Section 274: reference to the Principal Commissioner or Commissioner in GAAR cases

Step 1: the Assessing Officer's reference

At any stage of assessment or reassessment proceedings, the Assessing Officer may refer the matter to the Principal Commissioner or Commissioner if, based on the material and evidence before him, he considers it necessary to declare an arrangement as an impermissible avoidance arrangement and determine its tax consequences under Chapter XI.

Step 2: the Principal Commissioner/Commissioner's process

On receiving the reference, if the Principal Commissioner or Commissioner is of the opinion that Chapter XI needs to be invoked, he must issue a notice to the assessee setting out the reasons and basis for that opinion, and give the assessee an opportunity of being heard within a period specified in the notice, not exceeding sixty days.

If the assessee does not file any objection within the time given, the Principal Commissioner or Commissioner may issue such directions as he considers fit for declaring the arrangement an impermissible avoidance arrangement.

If the assessee does object, and after hearing the assessee the Principal Commissioner or Commissioner is not satisfied with the explanation, he must refer the matter to the Approving Panel.

If, after hearing the assessee, the Principal Commissioner or Commissioner is satisfied that Chapter XI is not to be invoked, he communicates that in writing to the Assessing Officer, with a copy to the assessee.

Step 3: the Approving Panel

On receiving a reference, the Approving Panel issues such directions as it thinks fit for declaring the arrangement an impermissible avoidance arrangement under Chapter XI, and specifies the tax year(s) to which the declaration applies.

No direction that is prejudicial to the assessee or to the interests of the revenue can be issued without giving both the assessee and the Assessing Officer an opportunity of being heard.

Before issuing directions, the Approving Panel may direct further inquiry by the Principal Commissioner or Commissioner (or another income-tax authority), call for and examine records, or require the assessee to furnish documents and evidence.

If members of the Approving Panel differ in opinion, the matter is decided by the majority.

• Constitution: one or more Approving Panels, each with three members including a Chairperson.
• Chairperson: a person who is or has been a High Court judge.
• Second member: an Indian Revenue Service officer not below the rank of Principal Chief Commissioner or Chief Commissioner of Income-tax.
• Third member: an academic or scholar with special knowledge of direct taxes, business accounts or international trade practices.
• Term: ordinarily one year, extendable up to three years.

Effect of the directions

The Assessing Officer must complete the assessment/reassessment proceedings as per the directions of the Principal Commissioner or Commissioner (or the Approving Panel) and the provisions of Chapter XI.

If a direction declares an arrangement impermissible for a tax year other than the one under proceedings, the Assessing Officer applies the same direction to that other tax year's assessment without needing a fresh direction.

Directions issued by the Approving Panel are binding on the assessee and on the Principal Commissioner or Commissioner and subordinate income-tax authorities. No appeal lies against these directions under the Act.

No assessment or reassessment order can be passed by the Assessing Officer without the prior approval of the Principal Commissioner or Commissioner, if tax consequences have been determined under Chapter XI.

Time limit for the Approving Panel's directions

The Approving Panel must issue its directions within six months from the end of the month in which the reference was received from the Principal Commissioner or Commissioner.

In computing this period, certain time is excluded - such as time spent obtaining information through an authority competent under an information-exchange agreement (capped at one year), and any period during which the proceeding is stayed by a court.

If, after excluding such periods, the remaining time available is less than sixty days, it is extended to sixty days (and the six-month period is deemed extended accordingly).

Frequently asked questions