SP Services
Income Tax Taxation

Controversies and Case Laws relating to Tax Avoidance

Controversies and Case Laws relating to Tax Avoidance

Tax Planning, Tax Avoidance and Tax Evasion are separated by minuscule margin. Tax Planning is legal but not tax evasion, and as far as tax avoidance is concerned, it has been a subject prone to litigation. These matters come up before court every now and then, and it has led to lengthy litigation. Lets’ discuss more on it.

Case Law- Controversies related to Tax Avoidance

There has been controversies related to tax avoidance. In a recent case, the Mumbai Tribunal dealt with the case of eligibility of set off or carry forward of long term capital loss under the provisions of the Income Tax Act[1], due to a sale of shares of an Indian company by a foreign company.

The taxpayer in this case, was a Switzerland based entity and provided re-insurance services to different insurance companies through its branches. This taxpayer acquired shares of about 26% of the total shares of a company in India in tranches under FDI route. During the AY, the taxpayer sold all its shares to an Indian company. Due to this, he incurred long term capital loss of 499.24 million rupees and carry forward of the loss was claimed in the income return.

The controversy arose about the price of shares bought by the taxpayer, and it was alleged to be a sham transaction using colourable device to create artificial loss selling shares below par value. The tribunal held that the choice to invest in shares at high premium is a commercial choice of the taxpayer and doesn’t amount to violation of any rules or regulations, including FEMA regulations. Therefore it was held that the sale and purchase of the shares was within the legal regulations therefore, it cannot be said that the transaction was a sham transaction using colourable device to create artificial loss selling shares below par value.

Judicial Precedents concerning Tax Avoidance

In the case of CIT vs. A Raman Co.

The Supreme Court in this case, held that avoidance of tax liability by arranging commercial affairs that tax charge is distributed is not prohibited. The taxpayer can resort to a device to divert the income before it accrues to him. The effectiveness of the device shall depend upon the operation of the Act.

In the case of McDowell and Co. Ltd vs. CIT

The Supreme Court held in this case that tax planning can be legal if it falls under the legal framework. Thus colourable devices can’t be a part of tax planning, and one cannot carry the notion that they can avoid paying tax by resorting to dubious ways. Every citizen who falls under the criteria of paying taxes is required to pay taxes honestly.

In the case of Vodafone International Holdings BV vs. Union of India

In the case of Vodafone International Holdings BV vs. Union of India

In the year 2012, the Supreme Court gave a landmark judgement in this case which involved taxability of capital gains on transfer of shares between 2 non-residents where the shares were deriving value from its subsidiaries from India. On noting the facts of the case, the apex court stated that the following factors should be kept in mind:

  • The concept of participation in the investment;
  • The time duration during which the holding structure exists;
  • The time of business operations in India;
  • The generation of taxable revenues in India;
  • The timing of the exit and on such exit the continuity of the business.

There have been different courts/benches that have applied these observations mentioned above to know if the transactions are legit or not.

In the case of CIT vs. High Energy Batteries (India) Ltd.

The Madras HC, in this case, held that transaction of sale and lease back is not a sham transaction, and it observed the decision of the Supreme Court where it stated that to determine the legal nature of a transaction, the courts should look at the transaction at its entirety and not with a dissecting view.

In the case of Consolidated Finvest and holdings Ltd. Vs. Asstt.

In this case, the Delhi Tribunal looked at various transactions between two related entities that caused capital loss to one entity and determined that there was not any tax avoidance. Further, it observed that the officer could not furnish any reasoning or any evidence to prove it to be a sham.

Tackling tax-avoidance transactions

India introduced limitation of benefit clause to tackle tax avoidance transactions. The limitation of Benefit clause provides for granting tax treaty benefits on meeting certain conditions. Further, India also ratified the Multilateral Instrument and included all of its tax treaties as Covered Tax Agreement. India has also adopted Simplified Limitation of Benefits clause in relation to its Covered Tax Agreement. Simplified Limitation of Benefits provides for benefits of tax treaty to be available to qualified persons. India also plans to adopt some other measures to combat tax avoidance strategies.


From the above, we can conclude that just because a transaction ends up into providing a tax benefit, one cannot say that such transaction is a method for tax avoidance. Not every transaction is a sham transaction, every case requires examination based on facts and circumstances and applying the principles laid down by the court of law.

Read our article:The Concept of Tax Evasion and Tax Avoidance: Definition and Differences

Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

Business Plan Consultant

Trending Posted

Startup CFO

Our Awards Our Awards

Top 100 Companies in Asia - Red Herring
Top 100 Companies in Asia - Red Herring

Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.

Top 25 in India - Consultants Review

Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.

Top 25 in India - Consultants Review

In the news