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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.

CHAPTER 1 TAX PLANNING & TAX MANAGEMENT

1. Explain briefly the concepts of Tax planning, tax Management, Tax avoidance and Tax
Evasion.
Ans: the concept of tax planning, tax management, tax avoidance and tax evasion is as given below –
(1) Tax Planning: Tax planning may be defined as an arrangement of one’s financial affairs in
such a way that, without violating in any way the legal provisions, maximum advantage is
taken of all tax exemptions, deductions, concessions, rebates, allowances and other reliefs or
benefits permitted under the Act so that the burden of taxation on the assessee is reduced to
the minimum.
(2) Tax Management: Tax management means systematic, well-devised and well-organized
steps taken by an organisation in order to ensure compliance with tax laws within the
specified time and in the specified manner with a view to minimize the tax cost.
Thus, tax management refers to compliance of tax laws to as to avoid interest and penalties
which can be levied on such non compliances whereas tax planning is aimed to minimize the
tax liability.
(3) Tax Avoidance: Tax avoidance is a device which takes advantages of the loopholes in the
law to reduce or avoid or transfer one’s tax burden. It is also defined in Mc Dowell & Co.
Ltd. v. CTO [1985] 154 ITR 148 (SC) that tax avoidance is an art of dodging tax without
breaking law.
(4) Tax Evasion: Tax Evasion means avoiding tax liability by dishonest means like
concealment of income, falsification of accounts, inflation of expenses, violation of law, etc.
Tax evasion devices are unethical and evasion, once proved, attracts heavy penalties and
prosecution.

2. Differentiate between tax planning, tax management and tax evasion, Or

Distinguish between ‘tax planning’ and ‘tax management’. (5 Marks, Dec.2010-NS) OR
“Tax Management is essential, tax planning is desirable and tax evasion is objectionable.”
Elaborate the statement.
Ans: The difference between tax planning, tax management and tax evasion is given below –

Aspect Tax Planning Tax Management Tax Evasion

Meaning Tax planning refers to Tax management refers to
Tax Evasion refers to
availment of maximum compliance of tax laws so
evasion of tax by
benefit of deductions, as to avoid interest and
adopting dishonest means
exemptions, rebates, etc. penalties. like falsification of
so as to reduce the tax account, concealment of
liability. income, etc.
Aim Tax planning is done Tax management is done It is unlawful and
within the framework of to comply with all the unethical in nature and

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.
law and beneficial requirements specified in includes an element of
provisions in law are used the provisions of the law. deceit
to reduce tax liability.
Legality This concept is acceptable Tax management is to be It is illegal, therefore,
to the judiciaries in India exercised mandatorily by prohibited.
the assessee
Provisions It allows use of beneficial It helps in making the tax Tax evasion, once proved,
in Law provisions of law to planning successful by attracts heavy penalties
reduce tax liability, hence avoiding the costs arising and prosecution.
it is a rewarding concept due to non-compliance of
for professionals or law.
experts
Approach Tax planning has
It relates to past In case of tax evasion,
futuristic approach since (assessment proceedings, there is nothing like past,
it aims to reduce the tax appeal, revision, present or future
liability of the future rectification, etc.), present approach. It aims to avoid
years only. (filing of return of the payment of tax after
income) and future the tax liability has arisen.
(corrective action)
Impact The benefits arising from As a result of effective It attracts stringent
tax planning substantial tax management, penalty and prosecution.
particularly in long run. prosecution penalty,
interest, etc. can be
avoided

3. Differentiate between “Tax Avoidance” and “Tax Evasion”. (5 marks, June 2010-NS)
Ans: The difference between tax avoidance and tax evasion is given below –
Aspect Tax Avoidance Tax Evasion
Meaning Tax avoidance refers to arranging the affairs in Tax Evasion refers to evasion
such a way that the tax liability is avoided by of tax by adopting dishonest
the use of artifice or device, which are sham or means like falsification of
make-believe, thus, defeating the basic intent of accounts, concealment of
the legislature behind the statute. income, etc.
Legality In spite of being within the framework of law, It is unlawful and unethical in
it takes advantages of loopholes in the law. nature and includes an element
of deceit
Acceptability The judiciaries in India do not accept or It is illegal, therefore,
recognize this concept. prohibited.
Impact It results in revenue loss to Government and Tax evasion, once proved,
brings a sense of injustice and inequality in a attracts heavy penalties and
common man. Now a days, in order to check prosecution.
tax avoidance, statute contains specific
provisions.

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.
Illustration 1 :- Nature of Acts: specify whether the following acts can be considered as an act of – (i)
tax management; or (ii) tax planning; or (iii) tax evasion:
(i) Amit deposits Rs.45,000 in P.P.F account so as to reduce tax payable from Rs.10,000 to 5,500.
(2 marks, June, 2001) (1 marks, June 2013)
(ii) Ajit Industries Ltd., installed an air conditioner costing Rs.60,000 at the residence of a director as
per terms of his appointment; but treats it as fitted in quality control section in the factory. This is
with the objective to treat it as plant for the purpose of computing depreciation. (2 Marks, June,
2001) (1 Marks, June 2013)
(iii) Anil industries Ltd. maintains register of tax deduction effected by it to enable timely
compliance. (2 Marks, June, 2001)
(iv) Surbhi Ltd., issues a credit not for Rs.36,000 payable to Suresh, who is son of Surjit, managing
director of the company. the purpose is to increase his income from Rs.1,00,000 to Rs.1,36,000
and reduce its income correspondingly. (2 Marks, June, 2001) (1 Marks, June 2013)
(v) Y, a non-resident indian citizen visit India every year only for 181 days to remain non-resident (1
Marks, June 2013)
(vi) Z Ltd., deducts tax a t source but fails to deposit the same in government treasury. (1 Marks,
June 2013)
(vii) B transferred 1,000 debentures of a company to his son C before the due date of interest to
reduce his tax liability. (1 Marks, June 2013)
Ans: The aforesaid acts are discussed below –
(a) Tax Planning The claiming of deduction from gross total income
under section 80C by depositing Rs.45,000 in PPF
account to reduce tax payable from Rs.19,000 to
Rs.10,000 comes under tax planning.
(b) Tax Evasion Depreciation can be claimed only if the asset is used for
business or profession of the assessee. Here, the AC has
been installed at residence of the director, which is for
personal purposes. By showing it as fitted in quality
control section of the factory and thereby claiming
depreciation thereon, Ajit Industries Ltd., would be
violating provisions of the Law. Thus, it is tax evasion.
(c) Tax management Anil Industries Ltd., has maintained the register of tax
deduction effected by it to ensure timely compliance
with law. It is tax management by Anil Industries Ltd.
(d) Tax Evasion Surbhi Ltd., has issued to credit note to Suresh with a
view to transfer a part of its income to Suresh. Suresh,
being an individual, will be liable to tax at normal rates
applicable to individual, which in this case, will be lower
than the rate applicable to Surbhi Ltd. Had such transfer
of income not been effected, the income would have
been taxed in the hands of Surbhi Ltd. at a higher rate of
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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.
30%. Such an act is a mode of tax evasion.
(e) Tax planning In this case Mr.Y will be regarded as non-resident and
his foreign income will not be taxable in India.
(f) Improper tax management In this case company will be liable to pay interest and
penalty
(g) Tax avoidance In this case Mr.B wants to avoid his tax liability by
transferring the same before the due date.

Illustration 2:- Tax evasion / tax avoidance: Indicate whether the following acts can be considered as
tax evasion / tax avoidance:
(a) Rajat deposits Rs.70,000 in PPF account to avail tax deduction under section 80C
(b) Raman is using a motor car for his personal purposes, but charges as business expenditure. (5
Marks, June 2010-NS)
Ans: The answer is as follows –
(a) Tax Planning : it is neither a tax avoidance nor tax evasion. The claiming of deduction from gross
total income under section 80C by depositing Rs.70,000 in PPF account comes under tax
planning.
(b) Tax evasion : it is an unlawful act to treat a personal expenditure as business expenditure, which
is disallowed under the law Raman is resorting to unfair means to claim deduction by falsification
of records. Therefore, it is tax evasion and illegal.

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.

OBJECTIVES OF TAX PLANNING

The basic objectives of tax planning are:

(a) Reduction of tax liability:

A taxpayer can derive the maximum savings by arranging his affairs in accordance with
the requirements of the law. Since every taxpayer wishes to retain a maximum part of his
earnings, rather than parting with it and facing the resource crunch, it would be to his
benefit to plan his tax affairs properly and avail the deductions and exemptions admissible
under the Act. He can succeed in doing so by being aware of the implications of the
various businesses/other transactions and the various concessions for which he is eligible.

Example: A company incurs expenditure on scientific research or provides contribution to

National laboratory to claim higher deduction and thereby reducing tax liability.

(b) Minimisation of litigation

Where a proper tax planning is adopted by the taxpayer in conformity with the provisions
of the taxation laws, the incidence of litigation is minimised. This saves him from the
hardships and inconveniences caused by the unnecessary litigations, which at times even
stretch upto the High Court/Supreme Court levels.

Example: Tax planning is not looked upon as bad in the law while tax avoidance by say
reducing income of one person by shifting it to another person or tax evasion by showing
less income or inflating expenditure attracts litigation, which is neither good for the
assessee nor for the Indian judiciary system which is already overburdened with large
number of cases.

(c) Productive Investment

Channelisation by a taxpayer of his otherwise taxable income to the various investment
schemes too is one of the prime objectives of tax planning as it is aimed to attain twin
objectives:

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.

(i) to harness the resources for socially productive projects, and

(ii) to relieve the taxpayer from the initial burden of taxation, and to convert the earnings
so made into means of future earnings.

Example: Deductions/Exemptions/Rebates under the Act are primarily to provide

incentives for making productive investment e.g. A person can invest in bonds of NHAI or
REC to reduce its tax burden on long term capital gain arising on a capital asset by availing
exemption under section 54EC.

(d) Healthy growth of economy

The growth of a nation’s economy is synonymous with the growth and prosperity of its
citizens. In this context, a saving of earnings by legally sanctioned devices fosters the
growth of both.

Tax planning measures are aimed at generating white money, thus having a free flow and
generation without reservations for the overall progress of the nation. Conversely, savings
by dubious means lead to generation of black money. Tax planning assumes a great
significance in this context.

Example: Under the income-tax act, several deductions are provided to boost
infrastructure facilities in India i.e. whether it is for making roads or for making hospitals
or for making hotels etc. This results in overall growth of the economy by providing
incentive to people engaged in these activities.

(e) Economic stability

Proper tax planning results in economic stability by way of:
(i) availing of avenues for productive investments by the tax payers and
(ii) harnessing of resources for national projects aimed at general prosperity of the
national economy and reaping of benefits even by those not liable to pay tax on their
incomes.

Therefore, notwithstanding the legal rulings in cases like McDowell, real and genuine
transactions aimed at a valid tax planning cannot be turned down merely on grounds of reduction
of the tax burden.

In the context of corporate taxation since the incidence of tax on Indian companies is considered
quite high the scope for ploughing back of profits for expansion and modernisation of the
existing plant and machinery etc. is considerably narrowed down. Thus the company has to plan
its taxation in such a way that will enable it to avail the tax incentives etc. provided by the
Government to the maximum. In this context, it was held in the case of M.V. Valliapan v. ITO
(1988) 170 ITR 238 (Mad.), by a proper tax planning, a smooth tax flow from the tax payer to
the tax administrator, without recriminations, is ensured.

IMPORTANCE OF TAX PLANNING

Tax planning is important for reducing the tax liability. However, there are other factors also,
because of which tax planning is considered as very important:

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.

(i) Timing is crucial for claiming deductions:

Where an assessee has not claimed all the deductions and relief, before the assessment is
completed, he is not allowed to claim them at the time of appeal. It was held in CIT v.
Gurjargravures Ltd. (1972) 84 ITR 723 that if there is no tax planning and there are lapses
on the part of the assessee, the benefit would be the least.

(ii) Tax planning exercise is more reliable:

Tax planning exercise is more reliable since the Companies Act, 2013 and other allied laws
narrow down the scope for tax evasion and tax avoidance techniques, driving a taxpayer to
a situation where he will be subjected to severe penal consequences.

(iii) Incentives by Government to promote activities of public interest:

Presently, companies are supposed to promote those activities and programmes, which are
of public interest and good for a civilised society. In order to encourage these, the
Government has provided them with incentives in the tax laws. Hence a planner has to be
well versed with the law concerning incentives.

(iv) Adequate time for tax planning:

With increase in profits, the quantum of corporate tax also increases and it necessitates the
devotion of adequate time on tax planning.

(v) Enables to bear burden of taxes during inflation:

Tax planning enables a company to bear the burden of both direct and indirect taxation
during inflation. It enables companies to make proper expense planning, capital budget
planning, sales promotion planning etc.

(vi) Capital formation attracts huge deduction:

Capital formation helps in replacing the technologically obsolete and outdated plant and
machinery and enables the carrying on of manufacturing operation with a new and more
sophisticated system. Any decision of this kind would involve huge capital expenditure
which is financed generally by ploughing back the profits, utilisation of reserves and
surplus along with the availing of deductions are revenue expenditure incurred for
undertaking modernisation, replacement, repairs and renewal of plant and machinery etc.
Availability of accumulated profits, reserves and surpluses and claiming such expenses as
revenue expenditure are possible through proper implementation of tax planning
techniques.

(vii) Money saved is money earned:

In these days of credit squeeze and dear money conditions, even a rupee of tax decently
saved may be taken as an interest free loan from the Government which perhaps an
assessee need not repay.

Thus, any legitimate steps taken by an assessee directed towards maximising tax benefits,
keeping in view the intention of law, will not only help him but also the society and promote the
spirit behind the legal provisions. All the assesses who practice tax planning may have the
satisfaction that they are contributing their best to the nation’s broad objectives and goals in a
welfare State like ours.

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.

DIVERSION OF INCOME v/s APPLICATION OF INCOME

The Supreme Court decision in case of CIT v. Sitaldas Tirthdas (1961) 41 ITR 367 is the
authority for the proposition that where by an obligation, income is diverted before it reaches the
assessee, it is deductible from his income as for all practical purposes it is not his income at all
(as it is diversion of income by overriding title) but where the income is required to be applied to
discharge an obligation after it reaches the assessee, it is

not deductible (as it is called as application of income). Thus, there is the difference between the
diversion of income by an overriding title and application of income as the former is deductible
while the latter is not.
Thus, when management of a company is taken over by another person from the existing team in
consideration of percentage of future profit to the latter, in computing the business income of the
former, such percentage of profits is deductible [CIT v.
Travancore Sugars and Chemicals Ltd. (1973) 88 ITR 1 (SC).

The Delhi High Court’s ruling in CIT v. Stellar Investments Ltd. (1991) 192 ITR 287 to the
effect that the Assessing Officer in terms of the power available to him under section 68 of the
Act, is not precluded from ascertaining the genuineness of the share capital, must be heeded.
There have been occasions when unscrupulous promoters have ploughed back their black money
into new companies by subscribing to shares in thousands of fictitious names. If the bluff is
called, the unexplained credit in the form of share capital would be treated as income under
section 68 of the Act.

ESSENTIALS OF TAX PLANNING

Successful tax planning techniques should have following attributes/requisites:

(a) Upto date knowledge of Tax Laws:

It should be based on upto date knowledge of tax laws. Also, assessee must be aware of
judgements of the courts. In addition, one must keep track of the circulars, notifications,
clarifications and administrative instructions issued by the CBDT from time to time.

(b) Disclosure and furnishing of information to Income-tax Department:

The disclosure of all material information and furnishing the same to the income tax
department is an absolute prerequisite of tax planning as concealment in any form would
attract the penalty clauses – the penalty often ranging from 100% to 300% of tax sought to
be evaded.

(c) Planning to be within the framework of law:

Whatever is planned should not only satisfy the requirements of legal provisions as stated
but should also be within the framework of law. It means that the use of sham transactions
and colourable devices, which are entered into just with a view to circumvent the legal
provisions, must be avoided.

A genuine tax planning device, aimed at carrying out the rules of law and courts’ decisions
and to overcome heave burden of taxation, is fully valid.

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J.K.SHAH CLASSES CS PROFESSIONAL – D.T.

(d) Capability to achieve desired objectives and amenable to changes:

A planning model must be capable of attainment of the desired objectives of a business and
be amenable to its possible future changes. Therefore, all the important areas of corporate
planning, whether related to strategic planning, project planning or operational planning
involving tax considerations for long term or short term management objectives and
policies should be strictly scrutinised in relative situations. Foresight is the essence of a
business. Tax planning is one of its important attributes.

TYPES OF TAX PLANNING

The tax planning exercise ranges from devising a model for specific transaction as well as for
systematic corporate planning. These are:

(a) Short range and Long range Tax Planning

Short range planning refers to year to year planning to achieve some specific or limited
objective. For example, an individual assessee whose income is likely to register unusual
growth in particular year as compared to the preceding year, may plan to subscribe to the
PPF/NSC’s within the prescribed limits in order to enjoy substantive tax relief. By
investing in such a way, he is not making permanent commitment but is substantially
saving in the tax. It is one of the examples of short range planning.

Long range planning involves charting out a plan at the beginning of the income year to be
followed around the year. This type of planning may not benefit immediately as in case of
short term tax planning but it is likely to help in long run. For example, when an assessee
transfers his equity shares to his minor son, he knows that the income from the shares will
be clubbed with his own income. But clubbing would also cease after minor attains
majority. Also if bonus shares are issued by the company, income from such bonus shares
shall not be taxable in hands of assessee ( i.e. transferor).

(b) Permissive tax planning

It involves making plans which are permissible under different provisions of tax laws. Tax
laws of our country offer many exemptions and incentives. Planning to take advantage
different tax concessions and incentives and deductions etc.

(c) Purposive tax planning

It involves making plans with specific purpose to ensure the availability of maximum
benefits to the assessee
– Through correct selection of investment.
– Making suitable plan for replacement of assets.
– Varying the residential status.
– Diversifying business activities and incomes etc.

It is based on the measures which circumvent the law. The permissive tax planning has the
express sanction of the Statute while the purposive tax planning does not carry such sanction.
For example, under Section 60 to 65 of the Act, the income of the other persons is clubbed in the
income of the assessee. If the assessee is in a position to plan in such a way that these provisions
do not get attracted, such a plan would work in favour of the tax payer because it would increase
his disposable resources. Such a tax plan would be termed as ‘Purposive tax planning’.

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