the interface between tax planning and tax avoidance has been a constant subject matter of debate between taxpayers tax authorities and judicial authorities in the recent years we have been witnessing a significant change in the approach of tax and judicial authorities across the globe who are closely scrutinising transactions entailing reduction of taxestax incidence can be reduced through tax planning tax avoidance or tax evasion to begin with there is a thin line separating tax planning from tax avoidance legitimate tax planning may reduce the incidence of tax but impermissible tax avoidance may lead to tax and penal consequencestax planning may be defined as an arrangement of ones financial affairs to take full advantage of all eligible tax exemptions deductions concessions rebates allowances permitted under the incometax act 1961 so that the tax burden is minimised in the hands of the taxpayer without violating the legal provisions for instance tax planning can be done by investing in specified permissible avenues eligible for deduction under section 80c or investment in an sez unit it is legitimate as the legislature intends optimum utilisation of these deductions and exemptions to promote economic activity in the countrytax avoidance is reducing or negating tax liability in legally permissible ways by structuring ones affairs any such transaction would be valid only if it has commercial substance and is not a colourable device the supreme court in ms mcdowell and co ltd vs commercial tax officer 1985 154 itr 148sc held that for tax planning to be legitimate it must be within the legal framework and colourable devices cannot be part of tax planning in deciding whether a transaction is a genuine or colourable device it is open for the tax authorities to go behind the transaction and examine the substance and not merely the formthe recent vodafone controversy is an attempt by the tax authorities in this direction in the case of vodafone the shares of a foreign company were transferred by one nonresident to another nonresident where the only principal asset of the foreign company was shareholding in the underlying indian company the tax authorities disregarding the corporate veil treated the transfer of shares of the foreign company as effectively resulting in transfer of shares of the indian company and taxed the capital gains arising on such transfer of shares in india the contention of the tax authorities was upheld by the mumbai high court and the matter is now pending before the supreme courttax evasion is the method or means by which the tax is illegally avoided through unacceptable means it refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure recording fictitious transactions etcit is to be noted that the proposed direct tax code dtc provides for general antiavoidance rules gaar to address the concerns of tax avoidance the provisions of gaar may be invoked by the commissioner of incometax wherein a taxpayer has entered into an arrangement to