Articles

Introduction: Friends, I have always felt that, “General anti-abuse measures are good as long as they don’t become specific tools for abuse themselves.”

With the advent of ‘General Anti Avoidance Rules’ (GAAR), in the Indian Income Tax Act, with the incorporation of a new Chapter X-A containing sections 95-102, w.e.f. AY 2018-19, it seems that the thin dividing line between the "legitimate tax planning" and the "illegitimate tax evasion", has gotten blurred and shrunk even further. Infact, looking at the language of these sections, one would really wonder, if legitimate tax planning, even within the four corners of Law, as upheld by the hon’ble Supreme Courts in UK and India in the landmark judgements of Duke of Westminster and Azadi Bachao Andolan, respectively, is still considered legitimate?

In my earlier published article with Taxmann, on GAAR, titled ‘Colourful Devices vs. GAAR’ [2019] 103 taxmann.com 255 (Article), I have discussed and analysed the legalities and nitty-gritties of the GAAR enabling Chapter X-A in the Income Tax Act and the critical need to strike a fine balance between the ratios emerging out of the landmark judgements of the "Ramsay/Mc Dowell" and the "Duke of Westminster/Azadi Bachao Andolan".

In my second published piece titled ‘Can GAAR Override DTAA?’ [2022] 135 taxmann.com 156 (Article), I have analysed the interplay between domestic GAAR and International Tax Treaties and have tried to arrive at a conclusion that GAAR should not override DTAA. The reasoning is that section 90(2A) of the Income Tax Act, providing for the overriding nature of GAAR over DTAA’s benefits and as conferred by Article 246 of the Constitution of India, can't override section 90(2) of the Income tax Act, mandating the overriding nature of more beneficial Treaty benefits and as conferred by Article 253 of the Constitution of India, which infact contains a non-obstante clause. A law made under Article 253 of the Constitution of India, such as section 90(2) of the Income Tax act, cannot be amended by a subsequent statute, which has been ordinarily made pursuant to the powers conferred under Article 246, such as section 90(2A) of the Income Tax Act. It is necessary to maintain the sanctity of international obligations because otherwise, domestic law would routinely alter the country's international obligations.

Recent Telangana High Court Judgement on the Interplay of GAAR vs. SAAR:

With the pronouncement of the much talked about recent Writ Petition Order of the hon’ble Telangana High Court in the case of ‘Ayodhya Rami Reddi Alla v. PCIT’ [2024] 163 taxmann.com 277 (Telangana), in Writ Petition Nos. 46510 & 46467 of 2022, dated 7.6.2024, I consider it worthwhile to pen down this third current piece on the interplay of domestic GAAR and domestic Special Anti-Avoidance Rules (SAAR).

Since much has already been written about the facts and merits of the said judgement, I will restrict my present piece to the more practical and critical aspects and issues arising out of this judgement, and to analyse as to whether GAAR can indeed override SAAR, or are we reading too much into the said judgement.

Facts of the Case:

The learned ASG representing the revenue has drawn the attention of the hon’ble Karnataka High Court to the events of the case that had transpired within a short span of time, entailing multiple transactions undertaken by the petitioner’s group of entities. The facts as mentioned in paras 20-24 of the judgement, include increase of authorised share capital of M/s Ramky Estate & Farms Ltd (REFL) in the AGM held on 27.2.2019 and the allotment of 7,64,40,100 shares to Shri Alla Ayodhya Rami Reddy (the petitioner) and 5,56,52,175 shares to M/s Oxford Ayyapa Consulting Services Pvt Ltd, on a private placement basis. Immediately thereafter, in a short span of time, the petitioner purchased the aforementioned 5,56,52,175/- of REFL. Subsequently, on 04.03.2019, REFL declared bonus shares in the ratio of 1:5 (correct ratio should be 5:1). As a consequence of bonus shares declaration, the value of the shares got declined from Rs.115/- per share previously to Rs.19.20/- per share. On 14.03.2019, the petitioner in turn further sold Rs.5,56,521/- shares to another firm i.e. ADR on the rate of Rs.19.20/- per share, thereby, resulting in a short-term capital loss of approximately Rs.462 crores in the hands of the petitioner, and which has been adjusted/offset by the petitioner against the long-term capital gains arising out of sale of some other shares in another transaction. (Here also, there seems to be some typo error in the judgement, as sale of 5,56,521 shares, at a loss of Rs. 95.80 per share (115-19.20) comes at around Rs. 5.33 crores and not Rs. 462 crores. Even if the entire lot of purchased shares of 5,56,52,175 is considered, then the short-term capital loss comes at around 533 crores and not 462 crores.)

It has been further contended by the revenue and accepted by the hon’ble High Court that the purchaser i.e. ADR did not have sufficient sources of funds to buy the shares of REFL from the petitioner. Funds in this regard were provided by M/s. Oxford Ayyapa Consulting Services India Private Limited to ADR. Thus, the money which was funded by M/s Oxford Ayyapa Consulting Services India Private Limited was returned by way of rotation of funds from within the group itself in the form of transfer from one group concerned to another. This entire exercise has been carried out with a sole motive of evading tax. Thus, the aforesaid transaction is nothing but round tripping of funds with no commercial substance. Moreover, the entire exercise has been done only with a mala fide intention of avoiding the payment of tax by creating losses. The entire transaction was made in the creation of a loss to the tune of Rs.462 crores without any economic, rational and commercial substance.

Petitioner’s Contention: In the said Writ Petition, the petitioner has contended that the transaction in question falls under the mischief of a Specific Anti Avoidance Rule (SAAR), pertaining to bonus stripping, stipulated under section 94(8) in Chapter X, of the Income Tax Act. Therefore, such SAAR provision should take precedence over the General Anti Avoidance Rule (GAAR), provided under sections 95-102 in Chapter X-A of the Act. Thus, the issuance of the impugned notice under Section 144BA invoking GAAR under Chapter X-A of the Act, is without jurisdiction and unsustainable in the eyes of Law.

It is pertinent to mention here that in the subject AY 2019-20, the SAAR provision u/s 94(8) aimed at curbing the abuse of bonus stripping covered only transactions of mutual funds units and didn’t cover ‘shares and securities’ within its scope. Shares and securities have been included in the scope of section 94(8) only w.e.f. 1.4.2023.

According to the petitioner, the Parliament while enacting Section 94(8) never had the intention of including shares and security within the scope of bonus tripping. If the Parliament would had intended the same, they would have included it within the rigors of Section 94(8) of the Act.

Therefore, what has been specifically excluded from the provisions curbing bonus stripping by way of SAAR cannot be indirectly curbed by applying GAAR. This was nothing but expansion of the scope of a specific provision in the Income Tax Act which is otherwise impermissible under the law.

Revenue’s Contention: The learned ASG representing the revenue has contended that the subject matter transactions could not be construed as the isolated case of bonus stripping, but the entire arrangement involved multiple transactions, undertaken by the petitioner deliberately within a very short span of time and aimed primarily to create artificial losses without any economic, rational and commercial substance, and as such the invocation of GAAR to consider the entire arrangement as an impermissible avoidance agreement was justified and lawful.

Hon’ble Telangana High Court’s Observations & Author’s Humble Analysis:

The hon’ble Telangana High Court in paras 32 and 36 of the judgement has observed that,

“32. As per the Revenue's perspective, given the multiple transactions that the taxpayer has undertaken, the case should be, one which should fall under the umbrella of Chapter X-A and not Chapter X. Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares, provided such issuance has an underlying commercial substance. However, this provision does not apply to the current case, as issuance of bonus shares here is evidently an artificial avoidance arrangement that lacks any logical or practical justification. It is clear that this arrangement was primarily designed to sidestep tax obligations, in direct contravention of the principles of the Act.

“36. The current arrangement is being scrutinized as it is considered devoid of commercial substance as per Section 97. It is perceived as a deliberate misuse of the Act's provisions, going beyond the intended use of the law, and manipulating it to one's advantage. It creates extraordinary rights and obligations that seem to be conducted not in good faith. These unusual rights and obligations are not in line with the general principles of fair dealing, leading to the conclusion that it's an impermissible avoidance agreement under Section 96. Consequently, the arrangement falls under the purview of Chapter X-A. Given these circumstances, procedures were set in motion to apply the rules and regulations of Chapter X-A to this arrangement.”

Author’s humble Analysis: The main crux of the petitioner’s contention rests on a natural corollary arising out of the well settled doctrine/ principle of interpretation, ‘lex specialis derogat legi generali’, which means that the special law overrides the general.

In simple words, if a specific SAAR legislative provision/section has been legislated by the Legislature to curb a particular tax avoidance/abuse transaction specifically, and if at the time of enactment of such provision, the Legislature in its wisdom has excluded some transaction(s) from the scope of such SAAR provision, then it would not be open for the revenue authorities to contend that such excluded transaction is indirectly covered by the GAAR provision.

In the author’s humble understanding, the main and the primary reason of the present case going in favour of the revenue, is not on account of the supremacy of GAAR over SAAR, which is generally being perceived in the tax circles.

The more logical and rationale justification and reason is that the revenue has been able to convince the hon’ble High Court that the subject matter transactions were not the isolated case of bonus stripping simpliciter, but the entire arrangement involved multiple transactions, undertaken by the petitioner deliberately within a very short span of time and aimed primarily to create artificial losses without any economic, rational and commercial substance, and as such the invocation of GAAR to consider the entire arrangement as an impermissible avoidance agreement was considered justified and lawful.

It is interesting to note here that infact the learned ASG in this judgement (as per para 32) has himself acknowledged and conceded that, “Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares, provided such issuance has an underlying commercial substance. However, this provision does not apply to the current case, as issuance of bonus shares here is evidently an artificial avoidance arrangement that lacks any logical or practical justification.” Thus, even the learned ASG didn’t seem to have vouch before the hon’ble High Court, for the proposition that GAAR will supersede SAAR. 

In this context, it would be interesting to think of an alternative “what if” scenario in the present case. Let us assume that the petitioner had made regular investments in the shares of a completely unrelated entity, and that unrelated entity had issued bonus shares to all its subscribers including the petitioner. In the year under consideration, the petitioner had sold the original shares, and consequently had incurred losses and had adjusted such losses against his other income. Then it would have been the case of simple bonus stripping transaction alone and not that of some pre-planned series of inter-group transactions involving round tripping, aimed solely at creating artificial losses and obtaining the tax benefit.

Then in that scenario, the contention of the petitioner should have found merit that in view of the applicability of a specific SAAR provision of bonus stripping u/s 94(8) in Chapter X, on the petitioner’s transaction and wherein the Legislature during the subject period under consideration, had in its wisdom, excluded the share transactions from the ambit of section 94(8) of the Act, then it would not have been open for the revenue authorities to indirectly cover the transaction of the petitioner by invoking GAAR provisions.

This issue can be analysed and looked at from another perspective also. For academic consideration let us assume that GAAR provision has not been enacted yet till the time period of the subject AY 2019-20, wherein the petitioner’s case falls.

We all know that section 94(8) has been amended prospectively to bring shares and securities also within the ambit of bonus stripping w.e.f. 1.4.2023. But let us assume that the language used in the amendment suggested that it is to be deemed that share transactions were always covered u/s 94(8) of the Act. Then in that case, whether the revenue authorities’ contention that the said amendment in section 94(8) being clarificatory in nature, applies to the transaction of the petitioner, retrospectively, would have found merit with the appellate authorities. The answer is in the negative as it is a settled legal position that retrospective/retroactive amendment in substantive provisions of the Income Tax Act is not sustainable.

Therefore, analysing the issue from this dimension, an important and a critical question arises for consideration of the Judiciary and all the stakeholders concerned, in the foreseeable unavoidable litigations in near future, as to whether the invocation of the subsequently enacted GAAR provision, by the revenue authorities, to cover the alleged tax avoidance/abuse transaction of the assessee, which is already addressed by the in-effect provision of SAAR, will tantamount to a backdoor/indirect retrospective amendment of that substantive SAAR provision, which otherwise is not permissible.

Further, giving a significant weightage to the fact of the subsequent enactment of GAAR’s enabling provisions vis-à-vis section 94(8)(SAAR), and the ‘non-obstante’ clause contained in section 95 of the Act, the hon’ble Telangana High Court in paras 27 and 28 of the judgement has observed as under:

“27. It is worth taking note of the fact that here is a situation where the special provision of law was already there in the Act when the general provision of law has been subsequently enacted by way of an amendment. Normally it is the vice-versa, i.e., where the general provision of law already being in force, the special provision of law is subsequently enacted. It is in those said circumstances, the Hon'ble Supreme Court of India as also the various High Courts have repeatedly held that when a special provision of law stands enacted, then the general provision of law would not and cannot be invoked. In the instant case chapter X-A has been only brought into force with effect from 01.04.2016 in terms of the Finance Act, 2013. Thus, the said contention of the learned Senior Counsel appearing for the petitioner cannot be accepted.

28. What next to be appreciated is the fact that chapter X-A begins with a non-obstante clause, where in Section 95(1) dealing with the applicability of the General Anti-Avoidance Rules, it has been held that, notwithstanding anything contained in the Act if the Assessing Authority finds that an arrangement entered into by the Assessee is an impermissible avoidance arrangement, the determination has to be done in respect of the consequential tax arising there from and shall be subject to the provisions of chapter X-A. This in other words means that by virtue of the aforesaid non-obstante clause, the provisions of chapter X-A gets an overriding effect over and above the other existing provisions of law.”

Author’s humble Analysis:

It is pertinent to mention here that the petitioner has relied upon the judgements of the hon’ble Supreme Court in the cases of Union of India v. Shiv Dayal Soin & Sons (P) ltd. and Others 2003 Volume 4 SCC 695, Commercial Tax Officer, Rajasthan v. Binami Cements Limited and Another 2014 8 SCC 319 and ‘R.S. Raghunath v. State of Karnataka and another’ 1992 1 SCC 335, and only a passing reference of these judgements has been made in para 17 of the said judgement, and the subject matter and the principal ratios emerging out of these judgements and as relied upon by the petitioner, have somehow not being addressed in the said judgement of the hon’ble Telangana High Court.

It is pertinent to mention here that in the judgement of the hon’ble Supreme Court in the case of ‘R.S. Raghunath v. State of Karnataka’ and another 1992 1 SCC 335, and as relied upon by the petitioner, the hon’ble Apex Court has categorically and expressly dealt with the issue, as to whether the subsequently enacted general rule provision of Rule 3(2) of Karnataka Civil Services (General Recruitment) Rules, 1977, with a non-obstante clause will override the earlier enacted special rule provision of the Karnataka General Service (Motor Vehicles Branch) (Recruitment) Rules, 1976.

The hon’ble Supreme Court after relying upon its earlier landmark judgements has categorically held that the earlier enacted special law provision shall prevail over the subsequently enacted general law provision, even if the general law provision contains a non-obstante clause, and when the scope of the provisions of an earlier enactment is clear the same cannot be cut down by resort to non-obstante clause of a later enactment.

For ready reference, the operating part of the said judgement of the hon’ble Supreme Court is being reproduced below.

“…..we are concerned with the enforceability of special law on the subject inspire of the general law. In Maxwell on the Interpretation or Signites, Eleventh Edition at page 168, this principle of law is stated as under:

"A general later law does not abrogate an earlier special one by mere implication. Generalia specialibus non derogant, or, in other words," where there are general words in a later Act capable of reasonable and sensible application without extending them to subjects specially dealt with by earlier legislation, you are not to hold that earlier and special legislation indirectly repealed, altered, or derogated from merely by force of such general words, without any indication of a particular intention to do so. In such cases it is presumed to have only general cases in view, and not particular cases which have been already otherwise provided for by the special Act."

In Maharaja Pratap Singh Bahadur v. Thakur Manmohan Dey and ors. ,AIR 1966 S.C. 1931, applying this principle it is held that general law does not abrogate earlier special law by mere implication. In Eileen Louise Nicoole v. John Winter Nicolle, [1992] 1 AC 284, Lord Phillimore observed as under:

"It is a sound principle of all juris- prudence that a prior particular law is not easily to be held to be abrogated by a poste- rior law, expressed in general terms and by the apparent generality of its language ap- plicable to and covering a number of cases, of which the particular law is but one. This, as a matter of jurisprudence, as understood in England, has been laid down in a great number of cases, whether the prior law be an express statute, or be the underlying common or customary law of the country. Where general words in a later Act are capable of reasonable and sensible application without extending them to subjects specially dealt with by earlier legislation, that earlier and special legislation is not to be held indi- rectly repealed, altered, or derogated from merely by force of such general words, without any indication of a particular intention to do so."

In Justiniane Augusto De Piedade Barreto v. Antonio Vicente Da Fortseca and others etc., [1979] 3 SCC 47, this Court observed that A law which is essentially general in nature may contain special provisions on certain matters and in respect of these matters it would be classified as a special law. Therefore, unless the special law is abrogated by express repeal or by making provisions which arc wholly inconsistent with it, the special law cannot be held to have been abrogated by mere implication.”

Also, on the non-obstante clause, the hon’ble Supreme Court in the same judgement has held that,

“In Chandavarkar Sita Ratna Rao v. Ashalata S. Guram, [ 1986] 4 SCC 447, the scope of non-obstante clause is explained in the following words:

On a conspectus of the above authorities it emerges that the non-obstante clause is appended to a provision with a view to give the enacting part of the provision an overriding effect in case of a conflict. But the non-obstante clause need not necessarily and always be co-extensive with the operative part so as to have the effect of cutting down the clear terms of an enactment and if the words of the enactment are clear and are capable of a clear interpretation on a plain and grammatical construction of the words the non-obstante clause cannot cut down the construction and restrict the scope of its operation. In Such cases the non- obstante clause has to be read as clarifying the whole position and must be understood to have been incorporated in the enactment by the Legislature by way of abundant caution and not by way of limiting the ambit and scope of the Special Rules.

…….If we examine the scope of Rule 3(2) particularly along with other General Rules, the context in which Rule 3(2) is made is very clear. It is not enacted to supersede the Special Rules.

As already noted, there should be a clear inconsistency between the two enactments before giving an overriding effect to the non-obstante clause but when the scope of the provisions of an earlier enactment is clear the same cannot be cut down by resort to non-obstante clause.”

However, somehow, the above discussed categorical ratios and binding legal precedents of the hon’ble Supreme Court, and as relied upon by the petitioner have not been taken cognizance and addressed by the hon’ble Telangana High Court in the said judgement.

Further regarding the reliance of the petitioner on the recommendations of the Shome Committee on GAAR, he hon’ble Telangana High Court in para 33 of the judgement has observed as under:

33. As far as the petitioner's reliance on the 2012 Shome Committee Report is concerned, in the given factual backdrop, the same is totally misplaced and misconstrued. Even the contention of the petitioner that the aforementioned Report with regard to SAAR under Section 94 would override the GAAR in Chapter X-A, is unacceptable. The Committee's stance that SAAR should generally supersede GAAR mainly pertains to international agreements, not domestic cases such as this. This stand, as per the report is further substantiated by the Finance Minister's declaration, made on January 14, 2013. During this announcement, the Minister stated that the applicability of either GAAR or SAAR would be determined on a case-by-case basis.”

Author’s humble Analysis:

In author’s humble understanding the reliance placed by the petitioner on the recommendations of the Shome Committee is also not misplaced and erroneous as has been observed in the said judgement. As a matter of fact, the Shome Committee in its Final Report, has categorically observed and recommended that, where SAAR is applicable to a particular aspect/element, then GAAR shall not be invoked to look into that aspect/element, and this recommendation was not just limited or confined to international transactions or agreements. In para 3.19 of its final Report, the Shome Committee has categorically observed that,

“it is a settled principle that, where a specific rule is available, a general rule will not apply. SAAR normally covers a specific aspect or situation of tax avoidance and provides a specific rule to deal with specific tax avoidance schemes. For instance, transfer pricing regulation in respect of transactions between associated enterprises ensures determination of taxable income based on arm‘s length price of such transactions. Here GAAR cannot be applied if such transactions between associated enterprises are not at arm‘s length even though one of the tainted elements of GAAR refers to dealings not at arm‘s length.”

The Shome Committee Report also contains many examples and illustrations clarifying that when domestic SAAR provisions like section 56(2)(x), and substantive provisions like section 10AA of the Act themselves address the issue in hand, then it would not be open for the revenue authorities to invoke GAAR in such cases.

Concluding Remarks:

Based on the above thread-bare analysis of the hon’ble Karnataka High Court judgement, in the humble understanding of the author, the said judgement can’t be considered and reckoned as a blanket and absolute verdict on upholding the supremacy of GAAR over SAAR. In this case, the revenue has been able to convince the hon’ble High Court that the subject matter transactions were not the isolated case of bonus stripping simpliciter, but the entire arrangement involved multiple transactions, undertaken by the petitioner deliberately within a very short span of time and aimed primarily to create artificial losses without any economic, rational and commercial substance, and as such the invocation of GAAR to consider the entire arrangement as an impermissible avoidance agreement was considered justified and lawful.

As far as the debate of GAAR vs. SAAR is concerned, it is a well-settled and established doctrine/ principle of interpretation, ‘lex specialis derogat legi generali’, which means that the special law overrides the general. Therefore, if a specific SAAR legislative provision/section has been legislated by the Legislature to curb a particular tax avoidance/abuse transaction specifically, and if at the time of enactment of such provision, the Legislature in its wisdom has excluded some transaction(s) from the scope of such SAAR provision, then it would not be open for the revenue authorities to contend that such excluded transaction is indirectly covered by the GAAR provision.

In the landmark judgement of the hon’ble Supreme Court in the case of ‘Maya Mathew vs State of Kerala & Ors [2010 (4) SCC 498], the hon’ble Apex Court has observed and held that,

“11. The rules of interpretation when a subject is governed by two sets of Rules are well settled. They are:

(i) When a provision of law regulates a particular subject and a subsequent law contains a provision regulating the same subject, there is no presumption that the later law repeals the earlier law. The rule making authority while making the later rule is deemed to know the existing law on the subject. If the subsequent law does not repeal the earlier rule, there can be no presumption of an intention to repeal the earlier rule;

(ii) When two provisions of law - one being a general law and the other being special law govern a matter, the court should endeavour to apply a harmonious construction to the said provisions. But where the intention of the rule making authority is made clear either expressly or impliedly, as to which law should prevail, the same shall be given effect.

(iii) If the repugnancy or inconsistency subsists in spite of an effort to read them harmoniously, the prior special law is not presumed to be repealed by the later general law. The prior special law will continue to apply and prevail in spite of the subsequent general law. But where a clear intention to make a rule of universal application by superseding the earlier special law is evident from the later general law, then the later general law, will prevail over the prior special law.

(iv) Where a later special law is repugnant to or inconsistent with an earlier general law, the later special law will prevail over the earlier general law.”

Further, when the scope of the provisions of an earlier enactment is clear the same cannot be cut down by resort to non-obstante clause of a later enactment. These legal propositions have the binding value and the stamp of approval of the hon’ble Supreme Court in a number of binding legal precedents as discussed above. Also in the humble understanding of the author, the clarification given by the CBDT in its Circular No 7 of 2017 that GAAR can coexist with SAAR, can muster/hold the legal waters only in those cases, where the subject matter transactions go much beyond the ambit and scope of the specific SAAR provision, and such going beyond is not on account of the Legislature’s intended exclusion of the said transaction from the ambit of such SAAR provision, and it can be established that transactions constitute a pre-planned series of multiple transactions, aimed solely at obtaining the tax benefit, and have been executed without any economic, rational and commercial substance.

[For any related queries, the author Shri Mayank Mohanka, FCA can be reached at camayank@smmohanka.com]