Tax Avoidance:

Any person who is able to avoid taxes is considered to be a wise guy.  It is believed Tax
Avoidance is a term which signifies a situation in which a taxpayer reduces his tax liabilities
by taking advantage of the loop holes and ambiguities in the legal provisions.[3] Since it is
not illegal, tax avoidance is some sort of a legally allowable way to reduce the tax burden. It
is not completely defined under Income Tax Act 1961.
♠ Characteristics of Tax Avoidance:
Tax Avoidance is a way of reducing the taxes through the medium provided by government
but before moving towards those ways, it is important to analyze tax avoidance from depth.
Here are the following features for tax avoidance:
1. Tax Avoidance involves the legal exploitation of tax laws to one’s own advantages.
2. 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 statutes of the
country.
3. An arrangement entered into solely by or primarily for the purpose of obtaining a tax
advantages.[4]
♠ Perception of Court’s on Tax Avoidance
Role of judiciary on the concept of Tax Avoidance can be traced back on the judgment which
was pronounced by Justice Chinnapa Reddy’s in the Mcdowell’s Case[5]. This case defines
the distinction between the term tax avoidance and tax evasion in a crisp manner, it defines
Tax Avoidance as “the art of dodging tax without breaking the law”. The inception of Tax
Avoidance can be traced back from England as in the case of IRC v. Duke of Westminster[6],
Lord Tomlin said “Every Man is entitled, if he can, to order his affairs, so that the tax
attaching under the appropriate Acts, is less than it otherwise would be. If he succeeds in
ordering them so as to secure this result, then, however unappreciative the commissioners
of Inland Revenue or his fellow tax gatherers may be of his ingenuity, He cannot be
compelled to pay an increased amount of tax.”[7]
Tax Evasion
Tax evasion is a crime in which an individual or a business entity intentionally underpays or
hide their certain amount of income in order to save more amount of taxes. This method is
certainly illegal in all the countries. Tax Evasion is basically non-payment of taxes by means
of not reporting all taxable income, or by taking not allowed deductions. It originated in
England between 1920 -1925.[8]
♠  Activities relating to Tax Evasion
1. Under reporting income.
2. Inflating deductions or expenses.
3. Hiding Money.
4. Hiding interest in offshore accounts.[9]
♠  Perception of Judiciary on Tax Evasion.
There are several cases relating to evasion of taxes. Some of the evasion of tax are like in
the case of Union of India v. Playworld Electronics Pvt. Ltd. & endash[10] the court declared
that “It is the obligation of every citizen to pay the taxes honestly without resorting to
subterfuges”. In the case of Calcutta Chromotype Ltd. V. Collector of C. Ex., Calcutta &
endash[11], the Hon’ble SC observed “Colourable devices, however, cannot be part of tax
planning. Dubious methods resorting to artifice or subterfuge to avoid payment of taxes on
what really is income can today no longer be applauded and legitimated as a splendid work
by a wise man but has to be condemned and punished with severest of penalties.”[12]
Difference between Tax Avoidance and Tax Evasion

S.No. Tax Avoidance Tax Evasion

1. Payment of tax is avoided though by Payment of tax is avoided through

complying with the provisions of law but illegal means or fraud.
defeating the intention of law.

2. It is undertaken by taking advantage of It is undertaken by employing unfair

loop holes in law. means.

3. It is not performed through malafide It is performed through unlawful way of

intention but by complying through the paying taxes and defaulter may get
provision of law. punishment.[13]

Conclusion
It is concluded from the above discussion that Tax Avoidance and Tax Evasion are those
concepts which enables a person to avoid liability on his income tax charged. One concept is
completely legal as provided under Income Tax Act 1961 and another is a complete illegal.
For the purpose of Tax Avoidance, Government has provided various ways in which a person
can legally restrain tax on his income whereas on the other hand Government has given
various penalties on the concept of Tax Evasion.