Answer. The tax paid is an addition to the cost. Just as every businessman tries to maximise his profit by reducing the cost, he should also arrange his affairs in such a way, that he pays the least amount of tax.
This however should be done within the four corners of law and there should be no element of fraud in it.
Q.2. Is tax planning confined only to direct taxes ?
Answer. No. The effect of other taxes like sales-tax, customs duty and excise duty, are to be taken into account. It is a dynamic concept and the decision once taken is not valid for all times and requires continuous reappraisal.
Q.3. Is tax planning harmful ?
Answer. Tax planning is not harmful. The tax saved can always be recycled in business and not necessarily wasted in conspicuous personal expenditure. The idea behind grant of incentives is to stimulate economy and hence there should be proper planning to make use of these incentives.
Q.4. When should planning be done ?
Answer. Planning has to be done before the income accrues or arises, i.e., at the source itself. Planning done after receipt of income is only diversion of income and may even lead to an inference of fraud.
Q.5. What are the factors to be taken in tax planning ?
Answer. The choice of taxable entity and other choice like time and place have all are common instances. Time is relevant for fixing the year of accrual. Place is relevant for fixing the residential status.
The status in which the income is to be assessed, i.e., individuals, HUF firm or AOP or company is also to be considered.
Q.6. Has tax planning any effect on the rate of tax ?
Answer. Yes. As dispersal of income over different taxable entities, slab rate can be reduced .
Q.7. What is the difference between dispersal and diversion of income ?
Answer. Dispersal ensures that income accrues separately in different hands. Diversion is said to take place when money is siphoned off to other hands after accrual in one hand. The decision of the
Supreme Court in CIT vs. Sitaldas Thirakhdas is as to what constitutes diversion as distinct from dispersal.
In this case, an amount of annuity decreed by the court to be paid by son to his mother in view of his obligation was held to be dispersal, i.e., diversion by overriding title, so that he was entitled to reduce such payment from his taxable income. While diversion by overriding title will amount to dispersal, any
other diversion without title at source is a mere application of income. The decision of Supreme Court in CIT vs. Thakar Das Bhargava illus-trates the principle of application of income, which does not help, where a lawyer who had assigned his right to fees to a charitable institution and had not received the same was still held liable to pay tax on such fees.
Q.8. Does tax planning include compliance within law ?
Answer. Certainly. Timely filing of returns, payment of advance tax, finally tax deduction at source, etc., are all important to avoid penal interest, penalty, prosecution, etc.
Q.9. Is method of accounting important ?
Answer. Yes. It is because income for tax purposes is one which is ascertained on the basis of what is computed under ordinary principles of commercial accounting subject only to such adjustments as are specifically required by the statute.
Q.10. What is the caution necessary in tax planning ?
Answer. Tax planning may be legitimate provided it is within the law. But colorable devices are not only dishonorable but should not be recognized by the Assessing Officer. One such device is to avoid tax though not prohibited by the statute. It is not necessary that there should be a specific disapproval of every device or scheme. If they are artificial, they are prone to be rejected. What is to be noted is that the device should be genuine in that the income really goes to the person to whom it is intended and does not come back or held effectively by the divisor of the scheme.
Though the decision of the Supreme Court in Union of India vs. Azadi Bachao Andolan has granted great recognition to tax planning, the warning against artificial transactions lacking in commercial credibility in McDowell’s case is still valid.
The concessional treatment for Short-term Capital Gains is available on such gains under section 111A.
It may, however, be noticed that these concessions are available only where the transactions are on capital account and not where the shares are held as stock-in-trade.
Rinav A. Khakhar
Khakhar & Associates.