[Opinion] Can GAAR Override SAAR? Are We Reading Too Much Into the Telangana HC Judgement?

Mayank Mohanka – [2024] 163 taxmann.com 562 (Article)

1. 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.

2. 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. Pr. CIT‘ [2024] 163 taxmann.com 277, 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.

3. 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 stripping 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.

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