Tax Avoidance

DAY 5
SESSION III & IV

SLIDE 5.4

Tax Planning

Tax planning can be defined as an arrangement of

ones financial and economic affairs by taking
complete legitimate benefit of all deductions,
exemptions, allowances and rebates so that tax
liability reduces to minimum

SLIDE 5.4

Tax Planning

Thus, all such arrangements by which the tax laws are

fully complied and which meet all legal obligations and
transactions (both individually and as a whole),
representing tax planning not taking form of colourable
devices and having no intention to deceit the legal spirit
behind the tax law, would naturally fall within the ambit
of tax planning.
SLIDE 5.4

Tax Planning

Colourable devices cannot be part of tax planning and it

is wrong to encourage or entertain the belief that it is
honourable to avoid payment of tax by resorting to
dubious methods [McDowell & Co. Ltd. v. CTO [1985]
154 ITR 148 (Supreme Court)]

SLIDE 5.4

Tax Planning
Tax planning should not be done with an intent to
defraud the revenue; though all transactions entered
into by an assessee taken individually could be
legally correct, yet on the whole these transactions
may be devised to defraud the revenue
Thus, planning for tax should be correct both in
form and substance

SLIDE 5.4

Colorable Devices
All such methods which are resorted to deceive
and impairing the true construction of the statute,
resulting in availing non-sacrosanct advantage of
law would be termed as colourable devices.
Those devices where statute is followed in strict
words but actually spirit behind the statute is
marred would be termed as colourable devices.

SLIDE 5.4

Tax authorities powers and

responsibilities

The taxing authority is entitled and is indeed bound to

determine the true legal relation resulting from a
transaction. If the parties have chosen to conceal by a
device the legal relation, it is open to the taxing authorities
to unravel the device and to determine the true character
of relationship. But the legal effect of a transaction cannot
be displaced by probing into substance of the transaction.
SLIDE 5.4

Tax avoidance
The line of demarcation between tax planning and tax
avoidance is very thin and blurred.
There is an element of mala fide motive involved in tax
avoidance.
Any planning of tax which though done strictly according
to legal requirement but defeats the basic intention of the
Legislature behind the statute could be termed as instance
of tax avoidance.

SLIDE 5.4

Tax avoidance

Criteria to define tax avoidance

(1) use of colorable devices;
(2) instances where doctrine of substance is defeated;
(3) defeating the genuine spirit of law;
(4) mis-representation or twisting of facts;
(5)taking only strict interpretation of law and suppressing the
legislative intent behind it.

SLIDE 5.4

Tax avoidance

Tax planning is a perfectly legitimate exercise if it complies

with under-mentioned ingredients

Tax planning should reflect the basic intention of Legislature

behind the statute.
2. Tax incentives availed of by the assessee is within the ambit of
legitimate tax planning.
3. Planning of financial affairs by a series of transactions (doctrine
of form) each having individual legitimacy and composite effect
produced as a whole (doctrine of substance) following the true
spirit of law is perfectly legitimate.
4. Tax planning should not involve use of colourable devices for
reducing tax liability.
SLIDE 5.4

Tax Evasion
All

methods by which tax liability is illegally

avoided are termed as tax evasion.
An assessee guilty of tax evasion may be
punished under the relevant laws.

SLIDE 5.4

Tax Evasion

Tax evasion may involve stating an untrue statement

knowingly, submitting misleading documents, suppression
of facts, not maintaining proper accounts of income earned
(if required under law), omission of material facts on
assessment.

SLIDE 5.4

Tax Evasion

All such procedures and methods are required by the statute to

be abided with but the assessee who dishonestly claims the
benefit under the statute before complying with the said
abidance by making false statements, would be within the
ambit of tax evasion.

SLIDE 5.4