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GAAR Prevails Over SAAR: Telangana High Court Reaffirms Substance Over Form in Tax Avoidance Cases


The Hon’ble High Court of Telangana (‘HC’), in the case of Ayodhya Rami Reddy Alla v. Principal Commissioner of Income Tax[i], shed light on issues concerning round-tripping of funds for tax evasion. The court emphasised that transactions lacking commercial substance and designed as artificial arrangements to avoid taxes cannot receive legal validation. Recalling the words of Justice Holmes, ‘Taxes are what we pay for civilised society. I like to pay taxes. With them, I buy civilization,’ the court reminded the importance of tax in a welfare state and the obligation of law-abiding citizens to pay their taxes.

Brief Facts

  • The petitioner sold shares of Ramky Estate and Farms Limited (‘REFL’) to Advisory Services Pvt. Ltd (‘ADR’). Before this sale of shares to ADR, REFL had issued bonus shares to its shareholders in a 5:1 ratio, reducing the face value of each share to 1/6th of its value. This sale of REFL shares to ADR resulted in a short-term capital loss (‘STCL’) amounting to approximately Rs. 462 crores to the petitioner. However, the petitioner set off this STCL against long-term gains made on another transaction of the sale of shares in Ramky Enviro Engineers Limited (‘REEL’).

  • In filing the income tax return for the assessment year 2019-2020 (‘relevant AY’), the petitioner adjusted the STCL from the sale of REFL shares against the profit from the sale of REEL shares and paid taxes based on the adjusted capital gain.

  • The respondents contended that the sale of shares to ADR was aimed solely at evading taxes. ADR lacked the funds to buy the shares and thus had borrowed from M/s. Oxford Ayyapa Consulting Services India Private Limited. The funds were returned through internal group transfers, constituting round-tripping of funds with no commercial substance. The respondents concluded that the transactions were impermissible avoidance arrangements (‘IAA’) under the General Anti Avoidance Rules (‘GAAR’) in ch. X-A, ss. 95-102 of the Income-tax Act, 1961. (‘Act’) rather than under s. 94(8) of the Act.

  • The petitioner objected to such a conclusion, arguing that the transaction was permissible under the Specific Anti-Avoidance Rules (‘SAAR’) in ch. X, which was a specific legislation and GAAR being a general provision, cannot supersede the same. The petitioner filed a writ petition against the notice issued under s. 144BA invoking ch. X-A of the Act and sought a mandamus to declare such proceedings illegal, arbitrary, and lacking jurisdiction.


  • The HC held that the disputed transactions were not permissible under tax avoidance arrangements, dismissing the writ petitions, and allowed the respondents to proceed with the process under s. 144AB of the Act. The HC cautioned that using colourable devices to avoid taxes is not a legitimate part of tax planning, and every citizen must pay taxes without resorting to subterfuges.

  • On whether the issuance of bonus shares was an artificial avoidance arrangement lacking justification, the HC answered in the affirmative. The HC noted that s. 94(8) might be relevant in simple cases of bonus shares issuance with commercial substance. Still, the disputed transactions were primarily designed to sidestep tax obligations in direct contravention of the principles of the Act.

  • The HC further held that the revenue had convincingly shown evidence that the transactions were impermissible tax avoidance arrangements. Hence, the provisions of ch. X-A applied.

  • Referring to the non-obstante clause in ch. X-A, it was clarified that it has an overriding effect over other existing provisions. This serves as a reminder of the purpose of adding ch. X-A, comprising ss. 95-102, to identify and address illegal tax avoidance arrangements.

  • In their words of wisdom, the HC reminded us that selective misinterpretation of legal provisions is unacceptable, and the applicability of GAAR or SAAR should be determined based on each case’s specifics. The petitioner’s reliance on the Shome Committee Report[ii] was found to be misplaced and inconsistent with legislative intent and judicial precedents.

  • Furthermore, it was noted that s. 96(2) of the Act places the burden on the taxpayer to disprove the presumption of a tax avoidance scheme, which the petitioner failed to do. On the other hand, the respondents provided clear evidence supporting their contentions.

Our Analysis

This judgement reiterates one of the fundamental principles of law: that what is not allowed directly under the law cannot be achieved indirectly. Although SAAR is a specific legislation and GAAR has general applicability, GAAR, enacted after SAAR, was intended and designed to act as an all-encompassing safety net to capture all illicit arrangements. Therefore, for arrangements lacking commercial substance, the focus should be on the substance over the form of the transaction.

Taxes are not meant to exploit citizens but to sustain them. In a welfare state like India, with huge income inequality, evading taxes not only gives rise to black money, causing inflation and disturbance to the economy but also deprives the nation of crucial public revenue. Therefore, the primary aim is to prevent the legitimization of devices used to avoid taxes and ensure they cannot receive legal validation. The judiciary must be vigilant and decide every case by applying legal principles and specific facts.

End Notes

[i] Ayodhya Rami Reddy Alla v. Principal Commissioner of Income-tax, [2024] 163 277.

[ii] Shome Committee Report on GAAR in IT Act, 2012

Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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