INTRODUCTION

According tothe Supreme Court thecomponents which enter into the concept of a tax are:
) The character ofthe imposition known by its nature which prescribes the taxable
event attracting the levy.
(Gi) A clear indication on whom the levy is imposed and who is obliged to
of the person

pay the tax.

(iii) The rate at which the tax is imposed.
(iv) The measure to which the rate will
be applied for computing the tax liability,
If these components are not clearly and definitely
ascertainable, it is difficult to 8ay that
IGovind Saran Ganga Saran vs. CST (1985)155 ITR 144)
the levy exists in point of law.
to arrange the fiscal
The rate of tax being very high at present, it has become necessary
least tax. This can be done by three ways :
affairs in such a way as to attract

(1)Tax evasion, (2) Tax avoidance, (3) Tax planning

/TAX EVASION
false claims or by withholding the
When a person reduces his total income by making
so that his tax liability is reduced, is known as tax
information regarding his real income,
it is also immoral, anti-social and anti-national
evasion. Tax evasion is not only illegal but
have been made for imposition of
practice. Therefore, under the direct tax laws provisions
proceedings against tax evaders.
heavy penalty and institution of prosecution
steps :
The tax evader reduces his taxable income by one or more of the following
(1) Unrecorded sales.
(2) Claiming bogus expenses, bad debts and losses.
e.g., car expenses, telephone
(3) Charging personal expenses as business expenses,
incurred for self or family may be
expenses, travelling expenses, medical expenses
shown in the account books as business expenses.
(4) Submission of bogus receipts for charitable donations
for deduction w/s 80G.
(5) Non-disclosure of capital gains on asset.
(6) Non-disclosure of income from Benami transactions.

In brief to evade tax he suppreses or omits receipts,inflates expenses and claims bogus
deductions.

TAX AVOIDANCE)
Tax avoidance is an art of dodging tax without actually breaking the law)t is a method
o reducing tax incidence by availing of certain loopholes in the law. The Royal Commission
on Tgation for Canada has explained the concept of 'avoidance of tax' as under
The expression "Tax Avoidance' will be used todescribe every attempt by legal means to
prevent or reduce tax liability which would otherwise be incurred, by taking advantage of
sOme proyision or lack of provision in the law. It excludes fraud, concealment or other illegal
measures)
Inother words, 'tax avoidance' is a device which technically satisfies the requirement of

the law but infact it is not in accordance with the legislativeintent.) .

Per Jagadisan J. lin Aruna Group of Estates vs. State of Madras (1965) 55 1TR 642
(Mad.)),"Avoidance of tax is not tax evasion and it carries no ignominy with it, for it is a
BOund law and; certainly,not bad morality, for anybody to so arrange his affairsas to reduce
the brunt of taxation to a minimum."
to avoid tax
However, now the Supreme Court is of the view that the colourable devices
the persons who avoid
Should not be encouraged and this is the duty of the court to expose
the social of tax avoidance are manitold,
tax and refuse to approve such practice because evils
and may be summarised as under:
in a welfare state like
(a) substantial loss of much needed public revenue, particularly
Ours;
 But so long there are loopholes in the laws, tax avoidance cannot be checked by the
by the
Ce.

The function of judiciaryin India is clearly not legislative, its role lies in courts.
interpreting the law
made by the legislature.

V/TAX PLANNING
(Tax planning may be defined as an arrangement of one's financial affairs in such a way
hat without violating, in any way, the legalprovisions of an Act, full advantage istaken of

all
exemptions, deductions, rebates and reliefs permitted under the Act, so that the burden
Or the taxation on an assessee, as far as possible, is the least.
Actually the exemptions, deductions, rebates and reliefs have been provided by the
legislature te achieve certain social and economic goals. For example Section 80IB of the
Income Tax Act, 1961 provides deduction from gross total income in respect of profits from
newly established industrial undertakings in industrially backward State or industrially
backward district as may be notified in this behalf. The object ofthe tax concession is clear,
L.e., economic development of industrially backward district or State. Section 80Cprovides
deduction fromn Gross Total Income, if an individual or H.U.F. saves the amount and invests
or deposits it in the prescribed schemes. The deduction has been provided to encouragesavings
and investments for economic development of the country. Thus, if a person takes the
advantage of the aforesaid deductions, he not only reduces his tax liability but also helps in

achieving the objective of the legislature, which is lawful, social and ethical.
Thus,tax planning is an act within the four corners ofthe Act and it is not a colourable
device toavoid the tax.
Precautions in Tax Planning
(1)Tax planning requires analysis of thetax implication of any decision involving finance.
Such analysis should precede the decision, for once the decision has been implemented in
ignorance of law,the tax obligations have to be met. Thus, tax planning presupposes thorough
knowledge of tax laws so that the best alternative or choice may be thought of in order to
attract least tax liability.
 INTRODUCTION
(9)Tax planning cannot be
attempted in isolation. Due
Lawe and economic factors attention has to be paid to alied
also. For examnple, from tax
point of view loan capital or
denosits may be cheaper than share Dublie
capital but the Companies Act,
restrictions on public [Link], 2018 puts certain
Sec.80-1 of the Income Tax Act provides
from gross total income in respect of profits from newly deduction
established industrial undertakincre
in North-Eastern States, but this area may require
additional overheads to be incurred like
transport,higher salaries/wages to trained and technical
staff, etc. and may thus nullify the
benefit of this incentive.
(3) In tax planning one has tokeep in view
all the direct tax laws. The amount of one
kind of tax saved through tax planning should not result in payment of more of the other tax.
The net result of tax planning should be the least of all the taxes taken together.
(4) Tax planning should not be based ontax [Link] tax avoidance is based on availing
of certain loopholes in the law. Whenever the loopholes come to light they will be checkedby
amendments in the law. Consequently, the planning based on such loopholeswill fail.
(5) Tax planning should not be based on the basis of decisions of High Courts or the
Supreme Court. When a decision is not in consonance of the intent of the legislature,
sometimes the law is amended retrospectively or prospectively. In this connection some of the
decisions and their fate may be noted :
) Calcutta High Court held in CIT vs. R. R. Bajoria (1988) 169 ITR 162] that city
compensatory allowance does not come within the definition of income, hence, it is not liable

to tax. The legislature amended the definition of income by the Direct Tax Laws (Amendment)
Act,1989, with retrospectiveeffect from 1.4.1962.
(iü) The Supreme Court held in CIT vs. B. C. Srinivasa Setty [(1981) 128 ITR 294] that

gains which arise from the transfer of initially generated goodwill of a business are not liable
to capital gains tax. The legislature amended theAct by the Finance Act, 1987 and the capital
gains on the transferofgoodwill became liable to tax. The decisionsregarding gains on transfer
of tenancy rights, stage carriage permits and loomhours met the same fate. The legislature
amended the Income Tax Act by the Finance Act, 1994 in this connection.
(ii) The Supreme Court held in Cloth Traders (P)Ltd. [Link]. CIT [(1979) 118 ITR 243]
that deduction ws 80M was to be allowed on the gross dividend and not on the net dividend
after deducting expenses incurred in earning it. The legislature inserted Sec. 80AA from the
inception of Sec. 80M (1.4.1968)by the Finance (No.2) Act, 1980 to overcome the decisionof
the highest court of the land.
These are few instances of the decisionsof the courts and their amendments. From this
it can be concluded that on the basis of decisions of the courts avoidance of tax is possible

legally for the time being. The objective of tax planning is to reduce the tax liability for the
period provided in the Act and not the immediate gain only. However the decisions of the
courts favourable to the revenue must always be kept in view so that the disallowed expenses
may aot tell upon the profits.

(6)Tax planning is done for a financial activity which a person proposes to carry out in
near [Link],thetax manager should keep in mind that thetax benefitswhich were
available earlier but which have been discontinued for the business
commencing in the current
year or in the Tollowing year, are not considered or their reference for tax planning is not
ade. Otherwise a wrong decision may be taken. For example, a deduction under Section
805 irom gross total income was allowed to a newly established small scale industrial
undertaking which began to manufacture or produce articles before [Link] for a person
0J6 planningto commence a small scale industrialundertaking, in the current year the
consideration of tax benefit under Section 801B
has no relevance.
(7) Some people are of the opinion that claiming the
deduction for expenses, wnie
expressly allowed under the Act, is tax planning, Ifa
person does not claim the expenses w
he has incurred and which are deductible in
computing the income shows ignorante
Oan planning
tourn presupposes thorough knowledge of tax laws. Tax planning is possibleonly
economic activity where alternativesare available In such a case he can
choose the
Dest alternative in order to attract least tax liability, For example, a senior
citizen wants to
 DIFFERENCE BETWEEN TAX PLANNING' AND TAX EVASION'
certain social and
[Link] planning is an act within the four corners of the Act to achieve
economic objectives and it is not a colourable device to avoid the tax. Tax evasion is a deliberot
attempt on the part of tax-payer by misrepresentation of facts, falsification of accounts
including downright fraud.
[Link] planning is a legal right and a social responsibility. By tax planning certain social and
nomic objectives are achieved. Tax evasion is alegal offence coupled with penalty and prosecution.
3. Tax planning requires thorough knowledge of the relevant Acts, social, economic and
political situation of the country while tax evasion requires boldness to infringe the law.
[Link] planning helps in economicdevelopment of the country by providing additional
funds for investment in desired channels while tax evasion generates black money which is
generally utilised for smuggling, bribery, extravagant expenseson luxury.
A tax planner
5. enjoys his fruits freely and he does not sufer from high blood pressure.
whereas a tax evader remains always in anxiety of search and seizure.
As our society has become 'money society', whatever the evils of black money may be, it
has become a part of the life of most of the people.
The Legislature has initiated steps to curb black money by passing Black Money Act and
Prevention of Money Laundring Act. This, if implemented effectively, can go a long way in

checking the menace of black money.

1DIFFERENCE BETWEEN TAX PLANNING' AND TAX AVOIDANCE'

1. In taxplanning the letter and the spirit of the law are followed while in tax avoidance the
tax is reduced by taking advantage of the loopholes of the law.
[Link] planning is permanent while tax avoidance is temporary. However,no penalty can be
imposedeither in case of tax planning or in case of tax avoidance.
DIFFERENCE BETWEEN TAX AVOIDANCE' AND TAX EVASION'
[Link] avoidance is legal but tax evasion is illegal.
2. In case of tax avoidance the objects and spirit of the law are not followed
while in the
case of tax evasion the provisions of the law are flouted.
3. In case of tax,avoidance no penalty can be imposed while in
case of tax evasion the
person is liable to penalty and prosecution.
[Link] case of tax avoidance, black money is not generated, hence,
it is not very harmfu
to the society. In case of tax evasion, black money is generated which is
mostly used T0r
unproductive purposes.
Need for Tax Planning
[Link] in tax liability :Thebasic need of tax planning is to reduce the tax
liability
8o that enough surplus out of profits remains with the earner for his
personal and social needs
and also for future investments in his business This is only possible by
planning his ta
atairs properly and avaling the deductions,exemptions and reliefs, [Link] are admissible
 INTRODUCTION
11

in doing so by updating his knowledge about the various

Acts. He can succeed laws and the conditions to be fulfilled to avail them.
the taxatipn
under in the
concessions
available There is always a tug-of-war between the tax payers and
of litigation
2. Minimisation try their best to pay the least tax and the tax
The tax payers
the tax administrators. maximum. Jr'his sometimes results in prolonged litiga-
extract the
attempt to lies in tax avoidance and not in tax planning.
administrators for litigation
tion. Actually
the main reason reduce his
tax liability by finding a loophole in the Act and
wants to of the assessee under which he
payer with the interpretation
Whenever a tax does not agree in good tax
results litigation. A planning is
the tax administrator relief, it
deduction or the provisions of the taxation
or in conformity with
is demanding exemption, of the statute
based on clear words are minimised.
always chançes of litigation in the functioning
the
laws. In such a
case brings fiscal discipline
proper tax planning has earned it by hard labaur
3. Produetive investmentA from the person who
and reduces the transfer
of money, the capacity of the tax
of a tax payer amount so saved enhances
for waste and ostentation.)The revenue of the Government.
to the Government
which in tufn increases the tax a part of cost of
paver for expansion
and growth,
tax (direct and indirect) forms in more
of
4. Reduction in
cost : Incidence reduces the overall cost. It results
by tax planning
reduction of tax
[Link] the growth
sale, more profit
and more tax revenue. ofa nation's economy depends upon
of economy
:The growth of economy whii savings
[Link] growth foster the growth
devices obvious.)The tax
of its citizens.
Savings through tax planning money, the evils of which are
of black and backward
lead to generation of backward districts
through tax evasion in the development the economy in
important role other words it takes
planning plays an facilities or in
of infrastructure
states and development in
intended direction. is generally invested
saved by tax planning
the
The amount creates new employ
6. Employment generation: expansion of the business. This
or that by and
commencement of new
undertakings
Further, taxation laws are so complicated
business. services of
ment opportunities in the affairs efficiently. Hence, such persons need
large tax payers cannot
plan their join the business
advisers and lawyers. Such persons
chartered accountants, financial
private professionals.
or provide their services as a whole
payers but also of the society as
concerns either as employees
tax planning is not only the need of the tax
Thus,
and the Government.
Limitations of Tax Planning he is entitled
has not claimed exemption, deduction or relieffor which
(1. When an assessee of mistake
he is not allowed to claim it as rectification
to, before the assessment is completed,
or in appeal or revision. apart from the Income
be done in isolation. Other economic factors,
2. Tax planning cannot
Partnership Law or Company Law) have
to be
Tax Act and other Economic Laws (e.g., This puts a
the tax liability.
consideredbefore taking any decision in respect of reducing
limitation on the scope of tax planning.
leads to a favour to some of the family
3. Sometimes a decision taken for tax advantage
members at the cost of others in terms of individual property or income rights. This may
cause
moral and psychological implications
irritations and imbalances in the family. Hence, social,
force not to go beyond a certain level for tax reduction.

4. With increase in profits, the quantum of tax

also increases, It necessitates the devouon
have been used for SOme
o adequate time on tax planning. Otherwise this time might
productíve purposes.
b. The direct tax laws are amended freguently either by the Direct
Tax Laws (Amendment
Act or by the Finance Act. This putsan hindrance inmaking a long-term tax planninEl
payers arenot surewhether the tax advantages granted at present by the legislature wm
t nnear future? So,they hesitate in taking a long-term decision for their ecOnomie
activities resulting in slow
growth of the economy)
it ls very
ax incentives are allowed on fulflmefof certain conditions. Sometimes
dmcult to fulfil those conditions and thetaxpayers are not in a position to avail the incentives.
 MANAGEMENT
PLANNING AND
CORPORATE TAX
12
TAX MANAGEMENT matters
tax management. Tax management covers
is not possible without
VTax planning
relating to :
legal formalities;
(i) compliance with
various tax incentives; froro
(ii) taking steps to avail of statutory duties,
L.e., Bavings
of non-compliance
(iii) saving from consequences
and prosecutions;
penal interest, penalties rectificationof mistake,
filing

orders and if need be apply for

(iv) review of department's
or settlement of a case.
appeal, request for revision
are discuSsed here in brief

:
Some important areas of tax management
OF TAX AT SOURCE
(A) DEDUCTION
(any s)
Meaning of Tax Dedyction at Source
for making payment of
The tax deduction at, source means that the person responsible
certain incomes to the income earners deduct
income tax at the prescribed rates on such
at source shall be deposited
incomes before payment is hadetothem, The amount so deducted
by the deductor in the Government Treasury within the prescribed time limit. The tax so
deducted is called deduction of tax at source.
Proper deduction of tax at source should be made in the following cases :
1. Salaries (Sec. 192)

2. Payment of recognised provident fund (Sec. 192A)

3. Intereston Securities (Sec. 193]
Note :No tax shall be deducted at source on interest payable on any security of the
Central Governmentor a State Government.

4. Dividends (Sec. 194]

5. Interestother than interest on securities [Sec. 194A)
6. Winnings from lotteries or crossword puzzles
(Sec. 194B]
7. Winnings from horse races (Sec. 194BB)
8. Payment to resident contractor (Sec. 194C]
9. Payment of insurance commission
[Sec. 194D)
10. Payment under a life insurance policy (Sec. 194DA)
11. Payment to non-resident sportsman or sports association
[Sec. 194E)
12. Payments in respect of deposit under of N.S.S.
(Sec. 194EE]
13. Payment on account of repurchase of units by Mutual Fund
or Unit
Trust of India
[Sec. 194F]
14. Payment of commission, etc. on sale of lottery tickets
15. Commission or [Sec. 194G]
Brokerage [Sec. 194H)
16. Payment of rent
(Sec. 194-)
[Link] on transfer of certain immovable property other than
18. Payment of rent by individuals or agricultural land [See. 194LA
H.U.F.
19. Payment under [Sec. 1941B)
specified agreement
20. Payment of fees for (Sec. 194IC]
professional or technical services
21, TDS on income in (Sec. 194J)
respect of units
22. Payment of compensation on (Sec. 19K]
acquisition of immovable 194LA)
23. Payment for any work or property (Sec.
supply of labour
24. Payment of certain (Sec. 194M)
amount in cash
25. TDS on E-commerce (Sec. 194N]
Transactions
26. Senior Citizen [Sec. 194-0]
above 75 years
(Sec. 194P)
 gner.

(C) PAYMENT OF TAX

Advance payment oftay: An assessee who is liable topay tax duing a Financial Year
of 10,000or more has to páy advance tax as under :
Corporate and Non-corporate Assessee:
I. on or before 15th June Not less than 15% of advance tax.
. on or before 15th SeptemberNotless than 45% ofthe advance
tax less the amount
paid in first installment.
III. on or before 15th December Notless than 75% of the advance tax less the
amount
paid in first and second installments.
V. on or before 15th March-100% of the advance tax less the amount paid in
earlier
installments.
2.
2. Tax on
self-assessmnent:Before furnishing the return of income an
assessee should
compute the tax on his total income declared in the
return and interest payable under the
provisions of this Act for delay in filing the return or any
default or delay in paymnent of
advance tax. If any tax or interest is due, it should be paid before
furnishing the return and
the proof of such payment must be furnished along with the return.
140A)
(Sec.
[Link] demand): When a notice of demand is received
amount should be paid within 30 days ofthe service ofthe notice or withinthe
fromn department,the
the specified period
in the notice of dermand, as the case may be. (Sec. 220)
D)Maintenance of accounts : Every businessman or a professional must
maintain such
books and documents as may enable the A.0. to compute the total income of the
assessee.
 INTRODUCTION 15

However, where compulsory to maintain books of account and other documents as provided
it is
in Sec. 44AA and Rule 6E. it should be maintained as provided and retained to avoid penalty
under Sec. 271A.
cases audit of accounts is not necessary. However,
where
(E)Auditof accounts: In all
1 crore and in
business for the previouS year exceeds
the turnover Or gross receipts in
(Sec. 44AB and Rule 6G). Further to
50 lakh the audit is compulsory
profession it exceeds
under certain sections the audit report is required in prescribed form,e.g.,
claim deduction
Sections For audit report
prescribed Form No.
801A
10CCB
80IB
10CCB
80JJAA 10DA
 G) Fulflmentof Conditions to Claim Certain Exemptions
and Deductions :)
the assessee wats claim
fa) Where a capital asset has been transferred and
to

the tax manager

exemption on capital gains u/s 54D or 54EC or 54G or 54GA,
must ensure that(a)the new eligible asset is acquired or the amount is deposited
in the Capital Gains Account Scheme, 1988, before, the due date
of furnishing the
return;and (b)the new eligible asset is acquired within
the specified period and
asset) is not transferred within a period of three years from
the date of
it (new

acquisition so that the exempted capital gains do not become chargeable to tax.
(b)Where the assessee has claimed exenmption on long-term capital gains ws 54EC
and he has invested long-term capital gains in the specified bonds within six
months from the date oftransfer of original assets, such bonds are not transferred
within three years from the date of acquisition.
(H) Furnishing the return of income) The tax manager must ensure that the return
of

income is furnished on or before the due date of furnishing the return [us 139(1)] otherwise
 AND MANAGEMENT
CORPORATE TAX PLANNING
16 liable +
the losses and become
carry-forward and
set-off
the right to
lose
the assessee will
both.
prosecution or fine or
penal interest, penalty,
of records Documentation is an indispensahls
(I Documentation and maintenance complete and updated
of tax management. An assessee should keep reliable, evidence can be mada
ingredient documentary
relevant tax files so that the
documentation of all the thereof, an assessee may
]nse
it is required. In absence,
available at a short notice whenever
documentary evidence.
the case for want of proper and agreements
records,vouchers, bills, correspondence
Maintenance of account books, required for claiming
a part of tax management.
Wherever separate accounts are
etc. is also accordingly.
scheme u/s 115VW)it should be maintained
tax benefit (e.g., tonnage tax to review the
function of tax management
J) Review of orders): It is an important an apparent
from the tax department. If there is
assessment order and other orders received the order prejudicial
for rectification should be made. If
is
mistake in the order, an application or an application
it is advisable to file an appeal, revision
to the interest of the assessee and
should be taken in this direction. In such a case the opinion
for settlement of the case steps
of the experts may be sought or they may be engaged
for the purpose.
Note :
For please refer Income
details Tax Law and Practice' by Dr. H. C. Mehrotra and Dr. S.P Goyal.

DIFFERENCE BETWEEN TAX PLANNING AND TAX MANAGEMENT'

Tax planning primarily aims at adopting an arrangement so as to bring about the least
incidenceof tax under the four corners of law. On the other hand, tax management comprises
a wider field like compliance with the statutory provisions of law, prospective planning so as
toease the financial constraints, if any, that would arise when discharging the commitments
through payment of tax, keeping close watch and monitoring the statutory requirements of
other laws, claiming the due reliefs arising on account of double taxation avoidance agree
ments or claiming unilateral relief, etc. Thus, whilst tax planning is the pivot which enables
the drawing up of the different incentives and keep the incidence of tax law, the tax
management is the revolving wheel which translates the policy in terms of results. The
differences between tax planning and tax management are :

1.
firststep towards tax planning.
a
Tax planning is wider-term. It incudes tax management. Tax management is the

2. The primary aim of tax planning isminimising incidence of tax, whereas main aim of
tax management is compliance with legal formalities.
3. Tax planning is not essential for every assessee, while tax management isessential
for every person, otherwise he may be liable for penal interest,
penalty and prosecutiom(For
example, a person may not be reducing his tax liability by
claiming any exemption,deduction,
relief, etc. in computing his total incomebut if he is
liable to pay advance tax or is
for deduction of tax at source,etc., he responsble
has to comply with all legal formalities?
4. Tax planning is a guide in
decision making while tax
of an undertaking. management is a regular feature
5. In tax planning exemptions,
ment the conditions are complied deductions and reliefs are claimed while in tax manage
with to claim the exemptions,
6. In tax planning deductions and reliefs.
alternative economic activities are studied
Whereas tax management includes and an activity with least
incidence of tax is selected.
prescribed form, get these audited, filing maintenance of accounts m
etc.
the required forms and returns,
payment of taxes,
7. Tax planning essentially
looks at future benefits arising
management relates to past, present and out of present [Link]
[Link] respect of appeals, revision,
of mistakes, etc. it deals with the rectification
past. Maintenance of records,
return and other documents, self-assessment, filing the
keeping pace with the changes, etc., are
Follow-up plans,etc. are future activities. present activities.
 INTRODUCTION
17

DIVIDEND TAX
(9pinh).
Whether tax should be levied on dividend or not, economists are nof unanimous on this issue) 1

Some economists are of the opinion that when tax has already been paid on the profits of the
company and the balance is distributed as dividend to the owners (shareholdars) of the company.
the tax should not be charged again on such income from the shareholders, They further argue
that the interest on loan is deductible as an expense and theborrower does not pay tax on interest.
the moneylenderpays the tax on the interest income. Similarly, either the company may not be
liable to pay tax on its income and the shareholders should pay tax on dividend income or the
company should pay tax on its income and dividend should be exempt in the hands of the
shareholders.

(On the other hand, some economisss are of the opinion that the company and the
shareholders are not one and the same. Ilompanyhas its own existence as a separate entity
as well as shareholdersare separate entities. Hence, chargingtax on theprofits ofthe company
fro the company and on dividends from the shareholders is justifed.)
(UnderIncome Tax Act, it is not considered whether charging tax on dividend is justified
or not. If tax is levied under the provisions ofthe
Act, the assessee is liable to pay it.
Tax Liability on Dividend under Income Tax Act SeeChapter
5.
QUESTIONS