General Anti-Avoidance Rule (GAAR ) introduced under a new Chapter X-A starting from section 95 by Finance Bill 2012-13 and likely to be applicable from 1st April 2012 is being feared by all pundits of tax planning as a measure by government to put a shackle in their practice .
GARR is applicable only when the Commissioner of Income Tax , on a matter referred by the Assessing Officer finds that the so called tax planning or arrangements have failed at least one of the test laid down under section 97 of the Income Tax Act which is given below :
96. (1) An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it—
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.
What is deemed to lack commercial substance under GAAR?
One of the four tests laid down for declaring an arrangement as impermissible , there is clause for deeming an arrangement to lack commercial substance under section 97 of the Income Tax Act . It provides in following conditions ,
97. (1) An arrangement shall be deemed to lack commercial substance if—
(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or
(b) it involves or includes—
(i) round trip financing;
(ii) an accommodating party;
(iii) elements that have effect of offsetting or cancelling each other; or
(iv) a transaction which is conducted through one or more persons and disguises the value,location, source, ownership or control of funds which is the subject matter of such transaction; or
(c) it involves the location of an asset or of a transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party.
(2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions—
(a) funds are transferred among the parties to the arrangement; and
(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (…………………
(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or
(b) it involves or includes—
(i) round trip financing;
(ii) an accommodating party;
(iii) elements that have effect of offsetting or cancelling each other; or
(iv) a transaction which is conducted through one or more persons and disguises the value,location, source, ownership or control of funds which is the subject matter of such transaction; or
(c) it involves the location of an asset or of a transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party.
(2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions—
(a) funds are transferred among the parties to the arrangement; and
(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (…………………
So , the most problematic out all the test is the deeming provision because it is worded very widely .
Commissioner of Income Tax is now most powerful entity courtesy GAAR !!!
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