Ruling of the Hon’ble Telangana High Court in the case of Ayodhya Rami Reddy Alla Ruling of the Hon’ble Telangana High Court in the case of Ayodhya Rami Reddy Alla

In his income tax return, the taxpayer set off the entire STCL of INR 4,620 million incurred on the sale of shares of REFL against long-term capital gains (‘LTCG’) made on another transaction involving the sale of shares of Ramky Enviro Engineers Limited (‘REEL’).

The Revenue authorities initiated proceedings under Section 144BA of the ITA, seeking to treat the transactions as an impermissible avoidance arrangement under General Anti Avoidance Rules (‘GAAR’) provisions laid down under Chapter X-A of the ITA.

The taxpayer filed the writ petition before the Hon’ble Telangana High Court challenging proceedings initiated under Section 144BA of the ITA.

Taxpayer’s Contention

• The transactions mentioned fall under Section 94(8) of the Income Tax Act (ITA), which is part of Chapter X. This section includes Specific Anti-Avoidance Rules (SAAR) and contains special provisions aimed at preventing tax avoidance.
• Special provision of Section 94(8) of the ITA takes precedence over the general anti-avoidance provisions codified as GAAR.
• Reliance placed on the guidelines issued by the Shom Committee, wherein it was recommended that where SAAR applies to a particular transaction, then GAAR should not be invoked to look into that element.

Revenue authority’s contention

• Writ jurisdiction is not meant to assail a show cause proceeding.
• The taxpayer has a right to appear and make submissions in response to the showcase, which the concerned authorities shall duly consider. No strong case to sustain the writ.
• Facts of the case clearly show that the transactions were pre-ordained, carried out in quick succession, and without any commercial rationale to create artificial losses and evade taxes, thus qualifying as an impermissible avoidance arrangement under GAAR.

Ruling of Hon’ble Telangana High Court       

• In this case, HC ignored the settled principles of interpretation that the special provisions prevail over general provisions as the special provision was enacted prior to the introduction of general provisions of GAAR.
• The provisions of Section 95(1) of the ITA dealing with the applicability of GAAR start with a non-obstante clause, i.e., notwithstanding anything contained in the ITA. Hence, the provisions of GAAR have an overriding effect over and above the other provisions of the ITA.
• Prior to the introduction of GAAR, the judicial system had established its own rules known as the Judicial Anti-Avoidance Rules, which operated under the principle of ‘substance over form’ to uncover structures or arrangements that lacked real commercial substance. The legal amendment by way of the introduction of GAAR provisions was driven by the judiciary’s firm commitment to uphold the anti-abuse principles, using the power of the law to enforce them.
• Section 100 of Chapter XA, which codified the GAAR provisions, states that the provisions of this chapter shall apply in addition to, or in lieu of, any other basis for the determination of tax. This provision emphasises the legislative intent that GAAR should act as an all-encompassing safety net designed to capture all illicit tax planning arrangements.
• Taxpayer’s reliance on the Shome Committee Report is misplaced and misconstructed as the committee’s stance that SAAR should prevail over GAAR mainly pertained to international agreements and not domestic transactions.
• The court noted that the Finance Minister’s declaration made on January 14, 2013, and the subsequent CBDT clarification stated that the applicability of GAAR and SAAR must be determined based on the facts of each case.
• The present arrangement is an impermissible avoidance arrangement under Section 96 of the ITA, as it is devoid of any commercial rationale. Also, it creates unusual rights and obligations that are not in line with the general principles of fair dealing and lack good faith.
• In contrast to the Supreme Court’s ruling in Vodafone, which placed the burden of proof on the Revenue to prove any fiscal misconduct, the provisions of Section 96(2) of the ITA place the onus on the taxpayer.
• In the present case, clear and compelling evidence suggests that the entire arrangement was intricately designed with the sole intent of evading taxes.
• Further, the court relied on the Supreme Court’s decisions in the cases of Union of India v. Shiv Dayal Soin & Sons (P) Ltd. and McDowell & Co. Ltd. v. CTO to support the view that legal provisions must be interpreted based on the specific facts and that tax avoidance schemes should be scrutinized for their underlying commercial intent.

In conclusion, the High Court of Telangana ruled in favor of the Revenue authorities and dismissed the writ filed by the taxpayer, challenging the initiation of proceedings under Section 144BA of the ITA.

KNAV Comments

This issue is significant as it tests the boundaries between SAAR and GAAR within the Indian tax framework.

This ruling highlights the judiciary’s stance towards tax avoidance schemes. It highlights the judicial support for the Revenue’s use of GAAR to combat tax avoidance arrangements that lack commercial substance. It further emphasises that taxpayers cannot solely rely on SAAR provisions to shield impermissible avoidance arrangements from scrutiny under GAAR.

Taxpayers may want to evaluate the impact of this ruling on the specific facts of their case.

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