The General Anti-Avoidance Rule (‘GAAR’) was introduced through Finance Act, 2012 to curb tax evasion through unethical means.^[1] The provisions of GAAR were incorporated under Chapter X-A of the Income-tax Act, 1961 (‘IT Act’) and have been effective since April 1, 2017. Furthermore, Section 144BA of the IT Act provides the procedure for an Assessing Officer to invoke GAAR provisions by making a reference to the Principal Commissioner or Commissioner, followed by adjudication by an Approving Panel, if required.

In a recent case before the High Court of Telangana (‘HC’)^[2], a Writ Petition was filed by the assessee challenging the directions of the Approving Panel issued under Section 144BA(6) of the IT Act. In brief, for the Assessment Year 2020-21, the taxpayer sold certain investments, which resulted in long-term capital gains. Subsequently, the Assessee also incurred a short-term capital loss due to sale of listed equity shares, which was sought to be set-off against the long-term capital gains. During assessment proceedings, upon a reference having been made under Section 144BA of the IT Act, the Approving Panel held that the sale resulting in short-term capital loss was an Impermissible Avoidance Arrangement (‘IAA’), since the same was undertaken only to claim a set off.

The HC, while allowing the Writ Petition, held that the Department was unable to prove that the transaction carried out by the Assessee satisfied the conditions for an IAA, as stipulated under Section 96(1) of the IT Act. Further, the HC also held that the transactions were pure trading transactions entered into by the Assessee in the open market and such transactions would not come under the purview of GAAR provisions.^[3]

Interestingly, the HC interpreted Section 96(1) of the IT Act by reading an implicit “and”  into the Sub-section, thereby treating the four ingredients as cumulative rather than alternative, despite the use of the disjunctive “or”  in the text.^[4] Furthermore, the HC noted that an arrangement could not be characterised as an IAA, until and unless it were between two or more persons, an interpretation not seemingly apparent from a literal reading of the provisions of Chapter X-A of the IT Act.^[5] Be that as it may, this judgment reaffirms that a bona fide transaction conducted within the four corners of law could not be subjected to GAAR provisions.

[1] An Expert Committee on GAAR under Dr. Parthasarathi Shome in 2012 was constituted, whose recommendations led to significant deferrals and modifications before GAAR was finally implemented from April 1, 2017.

[2] Smt. Anvida Bandi v. Deputy Commissioner of Income-tax, [Order dated August 22, 2025 in W.P. No. 3201 of 2023] (Telangana High Court).

[3] Page 69, Final Report on General Anti Avoidance Rules (GAAR) in Income-tax Act, 1961, Expert Committee (2012). https://dea.gov.in/sites/default/files/report_gaar_itact1961.pdf.

[4] Paragraph 12, Id. at No. 3.

[5] Section 102(1) of the IT Act.