Chapter 1 Concepts of Tax-planning “Taxes are what even an honest eitizen despises the most as human being PY very nature ts eS tHe out like to have tof al every good ining for mel and he would Pardly ke tha he fruits of hs labour are enjoyed by others and particularly by those with whom Ne 1 relationship, Hs Sill ty his best to see to it that his hard camed money is not taken away By OvnSTE forcibly ny from weity anatehing or by the rule of law, But itis elso a duty of the individual © Fae really om ayment of taxes so that the same may be available with him to make him an govaamnribg ts rood and honourable citizens. On the other hand, the practical concept oF NNO Taw st reallse the foo aacrewway Of tax tthe maximum, Therefore, the percenions of the APOE TT ae yeast | evfgotor are different, The taxpayer spares no efforts in maximising his profi and attracting tne eee coche. The tax-zolleetor, on the euher hand, ries to maximise revenue ihe the Framework of thw Tt ig here that the tax planning has assumed far-reaching importance in the confoun complexities of the taxation laws. he cost, he should also wary objective of id wealth ijust as every businessman tries to maximise his profits by reducing ¢ unt of tax, Thus, the p arrange his affairs in such a way, that he pays the least amo i fax planning isto save the hard labours of the taxpayer in enjoying the fruits of his income an to the maximum possible extent, 1.1 Methods commonly used by taxpayers to minimise tax 'As discussed above, the goal of the taxpayers is to min the following three methods are commonly used by him: 1. Tax evasion 2. Tax avoidance 3. Tax planning 1.2 Tax evasion ‘Unserupulous citizens evade their tax liability (a) Concealment of income; (B) Inflation of expenses to suppress income; (ec). Falsification of accounts; (@) Conscious violation of rules. ‘These devices are unethical an unethical means. Evasion, once prove: prosecution. Such an evader of tax is not a good citizen and tax evasion as a means to reduce tax liability eannot be advocated by any ore. 1,3 Tax avoidance Tax avoidance is minimising the incidence of tax by adjusting the affairs in such a manner that although itis within the four comers of the taxation laws but the advantage is taken by finding out bility ‘seis tax liability. To achieve this goal by dishonest means, Some of which are: \d have to be condemned. The courts also do not favour such d, not only attracts heavy penalties but may also lead toanagement Cy ¢ is that it is the art of dog, *! tein, % rate Tax Planning & 4 Corpo va abe laws. The shortest GEA OS of tax avoidane les i 7 loophole las veithout breaking, the 12%: ; ‘dance, the tax pay2t apparent x avoidance, the 18x Pays" TET gr device, often of a complex nature buy In the case of ta) Fe scheme om ye, or jee or completely avoid the t3% payable under the law Tn the words of Justice O. Chinnapy® Reddy of Supreme Court in MfcDowell & Co. Lig (1985) 154 ITR 148 (SC) at p. 160, the ‘evil consequences Of 12) summarised 25 under: (a) Substantial loss of much needed public revenue, (b) Serious turbance caused to the economy of the coun! money directly causing inflation. (oy. Large hidden loss to the eammunity By Some, of the best brains in the country being in, in the perpetual war waged between tax avoider and his expert team of advisers, lawyen, ® gecountants on one side, and the Tax Officer and his perhaps not so skillful advisers ais other side. Re (@)_ Sense of injustice and inequality whi unwilling or unable to profit by it. fives (or lack of it) of transferring the burden of tax lability to the shoulders of, uideless, good citizens from those of artful dodgers. As to the ethics of taxation, the earned Judge observed: We now live in a welfare State y financial needs, if backed by the law, have to be respected and met. We must recognise that 1h, behind taxation I yelfare legislation and i= 2 fave as much moral sanction as behind any other w Dretence to say that avoidance of tax nical and that it stands on no less mo honest peyment of taxation. ral plan the, ation is not unet 1.4 Tax planning Tax planning i are enjoyed by making Certain exemptions, deductions, rebates and reliefs, so and not frowned upon. even after McDowell's case: There might be a difference of opini ion Tax planning is permissible as these days Judges have started thinking in the in various quarters in respe:t of tax avoidance, interest of the State with 2 firm determination to leave the age-old accepted thinking of 1936 and ing of 1936 aod ie look into future. But tax planning is still not 1c j within the framework of law. He observes. ee ae ‘Tex planning may be legitim: ic it is withir 1 avoid the payment of tax by resorting to dubious metheds. It is the ob po eee iets honestly without resorting to subterfuges. AM ASE ETRE eye i ee ah ae devite fee eG he may be subjected in future, is ta be view vei ee sel Lraarauall oe enunetaed iete eel oe irrespective of the legitimacy or genui is ci tose oF SE ae spenel intheare feeeis tot affected the freedom of the citizen to ae ee eae aee clrcuntpertone oe ishes in the manner of doing any trade, ctivi eee ion = within the framework of law, unless the same fale ta he con of col Se : ‘ss the same falls in the category of colourable % y circumvents the law, without giving y, erimini x avoidance are manifol ‘a, d and pa the main purr’ particularly in a welfare State like our, try by piling up of mountains ofp. ey jch tax avoidance arouses in the breasts of those wh, Way © 5 the arrangement of financial activities in such a way that maximum tax benef. 3 ts use of all beneficial provisions in the tax laws. It entitles the assessce to ay ns to minimise bis tax liability. This is permedchap. 1 (b) The leamed Judges of the Ma, the decision in McDowell's case and the ofa scheme consisting of several ty from being ignored, merely on the 5 Concepts of Tax-planning High Court in Af, ¥alloppan's case went on to observe that nglish decisions which adopted the new approach in the case ‘ansactions does not rule out a transaction whieh is real and genuine f round that it results in reducing the tax burden. . (c) Similar views were also expressed in CWT v Arvind Narattan (1988) 173 ITR 479 (SC). when the Hon'ble Supreme Cour’s attention was invited to the observations of Justice Chinnappa Reddy in MeDovell’s case with regard to the exposure of tax avoidance device, |on'ble Sabyasachi Mukherjee, J. (as he then was) with the concurrence of the then Chief Justice, R.S. Pathak of the Supreme Court observed as under: “Ivis true that tax avoidance in an undeveloped country should not be encouraged on practical as well a8 ideological grounds. One would wish, as noted by Reddy, J. that one could get the enthusiasm of Justice Holmes that taxes are the price 10 buy civilisation. But the question which any ordinary taxpayers very often, in a country of shortages with ostentatious consumptions and deprivation for the large masses, ask is, does he with taxes, buy civilisation or does he facilitate the waste and ostentation of the few. Unless waste and ostentation in Government spending are avoided or eschewed, no amount of moral sermons would change peoples attitude to tax avoidance.” (@ It thus appears that not only is the principle in IRC v Duke of Westminster (1936) AC 1 alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell & Co. Ltd.'s case (supra). In Mathuram Agrawal v State of Madhya Pradesh (1999) 8 SCC 667 another Constitution Bench had occasion to consider the issue. The Bench observed: “The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision ‘which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain unambiguous language of the statute. Words cannot be added to or and intention of the legislature.” In the case of UOL v Azadi Bachao Andolan (2003) 132 Taxman 373 (SC), it was observed as under: ‘We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. 1.4a Distinction between tax planning, tax avoidance and tax evasion Tax planning, tax avoidance and tax evasion are three different approaches to the same objective viz, to reduce tax liability. However, they have different characteristics. Tax planning is perfectly Jegal as the object of tax reduction is achieved by making use of the beneficial provisions in the tax laws. On the other hand, tax avoidance is also legal though technically satislying the requirements of law. Tax evasion is a method of evading tax liability by dishonest means like suppression, conscious Violation of rules, inflation of expenses, etc. Tax planning imply compliance with the taxing provisions in such a manner that full advantage is ‘aken of all exemptions, deductions, concessions, rebates and reliefs permissible under the Act so that the incidence of tax is the least. Tax planning, therefore, cannot be equated to tax evasion of tax *voidance, Tax planning may be regarded as a method of intelligent application of expert knowledge qblanning corporate affairs with a view to securing consciously provided tax benefits on the basis of national priorities in keeping with the interest of the State and the public.where the taxpayer ay Te pfence by the se oft selei s sfer, reduce or completely PF reducing i are those efax avoidance’ se to a critica * sole purpose #8, lems by Suppression 9: i k Fag to solve tax pro! ‘ i of attempting (0 herefore, cannot be sion I ce pifation cof expenses, ole. TAX oe ok os 1 is vievheed Pe it violation of mounts (0 breakin Tet ww whereas tax planning 1s Gevised within te « because it a ended " peering of what the legislature intended. torent from t0x planning 6 % see dispute in accepting. (aX avoidance is differ 1S BUI the gy ere is no dispute in 2 La yn is often over looked. hy Thee is MO avoidance and te PLAN NE CR ere ila Heng IG difference bet retina sep ten BY 28 assessce cowards Loaeine iz os ee ing, : s ae ‘ose wh “i Thus, any eB rot only help him Bie the soil) a0 A ne ears with th tet 0H Wi ent and economic ori of their business airs withou ge a “ i . avoidance oF evasion. Ee eidance and (ax evasion has been spelt out in Hela Holding p ITR 129 (Cal) where the Court observed: i" petween tax evasion and tax avoidance 1S still prevalent. ing, tax evasion is the result of such things 9s illegality, suppresig could help thems entangled in the cot The distinetion ‘ad. v CIT (2003) 263 (1). The distinction Generally SI we ceerreent mand fraud. (3) Tax avoidance i the result 0} forbidden by the law in itself and no co prohibited. (4) The permissibilty of & tax avoidance, will full to be « basis of the facts and transactions truly and correctly disclosed by the assessee, @ poin! of arises, whether on a certain reasonable onstruction of one part of the taxing statute, « applied to the assessee'’s case, tax which would otherwise be payable by the assess, tezomes not payable in the case in hand. (5) When the court is faced with a task of constr pound to make the construction in favour of the assessee merely on p) hibited transaction, jthas entered into no illegality and made no prol (© The court would have to assess, in the facts and circumstanet of each case, upon gener! principles of conscience and justice, whether the arrangement of affairs by the assessee, 035 rere possibility of reduction of tex incidence, can fairly be permitted to the assess 1 cienuine and legal means of tax reduction, employed by it in a commercial fur sens. a a eruttowing the assessee to cam the reduction, in the facts and circumstances of he ic policy of not encouraging citizens to engist particular case, a8 opposed 10 the publ themselves in dealings and transactions designed primarily for the purpose of non-payment tax only. In this i case the assessee changed its stock valuation method correctly and was entitled to the 6 benefit arising therefrom, + actions taken by the assessee, none of which is ill ination of which is similarly forbidden « ¢ decided, when and only when, ont ction in the above manner, the court is nt roof by the assessee, tt Difference between tax planning and tax evasion Tax planning Tax evasion (1) Tax planning is a a permissible ae hike xe sie. te Tax evasion is an attempt to avoid tax by achieve social and economic benefits a9 usrerrescnieion of facts and falsification © counts,Tax planning is the taxpayer to objective a legs i <2 legal right which enable Achieve social and economic Tax planning accelerates development oF the economy of a country by. generatin funds for investment in desired sectors Concepts of Tax-planning 1 “Tax evasion is a legal offence which may lead (0 penalty and prosecution. Tetards the development of Tax evasion i by generating economic situation of a country black money which works as a pat Tax planning promotes profess strengthens economic situation of the country bribery and weakens ation of the country. Tax evasion encourag. economic and political Difference between tax avoidance and tax evasio Tax avoidance Tax evasion (I) Tax avoidance means planning for minimisation of tex according to legal requirement but it defeats the basic intention of the legislature Tax evasion means avoiding of tax liability illegally. Tax avoidance takes into accounts various lacunas of law. @ Tax evasion involves use of unfair means. Tax avoidance is lawful but involves the element of mala fide intention @) Tax evasion is unlawful (4) Tax avoidance is planning before the actual liability for tax comes into existence Tax evasion involves avoidance of payment of tax after the liability of tax has arisen 14b Tax management Tax management refers to the compliance with is optional, tax management is mandatory. It inc payment of taxes, deduction of tax at source, the statutory provisions of law, While tax planning Judes maintenance of accounts, filling of return, timely payment of advance tax, etc. Poor tax management may lead to levy of interest, penalty, prosecution, ete. [n some cases it may lead to heavy financial loss if proper compliance is not made, e.g. financial loss because such loss will not be allowed if'a loss return is not filed in time it will result in a to be carried forward. Difference between tax planning and tax management Tax planning Tax management (1) Tax planning a wider term and includes tax | Tax management is narrower term and is the management first step towards tax planning @ Tax planning emphasizes on minimisation | Tax management emphasizes on compliance of of tax burden Jogal formalities for minimisation of tax ©) Every person may not require tax planning | Tax management is essential for every person. (4) Tax planning helps in decision making Tax management helps in complying the conditions for effective decision making ‘Tax planning helps to claim various benefits of tax (3) Tax management helps in complying the conditions for claiming tax benefits. (6) Tax planning involves comparison of various alternatives before selecting the best one, Tax management involves maintenance of accounts in prescribed form, filing of return, payment of tax, ete, (7) Tax planning looks at future benefits Tax management relates to past present and future.Corporate Tax Planning & Management « ‘ Ny , jective tax pli ‘ ‘: 6 ene Sa eee of tax planning may be summarised as follows: (i) Reduction of tax liability. (i). Minimisation of litigation. (iit) Gy) Oo) @ janning Productive investment. Healthy growth of economy. Economie stability. _ eduction of tax Fiability: One of the supreme objectives of tax planning is the reduy, reat lability oF the taxpayer and the resultant saving of the earings for a better enjg ™ of the frais of the hard labour. By proper tax planning, 2 taxpayer can obj vhministrators ofthe taxation laws to kcep their hands off from his earings, & (@ Minimisation of litigation: Where a proper tax planning is resorted to by the topay provisions of the taxation laws, the chances of unscrupulous litigaige mnformity with the cernily "0 be minimised and the tax-payer may be saved from the hardships = inconveniences caused by the unnecessary litigations which more often than not even jy the doors of the supreme judiciary. (iit) Productive investment: The planning is a measure of awareness of the taxpayer to g, intricacies of the taxation laws and it is the economic consciousness of the income-carg:y, find out the ways and means of productive investment of the eatnings which would goa ye way to minimise his tax burden. The taxation laws offer large avenues for the productive investment of the camings granting absolute or substantial relief from taxation. A taxpay has to be constantly aware of such legal avenues as ere designed to open floodgates of hi, well-being, prosperity and happiness. When earnings arc invested in the avenues recognisa, by law, they are not only relicved of the brunt of taxation but they are also converte inn means of further earnings. (iv) Healthy growth of economy: The saving of earnings is the only basement upon which the economic structure of human life is founded. A saving of earnings by legally sanctioned devices is the prime factor for the healthy growth of the economy of a nation and its people ‘An income saved and wealth accumulated in violation of law are the scours on the economy of the people. Generation of black money darkens the horizons of national economy and leads the nation to avoidable economic destruction. In the suffocating atmosphere of black money. a nation sinks with its people, But tax planning is the gencrator of a superbly white economy where the nation awakens in the atmosphere of peace and prosperity, a phenomenon undreamt of otherwise. = @) Economie stability: Under tax planning, taxes legally duc are paid without any headacke either to the taxpayer or to the tax collector. Avenues of productive investments are largely availed of by the taxpayers. Productive investments increase contours of the national economy embracing in itself the economic prosperity of not only the taxpayers but also of those who ear the income not chargeable to tax. The planning thereby creates economic Stability of the nation and its popic by even distribution of economic resources, SELECTED CASE STUDIES With reason, whether the following acts ean be eonsidered as (i) Tax planning: of Case 1: Speci (@i) Tax management; or (iif) Tax evasion, (© An individual taxpayer making tax saver deposit of Z1,00,000 in 2 nationalised hank. (OA partnership firm obtaining dee! ‘depositors in Form No. 15 t P ig declaration from lenders/deposi No. 1SG/15H andChap. 1 (ii) A company installed an ai Concepts of Tax-planning ; conditioner costing £75,000 at the residence of a director os Pet bei ee appointment but treats it as fited in Be cand ‘section in the factory. This is objective to treat it as plant for the purpose of computing depreciation. @) eee issued a credit note for 280,000 as brokerage payable to Mr. Ramana who is the son Peite managing director of the company. The purpose is to increase the total incarhe of Mr. mana from %4,00,000 to 24,80,000 and reduce the ineame of RR Ltd. correspondingly. () A-company remitted provident fund contribution of both is own contribution and employees’ contribution on monthly basis before due date. [MAY 2015] Solution () An act of tax planning: Tax saver deposit of €1,00,000 made by an individual in @ nationalized benk for claiming deduction under section 80C is an act of tax planning under the provisions of incomexax. (An act of tax management: Partnership firm, a deductor, who is obtaining declaration from lenders/ depositors in Form No. L5G/15Hl and forwarding the same to Income-tax authorities is an act of compliance of statutory obligation under the Income-tax Act, 1961. (iii) An act of tax evasion; Furniture is eligible for depreciation @ 10% whereas, @ plant is eligible for depreciation @ 15%. Thezefore, an air conditioner fitted at the residence of a director as per the terms of his appointment would be a furniture eligible for depreciation @ 10% and rot 15% allowable for plant. Further, furniture provided at the residence of the director shall be treated as perquisite and the value of the same has to be included while computing bis income under the head salary for the purpose of deduction of tax at source. Thus, the default will amount to an act of tax evasion, (ix) dn act of tax evasion: Booking a fictitious expense for reducing the total income is a clear act of tax evasion as it reduces the tax liability of the assessee which is taxable at the flat rate of 30%, Whereas, the son of the managing director altracts the tax liability of 10%. (0) An act of tax management: Remittance of provident fund contribution of both its own and its, employees’ on monthly basis before due date is a compliance of statutory obligation and hence an act of tax management. ‘THEORETICAL QUESTIONS 1. Differentiate between ‘tax planning, 'tax management’ and ‘tox evasion’. 2. Define ‘tax planning’ and distinguish it from ‘tax evasion. Discuss Mc Dowell’s case. 3, "Tax planning is an act within the four comers of the Act and it is not colorable device to avoid tax." Discuss in brief. 4. Differentiate between ‘Tax Planning’ and ‘Tax Evasion’. 5. Explain the need of Tax Planning.