GAAR Explained : Mitigating Tax Evasion Through Robust Legislation - Telangana HC Recent Ruling

General Anti Avoidance Rule (GAAR) – Telangana HC Judgement | [2024] 163 taxmann.com 277 (Telangana)[07-06-2024] |

The enduring global drive against convoluted taxing regime and the expedient interpretation of loopholes in the law has obligated India to join the group of nations having a general anti-avoidance rules regime. This new regime is anticipated to create a robust deterrent against the practise of disguising tax avoidance as a business-driven decision. Hence GAAR emerged as a strategy for tapping the untapped.?

GAAR is a set of tax rules introduced by many countries to prevent tax avoidance by individuals and corporations. The purpose of GAAR is to discourage tax planning strategies that are designed solely to reduce or avoid tax liabilities, rather than being based on genuine commercial or economic considerations.

Facts

Assessee set off STCL incurred on sale of shares of Ramky Estate and Farms (REFL) against LTCG made on sale of shares in Ramky Enviro Engineers (REEL) , revenue contended that assessee purchased shares of REFL and subsequently, there was fall in share price due to bonus share declaration which resulted in business loss when assessee sold same shares in a short span of time, since issuance of bonus shares was evidently an artificial avoidance arrangement and was primarily designed to sidestep tax obligations, provisions of General Anti-Avoidance Rules (GAAR) under Chapter X-A would become applicable

Grounds/Petition (writ)- The issuance of notice under Section 144BA invoking chapter X-A of the Act which is under challenge in the present writ petitions.

Petitioners (Assessee) View –

• Transactions were covered by Section 94(8) of the Act, which is primarily enacted to prevent the avoidance of tax.
• The transactions undertaken fall under chapter X of the Income Tax Act, 1961 (ITA), a specific anti-avoidance provision (SAAR), GAAR cannot be invoked
• The Parliament while enacting Section 94(8) never had the intention of including shares and security within the scope of bonus tripping. If the Parliament would had intended the same, they would have included it within the rigors of Section 94(8) of the Act.
• Specifically excluded from the provisions curbing bonus stripping by way of SAAR cannot be indirectly curbed by applying GAAR
• Reliance was placed on the Shome Committee, which also recommended that in cases where SAAR is applicable, GAAR should not be invoked.

Respondent (Revenue) View-

• Transactions undertaken by the assessee qualifies as a "Impermissible Avoidance Arrangement (for short "IAA") under chapter X-A of the Act.
• Timelines

• This entire exercise has been carried out with a sole motive of evading tax. Thus, the aforesaid transaction is nothing but round stripping of funds with no commercial substance.
• Chapter X-A begins with a non-obstante clause, the provisions of chapter X-A gets an overriding effect over and above the other existing provisions of law.
• Section 100 of this chapter clarifies that this Chapter is applicable in addition to or as a substitute for any other existing method of determining tax liability.
• Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares. However, this provision does not apply to the current case, as issuance of bonus shares here is evidently an artificial avoidance arrangement that lacks any logical or practical justification.
• Shome committee - The Committee's stance that SAAR should generally supersede GAAR mainly pertains to international agreements, not domestic cases such as this.
• As per the report is further substantiated by the Finance Minister's declaration, made on January 14, 2013, the applicability of either GAAR or SAAR would be determined on a case-by-case basis
• This stance was already addressed and refuted by the Supreme Court in the case of Commissioner of Income-Tax (Central), New Delhi v. S. Zoraster and Company (1972), stated that laws must be interpreted based on the specific facts of each case.
• In stark contrast, Section 96(2) places this responsibility on the taxpayer. It requires the taxpayer to disprove the presumption of a tax avoidance scheme

Judgement

• 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.
• Transactions in the instant case are not permissible tax avoidance arrangements.
• Therefore, the provisions of Chapter X-A would become applicable