The Commissioner says my structure "lacks commercial substance". What does that phrase actually mean in the Act, and does it help me that the structure has been in place for years, has paid tax, and has a normal exit route?
Lack of commercial substance is not an open-ended commercial judgment; s.97(1) is a closed list of four deeming limbs. An arrangement is DEEMED to lack commercial substance if (a) its substance or effect as a whole is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes round trip financing, an accommodating party, elements that have the effect of offsetting or cancelling each other, or a transaction conducted through one or more persons that disguises the value, location, source, ownership or control of the funds; or (c) it involves the location of an asset, of a transaction or of the place of residence of a party without any substantial commercial purpose other than obtaining a tax benefit; or (d) it does not have a significant effect on the business risks or net cash flows of any party apart from the effect attributable to the tax benefit. Section 97(4) then says in terms that three matters — how long the arrangement has existed, the fact that taxes were paid under it, and the fact that it provides an exit route — "may be relevant but shall not be sufficient".
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2018-04-01, reported as Section 97 of the Income-tax Act, 1961, in the form enacted by section 97 of the Finance Act, 2013 (Act 17 of 2013). It bears on section 97, section 97(1), section 97(2), section 97(3), section 97(4), section 96, section 96(1)(c), section 95, section 98, section 102 of the Income Tax Act 1961, in How Tax Law Is Read, Assessment & Scrutiny and Evidence & Burden of Proof matters.
This is the section the whole Chapter runs on, because s.96(1)(c) imports it wholesale, and in practice it is the tainted element the Revenue reaches for first. Four working points. First, limb (d) is the widest and the least noticed: an arrangement that leaves the parties' business risks and net cash flows essentially where they were, once you strip out the tax saving, is deemed to lack commercial substance without anything more being shown. Second, round trip financing is defined in s.97(2) to catch a series of transactions in which funds are transferred among the parties and the transactions have no substantial commercial purpose other than the tax benefit — and it is expressly to be applied "without having any regard to" whether the funds can be traced, in what time or sequence they moved, or by what means or mode. Tracing arguments and "different pots of money" arguments are therefore closed off by the sub-section itself. Third, s.97(3) defines the accommodating party by reference to the main purpose of its participation, whether or not it is a connected person — so the familiar answer "that entity is unrelated to us" does not meet the point. Fourth, s.97(4) cuts both ways and should be quoted by both sides: for the taxpayer it establishes that these three matters ARE relevant, and an officer who dismisses a fifteen-year-old structure as irrelevant is wrong; for the Revenue it establishes that they cannot by themselves carry the day. Note the drafting: s.97(1) is a deeming provision, so an arrangement can be deemed to lack commercial substance even where, commercially, one could argue it has some; and s.96(1)(c) applies where the arrangement lacks commercial substance "in whole or in part".
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
Section 97, as substituted by the Finance Act, 2013, reads: "97. (1) 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 (b) it involves or includes— (i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or (c) it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party; or (d) it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the provisions of this Chapter). (2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions— (a) funds are transferred among the parties to the arrangement; and (b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter), without having any regard to— (A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement; (B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or (C) the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received. (3) For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement. (4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:— (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement."
Not a judgment. The statutory position is that lack of commercial substance is a DEEMED state of affairs arising only on one of the four limbs of s.97(1); that round trip financing is defined by s.97(2) to require both a transfer of funds among the parties through a series of transactions and the absence of any substantial commercial purpose other than the tax benefit, and is to be applied without regard to traceability, timing, sequence, means, manner or mode; that an accommodating party under s.97(3) is identified by the main purpose of its participation and not by whether it is a connected person; and that by s.97(4) the period for which the arrangement has existed, the payment of taxes under it and the provision of an exit route may be relevant but are not sufficient to determine the question either way.
Not a judgment; no judicial reasoning is stated for the section itself.
(4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:— (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppLack of commercial substance is not an open-ended commercial judgment; s.97(1) is a closed list of four deeming limbs. An arrangement is DEEMED to lack commercial substance if (a) its substance or effect as a whole is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes round trip financing, an accommodating party, elements that have the effect of offsetting or cancelling each other, or a transaction conducted through one or more persons that disguises the value, location, source, ownership or control of the funds; or (c) it involves the location of an asset, of a transaction or of the place of residence of a party without any substantial commercial purpose other than obtaining a tax benefit; or (d) it does not have a significant effect on the business risks or net cash flows of any party apart from the effect attributable to the tax benefit. Section 97(4) then says in terms that three matters — how long the arrangement has existed, the fact that taxes were paid under it, and the fact that it provides an exit route — "may be relevant but shall not be sufficient". This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 97, section 97(1), section 97(2), section 97(3), section 97(4), section 96, section 96(1)(c), section 95, section 98, section 102 of the Income Tax Act 1961. It is reported as Section 97 of the Income-tax Act, 1961, in the form enacted by section 97 of the Finance Act, 2013 (Act 17 of 2013). This is the section the whole Chapter runs on, because s.96(1)(c) imports it wholesale, and in practice it is the tainted element the Revenue reaches for first. Four working points. First, limb (d) is the widest and the least noticed: an arrangement that leaves the parties' business risks and net cash flows essentially where they were, once you strip out the tax saving, is deemed to lack commercial substance without anything more being shown. Second, round trip financing is defined in s.97(2) to catch a series of transactions in which funds are transferred among the parties and the transactions have no substantial commercial purpose other than the tax benefit — and it is expressly to be applied "without having any regard to" whether the funds can be traced, in what time or sequence they moved, or by what means or mode. Tracing arguments and "different pots of money" arguments are therefore closed off by the sub-section itself. Third, s.97(3) defines the accommodating party by reference to the main purpose of its participation, whether or not it is a connected person — so the familiar answer "that entity is unrelated to us" does not meet the point. Fourth, s.97(4) cuts both ways and should be quoted by both sides: for the taxpayer it establishes that these three matters ARE relevant, and an officer who dismisses a fifteen-year-old structure as irrelevant is wrong; for the Revenue it establishes that they cannot by themselves carry the day. Note the drafting: s.97(1) is a deeming provision, so an arrangement can be deemed to lack commercial substance even where, commercially, one could argue it has some; and s.96(1)(c) applies where the arrangement lacks commercial substance "in whole or in part". If it applies to you, the first step is this: Make the Revenue identify which limb of s.97(1) it relies on — (a), (b)(i) to (b)(iv), (c) or (d) — and answer that limb, not the phrase "commercial substance" at large.
Section 97, as substituted by the Finance Act, 2013, reads: "97. (1) 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 (b) it involves or includes— (i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or (c) it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party; or (d) it does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the provisions of this Chapter). (2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions— (a) funds are transferred among the parties to the arrangement; and (b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter), without having any regard to— (A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement; (B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or (C) the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received. (3) For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement. (4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:— (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement." The matter was decided on 2018-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that lack of commercial substance is a DEEMED state of affairs arising only on one of the four limbs of s.97(1); that round trip financing is defined by s.97(2) to require both a transfer of funds among the parties through a series of transactions and the absence of any substantial commercial purpose other than the tax benefit, and is to be applied without regard to traceability, timing, sequence, means, manner or mode; that an accommodating party under s.97(3) is identified by the main purpose of its participation and not by whether it is a connected person; and that by s.97(4) the period for which the arrangement has existed, the payment of taxes under it and the provision of an exit route may be relevant but are not sufficient to determine the question either way.
Not a judgment; no judicial reasoning is stated for the section itself. In the words reproduced by the source cited on this page: "(4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not, namely:— (i) the period or time for which the arrangement (including operations therein) exists; (ii) the fact of payment of taxes, directly or indirectly, under the arrangement; (iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement."
It was decided by the CBDT Circulars & Instructions on 2018-04-01 and is reported as Section 97 of the Income-tax Act, 1961, in the form enacted by section 97 of the Finance Act, 2013 (Act 17 of 2013). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 97, section 97(1), section 97(2), section 97(3), section 97(4), section 96, section 96(1)(c), section 95, section 98, section 102, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that lack of commercial substance is a DEEMED state of affairs arising only on one of the four limbs of s.97(1); that round trip financing is defined by s.97(2) to require both a transfer of funds among the parties through a series of transactions and the absence of any substantial commercial purpose other than the tax benefit, and is to be applied without regard to traceability, timing, sequence, means, manner or mode; that an accommodating party under s.97(3) is identified by the main purpose of its participation and not by whether it is a connected person; and that by s.97(4) the period for which the arrangement has existed, the payment of taxes under it and the provision of an exit route may be relevant but are not sufficient to determine the question either way. It arises in How Tax Law Is Read, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 97, section 97(1), section 97(2), section 97(3), section 97(4), section 96, section 96(1)(c), section 95, section 98, section 102 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For limb (d), put the arithmetic on record: show the change in business risk and in net cash flows for each party attributable to matters other than the tax benefit. This is the limb most often left unanswered, and it is answered with numbers rather than adjectives. If round trip financing is alleged, do not build the answer on tracing the money. Section 97(2) says the definition applies without regard to traceability, timing, sequence, means, manner or mode. Answer instead on the second condition — that the transactions DID have a substantial commercial purpose other than the tax benefit. If an accommodating party is alleged, address the main purpose of THAT party's participation, and do not rely on the fact that it is not a connected person; s.97(3) makes that irrelevant. Deploy s.97(4) affirmatively rather than defensively: cite it to establish that the life of the arrangement, the taxes paid under it and the exit route ARE relevant considerations the officer is bound to weigh, while accepting openly that they are not by themselves decisive.
Still good law. The text is the Finance Act 2013 substituted text, printed in a published edition of the Act and corroborated against the substituting Finance Act provision in an independent source. No later edition of s.97 was located, and none was looked for, so a later version cannot be excluded on this evidence. No check of judicial treatment of s.97 was made. Three qualifications follow. Because no judicial treatment has been examined, nothing here shows how the four limbs of sub-section (1) have been applied, and the expressions that will decide most disputes — 'accommodating party', 'round trip financing', and an effect on business risks or net cash flows that is 'significant' — are stated from the words alone. Because the section is one condition in s.96(1) and not a charge, its currency matters less than the currency of the Chapter as a whole; a reader should check s.95, s.96 and s.98 for the year in hand rather than assume that a settled s.97 means a settled position. And because the corroborating copy carries scanning noise, the text should be taken from the Act itself before it is quoted in a proceeding. The one place where the two copies differ on substance is an internal cross-reference in sub-section (2), which is a difference worth knowing about, because a cross-reference quoted wrongly in a reply is the kind of error that costs credibility rather than the point itself, and it is avoidable. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The text here is the Finance Act 2013 substituted text, taken from a published edition of the Act printing the heading "Arrangement to lack commercial substance", and confirmed against section 97 of the Finance Act, 2013 itself. The second copy carries obvious scanning noise — it prints "die" for "the" in several places and mis-prints the internal cross-reference in sub-section (2) as "sub-section (7)" where the first reads "sub-section (1)" — so where the two differ the first has been followed, and the second should be treated as corroboration of substance only and not of orthography. Sub-section (3), the accommodating party definition, is already covered in this library by the entry on section 99 and the accommodating party, and is set out here only because s.97 cannot be read without it. The 'decided_on' value 2018-04-01 is not the commencement of s.97: it is the first day of the first assessment year to which s.95(2) applies the Chapter. No later edition of the section was looked for. Three things a reader should carry. Section 97 does not make an arrangement impermissible; it decides one of the four alternative conditions in s.96(1), and the tax benefit and main purpose tests in s.96 still have to be satisfied before anything in the Chapter bites. An officer who establishes lack of commercial substance has established one limb and no more. The four limbs of sub-section (1) are alternatives joined by 'or', and each is a deeming limb: once a limb is made out the arrangement is deemed to lack commercial substance, and evidence of genuine commercial motive does not answer it except by displacing the limb itself. That is why the argument has to be directed at the facts the limb requires rather than at the commerciality of the transaction at large. And sub-section (4) is the taxpayer's provision as much as the Revenue's. It says that the life of the arrangement, the payment of taxes under it and the presence of an exit route may be relevant but are not sufficient. Cited by an officer it adds nothing; cited by an assessee it is an answer to a notice that rests on those three things alone. The consequences, if the Chapter does apply, are in s.98, and the treaty position in s.102 and the definitions there have to be read with it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that lack of commercial substance is a DEEMED state of affairs arising only on one of the four limbs of s.97(1); that round trip financing is defined by s.97(2) to require both a transfer of funds among the parties through a series of transactions and the absence of any substantial commercial purpose other than the tax benefit, and is to be applied without regard to traceability, timing, sequence, means, manner or mode; that an accommodating party under s.97(3) is identified by the main purpose of its participation and not by whether it is a connected person; and that by s.97(4) the period for which the arrangement has existed, the payment of taxes under it and the provision of an exit route may be relevant but are not sufficient to determine the question either way.
TaxSphere, “Statutory position — s.97: when an arrangement is DEEMED to lack commercial substance, what round trip financing means, and the three facts that s.97(4) says are never sufficient”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-97-when-an-arrangement-is-deemed-to-lack-commercial-substance-and-the-three-things-that-are-never-enough/ (validity last checked 2026-09-09)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The GAAR notice says a Mauritius company in my client's structure is an 'accommodating party' and that two group companies are 'connected persons'. What do those words actually mean and what follows if they are made out?
The Assessing Officer has written that he proposes to invoke Chapter X-A. Which provision actually gives him that power, from which assessment year does it bite, and can he pick on a single step of a transaction that as a whole was done for real commercial reasons?
The Commissioner's notice under s.144BA(2) says my arrangement is an impermissible avoidance arrangement. What exactly does the Revenue have to establish, and who has to prove what?
If the Approving Panel declares my client's arrangement impermissible, what consequences can the Assessing Officer impose, and can he recast the whole structure or only the offending part?
