Module VIII Tax Evasion, Tax Avoidance and Tax Planning.doc

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Tax Evasion, Tax Avoidance and Tax Planning:
Tax Evasion:
Tax evasion is adoption of dishonest means to reduce tax liability. It is done either by way of
understatement of income or overstatement of expenses and deductions.
For example, by recording more than what is really disbursed by way of salaries, making fictitious
entries of salaries paid to persons who perform no services to the business, showing inflated bills of travel,
vocation expenses, house rents, furniture repair and so on.
For this purpose, tax evaders maintain two sets of books, one presenting the true picture of the
business transactions and other reflecting all the manipulations meant for tax evasion.
Further, a few professional groups like the lawyers, medical practitioners, architects, movie-stars,
consultants are not in practice of maintaining their accounts.
No doubt, tax evasion is an offence and there are statutory provisions to punish them.
Tax Planning:
Tax planning may be defined as the art and science of planning one’s operation in such a way as to
attract the minimum liability to tax by availing of various exemptions, allowances, deductions and rebates
provided under the taxing statute.
If a person takes advantages of the various tax incentives, tax exemptions, or tax privileges offered
by the Government and minimizes his tax liability, he is said to be planning his taxes.
Tax planning is quite legitimate because by tax planning although on the one hand one reduces
one’s tax liability, on the other he helps the Govt. in adopting its welfare goal.
Tax Avoidance:
The term ‘tax avoidance’ is taken to refer to arrangements by which a person acting within the
letter of the law reduces his tax liability.
It involves taking advantages of the loopholes and lacunae of incompleteness in the existing
provisions of the taxing statute. It is the art of escaping the burden of tax without breaking the law.
A classic example of tax avoidance is the case of C.I.T.V. provided Investment Co. Ltd. (1957) 32ITR
190 (SC)
The assessees in this case were the managing agent of two other companies and they were
desirous of giving up the managing agency in favour of the other party for a large consideration. In those
days managing agency was transferable. Now, had they sold the managing agency to the intending
purchaser, there would have arise a large amount of tax to pay as capital gains. So they relinquished their
managing agency by resignation. On their resignation the other party was formally appointed to fill up the
void. In consideration for such relinquishment the other party paid a sum of Rs.50Lakh to the assessees.
The question was whether any capital gains were made out from the transaction by the assessee.
The Supreme Court held that the definition of transfer for the purpose of capital gains as it then existed
was not wide enough to include a case of relinquishment. The result was that the transaction did not
attract any capital Gains tax.
The result was that the law was promptly amended to include relinquishment within the meaning of
transfer.
Causes of Tax Evasion as per Wanchoo Committee:
The Direct Taxes Administration Enquiry Committee, popularly known as Wachoo Committee,
pointed out the following causes of tax evasion in the Indian Economy:
1. High rate of Taxation under the direct tax laws.
2. Economy of shortage and consequent controls and licenses.
3. Donation to political parties
4. corrupt Business Practices
5. Ceiling on, and disallowances of business expenses
6. High rates of Sales Tax and other levies
7. Ineffective enforcement of tax laws.
8. Deterioration in moral standards
Recommendations of Wanchoo Committee to Fight Tax Evasion:
The Direct Taxes Administration Enquiry Committee, popularly known as Wanchoo committee
recommended that the following measure should be taken to fight the problem of tax evasion:
1. Reduction in Tax rates: The Committee pointed out that prevalence of high tax rates was the
first and foremost reason for the tax evasion; this makes the tax evasion profitable and attractive
in spite of the attached risks. Hence, the committee recommended reduction in the then prevalent
tax rates.
2. Minimization of controls: The Committee recommended minimization of controls and licenses
in the economy.

3.

Regulation of donations to political parties: The Committee recommended for regulation of
donations to political parties.[Sections 80GGB and 80GGC inserted by election and other related
laws (Amendment)Act,2003 allows deduction of the amount without any upper limit from total
income contributed to any political party registered under section 29A of the Representation of
people Act,1951]. Income of political parties are exempted U/S 13A.
4. Creation of Confidence among small Tax payers: According to the Committee the practice of
being too meticulous in small cases where no worthwhile revenue is involved, has done much
damage to the image of the Department in the public eye. Hence, the Committee recommended
for creating confidence among small tax payers. It means the small tax payers should not be
harassed unnecessarily.
5. Allowance of certain Business Expenses: The Committee recommended that minimum
incurred in furtherance of the business should be allowed to be deduction as business expenditure
upto a certain limit
6. Changes in penal court: The Committee recommended that the minimum penalty for
concealment of income should be equal to the amount of tax sought to be evaded and the
maximum penalty should be twice the said amount. [The recommendation has been accepted
with regard to minimum penalty but the maximum penalty is 3 times the amount of tax evaded in
case of concealment of income. See Section 271(1) (iii)]
7. Public opinion: The Committee recommended that public conscience be created against tax
evation and tax evaders should be condemned by the society.
8. Vigorous prosecution: The committee also recommended that Department should under take a
more vigorous prosecution policy in order to instill a wholesome respect for the tax laws in the
mind of Taxpayers.
Some Other Suggestion:
1. People should be educated with regard to the real object of the collection of taxes through press,
radio, T.V., and films and other electronic media
2. Steps should be taken to convince the tax payers that the money collected through taxes is not
spent wastefully but put to proper use.
3. No official patronage or recognition or awards should be given to person who have been penalized
for concealment or in whose case prosecution
Some other important causes of tax evasion are as follow:
i.
Complexities in the tax laws.
ii.
Lack of different punishment
iii.
The harassment of the tax payers
iv.
Lack of publicity of the names of tax evaders
v.
Inefficient tax administration
vi.
Lack of integrity of the income tax staff
vii.
Inadequate prosecution machinery
viii.
Shortage of experienced personnel and inadequate staff
ix.
Lack of proper system of assessment and collection of taxes
x.
Absence of co-ordination with other tax departments
xi.
Lack of adequate legal advice on potential prosecution cases,
xii.
Evasion of other taxes
xiii.
Absence of a legal requirement to keep books and accounts in a standard form.
xiv.
Low public morals and absence of social consciousness,
xv.
Inflation and unstable economy,
xvi.
Operation of controls and inadequate enforcement machinery.
xvii. Lenient Judicial attitude towards tax evasion.
Distinction between Tax Evasion and Tax Avoidance:
Tax Evasion: Tax evasion denotes defrauding the revenue by illegal acts, such as concealment of income,
Tax evasion is adoption of dishonest means to reduce tax liability. It is done either by way of
understatement of income or overstatement of expenses and deductions. [see p.5 for various methods of
tax evasion.]
Tax Avoidance: Tax Avoidance may be explained as an art of dodging the payment of revenue without
actually breaking the law. It is an arrangement by which a person, acting within the letter of the law
reduces his tax liability. It involves taking advantages of the loopholes, lacunae and incompleteness of the
existing provision of the taxing statutes.
A classic example of Tax avoidance is the case of C.I.T. vs. Provident Investment Co. Ltd. (1957)32
ITR190(SC)-see in the Article-Managing agency transfer case.

Method of Tax Avoidance:
Tax avoidance schemes in brief may be classified into three parts:
i.
Income splitting
ii.
Income spreading and
iii.
Income transformation.
Income Splitting:
It is a method by which the income of a taxpayer, which is subject to a high rate of tax, is split into
many parts so that each part will pay a lower rate of tax. Thus the aggregate tax payable would be less
than what would have been payable otherwise.
It may take place in several ways, for example, by creation of family partnerships 1, trusts2,
companies or payment of salaries, interest or rent to the wives or children for normal services.
Income Spreading:
It is a device by which an assessee spreads his income and profits earned in one taxable year over
a number of years. By adopting this device a taxpayer succeeds in paying only a portion of tax in one
taxation year whereas the entire amount of tax is due. Thus the aggregate tax payable over all the
taxation years would be less than what would have been payable otherwise.
Income Transformation:
It is a device by which income temporarily belongs to some other person than the assessee and
ultimately it comes in the hands of the assessee. Some examples of Income transformation are as follow:
i. Bond washing: [Now s.94 of Income Tax Act makes provision to combat this method of tax Avoidance].
Bond washing is selling the securities before the dividend is declared and purchasing the same after
dividend is declared. In bond washing an arrangement is made whereby a dealer in securities sells
‘securities cum dividend’ to a tax-exempt party and subsequently repurchases the securities. The capital
loss suffered by the dealer may be set-off against his other income and thus taxation liability is reduced.
[Similar method is adopted in case of lottery incomes].
i.
Dividend Stripping:
In this method taxes on accumulated profits was being saved. Under this method a company (co.1)
purchased the shares3 of other company (co.2) which was having accumulated profits at a considerable
higher price4. The company having accumulated profits then declared dividend and paid the same to the
company, which purchased the shares. After that the company which purchased the shares resold the
same to their original shareholders at a loss. (i.e., for very less price). The amount of loss is deduction from
the dividend income of the company (co.1) and the company (co.2) saves tax on accumulated profits.
Benami Transactions:
In Benami transaction, a person instead of purchasing property in his own name, purchases
property in the names of his wife, children or other near relatives, so that he does not incur any taxation
liability in the income of the property. Although Benami Transaction prohibition Act, 1988 prohibits Benami
transactions, such transactions still take place to avoid taxes.
Besides the above common methods of tax avoidance prevalent in many Countries, there are other
methods of tax avoidance in India, which are unknown elsewhere. These are as follow:
A. Joint Hindu Family:
The Hindu undivided family is a social institution peculiar to India. It has been recognised by the Income
Tax statutes as a distinct legal entity and a unit of assessment for the purpose of taxation.
Earlier, the minimum exemption limit for an HUF was much higher than that of other class of
taxpayers. However, now it is equivalent to an individual. However, still there are following methods, which
are commonly used for tax avoidance through H.U.F.
i.
Partition of joint family assets:
Partition of the joint family assets is the most common device used by the HUF to avoid taxes. The
moment income of an HUF exceeds the exemption limit prescribed for the purpose of taxation, or the
income falls within a high income group which is subject to a higher rate of tax, the family effects partition
of the joint family property.
Partition may be total or partial. In case of a total partition, the entire assets of the family are
divided amongst the coparceners, whereas in the case of a partial partition, the division takes place only in
respect of certain assets of the family, generally business assets, and the family remains joint in other
1

Suppose there are two persons each earning Rs.2Lakh from their business. Now each person can contribute their 50% of the assets to
create a partnership firm so that each one will have individual income of Rs.1Lakh only and the firm will earn income of Rs.2Lakh. So
there will become three units of assessments.
2
A person having higher income may create a trust for the benefit of any other person keeping in view of provision of 5.64.
3
From shareholder
4
i.e., at premium

respects. [Generally after partition the members of the erstwhile joint family draw up a partnership deed
consisting of the same members as individuals and get the firm registered under the Income Tax Act.]
As a result the undivided joint family divides the income of the family into a number of separate
units, each assessable in the hands of individual coparceners at a considerably lower rate as compared
with that payable.
ii.
Alienation of family Assets:
The second device which is used by an HUF to reduce the impact of taxes is either to alienate the
family assets to one or more of the coparceners, or to finance from the family funds an individual member
or to employ a coparcener to participate in an undertaking financed by Joint Family funds and to earn a
salary or remuneration for his exclusive use. As a result the family property is diverted into different
channels. Each claiming assessments in its own right, as the self acquired property of the earner himself,
and thereby reducing the incidence of tax.
Anti- Avoidance provision:
Under the Income Tax Act, anti-avoidance provision are in chapter 10 (consisting of Ss 92 to 94)
which may be termed as special measures to combat tax avoidance and others are spread all over the Act
which may be termed as special measures to combat tax avoidance e.g., Ss 60 to 64, various deeming
provisions and inclusive definitions of various terms. Recently fringe benefit tax has also been introduced
for checking tax avoidance.
Effect of Tax Evasion and Tax Avoidance
1. Effect of Tax Evasion:
The evils of tax evasions are many,
i.
Tax evasion causes irreparable injury to public morals and public health. It brings frustration
among the people and has a demoralizing effect on honest taxpayers when he notices that the
tax evaders are getting honour and respect in the society.
ii.
Tax evasion like tax avoidance brings inequality because the honest taxpayers are made to bear
the burden of dishonest taxpayers.
iii.
Tax evasion leads to inflation in the market. Prices shoot up to the detriment of the common
man.
iv.
Tax evasion leads to large scale hoarding of goods. Crafty traders taking advantage of the
shortage of commodities, invest the proceeds of evasion in hoarding goods and sometimes
create an artificial scarcity. In this way, the chain of hoarding and black marketing goes on
unchecked.
v.
Besides hoarding the goods of day to day necessities, the proceeds of tax evasion are also used
in hoarding gold, jewelery and ornaments, kept in secret in their homes.
vi.
Tax evasion leads to corruption as the tax evaders utilize untaxed money is corrupting officials
and staff of the Income Tax Department, in order to get various concessions.
Untaxed money is also utilised to corrupt public man and political parties by making
contributions to political funds and corrupting public servants.
vii.
Evasion of the under one taxing statute may lead to evasion of tax under other fiscal statutes.
For example, if a trader evades excise duty by showing less manufacture or production, he will
be bound to evade Sales Tax on unshown production and ultimately income tax also.
viii.
Tax evasion leads to hampering the economic growth of the community. Tax evaded is generally
kept concealed in the form of unaccounted money and is not brought into the open or invested
in the market from fear of detected and caught. As a result the economy of the country is
adversely affected.
Effect of Tax Avoidance:
1. If the payment of a substantial amount of revenue is avoided by the use of loopholes and the lacunae
in law. It results in a loss of revenue to the exchequer.
2. Tax avoidance leads to inequality as the loss of revenue suffered by the Govt. is made good by the
remaining body of taxpayers, who either are unwilling to frustrate the apparent intention of the
legislature; or are unable to profit by it; or have no knowledge how to avoid tax or have no opportunity
for avoiding the tax.
3. In fact, tax avoidance is a game of wealthy people, big business men, industrialists and companies,
who can employ ingenious lawyers and accountants to devise various schemes to outwit the revenue.
Thus it leads to wastage of the country’s intellectual manpower, as best brains are employed to outwit
the legislature’s scheme and then the legislature spends the time and energy to combat those
measures.
4. Tax avoidance leads to tax evasion as tax payers who are not able to resort to tax avoidance devices
are tempted to adopt illegal means to evade payment of taxes.
5. Tax avoidance leads to deterioration of tax morality as well.
Judicial Attitude to Tax Avoidance:

Human reluctance to pay taxes is universal. It is paradoxical to find that people are very liberal in matter of
spending money for charities, donations, performing religious or social functions like marriages, birthday
functions, marriage anniversaries, opening ceremonies etc. but are painfully miser and reluctant in
payment of taxes especially direct taxes.
An important device to lessen the burden of taxation is to resort to various ways of tax avoidance.
Prior to 1926, whether tax incidence was reduced by lawful means or otherwise, it was regarded as
tax evasion. The distinction was drawn for the first time in I.R.C. v. Fisher’s Executors (1926) AC 395, 5 an
English decision in which it was held that the subject is entitled so to arrange his affairs as not to attract
taxes imposed by the crown, so far as he can do so within the law and that he may legitimately claim the
advantage of expressed terms or any emissions that he can find in his favour in taxing Acts. In doing so he
neither comes under any liability nor incurs blame.
Similarly Lord Tamlin, in I.R.C. vs. Duke of West Minister (1936) AC1 observed:
“Every man is entitled, if he can, to order his affairs so that the tax attracting under the appropriate
Act is less than it otherwise would be."
There had been considerable debate in the past regarding legitimacy of tax avoidance. Lord Chancellor
Viscount Simon in Latilla v. I.R.C. (1943) I.T.R. Suppl. 79(1+L) has expressed the following view regarding
tax avoidance:
“There is of course, no doubt that they (i.e., tax avoiders) are within their legal rights, but that is no
reason why their efforts, or those of the professional gentlemen who assist them in their matter, should be
regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On
the contrary, one result of such methods, if they succeed, is of course to increase portanto the load of tax
on the shoulders of the great body of good citizens who do not desire, or do not know how to adopt these
manoeuvres.”
However, in majority of the cases liberal view on the issue of tax avoidance was preferred and tax
avoidances were held neither illegal nor blame worthy or immoral.
The judiciary in India also likes the English courts upheld the right of citizens and the residents to
arrange his affairs so that he pays the minimum amount of tax, by adopting ingenious devices and making
use of the loopholes of the law.
In Jiyaji Rao Cotton Mills v. C.I.T. (1958) 34 I.T.R.888 (SC) it was held that every person is entitled to
so arrange his affairs as to avoided taxation but the arrangement be real and genuine and not a sham or
make believe.
However, most important observations in this regard are to be found in C.I.T. v. A. Raman & Co.
(1968) 67 ITR 11(SC):
“Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not
prohibited. A taxpayer may resort to a device to divert the income before it accrues to him”.
It was also held that taxing provisions may not be violated except on peril of penalty but it may lawfully be
circumvented.
The courts have validated and legalised tax avoidance on the theory that a taxing statute is to be
strictly construed.
The Wanchoo committee is its report has disapproved attempt to tax avoidance which violate the
sprit and intention of the law and at times border at tax evasion (para 3.5 page 70)
The defence against tax avoidance became weaker in U.K. after decision in W.T. Ramsay v. I.R.C.
(1982) A.C.300 wherein it was observed: “while techniques of tax avoidance progress and are technically
improved the courts are not obliged to standstill. Such immobility must result either in loss of tax to the
prejudice of other tax payers or to parliamentary congestion or to both. (i.e., overcrowding of provisions)
A more significant departure from West minister and Fishers Executors cases can be noticed in the
decision of the House of Kords in Furniss (Inspector of Taxes) v. Dawson (1984)1 All E R 530 (HL)
In this case, the house of lords was considering about taxation of capital gains accruing to a person
on the disposal of assets and the House of Lords was concerned with a situation where a series of two
transactions was planned as a single scheme to avoid tax on capital Gains.
Lord Bright man observed: “The fact that the court accepted that each step in a transaction was a
genuine step producing its intended legal results did not confine the court to considering each step in
isolation for the purpose of assessing the fiscal results”.
The English decision in the wake of Ramsay’s case began reinterpreting rules laid down by
Ramsay’s case. What has come out is a gradual watering down of the hard line adopted in the Ramsay’s
case.
5

See also Lord Clydle in Ayra shire Pullam Motor services & Ritchie vs. The I.R.C. (1929) 14 Tax cases 153 wherein he observed
that no man in this country is under the smallest obligation or otherwise, so to arrange his legal relations to his business, or to his
property as to enable the Inland Revenue to put the largest possible shovel into his stores.

The decision in England in Craven vs. White (1988) 3 All E R 495 (HL) went to restore earlier
position. According to majority view in this case: “There is no moral dimension by which tax avoidance is to
be judged so that any step undertaken with a view to the avoidance or mitigation of tax on an anticipated
transaction or disposition is for that reason to be ignored or struck down”.
Indian Cases:
In India also, the Supreme Court in Mc Dowell and Co. v. Commercial Tax Officer (1985) 154
ITR 148 (SC), a landmark decision, delivered by a bench of five judges discarded the old age theory that
tax avoidance is legal. The court said in unequivocal term that tax avoidance is harmful to a welfare state
like ours and that the Courts should not be a party to encourage such a transaction. Justice Chinnappa
Reddy in his judgement in this case held:
“We think that time has come for us to depart from the Westminster principle--- and to dissociate ourselves
from the observations made elsewhere”.
In this case an attempt was made by taxpayer to avoid Sales Tax on excise duty by excluding the
same from the total turnover.
Under the Andhra Pradesh excise Act,1968 Excise Duty was livable on the manufacturer of liquor.
According to normal commercial practice, Excise Duty should have been reflected in the bill either as
merged in price or being shown separately. As a fact, in the hands of the buyer, the cost of liquor is what is
charged by the manufacturer under its bill together with Excise Duty and Sales Tax is levied on that price.
However, in this case buyers of liquor agreed to pay the Excise Duty which was payable by the
manufacturer. Thus the appellant’s (manufacturer) bill of sale showed the price of liquor excluding the
Excise Duty and appellant paid Sales Tax on that price i.e., excluding Excise Duty. The commercial Tax
officer issued a notice to the appellant to include the sum of Rs.4,49,09,552-40 representing the Excise
Duty in the appellant’s turnover. For the year 1982-83, which was challenged by the appellant before the
Andhara Pradesh High Court? The High Court held that excise duty which was payable by the appellant but
had by an amicable arrangement been paid by the buyer was actually a part of the turnover of the
appellant (under the amended rules)6 and was, therefore, liable to be so included for determining liability
for Sales Tax, on appeal the supreme court also affirmed the decision of the high court.
The Supreme Court in this case noted the evil consequences of tax avoidance [see on page 2 of this
note]
Comment:
Though the decision in Mc Dowell case looks very sound in principle, it has opened a flood gate for
litigations. It is true that one should not transgress from tax planning into the territory of tax avoidance,
but it is not easy to demarcate the dividing line between the two.
No one knows what is acceptable to Govt, no one can predict with certainty the intention of the
policy makers. Authorities interpret laws differently therefore, it is not easy to distinguish a case of tax
avoidance with planning. It is evident from a few cases decided after the case of Mc Dowell.
In Neorth Oil Mills Co. Ltd. Vs. C.I.T. [1987] 166 ITR 418 (Ker) on perusal of the books of account
of the assessee, the Income-Tax officer found that the assessee had not disclosed a sum of Rs.
3,50,000/- which stood credited to the Suspense account as security received. Account to the assessee,
this amount was not received as income, but as security paid to it in terms of an agreement to which
the assessee and two others were parties and in terms of which the assessee transferred 17 licenses
(import license). In fact, the assessee was not entitled to sell the licenses as they were obtained by it
for its own manufacturing purposes as an actual user and registered exporter. The transaction
therefore postulated import of goods by the second party for and on behalf of the assessee and the
assessee had agreed to sell the goods to the first party after they were imported.
It was contended that the sum of Rs. 3,50,000/- was provided under the agreement for payment to
the assessee as its profit margin respecting the goods imported under the licenses and such amount
was payable only upon actual receipt for goods and sales of the same to the first party in terms of the
agreement. A like sum already received by the assessee under the agreement was only a security
which was to be adjusted against the profit margin receivable by the assessee upon performance of the
contract. Therefore the amount received as security was not the income of the assessee, although it
was convertible as income upon the subsequent performance of the contract.
It was found that although the transaction postulated import of the goods by the second party, for
and on behalf of the assessee and the assessee had agreed to sell the goods to the first party after
6

Earlier the Supreme Court in Mc Dowell & Co. Ltd. vs. C.T.O. [1977] 1 SCR 914 had held that excise duty paid directly by the
purchaser could not form the turnover of the manufacturer and hence manufacturer was not liable to pay Sales Tax on that amount.
Consequently the law was amended to provide no spirit or liquor manufactured or stored shall be removed unless the excise
Duty has been paid by a holder of D-2 licence before such removal.
The appellant manufacturer was a holder of D-2 licence.

they were imported, what really happened was an outright sale of the licenses by the assessee in favor
of the second party. The import was financed and carried out by the second party, either as a nominee
of the first party or in its own right, and in truth and essence the assessee had no future interest in the
goods, except that it was, in terms of the agreement, obliged to cooperate with the second party in
importing the goods and handling over the same to the first party. The so called security was not to be
refundable even if the goods were not imported by the second party during the stipulated period of
operation of licenses. In other words what was received as security was not repayable, whether there
was due performance of the contract or failure of performance of the contract.
It was held that on a consideration of the agreement as a whole, the conclusion was that it was an
attempt to defer payment of tax. This was an attempt to defeat the law and no court could
countenance it. In the circumstances, the sum of Rs. 3,50,000 received by the assessee in the
accounting year relevant to the assessment year 1975-75 was taxable in the Assessment year 197475.
On the other hand in C.I.T.vs.. Late G.D. Naidu and others (1987) 165 I.T.R. 63 assessee and his
son were partners in a firm carrying on the business of playing buses. The business of the firm was
taken over by another set of partners who were totally new and payments were made by the new firm
to the assessee and his son for not carrying on the business of playing buses, for a period of five years.
The question was whether the amount received by the assessee and his son would be liable to tax
as income or as capital gains. The court held that the amount received for not carrying on business was
not in the nature of income nor could it be regarded as capital gains. The attempt of the Department to
invoke the decision of the Supreme Court in Mc. Dowell & Co. Ltd. vs .C.T.O. (1985) that the firm
was a device to evade tax was held not applicable
In M.V. Valliappan vs. C.I.T. [1988] 170 ITR 238 (Mad) the question was whether partial
partition of an HUF could be considered as an act of tax avoidance to deprive the exchequer its dues.
The Madras High Court expressed the view that even in the light of new approach laid down in Mc
Dowell’s case, every attempt by a tax payer to reduce his tax burden cannot be rejected as
impermissible on the ground that it is intended to avoid tax.
The Supreme Court also in C.W.T. vs. Arvind Narottam [1988] 173 ITR 479 (SC) observed when
its attention was drawn to Mc. Dowell’s case –“It is true that tax avoidance in an undeveloped country
should not be encouraged--- One could get the enthusiasm of justice Holmes that taxes are the price to
buy civilization. But the question ----is---does he with taxes buy civilization or does he facilitate the
waste and ostentation of the few. Unless waste and ostentation in Government spending are avoided or
eschewed, no amount of moral sermons would change people’s attitude to tax avoidance.

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