Budget 2012-13 has proposed the introduction of General Anti-Avoidance Rule (GAAR) which has raised a tremendous controversy on various issues. One of the issues is about the burden of proof. Normally the burden of proof of evasion is discharged by Revenue. Here the proposal is to throw it back to the taxpayer. Here in this treatise I propose to discuss only this.
What comes to my mind first on this issue is a similar amendment made in 1955 of section 178A of the Sea Customs Act, 1978 to introduce the provision that where goods like gold and diamond were seized under the “reasonable belief” that the goods were smuggled, the burden of proof shall be on the person from whose possession the goods were seized. This led to a great consternation on the ground that the whole concept of burden of proof was compromised. Top most lawyers argued on both sides on the issue of constitutionality of an amendment. A constitutional bench, however, held that in view of the requirement of section 178A that the seizing officer should entertain “a reasonable belief that the goods seized were smuggled”, there was no violation of the constitutionality under section 14 & 19. The court elaborated that the amended legislation was “in line with the great principle underlying the structure of the rights guaranteed by Article 19 viz, a balancing of the need for individual liberty in the matter inter alia of the right to hold property or of the right to trade, with the need for social control in order that the freedoms guaranteed to the individual subserve the larger needs - moral, social and economic”.
The preamble in the case of the proposed GAAR clearly indicates a situation which was similar in 1955 when smuggling of gold and diamond was so rampant that the government could not control it by the ordinary provision of burden of proof. The preamble here says the following, “In the above background and keeping in view the aggressive tax planning with the use of sophisticated structures, there is a need for statutory provisions so as to codify the doctrine of “substance over form” where the real intention of the parties and effect of transactions and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to camouflage the real intent and purpose. Internationally several countries have introduced, and are administering statutory General Anti Avoidance Provisions. It is, therefore, important that Indian taxation law also incorporate a statutory General Anti Avoidance Provisions to deal with aggressive tax planning”.
In view of the above, a provision has been made in the proposed GAAR at A(iii) that “it shall be presumed that obtaining tax benefit is the main purpose of an arrangement unless otherwise proved by the taxpayer”. This is where the burden of proof has been shifted to the taxpayer. Normally evasion is to be proved by the Revenue. This special provision of shifting the burden of proof to the tax payer is precisely similar to the section 178A of the Sea Customs Act, 1878 and subsequent Section 123 of the Customs Act, discussed above. On the customs side there is a provision for forming a “reasonable belief” before seizing the goods such as gold and diamond and shifting the burden of proof to the party, here also in the case of GAAR there is an elaborate provision of satisfying four tests as given in A(ii). There is an additional requirement of procedure for invoking GAAR given in B (i) to (vii) which acts against arbitrariness. There is a similar provision also for the Conservation of Foreign Exchange and Prevenion of Smuggling Activity Act (COFEPOSA Act) that a screening committee consisting of five Additional Secretary level officers of different department must approve it before somebody can be detained under the Act.
The conclusion is that endowing special power to officers in a fiscal law to shift the burden of proof to the tax payer is constitutional provided that (i) there is evidence of rampant smuggling or evasion and (ii) there is a provision for stringent scrutiny before taking action.