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CA Final · Direct Tax Laws & International Taxation · Tax Planning, Tax Avoidance and Tax Evasion

Under the Income-tax Rules, 2026 (Rule 127), an arrangement of Vistara Holdings Ltd consists of Step A, Step B and Step C. The authorities declare only Step B to be an impermissible avoidance arrangement. How are the tax consequences determined?

The tax consequences are determined only with reference to Step B, the part declared an impermissible avoidance arrangement. Rule 127 limits the consequences to that part, so the other steps, which were not declared impermissible, are not re-characterised for tax purposes.

  1. AWith reference to the entire arrangement of Steps A, B and C
  2. BWith reference to Step B, the part declared impermissible, onlyCorrect
  3. CWith reference to Steps A and C, the permissible parts
  4. DWith reference to the step that gave the highest tax benefit, irrespective of the declaration

Explanation

Rule 127, made for section 181, provides that where a part of an arrangement is declared an impermissible avoidance arrangement, the tax consequences are determined with reference to such part only. Steps A and C were not declared impermissible, so they are not re-characterised. Applying the consequences to the whole arrangement ignores the rule.

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