s.96 — Impermissible avoidance arrangement
The definition that decides every GAAR case, and the two conditions the Revenue has to satisfy cumulatively before an arrangement can be declared impermissible.
The present section was inserted by the Finance Act 2013 with effect from 1 April 2016 and reaches assessment year 2018-19 onwards. The corresponding provision in the Income-tax Act, 2025 is section 179.
Income-tax Act, 1961
s.96
Income-tax Act, 2025
s.179
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 96(1) of the Income-tax Act, 1961 requires two things, and requires them together. The main purpose of the arrangement must be to obtain a tax benefit, and the arrangement must additionally answer any one of clauses (a) to (d): that it creates rights or obligations not ordinarily created between persons dealing at arm's length, that it results directly or indirectly in the misuse or abuse of the provisions of the Act, that it lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part, or that it is entered into or carried out by means or in a manner not ordinarily employed for bona fide purposes. The four clauses are alternatives, so any one of them suffices once the main purpose test is met, and the closing words of clause (c) govern the deeming limb as well as the first, so a partial lack of commercial substance is enough. Sub-section (2) is a rebuttable presumption: where the main purpose of a step in, or a part of, an arrangement is to obtain a tax benefit, the whole arrangement is presumed to have been entered into or carried out for that purpose, even though the main purpose of the whole is not, unless the assessee proves the contrary. The corresponding provision in the Income-tax Act, 2025 is section 179.
What the provision does
Defines the thing that may be declared impermissible and splits the enquiry into a purpose test and a character test. It does not say who bears the burden on sub-section (1); on sub-section (2) it does, placing it on the assessee. It does not define a tax benefit, which is section 102, does not authorise any consequence, which is section 98, and fixes no monetary threshold, which is in the Rules.
Threshold questions
- Whether there is an arrangement at all, as distinct from a single unilateral act
- Whether the order identifies the non-tax objects the assessee put forward and says why the tax object outranks them, as distinct from noting that a tax benefit resulted
- Which of clauses (a) to (d) the Revenue actually relies on, and whether the order says so
- Whether clause (a) is relied on, and if so what arrangement between persons dealing at arm's length the order says would ordinarily have been made, since the clause asks about the rights and obligations created and not whether the price was a market price
- Whether clause (d) is relied on, and if so what the order says the ordinary means or manner of carrying out such a transaction is, and on what material
- Whether the order finds the main purpose and the clause on the material before the Assessing Officer, or puts the Revenue's case to the assessee to disprove
- Whether the lack of commercial substance is said to affect the whole arrangement or only a part of it, which clause (c) permits in terms and which changes what consequence can follow under section 98 read with rule 10UA
In practice
The recurring disputes.
Who has to prove what, and at which stage
Section 96(1) says nothing about burden, and section 96(2) places only the rebuttal on the assessee. The taxpayer's argument is that the Revenue is the party asserting both the main purpose and the clause relied on, that the machinery of section 144BA, a reference, a right to object and a panel chaired by a judge, makes no sense unless the Revenue is putting a case the assessee answers, and that a subjective purpose is not to be presumed against a taxpayer who has disclosed the transaction. The Revenue's argument is that purpose and commercial rationale are peculiarly within the assessee's knowledge, that section 96(2) expressly presumes the purpose of the whole from the purpose of a step and so shifts the position once a tax-driven step is shown, and that an assessee who will not explain why he structured his affairs as he did cannot complain if the inference is drawn. The sub-section requires the contrary to be proved by the assessee but says nothing about what quality of material discharges that burden, and no decision has set it out.
Reasoning backwards from the tax saving
The taxpayer's argument is that an order which finds a large tax benefit, infers from its size that obtaining it must have been the main purpose, and then treats that same inference as satisfying one of clauses (a) to (d), has reversed the statute, which requires the clause to be made out independently of the purpose finding and on material of its own. The Revenue's answer is that purpose is rarely proved by direct evidence and must be inferred from the structure and effect of the arrangement, and that requiring something beyond the structure itself would make the section unworkable, and that section 96(2) authorises an inference about the whole from the purpose of a part, which is Parliament accepting that purpose may be established by what the structure shows. Where the line falls between a legitimate inference and a circular one is not stated in any decision.
Whether a benefit Parliament intended can be a misuse
Clause (b) reaches an arrangement that results in the misuse or abuse of the provisions of the Act. Where a taxpayer has done exactly what a provision permits and obtained exactly the relief it confers, the taxpayer's argument is that there is no misuse, only use: that a relief is construed by the conditions Parliament attached to it, that clause (b) speaks of misuse or abuse of the provisions of the Act and not of an unlegislated purpose behind them, and that treating compliance with every stated condition as abuse lets the Revenue add a condition Parliament did not enact and leaves nobody able to say in advance what a provision permits. The Revenue's argument is that a provision used for an end Parliament did not have in view is abused however precisely its words are met, and that a clause aimed at misuse would be empty if compliance with the words were a complete answer. The distinction between use and abuse is doing a great deal of work in the decided cases and is nowhere defined.
What clause (d) adds once the other three limbs are taken
Clause (d) reaches an arrangement entered into or carried out by means, or in a manner, not ordinarily employed for bona fide purposes. The taxpayer's argument is that a limb drafted this generally has no content independent of the other three, that every structured transaction is by definition not the ordinary way of doing the thing, and that a literal reading makes clauses (a) to (c) surplusage and leaves the main purpose test as the only real control. The Revenue's argument is that Parliament added a fourth limb precisely because the first three are closed descriptions while avoidance is not, that whether a manner is ordinarily employed is an objective question capable of evidence about how comparable transactions are in fact carried out, and that the words "for bona fide purposes" supply the content the taxpayer says is missing. No decision has given clause (d) a test of its own, and in practice it is pleaded alongside clause (c) rather than instead of it, which leaves open whether it can carry an order by itself.