Introduction

Tax planning can be defined as an arrangement of one’s financial and business affairs by taking
legitimately in full benefit of all deductions, exemptions, allowances and rebates so that tax liability
reduces to minimum.

Example A deposits 45,000 in PPF account so as to reduce his tax payable. This is an example of
legitimate tax planning through which tax is reduced.

Tax evasion :Tax evasion means avoiding tax by illegal means. Generally, it involves suppression of
facts, falsifying records, fraud or collusion. It is an attempt to evade tax liability with the help of unfair
means. Tax evasion is illegal and would result in punishment by way of penalty, fines and sometimes
prosecution

Tax Avoidance: Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting
mistakes for reducing tax liability and thus avoiding payment of tax which is lawfully payable. Generally,
it is done by twisting or interpreting the provisions of law and avoiding payment of tax. Tax avoidance
takes into account the loopholes of law.

Example: Sale and leaseback of assets, so that the depreciation is diverted but the asset remains with
assesse

Tax Planning :Tax planning means reducing tax liability by taking advantage of the legitimate
concessions and exemptions provided in the tax law. It involves the process of arranging business
operations in such a way that reduces tax liability.

Example: Investment in 80C, 80CCD, or reinvestment u/s 54, 54EC etc.

Tax Management: Tax management involves the compliance of law regularly and timely as well as the
arrangement of the affairs of the business in such a manner that it reduces the tax liability. Functions
under tax management includes maintenance of accounts, filing of return, deduction and deposit of TDS
on timely basis, payment of tax on time. Poor tax management can lead to imposition of interest, penalty,
prosecution. Losses may not be carried forward and set off if return of loss is not filed by due date. Tax
management emphasizes on compliance of legal formalities for minimization of taxes while tax planning
emphasis on minimization

OBJECTIVES OF TAX PLANNING

1 Reduction of tax liability: One of the supreme objectives of tax planning is the reduction of the tax
liability of the taxpayer and the resultant saving of the earnings for a better enjoyment of the fruits of
the hard labour. By proper tax planning, a taxpayer can oblige the administrators of the taxation laws to
keep their hands off from his earnings.

2 Minimization of litigation: Where a proper tax planning is resorted to by the taxpayer in conformity
with the provisions of the taxation laws, the chances of unscrupulous litigation are certainly to be
minimized and the tax-payer may be saved from the hardships and inconveniences caused by the
unnecessary litigations which more often than not even knock the doors of the supreme judiciary.
3 Productive investment: The planning is a measure of awareness of the taxpayer to the intricacies of
the taxation laws and it is the economic consciousness of the income-earner to find out the ways and
means of productive investment of the earnings which would go a long way to minimize his tax burden.
The taxation laws offer large avenues for the productive investment of the earnings granting absolute or
substantial relief from taxation. A taxpayer has to be constantly aware of such legal avenues as are
designed to open floodgates of his well-being, prosperity and happiness. When earnings are invested in
the avenues recognised by law, they are not only relieved of the brunt of taxation but they also
converted into means of further earnings.

4 Healthy growth of economy: The saving of earnings is the only basement upon which the economic
structure of human life is founded. A saving of earnings by legally sanctioned devices is the prime factor
for the healthy growth of the economy of a nation and its people. An income saved and wealth
accumulated in violation of law are the scours on the economy of the people. Generation of black
money darkens the horizons of national economy and leads the nation to avoidable economic
destruction. In the suffocating atmosphere of black money, a nation sinks with its people. But tax
planning is the generator of a superbly white economy where the nation awakens in the atmosphere of
peace and prosperity, a phenomenon undreamt of otherwise.

5 Economic stability: Under tax planning, taxes legally due are paid without any headache either to the
taxpayer or to the tax collector. Avenues of productive investments are largely availed of by the
taxpayers. Productive investments increase contours of the national economy embracing in itself the
economic prosperity of not only the taxpayers but also of those who earn the income not chargeable to
tax. The planning thereby creates economic stability of the nation and its people by even distribution of
economic.

IMPORTANCE OF TAX PLANNING

Tax planning is important for reducing the tax liability. However, there are other factors also, because of
which tax planning is considered as very important:

1 Timing is crucial for claiming deductions: Where an assessee has not claimed all the deductions and
relief, before the assessment is completed, he is not allowed to claim them at the time of appeal. It was
held in CIT v. Gurjargravures Ltd. (1972) 84 ITR 723 that if there is no tax planning and there are lapses
on the part of the assessee, the benefit would be the least

2 Tax planning exercise is more reliable: Tax planning exercise is more reliable since the Companies Act,
2013 and other allied laws narrow down the scope for tax evasion and tax avoidance techniques, driving
a taxpayer to a situation where he will be subjected to severe penal consequences.

3 Incentives by Government to promote activities of public interest: Presently, companies are supposed
to promote those activities and programmes, which are of public interest and good for a civilised
society. In order to encourage these, the Government has provided them with incentives in the tax laws.
Hence a planner has to be well versed with the law concerning incentives
4 Adequate time for tax planning: With increase in profits, the quantum of corporate tax also increases
and it necessitates the devotion of adequate time on tax planning.

5 Enables to bear burden of taxes during inflation: Tax planning enables a company to bear the burden
of both direct and indirect taxation during inflation. It enables companies to make proper expense
planning, capital budget planning, sales promotion planning etc.

6 Capital formation attracts huge deduction: Capital formation helps in replacing the technologically
obsolete and outdated plant and machinery and enables the carrying on of manufacturing operation
with a new and moresophisticated system. Any decision of this kind would involve huge capital
expenditure which is financed generally by ploughing back the profits, utilisation of reserves and surplus
along with the availing of deductions are revenue expenditure incurred for undertaking modernisation,
replacement, repairs and renewal of plant and machinery etc. Availability of accumulated profits,
reserves and surpluses and claiming such expenses as revenue expenditure are possible through proper
implementation of tax planning techniques.

7 Money saved is money earned: In these days of credit squeeze and dear money conditions, even a
rupee of tax decently saved may be taken as an interest free loan from the Government which perhaps
an assessee need not repay

Aspect Tax Evasion Tax Avoidance Tax Planning Meaning Method of evading or reducing tax liability by
dishonest means Methods of tax evasion include – *Concealing of Income; *Overstating Expenses;
*Manipulating accounts; *Violating Rules. Method to reduce or minimize tax liability by exploiting or
taking advantages of a loop holes in the law. It does not give rise to any critical offence. It is the
arrangement of financial activities to minimize the tax incidence by making use of all beneficial
provisions of the Income Tax Law.

Difference between Tax Evasion, Tax Avoidance and Tax Planning

Aspect Tax Evasion Tax Avoidance Tax Planning

Meaning Method of evading or Method to reduce or It is the arrangement of
reducing tax liability by minimize tax liability by financial activities to
dishonest means exploiting or taking minimize the tax
Methods of tax evasion advantages of a loop incidence by making
include – *Concealing holes in the law. It does use of all beneficial
of Income; *Overstating not give rise to any provisions of the
Expenses; critical offence. Income Tax Law
*Manipulating
accounts; *Violating
Rules.
Objective To reduce tax bill by any To reduce tax bill To reduce tax bill
means whether legal or following script but not following script & moral
illegal moral of law of law
Effect Result of illegality, Result of actions none Result of availing the
 supper-ssion, of which is illegal or benefits under various
misrepresentation and forbidden either singly beneficial provisions of
fraud or in any combination. Law.
Legality Illegal Technically Legal Legal
Permissibility Note Permissible Decided on the basis of Legally permissible
– a) Facts and under all circumstances.
circumstances of each
case; and b) General
principles of conscience
and justice.
Penalties Heavy penalty including Does not invite any No penalties
prosecution. penalty

Unit-II
Introduction
Income-tax is a composite tax on the total income of a person earned during a period of one previous year. There might
be cases where an assessee has different sources of income under the same head of income. Similarly, he may have
income under different heads of income. It might also happen that the net result from a particular source or head
may be a loss. This loss can be set off against other sources or head in a particular manner. For example, where a
person carries on two businesses and one business gives him a loss and the other a profit, then the income
under the head ‘Profits and gains of business or profession’ will be the net income i.e. after the adjustment of the loss.
Similarly, if there is a loss under one head of income, it should normally be adjusted against the income from
another head of income while computing the Gross Total Income, of course subject to certain restrictions. These
provisions for set off or carry forward and set off of loss are contained in sections 70 to 80 of Income-tax Act.

Set-off and Carry Forward of Losses: Meaning and Scope

As discussed in the earlier units an assessee may have income from various sources like employment, business,
interest, rent, etc. For the purpose of income tax we divide these incomes into five heads namely:
1. Income from salaries,
2. Income from house property,
3. Income from business & profession,
4. Capital gains, and
5. Income from other sources.
Similarly an assessee may have three to four sources of income under one particular head. For example a
person might have two businesses A and B which are two sources of income under the same head business and
profession. Similarly a person might be having two part time employments. He will receive salary from both the
employers; each salary received is a source of income. But both are taxable under the head ‘Income from Salary.’
While one endeavours to derive income, the possibility of incurring losses cannot be ruled out. Based on the
principles of natural justice, a set-off should be available for loss incurred. The income tax laws in India recognise
this and provide for adjustment and utilisation of the losses. However, there are conditions which have been
introduced to prevent misuse of such provisions. To the common taxpayer, income tax is a crunch into the income
earned. Accordingly, awareness of the relevant provisions pertaining to set off and carry forward of losses is
 essential in order to maximise tax benefits.

Basic Rules Regarding Set-off and Carry Forward of Losses

1. A very important rule to remember is that losses that are carried forward have to be set off against
income from the same head in the subsequent years – they cannot be set off against income from
any other head of income.

Example: If you have a loss from house property, you can set it off against income from house property
or income from salary in the year of the loss. But if you carry it forward, in the next year, you
can set it off only against income from house property.
2. A carried forward loss can be set off against income in subsequent years only if the loss has been
declared in the income tax return filed by you.
Additionally, if you have:
 A loss under the head capital gains, or
 Speculation business loss, or
 A loss under the head income from business or profession, or
 Loss from the activity of owning and maintaining race horses.
You have to file a loss return (or a return of loss) as per section 139 (3) if you want to carry forward the loss
to subsequent years.
3. A loss for a particular year can be carried forward only if the income tax return for that year is filed
by the due date. The only exception to this rule is loss from house property – this loss can be
carried forward even if the IT return is not filed in time.
4. Loss from a source of income which is exempt from income tax (for example, an agricultural loss)
cannot be set off against income from a taxable source of income.
5. Loss from none of the heads of income can be set off against winnings from lotteries, horse races,
gambling, etc. The losses from these cannot be set off even against income from lotteries, horse
races, gambling, etc.
4.1 Sections 72 and 80
Sections 72 and 80 deals with carry forward and set-off of business losses. Under the Act, the assessee has the right to
carry forward the loss in cases where such loss cannot be set-off due to the absence or inadequacy of income under
any other head in the same year. The loss so carried forward can be set-off against the profits of subsequent previous
years.
Section 72 covers the carry forward and set-off of losses arising from a business or profession.
Conditions
The assessee’s right to carry forward business losses under this section is, however, subject to the following
conditions:-
(i) The loss should have been incurred in business, profession or vocation.
(ii) The loss should not be in the nature of a loss in the business of speculation.
(iii) The loss may be carried forward and set-off against the income from business or profession though not
necessarily against the profits and gains of the same business or profession in which the loss was
incurred. However, a loss carried forward cannot, under any circumstances, be set-off against the income
from any head other than “Profits and gains of business or profession”.
 (iv) The loss can be carried forward and set off only against the profits of the assessee who incurred the loss. That is,
only the person who has incurred the loss is entitled to carry forward or set off the same. Consequently, the
successor of a business cannot carry forward or set off the losses of his predecessor except in the case of
succession by inheritance.
(v) A business loss can be carried forward for a maximum period of 8 assessment years immediately
succeeding the assessment year in which the loss was incurred.
(vi) As per section 80, the assessee must have filed a return of loss under section 139(3) in order to carry
forward and set off a loss. In other words, the non-filing of a return of loss disentitles the assessee from carrying
forward the loss sustained by him. Such a return should be filed within the time allowed under section 139(1).
However, this condition does not apply to a loss from house property carried forward under section 71B and
unabsorbed depreciation carried forward under section 32(2).

Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income
Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act.
There were large number of companies who had book profits as per their profit and loss account but were not
paying any tax because income computed as per provisions of the income tax act was either nil or negative or
insignificant. In such case, although the companies were showing book profits and declaring dividends to the
shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies.
In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f. assessment
year 1997-98.

When a Company has to Pay MAT

In India, in the case of companies, if the tax payable on their taxable income for any assessment year is less than
18.54% of their ‘book profit’ (if book profit does not exceed ` 10 m), or 19.9305% of book profit (if book profit
exceeds ` 10 m), an amount equal to 18.54% of the book profit (if book profit does not exceed ` 10 m) or
19.9305% of book profit (if book profit exceeds ` 10 m) is regarded as their tax liability.
The tax so paid could be carried forward and set off against normal tax (in excess of MAT for that year) of future years
up to ten years but from the financial year 2010-11 said carry forward shall not apply to a limited liability partnership
which has been converted from a private company or unlisted public company.

MAT Credit

A new tax credit scheme is introduced by which MAT paid can be carried forward
for set-off against regular tax payable during the subsequent five year period
subject to certain conditions, as under:
1. When a company pays tax under MAT, the tax credit earned by it shall be an
amount which is the difference between the amount payable under MAT
and the regular tax. Regular tax in this case means the tax payable on the basis
of normal computation of total income of the company.
2. MAT credit will be allowed carry forward facility for a period of five
assessment years immediately succeeding the assessment year in which
MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated
subject to the five year carry forward limit.
3. In the assessment year when regular tax becomes payable, the difference
between the regular tax and the tax computed under MAT for that year will
 be set off against the MAT credit available.

Procedure for Computation of MAT under Section 115JB

The provisions of section 115JB provide for working out the income-tax payable
as MAT on a deeming basis. The MAT tax liability under section 115JB can be
worked out by undergoing the following steps:-
1. Compute the total income of the company ignoring the provisions of under Section 115JB.
2. Compute the income-tax payable on total income.

Tax on Distributed Profits of Domestic Company

It must be noted that in India the treatment of tax on distributed profits of domestic companies is dealt in
by Chapter XIID which contains a special provision relating to tax on distributed profits of domestic
companies. This has only three sections, namely section 115 O, which is a charging section and also
prescribes the period, the rate of additional tax, which is payable, and time and manner of payment etc.
by company on dividend distributed. Section 115-P provides for interest payable for non-payment or
delayed payment of additional tax by domestic companies. Section 115-Q is about when company is
deemed to be in default. The concept of tax on distributed profits of domestic companies is further
explained in detail in Unit number 9.

Basis of Charge

The Dividend Distribution Tax or DDT is in addition to income tax paid by company is:
1. applicable only on domestic companies;
2. charged on amount declared, distributed or paid by a domestic company;
3. applicable on interim and final dividend;

On perusal of section 2(22) we can find that in case of other modes of distribution of profit, the company may
distributes such profit in any manner but it will be to all the shareholders in proportion to the number of shares held
by them, if all shares are equal in entitlement. In case there are different types of shares, then dividend will be in
proportion to paid-up capital thereon and as per the terms of issue.

Whereas in case of payments which are deemed as dividend under clause (e), the payments are not in proportion
to the share holding or paid up capital held by different members. Therefore, the deemed dividend u/s 2(22)(e)
is materially different from other types of dividend-covered u/s 2(22).