Telangana High Court (2024)
Applicability of the General Anti-Avoidance Rule; consequences of an impermissible avoidance arrangement; avoidance of tax by certain transactions in securities
Yes to the first and no to the second. A specific anti-avoidance provision does not oust the general rule; where the specific provision does not cover the arrangement, the general rule may still apply. The statutory process must run its course before the court will interfere.
Can the general anti-avoidance rule be invoked against a bonus stripping arrangement, where the specific anti-avoidance provision then in force did not cover shares, and may the taxpayer challenge the invocation by writ before the Approving Panel has ruled?
The assessee held shares in a company. A scheme of amalgamation was carried through, followed by the issue of bonus shares. The original shares, whose market value had fallen because of the bonus issue, were then sold at a substantial loss, while the bonus shares carrying the value were retained. The short-term capital loss so generated was set off against a large long-term capital gain arising from an unrelated transaction. The Assessing Officer took the view that the steps together constituted an impermissible avoidance arrangement whose main purpose was to obtain a tax benefit, and initiated the general anti-avoidance procedure by making a reference for approval. At the relevant time the specific provision addressing stripping applied to units of mutual funds and not to shares.
The assessee challenged the invocation by writ petition before the Telangana High Court, before the Approving Panel had considered the reference. The High Court declined to interfere and dismissed the petition.
For the assessee
Parliament had enacted a specific provision to deal with stripping and had deliberately confined it to units, leaving shares outside. Where the legislature has addressed a subject and drawn the boundary, the general rule cannot be used to extend that boundary; to do so would rewrite the specific provision. Each step in the arrangement was lawful and independently valid, and the general rule cannot be applied to a series of lawful transactions merely because their combined effect is a reduced tax liability.
For the Revenue
The general rule was enacted precisely because specific provisions cannot anticipate every device. It operates where an arrangement's main purpose is to obtain a tax benefit and it lacks commercial substance or is not at arm's length, and nothing in it is displaced by the existence of a specific provision covering a different situation. The steps here produced a loss that was wholly artificial, the value having simply migrated to the bonus shares that were retained.
The Court held that the general and specific anti-avoidance provisions operate in different registers and can coexist. A specific provision addresses a defined transaction on defined conditions; the general rule addresses arrangements whose main purpose is a tax benefit and which bear the hallmarks the statute identifies. The existence of the former does not, by implication, immunise everything falling outside it, and the Court declined to read the confinement of the stripping provision to units as a legislative decision that stripping through shares should be permitted. It held that the general rule is available where the specific provision does not apply, and that this is the very function a general rule performs. On the arrangement itself, the Court noted that each step viewed alone was lawful but that the general rule directs attention to the arrangement as a whole and its main purpose, and that the Revenue was entitled to form a prima facie view that the steps together produced an artificial loss. On the procedural challenge, the Court held that the statute establishes a graded process culminating in an Approving Panel headed by a judge, that the assessee would be heard at that stage, and that it was not appropriate to short-circuit the process by writ before the Panel had applied its mind.
The first significant Indian judgment applying the general anti-avoidance rule, now in Sections 178 to 184 of the IT Act 2025, with the specific securities provision in Section 175. Its holding that the general rule survives alongside specific provisions is the most consequential point, since the contrary view would have confined it to ground no specific provision had reached. Read with Walfort, which shows what happened before a general rule existed, and with Tiger Global, which holds that where avoidance is alleged the statutory machinery is the route rather than an assertion made outside it. Verify the citation before relying on it; the decision is recent and the reported reference should be checked.