The officer says our court-sanctioned demerger was an impermissible avoidance arrangement and the s.144BA reference is already with the Approving Panel - what is left to argue, and where do I take it if the directions go against us?
The client is a closely held Indian company making industrial valves, assessed at a circle in Pune, with turnover of Rs 3,18,00,00,000 in FY 2021-22. Under a scheme of arrangement filed on 21 June 2023 and sanctioned by the National Company Law Tribunal on 29 February 2024, with an appointed date of 1 April 2023, a group company demerged its loss-making foundry undertaking into the client. The accumulated unabsorbed business loss attributable to that undertaking, Rs 62,00,00,000, moved with it under s.72A(4). The client's own profit for FY 2023-24 was Rs 71,40,00,000. Its return for AY 2024-25, filed on 30 October 2024, set the whole Rs 62,00,00,000 off and declared Rs 9,40,00,000, on which the tax was Rs 2,61,50,800 at twenty-five per cent with seven per cent surcharge and four per cent cess. Without the set-off, tax on Rs 71,40,00,000 at the same rate with surcharge at twelve per cent would have been Rs 20,79,16,800, a difference of Rs 18,17,66,000. A s.143(2) notice issued on 12 August 2025 and a written notice under Rule 10UB(1) followed on 14 November 2025. The reference under s.144BA(1) in Form No. 3CEG reached the Principal Commissioner on 8 January 2026; his notice under s.144BA(2) issued on 22 January 2026 and he heard the company on 10 February 2026. His reference to the Approving Panel under s.144BA(4), in Form No. 3CEI under Rule 10UB(5), was received on 19 March 2026 and the matter is listed.
Compute the tax benefit for AY 2024-25 across both companies and put it on one sheet before drafting a word of the reply. The Chapter does not apply at all unless the benefit in aggregate to every party to the arrangement exceeds three crore rupees for the year, and it does not apply to an assessment year before 2018-19. Both are gateway questions and both are lost if they are asserted rather than computed. The computation also tells you what the department thinks the case is worth, which is what decides whether this is defended to the Panel and beyond or settled by conceding the set-off.
Chapter X-A has a commencement and a floor and both are checked against the facts, not asserted. Section 95(2) applies the Chapter in respect of any assessment year beginning on or after 1 April 2018, so from AY 2018-19; Rule 10U(2) then makes it reach an arrangement whenever it was entered into, provided the tax benefit is obtained on or after 1 April 2017. Rule 10U(1)(a) is the monetary floor: the Chapter does not apply where the tax benefit in the relevant assessment year, in aggregate to all the parties to the arrangement, does not exceed three crore rupees. Here the benefit is the difference between Rs 20,79,16,800 and Rs 2,61,50,800, that is Rs 18,17,66,000, and the floor does not save the client. Section 102(10) defines tax benefit inclusively and its sub-clauses reach a reduction, avoidance or deferral of tax and an increase in a loss.
Section 96(1) is a two-limb test and both limbs must be satisfied cumulatively. The arrangement must be one the main purpose of which is to obtain a tax benefit, and it must in addition carry 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, lack of commercial substance in whole or in part, or a manner or means not ordinarily employed for bona fide purposes. Section 96(2) then presumes, unless the assessee proves otherwise, that an arrangement whose main purpose is to obtain a tax benefit extends to a step in or a part of it. The first limb is where the burden has been shifted against you and the second is where it has not, so the reply and the hearing should be built on the four elements, element by element, with the commercial reasons for the demerger in support rather than as the whole case.
Lack of commercial substance is not an open-ended commercial judgment. Section 97(1) is a closed list of four deeming limbs, the first of which is that the substance or effect of the arrangement as a whole is inconsistent with, or differs significantly from, the form of its individual steps. If the department cannot bring the demerger inside one of those four limbs, that tainted element is not available to it, and the answer is drafted limb by limb rather than by asserting that the transaction was commercial. Section 99 matters at the same hearing: it lets connected persons be treated as one and the same person and an accommodating party be disregarded in determining whether a tax benefit exists, so the two group companies will be looked at together and that has to be met head on rather than resisted.
The instinct that a specific provision expressly permitting the loss to move must exclude a general anti-avoidance chapter is the instinct the Chapter was drafted against. Section 95(1) opens with the words notwithstanding anything contained in the Act, and s.100 provides that the Chapter applies in addition to, or in lieu of, any other basis for determination of tax liability - so it is not a remedy of last resort. A High Court has held on that footing that Chapter X-A is not shut out because a specific anti-avoidance rule occupies part of the field, the non-obstante clause displacing the usual presumption that the special provision excludes the general one. The nearest thing on these facts is a Bombay writ in which Rule was issued on a challenge to a s.144BA reference and Panel directions concerning a demerger sanctioned after notice to the income-tax authorities where s.72A(4) expressly allowed the loss to move, and the reference and the directions were stayed.
The Assessing Officer cannot apply the Chapter himself. He must first put a written notice to the assessee under Rule 10UB(1), then refer the matter to the Principal Commissioner under s.144BA(1) in Form No. 3CEG; the Principal Commissioner then issues his own notice under s.144BA(2) setting out his reasons, giving the assessee a period not exceeding sixty days to object and a hearing, and thereafter either drops the matter by an order in Form No. 3CEH under Rule 10UB(4) or refers it to the Approving Panel under s.144BA(4), recording his satisfaction in Form No. 3CEI under Rule 10UB(5). On this file each stage exists and is dated: 14 November 2025, 8 January 2026, 22 January 2026 with a hearing on 10 February 2026, and 19 March 2026 - so check that the s.144BA(2) notice specified its own objection period and that it did not exceed sixty days. A stage omitted, a hearing not given or a reference made in the wrong form is the strongest procedural point available, and it is taken before the Panel, not saved.
The Approving Panel is not a departmental committee. By s.144BA(15) the Central Government constitutes it with three members including a Chairperson, and by s.144BA(16) the Chairperson is or has been a judge of a High Court. By s.144BA(13) it must issue its directions within six months from the end of the month in which the reference is received, which on this file starts at 30 September 2026 - but the Explanation to that sub-section excludes the time taken on an inquiry through the competent authority under s.90 or s.90A, capped at one year, and any period during which the Panel's proceeding is stayed by a court, with a floor extending the balance to sixty days where less would otherwise remain. Its directions are binding under s.144BA(14) on the assessee and on the Assessing Officer, and the rules give the assessee the right to be heard. Brief it as you would brief a court: the four tainted elements separately, the commercial record on affidavit, the tax benefit computation as a schedule.
Section 144BA(14) makes the Panel's directions binding and provides that no appeal shall lie against them. That is why the two recent matters in this collection are both writs. In one, a High Court issued notice in two petitions directed against a single Panel order of 28 November 2025 and stayed it, and recorded that the department had been driven to a writ against the same order for its own reasons. In the other, a High Court issued Rule on a petition challenging a reference of 31 March 2025 and directions of 30 October 2025 and said in terms that the absence of an appeal is itself a reason to entertain the petition. A third High Court, where the reference had been made inside a reassessment, set aside the s.148A(d) order and the s.148 notice and the s.144BA notices went with them.
Section 98 is where the damage is done and it is wide. Sub-section (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, and disregarding an accommodating party. On this file the natural consequence is the set-off alone, and the argument at that stage is that the demerger is not to be unwound for any other purpose. There is one real limit: a Tribunal Bench has held that the Assessing Officer could not, while giving effect to the statutory process under s.144BA, proceed on a factual premise diametrically opposed to the findings the Approving Panel returned on the very arrangement referred to it.
There is very little to go on and the honest answer is that nobody knows. References under this Chapter are still rare, almost none has been decided on the merits at any appellate level, and the two matters this library holds are interim orders in writ petitions rather than decisions. What can be said is that the Commissioner's view is usually the view the Panel takes, so plan on adverse directions and on a writ against them rather than on a win at the Panel. Where the arrangement has a documented commercial driver that predates the tax benefit, the realistic outcome is a narrowing of the consequences under s.98 rather than a finding that the Chapter does not apply. Expect three to five years before anything is settled, with the assessment clock stopped throughout.
