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M/s P Chidambaram & Co. who seemingly worked as a limited liability partnership have earned much laurels in plucking leakages in revenue when they announced annual amendments in the Income tax Act provisions drawing conclusions from the rulings of the Courts side by side. Often any favourable ruling in its earliest pronounces were converted into an amendment so that the assessee hardly could benefit from the same. Retrospective amendments have been made year after year negating the advantage pronounced in assessee’s favour. It is quite a pity that once after the Income tax Act has been flirted with amendments one after the another year after year and even within a year has been announced as a complex book thereby fulfilling one’s own dreams to rewrite it once again.


It had been indeed a difficult time for assessee to defend their viewpoint. Recently I witnessed a case before the Income Tax Appellate Tribunal where the counsel for the assessee only came to the Tribunal with folded hands seeking only a proper opportunity from the A O when his client’s claim stood overturned in the middle course only by virtue of a retrospective amendment. In fact the new code is only a further step in the same direction to deface all other decisions of the Courts/Tribunal that have held a view in favour of the assessee at some point or the other.


Definitely this will provide a clarity in the minds of the assessee but at the same time this kind of jugglery would reflect badly on the part of the government as any assessee would never ever attempt a claim outside the code. This would mean you are preventing someone to plan his affairs in a manner as would save taxes. Everyone has a fundamental right to do his business and arrange his affairs. Equally one should not forget that interests, penalties etc. do add to the kitty of the government.


Take for instance the terms ‘impermissible avoidance arrangement’ or the term ‘lack of commercial substance, in whole or in part’ in the context of General Anti Avoidance Tax Rule which is taking away assessee’s fundamental right to do business in the manner he wants. This kind of provision is subjective and kind of lending trouble both for the assessee and the department and it is litigation prone and therefore must be avoided at the inception stage. Also this clause needs to be avoided as it may fail the constitutional test. Nobody can understand the business better than the assessee himself and his conduct cannot be doubted under any general anti-avoidance rule.  Avoidance is an outcome of a cause-effect syndrome. Even though the Code has drafted the effect of the same it has failed to achieve the purpose by failing to write the cause very clearly as both the term ‘commercial substance’, ‘arrangement’ etc. are not leading anywhere.


For instance the term ‘lacks commercial substance’ would regard a transaction as tax avoidance it provides significant tax benefit to either party in the arrangement. Perhaps there is a pointer on the sale and leaseback transactions. Different Courts including Delhi High Court have found that such transactions to be genuine.   Here while framing GAAR it is desirable also to set clear benchmark for the Commissioner to rate a transactions as one lacking commercial substance and he must have certain material/evidence in his possession before he invoke the same.


In the current environment there are found innovative and most unique methods of conducting business among the businessmen and these therefore cannot be described as one lacking commercial substance. Let us not forget the fact that in entering commercial transaction taxation weighs a definite parameter for the management/businessmen. The words’ it would result in a significant tax benefit’ under clause (a) of sub-section (17) of section 113 make a reference to a mere expectation of profit which is certainly different from ‘intention to make a profit’.


GAAR in my view per se would drive further litigation and might get a constitutional repeal so that it must be avoided. Let the role of assessing officer is played by the assessing officer and not by the Commissioner who is lopsided with several tasks.



Gopal Nathani


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