Research and Articles

• GAAR grandfathering is reaffirmed for income earned from transfer of investments made prior to 1 April 2017.

• The protection extends even to income arising from transfers of such pre-2017 investments after 1 April 2017.

Background 

Historically, Indian tax law addressed avoidance through judicial doctrines (commonly referred to as judicial anti-avoidance rules or “JAAR”), with courts oscillating between looking through the legal form of transactions to their underlying substance and, in other cases, according primacy to form. In the absence of a codified general anti-avoidance framework, this case-by-case approach led to uncertainty and inconsistent outcomes.

In Azadi Bachao Andolan ¹ the Supreme Court acknowledged that several jurisdictions had addressed treaty shopping by taking suitable steps either by way of incorporation of provisions in tax treaties or by domestic legislation. Referring to the maxim judicis est jus dicere, non dare, it clarified that courts were confined to interpreting and applying the law, not creating it. The Supreme Court noted that the working group on non-resident taxation had recommended the introduction of anti-abuse rules, making it clear that it was for Parliament or the executive to incorporate such measures. It ultimately held that whether, and for how long, treaty shopping should be permitted was a matter of policy best left to the executive.

Further, the Supreme Court, in Vodafone International Holdings BV v. Union of India, ² delineated the limits of JAAR in India and, in doing so, highlighted the need for a legislatively enacted general anti-avoidance rule (“GAAR”). While recognising that courts may invoke JAAR and adopt a narrower “look at” approach (instead of the broader “look through” approach) to examine a transaction as a whole and determine its true legal nature, the Court clarified that a structure may be disregarded only where it is established to be a sham or a colourable device lacking commercial substance. The Court also held that genuine strategic tax planning has not been abandoned.

Against the backdrop of increasingly sophisticated tax planning and global moves towards codified “substance over form” principles, India introduced the GAAR, through the Finance Bill, 2012, inserting Chapter X-A (Sections 95 to 102) and the procedure under Section 144BA (the procedure for GAAR) into the Income-tax Act, 1961 (“ITA”). GAAR was brought into force from 1 April 2017, alongside a grandfathering regime under which transfer of investments made up to 31 March 2017 are not subject to its provisions. 

GAAR

GAAR provides that, notwithstanding anything contained in the ITA, an arrangement entered into by a taxpayer may be declared an impermissible avoidance arrangement, with the tax consequences thereof determined in accordance with the provisions of Chapter X-A. ³ 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 97, 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. ⁴ Further, the burden of proving the negative, that obtaining tax benefit is not the main purpose of an arrangement, has been placed on the taxpayer.

Once an arrangement is characterised as an impermissible avoidance arrangement, GAAR empowers the tax authorities to determine the tax consequences in a manner that reflects the substance of the arrangement rather than its legal form, including denying any tax or treaty benefits. In doing so, the authorities are not constrained by the structure adopted by the taxpayer and may effectively reconstruct the arrangement to align it with its real commercial effect. ⁵

Procedure under GAAR

The ITA stipulates a structured procedure for the invocation of GAAR. ⁶ Where the Assessing Officer considers an arrangement to be an impermissible avoidance arrangement, a reference is made to the Principal Commissioner or Commissioner, who, upon forming a prima facie view, issues a reasoned notice to the taxpayer, granting an opportunity to file objections and be heard within a prescribed period of up to 60 days. The Commissioner may drop the proceedings if satisfied with the taxpayer’s response or, where objections are not accepted, refer the matter to an Approving Panel; ⁷ in cases where no objections are filed, the Commissioner may himself issue directions. The Approving Panel examines the matter and is required to issue binding directions on the applicability of GAAR within 6 months from the end of the month in which the reference is received. Such directions are non-appealable and binding on both the taxpayer and the tax authorities. Nonetheless, the directions may be challenged by way of a writ petition under Article 226 of the Constitution before the jurisdictional High Court. ⁸ The Assessing Officer is thereafter required to complete the assessment in conformity with such directions, with prior approval of the Commissioner. This multi-tiered process ensures that GAAR is invoked in a controlled and procedurally robust manner.

Exclusion from GAAR

Rule 10U of the Income-tax Rules, 1961 (“ITR”), specifies the circumstances in which GAAR does not apply. Inter alia, the rule excludes from the ambit of GAAR any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, a person from the transfer of investments made before 1 April 2017 by such person. However, exclusion under Rule 10U contained a carve-out which states that:

“without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st day of April 2017.” ⁹ 

The Supreme Court decision in Tiger Global International Holdings II 

Earlier this year, the Supreme Court in Tiger Global International Holdings II ¹⁰ examined, in the context of GAAR, the availability of treaty benefits in respect of capital gains arising under the indirect transfer provisions in relation to an offshore investment structure. While noting that the investments were made prior to 1 April 2017, the Court held that the grandfathering provisions under Rule 10U do not confer blanket immunity from GAAR. In particular, relying on Rule 10U(2) which operates “without prejudice” to Rule 10U(1), the Court observed that where the relevant tax benefit (such as exemption from capital gains under an applicable tax treaty) is sought to be availed upon exit after 1 April 2017, the transaction may still be examined under the GAAR framework. Accordingly, the mere fact that the investment predates the introduction of GAAR does not, in itself, preclude scrutiny at the stage the tax benefit is claimed. The Court’s reliance on Rule 10U(2) raises concerns regarding the scope of grandfathering. The judgment appears to read “without prejudice” as “notwithstanding”, thereby diluting the protection under Rule 10U(1)(d). As recognised in ITO v. Gwalior Rayon Silk Manufacturing Co. Ltd. ¹¹, a “without prejudice” clause operates as a constraint, preserving the primacy of the main provision. On this basis, Rule 10U(2) should not be invoked to undermine the statutory grandfathering, and the Court’s approach risks unsettling the legislative design, thereby creating issues with respect to whether or not GAAR applies to post 1 April 2017 exits.

Further, the decision creates uncertainty as to the distinction between an “investment” and an “arrangement” for GAAR purposes. In particular, it remains unclear whether a bona fide pre-2017 investment could itself be characterised as a “prima facie” impermissible avoidance arrangement, thereby blurring the line between mere investments and arrangements for the purposes of GAAR. While pre-2017 investments were grandfathered, arrangements were not grandfathered if the transfer occurred post 1 April 2017. ¹² 

Amendment 

The CBDT vide notification dated 31 March 2026 introduced the Income-tax (Tenth Amendment) Rules, 2026 under which it amended Rule 10U by substituting the following clauses for sub-rule (1) and (2) respectively as follows: ¹³

• “(1)(d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of such investments which were made before the 1st day of April, 2017 by such person.”

• “(2) The provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st day of April, 2017, except for that income which accrues or arises to, or deemed to accrue or arise to, or is received or deemed to be received, by any person from transfer of such investments which were made before the 1st day of April, 2017 by such person.” 

• Further, the explanatory memorandum states that “the amendment will have the effect that the provisions of Chapter X-A shall not be invoked on or after the date of publication of these rules in the Official Gazette in a case where income accrues or arises to, or deemed to accrue or arise to, or is received or deemed to be received, by any person from transfer of such investments which were made before the 1st day of April, 2017 by such person.”

  Notably, the Amended Carve-out omits the earlier “without prejudice” language.

It is pertinent to note that Rule 10U corresponds to Rule 128 of the Income-tax Rules, 2026 (“New ITR”), which comes into effect from 1 April 2026. A similar amendment (without the explanatory memorandum) has also been introduced in Rule 128 of the New ITR in relation to the GAAR provisions under Chapter XI of the Income-tax Act, 2025 (“New ITA”). ¹⁴

Moreover, Section 536 (Repeals and Savings) of the New ITA provides that rules and other instruments issued under the erstwhile ITA continue to apply, to the extent they are not inconsistent with the corresponding provisions of the new law. Accordingly, Rule 10U would continue to operate only insofar as it is not inconsistent with Rule 128 of the New ITR. In the present case, since corresponding amendments have been made to both Rule 10U and Rule 128, and the provisions are aligned, Rule 10U should continue to apply. 

Analysis  

The applicability of GAAR in light of the Amendment warrants closer examination in cases where the investment was made prior to 1 April 2017.

Exists Pre- 1 April 2017

The amendments to Rule 10U and Rule 128 provide that income arising from “transfer of such investments which were made before the 1st day of April, 2017” shall be grandfathered from the application of GAAR. Further, even before the amendments, GAAR did not apply prior to 2017,. Accordingly, where the transfer of investment and consequent tax benefit arose prior to 1 April 2017, grandfathering from GAAR applies, and the transaction would remain outside the scope of GAAR. However, JAAR would continue to apply to the extent the arrangement constituted a sham or a colourable device. 

Exits between 1 April 2017 to 1 April 2026 

Rule 10U applied up to 1 April 2026. Under the pre-amendment regime, while investments made before 1 April 2017 were grandfathered pursuant to CBDT Circular No. 7 of 2017, the decision in Tiger Global unsettled the position by casting doubt on whether such protection extended to cases where the relevant tax benefit arose thereafter. As a result, ambiguity persisted on the scope of grandfathering in such situations.

The amendments to Rule 10U now explicitly extend grandfathering to income arising from the transfer of investments made before 1 April 2017, irrespective of when such income arises. However, the application of this amendment is prospective, taking effect from 1 April 2026. The explanatory memorandum clarifies that the provisions of Chapter X-A “shall not be invoked on or after” the date of publication of the rules in respect of such income, thereby indicating that the benefit operates only going forward.

Accordingly, based on the explanatory memorandum, in cases where assessments are ongoing and GAAR has not yet been invoked, it may be contended that the tax authorities are precluded from invoking Chapter X-A after the effective date of April 1, 2017, even in case of ongoing assessments. A more nuanced issue arises where the matter has already been referred to the Approving Panel under Section 144BA. In such cases, a distinction may be drawn between a reference under Section 144BA and the actual invocation of Chapter X-A: the former is procedural in nature and does not, by itself, amount to invoking GAAR. Since the application of GAAR ultimately requires a determination that the arrangement is impermissible under Chapter X-A, it may be argued that, absent prior invocation, even pending references should not result in GAAR being applied post-amendment.

At the same time, given the pre-existing ambiguity on the application of GAAR to post-1 April 2017 exits, where GAAR has already been invoked by the tax authorities prior to 1 April 2026, such proceedings may continue. 

Exits on and after 1 April 2026

The amendment provides that that investments made before 1 April 2017 are grandfathered from the application of GAAR, thereby expanding the scope of grandfathering while correspondingly narrowing the ambit of GAAR. Considering that the amendment provides that income which accrues or arises (or is deemed to accrue or arise or be received) from the transfer of investments made before 1 April 2017 is itself excluded from the ambit of GAAR. This removes the ambiguity created post-Tiger Global in relation to exits from pre-2017 investments.

Accordingly, income arising from exits on or after 1 April 2026, should be covered by the expanded grandfathering protection, and the resulting income should not be subject to GAAR.

Interplay with JAAR and its impact post Tiger Global

In India, JAAR refers to judicially evolved anti-avoidance principles used to disregard sham transactions or colourable devices, particularly in the absence of specific statutory provisions, as recognised in McDowell & Co. Ltd., ¹⁵ Azadi Bachao Andolan and Vodafone.These principles operate on a “look at” approach, requiring the transaction to be assessed as a whole, and permit disregard only where the arrangement is a sham, a colourable device, or lacks commercial substance, thereby setting a relatively high threshold for invocation.

Post the CBDT amendments, the interplay between JAAR and GAAR is more clearly delineated. While GAAR is now confined to post-2017 investments (with pre-2017 investments effectively grandfathered), JAAR continues to subsist independently and may still be invoked in appropriate cases (with respect to pre-2017 investment). However, JAAR’s application remains subject to the higher threshold articulated in Vodafone requiring a holistic determination that the arrangement, viewed as a whole, is a sham or a colourable device lacking commercial substance, rather than a step-wise or prima facie assessment. Accordingly, in pre-2017 investment structures, the revenue’s ability to challenge arrangements would now rest on JAAR, requiring a holistic finding that the entire arrangement is a sham or colourable device, rather than a step-wise, “prima facie” or “look through” analysis. Both JAAR and GAAR therefore continue to coexist, but operate in distinct fields, with JAAR confined to its higher threshold.

In contrast, in Tiger Global, the Court appears to have adopted a more expansive approach, observing that a transaction may be regarded as prima facie tax-avoidant even under JAAR, without the formal invocation of GAAR, where it is structured to avoid tax otherwise payable under law. This reflects a shift from earlier jurisprudence, including Azadi Bachao Andolan and Vodafone, which maintained a clearer distinction between legitimate tax planning and impermissible avoidance, typically requiring demonstrable indicia such as sham, colourable device, or abuse before anti-avoidance principles could be triggered.

In effect has Tiger Global disturbed the findings in Azadi Bachao Andolan and Vodafone such that even in the absence of a formal invocation of GAAR, JAAR may operate in a similar fashion by applying analogous anti-avoidance principles? If Tiger Global proceeds on the basis that, in the alternative, JAAR may be invoked using similar reasoning, does this suggest that the threshold for JAAR now stands lowered from its traditional requirement of establishing sham, colourable device or abuse applying the “look at” test? In that sense, does Tiger Global suggest a dilution of the traditional threshold for invoking JAAR as understood in the Azadi–Vodafone era, where anti-avoidance would not be triggered in the absence of such indicia, thereby positioning Tiger Global as the new JAAR? Or, following the amendments to the rules, can it still be said that the regime goes back to the Azadi–Vodafone era, where a valid tax residency certificate remains sufficient unless the arrangement is shown to be a sham, illegal or a colourable device, and without any concurrent or expanded application of GAAR-like principles under the guise of JAAR?

Conclusion 

The amendment effectively resolves the interpretational ambiguity on whether post-2017 exits from pre-2017 investments could be subjected to GAAR, by clearly ring-fencing such outcomes from the ambit of Chapter X-A (and now Chapter XI of the New ITA). In doing so, it shifts the framework from a transaction-centric GAAR inquiry to a clear, origin-based test anchored to the date of investment, thereby providing much-needed certainty and likely reducing future litigation. Its prospective operation, however, ensures that GAAR determinations already invoked prior to 1 April 2026 remain undisturbed.

Further, where GAAR, being a specific and more stringent anti-avoidance regime that permits a look-through approach is itself inapplicable, it would be incongruous to invoke JAAR to achieve the same result. Consistent with the principles laid down in Azadi Bachao Andolan and Vodafone, in the absence of sham, colourable device, or abuse, legitimate tax planning should not be disregarded. Accordingly, transactions falling within the expanded grandfathering ought not to be subjected to JAAR, reinforcing the legislative intent to provide finality to pre-2017 investments.

Kamini Toprani and Parul Jain
You can direct your queries or comments to the authors.

¹Union of India vs. Azadi Bachao Andolan [2003] 132 Taxman 373 (SC)/[2003] 263 ITR 706 (SC)/[2003] 184 CTR 450 (SC)[07-10-2003].

²Vodafone International Holdings B.V. vs. Union of India [2012] 17 taxmann.com 202 (SC)/[2012] 204 Taxman 408 (SC)/[2012] 341 ITR 1 (SC)/[2012] 247 CTR 1 (SC)[20-01-2012].

³Section 95 of the ITA.

⁴Under Section 96 of the ITA.

⁵Section 98 of the ITA.

⁶Under Section 144BA of the ITA.

⁷Comprising a High Court judge, one member being a member of Indian Revenue Service and one member being an academic or scholar having special know-ledge of matters.

⁸Smt. Anvida Bandi vs. Deputy Commissioner of Income-tax [2025] 177 taxmann.com 726 (Telangana)[22-08-2025].

⁹Rule 10U(2) of the ITR.

¹⁰Authority for Advance Rulings (Income-tax) vs. Tiger Global International II Holdings [2026] 182 taxmann.com 375 (SC)/[2026] 485 ITR 214 (SC)[15-01-2026].

¹¹1975] 101 ITR 457 (SC).

¹²The India–Mauritius and India-Singapore double tax avoidance agreements were amended in 2016 to reallocate taxing rights over capital gains from the transfer of shares of Indian companies from an exclusive residence-based regime (taxable only in Mauritius/Singapore) to a source-based regime (taxable in India). However, shares acquired prior to 1 April 2017, were expressly grandfathered such that gains arising on their subsequent transfer post 2017 continue to be governed by the pre-amendment position and remain outside India’s taxing jurisdiction.

¹³Notification No. 54/2026/F. No. 370142/15/2026-TPL.

¹⁴Notification No. 55/2026/F. No. 370142/15/2026-TPL.

¹⁵Mc Dowell & Co. Ltd. vs. Commercial tax Officer [1985] 22 Taxman 11 (SC)/[1985] 154 ITR 148 (SC)/[1985] 47 CTR 126 (SC)[17-04-1985].