Chapter XVI - Procedure for Assessment
Section 274
Section 274: reference to the Principal Commissioner or Commissioner in GAAR cases
Section 274 lays down the procedure an Assessing Officer must follow when, during an assessment or reassessment, he considers it necessary to declare an arrangement as an "impermissible avoidance arrangement" under Chapter XI - the General Anti-Avoidance Rule (GAAR). It routes the matter first to the Principal Commissioner or Commissioner and, if the assessee objects, on to a specially constituted Approving Panel.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) The Assessing Officer may make a reference to the Principal Commissioner or Commissioner at any stage of the assessment or reassessment proceedings before him, if, having regard to the material and evidence available with him, he considers that it is necessary to— (a) declare an arrangement as an impermissible avoidance arrangement; and (b) determine the consequence of such an arrangement within the meaning of Chapter XI.
(2) The Principal Commissioner or Commissioner shall, on receipt of a reference under sub-section (1), if he is of the opinion that the provisions of Chapter XI are required to be invoked,–– (a) issue a notice to the assessee, setting out the reasons and basis of such opinion, for submitting objections, if any; and (b) provide an opportunity of being heard to the assessee within such period, not exceeding sixty days, as specified in the said notice.
(3) If the assessee fails to furnish any objection to the notice within the time specified in such notice issued under sub-section (2), the Principal Commissioner or Commissioner shall issue such directions as he deems fit in respect of declaration of the arrangement to be an impermissible avoidance arrangement.
(4) In case the assessee objects to the proposed action, and the Principal Commissioner or Commissioner, after hearing the assessee in the matter, is not satisfied with the explanation of the assessee, then, he shall make a reference in the matter to the Approving Panel for the purpose of declaration of the arrangement as an impermissible avoidance arrangement.
(5) If the Principal Commissioner or Commissioner is satisfied, after having heard the assessee that the provisions of Chapter XI are not to be invoked, he shall by an order in writing, communicate the same to the Assessing Officer with a copy to the assessee. (6) The Approving Panel, on receipt of a reference from the Principal Commissioner or Commissioner under sub-section (4), shall–– (a) issue such directions, as it deems fit, in respect of the declaration of the arrangement as an impermissible avoidance arrangement as per the provisions of Chapter XI; and (b) specify the tax year or years to which such declaration of an arrangement as an impermissible avoidance arrangement shall apply.
(7) No direction under sub-section (6) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interests of the revenue, as the case may be.
(8) The Approving Panel may, before issuing any direction under sub-section (6),— (a) if it is of the opinion that any further inquiry in the matter is necessary, direct the Principal Commissioner or Commissioner to make such inquiry or cause the inquiry to be made by any other income-tax authority and furnish a report containing the result of such inquiry to it; or (b) call for and examine such records relating to the matter as it deems fit; or (c) require the assessee to furnish such documents and evidence as it may direct.
(9) If the members of the Approving Panel differ in opinion on any point, such point shall be decided according to the opinion of the majority of the members.
(10) The Assessing Officer, on receipt of directions of the Principal Commissioner or Commissioner under sub-section (3) or of the Approving Panel under sub-section (6), shall proceed to complete the proceedings referred to in sub-section (1) as per such directions and the provisions of Chapter XI.
(11) If any direction issued under sub-section (6) specifies that declaration of the arrangement as impermissible avoidance arrangement is applicable for any tax year other than the tax year to which the proceedings referred to in sub-section (1) pertains, then,–– (a) the Assessing Officer while completing any assessment or reassessment proceedings relevant to such other tax year shall do so as per such directions and the provisions of Chapter XI; and (b) it shall not be necessary for him to seek fresh direction on the issue for such other tax year.
(12) No order of assessment or reassessment shall be passed by the Assessing Officer without the prior approval of the Principal Commissioner or Commissioner, if any tax consequences have been determined in the order under the provisions of Chapter XI.
(13) The Approving Panel shall, subject to sub-sections (14) and (15), issue directions under sub-section (6) within six months from the end of the month in which the reference under sub-section (4) was received.
(14) In computing the period referred to in sub-section (13), the following shall be excluded:— (a) the period commencing from the date on which the Approving Panel first directs the Principal Commissioner or Commissioner for getting the inquiries conducted through the authority competent under an agreement referred to in section 159 and ending with the date on which the information so requested is last received by the Approving Panel or one year, whichever is less; (b) the period commencing on the date on which the proceeding of the Approving Panel is stayed by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by the Approving Panel.
(15) If immediately after the exclusion of the period as per sub-section (14), the remaining period available to the Approving Panel for issue of directions is less than sixty days, such remaining period shall be extended to sixty days and the period of six months mentioned in sub-section (13) shall be deemed to have been extended accordingly.
(16) The directions issued by the Approving Panel under sub-section (6) shall be binding on— (a) the assessee; and (b) the Principal Commissioner or Commissioner and the income-tax authorities subordinate to him.
(17) No appeal under the Act shall lie against directions issued by the Approving Panel under sub-section (6), irrespective of anything contained in any other provision of the Act.
(18) The Central Government shall, for the purposes of this section, constitute one or more Approving Panels as may be necessary and each panel shall consist of three members including a Chairperson.
(19) The Chairperson of the Approving Panel shall be a person who is or has been a judge of a High Court, and— (a) one member shall be a member of Indian Revenue Service not below the rank of Principal Chief Commissioner or Chief Commissioner of Income-tax; and (b) one member shall be an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices.
(20) The term of the Approving Panel shall ordinarily be for one year and may be extended from time to time up to three years.
(21) The Chairperson and members of the Approving Panel shall meet, as and when required, to consider the references made to the panel and shall be paid such remuneration as may be prescribed.
(22) In addition to the powers conferred on the Approving Panel under this section, the powers which are vested in the Board for Advance Rulings under section 387 shall apply mutatis mutandis to the Approving Panel.
(23) The Board shall provide to the Approving Panel such officials as may be necessary for the efficient exercise of powers and discharge of functions of the Approving Panel under this Act.
(24) The Board may make rules for the purposes of the constitution and efficient functioning of the Approving Panel and expeditious disposal of the references received under sub-section (4).
Introduction
Section 274 sets a reference and approval process for a proposed tax treatment requiring review by the Principal Commissioner or Commissioner and the Approving Panel.
Its stages and deadlines matter because the panel’s directions can affect the eventual assessment.
Key takeaways
GAAR begins with a reference
During assessment or reassessment, the Assessing Officer may refer a proposed impermissible avoidance arrangement to the Principal Commissioner or Commissioner.
Notice and hearing
If Chapter XI may be invoked, the superior authority must state its reasons in a notice and hear the assessee.
Approving Panel directions
A referred matter goes through the panel process; its directions guide the assessment and can specify the tax years affected.
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).
Step-by-step flow for a Chapter XI reference under Section 274
- 1
Does the AO consider it necessary to declare an arrangement an impermissible avoidance arrangement?
At any stage of an assessment or reassessment, based on the material and evidence available, the AO may refer the matter to the Principal Commissioner or Commissioner to declare the arrangement and determine its consequence under Chapter XI (Section 274(1)).
- 2
Is the Principal Commissioner or Commissioner of the opinion that Chapter XI should be invoked?
If so, he issues a notice giving the reasons and basis, invites objections, and gives a hearing within a period not exceeding sixty days stated in the notice (Section 274(2)).
- 3
Did the assessee file objections within the time in the notice?
- No: The Principal Commissioner or Commissioner issues directions on the declaration (Section 274(3)). Skip to the AO step (step 6).
- Yes: He hears the assessee. Go to the next step.
- 4
After the hearing, is he satisfied that Chapter XI should not be invoked?
- Yes: He communicates this by written order to the AO, with a copy to the assessee (Section 274(5)).
- No: He refers the matter to the Approving Panel (Section 274(4)). Go to the next step.
- 5
Approving Panel directions
The Panel may call for inquiry, records or documents (Section 274(8)), must hear the assessee and the AO on prejudicial directions (Section 274(7)), decides by majority (Section 274(9)) and specifies the tax years covered (Section 274(6)(b)). It must issue directions within six months from the end of the month in which the reference is received, excluding the periods in Section 274(14), with a minimum remaining period of sixty days (Sections 274(13) to (15)). Its directions bind the assessee and the revenue and are not appealable under the Act (Sections 274(16) and (17)).
- 6
The AO completes the proceedings
As per the directions and Chapter XI, including for any other tax year covered, without seeking a fresh direction (Sections 274(10) and (11)). An order that determines Chapter XI tax consequences needs the prior approval of the Principal Commissioner or Commissioner (Section 274(12)).
Practical checklist
Do
- Identify the proposed adjustment and the Assessing Officer’s reference.
- Respond to the opportunity to present material before the reviewing authority or panel.
Avoid
- Treat an initial reference as the final tax demand.
Illustrative example
Worked example: an arrangement referred to the Approving Panel
Hypothetical facts (illustration only, not a real taxpayer): During the assessment of a company for tax year 2026-27, the AO doubts an arrangement under which group income was routed through an intermediate entity. He refers it to the Principal Commissioner. The Principal Commissioner issues a notice giving his reasons, and the company files objections within the time allowed. The Approving Panel receives the reference in May 2028.
Objection stage
The company objected in time, so the Principal Commissioner hears it. He is not satisfied with its explanation and refers the matter to the Approving Panel (Section 274(4)).
Panel's time limit
The ordinary limit is six months from the end of May 2028, i.e. 30 November 2028 (Section 274(13)). Suppose that, after excluding a period of court stay under Section 274(14)(b), only 20 days would remain. Section 274(15) extends the remaining period to sixty days.
Directions and years
After hearing the company and the AO, the Panel declares the arrangement an impermissible avoidance arrangement and specifies tax years 2026-27 and 2027-28 (Section 274(6)).
Completion
The AO completes 2026-27 as directed. For 2027-28 he follows the same directions without a fresh reference (Section 274(11)). Each order needs the Principal Commissioner's prior approval (Section 274(12)).
Outcome
- The Panel's directions bind the company and cannot be appealed under the Act (Sections 274(16) and (17)).
- The company's main chances to contest are its objections before the Principal Commissioner and its hearing before the Panel.
Frequently asked questions
What triggers a reference under Section 274?
The Assessing Officer refers the matter when, based on the material and evidence available during assessment or reassessment, he considers it necessary to declare an arrangement as an impermissible avoidance arrangement and work out its tax consequences under Chapter XI (GAAR).
Can I object to a proposed GAAR declaration?
Yes. Once the Principal Commissioner or Commissioner issues a notice under Section 274(2), the assessee can submit objections and must be given an opportunity of being heard within the period specified in the notice (up to sixty days).
Can the Approving Panel's directions be appealed?
No. Section 274(17) states that no appeal under the Act lies against directions issued by the Approving Panel under sub-section (6).
Who sits on the Approving Panel?
Three members: a Chairperson who is or has been a High Court judge, an Indian Revenue Service officer not below Principal Chief Commissioner/Chief Commissioner rank, and an academic or scholar with special knowledge of direct taxes, business accounts or international trade practices.
Need help applying this provision to your situation?
Get help responding to a GAAR reference under Section 274Last updated 10 October 2026