Eligibility Comes from Efforts,

Luck Comes from Opportunities

-Sundar Shetty

SUNDAR B. N.
ASSISTANT PROFESSOR
CORDINATOR OF M.com
 Tax planning is the analysis of a financial situation or
plan from a tax perspective. The purpose of tax
planning is to ensure tax efficiency, with the elements
of the financial plan working together in the most tax-
efficient manner possible. Tax planning is an
important part of a financial plan, as reducing tax
liability and maximizing eligibility to contribute to
retirement plans are both crucial for success.
 It is an arrangements of one’s financial affairs to avail
EXEMPTIONS, DEDUCTIONS, CONCESSION,
REBATES AND RELIEF which is permitted under
income tax act.
 Tax Planning is resorted to maximize the cash inflow
and minimize the cash outflow. Since Tax is kind of
cost, the reduction of cost shall increase the
profitability. Every prudence person, to maximize the
Return, shall increase the profits by resorting to a tool
known as a Tax Planning.
Tax Planning should be done by keeping following factors in mind:
 The Planning should be done before the accrual of income. Any planning done
after the accrual income is known as Application of Income and it may lead to a
conclusion of that there is a fraud.
 Tax Planning should be resorted at the source of income.
 The Choice of an organization, i.e. Taxable Entity. Business may be done
through a Proprietorship concern or Firm or through a Company.
 The choice of location of business , undertaking, or division also play a very
important role.
 Residential Status of a person. Therefore, a person should arranged his stay in
India such a way that he is treated as NR in India.
 Choice to Buy or Lease the Assets. Where the assets are bought, depreciation is
allowed and when asset is leased, lease rental is allowed as deduction.
 Capital Structure decision also plays a major role. Mixture of debt and equity
fund should be balanced, to maximize the return on capital and minimize the
tax liability. Interest on debt is allowed as deduction whereas dividend on
equity fund is not allowed as deduction
 Short Term Tax Planning : Short range Tax Planning means the
planning thought of and executed at the end of the income year to reduce taxable
income in a legal way.
Example : Suppose , at the end of the income year, an assessee finds his
taxes have been too high in comparison with last year and he intends to reduce it.
Now, he may do that, to a great extent by making proper arrangements to get the
maximum tax rebate u/s 88. Such plan does not involve any long term commitment,
yet it results in substantial savings in tax.

Long Term Tax Planning : Long range tax planning means a plan
chalked out at the beginning or the income year to be followed around the year. This
type of planning does not help immediately as in the case of short range planning
but is likely to help in the long run ;
Example: If an assessee transferred shares held by him to his minor son or
spouse, though the income from such transferred shares will be clubbed with his
income u/s 64, yet is the income is invested by the son or spouse, then the income
from such investment will be treaded as income of the son or spouse. Moreover, if
the company issue any bonus shards for the shares transferred , that will also be
treated as income in the hands of the son or spouse.
 Permissive Tax Planning : Permissive Tax Planning means making
plans which are permissible under different provisions of the law, such as
planning of earning income covered by Sec.10, specially by Sec. 10(1) , Planning of
taking advantage of different incentives and deductions, planning for availing
different tax concessions etc.

Purposive Tax Planning :It means making plans with specific

purpose to ensure the availability of maximum benefits to the assessee through
correct selection of investment, making suitable programme for replacement of
assets, varying the residential status and diversifying business activities and
income etc.
 Tax avoidance is an art of dodging tax without
actually breaking the law. It is a method of reducing
tax incidence by availing of certain loopholes in the
law. The expression Tax avoidance will be used to
describe every attempt by legal means to prevent or
reduce tax liability which would otherwise be
incurred, by taking advantage of some provision or
lack of provision in the law.
 it excludes fraud, concealment or other illegal
measures. In other words, it is a device which
technically satisfies the requirement of the law but in
fact it isn’t in accordance with the legislative intent.
 Substantial loss of much needed public revenue, particularly in a welfare state
like ours
 Serious disturbance caused to the economy of the country by piling up of
mountains of black money directly causing inflation
 Large hidden loss to the community by same of the best brains in the country
being involved in the perpetual War waged between tax avoider and his expert
team of the advisers, lawyers and accountants on one side and tax officers and
perhaps not so skilful advisers on the other side
 Sense of injustice and inequality which tax avoidance arouses in the breasts of
those who are unwilling or unable to profit by it.
 Ethics(or lack of it) of transferring the burden of tax liability to the shoulders
of the guideless, good citizens from those of artful dodgers.
One may not agree with the issue of generating black money by avoiding
of tax. In legal tax avoidance the money neither goes out of books nor it is spent
unnecessarily but it is used for further expansion of business.
When a person reduces his total income by
making false claims or by withholding the
information regarding his real income, so that
his tax liability is reduced, is known as tax
evasion. Tax evasion isn’t only illegal but it is also
immoral, anti-social and anti-national practice.
Therefore under the direct tax laws provisions have
been made for imposition of heavy penalty and
institution of prosecution proceedings against tax
evaders.
 LEVEL OF LTAXES – HIGHER
 SOCIAL PSYCHOLOGICAL TAX PAYER- STIGMA, REPUTATION
 THE COMPLEXITIES OF THE TAX SYSTEM
 MISUSE OR MISMANAGEMENT OF REVENUE FROM TAX- MEDIA EXPOSE DAILY
 INEQUAL DISTRIBUTION OF AMENITIES
 NATURE OF ECONOMY-AGRICULTURAL
 COMPLEXITY IN LAW-LACK OF INFO
 UNWILLINGNESS OF TAXPAYERS TO PAY TAXES
 CORRUPTIONS IN TAX ADMINISTRATION
 UNDERGRPUND ECONOMY- BLACK MONEY
 ABSENCE OF SPIRITE OF CIVIL RESPONSIBILITIES
 THE INSTABILITY OF TAX LEGISLATION AND MULTIPLICITY OF AMENDMENTS
 TAX PENALITIES-LOWER/HIGHER, HARSH
 POLITICAL CORRUPTIONS
 DOUBLE TAXATION
TAX PLANNING TAX EVASION
 Is an act within the r corners of the  It is a deliberate attempt on the
act to achieve certain social and part of tax payer by
economic activities and it isn’t a misrepresentation of facts,
colourable device to avoid tax. falsification of accounts
 Is a legal right and a social including downright fraud.
responsibility-certain social and
economic objectives are achieved.  Is a legal offence coupled with
penalty and prosecution.
 It requires through knowledge of
the relevant acts, social, economic  It requires boldness to infringe
and political situation of the the law.
country .
 It helps in economic development of
the country by providing additional
funds for investment in desired  It generates black money which
channels. is generally utilised for
 A tax planner enjoys his fruits freely smuggling, bribery, extravagant
and he doesn’t suffer from his expenses or on luxury
blood-pressure  A tax evader remains always in
anxiety of search and seizure
Every assesses liable to pay tax, needs to manage his/her
taxes. Tax management relates to management of
finances for payment of tax, assessing the advance tax
liability to pay tax in time.
Tax management has nothing to do with planning
to save tax it is just related with operational aspect of
payment of tax i.e. while managing his taxes a person
ensures that he/she is making timely payment of taxes
without running out of the money and he is complying
with all the provisions of the law.
 Tax planning is a broader term
which requires management of affairs in
such a way that results in the reduction
in minimisation of tax liability. Tax
planning is not possible without tax
management. It refers to the compliance
of statutory provisions of law.
(i) Deduction of tax at source u/s 194 to 196
(ii) Payment of tax and self assessment u/s 140A
(iii) Payment of tax on demand u/s 220
(iv) Maintenance of accounts u/s 44AA
(v) Audit of accounts u/s 44AB
(vi) Payment of cess, duty or fees, bonus and
commission to employees etc v/s 43B
(vii) Furnishing return of income u/s 139
(viii) Documentation and maintenance of tax files etc.
(ix) Review of order received from tax Authorities.
 Compliance with legal formalities
 Taking steps to avail various tax incentives
 Saving from consequences of non-compliance of
statutory duties
 Review of department’s orders
Tax Planning Tax Management
The Objective of Tax Planning is to The objective of Tax Management is to comply
minimize the tax liability with the provisions of Income Tax Law and its
allied rules

Tax Planning also includes Tax Tax Management deals with filing of Return in
Management time, getting the accounts audited, deducting tax at
source etc

Tax Planning relates to future Tax Management relates to Past ,. Present, Future.
Past – Assessment Proceedings, Appeals, Revisions
etc.
Present – Filing of Return, payment of advance tax
etc.
Future – To take corrective action

Tax Planning helps in minimizing Tax Tax Management helps in avoiding payment of
Liability in Short-Term and in Long Term interest, penalty, prosecution etc.

Tax Planning is optional Tax Management is essential for every assessee

Dividend is the subject matter of double taxation on the
part of payer and receiver, to reduce tax liability while
distributing dividend we use some technics so that one
can reduce tax liability
When a company receives dividend from another
company it is known as intercorporate dividend.
 DEEMED DIVIDEND – Sec 2(22)(e) of IT act.
Loans and advances given to Directors and family
member of closely held companies, who holds more
than 10% of voting rights or have substantial interest in
such companies, such loans and advances treated as
Deemed Dividend. It is taxable in the hands of
shareholders and not in the hands of company.
However, it will increase tax liability of its
shareholders
 Ask company not to give loans and advances
 Reduce voting power to less than 10%
 shouldn’t borrow from closely held company
Where a loan in the hands of a shareholder or concern
(mentioned as substantial interest and 10% voting
power) has been taxed as deemed dividend, such loan
shouldn’t repaid to the closely held company.
It should be adjusted against the dividends declared by
the company in future. The dividends declared in the
future and adjusted against the loan is not treated as
dividend declared. Thus the double taxation liability can
be avoided
When a Domestic company receives dividend including Deemed dividend from
another Domestic company except loan from a closely held company It is
exempted u/s 10(34). However, the Domestic company who is declaring,
distributing or paying dividend is liable to pay tax on such amount u/s 115-0 in
addition to tax on its total income.

Conditions for claiming Domestic company

Dividend
1. The amount of dividend received by the Domestic company during the
financial year if the following conditions are satisfied.
a. Dividend is received from its subsidiary company
b. The subsidiary company has paid Dividend distribution u/s 115-0
c. The domestic company is not a subsidiary company of another company
2. The amount for dividend paid to any person for, or on behalf of new pension
system trust. A company shall be subsidiary of another company if such other
company holds more than half in the nominal value of the equity share capital of
the company.
When a company issues Bonus shares to its equity
shareholders it is not a deemed dividend.
Hence, a domestic company may issue bonus shares to
its equity shareholders instead of dividend in cash to
reduce tax liability.
However, it will increase tax liability of its shareholders
The tax liability of the company can be reduced by
purchase of own shared by the company instead of
distribution of dividend
Entitled to not less than 20% of the income of the
concern or 20% voting right in that company
What is bonus shares?
When a company issues shares to its existing
shareholders in lieu of dividend such shares are termed
as Bonus Shares. By issue of Bonus shares a company
capitalizes its profit in computing income
 Expenditure incurred on issue of bonus shares is capital
expenditure, hence not deducted in computing the income
of the company
 Where bonus shares are issued to the equity shareholders,
the value of the shares is not taxed as dividend distribution.
However, when redeemable P/S are issued as Bonus shares,
on their redemption, the amount shall be taxed a dividend
distribution
 Where bonus shares are issued to the P/S/H, on their issue
it is deemed to dividend and liable to pay tax
 When an E/S/H sells the Bonus shares, the cost of bonus
shares is taken as nil. Hence, the whole value of net
consideration (consideration less selling expenses, if any)
is treated as long or short term capital gain.
1) An E/S/H may transfer his Bonus shares after one year from allotment to a firm or an
association of persons as capital contribution. The amount recorded in the books of
the Firm/AOP for such shares will be cost of acquisition for the Firm/AOP and long
term capital gain to transferor. Now, when the Firm/AOP will sell these share as long
term capital asset it will be entitled to deduct the indexed cost of acquisition instead
of nil cost as applicable to E/S/H. Alternatively, such shares may be sold to a relative
after one year of their allotment. The selling price will be the L-T capital gains of the
allotted of the Bonus shares for the year of sale. Whenever, the relative will sell these
shares he will get the benefit of indexation of the cost of acquisition.
2) A P/S/H may convert first P/S into E/S and thereafter receive Bonus shares. This will
reduce the tax liability at least at the time of issue of bonus shares.
3) A company may capitalize its profit by converting partly paid shares into fully paid up
shares instead of issue of BS . This conversion will not be deemed dividend. Further,
the benefit of indexation for the price paid by the shareholder will be available from
the date of allotment of shares.
4) Where BS are received by a firm it may transfer such shares to partners by sale, when
such shares are transferred by sale, the buyer will get the benefit of indexation cost
Tax planning with make or buy/ own or lease
When business concern requires a product or any part or
component of the product for its existing unit, it has to
decide whether it should make the product, part or
component or buy it from the other manufactures. There
are many costing and non-costing considerations
guiding the decision towards make or buy it.
 1. Whether for manufacture infra-structural facilities are available.
 2. Whether the present capacity of the undertaking is fully utilised. If not, it can be
utilised in making the required product.
 3. If an additional unit is required for manufacture the required product, whether
the concern possesses adequate funds for establishing the unit and whether the
whole production of the unit will be consumed by the concern or there is market for
the sale extra production.
 4. Whether the product is available in the market easily and at reasonable terms.
 5. If the cost of manufacture of a component is lower than the cost of purchase, it
should be manufactured.
 6. If the product is not manufactured in the country it has to be imported and then
import trade control relations and foreign exchange control regulations have also a
role.
 7. If there is change in the technology in production of that product, the concern
should be in a position to acquire the new technology without much difficulty. If
the product has to be imported, if not manufactured, and there is risk of the
security of the country, it must be manufactured in the country, whatever the cost
of manufacture may be
1) If a concern has surplus capacity and even decide to buy a product it may
require to sell a part of its plant and machinery. In such a case it may be
liable to capital gains tax.
2) If a new industrial undertaking (unit) is established to make the product,
which fulfils the conditions laid down in section 80IA, 80-IB80-IC etc of
the Act, a deduction will be allowed in computing the income and tax
liability of the undertaking.
 3.If the product, which is manufactured or purchased, is a capital asset, its cost will
not be allowed as a deduction in computing the income. However, if the asset is such
on which depreciation is allowed, it will be allowed in both the cases i.e.,
manufactured or purchased.
 4. If the product is a consumable one, raw material is required to replace a worn out
part at the time of repair, its cost will be treated as revenue expense and deductible
in computing the income from the business.
 Can claim depreciation at prescribed rate
 Can also charge expenses incurred on repairs,
maintenance etc. of the assets.
 If asset is financed with borrowed fund, can claim
interest as an expenses
Can claim lease rentals
 OWN
OR
LEASE
A lease of property is a transfer of right to enjoy such
property, made for certain time, in consideration of a
price payable periodically to the transferor by the
transferee.
In other words, leasing is an arrangement that provides
a person with the use and control over an asset, for a
price payable periodically, without having a title of
ownership.
In case of lease agreement the owner of the asset is
called the lessor and the user is called the lessee.
 When a person needs an asset for his business purposes, he has to decide whether the asset
should be purchased or taken on lease. While taking this decision he should keep in mind the
following factors:

1. Cash position. When a person has sufficient cash or he can borrow funds at a
reasonable rate of interest to purchase an asset or can acquire the asset under hire purchase
system, he may decide to buy it. The cost of asset is not deductible in computing the income but
the interest on borrowed amount or instalment system is deductible in computing the income. If
he neither has sufficient cash nor he can borrow due to stringent credit control, he has to take
the asset on lease. The lease rent is deductible in computing the income.

2. Depreciation. When the asset is purchased or acquired under hire purchase/instalment

system, the depreciation is allowed in computing income. When the asset is taken on lease the
depreciation is not allowed to the lessee, because user is not the owner of the asset, but it is
allowed to the lessor. Non availability of depreciation to the lessee will increase his tax liability. If
the asset is such on which depreciation is not allowed, e.g., land, the increase or decrease in the
value of the asset in future must be considered. If the asset is such where increase in the value is
expected, it may be purchased otherwise it may be taken on lease.

3. Obsolescence risk. When a plant or machinery is purchased and it becomes obsolete

earlier than its expected working life, it has to be replaced. The replacement cost can be met
partly out of depreciation fund and partly by arranging further funds. In case of lease the asset
will be replaced by the lessor. However, the lessor will also keep in mind the risk of obsolescence
and increase the lease rent to offset such a loss.
4. Residual Value. When a person owns an asset, he has full rights to the value
of the asset at the end of given period. In the case of asset with large residual value it
is better to purchase it rather than taken on lease.
5. Profit margin. Where profit margin is low, it is better to purchase the asset. If
the asset has been purchased by borrowed funds the cash outflow would be equal to
loan instalment, interest payment.
On the other hand, in case of lease the lease rent would be equal to part of the cost of
asset to lessor, interest on investment: and profit to the lessor. The cash outflow will
be equal to lease rent less nominal tax saving.
6. Profit after tax. It is an important consideration in tax planning. The assessee
should follow such a method for obtaining an asset which reduces his tax liability and
the profits after tax are greater.
For this purpose it is suggested that own funds should not be used in purchase of an
asset because interest on own funds is not deductible in computing the income,
whereas interest on borrowed funds is deductible. But one should keep in mind that
if own funds are invested outside the business, the interest earned will offset the
interest payment. Further, one must consider the difficulty involved in raising loans
and the other cost factors incidental thereto.

Conclusion. As far as possible the asset should be purchased and not taken
on lease because the cost of use of the asset purchased is less than the cost of lease
asset. However, where the assessee is suffering from scarcity of funds and and cannot
invest in an asset nor can he avail substantial credit from the suppliers or money-
lenders, he should take an asset on lease
 From the accounting point of view a person can debit, the expenses
incurred on repair or replacement of an asset, in profit and loss
account. But to show a better profitability or to increase the groas
block of assets so that higher amount of loans could be taken from
banks or financial institutions, the expenses on replacement of an
asset are capitalised. When expenses incurred on replacement of an
asset are capitalised, this increases the tax liability.
From tax point of view the person is not at liberty to
capitalise or not to capitalise the expenses incurred on replacement
of a part of asset or the asset itself. Let us consider the provisions
of the Income Tax Act regarding deduction of expenses incurred
on repairs and renewal/replacement of an asset.
Where an assessee uses a building for the purpose of
business or profession, he is entitled to a deduction of
the amount paid on account of 'current repairs' of the
premises.
If he has taken the building on rent and has undertaken
to bear the cost of repairs to the premises, he is entitled
to a deduction u/s 30 of the amount paid on account of
such repairs. Similarly if the assessee uses any
machinery, plant or furniture for the purposes of his
business or profession he is entitled to a deduction, in
computing his income, the amount paid on account of
current repairs u/s 31.
where an expenditure is incurred to bring new asset into
existence or to obtain a new or fresh advantage it is
considered as a replacement or renewal.
The replacement may be of a defective part or replacement of
the entire machinery of a substantial part of the entire
machinery.
If the replacement is of parts only, the expenditure for such
replacement is deductible in computing the income.
On the other hand if the replacement is the whole machinery
with a view to bring a new asset into existence, the
expenditure will not be deductible being capital in nature.
However, on such asset the depreciation may be allowed
u/s 32.
Losses co-exist with profits in a business. A business may suffer losses
due to one or more of the following reasons:
 Fall in demand. The demand of the product may fall due to
availability of new products in the market, change in fashion increase
in number of producers/competitors etc.
 Financial problems. A firm may not have sufficient finance of its own
nor further credit available from banks or financial institutions due to
government restrictions.
 Change in technology. Where the growth of technology is rapid and
if it is not possible to keep pace with it the net result may be a loss.
 High rates of taxes. High rate of taxes import- duty, control, etc.,
increase the price of the product. Due to this demand of the product
may fall and the business may suffer losses.
 Mismanagement. Efficient management is an important factor for
success of business. If it is inefficient, the result may be huge loss.
When a business suffers loss continuously, whatever the reason of loss may be, the
.management has to decide whether the business should be shut-down or continue.
While taking this decision, the impact of Income Tax provisions cannot be
overlooked. Following factors are considered.
(1) Treatment of losses and unabsorbed depreciation. When a business as a
whole is discontinued or closed down, the brought forward business losses and
unabsorbed depreciation shall be dealt with as under :
(a) Business Loss. If the business or profession has been discontinued loss can be
carried forward and set-off against profits and gains of business or profession.
(b) Unabsorbed Depreciation. If the business or profession has been discontinued,
unabsorbed depreciation is dealt as fallows:
(i) It can be set-off against income from business or profession or income under
any other head;
(ii) It can be carried forward and set-off for indefinite period, whether business is
carried on or discontinued.
Where a part of a business (unit, department or activity) is discontinued or a
business is continued with reduced level of activity it is not a discontinuation of
business.
If a person is running more than one business the loss making business should
not be discontinued but operated at a low key for some time to claim the certain
losses and expenses against the income of profit making business.
Provisions are as below:
(i) Retrenchment compensation to staff: If the business is closed and
retrenchment compensation paid, the expenditure would be disallowed as not
incurred for 'carrying on business'. [CIT vs. Gemini Cashew Sales Corporation
(1967) 65 ITR 643 (SC)]
(ii) In case of closely-held company: It may be taken care that there may not be a
change in the shareholding exceeding 49% of the shareholding. If there is a
change in shareholding exceeding 49%, and the transferor/s and transferee/s
are relatives, they may transfer some percentage of shares as gift rather than
sale so that the conditions for set-off of losses are complied with, to avail
carry forward and setoff of losses.
(iii) If the assessee is a company: it may amalgamate/demerge with other company
after satisfying the conditions laid down in Sec. 72A.
(1) From tax point of view it is suggested that the assesse should avoid indulgence in
illegal speculation business; if the old speculation business is not profitable the
assessee should start a new profitable speculative business so that he can set-off the
brought forward losses against such income within specified time.
(2) Withdrawal of certain deductions. The benefit of deductions under section 33AB (Tea
Development Account/Coffee Development Account/Rubber Development Account)
and 115VT (Reserve for Shipping Business) may be withdrawn and liable to tax for the
year in which business is discontinued.
(3) Deemed Income. If the business is discontinued and the assets used for scientific
research and family planning are sold, the selling price to the extent of deduction
claimed shall be deemed as profits of the previous year in which such assets are sold.
(4) Sale of depreciable assets. The assets on which the assessee has claimed depreciation,
are sold in the event of discontinuance of business, the difference between the net
consideration and W.D.V. shall be treated as short-term capital gain/loss. If there is a
gain it will be liable to tax. In case of loss it can be set-off only against the capital gains,
if any.
(5) Sale of other assets: When other assets are sold, there may be long-term or short-
term capital gain/loss, as the case may be. Such gain is liable to tax.