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

Mehta Textiles Ltd, an Indian company, had a transaction with a Mauritius-based entity. The Central Government has notified a double taxation agreement with that country. Under section 159 of the Income-tax Act, 2025, the agreement may be entered into for avoiding double taxation, but which condition is expressly attached to this purpose?

The agreement must avoid double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty shopping aimed at giving indirect benefit to residents of another country. This anti-abuse condition is stated in section 159(3)(b) of the Income-tax Act, 2025.

  1. AIt must be done without creating opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty shoppingCorrect
  2. BIt must grant full exemption in India on all income of the foreign resident
  3. CIt must apply only to residents of India and never to non-residents
  4. DIt must be approved by Parliament before each assessment year

Explanation

Section 159(3)(b) permits agreements for avoiding double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty-shopping arrangements aimed at indirect benefit to residents of any other country. The other options add conditions that do not appear in the text.

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