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CA Final · Direct Tax Laws & International Taxation · Tax Planning, Tax Avoidance and Tax Evasion

A part of an arrangement entered by Vikram Steels Ltd with a Mauritius affiliate is declared an impermissible avoidance arrangement under section 181 of the Income-tax Act, 2025. The remaining parts have genuine commercial substance. Under Rule 127 of the Income-tax Rules, 2026, how are the tax consequences determined?

Under Rule 127, when only a part of an arrangement is declared an impermissible avoidance arrangement, the tax consequences are determined with reference to that part alone. The remaining parts that are not so declared are not subjected to the consequences.

  1. AWith reference to the whole arrangement, including the genuine parts
  2. BWith reference only to the part declared to be an impermissible avoidance arrangementCorrect
  3. CWith reference only to the genuine parts
  4. DThe consequences are determined only by the Assessing Officer without limit to any part

Explanation

Rule 127 states that where a part of an arrangement is declared an impermissible avoidance arrangement, the tax consequences are determined with reference to that part only. Applying them to the whole arrangement would be wrong, since the genuine parts are not affected.

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