Tax avoidance is reducing or negating tax liability in legally

permissible ways and has legal sanction. Essential features of

tax avoidance measures are as follows:
• Legitimate arrangement of affair in such a way so as to
minimise tax liability
• Avoidance of tax is not tax evasion – it carries no public
disgrace
• An act valid in law can not be treated as fictitious merely
on the basis of some underlying motive supposedly
resulting in lower payment of tax
• There is no element of mala fide motive or use of
‘colourable devices’ or dubious methods involved in tax
avoidance

Case 1
1. Mr. Ashok Kumar, a private sector employee, is entitled to
furnished housing accommodation from his employers. Mr.
Kumar plans his housing in the following manner:

His wife, Rashmi, who works for the same private company,
takes housing loan from a bank and purchases a house,
furnishes it with AC, TV and other gadgets and furniture
worth Rs. 3 lakhs, and offers to her employer on lease. Mr.
Kumar arranges with his employers to get this house allotted
to him as a furnished housing accommodation.

Comment on the legality of the foregoing tax planning

measure under income tax laws.

Instead of being a salaried employee, had Mr. Ashok Kumar

been a self-employed professional running his professional
firm and if he had taken the house on rent from Rashmi,
would it have altered the legality of this scheme?

Case 2

Mr. Ramnath who has a engineering consultancy business

appoints his 80-year-old father as a consultant and pays
retainership fees. Comment on the legality of this tax
planning measure under income tax laws.
Case 3
Company A, an unlisted public company, has a running
manufacturing business; among other assets, it owns a
property worth 2 crores comprising an administrative
building and attached land in a major city. Company A forms
another Company A1 as a wholly owned Indian subsidiary
and sells the aforesaid property to the subsidiary company for
Rs. 3 crores. Accordingly, the only asset appearing in the
books of A1 is the aforesaid property at a book value of Rs. 3
crores.

Company B, listed in Ahmedabad Stock Exchange, now

acquires A1 and issues its own shares worth Rs. 3 crores to
Company A towards purchase consideration. Company B
plans to start a hotel on the property now acquired through
Company A1.

Comment on the legality of the above transactions from tax

avoidance/ tax planning point of view under income tax laws.