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CMA Final · Direct Tax Laws and International Taxation · GAAR

Under the General Anti-Avoidance Rule (GAAR) provisions, which of the following is treated as a consequence if an arrangement is declared an impermissible avoidance arrangement?

The consequence is denial of the tax benefit. The tax authorities may disregard or recharacterise the arrangement, treat entities as one, reallocate income or expenses among parties, or look through the structure, so that the tax outcome reflects substance rather than the artificial form adopted.

  1. AThe tax benefit may be denied, for example by disregarding or recharacterising the arrangement or reallocating income between partiesCorrect
  2. BThe arrangement is automatically void under the Contract Act and all parties are prosecuted
  3. COnly the interest on delayed tax is charged and no change is made to the computation of income
  4. DThe assessee is allowed to choose another valid arrangement and claim the original benefit

Explanation

On a declaration of impermissible avoidance arrangement, the tax benefit is determined and denied through measures such as disregarding parties, reallocating income, recharacterising items or looking through the arrangement. It is not a Contract Act voidness or a mere interest charge, and the original benefit is not retained.

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