Arrangement to lack commercial substance [ Section 97(1)(a) ] - Income Tax - Ready Reckoner - Income Tax

Arrangement to lack commercial substance [ Section 97(1)(a) ] Another alternate condition of an impermissible avoidance arrangement is that the arrangement lacks commercial or is deemed to lack commercial substances in whole or in part. An arrangement shall be deemed to lack commercial substance, if- (a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or [ Section 97(1)(a) ] Clause (a) of section 97(1) is the codification of substance v. form doctrine It implies that where substance of an arrangement is different from what is intended to be shown by the form of the arrangement, then tax consequence of a particular arrangement should be assessed based on the substance of what took place. In other words, it reflects the inherent ability of the law to remove the corporate veil and look beyond form . Principles enunciated by the courts on the questions as to whether it is the form or substances of a transaction 1. True legal relations is the crucial element for taxability [ Commissioner of Income Tax, Gujarat II VS BM Kharwar 1968 (8) TMI 14 - SC ] The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the substance of the transaction . This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence--oral and documentary--and conduct of the parties to the transaction.