1

Judicial Anti-Avoidance Rules

A final draft submitted in partial fulfilment of the course of
Environmental Law during the academic session 2020-21,
Semester VII

Submitted by: Aanchal

Roll no: 181602
B.B.A., LL.B. (Hons.)

Submitted to:Dr. G.P. Pandey

Faculty, Taxation Law-I

September, 2020

Chanakya National Law University, Mithapur,

Patna
DECLARATION

I hereby declare that the work reported in the B.B.A. LL.B (Hons.) Project Report
entitled “Judicial Anti-Avoidance Rules” submitted at Chanakya National Law
University, Patna is an authentic record of my work carried out under the supervision
of Dr. G.P Pandey I have not submitted this work elsewhere for any other degree or
diploma. I am fully responsible for the contents of my Project Report.

(Signature of the Candidate)

Aanchal
Chanakya National Law University, Patna
ACKNOWLEDGEMENT

A project is a joint endeavor which is to be accomplished with utmost compassion,

diligence and with support of all. Gratitude is a noble response of one’s soul to
kindness or help generously rendered by another and its acknowledgement is the duty
and joyance. I am overwhelmed in all humbleness and gratefulness to acknowledge
from the bottom of my heart to all those who have helped me to put these ideas, well
above the level of simplicity and into something concrete effectively and moreover on
time.
This project would not have been completed without combined effort of my revered
Taxation Law teacher Dr. G.P Pandey whose support and guidance was the driving
force to successfully complete this project. I express my heartfelt gratitude to him.
Thanks are also due to my parents, family, my dear friends and all those who helped
me in this project in any way. Last but not the least; I would like to express my sincere
gratitude to our Taxation Law teacher for providing us with such a golden
opportunity to showcase our talents.
Moreover, thanks to all those who helped me in any way be it words, presence,
Encouragement or blessings...

Aanchal
7th Semester
BBA LLB
RESEARCH METHODOLOGY

Doctrinal method :- Income Tax Act, books, internet, journals, judgements etc. Researcher
will mainly rely on library based study.
The researcher would like to follow doctrinal research methodology.

SOURCES OF DATA COLLECTION

Primary sources- judgements of apex court, bare acts, statute, & other official document.
Secondary sources- statement of judges, websites, articles, news paper, books, journals etc.

AIMS AND OBJECTIVES

The objectives of the research report is:

• To understand the meaning and concept of General Anti Avoidance Rule.
• To highlight the recent Judicial developments in Anti-Avoidance Rules.

LIMITATION OF THE STUDY

The research work is wholly based on doctrinal method of research, this research work
doesn’t rely on non-doctrinal research or empirical research.
TABLE OF CONTENTS

• Introduction…...................................................................................6-7
• Judicial Anti Avoidance Rule............................................................8-9
• Indian Judiciary on Anti Avoidance................................................10-12
• Principles of Judicial GAAR…...........................................................13
• Conclusion…......................................................................................14
• Bibliography…...................................................................................15
INTRODUCTION

General Anti Avoidance Rule (GAAR) was first introduced in the Direct Taxes Code Bill
2010. The original proposal gave the Commissioner of Income Tax the authority to
declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed
the main purpose of the arrangement was to obtain a tax benefit.

GAAR was introduced to address tax avoidance and ensure that those in different tax
brackets are taxed the correct amount. In many instances of tax avoidance, arrangements
may take place with the sole intention of gaining a tax advantage while complying with
the law. This is when the doctrine of ‘substance over form’ may apply. ‘Substance over
form’ is where real intention of parties and the purpose of an arrangement is taken into
account rather than just the nomenclature of the arrangement. Many countries, like
Canada and South Africa, have codified the doctrine of ‘substance over form’ through a
GAAR – type ruling. GAAR is an attempt by the Govt. to codify the very thin yet
impactful line of difference between tax avoidance and tax planning.

Distinction between Tax Avoidance and Tax Evasion:

• Tax evasion: intentional non-payment or underpayment of tax through fraud, non
disclosure or misrepresentation (criminal offence punishable by fines or imprisonment).
It is a result of unlawful, illegal, willful suppression and misrepresentation of facts
GAAR doesn’t apply.
• Tax avoidance: reduction of tax legally (i.e., no fraud, non-disclosure or
misrepresentation). Tax avoidance is difficult to define precisely. GAAR shall apply to
unacceptable tax avoidance.
– some tax avoidance may not be successful because of specific rules or court decisions
– some tax avoidance is acceptable and some is unacceptable
– tax avoidance is not usually illegal.
Tax planning, on the other hand, is a process of looking at various tax options and using the
available fiscal incentives to determine when, whether, and how to conduct business and
personal transactions so that taxes are eliminated or reduced. GAAR may not apply.

Unlike specific anti-avoidance rules, a GAAR is intended to apply to all types of transactions
and arrangements, all types of taxpayers, all types of taxes (PIT, CIT, capital gains tax)
and all types of payments and receipts. It attempts to discourage or prevent tax avoidance
before it occurs rather than dealing with it after it happens.

Techniques for Combating Tax Avoidance:

• Clearer tax legislation
• Judicial anti-avoidance doctrines
• Specific anti-avoidance rules
• Better enforcement
• General anti-avoidance rule

Most countries have concluded that a GAAR is necessary

– Specific rules are inadequate
– Extensive tax avoidance undermines public confidence in the tax system and fairness

A GAAR can be judicial or statutory. Most countries do not have well developed judicial
anti-avoidance doctrines. Therefore, a statutory GAAR is the only feasible option.
Transaction results in a tax benefit. The sole, principal or one of the principal purposes of
the transaction was to obtain the tax benefit. The transaction frustrates, defeats or abuses
the purpose of the relevant statutory provision.
JUDICIAL ANTI AVOIDANCE RULE

There are no GAAR provisions in the tax laws, but the domestic law contains specific anti-
avoidance provisions (SAAR). For example, the tax law disregards sham transactions
and disallows excessive deductions either under the “wholly and exclusively” rule or
under certain “disallowance” rules. The underlying principles are implemented through
administrative measures of the tax authorities and the judicial decisions of the Courts at
various levels. In recent years, guidance on cross-border transactions is also provided by
the decisions of the Authority for Advance Rulings.

The Shome Panel is responsible for constituting guidelines for General Anti Avoidance
Rules (GAAR) in India. The panel was established by Dr. Manmohan Singh and headed
by economist Parthasarathi Shome.

The committee has said that the retrospective application of tax law should happen in the
rarest of rare cases and for one of three reasons only:
• To correct anomalies in the statute.
• To matters that are clarificatory in nature such as technical/procedural defects that vitiate
the substantive law.
• To protect the tax base from abusive tax planning schemes to avoid tax.

The panel has recommend deferring GAAR for three years. 12 One may get the impression
that this is the last we have heard of it for some time. But GAAR exists even now, if not
in the statute book, then through the principle being enshrined through judicial
pronouncements.

1
Shome panel’s wrong call. The Hindu (2012-10-17). Retrieved on 2014-01-11.
2
GAAR: Parthasarathi Shome committee’s report card – Economic Times.
Articles.economictimes.indiatimes.com (2012-10-11). Retrieved on 2014-01-11.
In the Vodafone case judgement,3 the Supreme Court said, “The concept of GAAR is not new
to India since India already has a judicial anti-avoidance rule. The litigation that has
happened so far has only been because of lack of clarity and absence of appropriate
provisions in the statute on when judicial anti-avoidance rules would apply.”4

3
VODAFONE INTERNATIONAL HOLDINGS B.V. v. UNION OF INDIA & ANR. (Civil Appeal No. 733 of
2012)
4
[2012] 1 S.C.R. 573
INDIAN JUDICIARY ON ANTI AVOIDANCE

In the McDowell & Co. case,5 the Indian Supreme Court held that tax planning was
legitimate but only provided it was within the framework of law. It was the obligation of
every citizen to pay his taxes honestly without resorting to subterfuges. Colourable
devices could not be part of tax planning, and it was improper for taxpayers to avoid tax
by dubious methods. Excise duty payable on manufacture of liquor, being a liability of
manufacturer, should be included in calculation of turnover for determining sales tax
liability, even though the excise duty was paid by buyers of assessee through amicable
arrangements - SC rules in favour of Revenue; Holds that “excise duty though paid by
the purchaser to meet the liability of the appellant, is a part of the consideration for the
sale and is includible in the turnover of the appellant.” Precedence of substance over
form. Time to depart from the cardinal principle established in ‘Duke of Westminster’
6and reliance on principles established in ‘Ramsay’7 and ‘Burmah Oil Co’.8

Therefore, schemes devised to evade taxes could be struck down. In recent years, the Courts
have moved to a slightly more flexible and purposive approach to discourage
transactions contrary to the legislative intent.

This judgment was discussed by the Indian Supreme Court in the case of Azadi Bachao
Andolan.9 It distinguished the previous decision in McDowell and diluted it’s reasonings.
Lawful acts cannot be treated as non-est merely on the basis of underlying motive
supposedly resulting in economic detriment / prejudice to the national interests. It also
accepted the view, which was taken by the House of Lords in the cases of IRC v Fisher

5
Mc Dowell & Company Limited vs The Commercial Tax Officer, 1986 AIR 649, 1985 SCR (3) 791
6
1935 All E.R. 259
7
W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865
8
IRC v. Burmah Oil Co Ltd. (1982) 54 TC 200
9
Union Of India And Anr vs Azadi Bachao Andolan And Anr (2003) 263 ITR 0706
10
and IRC v Duke of Westminster,11 that “every man was entitled to so arrange his affairs
as not to attract taxes imposed by the Crown, in so far as he can do that within the law”.

For an anti-avoidance provision to be applied, it must be specifically enacted in the domestic

law or stated in the tax treaties.

In the Vodafone case,12 the Supreme Court observed 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. While doing so, it has to ‘look at’
the entire transaction as a whole and not adopt a dissecting approach. Transactions with
no business purpose other than tax avoidance to be disregarded. Authorities are bound to
determine true legal relationship resulting from transaction. The apex court pronounced a
landmark judgment and cleared the uncertainty with respect to imposition of taxes. The
apex court through this judgment recognized:

• The principles of tax planning.

• Business entities or individual may arrange the affairs of their business so as to reduce
their tax liability in absence of any statutory stipulation prohibiting the same.
• The multinational companies often establish corporate structures and all these structures
should be established for business and commercial purposes only.
• The corporate veil may be lifted in case facts and circumstances reveal that the transaction
or corporate structure is sham and intended to evade taxes.
• The transactions should be looked holistic manner and not in a dissecting manner and the
presence of corporate structures in tax neutral/investor friendly nations should not lead
to the conclusion that these are meant to avoid taxes.

10
IRC v Fisher’s Executors [1926] AC 412
11
supra.
12
VODAFONE INTERNATIONAL HOLDINGS B.V. v. UNION OF INDIA & ANR. (Civil Appeal No. 733 of
2012. [2012] 1 S.C.R. 573
In the end, it can be said that this judgment has helped in removing uncertainties with respect
to imposition of taxes and recognized the principle the if motive of the transaction is to
avoid tax does not necessarily lead to assumption of evasion of taxes and the supreme
court has endorsed the view of legitimate tax planning.

The ghost of GAAR has not therefore been exorcised. It’s specter will continue to be felt
through the ‘look at’ approach of the taxman as a judicial anti-avoidance principle.
GAAR has been designed to expose ‘seeming compliance’ under some guise or the other.
GAAR may not be there yet, but JAAR (judicial anti-avoidance rule) is very much there.
PRINCIPLES OF JUDICIAL GAAR

Sham Doctrine:
Applied by courts in cases where the substance of a transaction, as intended by the parties, is
not correctly represented by the documentation, i.e. the rights and obligations apparently
created differ from those actually intended by the parties.

Substance over form:

Courts look into the economic or fiscal substance of a transaction, rather than the legal
effects of a transaction, to determine the tax consequences of the transaction.

Step transaction:
Transactions that are undertaken for no purpose other than to avoid tax, and involve a series
of legally ineffective steps, are taxed on the basis of their ultimate result, thereby
ignoring the intervening steps.

Business purpose test:

Transactions are tested for a real business purpose, or any legitimate non-tax purpose, i.e.
transactions largely motivated by the desire to minimize or avoid tax are ignored.
CONCLUSION

General Anti Avoidance Rules (‘GAAR’) that became effective from April 1, 2017, enables
Revenue to go into the substance of a transaction and to disregard the same if the main
purpose of such an arrangement is to obtain tax benefits without any commercial
justification for creating such an arrangement. GAAR is an attempt by the Govt. to
codify the very thin yet impactful line of difference between tax avoidance and tax
planning. The researcher in this project report has made an effort to bring to some of the
landmark rulings on the aspect of tax avoidance vs. tax planning. Celebrated rulings by
the Apex Court in the cases of Mc.Dowell & Co. Ltd., Azaadi Bachao Andolan and
Vodafone International Holdings, to name a few, are considered in specific by the
researcher.

The researcher concluded that GAAR is not applicable on the arrangements where tax
benefit arising to all parties (in aggregate) does not exceed INR 30 million, non-resident
investors in such FIIs, and FIIs who do not avail tax treaty benefits. GAAR can also not
be applied on the arrangements entailing income accruing or arising to a person from
transfer of an investment made before 1 April 2017.

The Courts have usually favoured the taxpayer and take a literal view. A decision of the
Andhra Pradesh High Court in 1983 provides a more liberal treaty interpretation.But in
recent years, the Courts have moved to a slightly more flexible and purposive approach
to discourage transactions contrary to the legislative intent. GAAR has been designed to
expose ‘seeming compliance’ under some guise or the other. GAAR may not be there
yet, but JAAR (judicial anti-avoidance rule) is very much there.
BIBLIOGRAPHY

Book Referred:
• Law and Practice Relating to General Anti Avoidance Rules (GAAR) by D.P.
Mittal

Websites Referred:
• https://www.finmin.nic.in/sites/default/files/report_gaar_itact1961.pdf
• http://www.fitindia.org/downloads/Brian_Cleave_2011.pdf
• Economic Times. Articles.economictimes.indiatimes.com (2012-10-11). Retrieved on
2014-01-11.
• https://www.taxand.com/wp-content/uploads/2018/07/Taxand-Asia-Senior -
School-2018-DTA-Session-6-GAAR.pdf
• https://www.un.org/esa/ffd/wp-content/uploads/
2017/11/2017TB_08_GAARs_D3_1_Role-of-GAAR.pdf