s.95 — When the general anti-avoidance rule applies
The gateway provision that switches Chapter X-A on, fixes the first year it reaches, and sends the reader to the Rules for the filters that keep most arrangements outside it.
In force for assessment year 2018-19 onwards. The legislative history is confusing and is usually stated wrongly: the Finance Act 2012 inserted a version with effect from 1 April 2014 which never became operative, the Finance Act 2013 omitted that version with effect from 1 April 2014, the day it would otherwise have commenced, and by a separate section inserted the present Chapter with effect from 1 April 2016. The Finance Act 2015 then renumbered section 95 as section 95(1) and added section 95(2), with effect from 1 April 2015 on the Department's own footnote, not 1 April 2016 as much of the commentary says. Rule 10U(1)(d) and rule 10U(2), the grandfathering and the whenever-entered-into rule, were both substituted with effect from 31 March 2026; the substituted text is set out in the entry on the rules. Under the Income-tax Act, 2025 the Chapter is Chapter XI and runs from that Act's commencement on 1 April 2026.
Income-tax Act, 1961
s.95
Income-tax Act, 2025
s.178
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 95 of the Income-tax Act, 1961 is the gateway to Chapter X-A. Sub-section (1) opens with a non-obstante clause and provides that an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising from it may be determined subject to the provisions of the Chapter. The Explanation to the section declares, for the removal of doubts, that the Chapter may be applied to any step in, or a part of, an arrangement as it applies to the arrangement; in the Income-tax Act, 2025 that declaration becomes section 178(2). Sub-section (2), added by section 26 of the Finance Act 2015, applies the Chapter to assessment year 2018-19 onwards. Four filters sit outside the section, all in rule 10U: a three crore floor on the aggregate tax benefit, a carve-out for Foreign Institutional Investors, a carve-out for non-residents investing through them, and the grandfathering of investments made before 1 April 2017. A fifth point sits outside the Chapter altogether: section 90(2A) and section 90A(2A) provide that Chapter X-A applies even where it is not beneficial to the assessee, so a tax treaty is no answer to it. The corresponding provision in the Income-tax Act, 2025 is section 178.
What the provision does
Switches the Chapter on, fixes the year from which it bites, supplies the non-obstante clause, and extends the Chapter expressly to a step in or a part of an arrangement. It does not define an impermissible avoidance arrangement, does not say who may exercise the power, which is section 144BA, and contains none of the four filters in rule 10U, which are the first things to check.
Threshold questions
- Whether the year in question is assessment year 2018-19 or later, which is when the Chapter switched on
- Whether any of the four exclusions in rule 10U applies before anything else is considered, the three crore floor, the two foreign portfolio carve-outs or the pre-April 2017 grandfathering, all of which are set out in the entry on the rules
- Whether the relief claimed rests on a tax treaty, since section 90(2A) and section 90A(2A) apply the Chapter even where it is not beneficial to the assessee and the treaty is therefore no answer to it
- Whether the declaration is directed at the arrangement as a whole or at a step in or part of it, which the Explanation permits but which the order has to state, because rule 10UA then confines the consequences to that part
- Whether the order identifies the tax benefit it says was obtained, and the year in which it was obtained, since sub-rule (2) keys the Chapter to the benefit rather than to the date of the arrangement
In practice
The recurring disputes.
What is left of a treaty once the Chapter overrides it
The statute is explicit, so the bare question of override is not open: section 90(2A) and section 90A(2A) each provide that the provisions of Chapter X-A apply to the assessee even if they are not beneficial to him, and section 159(6) of the Income-tax Act, 2025 carries the same rule forward for Chapter XI. What is open is everything downstream. The taxpayer's argument is that a treaty is a bargain between two states, that several of India's agreements now carry their own purpose-based test negotiated for this very situation, and that applying a domestic general rule over the top of a negotiated test gives the assessee two thresholds for the same conduct and the Revenue its choice between them. The Revenue's argument is that Parliament has resolved the conflict in terms, that the treaty test and the domestic one are directed at different questions, and that nothing in an agreement obliges India to abandon its own anti-avoidance regime. Which test governs where both apply, and whether an investment protected by a treaty's own grandfathering is also outside the Chapter, has not been decided.
An old arrangement yielding a new benefit
Rule 10U(2) applies the Chapter to an arrangement whenever entered into, so long as the tax benefit is obtained on or after 1 April 2017, subject to the grandfathering of investments made before that date. The taxpayer's argument is that an arrangement structured years before the Chapter existed cannot be judged by it, and that the investment limb of the exception covers him. The Revenue's answer is that the Chapter taxes a benefit obtained after the appointed date rather than the act of entering into the arrangement, so it operates prospectively on its own terms, and that the grandfathering is the exact measure of the protection Parliament chose to give, leaving nothing to be read in beyond it. What is open is whether a structure put in place long before the Chapter existed and left untouched since is properly described as one from which a benefit is obtained after 1 April 2017 at all, or whether the benefit is obtained when the arrangement is made and merely received year by year afterwards. Nothing decides it, and the answer governs every standing structure of any age.
Whether the Chapter reaches a declaration against a step alone
The Explanation applies the Chapter to a step in, or a part of, an arrangement as it applies to the arrangement, section 98 allows a step to be disregarded or recharacterised, and rule 10UA confines the consequences to the part declared impermissible. The taxpayer's argument is that this cannot be used to isolate one commercially explicable step from a transaction that as a whole has substance, because the Chapter is directed at arrangements and the step provision is machinery within that enquiry rather than a separate charge. The Revenue's argument is that Parliament said in terms that the Chapter applies to a step as it applies to the arrangement, that rule 10UA assumes a part declaration can be made, and that a tax-driven step inserted into an otherwise ordinary transaction is the paradigm case the Chapter was written for. Where the line falls has not been decided.