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CS Professional · Advanced Direct Tax Laws and Practice · Transfer Pricing and General Anti Avoidance Rules (GAAR)

Once an arrangement is declared an impermissible avoidance arrangement under the Income-tax Act, 2025, which statement about the consequences is correct?

Consequences are determined as deemed appropriate and the statutory list is illustrative, not exhaustive. It includes disregarding or recharacterising steps, ignoring accommodating parties, reallocating items and treating equity as debt, so no single fixed outcome is mandated.

  1. AOnly denial of the tax treaty benefit is permitted
  2. BThe listed consequences are exhaustive, and no other treatment is allowed
  3. CThe consequences are determined as deemed appropriate and include, but are not limited to, listed measures such as recharacterising steps, disregarding accommodating parties and treating equity as debtCorrect
  4. DThe arrangement is always treated as never entered into, with no other option

Explanation

Section 181 says consequences, including denial of tax or treaty benefit, are determined as deemed appropriate in the circumstances, and the list in sub-section (2) is expressly non-exhaustive. Treating the arrangement as not entered into is only one option, and equity-debt recharacterisation is permitted.

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