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?
Section 96(1) is a two-limb test and BOTH limbs must be satisfied. The arrangement must be one "the main purpose of which is to obtain a tax benefit", AND it must additionally have at least one of four tainted elements — rights or obligations not ordinarily created between persons dealing at arm's length; misuse or abuse of the provisions of the Act; lacking or deemed to lack commercial substance under s.97, in whole or in part; or being entered into or carried out by means or in a manner not ordinarily employed for bona fide purposes. Section 96(2) then supplies a presumption that works against you: if the main purpose of a STEP in, or a part of, the arrangement is to obtain a tax benefit, the whole arrangement is presumed to have been entered into for that main purpose — "unless it is proved to the contrary by the assessee" — even though the main purpose of the whole arrangement was not a tax benefit.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2018-04-01, reported as Section 96 of the Income-tax Act, 1961, in the form enacted by section 96 of the Finance Act, 2013 (Act 17 of 2013), which superseded the text enacted by the Finance Act, 2012. It bears on section 96, section 96(1), section 96(2), section 95, section 97, section 98, section 100, section 102, section 144BA of the Income Tax Act 1961, in How Tax Law Is Read, Assessment & Scrutiny and Evidence & Burden of Proof matters.
Four points decide these cases. First, "the main purpose", not "a purpose": the Finance Act 2012 version of s.96(1) read "the main purpose or one of the main purposes of which is to obtain a tax benefit", and those five extra words were dropped when the Chapter was substituted. The version in force asks for THE main purpose, which is a materially higher threshold, and a departmental case built on showing that tax was ONE of several purposes does not meet the section as enacted. Second, the two limbs are cumulative — the word between the main-purpose limb and the four tainted elements is "and". An arrangement that is tax-driven but arm's length, commercially substantial, bona fide and involving no misuse of the Act is not caught, however much tax it saves. Third, the four tainted elements are alternatives among themselves (the list ends "; or"), so the Revenue needs only one; and the third of them incorporates the whole of s.97, which is where most of the real fighting happens. Fourth, s.96(2) is the provision that costs taxpayers cases. It is a rebuttable presumption, and the burden of rebutting it is placed expressly on the assessee; but note that the Finance Act 2012 version contained no words of rebuttal at all, so the words "unless it is proved to the contrary by the assessee" were a taxpayer-favourable addition and should be used as such. Read with the Explanation to s.95, which allows the Chapter to be applied to a single step, s.96(2) is how a tax-motivated step inside an otherwise commercial transaction pulls the whole arrangement into the Chapter.
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 96, as substituted by the Finance Act 2013, reads: "96. (1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it— (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; (c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes. (2) 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." The Finance Act 2012 version opened "An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it—", and its sub-section (2) contained no words allowing the presumption to be rebutted.
Not a judgment. The statutory position is that an arrangement is an impermissible avoidance arrangement only if BOTH limbs of s.96(1) are satisfied — the main purpose of the arrangement is to obtain a tax benefit, and it exhibits at least one of the four tainted elements in clauses (a) to (d); that clause (c) imports the whole of s.97; and that by s.96(2) an arrangement is presumed to have been entered into for the main purpose of obtaining a tax benefit where the main purpose of a step in or part of it was to obtain a tax benefit, that presumption operating notwithstanding that the main purpose of the whole arrangement was not a tax benefit, and being rebuttable only by proof to the contrary by the assessee.
Not a judgment; no judicial reasoning is stated for the section itself.
(2) 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.
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 96(1) is a two-limb test and BOTH limbs must be satisfied. The arrangement must be one "the main purpose of which is to obtain a tax benefit", AND it must additionally have at least one of four tainted elements — rights or obligations not ordinarily created between persons dealing at arm's length; misuse or abuse of the provisions of the Act; lacking or deemed to lack commercial substance under s.97, in whole or in part; or being entered into or carried out by means or in a manner not ordinarily employed for bona fide purposes. Section 96(2) then supplies a presumption that works against you: if the main purpose of a STEP in, or a part of, the arrangement is to obtain a tax benefit, the whole arrangement is presumed to have been entered into for that main purpose — "unless it is proved to the contrary by the assessee" — even though the main purpose of the whole arrangement was not a tax benefit. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 96, section 96(1), section 96(2), section 95, section 97, section 98, section 100, section 102, section 144BA of the Income Tax Act 1961. It is reported as Section 96 of the Income-tax Act, 1961, in the form enacted by section 96 of the Finance Act, 2013 (Act 17 of 2013), which superseded the text enacted by the Finance Act, 2012. Four points decide these cases. First, "the main purpose", not "a purpose": the Finance Act 2012 version of s.96(1) read "the main purpose or one of the main purposes of which is to obtain a tax benefit", and those five extra words were dropped when the Chapter was substituted. The version in force asks for THE main purpose, which is a materially higher threshold, and a departmental case built on showing that tax was ONE of several purposes does not meet the section as enacted. Second, the two limbs are cumulative — the word between the main-purpose limb and the four tainted elements is "and". An arrangement that is tax-driven but arm's length, commercially substantial, bona fide and involving no misuse of the Act is not caught, however much tax it saves. Third, the four tainted elements are alternatives among themselves (the list ends "; or"), so the Revenue needs only one; and the third of them incorporates the whole of s.97, which is where most of the real fighting happens. Fourth, s.96(2) is the provision that costs taxpayers cases. It is a rebuttable presumption, and the burden of rebutting it is placed expressly on the assessee; but note that the Finance Act 2012 version contained no words of rebuttal at all, so the words "unless it is proved to the contrary by the assessee" were a taxpayer-favourable addition and should be used as such. Read with the Explanation to s.95, which allows the Chapter to be applied to a single step, s.96(2) is how a tax-motivated step inside an otherwise commercial transaction pulls the whole arrangement into the Chapter. If it applies to you, the first step is this: Make the Revenue plead both limbs separately. Ask which of the four clauses of s.96(1) — (a), (b), (c) or (d) — is relied on, and on what material. A notice that asserts tax avoidance without identifying a tainted element does not state a case under the section.
Section 96, as substituted by the Finance Act 2013, reads: "96. (1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it— (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; (c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes. (2) 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." The Finance Act 2012 version opened "An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it—", and its sub-section (2) contained no words allowing the presumption to be rebutted. 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. Not a judgment. The statutory position is that an arrangement is an impermissible avoidance arrangement only if BOTH limbs of s.96(1) are satisfied — the main purpose of the arrangement is to obtain a tax benefit, and it exhibits at least one of the four tainted elements in clauses (a) to (d); that clause (c) imports the whole of s.97; and that by s.96(2) an arrangement is presumed to have been entered into for the main purpose of obtaining a tax benefit where the main purpose of a step in or part of it was to obtain a tax benefit, that presumption operating notwithstanding that the main purpose of the whole arrangement was not a tax benefit, and being rebuttable only by proof to the contrary by the assessee.
Not a judgment; no judicial reasoning is stated for the section itself. In the words reproduced by the source cited on this page: "(2) 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."
It was decided by the CBDT Circulars & Instructions on 2018-04-01 and is reported as Section 96 of the Income-tax Act, 1961, in the form enacted by section 96 of the Finance Act, 2013 (Act 17 of 2013), which superseded the text enacted by the Finance Act, 2012. 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 96, section 96(1), section 96(2), section 95, section 97, section 98, section 100, section 102, section 144BA, 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. Not a judgment. The statutory position is that an arrangement is an impermissible avoidance arrangement only if BOTH limbs of s.96(1) are satisfied — the main purpose of the arrangement is to obtain a tax benefit, and it exhibits at least one of the four tainted elements in clauses (a) to (d); that clause (c) imports the whole of s.97; and that by s.96(2) an arrangement is presumed to have been entered into for the main purpose of obtaining a tax benefit where the main purpose of a step in or part of it was to obtain a tax benefit, that presumption operating notwithstanding that the main purpose of the whole arrangement was not a tax benefit, and being rebuttable only by proof to the contrary by the assessee. It arises in How Tax Law Is Read, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 96, section 96(1), section 96(2), section 95, section 97, section 98, section 100, section 102, section 144BA 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. Attack the main-purpose limb on the words actually in force. The test is THE main purpose. Assemble the contemporaneous commercial record — board minutes, valuation reports, lender or regulator correspondence, the scheme papers — to show the dominant purpose was commercial. If the Revenue relies on s.96(2), identify precisely which STEP it says was tax-motivated, and then discharge the burden on that step: the sub-section makes the presumption rebuttable and puts the rebuttal on you, so it must be met with evidence and not with submissions. If clause (c) is relied on, go straight to s.97 — including s.97(4), which says that the period the arrangement existed, the fact that taxes were paid under it, and the fact that it provided an exit route may be relevant but are NOT sufficient to establish lack of commercial substance. If clause (b) — misuse or abuse of the provisions of the Act — is relied on where the Act itself expressly permitted what you did, say so in terms. That was the contention on which the Bombay High Court found a strong prima facie case for interim relief in Hinduja Global Solutions Ltd v PCIT on 19 December 2025, where s.72A(4) expressly allowed the transfer of accumulated loss on a demerger. The Court recorded it as the petitioner's contention and decided nothing on it; it is an argument worth making, not a holding to cite.
Still good law. The text is current so far as could be established: it is the Finance Act 2013 substituted text, and it is confirmed against the substituting Finance Act provision itself on an independent route. No text of s.96 later than that has been found; the only later-numbered material examined turned out to be the super-tax section of a different Act, so a later version cannot be excluded on this evidence. Two features of the substituted text are what a practitioner works with, and both were changes made in 2013. The test is that obtaining a tax benefit must be THE main purpose of the arrangement, not one of its main purposes. And the step presumption in sub-section (2) is rebuttable — 'unless it is proved to the contrary by the assessee' — so a notice that treats the presumption as conclusive is treating the 2012 text as if it were still the law. No check of judicial treatment of the section has been made beyond the decisions named in the editor's note. That is where the weight of this page ends: it states what the Revenue must establish and who bears what, and it states nothing about how the four tainted elements in clauses (a) to (d) have been applied. What would displace the entry: a further substitution of the section, or a decision construing 'main purpose' or any of the four elements. One point of practice follows from the rebuttable presumption. Because sub-section (2) now allows the assessee to prove the contrary, the answer to a step-based notice is evidence about the purpose of the step, and not merely an argument about the purpose of the arrangement as a whole. 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 change from the Finance Act 2012 text is established by comparing two texts of the section, both headed 'Impermissible avoidance arrangement'. The earlier prints 'an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit' and a s.96(2) presumption with NO words permitting rebuttal. The later prints 'an arrangement, the main purpose of which is to obtain a tax benefit' and a s.96(2) presumption qualified by 'unless it is proved to the contrary by the assessee'. Two changes, therefore, and both matter. The Revenue must now show that obtaining a tax benefit was THE main purpose of the arrangement and not merely one of its main purposes; and the step presumption in sub-section (2), which would otherwise be conclusive, is rebuttable by the assessee. The substituted text is confirmed word for word on an independent route: the text of section 96 of the Finance Act, 2013, which is the substituting provision itself. So the wording rests on two sources and not on one. A WRONG-SECTION WARNING. Material filed under a similar number serves a different provision altogether, headed 'Total income for super-tax' and belonging to a different Act. Check the heading before reading a word of it. The 'decided_on' value of 1 April 2018 is NOT the commencement of s.96. It is the first day of the first assessment year to which s.95(2) applies the Chapter. The date on which the substituted Chapter itself came into force could not be verified from anything read here, and no such date is stated. Judicial treatment of s.96 has not been checked beyond the Telangana High Court common order of 7 June 2024, which the library already holds, and the two interim orders cited on this page. That is a real limit: the four tainted elements in sub-section (1) and the words 'main purpose' are the whole of the argument in a s.144BA proceeding, and nothing on this page states what any court has made of them. One point of structure worth setting out. Sub-section (1) requires TWO things together: the main purpose of the arrangement must be to obtain a tax benefit, AND the arrangement must have at least one of the four tainted elements in clauses (a) to (d). A notice that establishes purpose and says nothing about the elements, or that asserts an element without addressing purpose, has not made out the definition, and that is the first thing to test a s.144BA(2) notice against. 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.
Not a judgment. The statutory position is that an arrangement is an impermissible avoidance arrangement only if BOTH limbs of s.96(1) are satisfied — the main purpose of the arrangement is to obtain a tax benefit, and it exhibits at least one of the four tainted elements in clauses (a) to (d); that clause (c) imports the whole of s.97; and that by s.96(2) an arrangement is presumed to have been entered into for the main purpose of obtaining a tax benefit where the main purpose of a step in or part of it was to obtain a tax benefit, that presumption operating notwithstanding that the main purpose of the whole arrangement was not a tax benefit, and being rebuttable only by proof to the contrary by the assessee.
TaxSphere, “Statutory position — s.96: what makes an arrangement impermissible — the main-purpose test, the four tainted elements, and the s.96(2) presumption that shifts the burden onto you”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-96-impermissible-avoidance-arrangement-the-main-purpose-test-four-tainted-elements-and-the-step-presumption/ (validity last checked 2026-09-09)
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.
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 AO invoked GAAR even though a specific anti-avoidance section covers my transaction. Can he do that?
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 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?
