Unit 4

HUF

4.1 Assessment of H.U.F. And Firm

Assessment of HUF

Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (Act). HUF is a separate entity for the purpose of assessment under the Act. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family. Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.

Taxability of HUF:-

In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of the Act). The following points should be keep in mind while computing income:

■ If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds).

■ If fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.

■ If any remuneration is paid by the HUF to the karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.

The following incomes are not taxed as income of HUF:-

■ If a member has converted or transferred without adequate consideration his self-acquired property into join family property, income from such property is not taxable in hands of the family.

■ Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.

■ Personal income of the members cannot be treated as income of HUF.

■ “Stridhan” is absolute property of a woman, hence income arising therefrom is not taxable as income of HUF.

■ Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

1. Deduction from gross total in

An HUF is entitled for deductions available under Chapter VI-A (as applicable) while calculating its taxable income.

2. Rate of Tax:

■ An HUF is taxed on same slab rates which are applicable to an Individual.

■ An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than 18.5 per cent (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions.

Assessment of firm (Section 184)

(1) A firm shall be assessed as a firm for the purposes of this Act, if—

(i) the partnership is evidenced by an instrument; and

(ii) the individual shares of the partners are specified in that instrument.

(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.

(3) Where a firm is assessed as such for any asses9+sment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.

(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.

(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.

Key Takeaways

• Hindu undivided family (‘HUF’) is treated as a ‘person’ under section 2(31) of the income-tax act, 1961 (act). HUF is a separate entity for the purpose of assessment under the act.

4.2 Assessment procedures: Filing of Return, Types of Assessments

Documents required to be attached with the return of income of HUF

Income tax return forms are attachment less forms and, hence, the taxpayer is not required to attach any document (like proof of investment, TDS certificates, etc.) along with the return of income (whether filed manually or filed electronically). However, these documents should be retained by the taxpayer and should be produced before the tax authorities when demanded in situations like assessment, inquiry, etc.

In case of a taxpayer who is required to furnish a report of audit under section 10(23C)(v),10(23C)(vi), 10(23C)(via), 10A,10AA, 12A(1)(b), 44AB, 44DA, 50B, 80-IA,80-IB,80-IC,80-ID, 80JJAA, 80LA,92E,115JB or 115VW shall furnish it electronically on or before the date of filing the return of income.​

Types of Assessment of HUF

An HUF is recognized as a separate assessable entity under the Act. Its income may be assessed if following two conditions are satisfied:

(i) There should be a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent assessment years till partition is claimed by coparceners.

(ii) There should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members.

Ancestral Property: 

Ancestral property may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e. his father, grandfather and great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property. Income from ancestral property held by following families is taxable as income of HUF:

(a) A family of widow mother and sons (may be minor or major);

(b) Family of husband and wife, having no child;

(c) Family of two widows of deceased brothers;

(d) Family of two or more brothers;

(e) Family of uncle and nephew;

(f) Family of mother, son and son's wife;

(g) Family of a male and his late brother's wife.

Partition of HUF: 

Partition means division of property. Where the property is capable of admitting a physical division, share of each member is determined by making physical division of the property. On the other hand, where the property is not capable of physical division, partition shall mean such division as the property may admit.

Though partition can be claimed only by coparceners, the following persons are also entitled to their share in the property:

(a) A son in the womb of mother at the time of partition;

(b) Mother (gets equal share if there is partition between sons after the death of father);

1. Assessment after partition (Section 171):

Once income of a joint family is assessed as income of a HUF, it will continue to be assessed as such until one or more coparceners claim partition. Such claim must be made before the relevant assessment year. The Assessing Officer, on the receipt of such claim, must make an enquiry after giving due notice to the members and record a finding whether there has been a partition and, if so, the date of partition. Income of the family from the first date of the previous year till the date of partition is assessed as income of HUF and, thereafter, income from the property which was subject to partition is assessed as individual income of the recipient members. If, however, the recipient member forms another HUF along with his wife and son(s), income of the property which was subject to partition is chargeable to tax in the hands of new HUF.

2. Partition – Total or partial: Under the Hindu law, an HUF is entitled to effect a partition which may be total or partial.

■ Total partition – where an HUF undergoes a total partition, the entire joint family property is divided amongst all coparceners and the family ceases to exist as an HUF.

■ Partial partition – A partial partition, on the other hand, may be partial as regards the persons constituting the joint family or as regards the properties belonging to the joint family or both.

(a) In a partial partition, as regards the persons constituting the family, one or more coparceners may separate from others and the remaining coparceners may continue to be joint.

(b) In a partial portion, as regards the property, a joint family may make a division and severance of interest in respect of a part of joint estate while retaining their status as a joint family and holding the rest of the properties as joint and undivided property.

Key takeaways

• Income tax return forms are attachment less forms and, hence, the taxpayer is not required to attach any document (like proof of investment, tds certificates, etc.) Along with the return of income (whether filed manually or filed electronically). However, these documents should be retained by the taxpayer and should be produced before the tax authorities when demanded in situations like assessment, inquiry, etc.

4.3 Tax Administration: Authorities, Appeals & Penalties, Tax deduction at source, Advance payment of tax, Tax Management, Tax planning, Tax Evasion and Tax Avoidance

Authorities

Income tax authority includes

      Commissioner

      Joint Commissioner

      Director

      Joint Director

      Assistant Director or a Deputy Director or an Assessing Officer, or

      Tax Recovery Officer.

Section 133 provides power to call for information to the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals)] may, for the purposes of this Act,—

(1) require any firm to furnish him with a return of the names and addresses of the partners of the firm and their respective shares;

(2) require any Hindu undivided family to furnish him with a return of the names and addresses of the manager and the members of the family;

(3) require any person whom he has reason to believe to be a trustee, guardian or agent, to furnish him with a return of the names of the persons for or of whom he is trustee, guardian or agent, and of their addresses;

(4) require any assessee to furnish a statement of the names and addresses of all persons to whom he has paid in any previous year rent, interest, commission, royalty or brokerage, or any annuity, not being any annuity taxable under the head ―Salaries‖ amounting to more than 5[one thousand rupees, or such higher amount as may be prescribed], together with particulars of all such payments made;

(5) require any dealer, broker or agent or any person concerned in the management of a stock or commodity exchange to furnish a statement of the names and addresses of all persons to whom he or the exchange has paid any sum in connection with the transfer, whether by way of sale, exchange or otherwise, of assets, or on whose behalf or from whom he or the exchange has received any such sum, together with particulars of all such payments and receipts;

(6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act.

The various tax authorities are discussed below-

(i)  Administrative [Income Tax Authorities] [Sec. 116]

1. The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
2. Directors-General of Income-tax or Chief Commissioners of Income-tax,
3. Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
   1. (cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),
   2. (cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax.
4. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
5. Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
6. Income-tax Officers,
7. Tax Recovery Officers,
8. Inspectors of Income-tax.

(ii) Assessing Officer [ Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act.

(iii)  Appointment of Income-Tax Authorities [Sec. 117]

1. Power of Central Government: The Central Government may appoint such persons as it thinks fit to be income-tax authorities. It kept with itself the powers to appoint authorities upto and above rank of an Assistant Commissioner of Income-Tax [ Sec. 117 (1)]
2. Power of the Board and Other Higher Authorities:  Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, the Central Government may authorize the Board, or a Director-General, a Chief Commissioner or a Director or a Commissioner to appoint income-tax authorities below the rank of an Assistant Commissioner or Deputy Commissioner.[ Sec. 117 (2) ]
3. Power to appoint Executive and Ministerial Staff:  Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, an income-tax authority authorized in this behalf by the Board may appoint such executive or ministerial staff as may be necessary to assist it in the execution of its functions.

(iv) Control of Income-Tax Authorities [Sec. 118]

The Board may, by notification in the Official Gazette, direct that any income-tax authority or authorities specified in the notification shall be subordinate to such other income-tax authority or authorities as may be specified in such notification.

Appeals & Penalties

Appeal before commissioner (appeals)

If any demand is raised by the Assessing Officer in the assessment, what’s the next step for Assessee. Aggrieved tax payer can file appeal before the Commissioner (Appeals) having, jurisdiction over the tax payer. Designation of the Commissioner (Appeals), with whom appeal is to be filed is also mentioned in the notice of demand issued by the Assessing Officer under section 156 of Income Tax Act. 

When appeal can be filed before commissioner (appeals), i.e. Appealable orders:

Appeal can be filed before Commissioner (Appeals), when a tax payer is adversely affected by Orders as under passed by various Income tax authorities:

• Order against tax payer where the tax payer denies liability to be assessed under Income Tax Act;
• Intimation issued under Section 143(1) making adjustments to the returned income;
• Scrutiny assessment order u/s 143(3) or an ex-parte assessment order u/s 144, to object to income determined or loss assessed or tax determined or status under which assessed,
• Order u/s 115WE/115WF/115WG assessing fringe benefits;
• Re-assessment order passed after reopening the assessment u/s 147/150;
• Search assessment order u/s 153A or 158BC;
• Rectification Order u/s 154/155;
• Order u/ s 163 treating the taxpayer as agent of a non-resident;
• Order passed u/s 170(2)/(3) assessing the successor to the business in respect of income earned by the predecessor;
• Order u/s 171 recording finding about partition of Hindu undivided family(HUF);
• Order u/s 115VP(3) refusing approval to opt for tonnage-tax scheme by qualifying shipping companies;
• Order u/s 201(1)/206C(6A) deeming person responsible for deduction of tax at source as assessee in default on failure to deduct/ collect tax at source or to pay the same to the Government;
• Order determining refund u/s 237;
• Order imposing penalty u/s 221/271 /271A/271AAA/ 271F/271FB/272A/272AA/272BB/275(1A)/158BFA(2)/271B/ 271BB/271C/271CA/271D/271E

Form of appeal and how to fill the same:

Every appeal to the Commissioner (Appeals) is to be filed in Form No. 35. In this form, details such as name and address of the tax payer, Permanent Account Number (PAN), assessment year, details of the order against which appeal is filed etc. are to be filled in.

E- Form is used in these day for filing appeal , no Physical documents are accepted in the department.

Against the column “Relief claimed in appeal”, amount of reductions sought in income or any other relief sought in appeal is to be mentioned.

In the column “Statement of Facts”, relevant facts in respect of each subject matter of appeal are to be mentioned in brief. Nature of business or profession, account books maintained etc. may also be mentioned in this column.

Against column “Grounds of appeal”, points on which relief is sought in appeal are to be mentioned in narrative form. For example, in an appeal against addition to the returned income by applying a gross profit rate on estimated turnover, the ground of appeal may be, “the Ld. Assessing Officer was not justified in rejecting the results as per regular books of account and in estimating the income by applying an adhoc rate of gross profit.”

Payment of accepted tax liability must before filing appeal:

An appeal will be admitted by Commissioner (Appeals) only if tax as per the returned income, where return of income is filed, or advance tax payable, where no return of income is filed has been paid prior to filing of appeal. In the latter situation i.e. where return of income is not filed, tax payer can apply to the Commissioner (Appeals) for exemption from such condition for good and sufficient reasons.

Penalty for under-reporting and misreporting of income (Section 270A)

(1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

(2) A person shall be considered to have under-reported his income, if—

(a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;

(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;

(c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;

(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;

(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income. (3) The amount of under-reported income shall be,—

(i) in a case where income has been assessed for the first time,—

(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143;

(b) in a case where no return has been furnished,—

(A) the amount of income assessed, in the case of a company, firm or local authority; and

(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);

(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order.

(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as ―preceding year‖) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—

(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and

(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represented by any addition made in conformity with the arm‘s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

(e) the amount of undisclosed income referred to in section 271AAB.

(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

(10) The tax payable in respect of the under-reported income shall be—

(a) where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income.

(b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income

(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.

Tax deduction at source

Processing of statements of tax deducted at source (Section 200A)

(1) Where a statement of tax deduction at source 4[or a correction statement] has been made by a person deducting any sum (hereafter referred to in this section as deductor) under section 200, such statement shall be processed in the following manner, namely:—

(a) the sums deductible under this Chapter shall be computed after making the following adjustments, namely:—

(i) any arithmetical error in the statement; or

(ii) an incorrect claim, apparent from any information in the statement; (b) the interest, if any, shall be computed on the basis of the sums deductible as computed in the statement;

(c) the fee, if any, shall be computed in accordance with the provisions of section 234E;

(d) the sum payable by, or the amount of refund due to, the deductor shall be determined after adjustment of the amount computed under clause (b) and clause (c) against any amount paid under section 200 or section 201 orsection 234E and any amount paid otherwise by way of tax or interest or fee;

(e) an intimation shall be prepared or generated and sent to the deductor specifying the sum determined to be payable by, or the amount of refund due to, him under clause (d); and

(f) the amount of refund due to the deductor in pursuance of the determination under clause (d) shall be granted to the deductor:

Provided that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the statement is filed.

Advance payment of tax

Liability for payment of advance tax (Section 207)

(1) Tax shall be payable in advance during any financial year, in accordance with the provisions of sections 208 to 219 (both inclusive), in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year, such income being hereafter in this Chapter referred to as ―current income‖.

(2) The provisions of sub-section (1) shall not apply to an individual resident in India, who—

(a) does not have any income chargeable under the head ―Profits and gains of business or profession; and

(b) is of the age of sixty years or more at any time during the previous year.

Conditions of liability to pay advance tax (Section 208)

Advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year, as computed in accordance with the provisions of this Chapter, is ten thousand rupees or more.

Computation of advance tax (Section 209)

(1) The amount of advance tax payable by an assessee in the financial year shall, subject to the provisions of sub-sections (2) and (3), be computed as follows, namely:—

(a) where the calculation is made by the assessee for the purposes of payment of advance tax under sub-section (1) or sub-section (2) or sub-section (5) or sub-section (6) of section 210, he shall first estimate his current income and income-tax thereon shall be calculated at the rates in force in the financial year;

(b) where the calculation is made by the Assessing Officer for the purpose of making an order under sub-section (3) of section 210, the total income of the latest previous year in respect of which the assessee has been assessed by way of regular assessment or the total income returned by the assessee in any return of income furnished by him for any subsequent previous year, whichever is higher, shall be taken and income-tax thereon shall be calculated at the rates in force in the financial year;

(c) where the calculation is made by the Assessing Officer for the purpose of making an amended order under sub-section (4) of section 210, the total income declared in the return furnished by the assessee for the later previous year, or, as the case may be, the total income in respect of which the regular assessment, referred to in that sub-section has been made, shall be taken and income-tax thereon shall be calculated at the rates in force in the financial year;

(d) the income-tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income-tax which would be 1[deductible or collectible at source] during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable.

Tax Management

Tax management refers to the management of finances, for the purpose of paying taxes. Tax Management deals with filing Returns in time, getting the accounts audited, deducting tax at source etc. Tax Management helps in avoiding payment of interest, penalty, prosecution. Elements of tax management are:

1) Filing return.

2) Auditing.

3) Source deduction.

Tax planning

Tax Planning means reducing tax liability by taking advantage of the legitimate concessions and exemptions provided in the tax law. It involves the process of arranging business operations in such a way that reduces tax liability. Tax planning is process of analyzing one’s financial situation in the most efficient manner. Through tax planning one can reduce one’s tax liability. It involves planning one’s income in a legal manner to avail various exemptions and deductions. Under Section 80C, one can avail tax deduction if specific investments are made for a specific period up to a limit of Rs 1, 50,000. The most popular ways of saving tax are investing in PPF accounts, National Saving Certificate, Fixed Deposit, Mutual Funds and Provident Funds. Tax planning involves applying various advantageous provisions which are legal and entitles the assesse to avail the benefit of deductions, credits, concessions, rebates and exemptions. Or we can say that Tax planning is an art in which there is a logical planning of one’s financial affairs in such a manner that benefits the assesse with all the eligible provisions of the taxation law. Tax planning is an honest approach of applying the provisions which comes within the framework of taxation law.

Example,

a) Investments Under Section 80C i.e. payment related deductions,

b) Under Section 80CCD i.e. contribution to Pension Fund of LIC or other insurance company

c) Reinvestment Under Section 54, 54EC etc.

Tax Evasion

Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. It involves illegal practices such as making false statements, hiding relevant documents, not maintaining complete records of the transactions, concealment of income, overstatement of tax credit or presenting personal expenses as business expenses. Tax evasion is a crime for which the assesse could be punished under the law.

Tax Avoidance

Tax avoidance is an act of using legal methods to minimize tax liability. In other words, it is an act of using tax regime in a single territory for one’s personal benefits to decrease one’s tax burden. Although Tax avoidance is a legal method, it is not advisable as it could be used for one’s own advantage to reduce the amount of tax that is payable. Tax avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by finding new ways to avoid the payment of taxes that are within the limits of the law. Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax rules. Tax avoidance is lawful but in some cases it could come in the category of crime.

Key takeaways

• Section 133 provides power to call for information to the assessing officer, the deputy commissioner (appeals), the joint commissioner or the commissioner

References:

1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax

2. Agrawal, B.K.: Income Tax law and practice

3. Agrawal, B.K.: Ayakar Vidhan Avam lekhe

4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices

5. Chandra, Girish: Income Tax