Comparison of JAAD and GAAR - Income Tax - Ready Reckoner - Income Tax

Comparison of JAAD and GAAR Particulars Judicial Anti Avoidance Rules (JAAR) General Anti Avoidance Rules (GAAR) Nature It is a judicial measure to curb the tax avoidance. It is a legislative measure to curb tax avoidance, Meaning JAAR is the judicial interpretation to deal with the situation of tax avoidance The Courts may take either a literal, i.e., strict view or purposive view towards statutory interpretation. GAAR standardized the approach to deal with situation of tax avoidance by codifying what constitutes tax avoidance. It is to codify the doctrine of substance over form , where the real intention of the parties and effect of transactions and purpose of an arrangement is required to be seen, GAAR provisions are introduced under the Act. Landscape In India, the judicial interpretation of substance over form was given by Apex Court in Mc Dowell [TS-1-SC-1985-O] in year 1985 . As famous as McDonalds, it was a landmark ruling in the context of tax planning, tax avoidance and tax evasion. In the case of Azadi Bachao Andolan [TS-5-SC-2003-O] in year 2003 , the Apex Court gave radical finding that there is no complete go bye to Westminster s principle. Lately, in Vodafone [TS-23-SC-2012-O] case in 2012 , the Supreme Court held that the Income-Tax Department could always apply the substance over form principle or pierce the corporate veil if they establish that a transaction is a sham or tax avoidant GAAR is an extended and codified version of JAAR as spelt out by Apex Court in various decisions starting with Mc Dowell to Vodafone. Scope The Courts on various occasions have held that that an attempt by resident of a third party to take advantage of existing provisions of double taxation avoidance agreement is not per se illegal unless such entity is per se sham or colorable device. Tax Department cannot alter such arrangement merely because it is detrimental to revenue. Scope of GAAR is much wider than what was explained by the Apex Court in Mc Dowell case. The deeming definition of lack of Commercial substance as provided under section 97(1) of the Act includes round trip financing, accommodating party, element of offsetting or cancelling effect of individual transactions, impact of arrangement on business risks and cash flows, location of assets or transaction or a place of residence of any party as one of the elements to treat any tax planning as tax avoidance. Threshold Limit No threshold limits for applicability of JAAR as essentially, JAAR revolves around the following two guiding principles- a) Business purpose rule (motive test) b) Substance over form rule (artificiality test) Its applicability has been restricted to cases where tax benefit exceed Rs.3 Cr. to avoid unintended harassment cost of litigation.