Advocate Akhilesh Kumar Sah

Akhilesh Kumar SahThere has been controversy from long about the limits on tax planning.

The Supreme Court judgment in the case of Mc Dowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) had marked dividing line between the tax evasion and avoidance of tax through tax-planning. In this case hon’ble Supreme Court held that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

A judgment of Gujarat High Court, Banyan & Berry v. CIT (1996) 133 Taxation 303 (Guj), has well drawn the silver line in respect of tax planning by taking into consideration the above mentioned SC judgment.

The Gauhati HC has held in CIT vs. George Williamson (Assam) Ltd. & ors. (2004) 178 Taxation 597  (Gau): (2004) 265 ITR 626 (Gau), that it is open for the assessees to arrange its affairs in such a manner that it would not attract the tax-liabilities, so far, it can be managed within in the permissible limits of law. The assessees can very well manage its tax affairs so that the tax attracted in the transaction is less and would not fall outside the four corners of the law applicable at the relevant time. The tax-management is permissible, if the law authorises so.

The Apex Court in Union of India vs. Azadi Bachao Andolan (2003)  177 Taxation 775 has approved a decision of Madras High Court in M. V. Vallipappan vs. ITO (1988) 170 ITR 238, where the Madras HC has held that the decision in Mc Dowell case (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour.

 In Vodafone International Holdings vs. Union Of India & Anr [2012] 341 ITR 1 (SC), the Supreme Court has held that Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. The Revenue’s stand that the ratio laid down in McDowell case (supra) is contrary to what has been laid down in Azadi Bachao Andolan case (supra), in our view, is unsustainable and, therefore, calls for no reconsideration by a Larger Bench.

The Gujarat High Court while deciding the case Banyan & Berry v. CIT (supra), has observed that what has been depreciated as tax planning for avoidance of tax are those acts which have doubtful or questionable character as to their bonafide and righteousness. Not all legitimate acts of a tax payer which in ordinary course of conducting his affairs a person does and are under law he entitled to do, can be branded of questionable character on the anvil of Mc Dowell & Co. Ltd V. CTO (supra) case, in which distinction between the methods of tax evasion and avoidance of tax through tax planning has been found to the effect the tax planning may be legitimate provided it is within the framework of law. The learned Judges of Gujarat High Court delivered, “we are unable to read in the aforesaid decision that any act of an assessee which results in reduction of his tax liability or expectation of tax benefit in future amounts to colorable device a dubious method or method of subterfuge to avoid tax and can be ignored if the acts are unambiguous and bona fide. The principle cannot be read as laying down the law that the person is to arrange his affairs so as to attract maximum tax liability”. The Gujarat High Court also observed that carrying on a trade is the fundamental right guaranteed under article 19 of the Constitution India. Right to carry on trade includes not to carry on any trade. How and in what form business is to be carried is also part of that freedom. Business is carried on individually or collectively by constituting partnership firm or forming an association of persons or by a company. The formation and dissolution of partnerships are governed by statutory provisions under Indian Partnership Act.

BOTTOMLINE:

It has been observed in Mc Dowell & Co. Ltd. vs. CTO (supra) that,  much legal sophistry and judicial exposition have gone into the attempt to differentiate the concepts of tax evasion and tax avoidance and to discover the invisible line supposed to exist which distinguishes one from the other. Tax avoidance, it seems, is legal; tax evasion is illegal. Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

In view of the above, there is need for clarifactory/ explanatory circulars by legislative authorities in their respective areas regarding the scope of tax planning.

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