GAAR: Grandfathering paradox
In a welcome move, the CBDT has amended Rule 10U of the 1962 Rules (w.e.f. 31.03.2026) dealing with the applicability of GAAR, along with corresponding Rule 128 of the new 2026 Rules (w.e.f. 1.04.2026).
The amendments make some tweaks in the language, essentially reiterating the original explicit legislative intent and assurance more firmly, that investments made prior to 01.04.2017 would be grandfathered.
Despite such original intent and assurance, a different position was canvassed by the Revenue before the Hon’ble Supreme Court in the case of Tiger Global, trying to create a distinction between an “investment” and an “arrangement”. This artificial distinction flew in the face of the “grandfathering” provision, rendering it, and the legislative intent and assurance, wholly redundant. What would have been the need of a grandfathering provision which only applies to investments actually NOT amenable to GAAR at all?
Surprisingly, the Revenue’s contention was accepted by the Hon’ble Apex Court by, inter alia, interpreting the words “without prejudice” in Rule 10U(2) in a manner never adopted earlier, nor likely to be adopted henceforth.
Now, by tweaking the language and primarily, removing the words “without prejudice” and inserting an exception in sub-rule (2) itself, the original intent seems to have been reinforced.
This raises various interesting issues:
- If the intent was always to allow such grandfathering, why was a contrary position canvassed before the Hon'ble Supreme Court? This is a serious concern.
- Since the amendments are stated to come into force prospectively, would they have an impact on the Hon’ble SC’s interpretation of the old rule (which was essentially an obiter dicta only)?
- What would be the fate of transfers which took place between 1.04.2017 to 30.03.2026 and where GAAR had already been invoked? Would it be accepted that a clarificatory/curative amendment resolving an ambiguity (if at all) in favour of taxpayers would apply retrospectively?
- If not, would it not be wholly irrational that in case of an investment made before 1.04.2017 and transfer made thereafter, GAAR could be invoked on 30.03.2026, but not on 31.03.2026?
Interesting times ahead!