The Revised 3CD Form has introduced additional reporting in view of the applicability of the Special Provisions Relating To Avoidance Of Tax Chapter: X And General Anti-Avoidance Rule Chapter: X-A. The new reporting requirements are contained in Clauses:-

30A. (a) Whether primary adjustment to transfer price, as referred to in sub-section (1) of section 92CE, has been made during the previous year? (Yes/No)

30B. (a) Whether the assessee has incurred expenditure during the previous year by way of interest or of similar nature exceeding one crore rupees as referred to in sub-section (1) of section 94B? (Yes/No)

30C. (a) Whether the assessee has entered into an impermissible avoidance arrangement, as referred to in section 96, during the previous year? (Yes/No)

The reporting requirements on these Special Provisions Relating To Avoidance Of Tax Chapter: X, And General Anti-Avoidance Rule Chapter: X-A. are discussed hereunder:

Section 94B :- The case where excess interest is paid to an associated enterprises.

The government has issued sometime in 2010 a revised discussion paper on Direct Tax Code (DTC) 2010 which proposed to introduce General Anti Avoidance Rules (GAAR) to curb tax avoidance by disregarding any arrangement called (impermissible Avoidance Arrangement (IAA) ) entered or carried on in a manner

a) Which is not normally employed for bona-fide business purposes or

b) Which is not at arm’s length prices or

c) Which Abuses the provisions of the DTC or

d) Which Lacks economic substance.

However in order to prevent arbitrary application of GAAR, suitable threshold limits for invoking GAAR were to be considered. One such measure was the application of the concept of ‘Thin Capitalisation’ rules to check tax avoidance by providing a benchmark Debt-Equity Ratio.(Safe harbor ratio)

Thin capitalisation means such a capital structure of a company where the amount of funding by debts is higher than equity-funding with an object to avoid tax because interest on debts is tax deductible while dividend is subject to some form of tax like Dividend Distribution Tax in India. There is no agreement on what constitutes thin capitalization. Two obvious measures are the debt/equity ratio and the ratio of interest to profits before tax. Therefore a judicious combination of debt, equity and reduction in tax liability is the need of the hour.

So long as the rate of return on funds employed is more than the rate of interest, the post-tax return to the equity holder keeps on increasing while the rate of tax on EBITD goes on reducing. The GAAR proposes measures to fight illegal tax optimization and non-payment of taxes by a mixture of debts & equity. Even when equity is easy companies will still go in partly for debt because equity is more expensive to service. Tax laws allow interest as cost while the whole of the profit becomes taxable. As such, debt, by reducing the tax liability, enhances the return on equity. GAAR thus proposed measures like fixing an ideal Debt/Equity ratio so as to optimize the rate of tax revenue. The transactions conducted in a manner to disguise the nature, location, source, ownership, or control, are most likely to be specifically covered under the net of arrangements lacking commercial substance.

The government had a number of options to decide the nature of capitalisation of a company. But it adopted the option which disallows ‘excess net interest expense,’ which may be defined as the excess of interest expenses over interest income if such excess exceeds a defined % of the earnings before (net) interest, tax, depreciation and amortisation (EBITDA).

In pursuance of this objective, Chapter: X Special Provisions Relating To Avoidance Of Tax, [Limitation on interest deduction in certain cases.] was inserted vide The Finance Act, 2017 w.e.f. 1st day of April, 2018

Section 94B tackles the case where excess interest is paid to an associated enterprises.

94B.(1) If an Indian company, or a PE of a foreign company in India, being the borrower, incurs any deductible expenditure by way of interest or of similar nature exceeding one crore rupees in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the Excess interest shall not be deductible in computation of income.

Provided that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.

(2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent. of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.

(3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

(4) Where for any assessment year, the interest expenditure is not wholly deducted against income under the head “Profits and gains of business or profession”, so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2):

Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed.

1) An enterprise with Low Equity and High Debts is called a Thin Enterprise.

2) An enterprise with High Equity and Low Debts is called a Thick Enterprise

The following example will explain the details.

Rs. In Crores
Particulars Thin Enterprise
2018 2019 2020
Equity 3.00 3.00 3.00
Debts 11.00 11.00 11.00
Total Funds 14.00 14.00 14.00
EBITDA 2.00 3.50 6.50
30% of EBITDA 0.60 1.05 1.95
Interest paid to AE @10% 1.10 1.10 1.10
Interest disallowed last year B/F 0.25 0.75 0.80
Total interest to be considered for deduction 1.35 1.85 1.90
Interest to be disallowed, lower of:
(a) Excess of total interest over 30% of EBIDTA 0.75 0.80 0.00
(b) Actual interest paid to AE ( Including last year’s shortage B/F) 1.35 1.85 1.90
Disallowance to be carried forward for 8 years 0.75 0.80 0.00

The reporting requirement of the above section 94B is provided by clause 30B of the Revised Form 3CD as under

30B. (a) Whether the assessee has incurred expenditure during the previous year by way of interest or of similar nature exceeding one crore rupees as referred to in sub-section (1) of section 94B? (Yes/No)

(b) If yes, please furnish the following details:-

(i) Amount (in Rs.) of expenditure by way of interest or of similar nature incurred 1.10
(ii) Earnings before interest, tax, depreciation and amortization (EBITDA) during the previous year (in Rs.): 2.00
(iii) Amount (in Rs.) of expenditure by way of interest or of similar nature as per (i) above which exceeds 30% of EBITDA as per (ii) above: 0.50
(iv)* Details of interest expenditure brought forward as per sub-section (4) of section 94B:* A.Y.

17-18

Rs. 0.25
(v) Details of interest expenditure carried forward as per sub-section (4) of section 94B: A.Y.

18-19

Rs. 0.75

* The provision is applicable w.e.f. A.Y. 18-19 and as such there would not be any amount of unabsorbed interest B/F from AY 17-18. Assumed only for the sake of explanation.

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Secondary adjustment in certain cases.

Section 92CE Inserted vide The Finance Act, 2017 w.e.f. 1st day of April, 2018

‘92CE. (1) Where a primary adjustment to transfer price,-

(i) has been made suo moto by the assessee in his return of income;

(ii) made by the Assessing Officer has been accepted by the assessee;

(iii) is determined by an advance pricing agreement entered into by the assessee under section 92CC;

(iv) is made as per the safe harbour rules framed under section 92CB; or 30

(v) is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or section 90A for avoidance of double taxation,

the assessee shall make a secondary adjustment:

Provided that nothing contained in this section shall apply, if,–

(i) the amount of primary adjustment made in any previous year does not exceed one crore rupees; and

(ii) the primary adjustment is made in respect of an assessment year commencing on or before the 1st day of April, 2016.

(2) Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed.

Analysis

This section provides for the control of the flight of Indian capital to foreign countries through Associated Enterprises by indulging in international transactions which are not at par with the arm’s length price i.e. expense more than arm’s length, or income less than arm’s length). An example may better clarify the matter.

Suppose an Indian company exports material worth Rs. 25 Crore to its Overseas Associated Enterprises whereas the transfer price of this transaction as determined by arm’s length price mechanism is Rs. 30 Crore. In such a case Rs. 5 crore shall be added to the income of the Indian company and taxed accordingly. This exercise addresses only the prime inequality between the prices but does not address the secondary effect of the transaction. The foreign AE will sell the material for Rs. 30 Crore, remit Rs. 25 crore to the Indian Company and retain the balance Rs. 5 Crore. The capital worth Rs. 5 Crore goes to the foreign country. This Rs. 5 Crore would be earning interest, year after year, for the foreign AE whereas in actuality, this interest belongs to the Indian company but for the lower invoice. In order to tackle this type of a situation an adjustment called secondary adjustment is made in the income of the Indian company.

Applicability of Secondary Adjustment

New Rule 10CB (Section 92CE) The provisions pertaining to secondary adjustment shall take effect in the following scenarios, where the amount of primary adjustment exceeds Rs. 1 Crore and excess money attributable to the adjustment is not repatriated to India:

Deeming fiction is introduced under the new provision whereby, if as a result of the primary adjustment, there is an increase in the total income or reduction in loss of the taxpayer, the excess money (i.e. the difference between ALP and the transfer price) which is available with the AE, and not repatriated to India within the prescribed time, is deemed to be an advance made by the taxpayer to such AE on which an interest would be imputed in accordance with the prescribed methodology.

Rule 10CB. Computation of interest income pursuant to secondary adjustments.-

(1) For the purposes of sub- section (2) of section 92CE of the Act, the time limit for repatriation of excess money shall be on or before 90 days ,-

1 Primary adjustments to transfer price has been made suo-moto by the assessee in his return of income From the due date of filing of return under section 139(1)
2 Primary adjustments to transfer price as determined in an order of Assessing Officer or the appellate authority; From the date of the order if the adjustment has been accepted by the assessee.
3 In the case of agreement for advance pricing entered into by the assessee under section 92CD ; From the due date of filing of return under section 139(1)
4 In the case of option exercised by the assessee as per the safe harbour rules under section 92CB;or From the due date of filing of return under section 139 (1)
5 In the case of an agreement made under the mutual agreement procedure under a Double Taxation Avoidance Agreement entered into under section 90 or 90A; From the due date of filing of return under section 139 (1)

(2) The imputed per annum interest income on excess money which is not repatriated within the time limit as per sub-section (1) of section 92CE of the Act shall be computed,-

1 In the cases where the international transaction is denominated in Indian rupee; For A Y 2018-19 At the one year marginal cost of fund lending rate of State Bank of India as on 1st of April 2017= 8% (+) 3.25% =11.25%
2 In the cases where the international transaction is denominated in foreign currency. For A Y 2018-19 At six month London Interbank Offered Rate as on 30th September,2017 = 1.51 (+) 3.00%

So in the above example a secondary adjustment will be made in the books of the Indian company which will be equal to Rs. 0.56 Crore (i.e. 11.25% of Rs. 5.00 Crore) on an annual basis.

In the next AY there will be one issue. On which amount the rate of interest should be applied? Whether on Rs. 5.00 Crore only or Rs. 5.00+0.56 Crore?. Nothing is specified and it needs an urgent amendment.

The Reporting requirement on this point is given in the Clause 30A of the Revised Form 3CD.

[30A. (a) Whether primary adjustment to transfer price, as referred to in sub-section (1) of section 92CE, has been made during the previous year? (Yes/No)

(b) If yes, please furnish the following details:-

(i) Under which clause of sub-section (1) of section 92CE primary adjustment is made? (ii)
(ii) Amount (in Rs.) of primary adjustment: 5.00 Crore
(iii) Whether the excess money available with the associated enterprise is required to be repatriated to India as per the provisions of sub-section (2) of section 92CE? (Yes/No) NO
(iv) If yes, whether the excess money has been repatriated within the prescribed time (Yes/No) NA
(v) If no, the amount (in Rs.) of imputed interest income on such excess money which has not been repatriated within the prescribed time: Rs. 0.56 Crore

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Sec-96. Impermissible avoidance arrangement.—

(1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—( Inserted vide Finance Act 2013, w.e.f. 1st day of April, 2016)

(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.]

97. Arrangement to lack commercial substance.—(1) An arrangement shall be 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 a part; 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 which is the subject matter of such transaction; 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 that would be obtained (but for the provisions of this Chapter).

(2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions—

(a) funds are transferred among the parties to the arrangement; and

(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter), without having any regard to—

(A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement;

(B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or

(C) the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received.

(3) For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement.

(4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:—

(i) the period of time for which the arrangement (including operations therein) exists;

(ii) the fact of payment of taxes, directly or indirectly, under the arrangement;

(iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.]

98. Consequences of impermissible avoidance arrangement.—(1) If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—

(a) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement;

(b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out;

(c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

(d) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount;

(e) reallocating amongst the parties to the arrangement—

(i) any accrual, or receipt, of a capital nature or revenue nature; or

(ii) any expenditure, deduction, relief or rebate;

(f) treating—

(i) the place of residence of any party to the arrangement; or

(ii) the situs of an asset or of a transaction, at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or

considering or looking through any arrangement by disregarding any corporate structure.

(2) For the purposes of sub-section (1),—

(i) any equity may be treated as debt or vice versa;

(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or

(iii) any expenditure, deduction, relief or rebate may be recharacterised.

The Reporting requirement in this case is as under:

30C.

(a) Whether the assessee has entered into an impermissible avoidance arrangement, as referred to in section 96, during the previous year? (Yes/No)

(b) If yes, please specify:-

(i) Nature of the impermissible avoidance arrangement
(ii) Amount (in Rs.) of primary adjustment: Amount (in Rs.) of tax benefit in the previous year arising, in aggregate, to all the parties to the arrangement

Circular No. 7 of 2017

F.No. 500/43/2016-FT&TR-IV

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

Date 27/01/2017

Clarifications on implementation of GAAR provisions under the Income Tax Act, 1961

The provisions of Chapter X-A of the Income Tax Act, 1961 relating to General Anti-Avoidance Rule will come into force from 1st April, 2017. Certain queries have been received by the Board about implementation of GAAR provisions. The Board constituted a Working Group in June, 2016 for this purpose. The Board has considered the comments of the Working Group and the following clarifications are issued:

Question no. 1: Will GAAR be invoked if SAAR applies?

Answer: It is internationally accepted that specific anti avoidance provisions may not address all situations of abuse and there is need for general anti-abuse provisions in the domestic legislation. The provisions of GAAR and SAAR can coexist and are applicable, as may be necessary, in the facts and circumstances of the case.

Question no. 2: Will GAAR be applied to deny treaty eligibility in a case where there is compliance with LOB (Limitation on Benefit) test of the treaty?

Answer: Adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies and the same are required to be tackled through domestic anti-avoidance rules. If a case of avoidance is sufficiently addressed by LOB in the treaty, there shall not be an occasion to invoke GAAR

Question no. 3: Will GAAR interplay with the right of the taxpayer to select or choose method of implementing a transaction?

Answer: GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction.

Question no. 4: Will GAAR provisions apply where the jurisdiction of the FPI is finalised based on non-tax commercial considerations and such FPI has issued P-notes referencing Indian securities? Further, will GAAR be invoked with a view to denying treaty eligibility to a Special Purpose Vehicle (SPV), either on the ground that it is located in a tax friendly jurisdiction or on the ground that it does not have its own premises or skilled professional on its own roll as employees.

Answer: For GAAR application, the issue, as may be arising regarding the choice of entity, location etc., has to be resolved on the basis of the main purpose and other conditions provided under section 96 of the Act. GAAR shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction. If the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefit, GAAR will not apply.

Question no. 5: Will GAAR provisions apply to (i) any securities issued by way of bonus issuances so long as the original securities are acquired prior to 01 April, 2017 (ii) shares issued post 31 March, 2017, on conversion of Compulsorily Convertible Debentures, Compulsorily Convertible Preference Shares (CCPS), Foreign Currency Convertible Bonds (FCCBs), Global Depository Receipts (GDRs), acquired prior to 01 April, 2017; (iii) shares which are issued consequent to split up or consolidation of such grandfathered shareholding?

Answer: Grandfathering under Rule 10U(1)(d) will be available to investments made before 1st April 2017 in respect of instruments compulsorily convertible from one form to another, at terms finalized at the time of issue of such instruments. Shares brought into existence by way of split or consolidation of holdings, or by bonus issuances in respect of shares acquired prior to 1st April 2017 in the hands of the same investor would also be eligible for grandfathering under Rule 10U(1) (d) of the Income Tax Rules.

Question no. 6: The expression “investments” can cover investment in all forms of instrument – whether in an Indian Company or in a foreign company, so long as the disposal thereof may give rise to income chargeable to tax. Grandfathering should extend to all forms of investments including lease contracts (say, air craft leases) and loan arrangements, etc.

Answer: Grandfathering is available in respect of income from transfer of investments made before 1st April, 2017. As per Accounting Standards, ‘investments’ are assets held by an enterprise for earning income by way of dividends, interest, rentals and for capital appreciation. Lease contracts and loan arrangements are, by themselves, not ‘investments’ and hence grandfathering is not available.

Question no. 7: Will GAAR apply if arrangement held as permissible by Authority for Advance Ruling?

Answer: No. The AAR ruling is binding on the PCIT/CIT and the Income Tax Authorities subordinate to him in respect of the applicant.

Question no. 8: Will GAAR be invoked if arrangement is sanctioned by an authority such as the Court, National Company Law Tribunal or is in accordance with judicial precedents etc.?

Answer: Where the Court has explicitly and adequately considered the tax implication while sanctioning an arrangement, GAAR will not apply to such arrangement.

Question no. 9: Will a Fund claiming tax treaty benefits in one year and opting to be governed by the provisions of the Act in another year attract GAAR provisions? An example would be where a Fund claims treaty benefits in respect of gains from derivatives in one year and in another year sets-off losses from derivatives transactions against gains from shares under the Act.

Answer: GAAR provisions are applicable to impermissible avoidance arrangements as under section 96. In so far as the admissibility of claim under treaty or domestic law in different years is concerned, it is not a matter to be decided through GAAR provisions.

Question no. 10: How will it be ensured that GAAR will be invoked in rare cases to deal with highly aggressive and artificially pre-ordained schemes and based on cogent evidence and not on the basis of interpretation difference?

Answer: The proposal to declare an arrangement as an impermissible avoidance arrangement under GAAR will be vetted first by the Principal Commissioner / Commissioner and at the second stage by an Approving Panel, headed by judge of a High Court. Thus, adequate safeguards are in place to ensure that GAAR is invoked only in deserving cases.

Question no. 11: Can GAAR lead to assessment of notional income or disallowance of real expenditure? Will GAAR provisions expand the scope of charging provisions or scope of taxable base and/or disallow the expenditure which is actually incurred and which otherwise is admissible having regard to diverse provisions of the Act?

Answer: If the arrangement is covered under section 96, then the arrangement will be disregarded by application of GAAR and necessary consequences will follow.

Question no. 12: A definite timeline may be provided such as 5 to 10 years of existence of the arrangement where GAAR provisions will not apply in terms of the provisions in this regard in section 97(4) of the IT Act.

Answer: Period of time for which an arrangement exists is only a relevant factor and not a sufficient factor under section 97(4) to determine whether an arrangement lacks commercial substance.

Question no. 13: It may be ensured that in practice, the consequences of a transaction being treated as an ‘impermissible avoidance arrangement’ are determined in a uniform, fair and rational basis. Compensating adjustments under section 98 of the Act should be done in a consistent and fair manner. It should be clarified that if a particular consequence is applied in the hands of one of the participants, there would be corresponding adjustment in the hands of another participant.

Answer: Adequate procedural safeguards are in place to ensure that GAAR is invoked in a uniform, fair and rational manner. In the event of a particular consequence being applied in the hands of one of the participants as a result of GAAR, corresponding adjustment in the hands of another participant will not be made. GAAR is an anti-avoidance provision with deterrent consequences and corresponding tax adjustments across different taxpayers could militate against deterrence.

Question no. 14: Tax benefit of INR 3 crores as defined in section 102(10) may be calculated in respect of each arrangement and each taxpayer and for each relevant assessment year separately. For evaluating the main purpose to be obtaining of tax benefit, the review should extend to tax consequences across territories. The tax impact of INR 3 crores should be considered after taking into account impact to all the parties to the arrangement i.e. on a net basis and not on a gross basis (i.e. impact in the hands of one or few parties selectively).

Answer: The application of the tax laws is jurisdiction specific and hence what can be seen and examined is the ‘Tax Benefit’ enjoyed in Indian jurisdiction due to the ‘arrangement or part of the arrangement’. Further, such benefit is assessment year specific. Further, GAAR is with respect to an arrangement or part. of the arrangement and therefore limit of ₹ 3 crores cannot be read in respect of a single taxpayer only.

Question no. 15: Will a contrary view be taken in subsequent years if arrangement held to be permissible in an earlier year?

Answer: If the PCIT/Approving Panel has held the arrangement to be permissible in one year and facts and circumstances remain the same, as per the principle of consistency, GAAR will not be invoked for that arrangement in a subsequent year.

Question no. 16: No penalty proceedings should be initiated pursuant to additions made under GAAR at least for the initial 5 years.

Answer: Levy of penalty depends on facts and circumstances of the case and is not automatic. No blanket exemption for a period of five years from penalty provisions is available under law. The assessee, may at his option, apply for benefit u/s 273A if he satisfies conditions prescribed therein.

(Dr. O. N. Supriya Rao)

Under Secretary to the Government of India

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