Tax Evasion, Tax Avoidance and Tax Planning: Tax Evasion: Tax Tax evasion is adoption of dishonest means to reduce tax liability. It is done either by way of understatement understatement of income or overstatement of expenses and deductions. For example, by recording more than what is really disbursed by way of salaries, making ctitious entries of salaries paid to persons who perform no services to the business, showing inated bills of travel, vocation expenses, house rents, furniture repair and so on. For this purpose, tax evaders maintain two sets of books, one presenting the true picture of the business transactions transactions and other reecting reecting all the manipulations manipulations meant for tax evasion. Further, a few professional groups like the lawyers, medical practitioners, architects, moviestars, consultants are not in practice of maintaining maintaining their accounts. !o doubt, tax evasion is an o"ence and there are statutory provisions provisions to punish them. Tax Planning: Tax Tax planning may be dened as the art and and science of planning one#s operation operation in such a way as to attract the minimum liability to tax by availing of various exemptions, exemptions, allowances, deductions and rebates provided under the taxing statute. If a person takes advantages advantages of the various tax incentives, tax exemptions, exemptions, or tax privileges o"ered o"ered by the $overnment and minimi%es his tax liability, he is said to be planning his taxes. Tax Tax planning is &uite legitimate because by tax planning although on the one hand one reduces reduces one#s tax liability, on the other he helps the $ovt. in adopting its welfare welfare goal. Tax Avoidance: Avoi dance: The term 'tax avoidance# is taken to refer to arrangements arrangements by which a person acting within the letter of the law reduces his tax liability. It involves involves taking advantages advantages of the loopholes and lacunae lacunae of incomple incompletenes teness s in the existin existing g provisions of the taxing statute. It is the art of escaping the burden of tax without breaking the law. ( classic example of tax avoidance is the case of ).I.T.* ).I.T.*.. provided Investment )o. +td. -/01 23IT4 -5 6)1 The assessees assessees in this case were the managing agent of two other companies and they were desirous of giving up the managing agency in favour of the other party for a large consideration. In those days days managin managing g agency agency was transferab transferable. le. !ow, had they sold the managing managing agency to the intending intending purchaser, purchaser, there would have arise a large amount of tax to pay as capital gains. 6o they relin&uished relin&uished their managing agency by resignation. resignation. 7n their resignation resignation the other party was formally appointed to ll up the void. In consideration for such relin&uishment relin&uishment the other party paid a sum of 4s./5+akh to the assessees. The &uestion was whether any capital gains were made out from the transaction by the assessee. The 6upreme )ourt held that the denition of transfer for the purpose of capital gains as it then existed was not wide enough to include a case of relin&uishment. The result was that the transaction did not attract any capital $ains tax. The result was was that the law was was promptly amended amended to include relin&uishme relin&uishment nt within the meaning of transfer. Causes of Tax Evasion as per Wanchoo Committee: The 8irect Taxes (dministration (dministration 9n&uiry )ommittee, popularly known as :achoo )ommittee, pointed out the following causes of tax evasion in the Indian 9conomy; -.
usin >usiness ess ?ract ?ractice ices s /. )eiling )eiling on, and and disallow disallowance ances s of busines business s expense expenses s @.
3.
Regulation of donations to political parties: The )ommittee recommended for regulation of donations to political parties.C6ections A5$$> and A5$$) inserted by election and other related laws (mendment1(ct,3552 allows deduction of the amount without any upper limit from total income contributed to any political party registered under section 3( of the 4epresentation of people (ct,-/-D. Income of political parties are exempted E6 -2(. 4. Creation of Con!dence among small Tax pa"ers: (ccording to the )ommittee the practice of being too meticulous in small cases where no worthwhile revenue is involved, has done much damage to the image of the 8epartment in the public eye.
Method of Tax Avoidance: Tax avoidance schemes in brief may be classied into three parts; i) Income splitting ii) Income spreading and iii) Income transformation. +ncome 'plitting: It is a method by which the income of a taxpayer, which is subGect to a high rate of tax, is split into many parts so that each part will pay a lower rate of tax. Thus the aggregate tax payable would be less than what would have been payable otherwise. It may take place in several ways, for example, by creation of family partnerships -, trusts3, companies or payment of salaries, interest or rent to the wives or children for normal services. +ncome 'preading: It is a device by which an assessee spreads his income and prots earned in one taxable year over a number of years. >y adopting this device a taxpayer succeeds in paying only a portion of tax in one taxation year whereas the entire amount of tax is due. Thus the aggregate tax payable over all the taxation years would be less than what would have been payable otherwise. +ncome Transformation: It is a device by which income temporarily belongs to some other person than the assessee and ultimately it comes in the hands of the assessee. 6ome examples of Income transformation are as follow; i) $ond #ashing: C!ow s.= of Income Tax (ct makes provision to combat this method of tax (voidanceD. >ond washing is selling the securities before the dividend is declared and purchasing the same after dividend is declared. In bond washing an arrangement is made whereby a dealer in securities sells 'securities cum dividend# to a taxexempt party and subse&uently repurchases the securities. The capital loss su"ered by the dealer may be seto" against his other income and thus taxation liability is reduced. C6imilar method is adopted in case of lottery incomesD. i) *ividend 'tripping: In this method taxes on accumulated prots was being saved. Ender this method a company co.-1 purchased the shares 2 of other company co.31 which was having accumulated prots at a considerable higher price =. The company having accumulated prots then declared dividend and paid the same to the company, which purchased the shares. (fter that the company which purchased the shares resold the same to their original shareholders at a loss. i.e., for very less price1. The amount of loss is deduction from the dividend income of the company co.-1 and the company co.31 saves tax on accumulated prots. $enami Transactions: In >enami transaction, a person instead of purchasing property in his own name, purchases property in the names of his wife, children or other near relatives, so that he does not incur any taxation liability in the income of the property. (lthough >enami Transaction prohibition (ct, -AA prohibits >enami transactions, such transactions still take place to avoid taxes. >esides the above common methods of tax avoidance prevalent in many )ountries, there are other methods of tax avoidance in India, which are unknown elsewhere. These are as follow; A) oint -indu Famil": The
Suppose there are two persons each earning Rs.2Lakh from their business. ow each person can contribute their 5!" of the assets to create a partnership firm so that each one wi## ha$e in%i$i%ua# income of Rs.1Lakh on#& an% the firm wi## earn income of Rs.2Lakh. So there wi## become three units of assessments. 2 ' person ha$ing higher income ma& create a trust for the benefit of an& other person keeping in $iew of pro$ision of 5.64. 3 (rom shareho#%er 4 i.e.) at premium
respects. C$enerally after partition the members of the erstwhile Goint family draw up a partnership deed consisting of the same members as individuals and get the rm registered under the Income Tax (ct.D (s a result the undivided Goint family divides the income of the family into a number of separate units, each assessable in the hands of individual coparceners at a considerably lower rate as compared with that payable. ii) Alienation of famil" Assets: The second device which is used by an esides hoarding the goods of day to day necessities, the proceeds of tax evasion are also used in hoarding gold, Gewelery and ornaments, kept in secret in their homes. vi) Tax evasion leads to corruption as the tax evaders utili%e untaxed money is corrupting oHcials and sta" of the Income Tax 8epartment, in order to get various concessions. Entaxed money is also utilised to corrupt public man and political parties by making contributions to political funds and corrupting public servants. vii) 9vasion of the under one taxing statute may lead to evasion of tax under other scal statutes. For example, if a trader evades excise duty by showing less manufacture or production, he will be bound to evade 6ales Tax on unshown production and ultimately income tax also. viii) Tax evasion leads to hampering the economic growth of the community. Tax evaded is generally kept concealed in the form of unaccounted money and is not brought into the open or invested in the market from fear of detected and caught. (s a result the economy of the country is adversely a"ected. E0ect of Tax Avoidance: 1) If the payment of a substantial amount of revenue is avoided by the use of loopholes and the lacunae in law. It results in a loss of revenue to the exche&uer. 2) Tax avoidance leads to ine&uality as the loss of revenue su"ered by the $ovt. is made good by the remaining body of taxpayers, who either are unwilling to frustrate the apparent intention of the legislatureB or are unable to prot by itB or have no knowledge how to avoid tax or have no opportunity for avoiding the tax. 3) In fact, tax avoidance is a game of wealthy people, big business men, industrialists and companies, who can employ ingenious lawyers and accountants to devise various schemes to outwit the revenue. Thus it leads to wastage of the country#s intellectual manpower, as best brains are employed to outwit the legislature#s scheme and then the legislature spends the time and energy to combat those measures. 4) Tax avoidance leads to tax evasion as tax payers who are not able to resort to tax avoidance devices are tempted to adopt illegal means to evade payment of taxes. 5) Tax avoidance leads to deterioration of tax morality as well. udicial Attitude to Tax Avoidance:
See a#so Lor% *#&%#e in Ayra shire Pullam Motor services & Ritchie vs. The I.R.C. +1,2,- 14 a/ cases 153 wherein he obser$e% that no man in this countr& is un%er the sma##est ob#igation or otherwise) so to arrange his #ega# re#ations to his business) or to his propert& as to enab#e the 0n#an% Re$enue to put the #argest possib#e sho$e# into his stores.
The decision in 9ngland in )raven vs. :hite -AA1 2 (ll 9 4 =/ <+1 went to restore earlier position. (ccording to maGority view in this case; KThere is no moral dimension by which tax avoidance is to be Gudged so that any step undertaken with a view to the avoidance or mitigation of tax on an anticipated transaction or disposition is for that reason to be ignored or struck downN. +ndian Cases: In India also, the 6upreme )ourt in Mc Dowell and Co. v. Commercial Tax Ocer -A/1 -/= IT4 -=A 6)1, a landmark decision, delivered by a bench of ve Gudges discarded the old age theory that tax avoidance is legal. The court said in une&uivocal term that tax avoidance is harmful to a welfare state like ours and that the )ourts should not be a party to encourage such a transaction. ustice )hinnappa 4eddy in his Gudgement in this case held; K:e think that time has come for us to depart from the :estminster principle and to dissociate ourselves from the observations made elsewhereN. In this case an attempt was made by taxpayer to avoid 6ales Tax on excise duty by excluding the same from the total turnover. Ender the (ndhra ?radesh excise (ct,-@A 9xcise 8uty was livable on the manufacturer of li&uor. (ccording to normal commercial practice, 9xcise 8uty should have been reected in the bill either as merged in price or being shown separately. (s a fact, in the hands of the buyer, the cost of li&uor is what is charged by the manufacturer under its bill together with 9xcise 8uty and 6ales Tax is levied on that price.
ar#ier the Supreme *ourt in Mc Dowell & Co. Ltd. vs. C.T.O. 1,77 1 S*R ,14 ha% he#% that e/cise %ut& pai% %irect#& b& the purchaser cou#% not form the turno$er of the manufacturer an% hence manufacturer was not #iab#e to pa& Sa#es a/ on that amount. *onseuent#& the #aw was amen%e% to pro$i%e no spirit or #iuor manufacture% or store% sha## be remo$e% un#ess the e/cise ut& has been pai% b& a ho#%er of 2 #icence before such remo$a#. he appe##ant manufacturer was a ho#%er of 2 #icence.
they were imported, what really happened was an outright sale of the licenses by the assessee in favor of the second party. The import was nanced and carried out by the second party, either as a nominee of the rst party or in its own right, and in truth and essence the assessee had no future interest in the goods, except that it was, in terms of the agreement, obliged to cooperate with the second party in importing the goods and handling over the same to the rst party. The so called security was not to be refundable even if the goods were not imported by the second party during the stipulated period of operation of licenses. In other words what was received as security was not repayable, whether there was due performance of the contract or failure of performance of the contract. It was held that on a consideration of the agreement as a whole, the conclusion was that it was an attempt to defer payment of tax. This was an attempt to defeat the law and no court could countenance it. In the circumstances, the sum of 4s. 2,/5,555 received by the assessee in the accounting year relevant to the assessment year -0/0/ was taxable in the (ssessment year -0= 0/. 7n the other hand in C.I.T.vs.. ate ".D. Naidu and others -A01 -@/ I.T.4. @2 assessee and his son were partners in a rm carrying on the business of playing buses. The business of the rm was taken over by another set of partners who were totally new and payments were made by the new rm to the assessee and his son for not carrying on the business of playing buses, for a period of ve years. The &uestion was whether the amount received by the assessee and his son would be liable to tax as income or as capital gains. The court held that the amount received for not carrying on business was not in the nature of income nor could it be regarded as capital gains. The attempt of the 8epartment to invoke the decision of the 6upreme )ourt in Mc. Dowell # Co. td. vs .C.T.O. -A/1 that the rm was a device to evade tax was held not applicable In M.!. !allia$$an vs. C.I.T. C-AAD -05 IT4 32A Jad1 the &uestion was whether partial partition of an ut the &uestion isdoes he with taxes buy civili%ation or does he facilitate the waste and ostentation of the few. Enless waste and ostentation in $overnment spending are avoided or eschewed, no amount of moral sermons would change people#s attitude to tax avoidance.
