Section 98

Section 98 — the law in short

What the courts have decided on section 98, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Statutory position — section 98 and Rule 10UA: what the department may actually do once an arrangement is declared impermissible CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — section 99, section 97(3) and section 102: connected persons and the accommodating party, and how they are collapsed into one taxpayer CBDT Circulars & InstructionsCuts both ways
  The GAAR notice says a Mauritius company in my client's structure is an 'accommodating party' and that two group companies are 'connected persons'. What do those words actually mean and what follows if they are made out?
  Section 99 says that in determining whether a tax benefit exists, connected persons may be treated as one and the same person, an accommodating party may be disregarded, an accommodating party and any other party may be treated as one and the same person, and the arrangement may be considered or looked through by disregarding any corporate structure. 'Accommodating party' is defined in section 97(3) — a party whose main purpose in participating, directly or indirectly and in whole or in part, is to obtain a tax benefit for the assessee, whether or not it is a connected person; 'connected person' is defined at length in section 102(4), with a twenty per cent 'substantial interest' test in section 102(8).
• Statutory position — sections 100 and 101: Chapter X-A applies in addition to or in lieu of any other basis, and only in accordance with prescribed guidelines CBDT Circulars & InstructionsCuts both ways
  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?
  Section 100 provides that the provisions of Chapter X-A shall apply in addition to, or in lieu of, any other basis for determination of tax liability — so GAAR is not an alternative of last resort and can be invoked alongside, or instead of, a specific charging or anti-avoidance provision. Section 101 provides that the Chapter shall be applied in accordance with such guidelines and subject to such conditions as may be prescribed, and it is under that section that rules 10U to 10UC are made.
• Statutory position — s.95: the gateway into Chapter X-A, the years it reaches, and the Explanation that lets the department attack one STEP of an otherwise genuine transaction CBDT Circulars & InstructionsCuts both ways
  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?
  Section 95(1) is the gateway, and it does two things: it opens with "Notwithstanding anything contained in the Act", so Chapter X-A overrides the rest of the Act, and it allows an arrangement to be "declared to be an impermissible avoidance arrangement" with the tax consequences then determined under the Chapter. Section 95(2) confines the whole Chapter to "any assessment year beginning on or after the 1st day of April, 2018" — that is AY 2018-19 onwards, and nothing earlier. The Explanation is the sting: the Chapter "may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement", so the officer does not have to condemn your whole transaction; he can isolate one step inside it.
• 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 CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — s.97: when an arrangement is DEEMED to lack commercial substance, what round trip financing means, and the three facts that s.97(4) says are never sufficient CBDT Circulars & InstructionsCuts both ways
  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?
  Lack of commercial substance is not an open-ended commercial judgment; s.97(1) is a closed list of four deeming limbs. An arrangement is DEEMED to lack commercial substance if (a) its substance or effect as a whole is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes round trip financing, an accommodating party, elements that have the effect of offsetting or cancelling each other, or a transaction conducted through one or more persons that disguises the value, location, source, ownership or control of the funds; or (c) it involves the location of an asset, of a transaction or of the place of residence of a party without any substantial commercial purpose other than obtaining a tax benefit; or (d) it does not have a significant effect on the business risks or net cash flows of any party apart from the effect attributable to the tax benefit. Section 97(4) then says in terms that three matters — how long the arrangement has existed, the fact that taxes were paid under it, and the fact that it provides an exit route — "may be relevant but shall not be sufficient".

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.