Section 178 — Applicability of General Anti-Avoidance Rule. Successor to s.95 of the 1961 Act.
Section 178 is in Chapter XI — General Anti-Avoidance Rule, which runs from section 178 to section 184.
Sub-section (1) is the enabling provision for the anti-avoidance chapter: notwithstanding anything in the Act, an arrangement entered into by an assessee may be declared an impermissible avoidance arrangement and the tax consequences flowing from it determined, subject to the rest of the Chapter. Sub-section (2) extends the Chapter to any step in, or part of, an arrangement, so a single step can be attacked without the whole arrangement being impermissible.
It switches on the general anti-avoidance rule and gives it priority over every other provision of the Act, while leaving the conditions, procedure and consequences to the other sections of the Chapter. Sub-section (2) closes the argument that an otherwise commercial arrangement is immune because only one step within it was tax-driven.
Nothing is decided by this section alone — it states the power and defers everything else to the Chapter, so the tests for what makes an arrangement impermissible and the consequences that follow are in the sections that come after it. The point that bites in practice is sub-section (2): a step or part of an arrangement can be isolated and dealt with on its own footing.
A group carries out a reorganisation in five steps, four of them commercially driven and one interposed only to secure a tax outcome. Sub-section (2) allows the Chapter to be applied to that single step as it applies to the whole arrangement, so the answer that the reorganisation taken as a whole was commercial does not by itself protect the step. Sub-section (1) opens “irrespective of anything contained in this Act”, so a provision the step relies on elsewhere in the Act gives way — but only if the conditions and the procedure in the rest of Chapter XI are satisfied, this section conferring the power and nothing more.
Not as a proceeding of its own — you meet it in whatever notice or order under the Chapter XI procedure proposes to declare an arrangement, or a step in it, impermissible, and in the assessment giving effect to the consequences. The section names no form and no authority; both come from the rest of the Chapter.
The provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement.
See the full 1961 to 2025 concordance.
