Two things, cumulatively: that the main purpose of the arrangement was to obtain a tax benefit, and that it carries at least one of the four tainted elements in s.96(1)(a) to (d). Even then, Chapter X-A does not apply at all if the tax benefit to all the parties in aggregate for the year is Rs 3 crore or less, or if the income is from the transfer of an investment made before 1 April 2017. And the Assessing Officer cannot declare anything himself: he refers the matter to the Principal Commissioner, who refers it to a three-member Approving Panel chaired by a serving or former High Court judge, whose directions bind both sides and against which no appeal lies.
Chapter X-A opens with a non obstante clause. s.95(1) provides that 'Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter', and s.95(2) that 'This Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018.' An Explanation adds that the Chapter may be applied to any step in, or a part of, an arrangement as it applies to the arrangement — so a single step can be attacked without the whole restructuring being condemned.
The definition is in s.96(1) and it has two limbs that must both be met. An impermissible avoidance arrangement 'means an arrangement, the main purpose of which is to obtain a tax benefit, and it—' then, at least one of: '(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'; or '(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes'. Purpose alone is not enough, and a tainted element alone is not enough.
A note on which text this page works from, because it matters. As enacted in 2012 the purpose limb read 'the main purpose or one of the main purposes'; the Finance Act 2013 narrowed it to 'the main purpose'. The department's own section page at incometaxindia.gov.in/w/section-96 still serves the wider 2012 words and carries no amendment footnote — it is stale. The narrowed wording is what appears on the independent bare-act pages fetched, and it is also what has been carried forward into s.179 of the Income-tax Act 2025. The Memorandum to the Finance Bill 2013 is the source for the attribution: it records that the existing provision required that an arrangement's 'main purpose or one of the main purposes' be to obtain a tax benefit and that the amendment reduces that to 'the main purpose'. Read 'the main purpose' as the operative test; if an officer quotes the department's page at you, that is worth saying.
The same warning attaches to the other departmental pages cited here, and it should be read as a warning about all of them rather than about s.96 alone. incometaxindia.gov.in/w/section-97 serves s.97(4) in its 2012 form, opening 'The following shall not be taken into account while determining whether an arrangement lacks commercial substance or not' — an absolute exclusion, where the current provision makes those matters relevant but not sufficient, which is the form set out below and the form carried into s.180(3) of the Act of 2025. incometaxindia.gov.in/w/section-144ba serves the 2012 machinery, with an Approving Panel of not less than three members constituted by the Board out of income-tax authorities not below Commissioner and an officer of the Indian Legal Service — not the panel described below. The Memorandum to the Finance Bill 2013 records both of those changes, along with the deferral of the Chapter, and it is the source relied on here for them. Use those departmental pages to confirm that words exist; never to show that words are absent.
s.96(2) then shifts the burden on purpose. An arrangement is presumed, unless the assessee proves the contrary, to have been entered into 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 that the main purpose of the whole arrangement is not to obtain a tax benefit. So one tax-driven step can put the whole arrangement on the wrong side of the presumption, and the answer has to be evidence of commercial rationale, step by step.
s.97 defines lack of commercial substance, and it is the tainted element that carries most of the litigation. Under s.97(1) an arrangement is deemed to lack commercial substance if '(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps'; or '(b) it involves or includes—(i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds'; or '(c) it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party'; or '(d) it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit'. Round trip financing is defined in s.97(2) to include funds transferred among the parties without any substantial commercial purpose, and it is expressly immaterial whether the funds can be traced, or in what manner, through what medium or by what order the transfers occurred. An accommodating party under s.97(3) is a party whose main purpose in participating is directly or indirectly obtaining a tax benefit for the assessee, whether or not it is a connected person. And s.97(4) closes off three easy defences: the period for which the arrangement exists, the fact that taxes were paid under it, and the existence of an exit route are relevant but are not by themselves sufficient to establish that it has commercial substance.
The consequences under s.98(1) are open-ended, which is the real risk. The authority may determine the tax consequences by 'disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement'; by 'treating the impermissible avoidance arrangement as if it had not been entered into or carried out'; by 'disregarding any accommodating party or treating any accommodating party and any other party as one and the same person'; by 'deeming persons who are connected persons in relation to each other to be one and the same person'; by reallocating receipts, expenditure and deductions among the parties; by treating the place of residence of a party, or the situs of an asset or transaction, as other than the place provided for in the arrangement; or by 'considering or looking through any arrangement by disregarding any corporate structure'. s.98(2) adds that for that purpose equity may be treated as debt and debt as equity, capital receipts as revenue and revenue as capital, and expenditure, deductions, reliefs or rebates recharacterised.
s.100 is short and it is the reason GAAR cannot be answered by pointing at some other provision: 'The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of tax liability.' The treaty side is closed off in the same way — s.90(2A) provides that notwithstanding s.90(2), Chapter X-A applies to the assessee even if it is not beneficial to him, so the beneficial-provision choice does not answer a GAAR proposal.
Two thresholds keep most cases out. Rule 10U(1)(a) provides that Chapter X-A does not apply to 'an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crore'. Note carefully what that measures: the benefit to all the parties taken together, in India, for that assessment year — not each taxpayer's own benefit, and not the benefit summed across years. CBDT Circular No. 7 of 2017, the sixteen-question FAQ on GAAR, states that it is to be worked out on a net basis across the parties. Rule 10U(1)(d) grandfathers income accruing or arising from the transfer of investments made before 1 April 2017; Circular 7/2017 extends that, in the words of the Board's own press release on it, to 'compulsorily convertible instruments, bonus issuances or split / consolidation of holdings in respect of investments made prior to 1st April 2017 in the hands of same investor', and says that lease contracts and loans are not 'investments' for this purpose. Rule 10U(1)(b) carves out a Foreign Institutional Investor which is an assessee, has not claimed treaty benefit under s.90 or s.90A, and has invested in securities in accordance with the SEBI regulations.
The grandfathering has just been widened, and this is the part most likely to be out of date in older material. Rule 10U(2) had said that Chapter X-A applies to any arrangement irrespective of the date on which it was entered into, in respect of the tax benefit obtained on or after 1 April 2017, and that was read by officers as cutting down the Rule 10U(1)(d) protection where the arrangement itself was later. By Notification No. 54/2026 dated 31 March 2026 the CBDT amended rule 10U to make clear that GAAR does not apply to income derived from the transfer of investments made before 1 April 2017 even though the arrangement is not itself grandfathered. A parallel amendment, Notification No. 55/2026, does the same to rule 128 of the Income-tax Rules 2026, which is the successor provision, with effect from 1 April 2026.
The machinery in s.144BA is a genuine safeguard and it is where the argument should be run. The Assessing Officer who proposes to invoke Chapter X-A makes a reference to the Principal Commissioner or Commissioner. That officer issues a notice setting out the arrangement, the tax benefit and his reasons, and gives the assessee a period 'not exceeding sixty days, as may be specified in the notice' to object. If the assessee does not object, the Commissioner issues directions himself. If the assessee objects and the Commissioner is not satisfied by the explanation, s.144BA(4) requires him to 'make a reference in the matter to the Approving Panel'; if he is satisfied that Chapter X-A is not attracted, he issues directions to that effect and it ends there. The Panel is constituted by the Central Government and consists of three members including a Chairperson: a person who is or has been a judge of a High Court, a member of the Indian Revenue Service not below the rank of Principal Chief Commissioner or Chief Commissioner, and one member who is, in the words of s.144BA(16)(ii), 'an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices'. The eligibility of that third member is restricted to an academic or a scholar; a practitioner with the same knowledge does not qualify. It may make its own enquiries or direct the Assessing Officer to. Under s.144BA(13) it 'shall issue directions under sub-section (6) within a period of six months from the end of the month in which the reference under sub-section (4) was received', with periods spent on enquiries abroad and under a court stay excluded. Its directions are binding on the assessee and on the Commissioner and the authorities subordinate to him, and no appeal lies against the directions themselves. Separately, s.144BA(12) forbids any assessment or reassessment order determining tax consequences under Chapter X-A without the prior approval of the Principal Commissioner or Commissioner.
The appeal route is unusual and easy to get wrong. Because the assessment order is one passed with the Commissioner's approval under s.144BA(12), s.253(1)(e) gives a direct appeal to the Appellate Tribunal against 'an order passed by an Assessing Officer under sub-section (3) of section 143 or section 147 or section 153A or section 153C with the approval of the Principal Commissioner or Commissioner as referred to in sub-section (12) of section 144BA'. There is no first appeal to the CIT(A). Filing one wastes the limitation.
The relationship between GAAR and a specific anti-avoidance rule is unsettled, and the two sources point in different directions. Circular 7/2017 answers the question directly: the provisions of GAAR and a SAAR can coexist and are applicable, as may be necessary, in the facts and circumstances, because the specific provisions may not address every case of abuse. The Telangana High Court in Ayodhya Rami Reddy Alla went further, holding that the non obstante clause in s.95(1) displaces the ordinary presumption that a special provision excludes a general one, so GAAR could supersede a SAAR — and that GAAR could reach an arrangement even though s.94(8), the specific rule on bonus stripping, covered only units at the material time and was extended to shares only later. That reasoning is under challenge: the Supreme Court has admitted the assessee's appeal and stay or status quo is recorded, so it should not be cited as settled. The practical point is that the specific-versus-general maxim is not by itself an answer, and the substantive objections belong before the Approving Panel.
Circular 7/2017 is worth reading in full for three other answers a practitioner will use. Where the Principal Commissioner or the Approving Panel has held an arrangement to be permissible in one year and the facts and circumstances remain the same, GAAR will not be invoked for that arrangement in a later year, on the principle of consistency. Where a court has explicitly and adequately considered the tax implications while sanctioning an arrangement — a scheme of amalgamation or demerger, in practice — GAAR will not apply. And an arrangement held permissible by the Authority for Advance Rulings is outside it.
The doctrinal line before GAAR still frames the argument, and it is worth knowing where each decision stops. McDowell & Co. Ltd v. Commercial Tax Officer, decided by the Supreme Court on 17 April 1985 and reported at 154 ITR 148, is the source of the proposition that colourable devices cannot form part of legitimate tax planning; it does not authorise a general power to disregard a genuine transaction. Union of India v. Azadi Bachao Andolan, reported at [2003] 263 ITR 706 (SC), upheld the India-Mauritius treaty and treaty shopping under it, and confined McDowell to devices that are shams. Vodafone International Holdings B.V. v. Union of India, decided 20 January 2012, held that an offshore share transfer was outside the Indian charge, that section 9(1)(i) could not by a process of interpretation be extended to cover indirect transfers of capital assets situate in India, and that the court's task is to 'look at' the transaction as a whole rather than adopt a dissecting approach — reading McDowell in that way, the Court said, there is no conflict between McDowell and Azadi Bachao Andolan. Chapter X-A is Parliament's answer to that line: from assessment year 2018-19 the statutory test in s.96 governs, and the judicial debate about how far substance may displace form matters chiefly to years before that and to the interpretation of the words Parliament chose.
Under the Income-tax Act 2025, GAAR is re-enacted in Chapter XI. s.178 is the successor to s.95, s.179 to s.96 and s.180 to s.97, and the substantive language is close to identical. The corresponding rule is rule 128 of the Income-tax Rules 2026.
GAAR is invoked rarely but it is invoked at the worst moment — a completed group reorganisation, a completed exit — and the consequences in s.98 include disregarding the corporate structure altogether. Most of the defensive work is not on the merits of purpose at all: it is on the Rs 3 crore threshold, on grandfathering, on whether the officer followed s.144BA, and on getting the substance argument in front of the Approving Panel rather than the Assessing Officer. The two thresholds and the procedure are also the parts that have moved most recently — the grandfathering rule was amended on 31 March 2026 — so anything written before that date needs checking before it is relied on.
I hold a Mauritius TRC. Can the department still deny me treaty relief on the capital gains?
The AO invoked GAAR even though a specific anti-avoidance section covers my transaction. Can he do that?
The department has invoked GAAR on a demerger that the NCLT sanctioned after notice to the income-tax authorities, and s.72A(4) expressly allowed the loss to move with the undertaking. I have no right of appeal against the reference or the directions. What can I actually do?
The GAAR reference in my case was made inside a reassessment. If I succeed in getting the s.148A(d) order and the s.148 notice set aside, do the s.144BA notices go too, or do I have to fight them separately?
The Approving Panel has issued its order and s.144BA(14) says no appeal lies. Will a High Court actually stay a Panel order, and does the same bar stop the department from challenging a Panel order it dislikes?
The Approving Panel held that my client's arrangement is NOT an impermissible avoidance arrangement, but the Assessing Officer has taxed the same transaction under another section anyway. Can he do that?
My non-resident payees had no PAN and the treaty rate is ten per cent. The officer says s.206AA has a non obstante clause and overrides everything, so twenty per cent it is. Is there a Special Bench on this?
The Assessing Officer says my client's 2015 restructuring is an impermissible avoidance arrangement. Can GAAR reach an arrangement entered into before it came into force, and is there a monetary floor below which it simply does not apply?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.