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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Location of Business

Once an arrangement is declared an impermissible avoidance arrangement, which of the following may be done in determining the tax consequences under section 181 of the Income-tax Act, 2025?

The tax authority may treat equity as debt or the reverse and may treat the arrangement as if it had not been entered into. Section 181 gives an inclusive list of consequences, including recharacterisation, reallocation, and relocation of residence or situs, beyond mere denial of benefit.

  1. AOnly the tax benefit may be denied, with no recharacterisation permitted
  2. BEquity may be treated as debt or vice versa, and the arrangement may be treated as if never entered intoCorrect
  3. CThe arrangement may only be disregarded if it is also held a criminal offence by a Special Court
  4. DOnly the place of residence of a party may be changed, not the situs of an asset

Explanation

Section 181(2) lists consequences including treating the arrangement as if it had not been entered into, and section 181(3) allows equity to be treated as debt or vice versa. The list is inclusive, not limited. The option confining consequences to denial of benefit is wrong, and situs of an asset can also be re-located under section 181(2)(f).

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