2009 (7) TMI 23 - HC - Income Tax

Tax Planning Versus Tax Avoidance - Agreement to reduce tax liability artificially ITAT held that , no colourable device has been adopted by the assessee, even when the intention of the assessee behind drafting the agreements between the assessee and the financial institution was to reduce the tax liability artificially of both the parties - Tax Planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Decision of ITAT uphold by following the decision of Supreme Court in the matter of CIT Vs. A. Raman & Co 2008 -TMI - 5051 - SUPREME Court

Summary

The High Court of Punjab and Haryana heard an appeal under Section 260A of the Income Tax Act, 1961. The case involved the Punjab State Electricity Board, which sold energy-saving devices with 100% depreciation and sought deductions for lease money. The Central Income Tax Appellate Tribunal disallowed the deduction, claiming the transactions were sham. However, the Tribunal ruled in favor of the assessee, stating that tax planning is legal and legitimate, and no colorable device was adopted. The court cited various judicial pronouncements, including the decision in Mc Dowell Ltd. Vs. CTO, to support the assessee's case. The Tribunal found no infirmity in the order and dismissed the appeal. The court further noted that reducing tax liability within the framework of the law is legitimate and that the terms "device" or "sham" should not be used to defeat a legal situation. Ultimately, the court concluded that no substantial question of law arose and dismissed the appeal.