Basic Concept of Income Tax-II

In continuation of our earlier discussion regarding basic concept of income tax, now we will discuss about the three very interesting and very important concepts of income tax viz.

Tax Evasion, Tax Avoidance and Tax Planning. In common discussion it is very difficult to explain the difference between the three but in real sense they all are very different and have very important impact on the taxation of any person. We will discuss these terms in details in the following paragraphs,

Tax Evasion: – Reducing one’s tax liability by incorporating fake claims (of various expenses incurred for earning income) or by suppressing information relating to income is known as tax evasion.  Tax evasion is not only illegal but it is anti social as well as anti national and that is why heavy penalties are levied under various sections of the Income Tax Act, 1961 for Income Tax Evasion. Tax can be evaded by adopting one or more of the following mechanism: –

1. Non reporting of Capital Gains Transaction on shares or any other type of capital assets while filing ITR.
2. Making false claims of expenses viz. paying salaries to bogus employees, fake conveyance bills etc.
3. Claiming false deduction of personal expenses as business expenses e.g. charging personal and family expenses relating to medical, health, car, telephone etc. to business.
4. Non-reporting of sales invoice i.e. receiving payment in cash without reporting to taxation authorities.

This list is just exemplary and not exhaustive one. Tax evaders always plan to find out new ways of evasion and government also tries to check out and control the various methods adopted by tax evaders.

The basic and foremost reason of tax evasion is corruption in society/deterioration of moral values and this is being helped by so called Tax Experts– the main culprits of society–the most educated one

Tax Avoidance: – There is a very thin line of difference between tax evasion, tax avoidance and tax planning. Tax evasion as we discussed above is illegal in law but it is really difficult to prove about the same for tax avoidance. These three concepts of tax evasion, tax avoidance and tax planning as been discussed in detail in

• there is substantial loss of much needed public revenue particularly in a welfare state like ours i.e. India,
• there is the serious disturbance caused to the economy of the the country by the piling up of mountains of black money directly causing inflation,
• 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 taxavoider and his expert team of advisers, lawyers and accountants on one side and tax gatherers and his perhaps not so skillful advisers on the other side,
• 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” and
• last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the artful doggers.

As per Ranganath Misra J.

“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.”

The concept was discussed in detail in the said case and lot of observations were made by the judges regarding tax avoidance and its impact on society.

Tax Planning: – Tax planning is the management of one’s financial affairs in such a manner to claim all the legitimate deductions/exemptions/allowances/rebates/reliefs etc available under the various provisions of the Income Tax Act, 1961 to minimize the tax liability. Tax planning is the management of tax in such a manner that everything is covered as per the provisions of the Act and nothing can be described as colourful schemes. Various examples of allowable deductions/exemptions are claim of HRA, Benefits available under Chapter VI-A, viz section 80-C relating to investments and Section 80-D relating to Medi-claim Expesnes. These are just exampl