Section 95 — General Anti-Avoidance Rule (GAAR)

Section 95 of the Income-tax Act, 1961 introduces the General Anti-Avoidance Rule (GAAR), which is designed to prevent tax avoidance strategies that exploit loopholes in the tax law. This section applies when an arrangement is entered into with the primary purpose of obtaining a tax benefit and lacks commercial substance. The significance of GAAR lies in its ability to disregard, recharacterize, or treat an arrangement differently for tax purposes if it is deemed to be an impermissible avoidance arrangement. The statutory test involves evaluating the purpose of the arrangement, its commercial substance, and the manner in which it is carried out. The burden of proof initially lies with the tax authorities to establish that an arrangement is an impermissible avoidance arrangement. In practice, GAAR is significant as it empowers tax authorities to challenge aggressive tax planning and ensures that tax benefits are claimed only for genuine commercial transactions.

Common Litigation Flashpoints

1. Determining the primary purpose of an arrangement
2. Assessing the commercial substance of transactions
3. Burden of proof in establishing tax avoidance
4. Application of GAAR to cross-border transactions

Judgments on Section 95 — General Anti-Avoidance Rule (GAAR)

• State, CBI vs Sashi Balasubramanian & Anr. — SC,
  Public servants cannot claim immunity under the Kar Vivad Samadhan Scheme, 1998, as the Scheme does not apply to them.
• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• The Authority for Advance Rulings (Income Tax) and Others vs Tiger Global International II Holdings — SC,
  The DTAA between India and Mauritius allows capital gains to be taxed only in Mauritius, provided the entity holds a valid TRC.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.