CORPORATE TAX PLANNING
There are two certainties in this world: Death & Tax.
How to do that?
Understand Tax Laws and apply
Why to understand and how to apply?
Illustrations [in the context of individuals]
§ Give money to spouse and spouse should purchase/construct houseproperty which can be used for self-purpose to avoid deeming provisions of Sec.27.
§ Transfer of house property to son’s wife or minor grand child(son’s son) without adequate consideration would attract provisions of Sec. 64.Because sec. 27 does not cover these two transfers (only spouse and minor child(not being a married daughter) are covered. So, if the property is underself-occupation, then nil income will be clubbed.
§ Transfer income yielding assets to spouse in exchange of non-incomeassets so that the question of adequate consideration is satisfied.
§ Create income-yielding assets from income of assets transferred tospouse.
§ Employing spouse in a sister concern of the entity where theassessee has substantial interest would help avoiding clubbing.
C T P ?
Companies Choosing amongalternatives
Price paid for buying civilization
SCOPE: Not only corporateentities, but all come under the purview of CTP (contrary to the common belief)
Knowledge of taxation is animportant ingredient in any financial decision-making. And, in the field of taxplanning Direct Tax laws is the most crucial input. Income Tax Act is the primefield of study in this context. The interpretation process and demonstration ofapplication would equip us with the art of getting into other legislationsalso. Nonetheless, holistic approach, wherever necessary, would be taken tocomprehend decision situations involving knowledge of multiple pieces oflegislation.
‘Taking complete legitimatebenefit of all deductions, exemptions, allowances and rebates so that taxliability is minimised.’
Doctrine of Form: Westminster principle:literally and strictly
Doctrine of substance:intention (upto the courts, not to the revenue)
TAXAVOIDANCE: Use of colourable devices, Spirit of law is defeated[misrepresenting facts]
Colourable devices: spirit isviolated
Ex. Sec. 80 IA: Assembly ofparts in a backward area.
A Raman & Co. [SC]: Avoidance of taxliability by so arranging commercial affairs that charge of tax is distributedis not prohibited. Effectiveness of the device depends not upon considerationof morality, but the operation of the Income Tax Act. Legislative injunction inthe taxing statute may not, except on peril of penalty, be violated but it maylawfully be circumvented.
Change in Judicial view: Yettax laws are social laws (Mcdowell’s case- transferring the excise liability tobuyer so that sales tax liability is reduced): Justice Reddy…. The ingeniousattempts to rationalise and legitimise tax avoidance have always fascinated andamused me and made me wonder how ready the minds are to adapt themselves anddiscover excuses to dip into the treasury.
TAXEVASION: Illegal avoidance, both spirit and letter are violated
STAGES IN TAXING STATUTE
A. Chargeability: By express enactment, can not be inferred
B. Assessment: Quantifying chargeability
C. Collection: TDS, Advance tax, Self-assessment tax (under IT Act )
DEEM – A LEGAL FICTION
What is the meaning of ‘deem’?
Why is it necessary? Ex. –deemed owner of house property
Statute: Written will of legislaturesolemnly expressed according to the form necessary to constitute it as the lawof the land.
NEED: English literature wouldhave been much poorer if English language could have been such that statutecould be drafted with divine precision.
A. LITERAL RULE: ordinary, natural and grammatical meaning:
If the provision is free fromambiguity, plain meaning must be ascribed to the words used without importingor subtracting anything from the given words. If a narrow interpretation wouldemerge which cannot serve the manifest purpose of the act, then a broad meaningcan be ascribed. (Ex. Sec. 173 (1) of the Companies Act, 1956: The nature ofthe concern or interest of the director or manager of a company in the subjectmatter of the proposed motion has to be disclosed. Here we cannot confine theinterest only to monetary interest alone.)
B.GOLDEN RULE: Rule ofreasonable construction: If application of literal rule yields absurd result bywhich object sought to be achieved would be defeated, words may be modified toproduce sensible meaning. It should not be guess work.
C.MISCHIEF RULE/ RULE OFBENEFICIAL CONSTRUCTION: suppress the mischief and advance the remedy.
Heydon’s case: Regard shouldbe given to
i) the earlier mischief for which the earlier law did not provide anysolution
ii) and the true intent of the present legislation with its remedy tothe mischief
D.RULE OF HARMONIOUSCONSTRUCTION
When two or more provisions ofthe cat are in conflict with each other, they have to be understood in such amanner that all have to be conjointly satisfied. [Ex. Sec. 210 (date of balancesheet shall not precede the date of meeting by more than six months) and 166(1)(gap between two AGMs should not be more than 15 months)]
E.EJUSDEM GENERIS: of the samekind or species
If there is apparent conflict between two provisions, special oneprevails.
General words following specific words have to draw their colourfrom the specific words [You can keep dogs, cats, cows, buffaloes and otheranimals (not a lion)]
If the particular words used exhaust the whole genus, then thegeneral words can cover a larger genus.
B. EXPRESSIONS LIKE ‘MAY’, ‘SHALL’, ‘OR’, ‘AND’:mandatory or directory?
AIDS TOINTERPRETATION OF STATUTE
Internal (what is within thebody of the act) External(external to the body of the act)
INTERNAL AIDS TOINTERPRETATION OF STATUTE:
§ LongTitle is a part of the act (short title only identifies the act)
§ Preamble:scope, object and purpose of the act, but can not override the plain words ofthe act.
§ Headingand title of a chapter: preamble to the sections
§ Marginalnotes: in India,they cannot be referred to.
§ Definitionalsections / clauses
§ Illustrationsare not a part of the section, but definitely a part of the act. But, theycannot expand or curtail the ambit of the section.
§ Proviso:exception to the section.
§ Explanation:is to be read in harmony with the main section and clarifies its meaning
§ Schedules:to be read together with the act. If they are in conflict with the act, actprevails.
EXTERNAL AIDS TOINTERPRETATION OF STATUTE:
§ Earlieracts, historical settings
1. Act, Ordinance, Rules
2. Structure of an Act – Chapter, Sections, Sub-sections, Clauses,Sub-clauses, Provisos, Illustration, etc.
3. Deductions, Allowances, Rebates, Relief, Exemption, etc.
4. Benevolent circular – Binding force of a circular
5. Heads of Income & Sources of Income, GTI, Total Income
6. Reason to believe v. Reason to Suspect
7. Application of mind
8. Principle of unjust enrichment