938 Act:Insurance Act, 1938

1979 Ordinance:Income Tax Ordinance, 1979

2000 Ordinance:Insurance Ordinance, 2000

2001 Ordinance:Income Tax Ordinance, 2001

A. Pakistan

I. Case Law

1.Commissioner of Income Tax, Central, Karachi v. Alpha Insurance Co. Ltd. and another PLD 1981 SC 293, ("Alpha Insurance")

2.Commissioner of Income Tax, Zone A Karachi v. Phoenix Assurance Co. Ltd. 1991 PTD 1028, ("Phoenix Assurance")

3.Central Insurance Co. and others v. Central Board of Revenue and others 1993 SCMR 1232 = 1993 PTD 766, ("Central Insurance")

4.Adamjee Insurance Co. Ltd. v. Central Board of Revenue and others 1989 PTD 1090 (SHC; DB) ("Adamjee Insurance")

5.EFU Insurance Company Ltd. v. Federation of Pakistan and others PLD 1997 SC 700, 1997 PTD 1693, ("EFU Insurance")

6.Commissioner (Legal) Inland Revenue v. EFU General Insurance Ltd. 2011 PTD 2042 = 2011 CLD 1300 ("EFU General (HC)")

II. Relevant statutory provisions (in material part)

(A) Income Tax Ordinance 2001

Section 99: [see the comparative Table below]

109. Recharacterisation of income and deductions.---(1) For the purposes of determining liability to tax under this Ordinance, the Commissioner may -

(a)recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme;

(b)disregard a transaction that does not have substantial economic effect; or

(c)recharacterise a transaction where the form of the transaction does not reflect the substance.

(2) In this section, "tax avoidance scheme" means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person's liability to tax under this Ordinance.

"(B) Comparative Table showing (in material part)

the special rules in relation to insurance companies in the

1922 Act, 1979 Ordinance and 2001 Ordinance

1922 Act	1979 Ordinance	2001 Ordinance (as amended up to Finance Act, 2007)
Section 10(7)	Section 26:	Section 99:
I Notwithstanding any-thing to the contrary contained in sections 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the First Schedule to this Act.	Notwithstanding any-thing contained in this Ordinance,- (a) the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Fourth Schedule;	The profits and gains of any insurance business shall be computed in accordance with the rules in the Fourth Schedule.
First Schedule:	Fourth Schedule:	Fourth Schedule:
[Rule] 6. (1) The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any expenditure, other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of investments, and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance. .	[Rule] 5 General insurance.--- The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts required under the Insurance Act, 1938 (IV of 1938) to be furnished to the, Controller of Insurance, subject to the following adjustments, namely:- (a) any expenditure or allowance, or any reserve or provision for any expenditure, or the amount of any tax deducted at source from any dividends or interest received which is not deductible in computing the income chargeable under the head "income from business or profession" shall be excluded;	[Rule] 5 General insurance.--- The profits and gains of any business of insurance (other than life insurance) shall be taken to be the balance of the profits disclosed by the annual accounts required under the Insurance Ordinance, 2000 (XXXIX of 2000), to be furnished to the Securities and Exchange Commission of Pakistan subject to the following adjustments - (a) any expenditure or allowance, or any reserve or provision for any expenditure, or the amount of any tax deducted at source from dividends or profit on debt received which is not deductible in computing the income charpeable under the head "Income from Business" shall be excluded;
[Rule] 3. In computing the surplus .--- (b) any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of securities or other assets, shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance-sheet on account or appreciation of or gains on the realization of the securities or other assets shall be included in the surplus : Provided that if upon investigation it appears to the Income-tax Officer after consultation with the Controller of Insurance that having due regard to the necessity for making reasonable provision for bonuses to participating policy-holders and for contingencies, the rateof interest or other factor employed in determining the liability in respect of outstanding policies is materially inconsistent with the valuation of the securities and other assets so as artificially to reduce the surplus, such adjustment shall be made to the allowance for depreciation of, or to the amount to be included in the surplus in respect of appreciation of, such securities and other assets, as shall increase the surplus for the purposes of these rules to a figure which is fair and just; .	(b) any amount either written off or taken to reserve to meet depreciation or loss on the realisation, of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realisation, of investments shall be treated as part of the profits and gains: Provided that the Deputy Commissioner is satisfied about the reasonableness of the amount written off or taken to reserve in the accounts to meet depreciation, or loss on the realisation, of investments, as the case may be. Provided that the Deputy Commissioner is satisfied about the reasonableness of the amount written off or taken to reserve in the accounts to meet depreciation, or loss on the realisation, ofinvestments, as the case may be. (c) Nothing contained in this rule shall be construed to authorise deduction of any expenditure or allowance or reserve or provision in excess of the limits laid down in the Insurance Act, 1938 (IV of 1938). [Rule] 7. Definitions. --For the purposes of these rules,- (1) "investments"; includes securities, stocks and shares; ... [Rule] 8. Application of this Schedule.-- The provisions of this Schedule shall apply notwithstanding anything contained in this Ordinance or any law for the time being in force.	(b) any amount either written off or taken to reserve to meet depreciation or loss on the realization of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation, or gains on the realization of investments shall be treated as part of the profits and gains, provided the Commissioner considers the amount to be reasonable; and (c) no deduction shall be allowed for any expenditure, allowance, reserve, or provision in excess of the limits laid down in the Insurance Ordinance, 2000 (XXXIX of 2000), unless the excess is allowed by the Securities and Exchange Commission and is incurred in deriving income chargeable to tax. [Rule] (6A) Exemptionof Capital Gains from the sale of shares.- In computing income under this Schedule, there shall not be included "capital gains", being income from the sale of ... shares of a public company (as defined in subsection (47) of section 2) ... derived up to tax year ending on the thirtieth day of June, 2008. [Rule] 7. Definitions.-- In this Schedule, "investments" includes all forms of shares, debentures, bonds, deposits and other securities, derivative instruments, and includes immovable property whether or not occupied by the insurer; ... Section 2(47): "public company" means--... (b) a company whose shares were traded on a registered stock ex-change in Pakistan at any time in the tax year and which remained listed on that exchange at the end of that year;...

(C) Insurance Ordinance, 2000 and Rules

(Relevant extracts)

(i) Insurance Ordinance, 2000

46. Accounting and reporting.---(1) Every insurer shall at the expiration of each year prepare and deliver to the Commission with reference to that year annual statutory accounts comprising the following statements duly audited by an approved auditor: ...

(b)in the case of a non-life insurer,

(i)a statement of assets and liabilities;

(ii)a statement of profits and losses;

(iii)a statement of cash flows;

(iv)a statement of premiums;

(v)a statement of claims;

(vi)a statement of expenses;

(vii)a statement of investment income;

(viii)a statement of claims analysis;

(ix)a statement of exposures; and

(x)such other statements as may be prescribed by the Federal Government;

each in such form as may be prescribed by the Commission and prepared in accordance with such regulations as are issued by the Commission from time to time in this behalf.

(ii) Securities and Exchange Commission

(Insurance) Rules, 2002

16. Accounting and reporting.---For the purposes of sub-sections (1) and (2) of section 46 of the Ordinance, the statements as set out in Annexure II shall be furnished.

Annexure II

[See rules 16 and 21(1)]

Statements required to be filed by life and non-life insurers

While preparing statements an insurer carrying on life insurance business shall comply with the requirements of Part A and an insurer carrying on non-life insurance business shall comply with the requirements of Part B.

Part B. Accounting Regulations for Non-life Insurance

13. Investments and Investment Properties

(1) For the purpose of all statements prepared under these regulations, and for the purpose of S.34(1) of the Insurance Ordinance, 2000.

a) available for sale investments shall be stated at the lower of cost or market value (market value being taken as lower if the fall is other than temporary)....The market value of investments at the balance sheet date shall be disclosed, as shall the effect of non-compliance with IAS 39; ....

AUSTRALIA

I. Case Law

Newton and others v. Commissioner of Taxation of the Commonwealth of Australia [1958] 1 AC 450, [1958] UKPC 14 ("Newton") (Privy Council)

II. Relevant statutory provisions (in material part)

Income Tax Assessment Act, 1936

(A) PART IVA--SCHEMES TO REDUCE INCOME TAX

(applicable to schemes on or

after 27.05.1981)

SECTION 177A

Interpretation

(1) In this Part, unless the contrary intention appears ...

"scheme " means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

. . .

(3)The reference in the definition of scheme in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.

(4)A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.

SECTION 177D

Schemes to which this Part applies

Scheme for purpose of obtaining a tax benefit

(1) This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

Have regard to certain matters

(2) For the purpose of subsection (1), have regard to the following matters:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme:

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

Tax benefit

(3) Despite subsection (1), this Part applies to the scheme only if the relevant taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme.

. . .

Schemes outside Australia

(5) This section applies whether or not the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia.

(B) Section 260

(applicable to schemes before 27.05.1981)

Contracts to evade tax void

(1) Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly:

(a) altering the incidence of any income tax;

(b) relieving any person from liability to pay any income tax or make any return;

(c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or

(d) preventing the operation of this Act in any respect;

be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.

(2) This section does not apply to any contract, agreement or arrangement made or entered into after 27 May 1981

Canada

I. Case Law (Supreme Court)

1. Canada Trustco Mortgage Co. v. Canada [2005] 2 SCR 601, [2005] SCC 54 ("Trustco")

2. Copthorne Holdings Ltd. v. Canada [2011] 3 SCR 721, [2011] SCC 63 ("Copthorne")

II. Relevant statutory provisions (in material part)

(from the Income Tax Act, RSC, 1985)

PART XVI

Tax Avoidance

Definitions

245(I) In this section,

tax benefit means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty; (avantage fiscal)

tax consequences to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount; (attribut fiscal)

transaction includes an arrangement or event. (operation)

General anti-avoidance provision

(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

Avoidance transaction

(3) An avoidance transaction means any transaction

(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

Application of subsection (2)

(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction

. . .

(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.

.

[From General Definitions as contained in section 248]

Series of transactions

(10) For the purposes of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series.

Hong Kong

Case Law

Collector of Stamp Revenue v. Arrowtown Assets Ltd. [2003] HKCFA 46 ("Arrowtown")

New Zealand

I. Case Law

1. Ashton and another v. Inland Revenue Commissioner [1975] 3 All ER 225 ("Ashton") (Privy Council)

2. Challenge Corporation Ltd. v. Commissioner of Income Tax [1986] 2 NZLR 513 ("Challenge")

High Court decision at pg. 516, Court of Appeal at pg. 530 and Privy Council at pg. 556. Privy Council judgment also available at [1986] UKPC 45, [1987] AC 155

3. Commissioner of Inland Revenue v. BNZ Investments Ltd. [2002] 1 NZLR 450, [2001] NZCA 184 ("BNZ") (New Zealand Court of Appeal)

4. Peterson v. Commissioner of Inland Revenue [2006] 3 NZLR 433, [2005] UKPC 5 ("Peterson") (Privy Council)

5. Ben Nevis Forestry Ventures Ltd. v. Commissioner of Inland Revenue [2009] 2 NZLR 289, [2008] NZSC 115 ("Ben Nevis") (Supreme Court)

6. Alesco New Zealand Ltd v. Commissioner of Inland Revenue [2013] 2 NZLR 175, [2013] NZCA 40 ("Alesco")

II. Relevant statutory provisions (in material part)

A. Predecessor GAAR (from the Land and

Income Tax Act 1954)

(prior to 1974 amendment)

108. Agreements purporting to alter incidence of taxation to be void.---Every contract, agreement, or arrangement made or entered into, whether before or after the commencement of this Act, shall be [absolutely void]* in so far as, directly or indirectly, it has or purports to have the purpose or effect of in any way altering the incidence of income tax, or relieving any person from his liability to pay income tax.

*= Substituted with "absolutely void as against the Commissioner for income tax purposes" in 1968

B. Previous GAAR (from the Income Tax Act, 1976)

99. Agreements purporting to alter incidence of tax to be void.---(1) For the purposes of this section-

"Arrangement" means any contract, aareement, plan, or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect:

"Tax avoidance" includes?

(a) Directly or indirectly altering the incidence of any income tax:

(b) Directly or indirectly relieving any person from liability to pay income tax:

(c) Directly or indirectly avoiding, reducing, or postponing any liability to income tax.

(2) Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner for income tax purposes if and to the extent that, directly or indirectly,-

(a) Its purpose or effect is tax avoidance; or

(b) Where it has 2 or more purposes or effects, one of its purposes or effects (not being a merely incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relate to, or are referable to, ordinary business or family dealings.-

whether or not any person affected by that arrangement is a party thereto.

C. Current GAAR (from the Income Tax Act, 2007):

BG 1 Tax avoidance

Avoidance arrangement void

(1) A tax avoidance arrangement is void as against the Commissioner for income tax purposes.

Reconstruction

(2) Under Part G (Avoidance and non-market transactions), the Commissioner may counteract a tax advantage that a person has obtained from or under a tax avoidance arrangement.

YA 1 Definitions

In this Act, unless the context requires otherwise,-

arrangement means an agreement, contract, plan, or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effect.

tax avoidance includes-

KMZ/C-13/Sindh Order accordingly.