CU-BBA-SEM III-Corporate Tax Planning-SECOND DRAFT

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER III CORPORATE TAX PLANNING

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 2 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENTS Unit 1: Introduction To The Concept Of Tax Planning .......................................................... 4 Unit 2: Objective And Importance Of Tax Planning ............................................................ 26 Unit 3: Methods Of Tax Planning........................................................................................ 36 Unit 4: Areas Of Tax Planning ............................................................................................ 51 Unit 5: Locational Aspects Of Tax Planning........................................................................ 71 Unit 6: Taxation Of Non-Residents ..................................................................................... 81 Unit 7: Tax Planning And Financial Management ............................................................. 103 Unit 8: Tax Planning In New Business .............................................................................. 116 Unit 9: Tax Planning And Amalgamation.......................................................................... 130 Unit 10: Tax Planning With Regard To Specific Management Decisions........................... 142 Unit 11: Accounting Systems And Taxation...................................................................... 148 Unit 12: Tds ...................................................................................................................... 160 Unit 13: Advance Payment Of Tax.................................................................................... 186 Unit 14: Filing Of Return .................................................................................................. 195 3 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1: INTRODUCTION TO THE CONCEPT OF TAX PLANNING STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Assessment of Companies 1.3 Concept of GST 1.4 Tax Planning, Tax Avoidance and Tax Evasion 1.5 Differences Between Tax Planning, Tax Avoidance and Tax Evasion 1.6 Judicial Thinking – A Brief Study 1.7 Summary 1.8 Keywords 1.9 Learning Activity 1.10 Unit End Questions 1.11 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the term Company and how it is assessed under Income Tax Act, 1961  Explain the concept of GST  Describe the terms tax avoidance, tax evasion and tax planning and how they are different from each other. 1.1 INTRODUCTION Taxes are levied by the Governments to meet the common welfare expenditure of the society. There are two types of taxes - direct taxes and indirect taxes. Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax. One cannot shift the burden of a direct tax from the individual who paid it to the government to someone else. e.g., Incometax. Indirect Taxes:A good example of an indirect tax is the Goods and Services Tax (GST) or Custom Duty. Indirect taxes are paid by one person, who then passes the tax burden on to another party. Taxes are levied for what reasons? 4 CU IDOL SELF LEARNING MATERIAL (SLM)

They are the government's primary source of revenue, which is why taxes are levied. The government uses the money raised to pay for things like defence, education, health care, and infrastructure like roads and dams. Power to levy taxes The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by authority of law.” Accordingly, for levy of any tax, a law needs to be framed by the government. Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central and State Government. The Parliament and State Legislatures are empowered to make laws on the matters enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of India. Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes. The following are the lists: (i) Union List: Parliament has the exclusive power to make laws on the matters contained in Union List. (ii) State List: The Legislatures of any State has the exclusive power to make laws on the matters contained in the State List. (iii) Concurrent List: Both Parliament and State Legislatures have the power to make laws on the matters contained in the Concurrent list. Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh Schedule to Article 246 of the Constitution of India has given the power to the Parliament to make laws on taxes on income other than agricultural income. 1.2 ASSESSMENT OF COMPANIES Meaning of ‘Company’ for purposes of Income Tax Under the Income-tax Act, 1961, the term “Company” has a much wider meaning than what has been given to it under the Companies Act. The company is considered as a ‘person’ for all purposes of assessment proceedings [Section 2(31)(iii)]. Section 2(17) of the Income-tax Act, 1961 defines a company for income-tax purposes. Accordingly, ‘company’ means – (i) any Indian company as defined in section 2(26); or (ii) any body corporate incorporated by or under the laws of a country outside India, i.e., any foreign company; or 5 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) any institution, association or body which is assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 or for any assessment year commencing on or before 1.4.1970 under the present Act; or (iv) any institution, association, or body, whether incorporated or not and whether Indian or non-Indian, which is declared by a general or special order of the CBDT to be a company. Such institution, association etc. shall be deemed to be a company for such assessment years as may be specified in the CBDT’s order. Classes of Companies Domestic and Foreign Company: Companies can be classified into two groups, viz. i) Domestic company and ii) Foreign company. (i) Domestic company means - an Indian company or - any other company, which, in respect of its income liable to tax, has made the prescribed arrangements for the declaration and payment of the dividends (including dividends on preferential shares) within India, payable out of such income [Section 2(22A)]. Indian Company [Section 2(26)] - A company has to satisfy the following two conditions so that it can be regarded as an Indian company – (a) the company should have been formed and registered under Companies Act, 19561 (b) the registered office of the company should be in India. The expression ‘Indian Company’ also includes the following provided their registered or principal office is in India: 1. a company incorporated under any law relating to companies formerly in force in any part of India [except Jammu and Kashmir, Goa,Dadra and Nagar Haveli, Daman and Diu and Pondicherry, wherein companies formed and registered under any law for the time being in force in the respective union territories are included in the definition]; 2. a corporation established by or under a Central, State or Provincial Act (like Financial Corporation or a State Road Transport Corporation); 3. an institution or association or body which is declared by the Board (CBDT) to be a company under section 2(17)(iv); 6 CU IDOL SELF LEARNING MATERIAL (SLM)

Prescribed arrangements for the declaration and payment of dividends within India [Rule 27]: To declare and pay dividends (including dividends on preference shares) in India, a company must make the following arrangements under section 194 and 236: i) If a company's principal place of business is in India, the company's share register for all its shareholders must be maintained on a regular basis as of the first day of the assessment year. ii) The general meeting for approving the previous year's accounts and declaring dividends shall only be held within India. iii) Dividend payments, if any, will be made to all shareholders only within India. Indigenous companies must comply with the above requirements; non-Indian companies will only be treated as domestic companies if they comply with the above requirements for dividend declaration and payment in India. Foreign Company: A company that is not a domestic company is a foreign company [Section 2(23A)]. Closely held and widely held Company: Domestic companies are again divided into broad groups, viz 1. companies in which public are substantially interested - ‘Widely-held companies’ 2. companies in which public are not substantially interested - ‘Closely held companies’ To determine whether a company is one in which the public are substantially interested, one has to apply the tests laid down in section 2(18). Briefly, the following companies fall under this category: i) A company owned by the government (either central or state, but not foreign) or the Reserve Bank of India (RBI), or a corporation owned by that bank, in which the government or the RBI owns at least 40% of the shares. ii) A corporation that is registered under Section 25 of the Companies Act of 1956 is referred to as a limited liability company (LLC) (formed for promoting commerce, arts, science, religion, charity, or any other useful object and which prohibits payment of dividends to its members). iii) A firm with no share capital that the CBDT declares to be a company in which the public has a considerable stake for the specified assessment years. iv) A mutual benefit financing firm that accepts deposits from its members as its primary activity and has been declared Nidhi or a Mutual Benefit Society by the Central Government under section 620A of the Companies Act, 19564. v) A corporation whose equity shares (not dividend-paying shares) bearing at least 50% of the voting power have been unconditionally allotted to or acquired unconditionally 7 CU IDOL SELF LEARNING MATERIAL (SLM)

by one or more co-operative societies and were beneficially held throughout the relevant prior year. vi) A company that is not a private company as defined by the Companies Act, 1956 and meets one of the following criteria: - its equity shares must have been listed in a recognised stock market in India as of the final day of the relevant prior year; or - Its equity shares with at least 50% (40 percent in the case of an Indian company in the shipbuilding business, manufacturing or processing goods, mining, generation or distribution of electricity or any other form of power) voting power should have been unconditionally allotted to or acquired by and beneficially held throughout the relevant previous period by a) Government or b) a Statutory Corporation or c) a company in which public are substantially interested or d) any wholly owned subsidiary of company mentioned in (c). Thus, it should be noted that all public limited companies must automatically be treated as companies in which public are substantially interested, whereas all private limited companies will be treated as companies in which public are not substantially interested. Relevance of the above classification: 1. The distinction between domestic and foreign companies is significant owing to, inter alia, the rates of tax. Domestic companies are taxed at 30% but where the total turnover or gross receipt in the previous year 2018-19 does not exceed ₹ 400 crore, it shall be taxed at 25% of the total income. However, a foreign company will be taxed at 40%. The rate of tax is 50% on specified royalties and fees for technical services received from the Government or an Indian concern pursuant to an agreement made by the foreign company with the Government or an Indian concern between 1.4.1961 and 31.3.1976 (in the case of royalties) and between 1.3.1964 and 31.3.1976 (in the case of FTS). Surcharge@7% of the tax payable is leviable in the case of domestic companies and @2% of tax payable in the case of foreign companies if the total income exceeds ₹ 1 crore but does not exceed ₹ 10 crore. Surcharge@ 12% of the tax payable is leviable in the case of domestic companies and @ 5% of tax payable in the case of foreign companies if the total income exceeds ₹ 10 crore. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

1.3 CONCEPT OF GST Let us first comprehend the basic concept of GST before moving on to the finer points of Indian GST.  GST is a value added tax levied on supply i.e., manufacture or sale of goods and provision of services.  GST provides a full and continuous chain of tax credits from the point of origin/service provider to the point of sale/consumer, taxing only the value added at each stage of the supply chain.  At each stage, the supplier is allowed to claim credit for GST paid on the acquisition of goods and/or services, which he can use to offset the GST due on the products and services he will provide. As a result, only the ultimate customer is responsible for the GST levied by the supply chain's last supplier, with set-off benefits available at all previous levels.  There is no tax on tax or cascading of taxes under the GST system because only the value contributed at each stage is taxed. The same can be understood better with the help of the following example: Particulars Manufacturer (₹) Distributor (₹) Retailer (₹) Consumer (₹) Cost + profit 1,00,000 1,00,000 + 11,200 1,11,200 + Cost = = 1,35,840 + = 1,11,200 24,640 24,451.20 1,35,840 Value 1,00,000 11,200 24,640 Nil addition GST payable 1,00,000 × 18% = 1,11,200 × 18% = 1,35,840 × 18% - 18,000 20,016 = 24,451.20 Input Tax Nil 18,000 20,016 Nil Credit 20,016 – 18,000 = 24,451.20 – Tax borne by GST Paid to 18,0000 = the consumer = Government 2,016 20,016 24,451.20 4,435.20 Table 1.1 Concept of GST Framework of GSTas Introduced in India I. Dual GST: 9 CU IDOL SELF LEARNING MATERIAL (SLM)

Due to the country's federal structure, India has adopted a dual GST scheme. As a result, the Centre and States impose GST on taxable supplies of goods or services, or both, that occur inside a State or Union Territory. As a result, the Centre and States levy taxes at the same time, i.e., the Centre and States tax products and services at the same time. The Centre now has the authority to tax intra-State sales, and states have the authority to tax services. GST applies to the entire country, including Jammu and Kashmir. II. CGST/SGST/UTGST/IGST GST is a destination-based tax that applies to all transactions involving the delivery of goods or services for a consideration, with some exclusions. On intra-State supplies of taxable goods and/or services, the Central Goods and Services Tax (CGST) is levied and collected by the Central Government, the State Goods and Services Tax (SGST) is levied and collected by State Governments/Union Territories with Legislatures, and the Union Territory Goods and Services Tax (UTGST) is levied and collected by Union Territories without Legislatures.Intra-State supply of goods or services is treated as such when the supplier's location and the place of delivery of goods or services are both within the same State/Union territory. Furthermore, it is recognised as inter-State provision of goods or services where the supplier's location and the place of supply of goods or services are in I two distinct States, (ii) two different Union Territories, or (iii) a State and a Union territory. The Integrated Products and Services Tax applies to interstate supplies of taxable goods and/or services (IGST). All inter- State supplies are subject to IGST, which is the sum of CGST and SGST/UTGST levied by the Centre. III. Legislative Framework The CGST is levied under a single law, the CGST Act of 2017. Similarly, the UTGST Act, 2017 governs the levying of UTGST in Union Territories without legislatures [i.e. Andaman and Nicobar Islands, Lakshadweep, Ladakh, Dadra and Nagar Haveli & Daman and Diu, and Chandigarh]. For levying SGST, states and union territories with their own legislatures [such as Delhi, Jammu & Kashmir, and Puducherry] have their own GST legislation. Despite the fact that there are multiple SGST legislations, the basic features of the law, such as chargeability, definitions of taxable event and taxable person, classification and valuation of goods and services, collection and levy procedures, and so on, are uniform in all SGST legislations to the extent possible. This is required in order to maintain the dual GST's essence. IV. Goods and service classification The HSN (Harmonised System of Nomenclature) is used to categorise items for GST purposes. The Chapters of the First Schedule to the Customs Tariff Act, 1975, are referred to in the Rate Schedules for goods. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

A new scheme for categorising services has been established, with services of various types being grouped into various sections, headers, and categories. Each group is made up of different Service Codes (Tariff). V. Composition Scheme Every taxable person is required to pay tax (CGST, SGST/UTGST for intra-State supplies, and IGST for inter-State supplies) under the GST regime, and provisions have been included in the law to this end. A easier form of paying taxes, known as the Composition Levy, is mandated to provide relief to small enterprises, notably manufacturers, providers of food goods, traders, and others, that make intra-State shipments. The scheme's scope has now been expanded to include small service providers as well. VI. Registration If his aggregate turnover exceeds the threshold limit during a fiscal year, every supplier of goods and/or services is required to register in the state/UT from which he makes the taxable supply. Different threshold limits have been prescribed for various States and Union Territories depending upon the fact whether the supplier is engaged exclusively in supply of goods, or exclusively in supply of services or in supply of both goods and services. The threshold limit prescribed for various States/UTs are as follows: States with threshold limit of ₹ 10 lakh for both goods and services  Manipur  Mizoram  Nagaland  Tripura States with threshold limit of ₹ 20 lakh for both goods and services  Arunachal Pradesh  Meghalaya  Sikkim  Uttarakhand  Puducherry  Telangana States with threshold limit of ₹ 20 lakh for services and ₹ 40 lakh for goods**  Jammu and Kashmir  Assam  Himachal Pradesh  All other States 11 CU IDOL SELF LEARNING MATERIAL (SLM)

**persons engaged exclusively in intra-State supply of goods VII. Exemptions Aside from offering relief to small businesses, the law also includes provisions for exempting necessary items and/or services from taxation. VIII. Seamless flow of credit Because GST is a destination-based consumption tax, SGST money usually goes to the states that consume it. The exporting State's inter-State supplier is permitted to offset the applicable credit against the IGST due on inter-State supplies made by him (order of utilisation of credit is explained below). The buyer in the importing State is entitled to a credit for IGST paid on purchases made across state lines. As a result, unlike in the past, when the credit chain would break in the instance of inter-State sales due to non-VATable CST, there is a seamless credit flow in the case of inter-State deliveries under the GST system. The exporting State does not receive revenue from inter-State sales, but instead passes to the Centre the SGST/UTGST credit utilised in IGST payment. The IGST credit utilised in the payment of SGST/UTGST is transferred to the importing State by the Centre. Order of utilization of credit - There is a specified order in which ITC should be utilized. First, IGST credit should be utilized towards IGST payment, and then towards payment of CGST and SGST/UTGST in any order and in any proportion. After entire ITC of IGST is utilized, ITC of CGST should be utilized for payment of CGST and IGST in that order. Thereafter, ITC of SGST /UTGST should be utilized for payment of SGST/UTGST and IGST in that order. It may be noted that ITC of CGST cannot be utilized for payment of SGST/UTGST and vice versa. Also, ITC of SGST/UTGST should be utilized for payment of IGST, only after ITC of CGST has been utilized fully. The seamless flow of credit under GST, in case of intra-State and inter-State supplies, can be better understood with the help of the following illustrations: Intra-State Supply ILLUSTRATION 1 In the case of a local supply of goods or services, the supplier would levy dual GST, namely CGST and SGST, at prescribed rates. 12 CU IDOL SELF LEARNING MATERIAL (SLM)

I. Supply of goods/ services by A to B Amount (in ₹) Value charged for supply of goods/ services 10,000 Add: CGST @ 9% 900 Add: SGST @ 9% 900 Total price charged by A from B for local supply of goods/ services 11,800 A shall remit the CGST and SGST charged on B for the supply of goods/services to the appropriate Central and State Government accounts. A is a first-stage supplier of goods or services and so does not have CGST, SGST, or IGST credit. II. Supply of goods/services by B to C – Value addition @ 20% B will take credit for the CGST and SGST he paid on the purchase of goods/services and use that credit to offset the CGST and SGST he owes on the supply of goods/services he makes to C. Value charged for supply of goods/ services (₹ 10,000 x 120%) Amount (in ₹) Add: CGST @ 9% 12,000 Add: SGST @ 9% 1,080 Total price charged by B from C for local supply of goods/ services 1,080 Computation of CGST, SGST payable by B to Government 14,160 CGST payable Amount (in ₹) Less: Credit of CGST 1080 CGST payable to Central Government 900 180 13 CU IDOL SELF LEARNING MATERIAL (SLM)

SGST payable 1080 Less: Credit of SGST 900 SGST payable to State Government 180 Note:For the purpose of simplicity, the CGST and SGST rates have been set at 9% apiece. Statement of revenue earned by Central and State Government Transaction Revenue to Central Government Revenue to State (₹) Government (₹) Supply of goods/services by A to B 900 900 Supply of goods/services by B to C 180 180 Total 1080 1080 Inter-State Supply ILLUSTRATION 2 When products or services are supplied between states, the supplier is required to charge IGST at prescribed rates. I. Supply of goods/services by X of State 1 to A of State 1 Amount (in ₹) Value charged for supply of goods/ services 10,000 Add: CGST @ 9% 900 Add: SGST @ 9% 900 Total price charged by X from A for local supply of goods/ services 11,800 X is the first-stage supplier of goods/services and so has no CGST, SGST, or IGST credit. II. Supply of goods/services by A of State 1 to B of State 2 – Value addition @ 20% Amount (in ₹) Value charged for supply of goods/ services (₹ 10,000 x 120%) 12,000 14 CU IDOL SELF LEARNING MATERIAL (SLM)

Add: IGST @ 18% 2,160 Total price charged by A from B for interstate supply of goods/ services 14,160 Computation of IGST payable to Government Amount (in ₹) IGST payable 2160 Less: Credit of CGST 900 Less: Credit of SGST 900 IGST payable to State Government 360 A of State 1 will remit the IGST charged on B of State 2 for the provision of goods/services to the relevant account of the Central Government. State 1 (Exporting State) will send an SGST credit of 900 to the Central Government, which would be used to pay IGST. III. Supply of goods/services by B of State 2 to C of State 2 – Value addition @ 20%B will take credit for the IGST he paid on the goods/services he bought and use it to offset the CGST and SGST he owes on the local supply of goods/services he made to C. Amount (in ₹) Value charged for supply of goods/ services (₹ 12,000 x 120%) 14,400 Add: CGST @ 9% 1,296 Add: SGST @ 9% 1,296 Total price charged by B from C for interstate supply of goods/ services 16,992 Computation of CGST, SGST payable to Government Amount (in ₹) CGST payable 1296 Less: Credit of IGST 1296 CGST payable to Central Government Nil 15 CU IDOL SELF LEARNING MATERIAL (SLM)

SGST payable 1296 Less: Credit of IGST (₹ 2160 – ₹ 1296) 864 SGST payable to State Government 432 The Central Government would transmit to State 2 an IGST credit of ₹ 864 that was used to pay SGST (Importing State). Note: For the purpose of simplicity, the CGST, SGST, and IGST rates have been assumed to be 9%, 9%, and 18%, respectively. Statement of revenue earned by Central and State Governments Transaction Revenue to Central Revenue to Revenue to of Government (₹) Government of Government state 2 (₹) state 1 (₹) Supply of goods/services by X to 900 900 A Supply of goods/services by A to 360 B Transfer by State 1 to Centre 900 (900) Nil Supply of goods/services by B to 432 C 864 Transfer by Centre to State 2 (864) 1296 Total 1296 1.4TAX PLANNING, TAX AVOIDANCE AND TAX EVASION Tax planning is application of the various provisions of tax laws to reduce the tax impact on the assessee to the minimum with the help of deductions, exemptions, rebates, reliefs etc. Tax planning requires latest knowledge of tax laws, circulars issued by the CBDT and various decisions of the Courts. Tax Planning is a system which in its implementation is designed to achieve a specific result. Tax planning tries to lower the amount of money paid to the government in taxes so that it can be used more effectively for the benefit of the individual or business, as the case may be. 16 CU IDOL SELF LEARNING MATERIAL (SLM)

Tax planning can be defined as the arrangement of one's financial affairs in such a way that, without violating the law in any way, full advantage is taken of all tax exemptions, deductions, concessions, rebates, allowances, and other reliefs or benefits allowed under the Act, reducing the assessee's tax burden to the bare minimum. The dividing line between tax evasion and tax avoidance is very thin. Tax planning involves reduction of taxes by taking benefits expressly provided under the Law but Tax Evasion involves reduction of taxes by using loopholes/lacunas in law. Tax avoidance defeats the object of law and not the law. However, Tax Evasion refers to any attempt to avoid payment of taxes by using illegal means. Some of the ways of tax evasion are: • Providing false information. • failure to record investments in books of account. • claim of bogus expenditure. • recording of any false entry in books of account. • failure to record any receipt in books of account having a bearing on total income. Tax planning  Taking use of tax exemptions or privileges given by the government in perfect compliance with the law.  Tax planning is the process of arranging your financial affairs in such a way that you may take full advantage of all available exemptions, deductions, rebates, and reliefs without breaching the law, lowering your tax bill.  For e.g., Mr Arun has a huge earning from his business. He wants to reduce his tax liability by taking a Life Insurance Policy and paying a premium of ₹ 1,00,000. This contribution is an allowed deduction u/s 80C. Tax evasion:  Tax evasion is the practise of avoiding paying taxes through illegitimate means.  Tax evasion usually entails concealing or falsifying income.  Underreporting income, exaggerating deductions without proof, concealing or failing to register cash transactions, and hiding money in offshore accounts are all examples of this.  Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non- payment of taxes. Fraud can be defined as “an act of deceiving or misrepresenting,”  It is not legally permissible under taxing statue. 17 CU IDOL SELF LEARNING MATERIAL (SLM)

 For e.g., Mr. Babu wants to reduce his tax liability. So, he conceals a part of income earned by him and balance only he reported to tax department and paid tax. This is a case of tax evasion. Common forms of tax evasion  Misrepresentation or suppression of facts.  Failure to record investments in books of account.  Claim of expenditure not substantiated by any evidence.  Making a note of any erroneous entry in the books of account.  Failure to record any receipt that has an impact on total revenue in books of account; and  Any foreign transaction, considered international transaction, or specified domestic transaction is not reported. Tax avoidance:  Between the two extremes of tax planning and tax evasion, there is a huge realm for picking a range of approaches that, although nominally meeting the requirements of the law, in actuality evade it in order to remove or decrease tax burden. 1.5 DIFFERENCES BETWEEN TAX PLANNING, TAX AVOIDANCE AND TAX EVASION Tax Planning Tax Avoidance Tax Evasion Tax planning is an action taken Tax Avoidance means reducing Tax Evasion is a deliberate within the four corners of the the tax by taking advantage of attempt on the part of taxpayer Income Tax Act to achieve the loopholes of the law. which leads to unlawful certain social and economic reduction of tax. goals, not a colorable device to avoid paying taxes. Tax Planning is a legal right and Tax Avoidance is legal only but Tax Evasion is unlawful a social responsibility. By tax it defeats the purpose of the planning certain social and law. economic objectives are achieved. Tax planning is done by Tax evasion is accomplished by Tax avoidance is carried out availing exemptions, deductions exploiting legal loopholes. using unethical tactics. and rebates provided under the Income Tax Act. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

Tax Planning helps in economic As tax avoidance is intended for Tax Evasion leads to generation development of the country. avoiding tax, it benefits the of black money and is harmful taxpayer and does not for the development of a contribute much for economic country. development. There are no penal Tax Avoidance also does not Since Tax evasion is unlawful, consequences. lead to any legal consequences. the defaulter will be punished. Table 1.2 Differences between Tax Planning, Tax Avoidance and Tax Evasion 1.6 JUDICIAL THINKING – A BRIEF STUDY Tax Planning under English Law  Every individual is entitled, if he can, to manage his business so that the tax attaching under the respective Acts is less than it would otherwise be, according to Inland Revenue Commissioner vs. Duke of Westminster 1936 AC 1. Regardless matter how unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be, if he succeeds in directing them to achieve this outcome,  In I.R.C. vs. Burmah Shell Co. Ltd. (1982) STC 30 (Burmah) and Furniss (Inspector of Taxes) vs. Dawson (1984) 1 All E.R.530, it was held that where tax avoidance was targeted through a series of transactions with no commercial or substantial value but with the sole purpose of avoiding tax, the Courts must ignore the transactions and the tax liability must be determined as if these transactions never took place. Tax Planning under Indian Law  The Supreme Court followed the case of the Westminster in CIT vs. A. Raman & Co. 1 SCR 10. It was found that avoiding tax duty by organising commercial affairs in such a way that the tax burden is dispersed is not illegal. A device may be used by a tax payer to redirect revenue before it accrues or arises to him. The device's effectiveness is determined by the operation of the Income-tax Act of 1961, not by moral considerations. Legislative injunctions in taxing statutes may not be disobeyed unless there is a punishment, although they may be lawfully bypassed. However, in Mc Dowell's case, the Supreme Court explicitly deviated from the aforementioned views and openly disassociated itself from past Supreme Court pronouncements echoing the sentiments of Westminster principle. The court listed the following negative implications of tax evasion: (1) Significant loss of much-needed public funds. (2) Significant disruption to the country's economy due to the accumulation of mountains of black money, which directly causes inflation. 19 CU IDOL SELF LEARNING MATERIAL (SLM)

(3) There is a significant hidden cost to the community as a result of some of the country's brightest minds being mired in endless litigation. (4) The feeling of injustice and inequality that tax evasion instils in those who are unwilling or unable to profit from it. (5) The immoral practise of shifting the burden of tax liability from the hands of the \"artful dodgers\" to the innocent, good citizens.  The court believed that tax laws had the same moral standing as any other benefit legislation, and that avoiding taxes was unethical. The right way to construe a taxing statute while evaluating a device to avoid tax, according to the Court, was not to inquire whether the provisions should be treated literally or liberally, nor was it to question whether the provisions should be construed literally or liberally nor  The Supreme Court emphasised that tax planning is legal as long as it is done within the confines of the law, and that colorable devices cannot be used in tax planning. It is inappropriate to advocate or entertain the notion that avoiding tax payment by using dubious means is honourable. The Supreme Court further stated that it is every citizen's responsibility to pay taxes honestly and without deception. 1.7 SUMMARY  Governments levy taxes in order to fund society's common welfare expenditures. Direct taxes and indirect taxes are the two sorts of taxes.  The primary reason for taxation is that it is the government's primary source of money.  A direct tax is one that is levied directly on a person's income or wealth.  It is an indirect tax if it is levied on the price of a good or service.  The Income-tax Act of 1961 governs the collection of income tax in India.  Every year, during the Budget Session of Parliament, the Finance Minister of the Government of India introduces the Finance Bill.  The Central Board of Direct Taxes is in charge of direct tax administration (CBDT).  The CBDT issues circulars from time to time to address specific issues and to clarify any ambiguities about the scope and meaning of certain Act provisions.  The Central Government issues notifications to give effect to the Act's provisions.  Income tax is a tax levied on a person's total income for the preceding year.  An individual, a Hindu Undivided Family (HUF), an Association of Persons (AOP), a Body of Individuals (BOI), a firm, or a company are all examples of people.  A person's income might come from a variety of sources. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

 GST is a ground-breaking indirect tax reform that aims to establish a single national market. GST includes excise duty, service tax, VAT, CST, luxury tax, entertainment tax, entry tax, and other indirect taxes.  Due to the country's federal structure, India has adopted a dual GST scheme. As a result, the Centre and States impose GST on taxable supplies of goods or services, or both, that occur inside a State or Union Territory.  The Goods and Services Tax (GST) is a destination-based tax.  In the case of intra-State supplies of taxable goods and/or services, GST in India consists of two levies.  The Central Government levies and collects the Central Goods and Services Tax (CGST).  State Goods and Services Tax (SGST) is a tax imposed and collected by state governments and union territories in collaboration with their legislatures.  Union Territory Goods and Services Tax (UTGST) is a tax imposed and collected by Union Territories that do not have legislatures.  For offering relief to small enterprises, notably manufacturers, suppliers of food commodities, traders, and others, making intra-State shipments, a simpler form of paying taxes is mandated, known as Composition Levy.  Because the Centre and State indirect tax administrations operated under different laws, regulations, procedures, and forms prior to GST, their IT infrastructure and systems were also separate.  Tax planning entails applying the various provisions of the direct tax laws to real situations in such a way that the tax impact on the assessee is kept to a minimum.  For a successful study of tax planning tactics, current understanding of tax legislation is required.  Planning is the creation of a system with the goal of achieving a specified result when it is implemented.  Any tax planning system should appear natural on the surface and should not appear to be a contrived setup.  Between the two extremes of tax planning and tax evasion, there is a broad realm for picking a range of strategies that, although officially following the requirements of law, really sidestep them in order to remove or decrease tax burden.  It entails structuring your affairs in such a way that your tax liability is adequately controlled.  Tax evasion is the practise of avoiding paying taxes by means other than lawful means.  Under the taxes statute, it is not legal to do so.  The term \"tax evasion\" is used to describe a type of tax fraud.  Tax evasion usually entails concealing or falsifying earnings. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

1.8 KEYWORDS  GST – Goods and Service Tax  CBDT – Central Board of Direct Taxes  CIT – Commissioner of Income Tax  Tax planning – Intelligent application of various provisions of direct tax to reduce the tax impact to minimum.  Tax Evasion – Using illegal means to avoid paying taxes. 1.9 LEARNING ACTIVITY 1. Learn more about indirect taxes that existed in Pre GST-Regime. ___________________________________________________________________________ _____________________________________________________________________ 2. A Client approaches you to know more about deductions. Explain more about deductions provided under Chapter-VIA. ___________________________________________________________________________ _____________________________________________________________________ 3. List out various investment opportunities for tax planning. ________________________________________________________________________ ________________________________________________________________________ 1.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. ABC Pvt Ltd Company which is in the business of selling electronics goods incurred a loss of ₹ 4, 00,000 in the FY 2020-21. In the FY 2021-22, the Company started another business of trading in FMCG. The Company earned a profit of ₹ 1, 50,000 and ₹ 70,000 from electronics and FMCG business respectively in FY 2021-22. Compute the business income which is taxable in the year 2021-22. 2. Explain the concept of tax avoidance. 3. Differentiate between tax planning, tax evasion and tax avoidance. 4. What is tax management? Explain briefly. 22 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Mr. Ramu lists out some of the ways to reduce his tax liability. He hires you to find out which one comes under tax planning, and which one are coming under tax evasion. 1. He has a let-out house property and earning rent from it. He took housing loan to build that house property which is let-out and he pays interest to the bank. He wants to claim that interest amount as deduction from the rental income. 2. He is running a shop. He has not issued invoices for certain high value transactions in order to conceal that part of income. 3. He took a medical insurance policy and wants to claim the premium amount paid as deduction. Long Questions 1. Briefly explain the two types of taxes. 2. Briefly explain the concept of GST. 3. Discuss briefly the threshold limits for registration under GST. 4. M Sports, a supplier registered under GST in the state of Tamilnadu supplied sport goods (taxable at 12%) for a value of ₹ 10,00,000 to D Sports who is also a registered supplier under GST in the state of Tamilnadu. D sports sold those goods at a margin of 20% to another supplier G Sports who is registered in the state of Karnataka. Show a detailed calculation of the GST involved in both the supplies and clearly mention the tax amounts earned by respective Governments (State Governments and Central Government). 5. Briefly explain the concept of tax planning. 6. What are the objectives of tax planning? 7. Write short notes on tax evasion. 8. What are the common forms of tax evasion? B. Multiple Choice Questions 1. When each part of the section is independent of each other, such parts are called _________. a. Sub-section b. Clause c. Sub-clause d. None of these 2. Which of the following is a type of deduction from Gross Total Income in respect of payment? a. Life insurance premium b. Interest on savings bank account c. Both (a) and (b) 23 CU IDOL SELF LEARNING MATERIAL (SLM)

d. None of these 3. The threshold limit applicable for a person supplying goods exclusively in the state of Tamilnadu is a. 20 Lakhs b. 10 Lakhs c. 40 Lakhs d. None of these 4. For intrastate supply of goods ___________ will be applicable. a. IGST only b. CGST only c. CGST and SGST d. SGST only 5. Companies in which public are substantially interested are called a. Closely held companies b. Widely held companies c. Both (a) and (b) d. None of these 6. Specified foreign company means a foreign company in which the Indian company holds ____ or more of the nominal value of the Equity share capital. a. 26% b. 25% c. 20% d. 10% 7. __________ may be defined as an arrangement of one’s financial affairs in such a way that, without violating in any way the legal provisions. a. Tax Management b. Tax Avoidance c. Tax Planning d. Tax Evasion 8. Which of the following is not an objective of tax planning? 24 a. Minimize war between taxpayer and tax administrator b. Making investments c. Hiding the profits d. Make the society grow CU IDOL SELF LEARNING MATERIAL (SLM)

9. Which of the following is a common form of tax evasion? a. Illegal means to avoid paying taxes b. False entry in books of accounts c. Claiming of false expenditure d. All of these 10. The objective of __________ is to comply with the provisions of law. a. Tax evasion b. Tax management c. Tax avoidance d. None of these 11. In order to reduce tax, Mr. Anand reported a high expense which was not actually incurred by him. This is a case of ___________. a. Tax avoidance b. Tax management c. Tax evasion d. Tax planning Answer 1-b, 2-a, 3-c, 4-c, 5-b, 6-a, 7-c, 8-c, 9-d, 10-b, 11-c 1.11 REFERENCES  V.K. Singhania,DirectTaxes,Taxman Publication (P)Ltd.,Delhi,Latestedition.  Lakhotia R.N., Income Tax Planning Handbook, Vision Books, New Delhi, Latestedition.  H.C. Mehrotra–IncomeTaxLaw&Practice.  Bhagwati Prasad: LawandPracticeofIncomeTaxinIndia  H.P.Ranina:CorporateTaxation: AHandbook(Taxmann).  V.S.Datey:IndirectTaxes–LawandPractice(TaxmannPublicationsLimited). 25 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2: OBJECTIVE AND IMPORTANCE OF TAX PLANNING STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Tax Planning – Other Relevant Aspects 2.3 Objectives and Importance of Tax Planning 2.4 Limitations of Tax Planning 2.5 Summary 2.6 Keywords 2.7 Learning Activity 2.8 Unit End Questions 2.9 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Outline in detail the concept of Tax Planning  Explain the Objectives of Tax Planning  State why Tax Planning is so important  Know the limitations of Tax Planning 2.1 INTRODUCTION Tax planning involves an intelligent application of the various provisions of the direct tax laws to practical situations in such a manner as to reduce the tax impact on the assessee to the minimum. To properly apply tax laws, a thorough understanding of its principles, methods, and procedures is essential. Before going into a transaction or beginning a firm, it is common to think about the profitability and other issues. The tax ramifications of the business's transactions, among other things, must be considered before proceeding with the transaction. Otherwise, one may unknowingly incur a significant tax liability. Tax planning aids in the generation of bigger savings of investable excess. 2.2 TAX PLANNING – OTHER RELEVANT ASPECTS Tax Planning and Doctrine of Form and Substance 26 CU IDOL SELF LEARNING MATERIAL (SLM)

 One of the reasons of tax planning is the existence of the doctrine of form and substance. Is it possible to ignore the form of a transaction and determine the substance thereof?  In Commissioner of Income tax vs. Motor and General Stores (P) Ltd. (1967) 66 ITR 692 (SC.) the Supreme Court had observed that in the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. According to the court, when the transaction is embodied in a document the liability to tax depends upon the-meaning and content of the language used in accordance with the ordinary rules of construction. The House of Lords in Duke of Westminster vs. ICR (1936) 19 ATC 498 held that in considering the substance of the transaction, the legal form cannot be disregarded. Principles governing the form and substance: (i) In deciding whether the transaction is a genuine or colourable one, it will be open to the authorities to pierce the corporate veil and look behind the legal facade at the reality of the transaction. (ii) The above rule cannot naturally apply where the transaction, as put through by the assessee, is not genuine but colourable or is a mere device. For here, the question is not one between ‘form’ and ‘substance’ but between appearance and truth. (iii) It is well settled that when a transaction is entered in one form known to law, it will attract tax liability while, if it is entered into in another form which is equally lawful, it may not. In considering, therefore, whether a transaction attracts tax or not, the form of the transaction put through by the assessee is to be considered and not the substance thereof. (iv) Where the terms of a transaction are contained in a document, it should not be construed only in its formal or technical aspect. While the words used should be looked at, too much importance should not be attached to the name or label given by the parties and the document should be interpreted so as to accord with the real intention of the parties as appearing from the instrument. (v) Where the authorities are charged under the Act with the duty of determining the nature or purpose of and payment or receipt on the facts of a case, it is open to them to work at the substance of the matter and the formal aspect may be ignored. Tax Planning and Retrospective Legislation  Tax Planning also has to deal with the specific problems arising from the retrospective application of tax rates and tax amendments.  The fundamental principle of construction is that a statute must always be viewed prospectively unless the statute's language expressly or by necessary implication makes it retrospective. A statute should not be subjected to a retrospective operation that would jeopardise vested rights or the legitimacy of previous transactions. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

 In India, the government generally adheres to the notion that changes in tax rates, as well as other revised aspects of tax legislation, should be implemented prospectively in respect to current incomes rather than prior-year incomes. However, there have been instances where the government has amended tax legislation retroactively. The legitimacy of such retroactive statutes has been upheld by the Supreme Court.  There are two aspects to every retrospective legislation. The modified clause would be applied to any outstanding assessments. In the case of completed assessments, the problem would occur. The impact of a retrospective legislative amendment is that the provisions as amended are assumed to have been included in the statute for all legal purposes as of the day the amendment became effective. All orders for periods after the date of retrospective amendment must comply with the explicit and clear provisions, as changed retrospectively. Tax Planning and Administrative Legislation  It is a common feature of enactment to lay down in the section of the Act, the principles and the policy of the Legislature leaving out details to be filled in or worked out by rules or regulations made either by the Government or by some other authority as may be empowered in the legislation.  The following principles emerging from various rulings are relevant in this context. 1. The rules cannot be made which are contrary to the object of the Act 2. A rule cannot have a condition, which is not sanctioned/consistent with the Act. 3. No rule/Regulation can be contrary to the rules of natural justice. 4. A rule can't override the subject matter of a specific Act provision. 5. A regulation cannot diminish, negate, or eliminate a right, privilege, advantage, or benefit conferred by the relevant provision or statute. 6. A rule cannot seek to impose a tax that the Legislature has deemed ineffective or unnecessary. 7. Both a regulation and a provision of legislation must satisfy Article 14 of the Constitution, which guarantees citizens' constitutional protection and fundamental rights. 8. A rule must be limited to the subject area for which the rule-making authority has been given jurisdiction under the statute. 9. A rule cannot be accorded the status of a law of Parliament simply because it is later put before Parliament. 10. If a rule divides persons and objects into identifiable classes and such classification is relevant to the aim of the legislation and for carrying out the provisions of the Act, it cannot be called into question, just as it cannot be called into question in the case of an enactment. 11. A rule has no retrospective effect unless the Act to which it applies expressly allows for the creation of rules with retrospective effect. Tax Planning and System of Advance Rulings 28 CU IDOL SELF LEARNING MATERIAL (SLM)

 A ruling is a written statement from a tax administering body to a taxpayer that interprets and applies the law and regulation to a specific set of facts and draws a judgement about the tax implications of that transaction. Advance rulings are so-called because they are issued in advance of the transactions in question.  With regard to the specific instances in which they are delivered, the advance decisions are obligatory on both the tax authorities and the applicant who sought the ruling. Because the law typically hinges on a date, an amount, the type of taxpayer, and other factors, a change in the facts might influence the basis of the judgements.  Similarly, even though the circumstances appear to be the same, a ruling issued for one transaction may not be valid for a subsequent transaction involving the same taxpayer.  Advance rulings are a fantastic tool for developing and supporting the self-assessment system, and they would help the government and the taxpaying people maintain good relations. These judgements are most desirable from the perspective of the tax payer because they provide greater assurance of certainty prior to engaging into a transaction and ensure greater uniformity in the implementation of tax legislation.They are also beneficial to the administration since they lessen the potential for litigation and dispute, reduce the time spent addressing questions from taxpayers, and aid in the achievement of a fair and coordinated tax administration. Tax Planning and Interpretation No tax can be imposed on the subject without explicit language indicating a desire to impose a burden on him. To put it another way, the subject can only be taxed if he follows the text of the law. (a) Natural Justice: Tax legislation must be construed fairly and in accordance with natural justice principles. The court must achieve the evident objective of the legislation and provide a reasonable construction where a literal construction would defeat it and produce an entirely unseasonable result. If a fiscal enactment's meaning is in doubt, the construction that is most beneficial to the subject should be used, even if it gives him \"a double advantage.\" A provision for relief exemption should be construed liberally and in the assessee's favour. A provision for appeal should be viewed flexibly as well. If there is any dispute about the construction, earlier judicial interpretation or legislation, or a reference to the evil meant to be repressed, can be used to help. Unless it is on the same subject and the previous legislation is confusing, a subsequent enactment provides no relevant reference to the interpretation of earlier law. (b) Definition clause and undefined words:A definition or interpretation clause that broadens the meaning of a word shall not be interpreted as removing its common meaning. Furthermore, unless there are competing terms to the contrary, such a phrase should be read in such a way that it does not damage the main notion or essential meaning of the expression stated. The words used in the Act's sections are believed to have been 29 CU IDOL SELF LEARNING MATERIAL (SLM)

used accurately and exactly as defined in the Act, and those who claim otherwise must establish that the subject or context is repugnant.Unless a contrary intention arises, words that are not clearly defined must be taken in their legal sense, dictionary meaning, popular or commercial sense, as opposed to their scientific or technical meaning. (c) Marginal Notes:Although marginal notes to sections cannot govern the interpretation of the act, they can shed light on the legislature's intent. (d) Legal fiction: The term \"deemed\" might refer to things that are evident, doubtful, or impossible. A legal fiction must be followed to its logical conclusion, but only within the confines of the specific purpose for which it was written. A legal fiction should not be understood in such a way that it causes injustice. (e) Provisos:A proviso cannot be used to restrict the substantive enactment or to revoke any part of what the main provision has provided by implication. Unless the substantive clause applies to the facts of the case, a proviso is not applicable. A proviso's proper function is to give an exception to a case that would otherwise come within the general language of the main enactment and have its effect limited to that case. A proviso, on the other hand, can be construed as a separate substantive enactment if the context warrants it.A proviso cannot be separated from the provision to which it is a proviso, whether it is interpreted as constraining the main provision or as a substantive element. It must be construed in a way that is consistent with the main enactment. Tax Planning and Diversion of Income/Application of Income The term \"diversion of income by overriding title\" refers to the diversion of income at the source, before it reaches an assessee. Such a distraction can occur as a result of legal compulsion, contractual obligation, or other circumstances. The diversion of income occurs when the assessee is required to apply the income in a specific way before it has accrued or arisen to the assessee. An responsibility to apply revenue that has accrued, arisen, or been received, on the other hand, is just the apportionment or application of the income, not its diversion.The boundary between diversion by overriding title and the application of revenue after it has accrued can be a little blurry at times. When income or a portion of revenue is diverted at the source by an overriding title before entering the channel intended for the assessee, it may be excluded from his assessable income. Wherever there is such a diversion of income, the diverted income cannot be included in the assessee's total income. Where income has accrued or originated in the hands of the assessee, on the other hand, its subsequent application in whatever form has no bearing on the tax due. 2.3 OBJECTIVES AND IMPORTANCE OF TAX PLANNING 1. Reduction in Tax Liability 30 CU IDOL SELF LEARNING MATERIAL (SLM)

The basic objective of tax planning is to reduce the tax liability so that enough surplus out of profits remains with the earner for his personal and social needs and also for future investments in his business. This is possible only by planning his tax affairs properly and availing the deductions, exemptions and reliefs etc. which are admissible under the Acts. He can do so by keeping up to date on the various tax reductions available and the conditions that must be met in order to take advantage of them. 2. Minimisation of Litigation Between taxpayers and tax administrators, there is constantly a tug-of-war. Taxpayers strive to pay the least amount of tax possible, while tax collectors seek to recover as much as possible. This can lead to a lengthy legal battle. In reality, tax avoidance, not tax planning, is the primary cause of litigation. When a taxpayer seeks to lower his tax due by exploiting a loophole in the law, and the tax administrator disagrees with the assessee's interpretation of the law under which he seeks exemption, deduction, or relief, litigation ensues.Good tax planning is always based on the clear wording of the statute or in accordance with the taxation laws' provisions. Litigation risks are reduced in this situation. 3. Productive Investment Proper tax planning instils fiscal discipline in a taxpayer's operations and decreases the amount of money transferred from the person who earned it through hard work to the government. The money saved increases the tax payer's capacity for development and growth, which raises the government's tax revenue. 4. Healthy Growth of Economy The growth of a nation’s economy depends upon the growth of its citizens. Savings through tax planning devices foster the growth of economy while savings through tax evasion lead to generation of black money. The tax planning plays an important role in the development of backward districts and backward states and development of infrastructure facilities. In other words, it takes the economy in the intended direction. 5. Employment Generation The money saved by tax preparation is usually put toward starting new businesses or expanding existing ones. This results in the creation of new job possibilities in the company. Furthermore, because tax laws are so complex, huge taxpayers are unable to plan their affairs properly. As a result, these individuals require the services of Chartered 31 CU IDOL SELF LEARNING MATERIAL (SLM)

Accountants, Financial Advisors, and Lawyers. These individuals work for businesses as employees or as independent contractors. As a result, tax planning is required not only by taxpayers, but also by society as a whole and the government. 2.4 LIMITATIONS OF TAX PLANNING 1. When an assessee has not claimed an exemption, deduction, or relief that he is entitled to before the assessment is concluded, he is not authorised to claim it as a correction of mistake, in an appeal, or in a revision. 2. Tax planning is not something that can be done in isolation. Apart from the Income Tax Act and other Economic Laws (e.g., Partnership Law or Company Law), other economic aspects must be examined before making any tax-reduction decisions. As a result, the scope of tax planning is limited. 3. The amount of tax levied rises in tandem with the increase in profits. It demands allocating sufficient time to tax planning. This time could have been better spent if it had been used for anything beneficial. 4. The Direct Tax Legislation (Amendment) Act or the Finance Act are used to change the direct tax laws on a regular basis. Long-term tax planning is hampered as a result of this. Taxpayers are unsure whether the current tax benefits granted by the legislature will be extended in the near future. As a result, they are hesitant to make long-term decisions for their economic operations, resulting in poor economic growth. 5. Certain conditions must be met in order for tax benefits to be granted. It can be difficult to meet such requirements at times, and taxpayers are unable to take advantage of the benefits. 2.5 SUMMARY  Tax planning requires thorough understanding of the principles, practices and procedures of tax laws is required to effectively apply those concepts.  In considering, therefore, whether a transaction attracts tax or not, the form of the transaction put through by the assessee is to be considered and not the substance thereof.  Unless the statute's language directly or by essential implication makes it retrospective, it must always be viewed prospectively.  A statute should not be subjected to a retrospective operation that would jeopardise vested rights or the legitimacy of previous transactions.  With regard to the specific instances in which they are delivered, the advance decisions are obligatory on both the tax authorities and the applicant who sought the ruling. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

 Because the law typically hinges on a date, an amount, the type of tax payer, and other factors, a change in the facts might influence the basis of the judgements.  The diversion of income occurs when the assessee is required to apply the income in a specific way before it has accrued or arisen to the assessee.  An responsibility to apply revenue that has accrued, arisen, or been received, on the other hand, is just the apportionment or application of the income, not its diversion.  A proper tax planning enhances the capacity of the taxpayer for expansion and growth, which in turn increases the tax revenue of the government.  The money saved by tax preparation is usually put toward starting new businesses or expanding existing ones. This results in the creation of new job possibilities in the company.  Tax planning is required not only by taxpayers, but also by society and the government as a whole.  The tax laws are amended frequently and it puts a hindrance on the long-term tax planning.  The conditions on which tax incentives are provided are sometimes difficult and the taxpayers may not be in a position to fulfil those conditions. 2.6 KEYWORDS  Diversion of Income by overriding title – Process of diversion of Income before it is earned by the assessee.  Doctrine of form and substance – It allows you to look at the substance of an agreement rather than its formal structure. 2.7 LEARNING ACTIVITY 1. Search in the google some of the tax planning case laws and briefly state your observations on those case laws ___________________________________________________________________________ ___________________________________________________________________________ 2.Learn about Scheme of partial Integration ___________________________________________________________________________ ___________________________________________________________________________ 2.8 UNIT END QUESTIONS A. Descriptive Questions 33 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)

1. Describe the terms application and diversion of income. 2. What are the limitations of tax planning? 3. Briefly explain the concept of tax planning with respect to retrospective legislation. 4. Explain in detail about the objectives and importance of tax planning. 5. Discuss in detail about the various aspects of tax planning. Long Questions 1. Briefly explain the concept of doctrine of form and substance. 2. Explain tax planning with respect to system of advance rulings. 3. Elucidate the tax planning aspects with respect to interpretation of statute. 4. What are the objectives of tax planning? Briefly explain its importance. 5. Explain the principles relating to administrative legislation emerging from various rulings. B. Multiple Choice Questions 1. _________________ to the sections cannot control the construction of the statute but they may throw light on the intention of the legislature. a. Legal fiction b. Marginal notes c. Section d. Provisos 2. A proper ________________ enhances the capacity of the taxpayer for expansion and growth, which in turn increases the tax revenue of the government. a. Tax avoidance b. Tax evasion c. Tax planning d. Tax management 3. The _______________ cannot be made which are contrary to the object of the Act a. Rules b. Section c. Notices d. Circulars 4. No rule/Regulation can be contrary to the rules of ___________. 34 a. Natural justice b. Act CU IDOL SELF LEARNING MATERIAL (SLM)

c. Constitution d. None of these 5. Which of the following is not an objective of tax planning? a. Employment generation b. Minimisation of litigation c. Productive investment d. Evasion of tax Answer 1-b, 2-c, 3-a, 4-a, 5-d 2.9 REFERENCES  V.K. Singhania,DirectTaxes,Taxman Publication (P)Ltd.,Delhi,Latestedition.  Lakhotia R.N., Income Tax Planning Handbook, Vision Books, New Delhi, Latestedition.  H.C. Mehrotra–IncomeTaxLaw&Practice.  Bhagwati Prasad: LawandPracticeofIncomeTaxinIndia  H.P.Ranina:CorporateTaxation: AHandbook(Taxmann).  V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited).V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited). 35 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3: METHODS OF TAX PLANNING STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Successful Tax Planning – Tests to be satisfied 3.3 Methods of Tax Planning 3.4 Deductions from Gross Total Income 3.5 Justification of Tax Planning and Tax Management 3.6 Summary 3.7 Keywords 3.8 Learning Activity 3.9 Unit End Questions 3.10 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the tests to be satisfied for a successful tax planning  Outline the various methods of tax planning  Visualise some of the important deductions available under the Income Tax Act  Explain the justification of tax planning and tax management. 3.1 INTRODUCTION  For a successful study of tax planning tactics, a full understanding of current tax legislation is required. Not only does one need to be up to date on the statute, but they also need to be aware of the contents of the CBDT's different circulars as well as case law in the form of various court decisions. Analyzing case laws is one of the finest ways to learn about tax planning in action. In light of this, students should recognise the relevance and utility of maintaining watch on Supreme Court and Other High Court rulings reported in tax law journals on a regular basis. Students should take the time to read through the relevant cases and comprehend the issues at hand as well as the reasoning behind the decisions. Tax preparation in a specific scenario would, of course, be dependent on the facts and circumstances of that specific case.  We discussed elaborately about the meaning of tax planning, objectives of tax planning and the differences between tax planning, tax evasion and tax avoidance in the previous unit. In this chapter we will try to understand the various methods of tax planning and related concepts. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

3.2 SUCCESSFUL TAX PLANNING — TESTS TO BE SATISFIED:  Tax planning in any case will entirely depend on the individual facts and circumstances. It is a tool in the hands of the taxpayer and tax practitioners for selective use. It is critical to understand (a) that the relevant facts are supported by evidence; (b) that the associated legal ramifications, including under personal and tax laws, are fully considered; and (c) that the scenario requires the use of \"tax planning.\"  Successful tax planning must conform to two outstanding tests viz, (a) conformity with the current law and (b) flexibility.  To pass the first test, the tax planner must have a thorough understanding of the law, rules, and regulations. This legal knowledge encompasses not only the provisions of taxing statutes and the case law that has built on those statutes, but also other disciplines of law, both civil and personal, to ensure that the tax planner's device is not undone by universal jurisprudential principles. The second criteria of flexibility ensures that the tax planning device's success is not harmed by statutory negation. Even if the tax planner is successful in locating a device that he believes is in compliance with the law, the later statutory denial may negate his success. His tax approach must be flexible in order to deal with this situation. The term \"flexibility\" refers to a device's ability to accommodate appropriate alterations in recognised forms. The concept of flexibility is a useful one. Its introduction and application are contingent on the facts of the case. Flexibility may not be an option in certain situations. Flexibility, in fact, may render the tax scheme ineffective. When flexibility is allowed, however, the tax planner should remember to apply this criterion to counteract statutory negation measures. In light of this condition, tax planning plans should be as flexible as feasible, aiming to avoid irreversible problems. As a result, the tax planner should be aware of any noteworthy advances in his sector.  To be a successful enterprise, tax planning efforts should not neglect legislative intent; they should be directed in every case to ensure that not only tax benefits are acquired, but also tax duties are met without fail, avoiding the application of penal provisions. 3.3 METHODS OF TAX PLANNING  The systems and methods of tax-planning in any case will depend upon the result sought to be achieved. Types of Tax Planning 1. Short-range Tax Planning 37 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Long-range Tax Planning 1. Short-range Tax Planning:  The goal of short-term tax planning is limited. An assessee whose income is expected to grow unusually in a given year as a result of, say, the sale of a capital asset such as a house property, might plan to invest the difference in notified bonds, bonds of the National Highway Authority of India, or bonds of the Rural Electrification Corporation Limited to claim exemption under section 54EC. This has a 5-year lock-in period. Despite the fact that such a plan does not require any long-term or permanent commitment, it does result in significant tax savings. This is an example of tax planning for the near term. Example 3.1 Mr. Sunil invested in the bonds redeemable after five years, issued by NHAI under section 54EC the amount of Long-term capital gain of ₹ 45 lakh arising from transfer of building on 1.8.2021. Examine whether this investment reduce his tax liability? Solution Conditions to be fulfilled under section 54EC: 1. There should be transfer of a long-term capital asset being land or building or both. 2. Such asset can also be a depreciable asset being a building held for more than 24 months. 3. The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer. 4. Long-term specified asset means specified bonds, redeemable after 5 years, issued on or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL) or any other bond notified by the Central Government in this behalf. 5. The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 5 years from the date of acquisition of such bonds. If the above conditions are fulfilled the amount invested will be fully exempt from tax. However, the maximum investment cannot exceed ₹ 50 Lakhs in a financial year. In the above case, the investment amount is ₹ 45 Lakhs. Assuming other conditions are met, the amount invested will be fully exempted from tax. This investment helped in saving the taxes in the short run. 2. Long-range Tax Planning 38 CU IDOL SELF LEARNING MATERIAL (SLM)

 On the other hand, long-term tax planning may not even provide immediate tax benefits. It may, however, pay off in the not-too-distant future. For example, if an assessee transfers certain shares to his spouse, the income from the shares will, of course, be combined with the income of the transferor. However, if the company later issues bonus shares in exchange for those shares, the bonus shares' income will not be included in the transferor's income. Similarly, income generated through the investment of revenue from transferred assets will not be included in the transferor's income Even for domestic or familial reasons, long-term tax planning may be used. Example 2: A transfer a house property to his wife without consideration. She earns a rental income of ₹ 10,00,000 from that property. This amount of ₹ 10,00,000 will be clubbed in the hands of the assessee as per the provisions of the Income Tax Act, 1961. The amount of ₹ 10,00,000 was reinvested by Mrs. A as a fixed deposit and she earned an income of ₹ 1,00,000. Now, this ₹ 1,00,000 will not be clubbed in the hands of Mr. A. Hence, it could be way to plan the taxes for the long run. It may not bring benefits in the short run.  In relation to income-tax, the following may be noted as illustrative instances of tax- planning measures: (a) Varying the residential status taking into consideration the number of days of stay in India to be a resident, in case of an individual. (b) Choosing the most appropriate type of assessable entity (individual, HUF, Firm, Co- operative society, Association of persons, Company, Trust, etc. to obtain optimal tax concessions) (c) Choosing the right kind of investments (share capital, loan capital, lease, mortgages, tax exempt investments, priority sector, etc.), considering deductions available in respect of interest or dividend etc. (d) Programmed replacement of assets to take advantage of the provisions governing depreciation. (e) Programmed sale of capital assets depending upon the period of holding and deductions specifically available for assets held for long term. (f) Diversification of the company's operations (hotel industry, agro-based industry etc.) considering the various profit-linked and investment-linked benefits available under the provisions of the Act. (g) In computing business income, the idea of commercial expediency is used to claim a deduction for expenses. 3.4 DEDUCTIONS FROM GROSS TOTAL INCOME 39 CU IDOL SELF LEARNING MATERIAL (SLM)

 There are various deductions which can be claimed from the Gross Total Income as per the provisions of Income Tax Act, 1961. Some of the important deductions are discussed below. Deduction in respect of investment in specified assets:  Savings in specified forms of investment are deducted from Gross Total Income under Section 80C. Only an individual or a HUF is eligible for the deduction under section 80C. The maximum permissible deduction under section 80C is ₹ 1,50,000. (i) Premium paid in respect of life insurance policy  Premiums paid for life insurance on the individual, spouse, or any kid (minor or major), as well as any member of a HUF. A life and an endowment policy will be included. Illustration 3.1  Mr. Hari paid ₹ 20,000 Life Insurance Premium for himself during the FY 2020-21. Actual Capital sum assured is ₹ 1,50,000. Compute the eligible deduction u/s 80C.  The life insurance premium paid by Mr. Hari is eligible for 80C deduction. However, the deduction is restricted to 10% of the actual capital sum assured which is ₹ 15,000. Hence, the deduction allowed under section 80C is ₹ 15,000. (ii) Contribution to SPF/PPF/RPF  Contributions to any qualified provident fund that is subject to the Provident Funds Act of 1925 are eligible for a deduction under section 80C.  Contributions to any Provident Fund established by the Central Government and notified in his name (e.g., the Public Provident Fund established under the Public Provident Fund Scheme, 1968) are likewise eligible for section 80C deduction. Contributions can be given in the name of the individual, his spouse, and any of his children; or, in the case of a HUF, any member of the family. The maximum limit for deposit in PPF is ₹ 1,50,000 in a year. Illustration 3.2  During the previous fiscal year 2020-21, an individual assessee residing in India made the following deposit/payment: 1. 1,50,000 in contributions to the public provident fund 2. Insurance premium paid on the life of the spouse (Actual sum assured ₹ 3,00,000) ₹ 36,000. What is the deduction allowable under section 80C for AY 2021 – 22?  Computation of deduction u/s 80 C for AY 2021-22 Deposit in Public Provident Fund ₹ 1,50,000 40 CU IDOL SELF LEARNING MATERIAL (SLM)

Insurance premium paid (Maximum 10 % of the assured value) ₹ 30,000 Total ₹ 1,80,000 However, the maximum permissible deduction u/s 80C is restricted to ₹ 1,50,000 (iii) Contribution to approved superannuation Fund An employee's contribution to an approved superannuation fund is deductible under section 80C. (iv) Tuition expenses for full-time education for up to two children at any university, college, school, or other educational institution in India. Payment of tuition fees to any university, college, school, or other educational institution in India by an individual assessee at the time of enrollment or thereafter for the full-time study of any two children of the individual. This benefit is only for tuition costs for full- time education and excludes any payment for development fees, donations, or other similar payments, as well as payments for education to any institution outside of India. (v) Payment of a mortgage, including stamp duty, registration fees, and other costs Any contribution made toward the acquisition or building of a new residential property. The income from such property – (1) should be taxed under the heading \"Income from house property\"; (2) would have been taxed under the heading \"Income from house property\" if it had not been used as the assessee's primary residence. The approved types of payments are as follows: (1) Any instalment or partial payment payable under any self-financing or other schemes of any development authority, Housing Board, or other authority engaged in the building and sale of house property on an ownership basis; or (2) Any instalment or part payment payable to any business or cooperative society in which the assessee is a stakeholder or member in relation to the cost of the house leased to him; or (3) Repayment of amounts borrowed by the assessee from the following sources: (a) The Central Government or any State Government. (b) Any bank, including a co-operative bank. (c) The Life Insurance Corporation. (d) The National Housing Bank. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

(e) Any public company formed and registered in India with the main object of providing long-term finance for the construction or purchase of houses in India for residential purposes, which is eligible for deduction under section 36(1)(viii). (f) Any company in which the public has a substantial interest, or any cooperative society engaged in the business of financing the construction or purchase of houses in India for residential purposes, which is eligible for deduction under section 36(1)(viii); (g) Where the assessee's employer is an authority, a board, a corporation, or any other body established or constituted by a Central or State Act, the assessee's employer. (h) The assessee's employer, if the assessee works for a public firm or a public sector corporation, a university established by law, or a college linked with such an institution, a local government, or a co-operative organisation. (4) Stamp duty, registration fees, and other costs associated with transferring such home property to the assessee. Inadmissible payments: However, the following amounts do not qualify for rebate: (1) admission fee, cost of share and initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming a shareholder or member; or (2) the cost of any addition or alteration or renovation or repair of the house property after the completion of the house or after the house has been occupied by the assessee or any person on his behalf or after it has been let out; or (3) any expenditure in respect of which deduction is allowable under section 24. (vi) Investment in five-year Term Deposit A term deposit that is (1) held for a duration of not less than five years with a scheduled bank and (2) in accordance with a plan framed and notified by the Central Government in the Official Gazette qualifies as an eligible investment for section 80C deduction. The maximum limit for investment in term deposit is ₹ 1,50,000. Scheduled bank means - (1) the State Bank of India constituted under the State Bank of India Act, 1955, or (2) a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, or (3) a matching new bank established under section 3 of the a) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or b) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or 42 CU IDOL SELF LEARNING MATERIAL (SLM)

(4) any other bank listed in the Reserve Bank of India Act, 1934. Deduction in respect of medical insurance premium (a) Deduction in respect of insurance premium paid for family: A deduction to the extent of ₹ 25,000 is allowed in respect of the following payments– (1) premium paid to establish or maintain a health insurance policy for oneself, one's spouse, and dependent children or (2) any contribution made to the Central Government Health Scheme or (3) such alternative health programme as the Central Government may deem appropriate. The Central Government has announced the Department of Atomic Energy's Contributory Health Service Scheme. (b) Deduction in respect of insurance premium for parents:A further deduction of up to ₹ 25,000 is allowed to effect or maintain health insurance for the assessee's parents. In the case of a senior citizen, an enhanced deduction of ₹ 50,000 (rather than ₹ 25,000) will be permitted if any of the individuals listed above is a senior citizen, defined as an individual resident in India who was 60 years or older at any time during the previous year. (c) Deduction in respect of payment towards preventive health check-up:Section 80D of the Internal Revenue Code allows a deduction of up to ₹ 5,000 for payments made for preventative health check-ups of self, spouse, dependent children, or parents during the preceding year. The ₹ 5,000 deduction, however, is within the overall maximum of ₹ 25,000 or ₹ 50,000, as mentioned in (a) and (b) above. (d) Mode of payment: In order to claim a deduction under section 80D, the payment must be made in one of the following ways: (1) by any mode, including cash, in the case of any sum paid for a preventive health check-up. (2) by any mode other than cash in all other circumstances. (e) Deduction for medical expenses incurred by senior citizens: As a welfare measure for senior citizens, i.e., persons aged 60 or more who are residents of India and are unable to obtain health insurance coverage, a deduction of up to ₹ 50,000 would be allowed in respect of any payment made on account of medical expenditure in respect of such person(s), if no payment has been made to a senior citizen (s). A ‘senior citizen' is someone who lives in India and is 60 years old or older at any point in the previous year. Illustration 3.3 43 CU IDOL SELF LEARNING MATERIAL (SLM)

Mr. Ravi, 45, paid a P.Y.2020-21 medical insurance premium of ₹ 22,000 to protect his and his spouse's health. During the year, he also paid a ₹ 47,000 medical insurance premium to cover the health of his 65-year-old father, who is not financially reliant on him. During the year, he donated ₹ 4,600 to the Central Government Health Scheme. He spent ₹ 3,000 in cash on preventative health check-ups for himself and his spouse, and ₹ 4,500 in cash for his father's preventive health check-up. Calculate the deduction under section 80D for the fiscal year 2021-22. Solution Deduction allowable under section 80D for the A.Y.2021-22 Particulars Actual Payment (₹) Maximum deduction allowable (₹) A. For self and spouse, premiums have 22,000 22,000 been paid and medical expenses spent. 4,600 3,000 i) Self- and spouse's medical insurance 3,000 Nil premiums (ii) Exp. on preventative health check- ups for self and spouse (iii) Contribution to CGHS 29,600 25,000 B. Premiums paid and medical expenses 47,000 47,000 incurred for father, a senior citizen 4,500 3,000 (i) Mediclaim premiums paid for father, who is over 60 years old (ii) Expenditure on father's preventative health check-up 51,500 50,000 Total deduction under section 80 D (₹ 25,000 + ₹ 50,000) = 75.000 Notes: (1) The total deduction under A.(i), (ii), and (iii) shall not be more than ₹ 25,000. As a result, the CGSH contribution would be restricted to ₹ 3,000 (₹ 25,000 – ₹ 20,000), and the cost of a preventive health check-up for the self and spouse would be 0 (25,000 – 22,000 – 3,000). 44 CU IDOL SELF LEARNING MATERIAL (SLM)

(2) The total deduction under B. (i) and (ii) shall not be more than ₹ 50,000. As a result, the cost of a preventative health check-up for father would be capped at 3,000 rupees, or (50,000 – 47,000). (3) In this case, the total deduction allowed for preventative health check-ups for self, husband, and father is 3,000, which is less than the maximum allowable limit of 5,000. Deduction in respect of interest loan taken for higher education [Section 80E] (i) Eligible assessee: Section 80E provides deduction to an individual-assessee in respect of any interest on loan paid by him in the previous year out of his income chargeable to tax. (ii) Conditions:The loan must have been taken for the aim of pursuing his or her higher education, or for the higher education of a relative. The loan must have been obtained from a financial institution or a non-profit organisation that has been approved. (iii) Meaning of certain terms: Term Meaning (a) Relative The individual's spouse and children, as well as the student for whom the individual is the legal guardian (b) Higher Education It refers to any course of study (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board, or university recognised by the Central Government, State Governments, or local governments, or by any other authority authorised by the Central Government, State Governments, or local governments to do so. As a result, interest on a loan received to pursue any degree after Class XII or its equivalent is deductible under section 80E. (c) Period of deduction The deduction is allowed in calculating total income for the initial assessment year (i.e., the assessment year in which the assessee begins paying interest on the loan) and the seven assessment years immediately following the initial assessment year, or until the assessee pays the interest in full, whichever comes first. (d) Approved Charitable It refers to a charity organisation approved by the specified Institution authority under section 10(23C) or a charitable institution referred to in section 80G(2) (a). (e) Financial Institution It means – (a) a banking company to which the Banking Regulation Act, 1949 applies (including a bank or banking institution referred to 45 CU IDOL SELF LEARNING MATERIAL (SLM)

in section 51 of the Act); or (b) any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf. Table 3.1 Meaning of certain terms Illustration 3.4 Mr. Gopal has taken three education loans on April 1, 2020, the details of which are given below: Loan 1 Loan 2 Loan 3 For whose education loan was taken Gopal Son of Gopal Daughter of Gopal Purpose of loan MBA B.Tech B.Tech Amount of loan (₹) 6,00,000 3,00,000 4,50,000 Annual repayment of loan (₹) 1,20,000 48,000 88,000 Annual repayment of interest (₹) 24,000 12,000 16,000 Calculate the A.Y.2021-22 deductible amount under section 80E. Solution An individual assessee can claim a deduction under section 80E for any interest paid on a loan taken for his higher education, or the higher education of his spouse or children, in the preceding year. Any course of study undertaken after completing the senior secondary exams is referred to as higher education. As a result, interest payments on all of the aforementioned loans would be deductible. Deduction under section 80E = ₹ 24,000 + ₹ 12,000 + ₹ 16,000 = ₹ 52,000. 3.5 JUSTIFICATION OF TAX PLANNING AND TAX MANAGEMENT Tax Planning  Tax planning is defined as the arrangement of one's financial affairs in such a way that, without violating the law in any way, full advantage is taken of all tax exemptions, deductions, concessions, rebates, allowances, and other reliefs or benefits allowed under the Act, reducing the assessee's tax burden to the bare minimum.  It entails planning one's financial affairs by foreseeing the implications that tax rules will have on the arrangements now in place. As a result, it's a mentally engaging activity. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

 Any tax planning system should appear natural on the surface and should not appear to be a contrived setup. Any tax planning scheme should be designed with considerable care and caution by the tax planner or tax consultant, as failure will result in significant issues and a large tax burden for the assessee for whom the programme is developed. Tax Management  It entails structuring your affairs in such a way that your tax obligations are correctly managed.  The goal of Tax Management is to ensure that the terms of the Income Tax Law and related laws are followed.  Tax management aids in the avoidance of interest, penalties, and prosecution, among other things. 3.6 SUMMARY  Tax planning involves an intelligent application of the various provisions of the direct tax laws to practical situations in such a manner as to reduce the tax impact on the assessee to the minimum.  Up-to-date knowledge of tax laws is a pre-requisite for a successful study of tax planning techniques.  Successful tax planning must meet two key criteria:  compliance with current legislation and  flexibility.  Types of tax planning  Short-range tax planning  Long-range tax planning  The short-range tax planning has limited objective.  An Assessee whose income is likely to register unusual growth in a particular year can opt for such short-range tax planning.  The long-range tax planning, on the other hand, may not even confer immediate tax benefits. 3.7 KEYWORDS  Tax planning – Intelligent application of various provisions of direct tax to reduce the tax impact to minimum.  Deductions – Deductions which are available from Gross Total Income  Exemption – Incomes which are specifically exempt under Income Tax Act 47 CU IDOL SELF LEARNING MATERIAL (SLM)

 Tax Management – Complying with various provisions of Income Tax Act, Return filing etc. 3.8 LEARNING ACTIVITY 1. A Client approaches you to know more about deductions. Explain more about deductions provided under Chapter-VIA. ___________________________________________________________________________ _____________________________________________________________________ 2. List out the various investments which you are planning to make in order to get deductions under the Income Tax Act and classify those deductions as short-range tax planning and long-range tax planning investments ___________________________________________________________________________ _____________________________________________________________________ 3.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List out a few illustrative instances of tax planning measures. 2. Briefly explain the tests to be satisfied for a successful tax planning. 3. During the P.Y.2020-21, Mr. Yatin, 48, paid a medical insurance premium of 23,000 to cover his health, as well as the health of his spouse and dependent children. During the year, he also paid a 35,000 medical insurance premium to insure the health of his mother, who is 71 years old and not reliant on him. He suffered a medical bill of $24,000 for his 78-year-old father, who is not covered by his Mediclaim policy. His father, too, is not reliant on him. During the year, he donated $6,500 to the Central Government Health Scheme. Calculate the deduction for the A.Y.2021-22 under section 80D. 4. Write an article about justification of tax planning and tax management. 5. Discuss elaborately about various deductions from gross total income. Long Questions 1. Explain the methods of tax planning. 2. Differentiate between short-range tax planning and long-range tax planning with examples. 3. Mr. Srinivasan, aged 61 years, furnishes the following particulars for the year ending 31.03.2021: 48 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) Life Insurance Premium paid – ₹ 15,000, actual capital sum of the policy assured for ₹ 1,40,000. The insurance policy was taken on 31.03.2012. (b) Tuition fee payment – ₹ 8,000 each for 2 sons pursuing full time graduation course in Calcutta; Tuition fee for daughter pursuing PHD in Kellogg University, USA – ₹ 2.50 Lacs; (c) Housing loan principal repayment – ₹ 32,000 to Axis Bank. (d) Principal repayment of housing loan taken from a relative – ₹ 70,000. The property is self-occupied situated at Pune. Compute the deduction eligible under appropriate provisions of section 80C for A.Y. 2021-22. 4. Mr. Dhaya has taken three education loans on April 1, 2020, the details of which are given below: Loan 1 Loan 2 Loan 3 For whose education loan was taken Self Son of Dhaya Daughter of Dhaya Purpose of loan MBA B.Tech B.Tech Amount of loan (₹) 10,00,000 3,00,000 4,50,000 Annual repayment of loan (₹) 2,00,000 48,000 88,000 Annual repayment of interest (₹) 40,000 12,000 16,000 Calculate the A.Y.2021-22 deductible amount under section 80E. 5. During the previous fiscal year 2020-21, an individual assessee residing in India made the following deposit/payment: 1. 1,50,000 in contributions to the public provident fund 2. Insurance premium paid on the life of the spouse (Actual sum assured ₹ 3,00,000) ₹ 36,000. What is the deduction allowable under section 80C for AY 2021 – 22? B. Multiple Choice Questions 1. __________ may not confer immediate tax benefits. a. Short range tax planning b. Long range tax planning c. Both (a) and (b) d. None of these 49 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Choosing the suitable form of organization is a measure of ________. a. Long range tax planning b. Short range tax planning c. Both (a) and (b) d. None of these 3. Which of the following is not a measure of Long-range tax planning? a. Choosing suitable forms of investment b. Diversification of the business activites c. Programmed sale of capital assets d. None of these 4. Which of the following tests must be satisfied for a successful tax planning? a. Conformity with the current law b. Flexibility c. Both (a) and (b) d. None of these 5. Maximum deduction in respect of medical insurance premium paid for senior citizens is a. 50,000 b. 60,000 c. 25,000 d. 30,000 Answers 1-b, 2-a, 3-d, 4-c, 5-a 3.10 REFERENCES  V.K. Singhania,DirectTaxes,Taxman Publication (P)Ltd.,Delhi,Latestedition.  Lakhotia R.N., Income Tax Planning Handbook, Vision Books, New Delhi, Latestedition.  H.C. Mehrotra–IncomeTaxLaw&Practice.  Bhagwati Prasad: LawandPracticeofIncomeTaxinIndia  H.P.Ranina:CorporateTaxation: AHandbook(Taxmann).  V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited).V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited). 50 CU IDOL SELF LEARNING MATERIAL (SLM)