Answer

Note: For a detailed answer to this question, please refer to our OCP on “Guidelines & Case Law on Acceptable Tax Planning” which you can subscribe to and view it.

1. Guidelines Based on Latest Case Laws

For arriving at the criteria for acceptable Tax Planning, we have analysed various case laws on the subject. There are three latest case laws on the subject which are very relevant for this purpose. In answer to the question for the last week, we have given gist of those three latest case laws. From these case laws, the guiding principles for acceptable Tax Planning are given below.

2. Summary of Key Guidelines on Acceptable Tax Planning:

1. A Tax Payer is entitled to minimise his tax liability by properly planning his affairs.
2. If the transaction is covered by specific provisions in the I.T. Act (e.g., Merger, exempt gift u/s.56 (2) (vii), selecting a backward area for s.80-IB benefit, Bonus Stripping u/s.94, etc.):
   • In order that it is acceptable as a valid tax planning, it must satisfy all the legal conditions.
   • It need not have any commercial purpose. That means, the tax planning may be the only objective.
   • The Real Motive of the Tax Payer is not relevant if the transaction is legal
3. If the transaction is not covered by specific provisions in the I.T. Act and it is a single-step transaction, then the tax payer must have a business purpose or a commercial objective for entering into the transaction.
4. If the transaction is not covered by specific provisions in the I.T. Act and if the transaction involves a series of transactions:
   • The tax payer either should have a business purpose, or
   • there should be a Sufficient Time Gap between non-taxable transaction and taxable transaction, or
   • have no nexus between Tax Avoidance Transaction and Taxable Transaction.
5. If the transaction is a Combination of (b) & (c) or of (b) & (d) above, i.e., it is partly covered by specific provisions in the I.T. Act and partly not covered by specific provisions in the I.T. Act, then fulfill the conditions of (b) & (c) or of (b) & (d) above, as the case may be.
6. If two or more options are available for carrying out a transaction, the Taxpayer can select any option which reduces his tax incidence.
7. If there is an Incidental Tax Benefit, or Tax avoidance is one of the objectives, it is still acceptable. For example, Reverse Merger (i.e., merger of a healthy company with a loss-making company) was accepted in Indo Continental Hotel, 185 ITR 38 (Raj) though one of the objectives of the reverse merger was availing of the tax losses of the transferring company.
8. Safe-Harbour Rule in All Cases: Have a Commercial Justifications as far as possible.