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

Kaveri Exports Pvt Ltd is party to an arrangement that the authorities declare an impermissible avoidance arrangement, but only one step of a multi-step arrangement is so declared. Under Rule 127 of the Income-tax Rules, 2026 read with section 181, 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 steps of the arrangement are not automatically affected by the declaration.

  1. AWith reference to the entire arrangement, treating all steps as tainted
  2. BWith reference to that part of the arrangement only, which is declared impermissibleCorrect
  3. COnly with reference to the last step in the arrangement
  4. DThe consequences are determined by the assessee's choice among the steps

Explanation

Rule 127 states that where a part of an arrangement is declared to be an impermissible avoidance arrangement, the tax consequences are determined with reference to such part only. Treating the whole arrangement as tainted is therefore wrong.

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