Rules 10U to 10UC — The GAAR exclusions, grandfathering and the reference forms
The four exclusions that keep most arrangements outside GAAR altogether, the part-arrangement rule, and the forms and time limits that govern a reference once they do not apply.
Rule 10U(1)(d) and rule 10U(2) were both substituted by the Income-tax (Tenth Amendment) Rules, 2026 with effect from 31 March 2026. The earlier sub-rule (2) opened "Without prejudice to the provisions of clause (d) of sub-rule (1)", wording the substituted text drops, so commentary written before that date quotes a rule that no longer exists. The substituted text has a narrow field, because from 1 April 2026 the Income-tax Rules, 2026 apply; it matters to proceedings for earlier years still pending on or after 31 March 2026.
Income-tax Act, 1961
Rules 10U to 10UC
Income-tax Act, 2025
Rules 127 to 130, Income-tax Rules, 2026
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Rules 10U to 10UC of the Income-tax Rules, 1962 were inserted by Notification 75 of 2013, S.O. 2887(E), dated 23 September 2013, as the Income-tax (17th Amendment) Rules, 2013, and commenced on 1 April 2016. Rule 10U(1) contains four exclusions, not the two usually discussed: clause (a) keeps the Chapter off an arrangement where the tax benefit in the relevant assessment year, in aggregate to all the parties, does not exceed three crore rupees; clause (b) excludes a Foreign Institutional Investor which is an assessee, has not taken a benefit under an agreement referred to in section 90 or 90A, and has invested in listed or unlisted securities with the prior permission of the competent authority in accordance with the SEBI (Foreign Institutional Investors) Regulations, 1995; clause (c) excludes a non-resident in relation to an investment made by him, directly or indirectly and whether by way of offshore derivative instruments or otherwise, in such an investor; and clause (d) grandfathers income from the transfer of investments made before 1 April 2017. Sub-rule (2) applies the Chapter to an arrangement whenever entered into, so long as the tax benefit is obtained on or after that date, subject to the same grandfathering, and sub-rule (3) defines the tax benefit by reference to section 102(10). Rule 10UA provides that where a part of an arrangement is declared impermissible, the consequences are determined with reference to that part only. Rule 10UB requires a notice before the reference and prescribes Forms 3CEG, 3CEH and 3CEI, and rule 10UC gives the Commissioner one month for directions and two months for the onward reference. Under the Income-tax Rules, 2026, which apply from 1 April 2026, the corresponding provisions are rules 127 to 130, with the order inverted so that rule 127 deals with consequences and rule 128 with non-application, and Forms 3CEG, 3CEH and 3CEI become Forms 62, 63 and 64.
What the provision does
Keeps the Chapter off four classes of arrangement, confines the consequences where only a part is impermissible, and fixes the forms and internal time limits for a reference. It does not limit the Chapter by reference to the nature of the transaction, the listing of the security or whether the trade was on an exchange, none of which appears anywhere in the rules, although those features may still bear on whether the deeming tests in section 97 are met.
Threshold questions
- Whether the tax benefit in the relevant assessment year, aggregated across all the parties, exceeds three crore rupees, and whether the order shows that computation
- Whether the taxpayer is a Foreign Institutional Investor within clause (b), including whether it has taken a benefit under a section 90 or 90A agreement, which disqualifies it, and whether the investment was made with the prior permission of the competent authority, which the clause requires
- Whether the taxpayer is a non-resident investing in such an investor within clause (c), by offshore derivative instruments or otherwise
- Whether the income arises from the transfer of an investment made before 1 April 2017
- Whether the part declared impermissible is identified in the declaration itself, since rule 10UA keys the consequences to the part declared and not to the part the order later describes
- Whether the notice under rule 10UB was issued before the reference, the reference was made in Form 3CEG, and the Commissioner acted within the periods rule 10UC allows
- Which version of rule 10U(1)(d) and rule 10U(2) governs the year, given the substitution with effect from 31 March 2026
In practice
The recurring disputes.
What an investment is for the grandfathering clause
The exception in rule 10U(1)(d) turns on income from the transfer of an investment made before 1 April 2017. Where shares were acquired before that date and bonus shares were issued after it, the Revenue's answer is that a bonus issue is an allotment of new shares on the date of allotment, that nothing is invested when they are issued, and that dating them back would grandfather an asset that did not exist before the cut-off. The taxpayer's answer is that a bonus issue is an accretion to an existing holding which divides the same interest into more shares, and that the investment to which the income is traceable was made before the date. The answer decides a whole class of cases and no decision settles it.
Whether the three crore floor is jurisdictional
Rule 10U(1) says the Chapter does not apply where the aggregate benefit does not exceed three crore rupees. The taxpayer's argument is that those words condition the existence of the power rather than describe the result of a computation, so an order that does not establish the aggregate has no foundation and the objection can be taken at any stage, including for the first time in appeal. The Revenue's argument is that the floor is framed as a non-application provision in a rule rather than as a condition written into the section conferring the power, that the aggregate benefit to all the parties cannot be known until the arrangement has been examined, which is what the reference and the Panel exist to do, and that an assessee who says the aggregate falls below the floor is the party holding the figures. Whether the floor is a jurisdictional fact the order must establish on its face, or a computation reviewable in appeal like any other, has not been decided.
Whether the Commissioner's time limits bind
Rule 10UC allows the Commissioner one month to issue directions and two months to make the onward reference. The taxpayer's argument is that rule 10UC is made under the Chapter's own rule-making power and so has statutory force rather than the force of an office instruction, that the period is fixed for a step which determines whether he is put through the Chapter at all, and that a period to which no consequence attaches is not a period. The Revenue's argument is that an administrative timeline internal to the Department creates no right in the assessee, that no consequence is prescribed for overrunning it, and that the Chapter's protections for the assessee are the hearing and the Panel rather than the Commissioner's diary. The point is undecided.
Whether the foreign portfolio carve-outs survive the treaty condition
Clause (b) excludes a Foreign Institutional Investor only if it has not taken a benefit under an agreement referred to in section 90 or 90A. The taxpayer's argument is that the condition is directed at an investor claiming treaty relief on the very income in question, so taking a treaty benefit on unrelated income should not forfeit the exclusion for the whole year. The Revenue's argument is that the clause is unqualified, that an investor choosing treaty protection has chosen a regime that carries section 90(2A) with it, and that reading the condition income by income would make it unadministrable. Nothing decides how far the condition reaches, and the point matters to every fund that claims treaty relief on part of its portfolio.