DECLARING IMPERMISSIBLE AVOIDANCE ARRANGEMENT

[Mr. M. GOVINDARAJAN]

Section 96 of Income Tax Act, 1961 (‘Act’ for short) defines the term ‘impermissible avoidance arrangement’ as an arrangement, the main purpose of which is to obtain a tax benefit and it-

• Create rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
• Results, directly or indirectly, in the misuse, or abuse, of the provisions of the Act;
• Lacks commercial substance or is deemed to lack commercial substance under Section 97, in whole or in part; or
• Is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.

Section 97 explains the term ‘lack commercial substance’. An arrangement shall be deemed to lack commercial substance if-

• The substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or
• It involves or includes-

(i)      Round top financing;

(ii)     An accommodating party;

(iii)    Elements that have effect of offsetting or canceling each other; or

(iv)    A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or

• It involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit; or
• It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.

Section 144BA of the Act provides that if the Assessing Officer, at any stage of the assessment or reassessment proceedings before him having regard to the material and evidence available, considers that it is necessary to declare an arrangement as an impermissible avoidance arrangement and to determine the consequence of such an arrangement he may make a reference to the Commissioner in this regard.

The Commission on receipt of a reference from the Assessing Officer, if he is of the opinion that the provisions of Chapter X-A are required to be invoked issue a notice to the assessing, setting out the reasons and basis of such opinion, for submitting objections, if any, and providing an opportunity of being heard to the assessee within such period not exceeding 60 days as may be specified in the notice. If the assessee does not furnish any objection to the notice within the time specified the Commissioner shall issue such directions as he deems fit in respect of declaration of the arrangement to be impermissible avoidance arrangement.

In case the assessee objects to the proposed action and the Commissioner after hearing the assessee in the matter is not satisfied by the explanation of the assessee he shall make a reference to the Approving Panel for the purpose of declaration of the arrangement as an impermissible avoidance arrangement.

Before going to the procedure adopted by the Approving panel, the constitution of Approving Panel may be seen.

The Central Government shall constitute one or more Approving panel as may be necessary and each panel shall consist of three members including a Chairperson. The Chairperson shall be a person who is or has been a judge of a high court and-

• One member shall be a member of Indian Revenue Service not below the rank of Chief Commissioner of Income Tax; and
• One member shall be an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices;

The term of the approving panel shall ordinarily be for one year and may be extended from time to time up to a period of three years. The Chairperson and members shall meet, as and when required to consider the references made to the panel and shall be paid such remuneration as may be prescribed.   In addition to the powers conferred it shall have the powers which are vested in the Authority for Advance Rulings under Section 245U.

The Board may make rules for the purposes of the constitution and efficient functioning of the Approving Panel and expeditious disposal of the references received.

The Approving Panel on receipt of a reference from the Commissioner shall issue directions as it deems fit in respect of the declaration of the arrangement as an impermissible avoidance arrangement in accordance with the provisions of Chapter X-A including specifying of the previous year or years to which such declaration of an arrangement as an impermissible avoidance arrange shall apply. No direction shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interests of the Revenue, as the case may be.

The Approving panel may, before issuing any direction-

• If it is of the opinion that any further inquiry in the matter is necessary direct the Commissioner to make such inquiry or cause the inquiry to be made by any other income tax authority and furnish a report containing the result of such inquiry to it; or
• Call for and examine such records relating to the matter as it deems fit; or
• Require the assessee to furnish such documents and evidence as it may direct;

If the members of the Approving Panel differ in opinion on any point such point shall be decided according to the opinion of the majority of the members. The Approving panel shall issue directions within a period of six months from the end of the month in which the reference was received. The directions issued by the Approving Panel shall be binding on the assessee and the Commissioner and the income tax authorities subordinate to him. No appeal shall lie against such directions under the Act.

The Assessing Officer on receipt of directions of the Commissioner or the Approving Panel shall proceed to complete the proceedings.   If any direction specifies that declaration of the arrangement as impermissible avoidance arrangement is application for any previous year other than the previous year to which the proceeding then the Assessing Officer while completing any assessment or reassessment proceedings of the assessment year with such directions and it shall not be necessary for him to seek fresh direction on the issue for the relevant assessment year.

No order of assessment or re-assessment shall be passed by the Assessing Officer without the prior approval of the Commissioner, if any tax consequences have been determined in the order.