3. Do we need Statutory GAAR?

In this section the GAAR's jurisprudential justifications is looked into elaborately. The study
of Hohfeld's rights goes a long way in understanding the legal relationship between the
investor and the income. Hohfeld derides the omnipresent practice of loosely using the terms
'right,' 'privilege' and 'duty' in his much celebrated article, 'Fundamental Legal Conceptions,'
among others, in an unscientific manner. In 4 pairs of partnerships he typifies civil
relationships. Just two of these pairs -"right -duty" and "privilege -no right" would be
involved.

A right is established in relation to another person's obligation. And wherever there is a right
in one person, there must be an obligation in the other person. On the other hand, a privilege
is defined as the denial of a duty. A right to commit an act necessarily implies that the
privilege owner has no obligation to do it.

According to Azadi, the taxpayer was allowed to use any scheme that minimized his or her
tax exposure so long as it was not expressly forbidden by law, i.e. the taxpayer was entitled to
use any tax avoidance mechanism that he or she considered fit.. This principle was articulated
by Justice Sri Krishna in the following words:
“The principle does not involve, in my opinion, that it is part of the judicial function to
reat as nugatory any step whatever which a taxpayer may take with a view to the avoidance
or mitigation or tax. It remains true in general that the taxpayer, where he is in a position to
carry through a transaction in two alternative ways, one of which will result in liability to tax
and the other of which will not, is at liberty to choose the latter and to do so effectively in the
absence of any specific tax avoidance provision such as s.460 of the Income and Corporation
Taxes Act, 1970”.

Azadi also approved of the judgment in Banyan and Berry v. Commissioner of Income tax1
where the Gujarat High Court held as under:
“The facts and circumstances which lead to McDowell's decision leave us in no doubt
that the principle enunciated in the above case has not affected the freedom of the citizen to
act in a manner according to his requirements, his wishes.. in the manner of doing any trade,
activity or planning his affairs with circumspection, within the framework of law.”

1
(1996) 222 ITR 831.
A privilege is the negation of an obligation, according to Hohfeld's theory of freedom. The
taxpayer had a right to avoid tax because he had no obligation not to use a tax avoidance
scheme. Applying Hohfeld's concept of' privilege' finds sufficient support in Azadi as the
judgment essentially granted tax payers the privilege of using any means of reducing their tax
liability that is not prohibited by law as an accompanying obligation not to engage in tax
avoidance schemes. In fact, a privilege as its correlative must always have a no-right. In
Azadi, it was held that while the taxpayer is free to engage means of tax evasion, the Revenue
has no right to prevent the taxpayer from escaping such tax unless expressly given a right by
enacted legislation to prevent a particular type of evasion. In addition, Azadi argued that legal
reality was a "far cry" from the judgment of Justice Reddy that the revenue had an intrinsic
right to avoid tax evasion.33Azadi claimed that the revenue had to be specifically empowered
to prevent tax evasion through a constitutional ban on the evasion agreement at which point
tax evasion would become illegal. Therefore, it is beyond doubt that post Azadi, the taxpayer
had a privilege to enter tax-avoidance arrangements where the Revenue had no right to
prevent such schemes.

On the other hand, the statutory GAAR clearly divides the whole spectrum of tax-avoidance
schemes into appropriate and illegal arrangements for avoidance. Simply put, if a taxpayer
uses an arrangement that meets the criteria set out in section 96(1), the income is empowered
to perform any of the steps set out in section 98. This essentially turns the luxury of indulging
in tax-avoidance schemes enjoyed by post-Azadi taxpayers into a right that Hohfeld
envisaged. In this legal relationship, the taxpayer has the right to use any arrangement that
does not meet the criteria set out in section 96(1) and is therefore admissible, whereas the
taxpayer has the obligation to permit these arrangements to be entered into.

Now that the change introduced by a statutory GAAR is evident, we are in a position to
address the issue of whether such rules are needed. The researchers believe that a GAAR
would benefit the Indian tax system for two reasons that are closely linked but equally
important. First, this shift from a "privilege -no right" relationship to a "right -duty"
relationship as between taxpayer and income would serve the purpose of tax equity as
outlined in this article earlier. Protecting the tax base is not only vital because it prevents
government revenue from being reduced, but also because it ensures that all taxpayers have a
level playing field that is commensurate with their earnings. Imagine a situation on the free
market with only two rivals-one that employed a highly dishonest yet legitimate scheme to
minimize its tax liability and one that has not. It would militate against the interests of the
latter as well as society as a whole to permit an unfair advantage to accrue to the latter.
Second, it is evident even after Azadi that, for the above reasons, the Tribunal and the
Advance Rulings Authority relied on McDowell to use the ' substance over shape test ' to
protect the tax base. Second, it is evident even after Azadi that, for the above reasons, the
Tribunal and the Advance Rulings Authority relied on McDowell to use the ' substance over
shape test ' to protect the tax base.