Chapter X-A of the IT Act contains the General Anti-Avoidance Rule (‘GAAR’), which enables the ITD to declare an arrangement entered into by an assessee as an “impermissible avoidance arrangement” in order to inter alia disregard the tax benefit arising out of such arrangement.  Prior to the induction of GAAR, the landscape of anti-avoidance measures undertaken by the ITD were circumscribed by the judicially evolved substance over form rules,^[1] where the burden to prove tax avoidance was specifically placed on the ITD based on the facts and circumstances under consideration.  This burden has now been shifted on the assessee post codification of GAAR by creating a rebuttable presumption in favour of the existence of “impermissible avoidance arrangement” for which a detailed procedure has also been codified in Section 144BA of the IT Act.

Section 144BA of the IT Act provides dual opportunity to the assessee to object to the declaration of “impermissible avoidance arrangement” made by the ITD, i.e., first before the Principal Commissioner/ Commissioner and, thereafter, before a neutral approving panel comprising three members.^[2] This procedure has been placed in the ITA in order to ensure that the assessment in the case of the assessee, where ITD seeks to declare an arrangement as “impermissible avoidance arrangement”, is not completed without providing adequate opportunity of being heard to the assessee against such declaration.

Very recently, the High Court of State of Telangana (‘Telangana HC’), dealt with a challenge to the invocation of GAAR and the procedure under Section 144BA of the IT Act against a claim of set off of capital loss with certain capital gains in the backdrop of bonus stripping involving shares of a company.^[3] The Telangana HC declined to interfere with the initiation of proceedings under Section 144BA of the IT Act, while giving a prima facie opinion that the transaction under scanner was in fact an impermissible avoidance agreement.

However, in doing so, the Telangana HC has also touched upon an important aspect, which was specifically argued on behalf of the assessee, and which may have a bearing on the evolving jurisprudence around GAAR.  The Telangana HC observed that given that GAAR has been codified (with a non-obstante clause), much after the codification of Chapter X and specifically Section 94(8) of the IT Act, which contains a special anti-avoidance rule (‘SAAR’) in relation to bonus stripping,^[4] the concept of “lex specialis derogat legi generali” may, therefore, not be permitted to be pressed against the invocation of GAAR.  This observation may well be a root cause for future litigation where in a given set of facts, conditions against invocation of SAAR (which pre-dates GAAR) are satisfied by the assessee.

[1] Vodafone International Holdings B.V. v. Union of India, [2012] 17 taxmann.com 202 (Supreme Court).

[2] In terms of sub-clause (16) of Section 144BA of the IT Act, three members of the approving panel shall constitute of one chairperson who is or has been a judge of a High Court, who shall be accompanied by two members with one being a member of Indian Revenue Service not below the rank of Principal Chief Commissioner or Chief Commissioner of Income Tax and the other being an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.

[3] Ayodhya Rami Reddy Alla v. PCIT, [2024] 163 taxmann.com 277 (Telangana HC).

[4] During the course of proceedings, it was contended by the assessee that Section 94(8) of the IT Act is a specific provision to curb tax avoidance in relation to the bonus stripping, however the Parliament while enacting the said provision restricted its scope of bonus stripping to units of mutual fund and did not include shares and securities within the scope of bonus stripping. Thus, it was conclusively submitted that what has been excluded by a special provision cannot be indirectly addressed by applying a subsequent general provision. However, the Telangana HC rejected the said argument of the assessee while observing that since as per assessee’s own submission bonus stripping on shares and securities is not included in the ambit of Section 94(8) of the IT Act, thus, the said transaction would fall within the purview of GAAR under Chapter X-A of the IT Act which was enacted with an intention to cover  the transaction which were not included under the ambit of SAAR and would satisfy the prerequisites for invocation of GAAR as prescribed in Chapter X-A of the IT Act.