Tax planning involves legally arranging one's financial affairs to minimize tax liability, while complying with all applicable tax laws. Tax avoidance uses artificial or dubious methods to reduce taxes in a manner that defeats the intent of tax statutes. Tax evasion illegally avoids taxes through actions like knowingly making untrue statements or omitting required information. The line between tax planning and avoidance is thin, with avoidance including an element of mala fide intent or use of "colorable devices" to circumvent the spirit of tax laws.

1. Tax Avoidance
DAY 5
SESSION III & IV
SLIDE 5.4

2. Tax Planning
 Tax planning can be defined as an arrangement of
one’s 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

3. 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

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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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