Colours symbolize vibrancy in Holi however in tax legal guidelines, what do they signify?

The expression ‘colourable device’ means any sham association or transaction, camouflaged as an actual transaction, missing in business substance, and completed solely to acquire a tax profit.

Consider this. An individual pays hire of ₹7 lakhs in a 12 months, to his personal dad and mom in respect of a home property and claims the identical as House Rent Allowance (HRA) deduction u/s 10(13A). The dad and mom present the mentioned hire as their revenue of their return of revenue, however declare a rebate of Rs. 25,000 u/s 87A, within the new private tax regime.

In International enviornment, the preparations equivalent to creation of the guardian entity holding the mental property rights in tax heaven jurisdictions like Ireland, UAE, Cayman Islands, Bahamas, and making of the royalty expenditure funds by the profit-making subsidiary entities to such guardian entity, with a view to reduce their tax outflows, have all the time stay a topic of litigation between the income authorities and the taxpayers.

The income authorities look down upon such preparations as a colourable machine, whereas the taxpayers defend these as tax planning preparations completed throughout the permissible 4 corners of legislation.

The skinny dividing line between ‘legitimate tax planning and ‘illegitimate tax evasion through colourable device’, has been distinguished by the hon’ble Supreme Court within the landmark judgements of McDowell, Azadi Bachao Andolan and Vodafone International Holdings B.V.

In these judgements, the Apex Court has noticed with refined readability that although tax evasion by means of the usage of colourable units and by resorting to doubtful strategies and subterfuges is just not permissible, but it surely can’t be mentioned that every one tax planning is impermissible.

With these landmark judgments, a effectively settled authorized place relating to the authorized sanctity of the ‘legitimate tax planning’ as in opposition to the ‘use of colourable devices for illegitimate tax evasion’, had emerged.

But then got here ‘General Anti Avoidance Rules’ (extra popularly known as ‘GAAR’).

A brand new Chapter X-A, containing GAAR provisions in sections 95 to 102, has been integrated, within the Income Tax Act and has been made relevant w.e.f. 1.04.2017.

Under the GAAR regime, any association, the primary function of which is to acquire a tax profit and which lacks business substance, can be thought of as an impermissible avoidance association.

A brand new part 144BA has additionally been inserted within the Income Tax Act, empowering the assessing officer, at any stage of the evaluation or reassessment proceedings, to make a reference to the Principal Commissioner, to declare any association or transaction of the taxpayer, as an impermissible avoidance association/colourable machine, in order to disclaim the tax profit arising out of such association or transaction. However, if the taxpayer objects to such declaration, then the matter must be referred to the GAAR Approving panel.

GAAR Secretariat has been arrange at Delhi and the GAAR Approving Panel has been constituted.

The legislative intent behind the introduction of those GAAR provisions, has been to curb the usage of colourable units facilitating tax evasion. The denial of tax profit in a colourable association aimed toward tax evasion, is totally justifiable. However, loads of subjectivity has been by some means, allowed to be crept in, particularly, within the method during which the textual content of sections 95 to 102, had been drafted. The most important and essential facet, i.e., what would represent an impermissible avoidance association, has been left to subjective whims and fancies of the Assessing Authorities.

Very large and unfettered powers have been given to the Assessing Authorities, to utterly disregard the authorized type of any association/transaction, and to look into the subjective substance of the transaction, to pierce the company veil, to deal with capital receipts as income receipts, to disallow any treaty advantages, by altering the residence, supply, location and taxability of any worldwide transaction, by treating any association as an impermissible avoidance settlement, assuming it to be missing business substance.

In order to place an appropriate examine on the blatant & adhoc software of the GAAR provisions, which is perhaps broadly used, to make exorbitant additions in assessments, appropriate amendments have to be integrated within the Legislature, in order to supply a typical and goal set of figuring out components and parameters for bringing any association below the purview of GAAR. Then solely, in true spirit and kind, the Governments’ goal of guaranteeing “Ease of Doing Business” will likely be achieved.

Taxpayers are suggested to take pleasure in their Holi, with a lot of vibrant Colours, however on the similar time to keep away from ‘colourable devices’ of their tax affairs.

Mayank Mohanka is the founding father of TaxAaram India, and a associate at S M Mohanka & Associates

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