If the Approving Panel declares my client's arrangement impermissible, what consequences can the Assessing Officer impose, and can he recast the whole structure or only the offending part?
Section 98(1) lets the consequences be determined 'in such manner as is deemed appropriate' and gives a non-exhaustive list of seven powers, including disregarding, combining or recharacterising any step; treating the arrangement as if it had not been entered into; disregarding an accommodating party; treating connected persons as one person; reallocating receipts and expenditure among the parties; relocating the residence of a party or the situs of an asset or transaction; and looking through any corporate structure. Section 98(2) adds that equity may be treated as debt or vice versa, capital may be treated as revenue or vice versa, and any expenditure, deduction, relief or rebate may be recharacterised — but Rule 10UA confines the consequences to the offending part where only a part of the arrangement is declared impermissible.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2018-04-01, reported as Income-tax Act, 1961, section 98; Income-tax Rules, 1962, rule 10UA. It bears on section 98, section 98(1), section 98(2), section 95, section 96, section 97, section 102, section Rule 10UA of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
Section 98 is the widest recharacterisation power in the Act and the words 'including by way of but not limited to' mean the seven clauses are illustrative, not exhaustive. Two limits are worth more than the list. The first is Rule 10UA: where a PART of an arrangement is declared impermissible, the consequences in relation to tax are determined with reference to that part only — so a declaration aimed at one step cannot be used to unwind the whole transaction, and the Explanation to section 95 (which permits the Chapter to be applied to a step or part) has its counterpart on the consequences side. The second is denial of a treaty benefit: section 98(1) says the consequences include 'denial of tax benefit or a benefit under a tax treaty', which is the express statutory foundation for overriding a DTAA under Chapter X-A, and it is the reason a treaty argument does not by itself answer a GAAR notice. Practically, the seven clauses are also a checklist for testing the department's order: an order that simply adds an amount to income, without identifying which clause of section 98(1) or 98(2) it is exercising and against which step, is vulnerable, because the section is a menu of determinate consequences and not a general power to assess.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
Section 98(1) provides that if an arrangement is declared to be an impermissible avoidance arrangement, then the consequences in relation to tax of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined in such manner as is deemed appropriate in the circumstances of the case, including by way of but not limited to: (a) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement; (b) treating the arrangement as if it had not been entered into or carried out; (c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; (d) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount; (e) reallocating amongst the parties to the arrangement any accrual or receipt of a capital nature or revenue nature, or any expenditure, deduction, relief or rebate; (f) treating the place of residence of any party, or the situs of an asset or of a transaction, at a place other than that provided under the arrangement; or (g) considering or looking through any arrangement by disregarding any corporate structure. Section 98(2) provides that for the purposes of sub-section (1), any equity may be treated as debt or vice versa, any accrual or receipt of a capital nature may be treated as of revenue nature or vice versa, and any expenditure, deduction, relief or rebate may be recharacterised. Rule 10UA provides that for the purposes of section 98(1), where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only.
Statutory position — no holding is asserted; this entry reproduces statutory and rule text. Once an arrangement is declared impermissible, the consequences may be determined in such manner as is deemed appropriate, including by any of the seven illustrative routes in section 98(1) and the three recharacterisations in section 98(2); but where only a part of the arrangement is declared impermissible, rule 10UA confines the consequences to that part.
The section is drafted as an open-ended power qualified by an illustrative list, and the qualification carries the weight. Because 'including by way of but not limited to' precedes the seven clauses, the list does not exhaust the consequences; but each clause identifies a determinate operation on a determinate object — a step, a party, an accrual, a place of residence, a corporate structure — which is what makes the exercise reviewable. Section 98(2) is not a separate power but an aid to sub-section (1), introduced by the words 'For the purposes of sub-section (1)'. The express mention of denial of 'a benefit under a tax treaty' in the opening words is what allows Chapter X-A to displace an otherwise available treaty relief, and it sits alongside section 100, which applies the Chapter in addition to or in lieu of any other basis for determining tax liability. Rule 10UA supplies the proportionality that the section itself does not: the Explanation to section 95 permits the Chapter to be applied to a step or a part of an arrangement, and rule 10UA makes the consequences follow the same boundary.
If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppSection 98(1) lets the consequences be determined 'in such manner as is deemed appropriate' and gives a non-exhaustive list of seven powers, including disregarding, combining or recharacterising any step; treating the arrangement as if it had not been entered into; disregarding an accommodating party; treating connected persons as one person; reallocating receipts and expenditure among the parties; relocating the residence of a party or the situs of an asset or transaction; and looking through any corporate structure. Section 98(2) adds that equity may be treated as debt or vice versa, capital may be treated as revenue or vice versa, and any expenditure, deduction, relief or rebate may be recharacterised — but Rule 10UA confines the consequences to the offending part where only a part of the arrangement is declared impermissible. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 98, section 98(1), section 98(2), section 95, section 96, section 97, section 102, section Rule 10UA of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, section 98; Income-tax Rules, 1962, rule 10UA. Section 98 is the widest recharacterisation power in the Act and the words 'including by way of but not limited to' mean the seven clauses are illustrative, not exhaustive. Two limits are worth more than the list. The first is Rule 10UA: where a PART of an arrangement is declared impermissible, the consequences in relation to tax are determined with reference to that part only — so a declaration aimed at one step cannot be used to unwind the whole transaction, and the Explanation to section 95 (which permits the Chapter to be applied to a step or part) has its counterpart on the consequences side. The second is denial of a treaty benefit: section 98(1) says the consequences include 'denial of tax benefit or a benefit under a tax treaty', which is the express statutory foundation for overriding a DTAA under Chapter X-A, and it is the reason a treaty argument does not by itself answer a GAAR notice. Practically, the seven clauses are also a checklist for testing the department's order: an order that simply adds an amount to income, without identifying which clause of section 98(1) or 98(2) it is exercising and against which step, is vulnerable, because the section is a menu of determinate consequences and not a general power to assess. If it applies to you, the first step is this: Ask which clause of section 98(1) or 98(2) the Assessing Officer is applying and to which identified step; the consequences must be traceable to a determinate power, not asserted at large.
Section 98(1) provides that if an arrangement is declared to be an impermissible avoidance arrangement, then the consequences in relation to tax of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined in such manner as is deemed appropriate in the circumstances of the case, including by way of but not limited to: (a) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement; (b) treating the arrangement as if it had not been entered into or carried out; (c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; (d) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount; (e) reallocating amongst the parties to the arrangement any accrual or receipt of a capital nature or revenue nature, or any expenditure, deduction, relief or rebate; (f) treating the place of residence of any party, or the situs of an asset or of a transaction, at a place other than that provided under the arrangement; or (g) considering or looking through any arrangement by disregarding any corporate structure. Section 98(2) provides that for the purposes of sub-section (1), any equity may be treated as debt or vice versa, any accrual or receipt of a capital nature may be treated as of revenue nature or vice versa, and any expenditure, deduction, relief or rebate may be recharacterised. Rule 10UA provides that for the purposes of section 98(1), where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only. The matter was decided on 2018-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory and rule text. Once an arrangement is declared impermissible, the consequences may be determined in such manner as is deemed appropriate, including by any of the seven illustrative routes in section 98(1) and the three recharacterisations in section 98(2); but where only a part of the arrangement is declared impermissible, rule 10UA confines the consequences to that part.
The section is drafted as an open-ended power qualified by an illustrative list, and the qualification carries the weight. Because 'including by way of but not limited to' precedes the seven clauses, the list does not exhaust the consequences; but each clause identifies a determinate operation on a determinate object — a step, a party, an accrual, a place of residence, a corporate structure — which is what makes the exercise reviewable. Section 98(2) is not a separate power but an aid to sub-section (1), introduced by the words 'For the purposes of sub-section (1)'. The express mention of denial of 'a benefit under a tax treaty' in the opening words is what allows Chapter X-A to displace an otherwise available treaty relief, and it sits alongside section 100, which applies the Chapter in addition to or in lieu of any other basis for determining tax liability. Rule 10UA supplies the proportionality that the section itself does not: the Explanation to section 95 permits the Chapter to be applied to a step or a part of an arrangement, and rule 10UA makes the consequences follow the same boundary. In the words reproduced by the source cited on this page: "If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—"
It was decided by the CBDT Circulars & Instructions on 2018-04-01 and is reported as Income-tax Act, 1961, section 98; Income-tax Rules, 1962, rule 10UA. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 98, section 98(1), section 98(2), section 95, section 96, section 97, section 102, section Rule 10UA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory and rule text. Once an arrangement is declared impermissible, the consequences may be determined in such manner as is deemed appropriate, including by any of the seven illustrative routes in section 98(1) and the three recharacterisations in section 98(2); but where only a part of the arrangement is declared impermissible, rule 10UA confines the consequences to that part. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 98, section 98(1), section 98(2), section 95, section 96, section 97, section 102, section Rule 10UA of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the declaration was of a PART of the arrangement, invoke rule 10UA to confine the consequences to that part, and resist any recomputation that unwinds steps not covered by the declaration. Where the department relies on section 98(1)(c) or (d) — disregarding an accommodating party, or deeming connected persons to be one person — check that the party in question meets the definition of accommodating party in section 97(3) or of connected person in section 102(4), because those definitions, not the department's characterisation, control. Where the department relocates residence or situs under section 98(1)(f), identify the tax consequence it produces; that clause is what converts an offshore transaction into an Indian one, and it is the clause that most often does the real work. Do not treat a favourable DTAA as an answer to a Chapter X-A notice: section 98(1) expressly contemplates denial of a benefit under a tax treaty as one of the consequences. Check whether the recharacterisation in section 98(2) has been used to convert capital into revenue or equity into debt, and whether the resulting computation has been carried through consistently in both hands where the arrangement has two parties.
Still good law. This is the statutory and rule text, not a decision about it, so the status records that the provisions are in force as stated and not that any court has construed them. The current published text of section 98 differs from the 2013 version only in the heading and in the wording of clause (1)(e)(i), and no amendment footnote is printed against it, so the section is stated as it currently stands. Rule 10UA carries no date stamp on the text available and could not be dated here. NO DECISION APPLYING SECTION 98 OR RULE 10UA IS RECORDED IN THIS ENTRY, and none is asserted. That is the position to expect for some time: Chapter X-A applies to arrangements entered into on or after 1 April 2017 and the procedure in section 144BA has produced very few completed references, so the consequences provision has scarcely been exercised, let alone reviewed. Three things follow for anyone using the entry. Every proposition here is textual and stands on the words of the section and the rule, which is why the seven clauses are set out in full. The proportionality limit in rule 10UA — where a part of an arrangement is declared impermissible, the consequences are determined with reference to that part only — has not been tested, and it is the limit most likely to be fought over, because the Explanation to section 95 permits the Chapter to be applied to a step or a part and the department's instinct will be to unwind the whole. And the express reference in section 98(1) to denial of 'a benefit under a tax treaty' is the statutory foundation for overriding a treaty under this Chapter; how that sits with section 90(2) and with a limitation of benefits article in a particular treaty is an open question that this entry does not answer. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
THE HEADING CHANGED WITH THE 2013 SUBSTITUTION and the change matters when a source is being checked. The older printing prints the heading 'Consequence of impermissible avoidance arrangement', in the singular, and a text in which clause (1)(e)(i) reads 'any accrual, or receipt, of a capital or revenue nature'. The current printing prints the heading 'Consequences of impermissible avoidance arrangement', in the plural, and clause (1)(e)(i) as 'any accrual, or receipt, of a capital nature or revenue nature'. The current text is what this entry states. Nothing turns on the difference in substance, but a quotation that carries the singular heading is a quotation from the superseded text and will be treated as such. A WARNING ABOUT THE NUMBER. Several unrelated provisions carry the number 98 and they are easily confused with this one. The original section 98 of the Income-tax Act, 1961 was headed 'Avoidance of super-tax' and has long since gone; section 98 of the Finance Act 1998 belongs to the Kar Vivad Samadhan Scheme; and section 98 of the Finance Act 2001 amends the Wealth-tax Act. A reference to 'section 98' without the Act and the heading is therefore ambiguous, and the Chapter X-A provision has to be identified by its heading — 'Consequences of impermissible avoidance arrangement' — every time. Rule 10UA carries no date stamp on the text available and could not be dated here, so nothing is stated about when it was inserted or whether it has been amended. TWO POINTS ON HOW THE SECTION READS. Section 98(2) is not a separate power: it opens with 'For the purposes of sub-section (1)', so the three recharacterisations in it — equity as debt or the reverse, capital as revenue or the reverse, and recharacterisation of any expenditure, deduction, relief or rebate — are aids to the consequences determined under sub-section (1) and cannot stand on their own. And the seven clauses of sub-section (1) are illustrative, because the opening words are 'including by way of but not limited to'; but each clause names a determinate operation on a determinate object, which is what makes an order under the section testable. An order that simply adds an amount to income without identifying the clause it is exercising and the step it is exercised against is not exercising this section at all. One point of scope: this entry sets out section 98 and rule 10UA only. The threshold questions — whether the arrangement is an impermissible avoidance arrangement within section 96, whether it lacks commercial substance within section 97, and whether it is outside the Chapter altogether under section 102 or the monetary threshold — are decided before section 98 is reached and are not addressed here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory and rule text. Once an arrangement is declared impermissible, the consequences may be determined in such manner as is deemed appropriate, including by any of the seven illustrative routes in section 98(1) and the three recharacterisations in section 98(2); but where only a part of the arrangement is declared impermissible, rule 10UA confines the consequences to that part.
TaxSphere, “Statutory position — section 98 and Rule 10UA: what the department may actually do once an arrangement is declared impermissible”, https://taxnotice.vittsphere.com/caselaw/case/section-98-consequences-of-an-impermissible-avoidance-arrangement/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Can the department run GAAR and a specific anti-avoidance provision on the same transaction, and is there anything that limits how GAAR is applied?
The Assessing Officer has written that he proposes to invoke Chapter X-A. Which provision actually gives him that power, from which assessment year does it bite, and can he pick on a single step of a transaction that as a whole was done for real commercial reasons?
The Commissioner's notice under s.144BA(2) says my arrangement is an impermissible avoidance arrangement. What exactly does the Revenue have to establish, and who has to prove what?
The Commissioner says my structure "lacks commercial substance". What does that phrase actually mean in the Act, and does it help me that the structure has been in place for years, has paid tax, and has a normal exit route?
