Date: 17 December, 2020
by Upamanyu Ganguly, ILS Law College, Pune
The General Anti-Avoidance Rule (GAAR) is a series of provisions targeting tax avoidance under the Income Tax Act, 1961.
The provisions are enshrined in Part X-A of the Act, and were added to quash certain arrangements and transactions that helped individuals or artificial persons in obtaining impermissible tax benefits.
PROVISIONS OF PART X-A OF THE ACT
Part X-A of the Act generally provides for topics such as applicability of GAAR, treatment of individuals, impermissible avoidance agreements et al, which will be duly explained next.
Applicability of GAAR-According to Section 95 of the Act, GAAR is applicable to cases where any avoidance of tax payment goes against the provisions of the Act, and such matters will be decided according to the provisions of the Act.
Impermissible Arrangements- According to the Act, an arrangement is said to be impermissible when-
The main purpose of the arrangement creates rights and benefits that would not normally be created between people that deal with each other- a direct example would be when two parties enter into an arrangement or agreement, whose sole purpose is to avoid the payment of tax;
The purpose of such arrangements is to misuse or abuse any provision of the Act
The arrangement lacks any commercial substance.
Arrangements lacking Commercial Substance are defined under Section 97 as any arrangement that does not have the usual commercial nature that normally arises when businesses transact or enter into agreements with each other. This includes transactions that hide the true value of assets or mask the locations, controller of funds etc. the section also includes round-trip financing, which basically means when an asset is sold and the seller buys back the same asset or similar assets, which creates no commercial substance and can be fraudulently reported as a legitimate transaction to avoid payment of taxes, and, accommodating parties, whose purpose is to obtain a tax benefit for the parties directly involved in an arrangement.
Treatment of Accommodating Persons is provided for in Section 99, which basically states that an accommodating party and the party in direct relation may be treated as one person, which basically means that the accommodating party will be held liable to the same extent as the parties in the arrangement.
GAAR was, as mentioned earlier, enacted in order to counter any arrangements or transactions that misused the provisions of the Income Tax Act, 1961. The Supreme Court held in judgments in regards to the same in the following cases-
In McDowell & Company Ltd. v. The Commercial Tax Officer (1986 AIR 649), the Supreme Court held that tax planning is not per se illegal, as long as there are no colourable devices used in it, and that it is the obligation of the citizens to pay taxes without avoiding it by resorting to dubious methods and subterfuges.
In Union of India v. Vodafone International Holdings (Civil Appeal No. 733 of 2012), the Supreme Court held that in order to determine whether an arrangement is impermissible, one has to look at the transaction as a whole and not dissect the transaction/ arrangement. The Vodafone case (2012) was an important step towards the execution of GAAR under the Income Tax Act, 1961.