Rule 127 of the Income-tax Rules, 2026

Where this rule sits

Rule 127 gives effect to Section 181 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.

← Rule 126  ·  Rule 128 →

What this rule does

The rule settles the reach of the consequences under section 181. Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax are to be determined with reference to that part only.

Why it is there

Section 181 attaches tax consequences to an impermissible avoidance arrangement, but an arrangement may be impermissible only in part. The rule prevents the whole arrangement being reconstructed because one limb of it failed, by confining the consequences to the part that was declared impermissible.

Who it applies to

• An assessee a part of whose arrangement has been declared to be an impermissible avoidance arrangement
• The income-tax authority determining the consequences in relation to tax under section 181

What this means in practice

The rule is a limiting provision, not an enabling one: it does not say what the consequences are — section 181 does — but it fixes what they may be applied to. Where the declaration is against a part, the untouched parts of the arrangement stand and are taxed as they are, so the assessee's exposure is measured by the impermissible part alone. The corollary is that the declaration itself has to identify which part is impermissible, because the consequences cannot be worked out without that identification.

An example

A group carries out a reorganisation with several steps, of which one interposed entity is declared to be an impermissible avoidance arrangement. The consequences in relation to tax are determined with reference to that step only; the remaining steps of the reorganisation are not recharacterised on the strength of that declaration.

Where you meet this rule

A reader meets it in an order determining the consequences of an impermissible avoidance arrangement under section 181, where the declaration is confined to a part of the arrangement.

The words themselves

What people get wrong

• Applying the consequences to the whole arrangement when only a part has been declared impermissible. The rule confines them to that part.
• Looking to this rule for the consequences themselves. It governs their reach; section 181 supplies them.
• Assuming a partial declaration is invalid. The rule proceeds on the footing that a part of an arrangement may be so declared.