GAAR: Chapter X-A, section 144BA and what the Revenue must prove

In one line. The General Anti-Avoidance Rule is a short chapter with a heavy burden attached, and almost every case decided under it so far has turned not on whether the taxpayer saved tax but on whether the Revenue proved the ingredients Parliament actually enacted.

The Telangana High Court quashed directions of the GAAR Approving Panel in M/s. EKGE Retail LLP v. Assistant Commissioner of Income-Tax, W.P. No. 21210 of 2022, reserved on 6 August 2026 and pronounced on 13 October 2026 by P. Sam Koshy ACJ and Narsing Rao Nandikonda J. A retail business trading under a well known apparel brand was sold as a going concern on 13 June 2017 for Rs 2,10,46,21,110, producing long-term capital gains of Rs 1,75,91,50,508 on a net worth of Rs 33,70,26,715 computed under section 50B. The seller has since continued as a franchisee of the buyer on a commission of about eighteen per cent, so the commercial relationship did not end with the sale. Part of the surplus was invested in listed equities, shares were bought before bonus issues and an equivalent quantity sold afterwards, and the resulting short-term capital loss of Rs 49,32,71,673 was set against the slump sale gains under section 70(2). The Approving Panel, by directions dated 23 February 2022 under section 144BA(6), declared that an impermissible avoidance arrangement. The Court held the Revenue had failed on every ingredient: no arrangement within section 102(1), no main purpose of obtaining a tax benefit within section 96(1), and neither clause (b) nor clause (d) made out.

One structural feature of the facts is worth having in mind throughout, because the order compresses it and a Revenue officer will not. The company that sold the business, New Meena Bazar International Pvt. Ltd., was amalgamated into Madevsag Retail Pvt. Ltd. by an order of the National Company Law Tribunal dated 18 June 2018 with an appointed date of 1 April 2017, so the transfer was deemed to have been effected by the transferee; Madevsag then merged into EKGE Retail by an order dated 24 December 2018 effective from 1 April 2018. The entity that sold the business, the entity that bought the shares and the entity that claimed the set-off are therefore not the same on the face of the record, and only a retrospective appointed date makes them one.

That is the third GAAR decision of the same High Court on capital loss harvesting in twenty-eight months, and the second of them on bonus stripping in listed shares; whether the middle one was a bonus case at all could not be established, and that uncertainty is dealt with at the end. The three do not sit comfortably together. This article is not a note on one of them. It sets out Chapter X-A as a whole, and alongside each provision its counterpart in the Income-tax Act, 2025, which has been in force since 1 April 2026 and governs tax year 2026-27 onwards; the 2025 Act number is given in brackets at the first substantive mention of each provision, and the full concordance is at the end. It takes the chapter as a whole because the pattern running through all three is that the cases are won and lost on the structure of section 96(1) rather than on the merits of the planning, and because the chapter is short enough that a practitioner can hold the whole of it in mind.

Key points

• Rule 10U keeps Chapter X-A out altogether where the aggregate tax benefit to all the parties in the relevant assessment year is three crore rupees or less, and where the income arises from the transfer of investments made before 1 April 2017. Both are computed on definitions elsewhere in the chapter, and both should be worked before anything else on the file.
• Section 96(1) has two requirements and they are cumulative: the main purpose must be to obtain a tax benefit, and the arrangement must additionally answer one of the four descriptions in clauses (a) to (d). The four descriptions are alternatives to each other, not a further list of cumulative conditions. Getting that structure wrong is the commonest error on both sides.
• Before section 96 is reached there must be an “arrangement” within section 102(1). That is a threshold, not a formality, and in two of the three Telangana cases it is where the Revenue lost.
• Section 99 lets the Revenue collapse connected persons, disregard an accommodating party and look through a corporate structure for the purpose of deciding whether a tax benefit exists at all. That is how a benefit is found in a taxpayer who has none, and how the three crore threshold is reached.
• Section 100 says the Chapter applies “in addition to, or in lieu of, any other basis for determination of tax liability”. Whether that lets the Revenue reach conduct Parliament chose to address by a specific rule is the central unresolved question in this field. It was not argued in EKGE.
• The section 144BA machinery has three stages and two of them are the Commissioner’s. A taxpayer who does not answer the section 144BA(2) notice loses the Approving Panel stage altogether, because the reference to the Panel arises only where the assessee has objected.
• No appeal lies against the Panel’s directions, by section 144BA(14). The assessment order made in consequence is appealable, but it bypasses the Commissioner (Appeals) and goes straight to the Tribunal under section 253(1)(e). The directions themselves can only be attacked under Article 226.
• A Chapter X-A adjustment carries penalty exposure, and a tax treaty is not an answer to it: section 90(2A) disapplies the beneficial-provision rule so far as the Chapter is concerned.
• Bonus stripping in shares was outside section 94(8) until the Finance Act 2022 extended it to securities with effect from assessment year 2023-24. Every GAAR case on the technique so far concerns a year before that.
• The same presiding judge upheld GAAR on related-party facts in June 2024 and has since quashed it twice on exchange-traded facts. The 2024 decision is before the Supreme Court, leave has been granted, and it has not been disposed of. The Supreme Court decided its own GAAR matter on 15 January 2026. Neither is mentioned in the October 2026 order.

What GAAR is, and when it switched on

Chapter X-A is eight sections long, and the Income-tax Act, 2025 re-enacts it as Chapter XI, sections 178 to 184, in substantially the same words. Section 95 applies it (2025 Act, section 178), section 96 defines the target (section 179), section 97 deems certain arrangements to lack commercial substance (section 180), section 98 sets out the consequences (section 181), section 99 allows connected persons and accommodating parties to be collapsed (section 182), section 100 states how the Chapter sits alongside the rest of the Act and section 101 is the rule-making hook (the two merged into section 183), and section 102 defines the terms (section 184). Everything else, the Approving Panel and the forms and the time limits, is in section 144BA (2025 Act, section 274) and in the rules made under section 101 (Income-tax Rules, 1962, rules 10U to 10UC; Income-tax Rules, 2026, rules 127 to 130).

Section 95(1) provides that “Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.” Sub-section (2) provides that “This Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018.” An Explanation adds that the Chapter may be applied to any step in, or a part of, an arrangement as it applies to the arrangement.

The non obstante clause is the whole of the Revenue’s answer on the SAAR question. It is the textual basis on which the Telangana High Court held in 2024 that GAAR can reach conduct which a specific provision did not then cover. It is dealt with at length below.

The Explanation makes a step a target in its own right. Read with the presumption in section 96(2), it means the Revenue does not have to characterise the whole of a commercial transaction as avoidance; it can isolate one leg. That is how a genuine business sale and a genuine investment programme can still generate a GAAR reference on one trade inside them, and it is the reason a planner has to give each step its own reason rather than relying on the commerciality of the whole.

And the commencement history is worth getting right, because it is frequently misstated. Chapter X-A was first inserted by section 41 of the Finance Act 2012 with effect from 1 April 2014. It never came into operation: section 25 of the Finance Act 2013 omitted that Chapter with effect from the very date it would have taken effect, and section 26 of the same Act inserted the present Chapter with effect from 1 April 2016. Section 26 of the Finance Act 2015 then renumbered section 95 as section 95(1) and added sub-section (2), pushing application out to assessment year 2018-19. So the Chapter has been on the statute book since 1 April 2016 but bites only from assessment year 2018-19, and the 2012 version is of historical interest only. The 2015 amendment is often dated to 1 April 2016. The better view is 1 April 2015: clause 26 of the Finance Bill 2015 renumbers section 95 and inserts sub-section (2) without a separate commencement date, and section 1(2) of the Finance Act 2015 brings the relevant sections into force on 1 April 2015 save as otherwise provided. On that reading the amendment to section 95 took effect a year before the Chapter it amends, which is odd but is what the Act says.

Section 101, which the 2025 Act folds into section 183(b), deserves a line of its own because it is usually passed over. It provides that the Chapter “shall be applied in accordance with such guidelines and subject to such conditions, as may be prescribed”, and it is the authority for Rules 10U onwards. The consequence matters: those rules are not administrative guidance of the kind that can be attacked as inconsistent with the Act, they are the conditions subject to which the Chapter itself operates. That is why Rule 10U(1)(a) is an exclusion from the Chapter rather than a concession the Revenue can decline to apply.

One consequence of the commencement date deserves a warning rather than a footnote. Because GAAR applies only from assessment year 2018-19, a good deal of the reasoning that looks like GAAR reasoning in earlier years is not. In ACIT v. Vallabh Roopchand Bhanshali, ITA No. 889/Mum/2024, decided on 6 August 2024 for assessment year 2017-18, an off-market sale of listed scrips at a loss to a limited liability partnership in which the assessee held sixty per cent, the Tribunal at Mumbai expressly noted that GAAR applies from assessment year 2018-19 onwards and was therefore inapplicable, said that an inference could nonetheless be drawn from section 95, and decided the matter on McDowell and Vodafone. The defence of that course is that the Tribunal was using section 95 as an indication of Parliament’s view of devices of that kind rather than as a source of power, which is a conventional if weak use of later legislation. Even so, importing the statutory standard into a year Parliament excluded from it is not a step that should pass without argument.

Rule 10U: the three crore threshold and the 1 April 2017 grandfathering

Before any of the doctrine matters, Chapter X-A has to apply at all, and Rule 10U of the Income-tax Rules, 1962 keeps it out of four situations. Its counterpart under the Income-tax Act, 2025 is rule 128 of the Income-tax Rules, 2026, which carries all four forward in the same terms, with “previous year” becoming “tax year” and the definitions pointing to the new Act. Two of them are structural and two are specific to foreign portfolio investment.

The rule as it governed every year so far decided, that is before 31 March 2026, provided:

“(1) The provisions of Chapter X-A shall not apply to—

(a) an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crore;

(b) a Foreign Institutional Investor,—(i) who is an assessee under the Act; (ii) who has not taken benefit of an agreement referred to in section 90 or section 90A as the case may be; and (iii) who has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 and such other regulations as may be applicable, in relation to such investments;

(c) a person, being a non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor;

(d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the 1st day of April, 2017 by such person.

(2) Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st day of April, 2017.”

The three crore gate. Read the words rather than the summary. It is the tax benefit “in the relevant assessment year”, it is computed “in aggregate, to all the parties to the arrangement”, and the test is whether it “does not exceed” three crore rupees. So it is tested year by year, it is aggregated across parties rather than applied per taxpayer, and it is an exclusion the Revenue must clear rather than a threshold the taxpayer must prove. How the benefit is quantified is in Rule 10U(3)(iv) (2026 Rules, rule 128(3)), which defines “tax benefit” for this purpose by reference to section 102(10) and provides that for sub-clauses (a) to (e) of that definition it is the amount of tax, and for sub-clause (f), an increase in loss, it is “the tax that would have been chargeable had the increase in loss referred to therein been the total income”. That last limb is the operative one in a loss-harvesting case: the benefit is measured by the tax on the loss, not by the loss.

Two features of it are easy to get wrong in both directions. Because the test aggregates across the parties, a taxpayer whose own benefit is modest can still be inside the Chapter; and because section 99 permits connected persons to be collapsed for the purpose of deciding whether a tax benefit exists, the aggregation can reach further than the parties the taxpayer would have named. Because the test is annual, an arrangement spread across years is tested year by year and a single year below the line does not protect the arrangement.

The grandfathering gate. Clause (d) excludes income from the transfer of investments made before 1 April 2017. The exclusion is keyed to when the investment was made, not to when the arrangement was entered into or when the income arose. Sub-rule (2) then applies the Chapter to an arrangement whenever entered into, in respect of a tax benefit obtained on or after 1 April 2017, and the opening words “without prejudice to the provisions of clause (d) of sub-rule (1)” are the pivot on which the whole grandfathering dispute turns. The Delhi High Court read them as confining sub-rule (2) so that it could not defeat the clause (d) grandfathering; the Supreme Court set that judgment aside on 15 January 2026, and that litigation is dealt with below.

On the EKGE facts neither gate was available, and the order does not mention Rule 10U at all. The short-term capital loss of Rs 49,32,71,673 sheltered long-term gains charged at twenty per cent, so the benefit measured on the Rule 10U(3)(iv) basis was of the order of ten crore rupees, several times the line. And the pre-bonus shares were bought during the financial year 2017-18, after 1 April 2017, out of the proceeds of a business sold in June 2017, so clause (d) had nothing to attach to. The year was assessment year 2018-19, the very first in which the Chapter applied. The silence of the order is a reminder that these gates are not applied by the officer of his own motion: they are raised by the taxpayer, in the objections, with the computation annexed.

Both provisions have since been rewritten. Clause (d) and sub-rule (2) were substituted by the Income-tax (Tenth Amendment) Rules 2026 with effect from 31 March 2026, the substitution dropping the “without prejudice” opening and writing the grandfathering exception into the operative words of sub-rule (2) instead; a companion amendment made the corresponding change to the rule under the Income-tax Act, 2025 with effect from 1 April 2026. The amendment is recorded in the footnotes to the Department’s own published text of the rules; the notifications are reported as No. 54/2026 for rule 10U and No. 55/2026 for rule 128, both of 31 March 2026, which could not be read in an official copy for this article. Anyone working a live file must therefore check which text governs the year in question: the version set out above governs every year any decided case concerns, and the substituted version governs from 31 March 2026 onwards. One further textual point for anyone quoting from the Department’s web page rather than the Gazette: the page prints “accrues of arises” in sub-rule (2) where the notification reads “accrues or arises”.

These gates are not theoretical, though the one decided case on them is more qualified than it is usually described. In Reverse Age Health Services Pte Ltd v. DCIT, ITA No. 1867/Del/2022, decided by the Tribunal at Delhi on 17 February 2023 for assessment year 2018-19, the Revenue had taxed short-term capital gains of Rs 1,92,63,473 on a conduit finding against a Singapore company. The Tribunal held both exclusions made out, the benefit being below three crore rupees and the shares acquired before 1 April 2017, but framed that reasoning on the assumption that GAAR applied and decided the appeal on other grounds. It is a useful illustration of how the exclusions are applied and it is not a case decided on Rule 10U alone, so it should not be cited as one.

A third gate sits outside Rule 10U and is worth a line. Chapter X-A applies only from assessment year 2018-19. For an earlier year the Revenue is thrown back on the judicial doctrine, which is a materially different and generally weaker position.

How bonus stripping produces a loss: nil cost, first-in-first-out and section 70(2)

Before the law, the mechanics, because a practitioner has to be able to show on paper where the loss comes from. The Revenue’s instinct is to describe it as artificial; the answer is that it is the arithmetic the Act itself prescribes.

The three provisions that produce the loss are given below in their 1961 numbering only; their counterparts in the Income-tax Act, 2025 were not traced for this article and are not guessed at, for the reason given in the concordance at the end.

The commercial idea is simple and the EKGE order sets it out in the taxpayer’s own illustration. If a share trades at Rs 1,000 before a bonus is declared and the bonus is allotted one for one, the price ought in theory to halve to Rs 500 once the enlarged capital is in issue. In practice it was believed it would not fall quite that far, trading at Rs 501 or above, and that the difference was an arbitrage available with little additional risk. On those figures an ex-bonus price of Rs 501 yields about two per cent within a fortnight, which annualises to about fifty per cent. That is the commercial rationale the taxpayer advanced, and whether it is made out on the evidence is a different question from whether it is a rational thing for an investor to attempt.

The gain being sheltered is computed separately, and the mechanics of a slump sale under section 50B are dealt with elsewhere. The tax consequence of the share trades comes from three provisions acting together.

The cost of a bonus share is nil. Section 55(2)(aa)(iiia) provides that the cost of acquisition of a financial asset “allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee”. It has applied since 1 April 1996, the clause having been inserted by the Finance Act 1995; the Department’s current page for the section carries no footnote recording that, so the attribution rests on the commencement date rather than on the Department’s own note. Clause (aa) is expressed to operate “subject to the provisions of sub-clauses (i) and (ii) of clause (b)”, so a bonus share that became the property of the assessee before 1 April 2001 is not forced to nil and the fair market value option survives. Citing section 55(2)(b) for the nil cost rule, as is sometimes done and as the Revenue’s submission recorded in the EKGE order appears to do, is wrong: clause (b) is the residuary provision and is relevant here only as the carve-out.

The shares sold are identified by first-in-first-out. For shares held in dematerialised form this is statutory, not administrative: section 45(2A) provides that for the purposes of section 48 and the proviso to section 2(42A), “the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method”. The circular that explains it is Circular No. 768 dated 24 June 1998, which also supplies the working rules that matter in practice, that first-in-first-out applies only to the dematerialised holding, that it is applied account-wise where an investor has more than one account, and that where physical shares are dematerialised later the basis is the date of entry into the account. Circular No. 704 dated 28 April 1995 is a different circular: it deals with the date of transfer by reference to the broker’s note, and its paragraph 3 applies first-in-first-out only “to reckon the period of the holding of the security, in cases where the dates of purchase and sale could not be correlated through specific numbers of the scrips”, which presupposes physical certificates. The Revenue’s submission in EKGE attributed the first-in-first-out requirement to Circular No. 704. That attribution has the wrong source. It appears in the Court’s summary of counsel’s submission rather than in the directions themselves, so nothing can safely be said from it about how the directions were written; but it is worth checking the Panel’s own order on any live file for the same error, because the two circulars do different work and the wrong one does not support the proposition.

And the set-off is unrestricted in the direction that matters. Section 70(2) entitles an assessee to set a short-term capital loss “against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset”, with no qualification. Section 70(3) confines a long-term loss to income “in respect of any other capital asset not being a short-term capital asset”. Section 74(1)(a) and (b) repeat the asymmetry for carried-forward losses. So a short-term capital loss can shelter a long-term capital gain and the converse is not true. Both sections were recast by the Finance Act 2002 with effect from 1 April 2003; between assessment years 1988-89 and 2002-03 the Finance Act 1987 had omitted section 70(2) altogether and both directions were open.

Put the three together and the loss is not an artefact of planning but of the statute. The original shares carry their full cost; the bonus shares carry nil; first-in-first-out treats the original shares as the ones sold; the market price after a bonus reflects the enlarged capital. The seller therefore realises a loss on the original shares and holds bonus shares at nil cost whose eventual sale will produce a gain of the whole consideration. The loss is real in the year and the gain is deferred to the year of the later sale.

That last sentence is the most useful thing a defender can say to a Panel, because it reframes the whole dispute. What the taxpayer obtains from bonus stripping is, in substance, a timing benefit. Section 94(8), where it applies, recognises exactly this: it does not condemn the transaction, it ignores the loss and adds it to the cost of the bonus units, so that the deferral is removed and nothing else is. Whether a timing benefit is the kind of mischief that justifies the machinery of Chapter X-A, when Parliament has addressed the identical mischief elsewhere by a rule that merely reverses the timing, is a question the Revenue should have to answer.

The two conditions in section 96(1), and how they are misread

Section 96(1), re-enacted without change of substance as section 179(1) of the Income-tax Act, 2025, is the heart of the chapter and it is short enough to set out in full:

“An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or

(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.”

Read the structure before the content. There is a stem, “the main purpose of which is to obtain a tax benefit”, and there is a tail, “and it”, followed by four descriptions. The word “or” appears once, at the end of clause (c), which is the ordinary drafting convention for a list of alternatives. So the provision requires the main purpose and any one of the four. It does not require all four, and it is not satisfied by any one of the four alone.

The EKGE court began from a canon of construction that a defender should quote before anything else:

“The scheme of Chapter X-A of the Act introduced w.e.f. 01.04.2018 is one of the considerable rigour and for that very reason its conditions must be construed strictly.”

It then stated the structure, unusually cleanly:

“Section 96(1) of the Act declares an arrangement to be an impermissible avoidance arrangement only where two conditions are cumulatively satisfied: firstly, that the main purpose of the arrangement is to obtain a tax benefit; and secondly, that the arrangement additionally answers any one of the four descriptions in clauses (a) to (d). The threshold requirement, preceding both limbs, is that there must exist an ‘arrangement’ as defined in Section 102(1).”

And on burden:

“The burden of establishing each of these ingredients rests upon the Revenue, for Chapter X-A of the Act, visits the assessee with consequences of the gravest kind, including disregard or re-characterisation of transactions and denial of treaty benefits, none of which can follow upon a mere suspicion or upon the Revenue’s disapproval of the commercial course an assessee has chosen to adopt.”

The strict construction holding is the answer to the Revenue’s best textual argument, which is that the definitions in Chapter X-A are drawn as widely as language permits and should be given their width. The Revenue’s reply, which should be anticipated, is that a rule aimed at avoidance which is construed strictly against the Revenue is a rule that defeats its own purpose, and that no decision of the Supreme Court yet applies a strict construction canon to this Chapter. At present the proposition rests on this judgment.

Both errors available on section 96(1) are live in the decided cases, and they run in opposite directions.

The Revenue’s error is to treat the four limbs as a description of the result rather than as conditions. If a tax benefit resulted, the reasoning runs, the arrangement must have been abusive and the manner must not have been bona fide. That is the reasoning the EKGE court identified and rejected, and it is addressed below.

The assessee’s error, or at least the assessee’s good fortune, is the opposite. The Telangana High Court is reported, in Smt. Anvida Bandi v. DCIT, to have treated the four limbs as cumulative, effectively reading an implicit “and” into a provision that uses “or”. If that is what the Court held, it is a generous reading and it should not be built on: it would require the Revenue to prove non-arm’s-length terms, misuse, absence of commercial substance and an unusual manner in every case, which would make clauses (a) to (d) a single compound test rather than four alternatives, and would make the “or” at the end of clause (c) do no work. There is a defence of the judgment available, and because nobody has read it in primary text the defence may well be the right reading: the Court may have been recording that the Revenue had pleaded all four limbs and failed on each, rather than laying down a cumulative test. Until the certified copy is available, treat EKGE as the authority on the structure of section 96(1) and Anvida Bandi as authority on the facts.

A word on Anvida Bandi generally, because it is cited a great deal and will be cited to you. The judgment is reported at [2025] 177 taxmann.com 726 (Telangana), W.P. No. 3201 of 2023, and is dated 22 August 2025 before P. Sam Koshy and Suddala Chalapathi Rao JJ, for assessment year 2020-21. Its primary text is not publicly available: although the free judgment databases carry Telangana decisions up to the present, this one is absent from them, and the High Court’s own judgment search is behind a security check. Everything located for this article is law-firm paraphrase, and no such note reproduces a sentence of the judgment. The writ number and the amounts are corroborated across several of those notes; the date of 22 August 2025 and the composition of the bench are given by the Taxmann report and could not be confirmed elsewhere. The particulars and holdings described in this article are taken from those reproductions rather than from a primary text, and nothing from it should be put inside quotation marks in a submission without a certified copy.

The threshold question: is there an arrangement at all?

Section 102(1), which becomes section 184(2) of the Income-tax Act, 2025, defines “arrangement” to mean “any step in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.”

On its face that is about as wide as a definition can be made. It covers a step, it covers a part, it covers an understanding that is not enforceable, and it expressly brings in the alienation of property. The Approving Panel in EKGE held that buying before a bonus and selling after it was an “operation” and a “scheme” within those words, which is not an obviously wrong reading of the text.

The Court disagreed, and the reasoning repays close reading:

“The words ‘transaction’, ‘operation’, ‘scheme’, ‘agreement or understanding’ employed in Section 102(1) of the Act must be read in their setting, and each of those expressions read in the company of the others, connotes a degree of concert, design or arrangement between identifiable parties, or at the very least a pre-ordained set of steps whose outcome is within the control of the person said to have entered into it.”

Applied to the facts:

“Whereas here, the quantum of gain or loss is not and cannot be pre-ordained, being wholly dependent upon the movement of market prices over which the petitioner exercised no control whatsoever, it is difficult to characterise the petitioner’s trade as an ‘operation’ or ‘scheme’ within the meaning of the definition.”

And the observation that gives it force:

“That the petitioner’s expectation of a favourable price movement post-bonus happened to be borne out in some instances and evidently not in others is a consequence of market behaviour and not of any design of the petitioner’s making.”

This is a noscitur a sociis argument: the wide words take colour from their neighbours. It is a respectable argument and it produces a sensible result. It is also doing a great deal of work, and three difficulties should be acknowledged by anyone who intends to rely on it.

The statute does not say “two or more persons”. The reported holding in Anvida Bandi that an arrangement must be between two or more persons has no textual anchor in section 102(1), which speaks of a step in a transaction and of an understanding that need not be enforceable. A unilateral series of steps is comfortably within the ordinary meaning of “operation”. The counter is that “agreement or understanding” plainly imports bilaterality and that “scheme” and “operation” should be read with them, which is the EKGE reasoning; but the Revenue has the easier textual case here and should be expected to make it.

That matters on the EKGE facts in a way the order does not develop. The transferor was amalgamated into the transferee by an order of the National Company Law Tribunal with an appointed date retrospective to a point before the business sale, so the identity of the person who made the gain, the person who bought the shares and the person who claimed the set-off is supplied by the scheme rather than by the trades. A Revenue officer with a freer hand would say that the scheme is itself a step in an arrangement within section 102(1) read with the definition of “step” in section 102(9). The taxpayer’s answers are that the appointed date was fixed for company-law reasons unconnected with the shares, that the Board has said GAAR will not apply where a court has explicitly and adequately considered the tax implications in sanctioning an arrangement, and that the amalgamation preceded both the share purchases and any tax benefit. None of that was argued, and it is the line of attack this order leaves open for the next case.

The definition expressly includes a single step, and “step” is itself defined. If an arrangement can be “any step in” a transaction, it is hard to see why one leg of an investment programme cannot be an arrangement merely because the counterparty to that leg is anonymous. The answer, if there is one, is that the step must still be a step in something that is itself an arrangement.

And the Court’s reasoning turns on the outcome rather than on the steps, which is the Revenue’s best point. Section 102(1) requires a transaction, operation, scheme, agreement or understanding, or a step in one. It nowhere requires that the outcome be determinate. The steps here were entirely pre-ordained: buy before the record date, take the allotment, sell an equivalent quantity afterwards. What was not pre-ordained was how much the trade would make or lose. On the Revenue’s case the Court has read an outcome requirement into a definition that contains only a conduct requirement, and the consequence of that reading, if it is right, is that no unilateral multi-step restructuring carried out by a single taxpayer at market prices can ever be an arrangement, which would take a large part of Chapter X-A out of use. That is the strongest objection to this part of the judgment and it will be made on appeal.

What the anonymity of the counterparty really establishes is that the price was not set by concert, which goes to clause (a) and clause (d). It does not by itself show there was no design on the part of the taxpayer.

None of that means the Court was wrong. It means the holding is a construction of wide words against the Revenue in a penal context, which is a legitimate approach but is not the only available one, and it has not yet been tested on appeal.

The definitions that decide the case: section 102

Section 102, which becomes section 184 of the Income-tax Act, 2025 with every clause number shifted by one from “arrangement” onwards, does more work than its position at the end of the Chapter suggests. Four of its eleven definitions decide who is inside an arrangement, and therefore whose tax benefit is aggregated for the three crore gate and in whose hands a benefit can be found at all. An adviser who has not read them cannot do the Rule 10U arithmetic the rest of this article recommends.

“Party”, in clause (6) (2025 Act, section 184(7)), “includes a person or a permanent establishment which participates or takes part in an arrangement”. Note that a permanent establishment is a party in its own right, and that participation is the test rather than contracting. The three crore aggregation under Rule 10U(1)(a) runs across “all the parties to the arrangement”, so this definition fixes the denominator of the calculation.

“Connected person”, in clause (4) (2025 Act, section 184(5)), is very wide and is the provision that does the most damage in a family or group file. It means any person connected directly or indirectly to another person and includes: a relative of an individual; a director of a company or a relative of such director; a partner or member of a firm, association of persons or body of individuals, or a relative of such partner or member; a member of a Hindu undivided family or a relative of such member; any individual having a substantial interest in the business of the person, or a relative of such individual; a company, firm, association, body or family having a substantial interest in the business of the person, together with its directors, partners or members and their relatives; the converse case where the person’s own director, partner or member has a substantial interest in the other; and any other person carrying on a business in which the person, or its director, partner or member, or a relative, has a substantial interest. “Relative” is separately defined by section 102(7), which takes the meaning in the Explanation to section 56(2)(vi); and two further definitions complete the set, “asset” in clause (2), which includes property or a right of any kind, and “benefit” in clause (3), which includes a payment of any kind whether tangible or intangible and is the root of “tax benefit”.

“Substantial interest”, in clause (8) (2025 Act, section 184(9)), is the twenty per cent test that governs most of those limbs: a person has a substantial interest in a business if, at any time during the financial year, he is the beneficial owner of equity shares carrying twenty per cent or more of the voting power where the business is carried on by a company, or is beneficially entitled to twenty per cent or more of the profits in any other case.

“Step”, in clause (9) (2025 Act, section 184(10)), “includes a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement”. The Explanation to section 95 and the presumption in section 96(2) both key off that word, which is how a single leg of a larger transaction becomes the unit of analysis.

Two further definitions matter in specific contexts. “Tax benefit”, in clause (10) (2025 Act, section 184(11)), includes a reduction, avoidance or deferral of tax or other amount payable under the Act, an increase in a refund, the same two things arising as a result of a tax treaty, a reduction in total income, and an increase in loss, in each case “in the relevant previous year or any other previous year”; those closing words govern the whole list, which is what allows a benefit obtained in a later year to be attributed to an arrangement entered into earlier. And “fund”, in clause (5) (2025 Act, section 184(6)), includes cash, cash equivalents and any right or obligation to receive or pay cash, which is the definition that gives round trip financing under section 97(2) its reach.

The practical instruction is short. Before accepting that the aggregate tax benefit is below three crore rupees, work out who the parties are under clause (6) and who is connected under clause (4) read with clause (8), because the Revenue will.

Main purpose, and the error of reasoning backwards

Suppose the threshold is crossed. The Revenue must then show that the main purpose of the arrangement was to obtain a tax benefit. The statute says “main purpose”, not “a purpose”, and not “one of the main purposes”, which is the formulation used in the principal purpose test in the multilateral instrument and in several foreign general anti-avoidance rules. India chose the narrower test in 2013 and did not change it when the chapter was re-enacted in the Income-tax Act, 2025. The point is stronger than it looks: the Chapter as first enacted in 2012 read “the main purpose or one of the main purposes”, and the words “or one of the main purposes” were dropped when the present Chapter was substituted in 2013. The EKGE court put the point in a sentence worth carrying into a hearing:

“The statute uses the words ‘main purpose’, not ‘a purpose’ or ‘an incidental consequence’. That an assessee, having incurred a loss, thereafter claims the set-off which the statute itself expressly permits, cannot by itself convert the earning of that loss into an exercise whose main purpose was the obtaining of a tax benefit.”

“Tax benefit” is widely defined and expressly includes a reduction in total income and an increase in loss, so a loss claim is squarely a tax benefit. That is not the difficulty. The difficulty is purpose, and the Court identified the characteristic failure in the Revenue’s reasoning and named it:

“Instead of asking whether the material established that the dominant purpose of the petitioner’s investment decisions was the obtaining of a tax benefit, the impugned directions proceed from the premise that because a tax benefit resulted, the purpose must have been to obtain it. That is to reason backwards from effect to intention and it is not the enquiry that Section 96(1) mandates.”

The same paragraph then states, inside Chapter X-A and in the Court’s own voice, the proposition that is usually traced through Azadi Bachao and the English cases:

“It is well settled that an assessee is entitled to so arrange its affairs as to attract the least incidence of tax, provided it does so within the four corners of the law, and that the mere circumstance that a lawful course adopted by an assessee also happens to be tax-efficient does not render that course impermissible.”

That is the single most useful sentence in the order for a defender, because it is a statement of the principle made by a court applying the very chapter said to displace it.

That is a real error and not merely a rhetorical one. Section 96(1) is not satisfied by an arrangement that produces a tax benefit; if it were, the stem would be surplus and every loss claim would be within the chapter. The stem exists to separate arrangements undertaken for a commercial reason that happen to be tax-efficient from arrangements undertaken because they are tax-efficient. That separation can only be made on evidence about why the thing was done, and the Revenue has to gather it.

In EKGE there was evidence, and the Court set it out at length: a surplus of Rs 151.06 crore after discharging Rs 59.40 crore of liabilities out of the consideration of Rs 210.46 crore, of which about Rs 20 crore arrived only a year after the transfer, leaving about Rs 130 crore then available for investment; engagement with the representatives of most of the leading financial institutions in the country; an internal consultant retained to advise on deployment, the taxpayer having no prior experience of dealing with investment managers; the surplus parked meanwhile in liquid mutual funds, which earned Rs 2,09,27,881 in the year and was returned as short-term capital gains; and a considered allocation of about one-third to listed equities and two-thirds to bonds and debt funds. The Court described that as “a commercial narrative that respondent No.3 has left substantially unaddressed”, which is the criticism that matters: not that the Panel reached the wrong conclusion on the evidence, but that it did not engage with it.

Two cautions about using that narrative as a template, because a practitioner who copies it without noticing them will be caught.

The allocation and the execution did not match. The stated plan was about Rs 50 crore into equities. The aggregate actually invested in pre-bonus shares was Rs 106.31 crore, more than double that figure and over eighty per cent of the corpus. The order records both numbers without reconciling them. That is the most obvious line of attack on the commercial narrative and it should be expected in the next case. A written asset allocation is worth having; a written asset allocation that the execution then departs from by a factor of two is worth rather less, and the file should either follow the plan or record why it changed.

And the retained position proves less than it looks. The Court said of the Rs 49.07 crore retained at cost:

“That retention is itself telling; an assessee whose sole object was the manufacture of a capital loss would have had no reason to remain invested to that extent in the underlying scrip.”

The Revenue’s answer, which the judgment does not address, is that retaining stock is a definitional feature of the technique rather than evidence against it. Bonus stripping works by selling the original holding and keeping the nil-cost bonus shares, and section 94(8)(c), where it applies, requires as a condition of the specific rule that the person sells the original units “while continuing to hold all or any of the additional units”. Parliament legislated on the assumption that a bonus stripper retains stock. So retention as such is neutral. What is not neutral, and what a taxpayer should be able to show, is retention of the original scrip beyond what the technique requires, at a quantum that can be explained on commercial grounds. A taxpayer who exits entirely is in much the weaker position; a taxpayer who stays invested has a real answer, provided he can say why he held what he held.

The group comparison, and what the Revenue’s own assessments show

There is a third ground in the judgment which is neither purpose nor clause, and it is the one most transferable to a search practice. The Court said:

“We are also unable to overlook two features of the record that the impugned Directions leave unexplained. The search and seizure operation conducted on 27.11.2018 and 28.11.2018 yielded no incriminating material whatsoever against the petitioner, and although the statement of its Director came to be recorded, nothing that could be described as incriminating emerged. Further, of the approximately 105 assessments of the petitioner’s group reopened in consequence of that search, 104 came to be completed with nil or minimal adjustment to the returned income.”

And drew the conclusion:

“Against this backdrop, the singling out of the present assessment for the invocation of the extraordinary machinery of Chapter X-A required, at the very least, a careful and reasoned demonstration of each ingredient of Section 96(1) and such a demonstration is conspicuously absent from the impugned Directions.”

This is a comparative argument: the Revenue’s own treatment of the group is evidence against its characterisation of this one assessment. In any file arising out of a search the group’s assessment history is known to the taxpayer and should be tabulated and put on the record before the Commissioner, with the dates and the adjustments. A Chapter X-A reference that is the sole adverse outcome of a group-wide exercise invites exactly the question the Court asked.

The Revenue’s answer is available and should be anticipated: each assessment stands on its own facts, and a hundred clean assessments say nothing about the one transaction that nobody else in the group entered into. That answer is a good one where the transaction really is unique to the assessee. It is a much weaker one where the Chapter X-A reference is the residue of an exercise that found nothing.

The presumption in section 96(2), and the order of the enquiry

Section 96(2), re-enacted as section 179(2) of the Income-tax Act, 2025 with “notwithstanding” becoming “irrespective of”, provides:

“An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.”

It is narrower than it is usually described. It is not a general presumption that an arrangement is an impermissible avoidance arrangement. It is a presumption about the relationship between a step and the whole: once the main purpose of a step is shown to be a tax benefit, the whole arrangement is presumed to have that main purpose, and it is for the assessee to prove the contrary. Its practical effect is to stop a taxpayer from sheltering a tainted step inside a large commercial transaction by pointing to the commerciality of the transaction as a whole.

The presumption has a precondition and the Revenue has to satisfy it. Something must first be shown about the main purpose of a step. The presumption cannot be used to establish that very thing, and it cannot be used to establish the separate ingredients in clauses (a) to (d) at all. That sequential reading is reported to be the one the Telangana High Court adopted in Anvida Bandi, holding that the presumption arises only once a section 96(1) condition is met and that the Revenue must establish the conditions with concrete evidence rather than assertions of intent.

But the opposite reading is on the books and is from the same Court. In Ayodhya Rami Reddy Alla v. PCIT (Central), W.P. Nos. 46510 and 46467 of 2022, decided on 7 June 2024 by P. Sam Koshy and Laxmi Narayana Alishetty JJ, the Court contrasted the position under GAAR with Vodafone and said that section 96(2) places the responsibility on the taxpayer. That is a reading on which the presumption does rather more work, and the Revenue will cite it. It is also the decision now before the Supreme Court.

For a practitioner the safe course is to argue the sequence, not the burden in the abstract. The question to put to the Panel is: which step have you identified, and what is the material from which you say its main purpose was a tax benefit? If the answer is that the loss was claimed, that is reasoning backwards again. If there is a real answer, the presumption engages and the file turns on the commercial narrative.

Clause (a): rights and obligations not ordinarily created at arm’s length

Clause (a) catches an arrangement that “creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length”. It was not invoked in EKGE and is not discussed in any of the three Telangana decisions, which is unfortunate, because in practice it is the limb with the widest reach. Most real GAAR exposure is in related-party restructuring, intra-group funding, family settlements, share swap ratios and buy-backs, and clause (a) is the limb that bites there.

It looks at the content of the rights and obligations, not at the price. A transaction can be at an arm’s length price, certified as such under Chapter X, and still create rights no independent party would accept: a tenure no lender would grant, an option exercisable only on the occurrence of a tax event, a put that leaves the holder without economic risk, a waiver or subordination that an unconnected creditor would never give, a ratio in a scheme that no outside shareholder would have voted for. The question is not what the parties paid but whether they would have agreed to this at all.

It is the only limb with an express comparator, and the comparator has to be identified. “Not ordinarily created between persons dealing at arm’s length” requires the Revenue to say what persons dealing at arm’s length would ordinarily have done. An order that asserts the conclusion without identifying the comparator transaction has not applied the clause, and that is a point to take in the objections rather than at the hearing.

And it overlaps with the transfer pricing code and with section 40A(2), which cuts both ways. The taxpayer’s argument is that where the terms have been tested and documented under section 92 and found to be at arm’s length, that is strong evidence under clause (a) too. The Revenue’s answer is that section 92 prices a transaction that the parties have chosen to enter into, whereas clause (a) asks whether parties at arm’s length would have entered into it in that form at all, so an arm’s length price is not an answer to a non-arm’s length right. Both propositions are respectable and neither has been decided.

On the facts of a case like EKGE, clause (a) is very difficult to run, and saying why is cleaner than relying on the general proposition that exchange execution is ordinary, which belongs to clause (d). Where a taxpayer buys and sells listed shares on an exchange at market prices, there is no identifiable person with whom non-standard rights could have been created, so the comparator has little to bite on.

The Revenue’s answer has not been run in any of the decided cases and should be anticipated. An exchange trade does create rights and obligations: the contract note creates them, and the trade is novated to the clearing corporation, which is an identifiable counterparty in law even though the opposite client is not. On that footing the question clause (a) asks is whether those rights are ones ordinarily created between persons dealing at arm’s length, to which the answer on screen-based dealing is plainly yes. That is a less elegant answer than saying the clause has nothing to bite on, and it is the more durable one, because it does not depend on a proposition about anonymity that the statute nowhere requires.

Clause (b): misuse or abuse

Clause (b) catches an arrangement that “results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act”. The EKGE court dealt with it in a short passage and the reasoning is the most doctrinally important part of the judgment:

“There has been no misuse and no abuse. The petitioner invoked Section 70(2) according to its terms, computed the cost of bonus shares as the statute commanded under Section 55, applied the First-In-First-Out method as the Board’s Circular required, and computed its slump sale gains under Section 50B. Abuse connotes the employment of a provision for a purpose alien to that for which it was enacted. Set-off under Section 70(2) exists precisely so that losses may be set against gains in arriving at total income, and the petitioner used it for no other purpose.”

That gives clause (b) a workable content: abuse means using a provision for a purpose alien to the purpose for which it was enacted. It is the orthodox formulation of abuse in anti-avoidance law and it imports a purposive enquiry into the provision relied on, not into the taxpayer’s motive. The distinction matters, because it means the Revenue cannot establish clause (b) merely by establishing the stem. If the stem were enough, clause (b) would add nothing.

The Court reinforced the point with a structural argument about the nature of the charge:

“Income tax is a single, unified and annual levy. It is not an aggregate of discrete taxes upon discrete receipts. The total income of an assessee for a previous year can be arrived at only after the losses sustained in some activities are set off against the gains derived from others; that is not a concession granted to the assessee but an intrinsic feature of the manner in which taxable income is computed under the Act.”

And drew the conclusion:

“To describe the working out of a computation provision according to its own terms as the obtaining of a ‘tax benefit’ is to misapprehend the nature of the levy. A ‘tax benefit’ within the contemplation of Chapter X-A must be something that the assessee secures by circumventing or subverting the scheme of the Act and not something that flows from the direct and unavoidable operation of a computation provision upon a loss that was genuinely and commercially sustained.”

This passage deserves both approval and a caveat, and a practitioner should carry both.

The approval is that it is right about set-off. Sections 70 and 74 are not reliefs. Section 70(2) entitles an assessee to set a short-term capital loss against the income computed in respect of any other capital asset, and the words carry no restriction. Treating the exercise of that entitlement as itself the abuse would be to treat the computation of total income as presumptively suspect.

The caveat is that the sentence about a tax benefit proves too much if read widely. Section 102(10) defines tax benefit to include “an increase in loss” and “a reduction in total income”, so a loss set-off is a tax benefit as the statute uses that term; what the Court must mean is that the existence of a tax benefit is not itself the misuse required by clause (b), which is a point about clause (b) and not about the definition. Read as a gloss on the definition it would put most of Chapter X-A out of action, because almost every tax benefit arises from the operation of some provision according to its terms. Read as a point about abuse it is sound. Quote it with that distinction made, or it will be turned around.

Clause (c): commercial substance under section 97, the limb nobody argued

Clause (c) of section 96(1) catches an arrangement that “lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part”. It is the most heavily drafted of the four limbs and, on these facts, the most dangerous, which makes it striking that the EKGE order does not mention section 97 at all. The Approving Panel had invoked clauses (b) and (d), and the Court decided the case on those. Anyone reading the judgment as authority that bonus stripping has commercial substance, or that clause (a) could not be made out on such facts, is reading into it something it does not contain.

Section 97(1), which becomes section 180(1) of the Income-tax Act, 2025, deems an arrangement to lack commercial substance if:

“(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or

(b) it involves or includes—(i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or

(c) it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party; or

(d) it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the provisions of this Chapter).”

Sub-section (2) provides that round trip financing “includes” any arrangement in which, through a series of transactions, funds are transferred among the parties and those transactions have no substantial commercial purpose other than the tax benefit, and it directs that this be determined without regard to whether the funds can be traced, to the sequence in which they moved, or to the means by which they moved. The word is “includes”, not “means”, so the category is open, which is the Revenue’s point and is worth noticing before the provision is dismissed as narrow. Sub-section (3) defines an accommodating party as one whose main purpose in participating, in whole or in part, is to obtain a tax benefit for the assessee, whether or not it is a connected person; the 2025 Act moves that definition out of the section entirely, to section 184(1).

Sub-section (4), which becomes section 180(3) of the 2025 Act, is the one that wins cases for taxpayers and is the least quoted:

“For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:—(i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.”

Notice the force of “shall not be sufficient”. Parliament has legislated that short duration cannot by itself establish absence of commercial substance. In a bonus stripping case the Revenue’s instinct is to point at the holding period: bought days before the record date, sold days after. Clause (i) of section 97(4) is the direct answer to that instinct. The Telangana High Court is reported to have held in Anvida Bandi that timing alone cannot bring a transaction within GAAR, though the accounts of that decision attribute the holding to the Expert Committee’s report rather than to section 97(4); the statutory provision is the better foundation and is available whether or not the Court used it.

Two limbs would nonetheless repay a careful Revenue’s attention on a bonus stripping file.

Clause (b)(iii), offsetting or cancelling elements. Buying a block of shares and selling an equivalent quantity of the same scrip within weeks looks, on one view, like two elements that cancel each other. The answer is that they do not cancel: the taxpayer is left holding the bonus shares and remains exposed to the scrip. The qualification made above applies here too, that the bonus parcel is retained as a feature of the technique, so the answer is stronger where the taxpayer also keeps original scrip he was not required to keep.

Clause (d), no significant effect on business risks or net cash flows. This is the serious one. A bonus stripping trade does move cash and does carry price risk between purchase and sale, which is real market risk and is the risk the EKGE court treated as decisive at the threshold. But the Revenue’s point would be that the risk is incidental and that the net effect on the taxpayer’s position, apart from the tax benefit, is slight against a loss sheltering a gain many times its size. That is an argument about degree, it has never been tested on exchange-traded facts, and it is the argument the Revenue should have been making.

In Ayodhya Rami Reddy Alla the Court did decide the case on commercial substance, holding the arrangement “devoid of commercial substance as per Section 97”. The facts there were different in kind, and the difference is set out below.

Clause (d): the means and the manner

Clause (d) catches an arrangement “entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes”. The EKGE court’s treatment of it is the easiest passage in the judgment to apply:

“The clause is directed at the means and the manner, not at the outcome.”

Then the application:

“Purchases and sales of listed securities on a recognised stock exchange regulated by the Securities and Exchange Board of India, with securities transaction tax and service tax duly discharged, represent the most ordinary, conventional and universally employed means of transacting in securities in this country. Transactions of enormous aggregate volume are executed through this very channel every trading day. There is no means more ordinary and no manner more bona-fide available to an investor wishing to deal in equities. To hold that recourse to a regulated stock exchange is a means not ordinarily employed for bona-fide purposes would be to stand the clause upon its head.”

The sentence “directed at the means and the manner, not at the outcome” is the sentence to take into a hearing. Clause (d) is about how the thing was done. It is not a second route to the same conclusion as the stem, and an order that establishes clause (d) by pointing to the tax result has not applied it at all.

The limit of the point should also be stated plainly, because an adviser who overstates it will mislead a client. Clause (d) is not satisfied merely because the venue was ordinary, and it is not answered by showing that the venue was ordinary either. An arrangement can be carried out through entirely conventional channels and still be caught by clause (b) or clause (c). Where a taxpayer has dealt on exchange, clause (d) will usually be the Revenue’s weakest limb and clause (c) its strongest.

Section 99, and how a tax benefit is found where there is none

Section 99, which becomes section 182 of the Income-tax Act, 2025, is one sentence long and is usually read as an appendix to section 98. It operates a stage earlier, at the point of deciding whether a tax benefit exists at all:

“For the purposes of this Chapter, in determining whether a tax benefit exists,—(i) the parties who are connected persons in relation to each other may be treated as one and the same person; (ii) any accommodating party may be disregarded; (iii) the accommodating party and any other party may be treated as one and the same person; (iv) the arrangement may be considered or looked through by disregarding any corporate structure.”

A taxpayer whose own position shows no tax benefit can still be inside the Chapter, because the benefit can be located in a connected person and the two collapsed into one. The answer to “where is my tax benefit?” may be that it is in somebody else’s return.

The same collapsing is what lifts an arrangement over the three crore line. Rule 10U(1)(a) aggregates the benefit across all the parties; section 99 decides who counts as one person for the purpose of finding a benefit at all. An adviser modelling the threshold on the client’s own numbers is modelling the wrong thing.

And a corporate structure can be disregarded for this purpose without anything being decided about the structure itself. Section 99(iv) is a limited look-through, directed only at the existence of a benefit, and it is worth insisting on that limit: a finding under section 99 is not a finding that the company is a sham.

Two further points are worth having. The four items in section 99 reappear almost word for word among the consequences in section 98(1), so the same collapsing does duty twice, once to find a benefit and again to tax it; a taxpayer answering a section 99 finding is therefore answering the consequence as well. And nothing in the section requires the person in whom the benefit is found to be the person assessed, which is what makes it the Revenue’s route into a group.

A two-line example shows the shape of it. A loss is claimed by A, whose own tax saving is two crore rupees and so below the Rule 10U line. B, a company in which A’s spouse holds thirty per cent, takes the matching gain. Collapse A and B under section 99 and the aggregate benefit is above the line, the arrangement is within the Chapter, and the consequences can then be visited on either.

The defence is to attack the connected person finding and the accommodating party finding on the statutory definitions, before arguing about purpose. “Connected person” is defined in section 102(4) and turns on the twenty per cent substantial interest test in section 102(8); “accommodating party” is defined in section 97(3) and requires that the main purpose of that party’s participation be to obtain a tax benefit for the assessee. Both are findings of fact that have to be made, and if they are not made the aggregation falls away with them.

The consequences, if GAAR does bite

Most of the argument in these files is about whether Chapter X-A applies at all, and the consequences if it does repay more attention than they usually get. They are drastic, and they should be explained before a client is told that the worst case is a disallowed loss.

Section 98, which becomes section 181 of the Income-tax Act, 2025, provides by sub-section (1) that where an arrangement is declared impermissible, the consequences in relation to tax, “including denial of tax benefit or a benefit under a tax treaty”, shall be determined in such manner as is deemed appropriate, “including by way of but not limited to” seven listed consequences: disregarding, combining or recharacterising any step or the whole; treating the arrangement as if it had not been entered into; disregarding an accommodating party or treating it and another party as the same person; deeming connected persons to be one and the same person; reallocating any accrual or receipt of a capital or revenue nature, or any expenditure, deduction, relief or rebate, among the parties; treating the place of residence of a party or the situs of an asset or transaction as being somewhere else; and looking through any arrangement by disregarding a corporate structure.

Sub-section (2) adds that for those purposes any equity may be treated as debt or vice versa, any accrual or receipt of a capital nature may be treated as of a revenue nature or vice versa, and any expenditure, deduction, relief or rebate may be recharacterised.

Six practical observations.

The list is open. “Including by way of but not limited to” means the seven consequences are illustrations. There is no closed menu, and an order that does something not on the list is not for that reason bad.

Recharacterisation can increase the tax beyond the benefit denied. Treating equity as debt or a capital receipt as revenue does not merely cancel the arrangement; it can produce a liability the taxpayer never had on any view of the transaction. That is the real exposure in a GAAR file and it is the reason the chapter is described in the EKGE order as visiting “consequences of the gravest kind”.

A treaty is not an answer. Section 90(2) normally allows a taxpayer to take whichever of the Act or the treaty is more beneficial. Section 90(2A), and section 90A(2A) for specified associations, disapplies that rule so far as Chapter X-A is concerned. That is the statutory basis for the words “denial of … a benefit under a tax treaty” in section 98(1) and for the whole of the Tiger Global dispute. Two limits are worth stating: section 90(2A) says nothing about whether the arrangement is impermissible, only that the treaty will not save it if it is; and where the treaty contains its own limitation of benefits article, the taxpayer’s argument is that the contracting states have themselves measured the mischief, which is the treaty analogue of the argument on specific anti-avoidance rules made below.

There is no corresponding adjustment. Chapter X-A contains no mechanism for relieving the mirror treatment adopted by another party or in another year. A reallocation under section 98(1) can therefore leave the same amount taxed twice across a group, and nothing in the Chapter requires the Revenue to unwind the other side. Put the double taxation effect on the record before the Panel, because once directions issue the Assessing Officer has no discretion to mitigate it.

And know Rule 10UA, because it is the only provision that limits consequences. It reads: “For the purposes of sub-section (1) of section 98, where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only.” Three things follow. It is addressed to the determination of consequences and not to the declaration, so it is argued after the declaration has been lost and should therefore be pleaded in the alternative in the objections rather than raised for the first time before the Assessing Officer. Where the impugned part is one leg of a composite transaction, “such part only” is the argument for leaving the commercial transaction around it undisturbed, which is the natural answer to a reference built on the Explanation to section 95. And although the rule speaks of section 98(1), the recharacterisation powers in section 98(2) are expressed to operate “for the purposes of sub-section (1)”, so the better view is that a consequence confined by Rule 10UA confines the recharacterisation with it. Its counterpart under the new Act is rule 127 of the Income-tax Rules, 2026.

The consequences can reach years that are not before the officer. Section 144BA(11) provides that where the Panel’s direction specifies a previous year other than the one in which the reference arose, the Assessing Officer must apply it to that other year, and no fresh direction is needed. So the exposure is not confined to the year under assessment, and a taxpayer must address the other years at the Panel stage.

And there is a penalty question that should be put to the client at the start. A Chapter X-A adjustment is an addition to total income like any other. The Revenue’s position in these files is under-reporting in consequence of misreporting under section 270A, at 200 per cent of the tax on the under-reported income, on the footing that the claim was not bona fide, and immunity under section 270AA is unavailable where misreporting is alleged. The taxpayer’s answer is that a claim made on fully disclosed facts, computed under provisions applied according to their terms and disclosed in the return and the tax audit report, is not misreporting merely because a declaration under section 96 has been made against it, and that the penalty question is separate from and later than the Chapter X-A question. No decided case applying a section 270A(9) finding to a GAAR addition could be traced, so the position is at present a matter of argument rather than of authority, and it should be described to a client in those terms.

GAAR or SAAR: section 100 and the section 94(8) problem

This is the central unresolved question in Indian anti-avoidance law. Before setting it out, one thing should be said plainly: it does not appear anywhere in the EKGE order. Section 100 is not mentioned, section 94(8) is not mentioned, and so far as the published record goes the point was not argued. A reader should not take the decision as authority on it either way.

Section 100, carried into section 183(a) of the Income-tax Act, 2025 word for word, reads in its entirety:

“The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of tax liability.”

Section 95(1) opens “Notwithstanding anything contained in the Act”. Taken together, the Revenue’s case is simple and textually strong: Chapter X-A is a later chapter with an overriding clause, it is expressed to apply in addition to any other basis of determining liability, and nothing in it says that the existence of a specific rule ousts it.

Why the question arises on bonus stripping

The provisions in this section are given in their 1961 numbering only, their 2025 counterparts not having been traced for this article. Section 94 is the Act’s own anti-stripping code. Sub-section (7), unchanged throughout the period relevant to these cases, deals with dividend stripping:

“(7) Where—(a) any person buys or acquires any securities or unit within a period of three months prior to the record date; (b) such person sells or transfers—(i) such securities within a period of three months after such date; or (ii) such unit within a period of nine months after such date; (c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.”

Sub-section (8) deals with bonus stripping. As it stood for assessment year 2018-19 it read:

“(8) Where—(a) any person buys or acquires any units within a period of three months prior to the record date; (b) such person is allotted additional units without any payment on the basis of holding of such units on such date; (c) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b), then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.”

The word is “units”, and “unit” was then defined by the Explanation to mean a unit within the Explanation to section 115AB, that is a mutual fund unit. Sub-section (7), sitting immediately above it, said “securities or unit” throughout. The contrast is within the same section and is hard to read as an accident.

That contrast was tested before GAAR and the taxpayers won. The Tribunal at Bangalore held in DCIT v. B.G. Mahesh, ITA No. 450/Bang/2012, pronounced on 20 September 2013, on shares of Dabur, HCL Technologies and Sundaram Fasteners bought cum-bonus and sold ex-bonus, that the Explanation confined sub-section (8) to mutual fund units and that “the intention of legislative was to exclude the shares of companies from the ambit of the provisions of section 94(8)”. The Tribunal at Pune held the same in DCIT v. Adar Cyrus Poonawalla, ITA Nos. 2252 and 2273/PUN/2014, pronounced on 2 February 2017 on HCL Technologies shares, finding that Parliament “restricted the scope of bonus stripping u/s 94(8) of the Act only to the units and did not extend it to the shares” and rejecting the Assessing Officer’s inference of dubious tax planning.

One caution on B.G. Mahesh before it goes into a submission: the order also records, at paragraph 6.4.1, that the assessee “has not incurred any loss as the loss claimed by him is a notional loss”. The Revenue’s appeal was still dismissed, but that sentence cuts against the clean proposition the case is usually cited for, and it will be produced.

A third decision is often added to that list and should not be, at least not for that proposition. Marine Container Services South Pvt. Ltd. v. ACIT, T.C.(A) No. 17 of 2009, decided by the Madras High Court on 12 November 2018, held that section 94(8) is prospective and “neither curative nor declaratory of the previous law”, setting aside a Tribunal order that had treated it as clarificatory and therefore retrospective. But the case concerns units of a bond fund for assessment year 2004-05, and the point decided is that the sub-section operates prospectively from its own commencement and cannot be applied to an earlier year. It says nothing about whether section 94(8) reaches shares. It is good authority that a new anti-stripping charge is not to be applied backwards, which is a different and narrower proposition.

Then Parliament acted. Section 25 of the Finance Act 2022 substituted “securities or units” for “units” wherever it occurs in section 94(8), and recast the definitions of “record date” and “unit”, with effect from 1 April 2023. So bonus stripping in shares is within the specific rule from assessment year 2023-24. Commentaries attributing this to the Finance Act 2023 are mistaken; that Act did not touch the sub-section, and the error comes from the 1 April 2023 effective date.

The result is a window. For assessment years 2018-19 to 2022-23, GAAR applied and section 94(8) did not reach shares. Every GAAR bonus stripping case so far falls in that window, and the window is not a coincidence: section 94(8) did not reach shares in those years.

The two cases

The Revenue’s case, and it has a judgment behind it. In Ayodhya Rami Reddy Alla the assessee argued that what the specific rule deliberately left out cannot be brought back by the general one. The Court rejected it, on four strands: Chapter X-A came into force after section 94 was enacted, so the later provision prevails; section 95(1)’s non obstante clause gives the Chapter overriding effect; section 100 makes the Chapter applicable in addition to or as a substitute for any other method of determining liability, making GAAR, in the Court’s phrase, an all-encompassing safety net; and the Shome Committee’s view that a specific rule should supersede the general one pertains mainly to international agreements rather than to domestic cases such as that one. The Court also observed that section 94(8) “might be relevant in a simple, isolated case of the issuance of bonus shares”, which concedes something but not much.

The taxpayer’s case, which no court has yet accepted. It has three strands and they are not weak.

First, the Shome Committee, on whose work Chapter X-A in its present form is built, recommended that “where SAAR is applicable to a particular aspect/element, then GAAR shall not be invoked to look into that aspect/element”. Whether that recommendation is confined to treaty cases, as the Telangana High Court held, is a question on which the report itself should be read rather than paraphrased. The official copy of the final report of 30 September 2012 is not reachable by automated retrieval and the freely available mirrors are the draft of 1 September 2012, so the section and page numbers in circulation should not be cited as the final report’s. The recommendation quoted above and the recommendation of a three crore rupee threshold both appear in the draft, and the threshold was accepted by the Government, as the Department’s press release of 14 January 2013 records.

Second, and this is the stronger point, Parliament’s own conduct. If the general rule already reached bonus stripping in shares, the amendment of 2022 was unnecessary. Legislating a specific rule for conduct said to be caught by the general one is at least some evidence that the general one was not understood to cover it. The counter is that Parliament often legislates for certainty and that section 100 expressly contemplates overlap; the counter to the counter is that section 100 permits GAAR to be applied in addition to another basis, which assumes the other basis is available, and says nothing about applying GAAR to supply a rule Parliament declined to enact for the year in question.

Third, a narrower version of the argument that is more likely to work and is usually overlooked. Where section 94(8) does apply, it produces a defined consequence: the loss is ignored and added to the cost of the bonus units, so it is deferred rather than destroyed. If the Revenue invokes GAAR on facts within a specific rule and seeks a harsher consequence under section 98 than that rule provides, the complaint is not that GAAR is unavailable but that the consequence chosen is disproportionate to a mischief Parliament has itself measured. That is an argument about section 98 rather than about section 100, and it does not require the general proposition to be won.

The same argument, in the other places it arises

Bonus stripping is only the instance that has reached court. The same question arises wherever a specific rule already addresses the conduct, and a planner should be able to see the field. The provisions most often overlapping with Chapter X-A are section 93 on the transfer of income to non-residents; section 94(7) on dividend stripping; section 94B on interest limitation in cross-border debt; the transfer pricing code in Chapter X; section 40A(2) on payments to related parties; section 56(2)(x) on receipts for inadequate consideration; section 2(22)(e) on deemed dividend; section 79 on the carry-forward of losses after a change in shareholding; section 115BBE on unexplained income; and the anti-abuse conditions built into the amalgamation and demerger reliefs. In each the argument is the same one set out above, and in each it is open.

The honest summary for a client is this: the argument is available, it is respectable, it has lost once in the only court to decide it, that decision is under appeal, and the narrower version directed at the consequence rather than at the jurisdiction is the one most likely to succeed.

The section 144BA machinery, step by step: reference, Commissioner, Approving Panel

Chapter X-A cannot be applied by an Assessing Officer on his own. Section 144BA, which becomes section 274 of the Income-tax Act, 2025 with twenty-four sub-sections in place of twenty-one, builds a three-stage process, and the practitioner’s leverage is concentrated in the second stage, not the third.

Stage one, the Assessing Officer. Section 144BA(1) provides that if the Assessing Officer, “at any stage of the assessment or reassessment proceedings before him having regard to the material and evidence available”, considers it necessary to declare an arrangement impermissible and to determine the consequence, “he may make a reference to the Principal Commissioner or Commissioner in this regard”. There is no time limit in the section, and the power exists only within a pending assessment or reassessment, so a reference cannot be made in the air.

Before he refers, Rule 10UB(1), which becomes rule 129(1) of the Income-tax Rules, 2026, requires him to issue a written notice to the assessee seeking objections to the applicability of Chapter X-A. That requirement is in the rule and not in the section, which is easy to miss and is a point of attack where it has not been complied with. Rule 10UB(2) specifies what the notice must contain, and the list is a checklist for the defence as much as for the officer: the details of the arrangement, the tax benefit arising under it, “the basis and reason for considering that the main purpose of the identified arrangement is to obtain tax benefit”, “the basis and the reasons why the arrangement satisfies the condition provided in clause (a), (b), (c) or (d) of sub-section (1) of section 96”, and the list of documents and evidence relied upon for the last two. A notice that does not identify which clause of section 96(1) is relied on, and why, does not comply with the rule.

The EKGE record is a clean illustration of that attack, and the Court did not have to deal with it. The notice of 5 April 2021 by which the GAAR question was first raised is described by the petitioner as a notice issued “under Section 142(1) of the Act”, and by the Revenue, narrating the same notice of the same date, as having been issued “under sub-rule (1) of Rule 10UB”. Those are different things. A questionnaire issued under section 142(1) that does not set out the five matters in Rule 10UB(2) is not compliance with Rule 10UB(1), whatever it is called afterwards, and the first thing to do on any file is to obtain the notice and test it against the sub-rule.

The reference itself goes in Form No. 3CEG, which becomes Form No. 62 under the 2026 Rules. The form is said to require the officer to state the last date for completing the assessment, which is how the rest of the machinery is kept inside the section 153 limitation; the form itself could not be read for this article, so ask for it rather than assume its contents.

Stage two, the Commissioner. On receipt of the reference, if the Commissioner is of the opinion that Chapter X-A is required to be invoked, section 144BA(2) requires him to issue a notice to the assessee “setting out the reasons and basis of such opinion”, for objections, “and providing an opportunity of being heard to the assessee within such period, not exceeding sixty days, as may be specified in the notice”. Sixty days is a ceiling on the period he may specify, not an entitlement.

Three outcomes are possible, and the difference between them is the single most important procedural fact in this field. If the assessee does not object, sub-section (3) requires the Commissioner to issue such directions as he deems fit. If the assessee objects and the Commissioner, after hearing him, is satisfied that the Chapter is not to be invoked, sub-section (5) requires him to say so by an order in writing communicated to the Assessing Officer with a copy to the assessee, recorded in Form No. 3CEH. And if the assessee objects and the Commissioner is not satisfied by the explanation, sub-section (4) requires him to refer the matter to the Approving Panel, with his recorded satisfaction in Form No. 3CEI.

So silence costs the Approving Panel. The reference to the Panel under sub-section (4) arises only where the assessee has objected and the Commissioner is unpersuaded. A taxpayer who does not answer the section 144BA(2) notice converts a three-stage process containing an independent, judicially chaired hearing into a decision by one officer, and the resulting direction under sub-section (3) is not even covered by the appeal bar in sub-section (14), which is addressed only to directions under sub-section (6). Answering the notice is therefore the first procedural instruction on any such file, and it should be answered even where the objections are thin.

Rule 10UC gives the Commissioner one month from the end of the month of compliance with the notice to issue directions under sub-section (3), and two months from the end of the month in which the final submission is received to make a reference under sub-section (4).

This is where the file is decided. The Commissioner is the only person in the chain with an unfettered power to stop the matter. Everything that is going to be said to the Approving Panel should be said here first, in writing, with the material annexed.

Stage three, the Approving Panel. Section 144BA(6) empowers the Panel to issue such directions as it deems fit on the declaration, “including specifying of the previous year or years to which such declaration” shall apply. Sub-section (7) bars any direction without an opportunity of being heard, given to the assessee and to the Assessing Officer, on directions prejudicial to that party. Note that the right is conditional, not freestanding: it arises where the direction would be prejudicial. The practical answer is to ask for the hearing expressly and in writing at the first opportunity, to record that any direction adverse to the assessee would be prejudicial within sub-section (7), and to treat a refusal as a ground in itself.

Sub-section (8) lets the Panel direct the Commissioner or another authority to make further inquiry and furnish a report, call for and examine records, or require the assessee to furnish documents and evidence. Where an inquiry is directed, ask for the report and for an opportunity to answer it; a direction founded on material the assessee has not seen is open to the same objection as any other.

Sub-section (9) decides differences by majority. Sub-section (10) requires the Assessing Officer, on receipt of directions under sub-section (3) or sub-section (6), to “proceed to complete the proceedings referred to in sub-section (1) in accordance with such directions”. He has no discretion, which is the real reason the Commissioner stage is decisive and the reason nothing said to the Assessing Officer after the directions is worth saying. Sub-section (11), set out earlier, lets directions govern other years. Sub-section (12) provides that no assessment or reassessment order determining tax consequences under Chapter X-A may be passed without the prior approval of the Commissioner, and that sub-section is the hinge on which the appeal route turns. Sub-sections (17) to (21) deal with the Panel’s term, its meetings and remuneration, the advance-ruling powers it borrows, the officials provided to it, and the Board’s power to make rules for its constitution and functioning.

The clocks. Section 144BA(13), which is section 274(13) of the 2025 Act with the same formula, gives the Panel six months “from the end of the month in which the reference under sub-section (4) was received”. The Explanation that follows excludes the time taken to obtain information through a treaty partner, capped at one year, and the period of any court stay, with a proviso extending the remaining period to sixty days if less than sixty days would otherwise be left. The court-stay exclusion in its present form was substituted with effect from 1 April 2025.

Two things about that period are worth more than the statement of it.

The date it runs from is a date the assessee is never told. It is the date the Commissioner’s reference was received by the Panel, which appears nowhere in the directions and nowhere in anything served on the taxpayer. Ask for it in writing, and ask for Form 3CEI with its date of dispatch and its date of receipt, because without that date the six-month computation cannot be done and a direction cannot be tested. On the EKGE record, for instance, the notice raising GAAR was dated 5 April 2021, the objections were filed on 20 April 2021, the Commissioner’s notice under section 144BA(2) issued on 24 May 2021 and the directions came on 23 February 2022. Those dates allow the Rule 10UC limits to be tested but not the section 144BA(13) limit, because the one number that governs it is missing.

And the consequence of exceeding the six months has not been decided. Section 144BA(13) says the Panel “shall issue directions” within the period and prescribes no consequence. That is the classic mandatory or directory question and it has not been decided. The taxpayer’s argument is that a provision conferring a drastic power, with a fixed outer limit and a judicially chaired body, is mandatory, and that the limit would otherwise be meaningless. The Revenue’s argument is that no consequence is prescribed and that the Explanation’s carefully drawn exclusions show Parliament managing the period rather than conditioning the power. Both are available and the point is worth taking.

Separately, section 153, Explanation 1, clause (xi) excludes from the assessment limitation the period from the date on which the reference under section 144BA(1) is received by the Commissioner to the date on which the Assessing Officer receives a direction under sub-section (3) or (6) or an order under sub-section (5). Note where the period starts: on receipt by the Commissioner, not on the officer’s despatch. The general proviso to Explanation 1 then extends the remaining period to sixty days where less would be left. The practical point is that a GAAR reference costs the Assessing Officer no time at all, so there is no limitation pressure discouraging him from making one.

One question the machinery does not answer. Where the taxpayer is an eligible assessee under section 144C, typically a foreign company, and the draft order contains a Chapter X-A variation, it is not clear how the Dispute Resolution Panel route and the Approving Panel route interact: whether the Dispute Resolution Panel is bound by the Approving Panel’s directions, whether both routes run, and which appeal provision then applies. Section 246A carves out both kinds of order and section 253(1)(e) names only the section 144BA(12) approval. The question is a real one for the population most likely to meet GAAR on treaty facts, and no decision on it could be traced.

And one point to settle at the outset of any search file. Where the Chapter X-A reference is made inside a section 153A proceeding, as it was in EKGE, the threshold question is whether that assessment can carry any addition at all. On the settled line of authority an unabated assessment cannot be disturbed in the absence of incriminating material found in the search, and a Chapter X-A declaration is an addition like any other; the firm’s treatment of that line is set out in its article on what follows an income tax search. The Revenue’s answers are that the assessment had abated because a notice under section 143(2) was pending when the search took place, and that section 144BA(1) permits a reference at any stage of an assessment or reassessment without distinguishing between them. The abatement position should therefore be established before anything else is argued, because if the assessment abated the argument is not available. On the EKGE facts the sequence was a search on 27 and 28 November 2018, a scrutiny notice under section 143(2) on 21 September 2019 which named capital gains and loss among the issues selected, a notice under section 153A fourteen months after the search on 22 January 2020, and a return filed on 20 February 2020 repeating the original claims.

The Approving Panel, and what a hearing before it is worth

Section 144BA(15), which becomes section 274(18) of the Income-tax Act, 2025, provides that the Central Government shall constitute one or more Approving Panels “as may be necessary and each panel shall consist of three members including a Chairperson”. Sub-section (16), which becomes section 274(19), provides that the Chairperson “shall be a person who is or has been a judge of a High Court”, that one member shall be an officer of the Indian Revenue Service “not below the rank of Principal Chief Commissioner or Chief Commissioner of Income-tax”, and that one member shall be “an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices”. The term is ordinarily one year, extendable to three. By sub-section (19) the Panel has the powers vested in the Authority for Advance Rulings under section 245U, and by sub-section (18) it meets as and when required. The reference to the Authority is now an anachronism, the Authority having been replaced by the Board for Advance Rulings; the Income-tax Act, 2025 corrects it at section 274(22), which borrows the powers of the Board under section 387.

The composition is more independent than any other stage of the process. A serving or retired High Court judge in the chair, with a non-official third member, is structurally a better forum than an internal review, and the tone of a submission should be the tone used before a court. Nothing is published about outcomes, so no inference should be drawn beyond the composition itself: in each of the decided cases the Panel had held against the taxpayer, which is what brought the matter to court.

But it is not a court and there is no appeal from it. The combination of a judicial chairperson, a binding direction and no appeal means that the hearing before the Panel is, for most purposes, the only oral hearing the merits will ever receive from an independent person before the assessment is made. It should be prepared accordingly, with a paper book, and with every document the commercial narrative depends on in it. In EKGE the Court twice referred to what the record disclosed and twice criticised the Panel for leaving it unaddressed; that criticism is only available to a taxpayer who put the material on the record.

On the Panel’s own procedure, candour is better than invention. Section 144BA(18) and (21) contemplate that the Panel meets as required and that the Board may make rules for its constitution and efficient functioning, and rules have been made for the Panel beyond those dealing with the reference itself. The detail of what those rules provide for representation, for adjournments, for the filing of additional evidence and for answering a report obtained under sub-section (8) could not be closed against the Gazette for this article, and a practitioner with a live matter should obtain them rather than rely on a secondary account, including this one.

The Panel does decline references, which is worth saying because the system is usually described as though it never did, though the evidence for it is a single reported instance. In DCIT v. Sanjana Cryogenic Storages Ltd., ITA No. 2503/Mum/2026, decided by the Tribunal at Mumbai on 31 August 2026 for assessment year 2022-23, the Assessing Officer had made a section 144BA reference on a buy-back and the Approving Panel, by directions dated 30 January 2025, held that there was no impermissible avoidance arrangement under section 96. The Assessing Officer then taxed the same transaction under section 56(2)(x) instead. The Tribunal treated the Panel’s findings as relevant to the commercial character of the transaction and dismissed the Revenue’s appeal, while expressly declining to decide whether a rejection of GAAR precludes recourse to other provisions. That last question is open and is worth knowing about: a favourable Panel direction is not necessarily the end of the matter.

Appeal and remedy against GAAR directions: section 144BA(14), section 253(1)(e) and the writ

Section 144BA(14), which the Income-tax Act, 2025 splits into section 274(16) for the binding effect and section 274(17) for the appeal bar, provides:

“The directions issued by the Approving Panel under sub-section (6) shall be binding on—(i) the assessee; and (ii) the Principal Commissioner or Commissioner and the income-tax authorities subordinate to him, and notwithstanding anything contained in any other provision of the Act, no appeal under the Act shall lie against such directions.”

Precision matters here, because two opposite errors are common and both are serious.

The bar is confined to the directions. The words are “no appeal under the Act shall lie against such directions”, and “such directions” is anchored to the Panel’s directions under sub-section (6). On its face the bar does not reach a direction of the Commissioner under sub-section (3), which is a point of some value to a taxpayer who failed to object to the section 144BA(2) notice.

The assessment order is appealable, but not to the Commissioner (Appeals). Section 246A, which lists appealable orders before the Commissioner (Appeals), carves GAAR assessments out: several of its clauses are expressed as applying “except an order passed in pursuance of directions of the Dispute Resolution Panel or an order referred to in sub-section (12) of section 144BA”. The route instead is section 253(1)(e), which becomes section 362(1)(e) of the Income-tax Act, 2025, and which gives a direct appeal to the Appellate Tribunal against “an order passed by an Assessing Officer under sub-section (3) of section 143 or section 147 or section 153A or section 153C with the approval of the Principal Commissioner or Commissioner as referred to in sub-section (12) of section 144BA”, or an order under section 154 or 155 in respect of such an order. The architecture mirrors the Dispute Resolution Panel route: one tier is removed and the matter goes straight to the Tribunal.

So two statements that are frequently made are both wrong. “Section 144BA(14) bars an appeal against a GAAR assessment” is wrong: it bars an appeal against the Panel’s directions. “A GAAR assessment is appealable to the Commissioner (Appeals)” is also wrong: section 246A excludes it.

What follows is the reason every GAAR case so far has come up as a writ petition. A taxpayer who wants the directions themselves set aside, before an assessment is made on them, has no remedy under the Act at all. Article 226 is the only route, and that is why Ayodhya Rami Reddy Alla, Anvida Bandi and EKGE Retail are all writs. The EKGE petitioner put it exactly that way, pleading that because section 144BA(14) bars an appeal and makes the directions binding on the assessee and on the Revenue alike, he “was left with no other alternative efficacious remedy”. It should be said accurately that this is the petitioner’s case as the judgment records it; the Court did not return to maintainability in its reasoning, and simply entertained the petition and allowed it.

The Revenue’s answer should be anticipated rather than assumed to have been run, because on the face of the two reported records it has not been, at least not in this form. In EKGE the Revenue’s submissions as recorded contain no maintainability objection at all; in Ayodhya Rami Reddy Alla the objection taken was the narrower one that writ jurisdiction is not meant to assail show cause proceedings, and section 253(1)(e) is not mentioned in either judgment. The argument available to the Revenue is that the taxpayer should wait for the assessment and appeal to the Tribunal under section 253(1)(e), and that a writ against an intermediate direction involving disputed questions of fact is not maintainable. That answer has force where the complaint is about the correctness of a factual conclusion, and much less where the complaint is that the Panel applied the wrong test or never addressed an ingredient. The distinction to press is between a challenge to the evaluation and a challenge to the approach, and it is the latter that belongs in a writ court.

Ask for substantive relief, not a remand. This is the practical lesson of EKGE and it is easily missed. The Court did not merely quash the directions. It held that the Revenue had failed on each ingredient, and then declared that “The petitioner is entitled to the benefit of set-off claimed under Section 70(2) of the Act in respect of the short-term capital loss of Rs.49,32,71,673/- against the long-term capital gains arising on the slump sale”, answering the question of law in his favour and setting the directions aside without remitting anything. A writ petition that pleads the record fully, and asks in terms for a declaration of entitlement rather than for a fresh exercise, makes that outcome available.

It is also the part of the order most exposed on appeal, and a practitioner should know that before relying on it. The Revenue’s best point against EKGE is precisely this: that a writ court has decided a question of purpose, which is a question of fact, on affidavit, without remitting it to the body Parliament constituted to decide it, and that where the complaint is that the Panel failed to engage with the record the orthodox order is a remand for it to do so. EKGE’s answer, which a defender should have ready, is that where the Revenue has failed to discharge a burden on the material it chose to put forward there is nothing to remit, because it does not get a second opportunity to make out a case it did not make. The same objection was available in Ayodhya Rami Reddy Alla and was not needed there, because the writs were dismissed.

What the three Telangana decisions actually decide

Almost the whole of the Indian case law on capital loss harvesting under GAAR comes from one High Court, and the same judge has presided over all three decisions.

	Ayodhya Rami Reddy Alla	Anvida Bandi	EKGE Retail LLP
Number and date	W.P. 46510 and 46467 of 2022, 7 June 2024	W.P. 3201 of 2023, 22 August 2025	W.P. 21210 of 2022, 13 October 2026
Bench	P. Sam Koshy and Laxmi Narayana Alishetty JJ	P. Sam Koshy and Suddala Chalapathi Rao JJ	P. Sam Koshy ACJ and Narsing Rao Nandikonda J
Assessment year	2019-20	2020-21	2018-19
The gain sheltered	Long-term gain on shares of a group company	Long-term gain of about Rs 44 crore	Slump sale gain of Rs 1,75,91,50,508 under section 50B
The loss	About Rs 462 crore	About Rs 17.65 crore	Rs 49,32,71,673
The shares	A group company, after a bonus issue	Listed, on a recognised exchange	Listed, on a recognised exchange, before and after bonus issues
How sold	To a named related entity at Rs 19.20 a share, allotments having been made on private placement	On exchange	On exchange
Decided on	Commercial substance, section 97; burden on the taxpayer under section 96(2)	No arrangement; main purpose not established; timing alone insufficient, on the Expert Committee’s report	No arrangement under section 102(1); main purpose not established; clauses (b) and (d) not made out
Outcome	Writs dismissed, GAAR upheld	Writ allowed, directions quashed	Writ allowed, directions set aside
Status	Under appeal, Civil Appeal No. 9790 of 2024, not disposed of	No appeal traced	Recent

Read across that table and the apparent conflict narrows considerably, though the reconciliation has to be stated carefully.

The distinction that does the work is the identity of the counterparty. It is tempting to describe Ayodhya Rami Reddy Alla as an off-market case about unlisted shares and the other two as exchange cases, and much of the commentary does. The judgment itself does not use the words “off market”, “unlisted” or “listed”. What it does record is that the allotments were made on a private placement basis, that the petitioner sold the shares to Advisory Services Pvt. Ltd., described as another related entity, at Rs 19.20 per share against a pre-bonus value of about Rs 115, and that the funds with which that buyer paid were provided by another group company. The characterisation is therefore the reader’s inference from those facts and not a finding of the Court, and it should be put that way in a submission. The inference is a fair one: none of those features is available where the trade is screen-based, and every element of section 96(1) is easier for the Revenue where they are present. Rights not ordinarily created at arm’s length under clause (a); the circulation of funds within a group, which is round trip financing territory under section 97(2) and so a deemed lack of commercial substance under clause (c); and a manner not ordinarily employed under clause (d). In the two later cases the trades were screen-based, the counterparty was anonymous, the price was the market’s and securities transaction tax was paid.

The reconciliation is the reader’s, not the Court’s. The EKGE order does not mention Ayodhya Rami Reddy Alla or Anvida Bandi anywhere. No reported commentary records Anvida Bandi engaging with Ayodhya either. So far as the published record goes, the same High Court has decided the same question three times without once addressing its own earlier decision. For a practitioner that has two consequences. In Telangana, the Revenue will cite Ayodhya and there is no judicial answer to it in the later cases to point to, only a factual distinction you will have to draw yourself. Outside Telangana, a court asked to follow EKGE will be shown Ayodhya and will have to choose between two decisions of equal standing, one of which is under appeal.

And the three differ on the law, not only on the facts. On burden, Ayodhya says section 96(2) places the responsibility on the taxpayer and Anvida Bandi is reported to say the presumption arises only after a section 96(1) condition is shown. On the structure of section 96(1), EKGE states the orthodox two-condition test and Anvida Bandi is reported to treat the four limbs as cumulative. Those are not factual differences and they cannot be reconciled by pointing at the exchange.

A final point of fairness to Ayodhya Rami Reddy Alla, which is sometimes described as though it were a decision that bonus stripping is always abusive. It is not. The Court’s reasoning was tied to a finding that the arrangement was devoid of commercial substance on facts that included a sale to a related party and the movement of funds within a group, and it said in terms that section 94(8) “might be relevant in a simple, isolated case of the issuance of bonus shares”. Read as a decision on its facts it is considerably narrower than its reputation. Two blemishes on the face of it are worth knowing before it is quoted: the judgment gives the bonus ratio as 5:1 at paragraph 4 and as 1:5 at paragraph 22, and it twice renders section 144BA as “144AB”.

The Supreme Court, and what is not yet known

Two matters above the High Court bear on this and neither is mentioned in the October 2026 order.

The appeal in Ayodhya Rami Reddy Alla. The judgment of 7 June 2024 was challenged, and the challenge has gone further than most. Leave was granted on 12 August 2024 and the matter is registered as Civil Appeal No. 9790 of 2024, heard with Civil Appeal No. 9896 of 2024 in the companion matter. By an interim order dated 18 October 2024, Abhay S. Oka and Augustine George Masih JJ directed that no further proceedings be taken on the basis of the show cause notice dated 14 December 2022, and listed the appeal for hearing on 5 February 2025. No order after 18 October 2024 could be traced as at the date of this article, and the appeal has not been disposed of. The correct way to describe this in a submission is that leave has been granted and a civil appeal is pending; describing it as a pending special leave petition is wrong, and matters, because leave having been granted the High Court’s reasoning is squarely in issue.

So the only decision upholding GAAR on this technique is a decision under appeal with an interim order in the taxpayer’s favour, and the two decisions quashing it do not refer to it.

The Tiger Global judgment. On 15 January 2026 the Supreme Court decided Authority for Advance Rulings (Income Tax) v. Tiger Global International II Holdings, Civil Appeal Nos. 262 to 264 of 2026, neutral citation 2026 INSC 60, by Pardiwala and Mahadevan JJ, the judgment written by Mahadevan J with a separate concurring judgment by Pardiwala J. It arose from the sale of Flipkart Singapore shares by three Mauritius companies to the Walmart group in 2018, and from the Authority’s rejection of advance ruling applications under proviso (iii) to section 245R(2) on the footing that the transaction was prima facie designed for the avoidance of tax. The Delhi High Court had set that rejection aside on 28 August 2024; the Supreme Court allowed the appeals and set the High Court judgment aside.

This article is going to be more cautious about that judgment than most of what has been written on it, and the reason should be stated openly. The judgment runs to 133 pages plus a concurring opinion, and its operative part, the Discussion and Findings beginning at page 104, the Conclusion at page 132 and the Result at page 133, is not available in any freely accessible full text: the official file and every free reproduction truncate at about page 70, inside a long quotation from Vodafone. What follows separates what can be read from what cannot.

What is verifiable. The Court framed the question for itself in these terms: whether the Authority was right in rejecting the applications on the ground of maintainability by treating the capital gains to be prima facie an arrangement for tax avoidance, and whether that could be enquired into. It said it was inclined “to deal with the core issue alone”. That framing is important and is the reason for the caution: the question before the Court was a threshold question about the Authority’s jurisdiction to reject an application, decided on a prima facie standard, and not a determination under Chapter X-A, which would require the section 144BA machinery that had never been invoked.

What is reported but could not be verified. Commentaries record the Court as having held that the transactions were impermissible avoidance arrangements and that the assessees were not entitled to treaty exemption; that a tax residency certificate is an eligibility condition rather than conclusive proof; that the grandfathering in Rule 10U(1)(d) attaches to investments while Rule 10U(2) applies to arrangements, so that the cut-off runs from the date of transfer; that the onus shifts to the taxpayer; and that judicial anti-avoidance doctrine operates in parallel with the statute and can be invoked even where GAAR is inapplicable. Those accounts converge, and the convergence is some comfort, but none of the sentences has been checked against the judgment itself and no source identifies which clause of section 96(1) the Court applied, if any. The concurring opinion is reported to set out a list of safeguards to be sought in future treaty negotiation; the published accounts give the number variously as four, five, seven, ten and twelve, which is a reason to describe it as a set of suggested safeguards and not to put a figure on it.

Which makes the ratio question real rather than pedantic. Several professional commentators have made the point independently: a conclusion expressed in impermissible-avoidance language, reached on a prima facie standard in a jurisdictional enquiry about an advance ruling, without the Approving Panel process and without the taxpayer having had the hearing that Chapter X-A requires, is not obviously a determination under Chapter X-A at all. A practitioner met with Tiger Global across the table should ask which paragraph is relied on, for what proposition, and whether it is part of the ratio of a decision on section 245R(2). That is a fair question and at present it does not have a published answer. The Revenue’s reply to it is that a judgment of the Supreme Court expressed in impermissible-avoidance language binds under Article 141 whatever the jurisdictional frame in which it was given, which is an answer that will have to be met rather than brushed aside.

One consequence is already on the statute book. Whatever the Court held about Rule 10U, the executive moved quickly afterwards: Rule 10U(1)(d) and Rule 10U(2) were both substituted with effect from 31 March 2026, and the corresponding rule under the Income-tax Act, 2025 with effect from 1 April 2026. Anyone arguing a grandfathering point today must work from the substituted text and not from the version quoted in the 2024 and 2025 commentary.

Judicial anti-avoidance alongside the statute

GAAR did not arrive on empty ground, and the older doctrine still matters, both because it governs pre-2018 years and because the Revenue argues that it survives alongside the statute.

McDowell, and the attribution that is usually got wrong. McDowell & Co. Ltd. v. Commercial Tax Officer, Civil Appeal No. 570 of 1983, was decided on 17 April 1985 by a Constitution Bench of Chandrachud CJ, Chinnappa Reddy, Desai, Ranganath Misra and Venkataramiah JJ, and is reported at (1985) 3 SCC 230 and (1985) 154 ITR 148. The passage everybody quotes is:

“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.”

That passage is Ranganath Misra J’s, for the majority. It is routinely attributed to Chinnappa Reddy J, and the word “colourable” does not appear anywhere in his separate opinion. What is Chinnappa Reddy J’s is the far wider proposition that the time had come to depart from the Westminster principle and that it had been given “a decent burial”, and it is that proposition, not the colourable devices passage, which the Supreme Court later declined to adopt.

Azadi Bachao Andolan drew the line. In Union of India v. Azadi Bachao Andolan, Civil Appeals Nos. 8161-8162 and 8163-8164 of 2003, decided on 7 October 2003 by Ruma Pal and Srikrishna JJ with the judgment delivered by Srikrishna J, reported at (2004) 10 SCC 1 and (2003) 263 ITR 706, the Court upheld Circular No. 789 and declined to treat treaty shopping as unlawful in the absence of a limitation of benefits clause. On McDowell it was explicit. It introduced the colourable devices passage as the words of Ranganath Misra J “speaking for the majority”, described that opinion as “a far cry from the view of Chinnappa Reddy, J”, and concluded:

“We are afraid that we are unable to read or comprehend the majority judgment in McDowell as having endorsed this extreme view of Chinnappa Reddy, J”

It added a caution that remains useful in any GAAR hearing:

“These words are not intended to be used as magic mantras or catchall phrases to defeat or nullify the effect of a legal situation.”

One point of precision for anyone quoting the taxpayer’s right to arrange his affairs: Azadi Bachao does not state it in its own voice, and it is commonly misattributed. The proposition that the subject may arrange his affairs so as not to attract tax is quoted there from Lord Sumner in Fisher’s Executors; the Duke of Westminster passages reproduced are Lord Atkin’s, on the subject’s legal right to dispose of his capital and income so as to attract the least tax, and Lord Tomlin’s, on documents used as a cloak to conceal a different transaction. Lord Russell of Killowen is mentioned only at one remove, as having been quoted with approval in an earlier Constitution Bench decision. The Court also quotes with approval the Gujarat High Court in Banyan and Berry. Its own nearest holding is that an act which is otherwise valid in law cannot be treated as non-est merely on the basis of some underlying motive. The practical answer to all of this is now EKGE itself, which states the proposition in its own voice and does so inside Chapter X-A rather than outside it.

Vodafone settled the method. Vodafone International Holdings B.V. v. Union of India, Civil Appeal No. 733 of 2012, was decided on 20 January 2012 by Kapadia CJI, Radhakrishnan and Swatanter Kumar JJ, the main judgment delivered by Kapadia CJI for himself and Swatanter Kumar J with a separate concurring judgment by Radhakrishnan J, reported at (2012) 6 SCC 613. At paragraph 71 the Court held that section 9(1)(i) “is not a ‘look through’ provision” and that providing for look-through “is a matter of policy”. At paragraph 73 it held that “In this case we need to apply the ‘look at’ test”, that “the task of the Revenue is to ascertain the legal nature of the transaction” and that “it has to look at the entire transaction holistically and not to adopt a dissecting approach”. At paragraph 64 it held that “it cannot be said that all tax planning is illegal/illegitimate/impermissible”, that “colourable device cannot be a part of tax planning”, and that “there is no conflict between McDowell and Azadi Bachao”.

Chapter X-A is Parliament’s answer to Vodafone on the first point: it supplies by statute the look-through that the Court held was a matter of policy. That is why arguments drawn from Vodafone about the limits of judicial anti-avoidance have less force inside Chapter X-A than outside it, and a submission that relies on Vodafone without acknowledging that should expect to be told so.

Does the judicial doctrine survive GAAR? The Telangana High Court in Ayodhya Rami Reddy Alla treated Chapter X-A as a structural codification of the earlier judicial rules and applied both, and the Supreme Court in Tiger Global is reported to have held that judicial anti-avoidance operates in parallel with the statute and can be used even where GAAR is inapplicable. That proposition has a real edge for taxpayers. If it is right, the Rule 10U gates are not a safe harbour at all: a tax benefit of two crore rupees, or income from an investment made in 2015, escapes Chapter X-A but not the doctrine. Whether a judicially developed rule can be applied to do what Parliament has set conditions for doing, and has declined to do below those conditions, is a question that has not been argued out, and it is the other large open question in this area. The Revenue’s answer to it is that the judicial doctrine is not a competing anti-avoidance power at all but a rule for construing the charging and computation provisions, so that the conditions in Rule 10U, which are conditions on the exercise of a statutory power, have nothing to say to it.

Dividend stripping before section 94(7): what Walfort decided

The closest analogue to bonus stripping decided by the Supreme Court is dividend stripping, and the decision is CIT v. Walfort Share and Stock Brokers P. Ltd., Civil Appeal No. 4927 of 2010, decided on 6 July 2010 by Kapadia CJI and Swatanter Kumar J, reported at (2010) 8 SCC 137 and (2010) 326 ITR 1.

The facts are the clearest statement of the technique in the decided cases. On 24 March 2000, the record date, the assessee bought units of a mutual fund at a net asset value of Rs 17.23 and received a tax-free dividend of Rs 4 per unit, Rs 1,82,12,862.80 in all. On 27 March 2000, the next trading day, the net asset value had fallen to Rs 13.23, exactly the dividend, and the assessee sold the whole holding. It claimed the dividend exempt and set off the resulting loss. The Assessing Officer disallowed the loss to the extent of the dividend as artificial and tax-motivated.

The Supreme Court held the disallowance wrong. The year was before section 94(7) applied, and the Court said:

“We are of the view that the AO had erred in disallowing the loss.”

“Hence, in the cases arising before 1.4.2002, losses pertaining to exempted income cannot be disallowed.”

“Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction.”

And on what Parliament had done about it:

“the Parliament has not treated the dividend stripping transaction as sham or bogus.”

“The object of Section 94(7) is to curb the short term losses.”

The case pulls in different directions, which is why it is worth reading rather than citing.

For the taxpayer. A deliberately planned loss, engineered to the rupee against a known corporate action, was held genuine and allowable before the specific rule applied to it, and Parliament’s response was a measured rule that ignores the loss only to the extent of the dividend rather than condemning the transaction.

For the Revenue. Walfort was decided in 2010, eight years before GAAR applied. It says nothing about Chapter X-A and it could not. Its holding that the loss is allowable is a holding about the computation provisions and section 14A, not about a chapter that empowers the Revenue to disregard a transaction notwithstanding anything in the Act. Section 95(1) was enacted precisely to change the position Walfort describes.

And for both. Walfort contains no sentence about bonus stripping. An order or a submission that attributes one to it is wrong, and the mistake is made often enough to be worth checking before it is relied on.

What the Board has said: Circular No. 7 of 2017

The Central Board of Direct Taxes issued sixteen clarifications on GAAR in question and answer form on 27 January 2017, shortly before the Chapter took effect. It will be produced across the table and a practitioner should know what is in it, with a caution about the source.

The caution first. The Department’s own published file of the circular is a scanned image without a text layer and could not be read for this article, and the departmental bulletin that reproduces it is not reachable. What follows is taken from the Press Information Bureau release of the same date, which is official but is a summary, and from independent reproductions of the full text which agree with each other. It should be checked against a printed copy before any of it is quoted in a submission.

The first answer is the one that matters most here, and it goes against the taxpayer. Question 1 asks whether GAAR will be invoked if a specific anti-avoidance rule applies. The Board’s answer is that it may:

“It is internationally accepted that specific anti avoidance provisions may not address all situations of abuse and there is need for general anti-abuse provisions in the domestic legislation. The provisions of GAAR and SAAR can coexist and are applicable, as may be necessary, in the facts and circumstances of the case.”

So the Board did not adopt the Shome Committee’s recommendation that a specific rule should displace the general one on the element it covers; it declined to. Anyone running the argument set out earlier in this article must meet that answer, and must meet it knowing that it is the Revenue’s own published position and not merely counsel’s. The answer is not fatal to the argument, because a circular cannot control the construction of a section and because the Board’s words still leave the question to “the facts and circumstances of the case”, which is precisely where the proportionality point about the consequence belongs. But an article that told you the Board was on your side here would be doing you no favours.

Three other answers bear directly on this subject.

Court and tribunal sanction, question 8. Asked whether GAAR will be invoked where an arrangement is sanctioned by a court, the National Company Law Tribunal or settled judicial precedent, the Board answered that “Where the Court has explicitly and adequately considered the tax implication while sanctioning an arrangement, GAAR will not apply to such arrangement.” Read the qualification: sanction alone is not enough, and the question in any scheme case is what the tribunal was actually shown about tax. That is directly in point on facts like EKGE’s, where the identity of the person who made the gain and the person who claimed the set-off is supplied by two amalgamation orders.

The threshold, question 14. The Board confirmed that the Rs 3 crore limit is tested by reference to the tax benefit arising from the arrangement, aggregated across the parties in a year, rather than taxpayer by taxpayer, which is how Rule 10U(1)(a) reads.

Consistency across years, question 15. Where the Approving Panel has held an arrangement permissible, the Board’s answer is that the Revenue will not ordinarily reopen that question for a later year on the same facts. That is worth having on a file where a technique recurs annually.

The circular also deals with grandfathering of bonus issues, splits and conversions, with leases and loans, with foreign portfolio investors and participatory notes, with the interaction between a treaty limitation of benefits article and the Chapter, with corresponding adjustments, and with a five-year immunity from penalty in certain cases. Those are outside the scope of this article and are listed so that the reader knows what else is in the document. There is nothing in it about the position of a deductor at the withholding stage.

The Department’s case, at its highest

It is worth setting out before the answers, because a taxpayer who has read only the decisions in his favour is not prepared. What follows is the case as a standing counsel would build it, not the case that was actually run in EKGE.

Start with the statute’s own instruction. Chapter X-A opens with a non obstante clause and section 100 says it applies in addition to or in lieu of any other basis for determining liability. Parliament enacted a general rule precisely because specific rules are always behind the planning, and the Board has said in terms that GAAR and a specific rule can coexist and are applied as the facts require. The taxpayer’s argument that a specific provision occupies the field is therefore contrary both to the text and to the Revenue’s published position, and has been rejected by the only court to decide it.

Then attack the construction, not the facts. The strict-construction canon on which the whole of EKGE rests comes from EKGE and from nowhere else. No decision of the Supreme Court applies such a canon to this Chapter, and a rule directed at avoidance which is read down against the Revenue defeats the purpose for which it was enacted. The definitions were drawn wide deliberately: “arrangement” extends to a step, to a part, and to an understanding that is not enforceable, and the Explanation to section 95 says the Chapter applies to a step as it applies to the whole.

And the threshold holding reads a requirement into the definition that is not there. Section 102(1) requires a transaction, operation, scheme, agreement or understanding, or a step in one. It nowhere requires that the outcome be determinate. The steps in a bonus stripping programme are entirely pre-ordained; what is not pre-ordained is how much the trade makes. If an arrangement needs a determinate outcome, then no unilateral multi-step restructuring carried out by one taxpayer at market prices can ever be an arrangement, which would take a large part of the Chapter out of use. Nor does the statute require two or more identifiable parties; that requirement is judicial gloss.

On purpose, the record supplies the admissions. The order itself records that the taxpayer was advised in advance that buying pre-bonus and selling post-bonus would yield a short-term return and that it invested with a view to achieving that objective. The purchases cluster before record dates, the sales follow the allotments, and the quantity sold matches the original holding. The written allocation was about Rs 50 crore to equities and Rs 106.31 crore went into pre-bonus shares. And the retention relied on so heavily is, on the face of section 94(8)(c), the parcel that the technique itself assumes a bonus stripper will hold.

Where the taxpayer’s own benefit is modest, section 99 answers it. Connected persons may be collapsed and an accommodating party disregarded for the very purpose of deciding whether a tax benefit exists, which is also how the arrangement is brought over the three crore line.

The limb that was never pleaded is the strongest one. Section 97(1)(d) asks whether the arrangement has a significant effect on the business risks or net cash flows of any party apart from the tax benefit. A fortnight’s market exposure on a matched purchase and sale is slight against a loss sheltering a gain many times its size. Section 97 was not argued in EKGE and clause (a) was not invoked, so the version of the Revenue’s case that won in Ayodhya Rami Reddy Alla has never been tested on exchange-traded facts.

There is now a Supreme Court decision, and the Revenue will open with it. Whatever the limits of Tiger Global as a determination under Chapter X-A, it is reported to hold that the onus shifts to the taxpayer and that judicial anti-avoidance doctrine survives alongside the statute. A High Court asked to construe the Chapter strictly against the Revenue will be shown it, and the answer that it was a decision on section 245R(2) has to be made rather than assumed. The Revenue’s reply to that answer is that a judgment of the Supreme Court expressed in impermissible-avoidance language binds under Article 141 whatever the jurisdictional frame in which it was given.

And the relief granted in EKGE is vulnerable on its own terms. A writ court decided purpose, which is a question of fact, on affidavit, and declared an entitlement to the set-off rather than remitting the matter to the body Parliament constituted to decide it. Where the complaint is that the Panel failed to engage with the record, the orthodox order is a remand so that it can. On a search file the Revenue adds that the reference was made inside a section 153A proceeding which had abated, so the incriminating-material argument is not available either.

That case failed on the EKGE facts, and it failed for reasons about evidence rather than sympathy: the Revenue identified no step whose main purpose it could demonstrate, left the commercial narrative unanswered, and advanced clauses (b) and (d) by pointing to the tax result rather than to the misuse or to the manner. But it failed as it was run. EKGE’s own best answer to the remand point, which a defender should have ready, is that where the Revenue has failed to discharge a burden on the material it chose to put forward there is nothing to remit, because it does not get a second opportunity to make out a case it did not make.

The clause the auditor has to answer first: Form 3CD clause 30C

Before any of the defence below is reached, a chartered accountant has usually already answered the GAAR question once, in a document signed and filed before any notice issued. This is the most immediate professional exposure in the whole subject and it is rarely discussed.

Clause 30C of Form No. 3CD, prescribed under rule 6G(2), reads:

“30C. (a) Whether the assessee has entered into an impermissible avoidance arrangement, as referred to in section 96, during the previous year? (Yes/No)

(b) If yes, please specify:—

(i) Nature of the impermissible avoidance arrangement:

(ii) Amount (in Rs.) of tax benefit in the previous year arising, in aggregate, to all the parties to the arrangement:”

It was inserted, together with clause 30A on secondary adjustments and clause 30B on the interest limitation, by the Income-tax (Eighth Amendment) Rules 2018 with effect from 20 August 2018.

And it is operative, whatever you may have been told. Reporting under clause 30C was kept in abeyance by four successive circulars: Circular No. 6/2018 of 17 August 2018 to 31 March 2019, Circular No. 9/2019 of 14 May 2019 to 31 March 2020, Circular No. 10/2020 of 24 April 2020 to 31 March 2021, and Circular No. 5/2021 of 25 March 2021 to 31 March 2022. There is no circular after that. Reporting has therefore been live for every tax audit report furnished on or after 1 April 2022. Commentary still describing the clause as deferred has been wrong for four years, and some of it cites Circular No. 2/2024 for a further deferral, which is a circular about Form 10B and Form 10BB for trusts and has nothing to do with Form 3CD. Of the circulars above, only the first could be read in an official source for this article, through the Press Information Bureau release announcing it; the other three are corroborated across professional sources including the Institute’s own Guidance Note, which names Circular No. 5/2021 as the operative deferral.

Read what the clause actually asks, because it is remarkable. It asks the auditor to say whether the assessee has entered into an impermissible avoidance arrangement “as referred to in section 96”. It does not mention section 144BA. It does not mention the Approving Panel. And it carries no threshold, where Rule 10U(1)(a) keeps the Chapter out altogether below three crore rupees, so the set of arrangements reportable under clause 30C and the set to which Chapter X-A applies are not the same set.

The difficulty follows from the architecture described earlier in this article. A declaration that an arrangement is impermissible can be made only through section 144BA, after a notice, objections and a hearing, by a three-member panel chaired by a serving or former High Court judge, and the resulting directions bind the Commissioner as well as the assessee. Neither the Assessing Officer nor the Commissioner can reach that conclusion alone. Clause 30C nevertheless asks a chartered accountant to answer it, in a form signed before any of that machinery has been engaged.

The Department’s own reference material does not engage the problem: it sets out four cumulative ingredients the auditor is to satisfy himself about, including that the arrangement is “impermissible”, and says nothing about section 144BA, the Approving Panel or Rule 10U. The Institute’s Guidance Note on tax audit does address clause 30C, and on the summaries available it directs the auditor to the narrower and more defensible enquiry of whether the Commissioner or the Approving Panel has already declared an arrangement impermissible or referred one for declaration, and to indicate in Form 3CA or 3CB where the aggregate tax benefit cannot be ascertained. The relevant pages of the Guidance Note could not be read for this article, so that account is taken from secondary summaries and the Guidance Note should be read before it is relied on. The Bombay Chartered Accountants’ Society has put the objection more bluntly, that a tax auditor “is not competent to say that a particular arrangement is an impermissible avoidance arrangement” because “it is only the Approving Panel which can declare an arrangement as impermissible avoidance arrangement”, and has proposed a disclaimer.

The practical course, pending anything authoritative, is a reasoned negative answer rather than a bare one: record in the working papers the basis on which the answer was given, including the Rule 10U computation showing the aggregate tax benefit, obtain a management representation, and consider a qualifying note where the position is genuinely open. An unqualified “No” that the Revenue later contradicts is the first document produced across the table. A “Yes” entered out of caution is an admission on the central issue, made by someone the statute does not authorise to make it.

One change worth knowing for tax year 2026-27. The successor to Form 3CD under the Income-tax Act, 2025 is Form No. 26, prescribed by rule 47 of the Income-tax Rules, 2026. Its Part D particulars carry forward the neighbours of clause 30C, the secondary adjustment becoming clause 40 and the interest limitation clause 41, but they contain no counterpart to clause 30C. On the notified form the GAAR reporting obligation in the tax audit report does not survive the move to the new Act. Note also that Form No. 26 has a clause numbered 44, which is unrelated to the old clause 44 on goods and services tax expenditure; that becomes clause 52(b).

Defending a GAAR reference

Roughly in this order. The first three are arithmetic and dates rather than argument, and they are capable of disposing of the file before any of the doctrine is reached. The provision numbers given are the 1961 Act’s, which govern the years now under assessment and appeal; for tax year 2026-27 onwards read section 179 for section 96, section 180 for section 97, section 274 for section 144BA and rule 128 for rule 10U, and the concordance table below for the rest.

Work Rule 10U before anything else. Compute the tax benefit on the Rule 10U(3)(iv) basis, which for an increase in loss is the tax that would have been chargeable had the increase been the total income, and aggregate it across all the parties for the relevant assessment year, taking “party” from section 102(6) and bearing in mind that section 99 lets connected persons be collapsed. If the aggregate is three crore rupees or less, Chapter X-A does not apply. Then check when the investment was made: if the income is from the transfer of an investment made before 1 April 2017, clause (d) is engaged, and check which version of clause (d) and sub-rule (2) governs the year.

Check the year. Chapter X-A applies only from assessment year 2018-19. For an earlier year the Revenue is on the judicial doctrine, and an order that uses section 95 or section 97 as an aid to construction in a pre-GAAR year should be challenged for doing so rather than answered on its merits.

On a search file, settle abatement first. Where the reference is made inside a section 153A proceeding, whether that assessment can carry any addition at all depends on whether it had abated, and that question comes before everything in this article.

Answer the section 144BA(2) notice, whatever the state of the objections. Silence costs the Approving Panel altogether, because the reference under sub-section (4) arises only where the assessee has objected. This is the single most consequential procedural step in the chapter and it is lost by inaction.

Force the Revenue to name the clause. Rule 10UB(2)(iv) requires the pre-reference notice to state “the basis and the reasons why the arrangement satisfies the condition provided in clause (a), (b), (c) or (d) of sub-section (1) of section 96”, and sub-clause (v) requires the documents and evidence relied on for it. A notice that asserts an impermissible avoidance arrangement without identifying the clause has not complied, and the omission matters: the four clauses require different evidence, and a taxpayer who does not know which is alleged cannot answer it. Check also whether the notice was issued under Rule 10UB(1) at all, or whether it was a section 142(1) questionnaire later described as one.

Separate the two conditions in your reply, and answer them separately. Deal with the threshold under section 102(1) first, then the main purpose, then the identified clause. Do not run them together, because the Revenue’s characteristic error is to run them together and the defence depends on keeping them apart. Open on the strict construction holding in EKGE, which is the answer to the width of the definitions.

Answer the main purpose question with contemporaneous documents, not with assertions. What won EKGE was a record: advice taken from named institutions, an internal consultant retained, funds parked in liquid instruments pending a decision and returning income that was itself offered to tax, a written allocation between asset classes, and a rationale for the trade that existed before the trade. Board minutes, investment committee notes, advisers’ letters, the mandate given to a portfolio manager and the research note on which the trade was placed are the material. A narrative constructed after a section 144BA(2) notice is worth very little and looks like what it is. Where the execution departed from the written plan, explain the departure in the same document set rather than leaving the Revenue to find it.

Put the group’s own assessment history on the record. Where the reference follows a search or a group-wide exercise, tabulate the other assessments and their outcomes. The comparison was an independent ground in EKGE and it is discoverable material the taxpayer already has.

Meet section 97 even if it has not been pleaded. It is the limb on which the one adverse decision was given. Be ready on duration with section 97(4)(i), which provides that the period for which an arrangement exists “may be relevant but shall not be sufficient”; on offsetting elements under section 97(1)(b)(iii); and on business risks and net cash flows under section 97(1)(d) with the actual price movement over the holding period, including the trades that lost money.

Put every point to the Commissioner, not to the Panel. He is the only person in the chain who can stop the matter under section 144BA(5), and he must act within the Rule 10UC limits. Treat the objections as the main submission of the case, annex the paper book, and ask for the personal hearing that sub-section (2) expressly provides for, recording the request in the objections themselves.

Prepare the Panel hearing as the only oral hearing you will get. Ask for the hearing expressly under section 144BA(7), recording that any adverse direction would be prejudicial. File a paper book. If an inquiry is directed under sub-section (8), ask for the report and for an opportunity to answer it. And remember sub-section (11): if other years are in issue, address them now, because directions can be made to govern years for which no fresh reference is needed.

Get the dates. Ask in writing for Form 3CEG, Form 3CEI and the date on which the Commissioner’s reference was received by the Panel. Without that last date the six-month limit in section 144BA(13) cannot be computed, and whether a direction issued outside it is void is an open question worth preserving.

Deal with recovery, and know who can appear. A GAAR reference does not itself create a demand; the demand arises on the assessment made in conformity with the directions, and from that point recovery runs as it does on any other demand, so a stay application belongs with the appeal to the Tribunal under section 253(1)(e) and the usual deposit practice applies. The rest of the assessment is not stayed while the reference is pending; section 144BA(1) permits the reference at any stage and section 153 simply excludes the detour from the limitation, so the officer continues with the other issues. On representation, a chartered accountant is an authorised representative for proceedings under the Act and the Panel’s own procedural rules could not be read for this article, so confirm the position before the hearing rather than at it.

Keep the remedy question in view from the start. If the directions go against you, the choice is a writ under Article 226 or an appeal against the resulting assessment direct to the Tribunal under section 253(1)(e). A writ is the stronger course where the complaint is that the Panel applied the wrong test or never addressed an ingredient, and the weaker course where the complaint is about the evaluation of evidence. Frame the objections and the hearing so that the record supports the former, and if you go to the writ court ask for a declaration of entitlement rather than a remand, which is what EKGE gave.

And tell the client what the exposure actually is. Not simply the denial of the claim: recharacterisation under section 98, which can produce a liability the transaction never carried; no corresponding adjustment, so the same amount can be taxed twice across a group; the treaty displaced by section 90(2A); other years reached under section 144BA(11); and a penalty case under section 270A with no section 270AA immunity if misreporting is alleged. Invoke Rule 10UA expressly to confine the consequences where only part of an arrangement is impugned.

Structuring so that the question does not arise

For a transaction being planned now the governing text is the Income-tax Act, 2025, so the numbering below is the new one with the familiar one in brackets.

Start by asking whether a specific rule already covers the ground. If it does, the consequence Parliament prescribed is the measure of the mischief and the Revenue has to justify anything harsher; if it does not, and the conduct is of a kind Parliament has since brought within a specific rule, the Shome Committee argument is available, though the Board’s own clarification of 27 January 2017 is against it. The provisions to run the transaction against are listed above, in their 1961 numbering; their counterparts in the 2025 Act were not traced for this article.

Then run the three crore test properly, under rule 128(1)(a) of the Income-tax Rules, 2026 (rule 10U(1)(a) of the 1962 Rules). It aggregates across all the parties, not the client, and section 182 (section 99) can bring connected persons inside that aggregate. Model the group’s benefit and not the entity’s, and model it year by year, because the test is annual. Where the benefit is genuinely below the line the Chapter does not apply at all, and that is a threshold Parliament enacted rather than something to be embarrassed about. The caution is that spreading an arrangement across years is a different thing from a single year falling below the line, and the Revenue will look at the arrangement as a whole.

Expect no advance clearance, because there is none. Chapter XI, like Chapter X-A before it, contains no ruling procedure, no safe harbour and no analogue of an advance pricing agreement. The only route to advance certainty is an application to the Board for Advance Rulings, and the Tiger Global litigation shows the difficulty with it: a prima facie view that the transaction is designed for the avoidance of tax is itself a ground on which the application can be rejected, under what was proviso (iii) to section 245R(2), so the very feature that makes an applicant want certainty may be the feature that denies it. The practical consequence is that the file built before the transaction is the only protection available, and it is built for a reader who will be hostile.

Give each step its own reason, not just the transaction. This is the specific risk created by section 178(2) (the Explanation to section 95) and the presumption in section 179(2) (section 96(2)). A commercially impeccable transaction containing one tax-driven step is not protected by its own commerciality; the step is the unit of analysis and the presumption then colours the whole. Any step whose only explanation is the tax result should be removed or given one.

Document the alternatives, not just the decision. A board minute that records the course chosen is evidence of a decision. A board minute that records the options considered, including a less tax-efficient one, and the commercial reasons for preferring the one adopted, is evidence of a purpose, which is what section 96(1) actually asks about. The document should be contemporaneous with the decision and not with the transaction.

Do not make the tax the only return. The bonus arbitrage in EKGE had an expected commercial return the Court recited and could test. A trade whose only expected return is the tax saved has no answer to section 179(1), formerly section 96(1), and none to section 180(1)(d), formerly section 97(1)(d), either.

Watch the terms, not just the price, in anything intra-group. Clause (a) of section 179(1), formerly section 96(1)(a), is the limb a related-party transaction will be tested against, and an arm’s length price certified under the transfer pricing code is not by itself an answer to a right or obligation that no independent party would have accepted. Tenure, security, conversion and exit terms, voting and ratchet arrangements, waivers and subordinations, and swap ratios should each be capable of being defended as terms an outsider would have agreed.

Transact at market, through ordinary channels, and pay the transaction taxes. That is not a safe harbour, and no statute says it is, but it is the factual difference between the decision that went against the taxpayer and the two that went for him. The corollary is the real advice: a leg routed to a related party, or a price the parties set between themselves, converts a defensible position into a difficult one, and it is usually inserted for convenience rather than necessity.

Avoid circularity of funds. Round trip financing is a deeming provision under section 180(2), formerly section 97(2), the definition is inclusive rather than exhaustive, and it is determined without regard to whether the funds can be traced, to the sequence of transfers or to the means used. Funding an acquisition from a group entity that is itself funded by the proceeds is the fact pattern that lost Ayodhya Rami Reddy Alla.

Keep a position where the technique allows one, and be able to say why that quantum. Retention of the parcel the technique requires you to hold proves nothing. Retention beyond it, at a level that can be explained on investment grounds, is the fact that answers the purpose question.

And where a treaty is in the picture, do not treat it as the answer. Section 90(2A) disapplies the beneficial-provision rule so far as Chapter X-A is concerned; under the new Act the treaty power is section 159 and the override is at section 159(6).

Nor take comfort from “main purpose” where a treaty is involved. The domestic rule asks whether the main purpose of the arrangement was a tax benefit. The principal purpose test imported into most of India’s treaties through the multilateral instrument asks whether obtaining the benefit was one of the principal purposes, which is a materially lower threshold, and it is applied by the treaty partner’s authorities as well as by ours. A structure that survives section 179(1) can still fail the treaty test, and the two enquiries are not conducted by the same people or at the same time. A limitation of benefits article is worth having, both for its own sake and because it supports the argument that the contracting states measured the mischief themselves, but it is an argument and not a shield.

The Income-tax Act, 2025: the full concordance, and what actually changed

The Income-tax Act, 2025 came into force on 1 April 2026 and governs tax year 2026-27 onwards, so for anything being planned now it is the operative statute and the 1961 Act is the one that governs the years still under assessment and appeal. Both are therefore live, which is why this article gives the 2025 number alongside each provision as it goes. For anyone holding both in mind, the chapter was re-enacted rather than rewritten: the main purpose test, the four limbs, the presumption, the deeming provisions on commercial substance and the consequences all survive in substantially identical words.

One point of vocabulary first, because the labels collide. Assessment year 2026-27, that is the financial year 2025-26, is the last year governed by the 1961 Act and is the year most files now in hand concern. Tax year 2026-27, the year beginning 1 April 2026, is the first governed by the 2025 Act. The two carry the same numbers and are a year apart, so a note on a file should say which Act it is using. “Notwithstanding” becomes “irrespective of” throughout, which is the new Act’s drafting convention and not a change of meaning, and “previous year” becomes “tax year”.

The concordance

Income-tax Act, 1961	Subject	Income-tax Act, 2025
Chapter X-A, ss. 95 to 102	General anti-avoidance rule	Chapter XI, ss. 178 to 184
s. 95(1)	Applicability, non obstante	s. 178(1)
s. 95(2)	Applies from assessment year 2018-19	no counterpart, spent
s. 95, Explanation	Application to a step or part	s. 178(2)
s. 96(1)(a) to (d)	Impermissible avoidance arrangement	s. 179(1)(a) to (d)
s. 96(2)	Presumption from a tainted step	s. 179(2)
s. 97(1), (2)	Deemed lack of commercial substance; round trip financing	s. 180(1), (2)
s. 97(3)	Accommodating party	s. 184(1), not s. 180(3)
s. 97(4)	The “may be relevant but shall not be sufficient” list	s. 180(3)
s. 98(1)	Consequences, the seven listed	s. 181(1) and (2)
s. 98(2)	Equity as debt, capital as revenue	s. 181(3)
s. 99	Connected persons and accommodating parties	s. 182
s. 100	“In addition to, or in lieu of”	s. 183(a)
s. 101	Guidelines and conditions as prescribed	s. 183(b)
s. 102	Definitions	s. 184, every clause shifted by one from “arrangement”
s. 102(1) arrangement		s. 184(2)
s. 102(2) asset		s. 184(3)
s. 102(3) benefit		s. 184(4)
s. 102(4) connected person		s. 184(5)
s. 102(5) fund		s. 184(6)
s. 102(6) party		s. 184(7)
s. 102(7) relative		s. 184(8), pointing to s. 92(5)(g)
s. 102(8) substantial interest		s. 184(9)
s. 102(9) step		s. 184(10)
s. 102(10) tax benefit		s. 184(11)
s. 102(11) tax treaty		s. 184(12), pointing to s. 159
s. 144BA	Reference, Commissioner and Approving Panel	s. 274, with 24 sub-sections
s. 144BA(12)	Prior approval before the order	s. 274(12)
s. 144BA(13)	Six months for the Panel	s. 274(13)
s. 144BA, Explanation	Exclusions and the sixty-day floor	s. 274(14) and (15)
s. 144BA(14)	Binding effect; bar on appeal	s. 274(16) and s. 274(17)
s. 144BA(15), (16)	Constitution and composition of the Panel	s. 274(18), (19)
s. 144BA(19)	Borrowed advance-ruling powers	s. 274(22)
s. 144BA(21)	Rule-making power	s. 274(24)
s. 253(1)(e)	Direct appeal to the Tribunal	s. 362(1)(e)
s. 245U	Powers borrowed by the Panel	s. 387, Board for Advance Rulings
s. 90, s. 90A	Treaties, and the s. 90(2A) override	s. 159
Rule 10U	Chapter not to apply in certain cases	Rule 128 of the Income-tax Rules, 2026
Rule 10UA	Consequences of a part arrangement	Rule 127
Rule 10UB	Notice and forms for the reference	Rule 129
Rule 10UC	Time limits	Rule 130
Forms 3CEG, 3CEH, 3CEI	Reference, dropping, satisfaction	Forms 62, 63, 64

Two cautions about reading that table. The rules invert: rule 127 of the 2026 Rules is the consequences rule and rule 128 is the non-application rule, the reverse of 10U and 10UA, so do not assume 10U becomes 127. And the sub-section mapping within section 274 is set out above only where it has been checked against the text on both sides; for sub-sections (1) to (11) the content matches in the same order but the alignment is inference from matching content, so cite section 274 generally rather than a sub-section unless you have read it.

No provision outside Chapter X-A and section 144BA has been traced into the 2025 Act for this article, apart from section 253(1)(e), section 245U and the treaty provisions, which appear in the table above. So where a 1961 provision is discussed in this article without a 2025 number beside it, including sections 70, 74, 55, 45(2A), 50B, 94, 246A, 270A, 153A, 144C, 245R and the specific anti-avoidance provisions listed earlier, that is why: the counterpart was not checked and is not guessed at here.

What actually changed

Change	Where	What it does
The accommodating party definition moves	from s. 97(3) to s. 184(1)	s. 180 has three sub-sections where s. 97 had four, so s. 180(3) is the counterpart of s. 97(4), not of s. 97(3); citing s. 180(3) for the accommodating party definition would be wrong
The assessment year switch-on disappears	s. 95(2) has no counterpart	spent: the new Act’s own commencement does that work. The gates are unaffected, because they never lived in s. 95; the Rs 3 crore threshold and the 1 April 2017 grandfathering are in rule 128
The appeal bar separates from the binding provision	s. 144BA(14) becomes s. 274(16) and s. 274(17)	citing “section 274(16)” for the appeal bar is wrong
The Explanation becomes operative sub-sections	the Explanation to s. 144BA becomes s. 274(14) and (15)	the exclusions and the sixty-day floor move into the body of the section
The borrowed powers change their source	s. 144BA(19) becomes s. 274(22)	the Panel takes the powers of the Board for Advance Rulings under s. 387, not of the Authority for Advance Rulings under s. 245U
The removal-of-doubts preamble goes	s. 97(4) becomes s. 180(3)	the operative words “may be relevant but shall not be sufficient” are unchanged, but the clause is no longer expressed as clarificatory
The recharacterisation lead-in widens	s. 98(2) becomes s. 181(3)	“For the purposes of sub-section (1)” becomes “In this section”, which on its face extends the equity-for-debt and capital-for-revenue powers to the whole section rather than to its opening words

One question the concordance does not answer and a planner has to. Section 95(2) fixed the switch-on at assessment year 2018-19 and has no counterpart, because the new Act’s own commencement does that work. What Chapter XI does not address anywhere is the arrangement entered into under the old Act whose tax benefit falls in a year governed by the new one. On the rules the position looks continuous: rule 128 carries both gates forward and the grandfathering is keyed to when the investment was made rather than to which Act was in force. But the repeal and savings provision of the 2025 Act was not traced for this article, and anyone structuring across the changeover should read it rather than assume continuity from the rules.

Two of the changes above are worth a sentence more.

The recharacterisation change is probably of no practical effect, because the list of consequences is itself the elaboration of the opening words, but it is a textual broadening rather than pure renumbering and a careful reader will notice it.

And the new Act did not take the opportunity to soften “the main purpose” to “one of the main purposes”, which is the formulation used in the principal purpose test in the multilateral instrument and in several foreign general anti-avoidance rules. India’s general rule remains a single-main-purpose test, which, together with the three crore exclusion in the rules, is the most significant protection the chapter contains.

A note for anyone working from these orders

Five things could not be closed against a primary source. Each is flagged where it arises and they are gathered here so they can be found: the primary text of Anvida Bandi; the operative half of the Supreme Court’s judgment in the Tiger Global matter and its concurring opinion; the official text of CBDT Circular No. 7 of 2017; the final version of the Shome Committee report, and with it Example 9; and the rules governing the Approving Panel’s own procedure. Three smaller ones belong with them: the contents of Form No. 3CEG, the pages of the Institute’s Guidance Note dealing with clause 30C, and three of the four circulars deferring that clause.

One of those deserves more than a cross-reference, because the whole comparison between the Telangana decisions turns on it. It could not be established whether Anvida Bandi involved a bonus issue at all. It is said to have concerned shares of a large listed technology company which did make a one for one bonus issue with a record date falling in the relevant year, and the figures are consistent with a bonus pattern; but they are equally consistent with the market fall of early 2020, and no available account states it. If that case was a bonus stripping case, the silence about Ayodhya Rami Reddy Alla is a serious criticism of it. If it was not, the two are less comparable than they look, and this article’s reconciliation of the three decisions rests on two of them rather than three.

And some defects on the face of the orders should be known before either is quoted.

In Ayodhya Rami Reddy Alla the bonus ratio is given as 5:1 at paragraph 4 and as 1:5 at paragraph 22, and section 144BA is rendered as “144AB” three times, twice at paragraph 38 and once at paragraph 43.

In EKGE Retail there are five. Paragraph 29 describes Chapter X-A as “introduced w.e.f. 01.04.2018”, which is accurate as to when the Chapter applies under section 95(2) but not as to when it was inserted, which was 1 April 2016. Paragraph 18 describes the Assessing Officer’s reference to the Commissioner as having been made “under Section 144BA(2)”, where sub-section (1) is the reference provision and sub-section (2) is the Commissioner’s notice. Paragraph 20 twice refers to “Section 70(2)(i)”, though sub-section (2) as substituted by the Finance Act 2002 has no clauses; the Court reverts to “Section 70(2)” later. The Revenue’s submission at paragraph 26 is recorded as resting on “Section 55(a)(iiia)”, where the provision is section 55(2)(aa)(iiia). And the cause title is “EKGE Retail LLP” while paragraph 5 records the merger as having been into “EKGE Retail Private Limited”, with paragraph 6 describing Madevsag Retail as “the petitioner herein”; anyone drafting a cause title or a citation should notice that before copying it.

Two further slips are worth flagging because a defender might otherwise quote them. The worked bonus illustration at paragraph 10 does not produce the return it states: on the figures given, a holding worth Rs 1,000 before a one for one bonus becomes two shares at Rs 501, which is Rs 1,002 and a return of 0.2 per cent, not the 2 per cent the paragraph asserts and not the 50 per cent annualised that follows from it. The commercial rationale survives the arithmetic, because an arbitrage of that kind is real and is measured in fractions of a per cent, but the figures as printed do not work. And the sentence at paragraph 21 recording the petitioner’s submission, “The price of the stock in questions was based entirely on market improbable”, is garbled and should not be quoted.

Where this leaves the subject

The striking thing about Indian GAAR so far is how little of the litigation is about avoidance. The decided cases turn on the structure of a definition, on who has to prove what and in what order, on whether a threshold in a rule was crossed, and on whether a High Court can decide a disputed fact in a writ. Those are not the questions the chapter was enacted to raise, and the reason they dominate is that Chapter X-A is unusually demanding of the officer who invokes it. It requires an arrangement, a main purpose, an identified clause, a tax benefit above a stated figure, and a hearing before a judicially chaired panel, and an order that skips any of those is vulnerable however unattractive the planning looks.

For the Revenue the lesson of the Telangana line is that the chapter rewards evidence and punishes characterisation. An order that reasons from the tax result to the taxpayer’s purpose will not survive, and an order that does not say which of the four clauses is relied on has not begun. For the taxpayer the lesson is the mirror image: the material that answers a GAAR allegation is material that exists before the allegation, and a reason recorded at the time, with the alternatives that were rejected, is worth more than any submission made afterwards.

Two things will decide how this field develops and neither is in anyone’s hands at the moment. The appeal in Ayodhya Rami Reddy Alla is pending before the Supreme Court with leave granted and an interim order in the taxpayer’s favour, and it squarely raises whether a general anti-avoidance rule can be applied to conduct that Parliament chose to address, later and specifically, elsewhere. And the operative reasoning of the Supreme Court’s own GAAR judgment of January 2026 is not freely readable, so what it decides about Rule 10U and about the burden of proof is at present known mainly at second hand.

In the meantime the practical position is narrow and worth stating plainly. Exchange-traded loss harvesting, supported by a contemporaneous commercial rationale and a retained position, has twice been held outside Chapter X-A by a High Court, on reasoning that has not been tested against section 97 or clause (a) and has not been tested on appeal. Loss harvesting routed through related parties with circulating funds has once been held inside it. From assessment year 2023-24 the question largely falls away for bonus stripping, because section 94(8) now reaches securities and the specific rule applies of its own force. Not entirely, though: section 100 still permits the Chapter to be applied in addition to the specific rule, and the Revenue may want the harsher consequence that section 98 allows and section 94(8) does not. What remains is everything else the chapter can be pointed at, and there the first question to ask of any order is the one the Telangana High Court asked and the Revenue could not answer: which clause, and on what material.

This note is general commentary on the law as at 18 October 2026 and is not advice on any matter. The position in a particular case depends on its own facts.