HIDAYATULLAH NATIONAL LAW UNIVERSITY,

A Project Report on

Meth and reality of Tax Avoidance And Tax Evasion

Subject:
Law of Taxation
Submitted to:
Mr. Rana Navneet Roy

Submitted by:
PRAVEEN KUJUR
(B.A.LL.B. (Hons.) 5th semester, Roll no. 99)
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ACKNOWLEDGEMENT
Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty.
This research venture has been made possible due to the generous co-operation of various
persons. To list them all is not practicable, even to repay them in words is beyond the domain
of my lexicon.
I would like to sincerely like to thank my LAW OF TAXTATION teacher Mr.Rana Navneet
Roy for giving me this topic and guiding me throughout the project. Through this research
project I have learned a lot about the aforesaid topic and this in turn has helped me grow as a
student.
My heartfelt gratitude also goes out to the staff and administration of HNLU for the
infrastructure in the form of our library and IT lab that was a source of great help in the
completion of this project.
I also thank my friends for their precious inputs which have been very helpful in the
completion of this project.

Research Methodology

This project is based upon descriptive method of analysis. This project has been done after a
thorough research based upon intrinsic and extrinsic aspects of the project.
Sources of Data:
The following secondary sources of data have been used in the project1

Articles.

Books

Journals

Websites

Method of Writing:
The method of writing followed in the course of this research project is primarily
analytical and based on secondary source of data.

Objective:

To study the tax evasion and tax avoidance

Difference between Tax evasion and Tax avoidance
Tax evasion in India
Step to check Tax evasion

Table of Contents

Acknowledgments.1
Research methodology...2
Cases..3
Objective4
Introduction ...5
Tax Avoidance/Tax Evasion: What is the Difference? .6
The Concept of tax Evasion and Avoidance ..7
Tax Evasion in India. 8

Different ways of Tax Evasion in India 8

Effect of Tax Evasion in India.. 8

Best ways to avoid tax evasion 10

Tax planning versus tax evasion and avoidance 11

Issues in Anti-Avoidance... 12
Provisions in the Income-tax Act, 1961 (Act) ....13
Other means of checking anti-avoidance15
Judicial interpretation ....16

Outside India....17
In India.... 17

Legal framework Under DTC ..18

Conclusion 14
Bibliography...15

Introduction
From an economic point of view, legal considerations apart, tax avoidance, tax evasion and
tax flight have similar effects, namely a reduction of revenue yields, and are based on the
same desire to reduce the tax burden. Due to legal differences and moral concerns it is,
however, likely that individual perceives them as different and as unequally fair.
Tax evasion is the illegal practice where individuals/firms escape paying taxes to the
government through deliberate concealment or misrepresentation of their tax liability. Tax
evasion varies depending on the sector (agriculture, industry, commerce), organisation of
production (small traders or businesses/companies), or type of economic agent (salaried, selfemployed, capital owner) and it can happen in numerous ways, such as, deliberate
concealment of total annual income and in turn underestimation of taxable income,
overestimation/over reporting of deductible tax expenses(governments of every country
provide certain tax exemptions/deductions to provide tax relief to tax payers for various
reasons; sometimes, deductible expenses are exaggerated in an unfair manner to reduce
taxable income substantially). In fact, the variety of tax evasion is inconceivable and one can
always find newer ways of evasion.
on the other hand, when a taxpayer escapes his/her tax liability by exploiting legal
ambiguities or resorts to noncompliance of tax payments while remaining within the
framework of the law (i.e. not violating any laws), it amounts to tax avoidance. Another way
to make a distinction between tax evasion and avoidance is that while in case of evasion,
transactions are mostly unreported due to the natural tendency of avoiding punitive actions, in
tax avoidance details are not hidden by tax payer(s) i.e. transactions are usually on record.
For instance, the Australian Ralph Review of Business Taxation has described tax avoidance
as misuse of the law that is often driven by structural loopholes in the law (as reported by
PricewaterhouseCoopers or PwC).
However, it is often difficult to distinguish between the two as both practices are harmful to
society as they cause a drain on the exchequer through loss of public revenue. Both tax
avoidance and evasion are forms of tax non-compliance describing a range of activities that
are unfavourable to a nation's tax system. Though tax avoidance is a legal practice, it is often
very hostile as companies/individuals seek to pay less than their payable tax liabilities. Such
aggressive tax avoidance causes substantial loss of public revenue.
Hence, most literature on tax evasion discusses both tax evasion and avoidance as a collective
way of escaping taxes. For instance, according to wenzel: Tax evasion refers to such
deliberate criminal non-fulfilment of tax liabilities. In contrast, tax avoidance refers to
deliberate acts of reducing one's taxes by legal means; however, the distinction is not always
clear because tax laws are not always precise. Moreover, when taxpayers try to find loopholes
with the intention to pay less tax, even if technically legal, their actions may be against the
spirit of the law and in this sense considered noncompliant. On the other hand, 'tax planning'
may refer to cases where individuals/institutions or firms plan to minimise their tax payments
through financial planning.
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Tax Avoidance/Tax Evasion: What is the Difference?

While tax evasion is an outright Illegal way of non-payment of taxes and is quite
unambiguous from the legal point of view, the distinction between tax avoidance and tax
planning is often difficult to make. The ambiguity arises since both tax planning and tax
avoidance are related with the activity of non-payment of tax liability while remaining within
the framework of law.
For instance, a person may adopt different accounting methods for different sources of
income, or invest in tax saving securities or other tax planning schemes - all these may reduce
his/her tax liability without violating laws. However, some strategies for tax avoidance (for
instance transfer miss-pricing) are often intended for the sole purpose of non-payment of
taxes and are hence seen as contentious. Therefore, tax avoidance seems to be a lot more
contentious than tax planning, though both are legal. The debate then ultimately boils down
towards identifying what transactions should be treated as legal. Given the proliferation of
sophisticated devices used by companies for non-compliance of legitimate tax payments,
fine-tuning the existing legal provisions has become essential.
According to a briefing by Richard Murphy of Tax Research UK, where he tackles the
language of defining these terms, the following definitions have been outlined:
Tax Evasion: Tax evasion is the illegal non payment or under-payment of taxes, usually
resulting from the making of a false declaration or no declaration at all of taxes due to the
relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the
perpetrator of tax evasion is caught.
Tax Avoidance: Tax avoidance is seeking to minimise a tax bill without deliberate deception
(which would be tax evasion) but contrary to the spirit of the law. It therefore involves the
exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the
law.

The Concept of tax Evasion and Avoidance

Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the
amount of tax that is payable by means that are within the law. By contrast, tax evasion is the
general term for efforts not to pay taxes by illegal means.

Meaning
Tax avoidance: It refers to those cases where the tax payer has apparently circumvented
the law, without giving rise to a critical offence by the use of a scheme, arrangement or devise
often of a complex nature whose sole purpose is to defer, reduce or completely avoid the tax
payable under the law. In other words tax avoidance is the method of reducing incidence of
tax by taking advantage of certain loopholes in tax laws

Tax evasion: It is an illegal practice where a person, organization or corporation

intentionally avoids paying his/her/its true tax liability. Those caught evading taxes are
generally subject to criminal charges and substantial penalties. Tax evasion is the general
term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means.
Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state
of their affairs to the tax authorities to reduce their tax liability, and includes, in particular,
dishonest tax reporting (such as declaring less income, profits or gains than actually earned;
or overstating deductions)

Tax Evasion in India

One of the major obstacle before India Government is Tax evasion. Tax evasion is the way
people evade tax by illegal and unfair means. They may claim lesser profit, gains or turnover
than actual. Even if there is huge amount of tax to be paid, evaders get refund by making
misrepresentations before tax authorities. Huge amount of revenue is lost through this way
for government so that we cannot climb from economic stagnation. Most of the welfare
activities for poor are put on hold due to lack of money while some people who can buy even
the government with black money are growing daily.

Different ways of Tax Evasion in India

Ways through which people evade tax are smuggling, Evasion of sales and value Added Tax,
Evasion of Income Tax, and Evasion of wealth Tax, Evasion of customs Duty and Evasion of
Excise Duty. Also, officials take bribery and help in making misrepresentations and
fabricated financial statements instead of reporting to tax authorities. Evaders wilfully fails to
file return, submits false returns, submits false certificates to get deductions, exemptions and
claim low income, charging personal expenses to revenue, fails to pay dues within due date
and so on to evade tax.

Effect of Tax Evasion in India

Taxes are the major source of revenue of India government. Tax evasion causes economic
inequality that is how some people are getting richer and others are getting poorer. Many
reform measures and initiatives of government have to be set aside and welfare activities are
getting affected. Black money causes inflation and value erosion.

Measures taken by India government to curb Tax Evasion

Several steps as below have been taken by India government to avoid tax evasion. In India,
tax evasion is regarded as a crime. Prosecution and Penalties are imposed under different acts
by government. Income tax reward scheme has been introduced by Income Tax Department
which gives rewards to informers about tax evasion. Recently, India has entered into pact
with Us to avoid tax evasion by Americans through Indian financial organizations.
Special Bearer Bond Scheme (Immunities and Exemptions Act, 1981) enable person in
possession of black money to invest in special bonds. Voluntary Compliance scheme
(Amnesty scheme) was another one. Government increased the tax slab, reduced deduction
rate, and increased legal tax avoidance measures. Most recently, Tax Administration Reform
Commission was set up by Government to make structural reform to tax matters to simplify
and streamline tax procedures. Earlier India had set up several committees like Taxation
Enquiry Committee, Indian Tax Reforms Committee, and Direct Taxes Enquiry Committees
etc. Transfer Pricing Audit was introduced by Finance Bill to audit undisclosed transactions
to curb tax evasion.

Limitations of Indian Tax Structure which result in tax evasion

1. High rate of taxation. High rate of taxation cause a burden to tax payer. So, they find ways
to avoid tax.
2. Failure to curb bribery. There should be adequate system to curb bribery and corruption
among officials. They help taxpayers to avoid tax by taking an agreed share of profit out of
evaded tax.
3. Lack of simplified procedures.
Tax structure in India is complex and people find it hard to go to different departments for a
single matter.
4. Existence of large number of taxes. Existence of large number of different type of taxes
causes burden on taxpayers.
5. Complex tax laws and loopholes to avoid tax in laws. Indian tax law is complex. In the
same law, people find provisions to escape from tax liability.
6. Lack of organized and systematic Administration structure.
7. Frequent changes in Government and Political instability. Frequent changes and political
instability is another reason of non-implementation of well-defined tax system. Different
governments implement different tax system and it becomes difficult to follow.
8. Frequent changes in tax policies. Tax policies in India are changed frequently by
government. It creates confusion among tax payers and officials about the relevant
provisions.
9. Deficiencies in implementing Penalty Provisions.

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Best ways to avoid tax evasion

1. Reducing tax rates.

2. Make more simplified laws and simplified system.
3. Design a well-organized tax administration structure.
4. Strengthen anti-corruption policies
5. Increase awareness among taxpayers by conducting seminars, conferences and through
media.
6. Design a permanent tax structure.
7. Ensure the political changes do not affect well defined tax structure. Make tax
administration more independent and autonomous without losing final control of
Government.
8. Audit, tax collection, depositing and filing provisions to be more strengthened and updated.
9. Make penalty provisions stronger and avoid its non-implementation.
10. Encourage taxpayers to pay tax by more friendly schemes.
11. Give relief provisions to huge tax payers.

Issues in Anti-Avoidance
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Indian tax laws do not contain any generic provisions relating to anti-avoidance. There are
some specific anti-avoidance provisions as explained below. Accordingly, in order to
determine the position with regard to anti-avoidance, it is necessary to rely on various judicial
decisions issued in this regard.
The judicial view in India used to be that it is open to a person to avoid payment of duty by
disposing off his property in any way not forbidden by law and the question of his motives is
wholly irrelevant. It has been a well-accepted principle of law that an assessee can so arrange
his affairs as to minimise his tax burden. Over and over again, ~ Courts had held that there is
nothing-sinister in so arranging ones affairs as to keep-taxes as low as possible.
The principles stated above were considered to be too wide and the Supreme Court in the
case of McDowell & Co Ltd v Commercial Tax Officer (154 ITR 148) highlighted a different
approach in the matter. The Supreme Court after discussing at length a few English cases on
the subject, held that the courts are now concerning themselves not merely with the
genuineness of a transaction but with the intended effect of it on fiscal purposes. It held that
no one can get away with a tax avoidance project with the mere statement that there is
nothing illegal about it. The Supreme Court further observed:
The evil consequences of tax avoidance are manifold. First, there is substantial loss of much
needed public revenue, particularly in a welfare state like ours, next, there is the serious
disturbance caused to the economy of the country by the piling up of mountains of black
money, directly causing inflation. Then there is the large hidden loss to the community by
some of the best brains in the country being involved in the perpetual war waged between the
tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the
tax-gathers and his perhaps not so skilful advisers on the other side. Then again there is the
sense of injustice and inequality which tax avoidance arouses in the breasts of those who are
unwilling or unable to profit by it.
In the case of MV Valliappan v ITO (170 ITR 238), the Madras High Court held that a
legitimate transaction which does not amount to a dubious device is not hit even by the new
approach adopted by the English Courts and by the Supreme Court in McDowells case.
Further, in the case of CWT v Arvind Narottam (173 ITR 479), the Supreme Court also
observed that where the true effect on the construction of the deeds is clear, appeal to
discourage tax avoidance is not a relevant consideration. This issue was discussed at length
by the Supreme Court in UOI v Azadi Bachao Andolan (263 ITR 706), where the Suprem
Court referred to almost all the landmark judgment on tax avoidance including
McDonnells case and held as follows:If the court finds that notwithstanding a series of
legal steps taken by an assessee, the intended legal result has not been achieved, the court
might be justified in overlooking the intermediate steps, but it is not permissible for the court
to treat the intervening legal step as based on hypothetical assessment. Real motive of the
assessee. An act which is otherwise valid in law cannot be treated as non est. merely on the
basis of some underlying motive supposedly resulting in it some economic detriment or
prejudice to the national interests.
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Provisions in the Income-tax Act, 1961 (Act) in the nature of antiavoidance

Although there are no specific provisions in the Act dealing with anti-avoidance in !&general, certain provisions of the Act deal with specific transactions perceived to be in r the
nature of avoidance of tax. A few key provisions are discussed below.
Change of ownership
The Act provides- that the unabsorbed- business losses-of-a company can be carried
forward and set off against the income of that company in subsequent years, subject to a
maximum of eight years.
However, the benefit of the carry forward and set off of losses in the case of a private
Unlisted Company is available to such company only if at least 51% of the voting power of
such a company continues to be held by the same persons during each year the loss is to be
set off, as was held in the year in which the loss was incurred. Certain exceptions to this
general rule are provided for (s 79 of the Income-tax Act, 1961). Also it is pertinent to note
that this provision is not applicable with respect to unabsorbed depreciation.
Carry forward and set off of accumulated loss and unabsorbed depreciation in case of
amalgamation
Accumulated losses and unabsorbed depreciation are permitted to be carried forward and set
off against future taxable profits, subject to certain conditions. In an Amalgamation of two or
more companies, there are specific provisions permitting carry Reward of losses, subject to
detailed conditions. However, the benefit of the carry forward and set off of losses and
unabsorbed depreciation would not be permitted unless the amalgamating company and the
amalgamated company comply with certain prescribed conditions:

The amalgamating company has been engaged in the business in which the
accumulated loss s has occurred or the unabsorbed depreciation remains
unabsorbed, for three or more years;
The amalgamating company has held continuously as on the date of the
amalgamation at least three-fourths of the book value of fixed assets held by it E
two years prior to the date of amalgamation;
The Amalgamating Company continues to hold at least three-fourths. (3/4ths) of
book value of fixed assets of the amalgamating company which is acquired as a
result of amalgamation, for at least five years from the date of amalgamation;
The amalgamated company continues the business of the amalgamating company
for a minimum period of five years; and

the amalgamated company, acquiring an industrial undertaking of (he

amalgamating company by way of amalgamation, should achieve the level of
production of at least 50% of the installed capacity of the said undertaking before
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the end of four years from the date of amalgamation and continue to maintain the
said minimum level of production till the end of five years from the date of
amalgamation. Installed capacity for this purpose means the capacity of
production existing on the date of amalgamation.
Reduction on the deductibility-of certain expenses
In order to ensure that the requisite taxes are withheld and paid into the Government treasury
upfront, on certain payments made overseas, Indian taxpayers are not permitted to claim a
deduction in respect of any interest, royalty, fees for technical services, salary or other "sums
payable overseas or in India for a non-resident, not beings company or ft foreign company,
unless the tax thereon has been withheld/paid into the Government treasury before the expiry
of the prescribed time.
In the event any person incurs any expenditure in respect of which the person makes or has to
make a payment to a related person (related person has been specified for the purposes of
this section), and the Revenue authorities are of the opinion that such expenditure is
excessive or unreasonable, the authorities could disallow such excessive expenditure. The
extent to which the expenditure is excessive or unreasonable is determined based on the fair
market value of the goods, services or facilities for which the payment is made, or the
legitimate needs of the business or the benefit derived by or accruing to the taxpayer.
With the Finance Act, 2008, expenditure incurred in respect of payments or in aggregate of
payments made to a person, in a day, in excess of 1NS20,000, otherwise them by way of an
account payee cheque drawn on a bank or an account payee bank draft will now not be
allowed as a deduction. However, this disallowance may not apply under certain cases and
circumstances as may be prescribed, having regard to the nature and extent of banking
facilities available, considerations of business expediency and other relevant factors.
Restrictions on depreciation allowance
Where assets transferred to a taxpayer were previously used by another person for the
purpose of his business and the Revenue authorities are of the opinion that the main purpose
of the transfer to such taxpayer is to reduce tax liability 'on an enhanced cost), then for the
purposes of claiming , of the asset for the taxpayer may be substituted by such amount as
determine Revenue authorities.
Where an asset used by a taxpayer in his business is transferred and subsequently reacquired
by the taxpayer, then the actual cost of such asset for the taxpayer would be the actual cost of
asset reduced by the depreciation allowed to the taxpayer under the Act, or the actual price
for which the asset acquired, whichever is lower.
The Act provides a situation where a sale and leaseback will not result in gcpreciation being
available at the full sale value to the leasing company. Where an asset L ysed by a person for
his business and depreciation is claimed thereon, and such asset is yd to another person (such
as a leasing company) and leased back to the original user owner of the asset, depreciation
will be available to the leasing company not on the price paid for the asset, but at the written
14

down value (i.e. tax depreciable basis) of the I original owner and lessee of the asset
(Explanation 3, 4 and 4A to s 43(1) of the Income-1961).
Clubbing of income
The Act provides that the income of certain persons should be clubbed together and the
consolidated income be offered to tax. The objective of these provisions (commonly referred
to as clubbing provisions) is to prevent the distribution of income between members of a
family, with a view to avoid tax on part of the income altogether or having part of the income
taxed in lower tax brackets (sec 64 of the Income-tax Act, 1961).

Other means of checking anti-avoidance

Audit of returns of income
The Act empowers the Revenue authorities to take up the audit of returns of income filed
with them. The criteria for selecting returns for audit are not specified in the Act. The
Revenue authorities frame internal guidelines from time to time that are considered for
deciding on the returns to be picked up for audit. The factors that could be considered include
total income and/or turnover, nature of income, quantum of loans, past tax assessments,
refund claims, etc. As mentioned above, these criteria are issued internally and vary from
year to year.
Introduction of retrospective amendments
Generally, the intent of introducing a retrospective amendment is to plug a loophole or a
leakage in the tax laws that are being used by taxpayers for tax planning. In India, there are
no specific restrictions on the introduction of regulations or amendments to provisions of the
Act with retrospective effect, although, it is not a common practice to introduce provisions
with retrospective effect.
An example of a retrospective amendment is the introduction of s 14A of the Act through the
Finance Act, 2001 (with retrospective effect from 1 April 1962), which provides that a
deduction cannot be claimed in respect of expenditure incurred in relation to income which is
exempt from tax or is not chargeable to tax.
Generally, the intent of introducing a retrospective amendment is to plug a loophole or a
leakage in the tax law that is being used by taxpayers for tax planning. In India, there are no
specific restrictions on the introduction of regulations or amendments to provisions of the Act
with retrospective effect, although, it is not a common practice to introduce provisions with
retrospective effect.

Tax planning versus tax evasion and avoidance

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Tax planning is not tax evasion!

Whatever is valid in the eyes of law cannot become invalid merely because it also results in
tax being saved! Tax planning, tax efficiency and tax avoidance by companies is not equal to
tax evasion. These are the different approaches to the same objective that is, tax reduction.
However, they have different characteristics and tax planning is perfectly legal as the object
of tax reduction is achieved by making use of the beneficial provisions in the tax laws. On the
other hand, tax avoidance is also legal though technically satisfying the requirements of law.
Tax evasion is the method of evading tax by dishonest means like suppression, conscious
violation of rules, etc. the prime objectives of tax planning are: reduction of tax liability,
minimisation of litigation, productive investment, healthy growth of economy and economic
stability. There is a very thin line of demarcation between tax avoidance and tax evasion;
though both result in avoidance of tax. The distinction between the two lies in the legality of
a transaction. Deliberate attempt to subvert the law or manipulation of records to obtain tax
relief is an illegal act and would be regarded as tax evasion and is impermissible. On the
contrary, tax avoidance involves arranging transactions within the permissible boundaries of
law to secure a tax advantage and is generally accepted as legal. The courts have attempted to
provide some distinction between unacceptable tax evasion and acceptable tax avoidance,
which is increasingly referred to as tax planning. However, there certainly exists a grey area
between legitimate tax avoidance planning and illegal tax avoidance and the distinction has
become increasingly blurred, in view of varying and often conflicting views of the courts.

Judicial interpretation
Outlook of judiciary outside India
Verdicts have come from different courts in various jurisdictions distinguishing tax evasion
from tax avoidance or laying down the nature of these. The crux of these decisions is that "the
legal right of an individual to decrease the amount of what would otherwise be his taxes or
altogether avoid them, by means which the law permits, cannot be doubted.Avoidance of tax
is not tax evasion and, it carries no ignominy with it, anybody can so arrange his affairs so as
to reduce the burden of tax to minimum. This was held by the House of Lords in the Lord
Tomlin TRC vs Duke of westminster case. The house in that case stated that the citizen has the
legal right to dispose of his capital and income so as to attract upon himself the least amount
of tax. Yet in another case, the W. T. Ramsay vs Inland revenue commissioners case, the house
laid the principle that the fiscal consequences of a preordained series of transactions, intended
to operate as such, are generally to be ascertained by considering the result of the series as a
whole, and not by dissecting the scheme and considering each individual transaction
separately. This case marked the significant departure of judiciary in England in their outlook
towards tax avoidance schemes. The significance of Ramsay as a turning point in the
interpretation of tax laws in England and the departure from the strings of westminster were
explained in Inland revenue commissioners vs Burmah Oil Co. Ltd.

Judicial outlook- Indian scenario

16

Talking about Indian scenario and outlook of Judiciary towards these transactions three
important things observed are:
1) Influence of the decisions of House of Lords;
2) The major criteria in deciding the nature of any transaction or distinguishing is the legality
and permissibility of that transaction; and
3) An attempt to overcome the abuse of Law by the tax payers. Before the decision in
Mcdowells case, the scene was that anything which in some or the other way, by
restructuring, manipulation or in any manner comes within the purview of legal framework
are permissible. In the CIT vs. A. Raman and Co. case, the Supreme Court of India observed
that avoidance of tax liability by so arranging commercial affairs that charge of tax is
distributed is not prohibited. Legislative injunction in taxing statutes may not, except on peril
of penalty, be violated, but it may lawfully be circumvented. However, the Supreme Court in
McDowell vs. CTO took the view that the legal position in case of tax avoidance should be
taken as altered in the light of the judgments given by the House of Lords. With this the
outlook has been changed. 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 payment of tax by resorting to
dubious methods.
As in all areas of law, the jurisprudence developed and, the courts permitted the scheme, if
there was a strong commercial motivation behind a series of transactions and tax benefit was
only incidental. This was the case in Pigott vs Staines Investments Ltd which involved a
company securing a tax advantage from transferring profits within a group. The court decided
that the method of transferring profits was normal and commercial and the fact that a tax
advantage was obtained was purely incidental. The a forestated principles and decisions were
discussed in great detail by the Supreme Court in the much celebrated Azadi Bachao
Aandolan case rendered in 2002, wherein the court observed: We are unable to agree with
the submission that an act which is otherwise valid in law can be treated as non est merely on
the basis of some underlying motive supposedly resulting in some economic detriment or
prejudice to the national interests, as perceived by the respondents. The Supreme Court in
this case also observed that the principle laid down in the Westminster case, namely. 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, is very much alive and kicking despite the hiccups of
McDowell.

Legal framework under DTC: GAAR(General Anti-Avoidance Rule)

17

The direct tax code (DTC), 2009, proposes to introduce general anti-avoidance rule
(GAAR), which would erase the thin line between tax avoidance and tax evasion Under the
1961 Act there are no direct and express provisions dealing with tax evasion and tax
planning. Except some special provisions relating to avoidance of tax in International
transactions under chapter x, section 92 and 93. To prevent aggressive tax avoidance, which
the government believes undermines the integrity and equity of the system, general antiavoidance Rule (GAAR) has been inserted vide Section 112 of the new direct taxes code
(DTC). The GAAR has defined a transaction as an arrangement to mean any step in, or a
part or whole of, any transaction, operation, scheme, agreement or understanding, whether
enforceable or not, and includes any of the foregoing involving the alienation of property.
The expression impermissible avoidance arrangement has also been defined under Section
113 of the DTC to mean a step in, or a part or whole of, an arrangement, whose main purpose
is to obtain a tax benefit and it,- creates rights, or obligations, which would not normally be
created between persons dealing at arms length; results, directly or indirectly, in the misuse,
or abuse, of the provisions of the DTC; lacks commercial substance, in whole or in part; or is
entered into, or carried out, by means, or in a manner, which would not normally be
employed for bona fide purposes. These definitions of arrangement and impermissible
avoidance arrangement are very wide and there is a genuine apprehension in the mind of the
taxpayer that it might even encompass bona fide commercial transactions. The direct tax
code, 2009, proposes to introduce General anti-avoidance rule (GAAR), which would erase
the thin line between tax avoidance and tax evasion. Section 112 of the code empowers
revenue authorities to declare any arrangement as impermissible avoidance arrangement if it
results in certain tax benefits or it creates rights or obligations which would not normally be
created between persons dealing at arms length or it results in abuse of the provisions of the
code, lacks commercial substance or lacks bonafide business purpose. It allows revenue
authorities to disregard, combine or re-characterize any step in any such arrangement, or recharacterize equity into debt and vice versa.

Conclusion
18

The difference between tax avoidance and tax evasion is that tax avoidance is legally
permissible by law while tax evasion is not. Judicial pronouncements within India and
outside India have always marked out this distinction between the two. The predominant
feature in deciding the nature of any transaction is not the underlying motive but the legality
of such transaction. However, this position is now going to be changed with DTC coming
into force in coming years where the distinction between tax avoidance and evasion has been
blurred to a great extent in order to restrict not only tax evasions but also tax avoidance. This
is correct but only to the extent that it should not make the restriction and its scope so wide so
as to include tax planning also within it, which otherwise is always should be encouraged.
Further, there are certain concerns with the DTC and GAAR, which should be overcome by
the possible ways mentioned.

BIBLOGRAPHY
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Dr. Girish Ahuja & Dr. Ravi Gupta, Systematic Approach to Direct Taxation 9th
Edition 2014
Dr. Vinod Singhania & Dr. Kapil Singhania, Direct taxes law & practices 52nd
Edition 2014

WEBLOGRAPHY

http://www.investopedia.com/terms/t/taxevasion.asp
http://blogs.telegraph.co.uk/finance/ianmcowie/100003388/taxavoidance-orterrorism-which-is-the-biggest-threat/
http://www.moneycontrol.com/news/management/tax-planning-is-nottax
evasion_438940.html
http://www.thehindubusinessline.com/mentor/2009/10/19/stories/2009101950171
100.htm

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