Section 179 — Impermissible Avoidance Arrangement | ITA 2025

Section 179 — - IMPERMISSIBLE AVOIDANCE ARRANGEMENT

Section 179 is the substantive equivalent of 1961 s. 96 -- the DEFINITIONAL CORE of GAAR. It defines 'impermissible avoidance arrangement' (IAA) by a TWO-PRONG test: (a) main purpose is to obtain TAX BENEFIT; AND (b) one or more of FOUR ABNORMALITY INDICATORS: (i) creates rights / obligations not at arm's length; (ii) results in misuse / abuse of Act provisions; (iii) lacks COMMERCIAL SUBSTANCE (defined in s. 180); (iv) entered into / carried out by means / in manner not ordinarily employed for bona-fide purposes. Both prongs must be satisfied. The 'main purpose' test (sub-s. 1 + presumption in s. 182) is the practical hinge -- once main-purpose-tax-benefit is established, any single abnormality indicator triggers IAA classification.

Statutory text — Income-tax Act, 2025

Marginal note -- Impermissible avoidance arrangement

(1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

(c) lacks commercial substance or is deemed to lack commercial substance under section 180, in whole or in part; or

(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

(2) An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtain- ing a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, irrespective of the fact that the main purpose of the whole arrangement is not to obtain a tax benefit. Arrangement to lack commercial substance.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 179	INCOME-TAX ACT, 1961 -- s. 96
Sub-s. (1) -- definition: main purpose tax benefit + four abnormality indicators	1961 s. 96(1)
Sub-s. (2) -- main-purpose test	1961 s. 96(2)

TWO-PRONG TEST

PRONG 1 -- MAIN PURPOSE: arrangement must have OBTAINING TAX BENEFIT as its MAIN PURPOSE (or one of main purposes). 'Tax benefit' is defined in s. 184 -- includes reduction of tax / increase of refund / reduction in income / etc. PRONG 2 -- FOUR ABNORMALITY INDICATORS (any ONE sufficient): (a) NON-ARM'S-LENGTH: rights / obligations not at arm's length -- inter-AE pricing distortion; (b) MISUSE / ABUSE: results in misuse / abuse of provisions of this Act -- exploiting technical interpretations to defeat policy; (c) NO COMMERCIAL SUBSTANCE: lacks commercial substance (s. 180 detailed) -- no real economic activity / merely cosmetic; (d) NON-ORDINARY MEANS: entered into or carried out by MEANS / in a MANNER which would not ordinarily be employed for bona-fide purposes. AGGREGATE TEST: BOTH prongs required. Tax-driven structure with commercial substance = NOT IAA. Non-tax-driven structure without commercial substance = NOT IAA. Tax-driven AND non-commercial-substance = IAA. Practitioner: tax-planning is permissible; tax-avoidance via abnormal structure is IAA-vulnerable. Document commercial rationale, market-comparable terms, business decision-making evidence.

CROSS-REFERENCES

Section 178 -- GAAR applicability.
Section 180 -- Commercial substance test.
Section 181 -- Consequences.
Section 182 -- Presumption of main purpose.
Section 184 -- Definitions including 'tax benefit'.

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