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

Under the Income-tax Act, 2025 (applicable from June 2027), an arrangement is an impermissible avoidance arrangement only if its main purpose is to obtain a tax benefit and it additionally satisfies at least one of the specified tests. Which of the following is one of those tests?

Lack of commercial substance, in whole or in part, is one of the four alternative tests. An arrangement whose main purpose is a tax benefit becomes impermissible if it meets any one test; related-party dealings or monetary thresholds are not tests under the definition.

  1. AIt results in a tax liability higher than in the previous year
  2. BIt lacks commercial substance, in whole or in partCorrect
  3. CIt is entered into with a related party in India
  4. DIt involves a transaction exceeding a fixed monetary threshold

Explanation

Section 179(1) requires a main purpose of obtaining a tax benefit plus one of four tests: non-arm's-length rights or obligations, misuse or abuse of the Act, lack of commercial substance, or means not ordinarily employed for bona fide purposes. Related-party status and monetary thresholds are not tests in this definition.

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