Section 179 of the Income-tax Act, 2025 defines an impermissible avoidance arrangement as one whose main purpose is to obtain a tax benefit and which creates non-arm's length rights, misuses the Act, lacks commercial substance, or is not carried out for bona fide purposes.
What section 179 does
Section 179 is the heart of the General Anti-Avoidance Rule — the successor to section 96 of the Income-tax Act, 1961. It supplies the test that section 178 applies and section 181 gives consequences to.
The definition has two elements. First, the arrangement's main purpose must be to obtain a tax benefit. Second, it must satisfy at least one of four conditions: it (a) creates rights or obligations not ordinarily created between persons dealing at arm's length; (b) results, directly or indirectly, in the misuse or abuse of the provisions of the Act; (c) lacks commercial substance, or is deemed to under section 180, in whole or in part; or (d) is entered into or carried out by means or in a manner not ordinarily employed for bona fide purposes.
Sub-section (2) is the provision that decides most GAAR disputes. An arrangement is presumed to have been entered into for the main purpose of obtaining a tax benefit if the main purpose of any step in, or part of, the arrangement is to obtain a tax benefit — irrespective of the fact that the main purpose of the whole arrangement is not. The presumption stands unless the assessee proves the contrary.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 96(1) | Definition of impermissible avoidance arrangement | 179(1) |
| 96(2) | Presumption from the purpose of a step | 179(2) |
| 95 | Applicability of GAAR | 178 |
| 97 | Arrangement lacking commercial substance | 180 |
| 98 | Consequences of an impermissible arrangement | 181 |
| 99 | Connected person and accommodating party | 182 |
| 102 | GAAR definitions | 184 |
Section 179 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the main purpose test plus one of four conditions
An impermissible avoidance arrangement means an arrangement the main purpose of which is to obtain a tax benefit, and which satisfies at least one of four conditions. Both elements are necessary: a tax-motivated arrangement that meets none of the four conditions is not impermissible, and an arrangement meeting a condition without the main purpose of a tax benefit is likewise outside the section.
Condition (a) — non-arm's length rights and obligations
The arrangement creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length. This looks at the commercial terms themselves — whether unrelated parties negotiating at arm's length would have agreed to them.
Condition (b) — misuse or abuse of the Act
It results, directly or indirectly, in the misuse or abuse of the provisions of this Act. This is the condition invoked where a provision is used to achieve an outcome the legislature did not intend, even though the literal words are satisfied.
Condition (c) — lack of commercial substance
It lacks commercial substance, or is deemed to lack commercial substance under section 180, in whole or in part. Section 180 sets out the deeming situations — round tripping, accommodating parties, offsetting elements, disguised transactions and the like. Note the words in whole or in part: a partly substantive arrangement can still fail this condition.
Condition (d) — means or manner not ordinarily employed
It is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes. This is the conduct-focused condition — the question is how the arrangement was implemented, not only what it achieved.
Sub-section (2) — the step-level presumption
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 obtaining 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. A single tax-driven step can therefore taint an otherwise commercial transaction, and the burden of rebuttal sits with the taxpayer.
Worked example
A group restructuring in tax year 2026-27 with a genuine commercial objective, but one tax-driven step.
| Element | Position | Effect under section 179 |
|---|---|---|
| The overall restructuring | Driven by an operational consolidation | Main purpose is not a tax benefit |
| One intermediate step inserted solely to access a lower rate | Main purpose of that step is a tax benefit | Presumption under sub-section (2) applies to the whole arrangement |
| Burden of proof | On the assessee | Must prove the contrary |
| Rights created in that step | Not of a kind unrelated parties would agree | Condition (1)(a) satisfied |
| Result | Capable of being declared an impermissible avoidance arrangement under section 178 |
Two lessons follow. First, contemporaneous documentation of the commercial rationale for every step — not just for the transaction as a whole — is what rebuts the sub-section (2) presumption. Second, section 178(2) allows the chapter to be applied to a step in, or part of, an arrangement, so the consequences under section 181 can be confined to the offending step.
The procedural route runs through section 274 — reference to the Principal Commissioner or Commissioner and the Approving Panel — and a direction of the Approving Panel feeds into section 280(5)(b) and section 281(4)(b).
Compliance checklist and due dates
- Document the commercial rationale of each step, not merely of the overall transaction — sub-section (2) operates at step level.
- Test the arrangement against all four conditions in sub-section (1); satisfying any one is enough.
- Read section 180 for the deemed lack of commercial substance situations before concluding the arrangement has substance.
- Ensure intra-group terms would be acceptable between parties dealing at arm's length — condition (1)(a).
- Prepare to discharge the burden of rebuttal; the presumption operates against the taxpayer.
- Note that consequences under section 181 may be applied to a single step, by virtue of section 178(2).
- Follow the procedure in section 274, including the Approving Panel, before any GAAR consequence is given effect.
Common mistakes
- Relying on the commerciality of the overall transaction while leaving one tax-driven step undocumented.
- Treating the four conditions as cumulative; any one suffices.
- Assuming an arrangement with some commercial substance is safe — condition (c) applies 'in whole or in part'.
- Overlooking the deeming provisions in section 180.
- Failing to prepare contemporaneous evidence, given that the presumption places the burden on the assessee.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.