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

Zenith Ltd, an Indian company, entered into a multi-step arrangement, one part of which has been declared an impermissible avoidance arrangement. Step A (declared impermissible) shifted a Rs 40 lakh income to a related party; Step B, a genuine commercial sale, produced Rs 25 lakh income for the related party. As per Rule 127 of the Income-tax Rules, 2026, how are the tax consequences to be determined?

The tax consequences are determined with reference only to the part of the arrangement declared impermissible, here Step A involving Rs 40 lakh. Rule 127 does not extend the consequences to the remaining genuine part, so Step B's Rs 25 lakh is not affected by the declaration.

  1. AWith reference to Step A only, the part declared impermissibleCorrect
  2. BWith reference to the whole arrangement, i.e. Rs 65 lakh
  3. CWith reference to Step B only, as it is the genuine part
  4. DNo consequences arise unless the whole arrangement is declared impermissible

Explanation

Rule 127 provides that where a part of an arrangement is declared an impermissible avoidance arrangement, the tax consequences are determined with reference to that part only. So only the Rs 40 lakh shifted by Step A is affected. Taxing the whole Rs 65 lakh is wrong because Step B was not declared impermissible.

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