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

Under Section 181(3) of the Income-tax Act, 2025, which recharacterisation is permitted when applying consequences of an impermissible avoidance arrangement?

Equity may be treated as debt and debt as equity, and capital receipts may be treated as revenue and vice versa. Section 181(3) permits recharacterisation in both directions and also covers expenditure, deduction, relief or rebate.

  1. AEquity may be treated as debt or vice versa, and a capital receipt may be treated as revenue or vice versaCorrect
  2. BOnly revenue receipts may be treated as capital receipts, not the reverse
  3. CDebt may be treated as equity, but equity may never be treated as debt
  4. DRecharacterisation is permitted only for expenditure and never for receipts

Explanation

Section 181(3) states that any equity may be treated as debt or vice versa, that capital accruals or receipts may be treated as revenue or vice versa, and that expenditure, deduction, relief or rebate may be recharacterised. The other options each restrict this to one direction or one category, which the text does not do.

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