TAX PLANNING,

TAX AVOIDANCE,
TAX EVASION
 TAX PLANNING
 It is Arrangement of financial resources so that
maximum tax benefits are enjoyed by making use
of beneficial provisions in tax laws.
 Tax planning according to Mcdowell’s case:
 tax planning should be within framework of law
 tax planning should be correct in form and
substance
 devices where statute is followed but spirit
behind statute is marred are colorable devices
 example of Section 80-IB – is tax avoidance
 Substance & Form of Transactions
 taxing authority is entitled and indeed bound to
determine true legal relation from a transaction
 Mcdowell’s case:
Court should not interpretate anything which
defeats provision of social statutes
There is a moral sanction behind tax laws as
behind any other social or welfare law
 Form of transaction means that real intention
may remain concealed
 Substance of transaction means ascertaining
true intention of parties behind transaction
 Judicial Rulings
 taxing authority is entitled & bound to
determine true legal relation behind a transaction
 In revenue cases, substance of transaction is
regarded more as to its mere form- Kikabhai
Premchand v/s CIT
 It is duty of a Court to give importance to both
form and substance of a transaction – Smt. C.
Kamala v/s CIT
 One must tear the veil to see true character of a
payment – Union of India v/s Gosdia Shipping P.
Ltd.
 Objectives of Tax planning
 Reduction of Tax liability
 Minimisation of tax litigation
 Productive investment – tax laws offer avenues
 Healthy growth of economy
saving of earnings – accumulation of wealth
Avoid generation of black money
 Economic Stability
Due to even distribution of economic resources
Economic prosperity for taxpayers and those
not chargeable to tax
 Types of Tax Planning and Factors
behind it
 Types : Short-term and Long-term
 Factors for Tax Planning:
i) Residential status & citizenship of assessee
ii) Heads of income/Assets in net wealth
Salaries- section 88, 88D etc.
House Property- section 24- Std. Deduction
Business – section 32, 33ABA- site restoration
Capital gain – section 54B, section 54D
Other income – section 80L- 15,000 deduction
 Other Factors for Tax Planning
 Latest Legal Position: according to Annual
Finance Acts, taxation amendments etc.
 Form v/s Substance:
a) Form: For Genuine transactions
A citizen cannot be taxed merely, for
increasing revenues, ignoring legal position by
substance of transaction.
b) Genuine transaction:
Look behind legal facade at reality.
True legal relation alone determines taxability
c) Expenditure: To determine revenue or capital
nature, substance & not merely form
 Areas of Tax Planning
 Location of business
 Nature & Size of business
 Form of business organisation & ownership
 Specific management decisions
 Employee remuneration
 Merger/amalgamation of companies
 Double taxation relief
 Non-residents
 Advance ruling
 Tax Evasion

 Meaning: Don’t pay taxes by employing

dishonest means
Examples: a) Concealment of income
b) Inflate expenses to suppress income
c) Falsification of Accounts
d) Conscious violation of rules
 Evasion attracts heavy penalties, prosecution
 Penalties:
Concealment of income – u/s 271(1)(c) –
100% of tax to 300% of tax evaded
 Tax Evasion
 Penalties: Income exceeds return income under
section 143(1) – minimum 20% of tax payable on
excess amount
 Prosecution: section 276(C)(1) – wilful attempt
to evade tax penalty or interest imposable
section 276(C)(2)- evade payment of any tax,
penalty or interest
section 277- Make false statement in
verification or deliver false account or statement.
 Tax Avoidance
 It is the art of dodging tax without breaking
law.
 Use of scheme, arrangement or device of a
complex nature with purported intention to avoid
tax, within four corners of law.
 Some Observations in Mcdowell & Co.
a) Substantial loss of public revenue
b) Serious disturbance by black money
c) Large hidden loss to community
d) Injustice for those unable to profit from it
e) Ethics of transferring tax liability on shoulders
 Tax Avoidance
 Earlier Scenario:
 effectiveness of colorable device used to divert
income depends not upon consideration of
morality, but on operation of Income-tax Act
(Supreme Court)
 Fact that certain transaction has been entered
into with ulterior object of enabling taxpayer to
avoid payment of income-tax would not render
transaction void, for motive alone cannot make
unlawful what the law allows (Punjab High Court)
 Substance of transaction cannot override legal
form of transaction
 Tax Avoidance
 Changes In Judicial Stand:
 Supreme Court held some distinction between
tax planning and tax avoidance and Mr. Chinnappa
Reddy made observations as under:
1. Ingenuous attempts to rationalise & legitimate
tax avoidance have always fascinated him
2. Shortest definition of tax avoidance is “art of
dodging tax without breaking the law
3. Legislation cannot be required or even
desirable to enable courts to arrive at a conclusion
which corresponds to parties own intentions
 Tax Avoidance
4. Courts are now concerning themselves not
merely with genuineness of a transaction but
with its intended effect on fiscal purposes
5. Now, people live in a welfare state, where
financial needs, backed by law, have to be met
6. Courts should determine nature of new and
sophisticated legal devices to avoid tax and
consider whether situation created by devices
could be related to existing legislation with
emerging techniques of interpretation (Ramsay,
Burma Oil and Dawson)
 Tax Avoidance
 Changes in Judicial Stands (English Courts):
 Normal meticulous methods of statutory
construction tend to concentrate more on verbal
niceties and little attention to provisions as a whole
 Given that document or transaction is genuine,
court cannot go behind it to some supposed
underlying substance – principle of Inland
Commissioner v/s Duke of Westminister
 Ramsay’s case: courts are not bound, to consider
individually, each step in a composite transaction
So it should be found whether tax scheme should
be considered for analysis for any case
 Tax Avoidance
 Justification of Mcdowell Case:
 Supreme Court could review its earlier rulings
on following grounds:
Relevant statutory provision was not being noticed
Amendment in Statute
Material issue remains unconsidered
For avoiding public hardship or mischief in law
 Justice Reddy gave general observations as very
bleak nexus existed with dispute as it was an
accounting error committed by assessee
 Tax Avoidance
 Madras High Court in M. V. Valliapan gave
following rulings:
 every attempt by taxpayer to reduce tax burden
cannot be rejected on grounds of tax avoidance
 real and genuine transaction cannot be ruled out
in a scheme of series of transactions
 if assessee parts with an income not accruing to
him, then such arrangement will not be hit by
rulings in Mcdowell’s case
 Mcdowell’s case has not given the law saying
that every attempt to save tax is tax avoidance
 Tax Avoidance
 CWT v/s Arvind Narrotam:
Does an ordinary taxpayer by paying taxes buys
civilization or facilitates waste & ostentation of
few ?
 Principle in Duke of Westminister’s case is alive
and also has acquired judicial benediction of
Constitutional bench in India
 Court must deal with what is tangible in an
objective manner & cannot afford to chase images
 An act which is legally valid cannot be seen as
non est on basis of motive as economic detriment
 Tax Avoidance
 Correct interpretation of Mcdowell’s case:
 tax planning should reflect basic intention of
legislation behind the statute
 tax incentives are for legitimate tax planning
 planning of financial affairs by transactions with
individual legitimacy & composite effect as a
whole following true spirit of law is perfectly
legitimate
 tax planning should not involve use of colorable
devices to reduce tax liability
 Tax Planning v/s Tax Management
Tax Planning Tax Management

Objective is minimum tax Objective is to comply

liability with provisions of law
Futuristic in Approach Relates to past, present and
future
Very wide in coverage and Has a limited scope
includes tax management
Benefits are substantial Penalty, penal interest,
particularly in long run prosecution etc. can be
avoided
 Tax Avoidance v/s Tax Evasion
Tax Avoidance Tax Evasion
Tax planning defeating basic Tax liability is illegally
intention of legislation behind avoided by all methods
statute
Considers loopholes of law Use of unfair methods

It is tax hedging It is tax omission

Involves malafide motive Guilty assessee may be

punished under the law
It is intentional tax planning Intentional tax avoidance
before actual tax liability after actual tax liability