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BA.LLB (HONS)2014-2019

1. Introduction
2. Tax Avoidance

3. McDowell & Co. Ltd. v. CTO

4. Tax Evasion
5. Commissioner of Income Tax V. Shiv Raj Gupta

With the changing economic scenario, the usual business practices have now changed over
the time. The concept of making profit in the form of Sales Price= Cost + Profit has ceased to
exist. Now the Sales Price cannot be predetermined as it is now regulated by the market.
Thus, it has now shifted to Profit = Cost Price Sales Price. Profit is important for the
continuation of the business and therefore the concept of target costing is now becoming a
trending concept. Under this concept, the price of the goods that can be offered by the market
is the cost and one must maintain the price below that.

This has now realised the need for the tax planning as indirect taxes affect the profits and thus
payment of less taxes on the costs and price, the profit margin can be increased. This is
usually done in two forms: Tax avoidance or Tax evasion,There happens to be a constant
conflict of interest between the government and the tax payers whenever a new tax is

In the case of IRC v Duke of Westminster [1936] AC 1, Lord Tomlin stated: Every man is
entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is
less than it otherwise would be. If he succeeds in ordering them so as to secure this result,
then, however unappreciative the Commissioners of Inland Revenue or his fellow-taxpayers
may be of his ingenuity, he cannot be compelled to pay an increased tax.1 Under our legal
system, it is an accepted principle that people resort to ways by which they can minimise the
amount of tax they pay however this can be done when they stay within the confines of the
law and do not cross the thin line into tax evasion.

Tax Avoidance

You dont have to resort to cheating to lower your taxes. There are plenty of methods
approved by the IRS or state tax code that can help. The use of these legitimate ways for
reducing tax liability is known as tax avoidance.

1 Westminster doctrine- A Dictionary of Law published by OUC Oxford, Page No. 664.
Many people pay more state and federal income tax than necessary simply because they
misunderstand tax laws and dont keep good records. The most common means of tax
avoidance is accomplished by claiming all your permissible deductions and credits. For
example, contributing to a pre-tax retirement fund lowers your current taxable income.

McDowell & Co. Ltd. v. CTO 2

Probably one of the most debated decisions when it was first delivered, ( I had barely started
my articleship then), this decision remains landmark in terms of explaining the difference
between tax avoidance and tax evasion. It also clearly frowned upon tax avoidance, a legal
way of avoiding tax and held that tax planning was legitimate provided it was within the
framework of the law. Colourable devices cannot be part of tax planning and it is wrong to
inspire or amuse the trust that it is honourable to evade the payment of tax by resorting to
unsure methods. It is the obligation of every citizen to pay taxes honestly without resorting to
maneuvers. This decision even though not completely giving a go by to looking at the legal
form of a transaction for the purpose of levy of tax, did draw the line when it came to
approving transactions which were entered into only for the purpose of avoidance of payment
of tax. Probably the world has come a long way since then with General Anti Avoidance
Rules ( GAAR) now being a part of the tax legislation in several countries and the world
debating on the morality of multinationals like Google or Starbucks. This decision clearly
was the guidance for an important principle that stretching of the law beyond a point would
be counterproductive.

Tax Evasion
Tax evasion is the use of illegal means to avoid paying your taxes. Tax evasion occurs when
the taxpayer either evades assessment or evades payment. For example, if someone transfers
assets to prevent the IRS from determining their actual tax liability, there is an attempted to
evade assessment. However, if the assets are hidden after a tax liability has become due and
owing, this is an attempt to evade payment.

2 [ 1985] 154 ITR 148 ( SC)

An honest mistake on your tax return doesnt qualify as tax evasion. A conviction requires the
prosecution prove you wilfully acted to evade assessment or payment of your taxes.
This crime comes with serious penalties, including:

Fines: Tax evaders not only have to pay their original tax liability plus interest, but there are
also hefty fines that accompany any conviction. For individuals, a fine of up to $100,000 can
be assessed.

Prison: There are different maximum prison sentence for evading assessment versus evading
payment. Terms can range from a few months to several years depending on the

The difference between Tax Avoidance and Tax Evasion has been clearly laid down in the
case Commissioner of Income Tax V. Shiv Raj Gupta where it was laid down that:3

39. Expressions tax avoidance, tax evasion and tax mitigation are often spoken about, but
differently understood. Rule of law mandates and requires a measure of certainty in
understanding the said terms. Juristic explications on the subject are indicative of
equivocating and divergent stand points.

43. Tax mitigation in simple words would refer to a taxpayer taking advantage or benefit of
a beneficent provision under the tax code and complying with the requisites to his lower
the tax liability. In the words of Lord Nolan in CIR versus Willoughby [1997] 4 All ER 65, it

The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a
fiscally attractive option afforded to him by the tax legislation and genuinely suffers the
economic consequences that Parliament intended to be suffered by those taking advantage of
the option The aforesaid quote uses the expression economic consequences that
Parliament intended which as per some, causes confusion and is self-contradictory. However,
the said criticism overlooks that if the intention of the Parliament is clear and unambiguous;
taking advantage or benefit as envisaged by the provision is a case of tax mitigation. Even in
3 (2015) 372 ITR 337
case of debate, when the intention of the Parliament is favourable and adjudication decides
the question in favour of the assesse, it would be a case of tax mitigation. Courts are trusted
and given the power to determine as to what was the intent of the Parliament while enacting a
provision. When the court decision interpreting the legislative intent is in favour of the
assesse, there is no avoidance of tax because the conduct is consistent with
the taxing provision. If there is no tax avoidance, the question of abusive tax avoidance does
not arise, for the latter refers to a category of transactions that are unacceptable being
pejorative, i.e. sham, colourable device or deceitful and is distinct from tax mitigation. Albeit,
where the Parliament's intention is to the contrary and the finding negates the assessed's
submission, it would be a case of tax avoidance, whether acceptable or abusive is a different
and another matter. Thus, the term tax mitigation is simple, intelligible and unequivocal. It
is a positive term and refers to the assessed taking benefit or advantage of a provision which
the tax code intends and wants to confer. Deductions under Chapter VIA, exemptions under
Sections 10A, 10AA, 10B etc. of the Act are all provisions relating to tax mitigation. If an
assessee takes benefit or advantage by complying with the stipulated conditions therein to
reduce his tax liability, it would be a case of tax mitigation.

45. Tax avoidance by elimination would mean the residual and surplus, after we exclude
cases of tax mitigation and tax evasion. Tax mitigation and tax evasion are two end points. It
is easier and more beneficial to follow this discernment to define tax avoidance, for the
confines and bounds of tax mitigation and tax evasion are easier to decipher and define
legally and also identify with some exactness in practice.

GAAR (General anti-avoidance rule)

GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax
benefits of transactions or arrangements which do not have any commercial substance or
consideration other than achieving the tax benefit. Whenever revenue authorities question such
transactions, there is a conflict with the tax payers. Thus, different countries started making rules so
that tax can not be avoided by such transactions. Australia introduced such rules way back in 1981.

Later on countries like Germany, France, Canada, New Zealand, South Africa etc too opted for
GAAR. However, countries like USA and UK have adopted a cautious approach and have not been
aggressive in this regard.
Thus, in nutshell we can say that GAAR usually consists of a set of broad rules which are based on
general principles to check the potential avoidance of the tax in general, in a form which can not be
predicted and thus can not be provided at the time when it is legislated.


Reducing the tax liabilities can be done in two way- through tax avoidance and tax evasion.
There exists a thin line of difference between tax evasion and tax avoidance. The distinction
between evasion and avoidance is based upon the methods resorted to reduce the tax
burden. Tax avoidance is the availing of exemptions given by the government in a lawful
manner. On the other hand, tax evasion are manoeuvres involving an element of fraud,
misrepresentation of accounts, deceit etc. for escaping the tax liabilities.