s.98 — The consequences of an impermissible avoidance arrangement

Currently operative

This is the only provision in the Chapter that authorises anything. A threshold list that terminates at "the Chapter applies" has stopped one step short: the order has still to be read for which consequence in section 98 it visits, and on what reasoning. Where only a part of an arrangement is declared impermissible, rule 10UA confines the consequences to that part.

Income-tax Act, 1961

s.98

Income-tax Act, 2025

s.181

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 98(1) of the Income-tax Act, 1961 provides that where an arrangement is declared an impermissible avoidance arrangement, the consequences in relation to tax, including denial of a tax benefit or of a benefit under a tax treaty, are to be determined in such manner as is deemed appropriate in the circumstances, including but not limited to seven listed consequences: disregarding, combining or recharacterising any step in, or a part or whole of, the arrangement; treating it as if it had not been entered into or carried out; disregarding an accommodating party or treating it and another party as one and the same person; deeming connected persons to be one and the same person for determining the tax treatment of any amount; reallocating among the parties any accrual or receipt of a capital or revenue nature, or any expenditure, deduction, relief or rebate; treating the place of residence of a party, or the situs of an asset or of a transaction, as being somewhere other than where the arrangement provides; and looking through any arrangement by disregarding a corporate structure. Sub-section (2) adds that for those purposes equity may be treated as debt or the reverse, a capital accrual or receipt as revenue or the reverse, and any expenditure, deduction, relief or rebate may be recharacterised. Denial of a treaty benefit is possible because of the override in section 90(2A) and section 90A(2A), dealt with in the entry on section 95. The corresponding provision in the Income-tax Act, 2025 is section 181.

What the provision does

Supplies the menu of consequences and settles that the Chapter is not merely declaratory. It does not require the Assessing Officer to choose the least intrusive consequence available, does not in terms confine the consequence to the assessee before him, and gives no rule for computing the tax once the recharacterisation is made. The list is expressly not exhaustive.

Threshold questions

Which consequence in section 98 the order applies, as distinct from a finding that the arrangement is impermissible
Whether the order identifies the arrangement or the step it disregards, and says what it puts in its place
Whether only a part of the arrangement was declared impermissible, in which case rule 10UA confines the consequences to that part
Whether a consequence is being visited on a person other than the assessee before the Assessing Officer, and on what authority
Whether the recharacterised position has actually been computed, with the tax attributable to it shown
Whether the order says it is applying the Chapter in addition to, or in lieu of, the ordinary basis of assessment, which section 100 permits either way but which has to be made clear if double counting is to be avoided
Whether penalty has been initiated on the GAAR addition, on which limb, and whether the order identifies the misrepresentation relied on as distinct from the recharacterisation itself

The recurring disputes.

How far the counterfactual can go

Section 98 allows the tax consequence to be determined as if the arrangement had not been entered into. The taxpayer's argument is that this authorises a recharacterisation for tax purposes only, that the section cannot manufacture income that never accrued to anyone, and that the Revenue must identify the transaction the assessee would in fact have undertaken rather than the most heavily taxed one it can imagine. The Revenue's argument is that the opening words are deliberately open, that the listed consequences are expressly not exhaustive, and that an avoidance rule which could only substitute a counterfactual the assessee accepts would be self-defeating. No decision has fixed the outer limit of the counterfactual or said who chooses it.

Whether a consequence can reach someone who is not the assessee

The section permits parties to be treated as one and the same person and permits accrual, receipt and expenditure to be reallocated among them, which on its face can shift income to a person who was never assessed and never heard. The taxpayer's argument is that a consequence determined in one assessee's assessment cannot bind a stranger to it, and that any reallocation must be made in that other person's own assessment with its own section 144BA reference. The Revenue's argument is that the section operates on the arrangement rather than on the assessee, and that requiring a separate reference for every party would make the Chapter unworkable against the multi-party structures it targets. The point is open.

Penalty on a GAAR addition

Chapter X-A contains no penalty provision, so the ordinary regime in section 270A applies to a GAAR addition or it does not. The taxpayer's argument is that an arrangement disclosed in full in the return and then recharacterised by the operation of a deeming code involves neither concealment nor an inaccurate particular, that the Chapter works by treating as having happened something which admittedly did not, and that an addition existing only because the statute deems it to exist cannot be income the assessee underreported. The Revenue's argument is that the charge bites on the difference between the income assessed and the income returned however that difference arises, that an assessee who puts in place an arrangement whose main purpose is a tax benefit and does not disclose that purpose has misrepresented the facts, which is the higher limb, and that an avoidance code carrying no penalty prices avoidance at the tax alone. Nothing decides whether a GAAR addition is underreported income, misreported income. On the rates section 270A(7) and (8) carry, the difference between the two limbs is fifty per cent of the tax where income is underreported against two hundred per cent where it is misreported. Nothing decides whether a GAAR addition is underreported income, misreported income, or outside the regime altogether.

Choosing between consequences

The section lists seven consequences and says the determination is to be made in such manner as is deemed appropriate. The taxpayer's argument is that a discretion exercisable against a citizen must be exercised on stated reasons, so an order that recites the whole list without saying which limb it applies and why has not exercised the discretion at all. The Revenue's argument is that the statute deliberately avoids a hierarchy, that the appropriate consequence depends on the facts, and that the reasons appear from the order read as a whole. No decision requires the limb to be identified, and the opening words can be read either as the source of a duty to give reasons for the choice or as the answer to the suggestion that there is a choice to be reasoned at all.

Frequently asked.

What can the Revenue actually do once an arrangement is declared impermissible?

Section 98 allows the tax consequences to be determined as deemed appropriate, including by disregarding, combining or recharacterising any step or the whole arrangement, treating it as if it had never happened, disregarding an accommodating party, treating connected persons as one person, reallocating accruals, receipts, expenditure, deductions, reliefs or rebates among the parties, relocating a party's residence or an asset's or transaction's situs, and looking through a corporate structure. Equity may be treated as debt and capital as revenue, or the reverse.

Can a GAAR consequence be visited on a party other than the assessee?

The section permits parties to be treated as one and the same person and permits amounts to be reallocated among the parties to the arrangement, which on its face reaches beyond the assessee being assessed. Whether a consequence can be determined in one assessee's assessment so as to affect a person who was not before the Assessing Officer and had no section 144BA reference of his own has not been decided.

Can penalty be levied on a GAAR addition?

Chapter X-A contains no penalty provision of its own, so the question is whether the ordinary regime in section 270A reaches an addition made by recharacterising a transaction the assessee disclosed. The Revenue's position is that the charge bites on the difference between the income assessed and the income returned however that difference arises, and that a main purpose not disclosed is a misrepresentation. The assessee's position is that an addition existing only because the statute deems something to have happened is neither concealment nor an inaccurate particular. Nothing decides which limb applies, or whether the regime reaches a GAAR addition at all.

What happens if only part of an arrangement is held impermissible?

Rule 10UA provides that where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax are to be determined with reference to that part only. It is a short rule and easily missed, and it is the answer to an order that recharacterises an entire transaction on the strength of one tainted step.