Tax Planning, Tax Avoidance and Tax Evasion – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Tax Planning, Tax Avoidance and Tax Evasion – CA Final DT Question Bank
Question 1.
Specify with reason, whether the following acts construe (i) Tax planning; or (ii) Tax management; or (iii) Tax evasion.
1. An individual taxpayer making tax saver deposit of ₹ 1,00,000 in a nationalised bank.
2. A partnership firm obtaining declaration from lenders/depositors in Form No. 15G/ L5H and forwarding the same to income-tax authorities
3. A company installed an air-conditioner costing ₹ 75,000 at the residence of a director a$ per terms of his appointment but treats it as fitted in quality control section in the factory. This is with the objective to treat it as plant for the purpose of computing depreciation.
4. RR Ltd. issued a credit note for ₹ 80,000 as brokerage payable to Mr. Ramana who is the son of the managing director of the company. The purpose is to increase the total income of Mr. Ramana from ₹ 4,00,000 to ₹ 4,80,000 and reduce the income of RR Ltd. correspondingly.
5. A company remitted provident fund contribution of both its own contribution and employees’ contribution on monthly basis before due date. [CA Final May 2015] [5 Marks]
Answer:
Tax Planning/Tax Management/Tax Evasion
1. Tax planning: Making a tax saver deposit in a nationalized bank for claiming deduction u/s 80C is a permitted tax planning measure under the provisions of income-tax law.
2. Tax management: Obtaining declaration from lenders/depositors in Form No. 15G/15H and forwarding them to Income-tax authorities is for the compliance of statutory obligation under the Income-tax Act, 1961.
3. Tax evasion: Air conditioner fitted at the residence of a director as per the terms of his appointment would be a furniture eligible for depreciation @ 10%, whereas an air-conditioner fitted in a factory would be a plant eligible for higher depreciation @ 15%. This false treatment unjustifiably increases depreciation and consequently, reduces profit and evades tax.
4. Tax evasion: The given fictitious transaction is a method of reducing the tax liability of the company. The company is liable to tax at a flat rate of 25% where total turnover of P.Y. 2018-19 does not exceed ₹ 400 crores or 30% in any other case, whereas Mr. Ramana is liable to pay tax (& 10% above the basic exemption limit of ₹ 2,50,000, since his total income does not exceed ₹ 5,00,000. Further, Mr. Ramana would also eligible for rebate upto ₹ 12,500 u/s 87A. Reducing tax liability by recording a fictitious transaction would be a tax evasion.
5. Tax management: Remitting of own contribution to provident fund and employees contribution to provident fund on a monthly basis before due date is proper compliance of the statutory obligations.
Question 2.
You are appointed as the taxation manager of Tatla Well Ltd. In the context of tax planning, what all are the tests that are to be satisfied for the tax planning strategy to be successful? State them briefly. [CA Final May 2019 (New Syllabus)] [4 Marks]
Answer:
Tests for evaluation of Successful Tax Planning: –
(i) Conformity with Law: The one who is planning his tax obligations should have complete knowledge of the applicable law, rules and regulations. Such knowledge is not only that of Tax Laws, but also Social and Personal branches of Law, so that the Tax planner’s scheme does not get defeated by the universal principles of ‘Jurisprudence’,
(ii) Flexibility: This ensures that the tax planning should not be nullified by statutory negations or interpretations. The tax planner should ensure that his scheme provides for suitable changes to meet his end. For this, he should be aware of all significant amendments and developments in his field.
(iii) Compliance: Tax planner should not avoid legislative intent. Tax planning in every case shall not see only tax benefits available, but also discharge all tax obligations, so that penal provisions are not attracted.
Question 3.
Examine whether General Anti-Avoidance Rules (GAAR) can be invoked to deny the treaty benefit in the following case, assuming that all other conditions prescribed for application of GAAR are being satisfied:
X Pvt. Ltd., an Indian Company and Y Pvt. Ltd. (100% subsidiary of YAN Ltd.) located in country “A” formed a joint venture company XY Pvt. Ltd. in India on 01.04.2020. As per the joint venture agreement, 51% of shares are held by X Pvt. Ltd. and 49% are held by Y Pvt. Ltd in XY Pvt. Ltd. There is no other business activity in Y Pvt. Ltd.
X Pvt. Ltd. is designated as Permitted Transferee of YAN Ltd. Permitted Transferee means though shares of XY Pvt. Ltd. are held by Y Pvt. Ltd. all rights of voting, management, right to sell etc. are vested with YAN Ltd.
On 19.03.2021, the shares held by Y Pvt. Ltd. in XY Pvt. Ltd. are sold to P Pvt. Ltd. which is a group company of X Pvt. Ltd. As per the tax-treaty between India and Country “A”, there is no tax for capital gains either in source country or in Country “A”. Consequently, the capital gains arising to Y Pvt. Ltd. are not taxable in India. [CA Final Nov. 2018 (Old Syllabus)] [3 Marks]
Answer:
GAAR may, prima facie, apply, when the following twin conditions are satisfied:
- Main purpose of the arrangement being tax benefit, and
- Existence of tainted benefit.
As per the tax treaty between India and Country “A”, there is no tax on capital gains either in the Source country or in Country “A”. Consequently, the capital gains arising to Y Pvt. Ltd. is not taxable in India.
The arrangement of routing investment through Country “A” would result in a tax benefit. Since, there is no business purpose in incorporating a company Y Pvt. Ltd. (100% subsidiary of YAN Ltd.) in Country “A”, it can be said that the main purpose of the arrangement is to obtain a tax benefit.
On the question of whether the arrangement has any tainted element, it is evident that there is no commercial substance in incorporating Y Pvt. Ltd. as it does not have any effect on the business risk of YAN Ltd. or cash flow of YAN Ltd. Additionally, the fact that all rights of shareholders of Y Pvt. Ltd. (designated as Permitted Transferee) are being exercised by YAN Ltd. instead of Y Pvt. Ltd., indicates that Y Pvt. Ltd. lacks commercial substance.
As the twin conditions of main purpose being tax benefit and existence of a tainted element are satisfied, GAAR may be invoked in this case.
Question 4.
Discuss the correctness or otherwise of the following with reference to the provisions of Income-tax Act, 1961:
Tax Avoidance is not defined in taxing statue. It is the outcome of actions taken by the assessee, none of which or no combination of which is illegal or forbidden by the law as such. The international literature tends to describe the tax avoidance in many ways. If yes, state briefly ways of tax avoidance. [CA Final Nov. 2018 (Old Syllabus)] [2 Marks]
Answer:
The statement is correct.
It is the outcome of action taken by the taxpayer, none of which or combination of which, is illegal or forbidden by law.
International literature on the subject tends to describe it in the following ways:
- Tax avoidance involves the legal exploitation of tax laws to one’s own advantage.
- Every attempt by legal means to prevent or reduce tax liability which would otherwise be incurred, by taking advantage of some provisions or lack of provisions in the law.
- An arrangement entered into solely or primarily for the purpose of obtaining a tax advantage. Taxpayers consider it their legitimate right to arrange their affairs in a manner as to pay the least tax possible.
Question 5.
Under the provisions of a tax treaty between India and Country V, if a resident of country V makes any capital gains by selling the shares in p, any Indian Company, such capital gains will be taxable only in Country V and it will be exempt from tax in India. However, as an exception it is also provided that, such exemption is not available if the, transferor holds more than 10% interest in the equity capital of the Indian Company. VFX Ltd., a resident in Country V floated two wholly owned subsidiaries in country V. On 1.4.2020, both the subsidiaries bought 9% shareholding in XYZ Co. Ltd., an Indian Company. These subsidiaries do. not have any other income. On 31.12.2020, both of them sold the investment in XYZ Co. Ltd. Each of the subsidiaries claim exemption from Indian capital gains tax amounting to ₹ 2.5 crores from such sale, as each is holding less than 10% equity shares in the Indian Company. Can GAAR be invoked in such case to deny the treaty benefit?
Will your answer be different if the capital gain tax on such sale is calculated at ₹ 1.2 crores each? [CA Final May 2019 (Old Syllabus) [4 Marks]
Answer:
The arrangement by VFX Ltd., a resident in Country V, of floating two wholly owned subsidiaries and splitting the investment in equity shares of the Indian company through such subsidiaries appears to be with the intention of obtaining tax benefit under the treaty between India and Country V, so that the individual subsidiaries do not hold more than 10% interest in the equity capital of the Indian company.
Further, there appears to be no commercial substance in creating two subsidiaries as they do not change the economic condition of investor VFX Ltd. in any manner (i.e. on business risks or cash flow), and reveals a tainted element of abuse of tax laws.
Since, the tax benefit in the P. Y. 2020-21 in aggregate is ₹ 5 crores (₹ 2.5 crores × 2), which exceeds the specified threshold of ₹ 3 crores, the arrangement can be treated as an impermissible avoidance arrangement and GAAR can be invoked. Consequently, treaty benefit would be denied by ignoring the two subsidiaries, or by treating the two subsidiaries as one and the same company for tax computation purposes.
If the capital gains tax on such sale is calculated at ₹ 1.2 crores each, the tax benefit of ₹ 2.4 crores would be less than the specified threshold of ₹ 3 crores. Hence, GAAR cannot be invoked in such case.
Question 6.
MNO Ltd. in Mumbai is a wholly owned subsidiary of a holding company located in Low Tax Jurisdiction (LTJ). MNO Ltd. has accumulated profit of ₹ 1,500 lakhs. It deposited ₹ 1,000 lakhs in fixed deposit with a branch of foreign bank located in India. Based on the security of the deposit, the holding company located in LTJ availed bank loan of ₹ 800 lakhs. Is this an impermissible arrangement lacking commercial substance? Support your answer with applicable legal provisions. [CA Final Nov. 2019 (New Syllabus)] [4 Marks]
Answer:
As per section 97, where a party is included in an.arrangement mainly for obtaining tax benefit to the taxpayer. Such party may be termed as ‘Accommodating’ party and consequently the arrangement shall be deemed to lack commercial substance.
In the above arrangement, MNO Ltd. is obtaining the loan facility through the accommodating party in LTJ in order to have tax benefit. Thus, the above arrangement is deemed to be an impermissible arrangement avoiding commercial substance.