s.97 — Arrangement lacking commercial substance
The deeming provision that supplies one limb of section 96(1), and the sub-section that says what is not by itself enough to make an arrangement lack commercial substance.
The mapping to the Income-tax Act, 2025 is not clause for clause. The definition of an accommodating party moves out of section 97(3) into section 184(1) of the 2025 Act, so section 180(3) of that Act is the counterpart of section 97(4) of the 1961 Act, not of section 97(3). Anyone carrying the old sub-section numbering into a year governed by the new Act will be citing the wrong provision. The proposition drawn from Anvida Bandi in the discussion below rests on reports of that decision; the primary text could not be obtained, so it should be advanced as reported rather than quoted, and it has not been tested above the High Court.
Income-tax Act, 1961
s.97
Income-tax Act, 2025
s.180
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 97(1) of the Income-tax Act, 1961 deems an arrangement to lack commercial substance on any of four grounds: clause (a), that 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; clause (b), that it involves 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 which disguises the value, location, source, ownership or control of the funds that are its subject matter; clause (c), that it involves the location of an asset, of a transaction or of a party's residence without any substantial commercial purpose other than obtaining a tax benefit; and clause (d), that it does not have a significant effect upon the business risks or net cash flows of any party apart from the effect attributable to the tax benefit. Sub-section (2) is an inclusive definition: round trip financing includes any arrangement in which, through a series of transactions, funds are transferred among the parties and those transactions have no substantial commercial purpose other than obtaining the tax benefit. Within that described case both elements are required, and the sub-section strips the taxpayer of three answers, since it is decided without regard to whether the funds can be traced, to the time or sequence of the transfers, or to the means, manner or mode of them; because the definition is inclusive, whether anything outside the described case can still be round trip financing is open. Sub-section (3) makes a party an accommodating party where the main purpose of its direct or indirect participation in the arrangement, in whole or in part, is to obtain a tax benefit for the assessee, and adds that it is immaterial whether or not that party is a connected person. Sub-section (4) provides that the period for which the arrangement exists, the payment of taxes under it, and the provision of an exit route may be relevant but shall not be sufficient. The corresponding provision in the Income-tax Act, 2025 is section 180.
What the provision does
Supplies a four-limb deeming definition for one limb of section 96(1) and, in sub-section (4), fences off three factors that cannot on their own carry the conclusion. It does not define commercial substance positively, so an arrangement outside the deeming tests is not thereby shown to have substance, and it does not say what follows from a finding that a party is an accommodating party, which is section 99.
Threshold questions
- Which of the four limbs of section 97(1) the order relies on, as distinct from a general assertion that the arrangement lacked substance
- Whether round trip financing is made out on both elements the described case in sub-section (2) requires, and if the Revenue puts its case outside that description, on what footing, the definition being inclusive rather than exhaustive
- Whether the order appreciates that traceability, timing, sequence and the mode of transfer are all expressly irrelevant to round tripping, so arguments built on them will not answer it
- Whether the Revenue relies on the disguise limb, and if so what is said to be disguised out of the value, location, source, ownership and control of the funds
- Whether the main purpose of the alleged accommodating party's direct or indirect participation in the arrangement, in whole or in part, was to obtain a tax benefit for the assessee, which is what section 97(3) requires, and whether the order addresses participation in part as well as in whole
- Whether anything in the order rests on timing alone, on the payment of tax under the arrangement, or on the existence of an exit route, none of which is sufficient under sub-section (4)
- Where clause (c) is relied on, what commercial purpose other than the tax benefit the order accepts or rejects for the location chosen, and on what material
In practice
The recurring disputes.
What the section 97(4) factors cannot do, and how orders get round them
Sub-section (4) says the period for which the arrangement exists, the payment of taxes under it and the provision of an exit route may be relevant but shall not be sufficient, and Anvida Bandi is reported to have applied the first of those to a short-lived arrangement. Two questions follow and neither is answered. The taxpayer's argument is that a provision denying sufficiency to each factor cannot be satisfied by stacking all three, and that a sub-section which denies sufficiency to timing cannot be met by relabelling the same fact as the manner in which the transaction was carried out under section 96(1)(d), since that leaves the protection intact in form and empty in substance. The Revenue's argument is that the sub-section speaks of sufficiency and not of relevance, so relevance accumulates in the ordinary way, and that it is directed in terms at what establishes a lack of commercial substance and says nothing about the other three clauses of section 96(1), which ask different questions. Whether the factors can combine, and whether a timing point may be run under clause (d) instead, are both open.
What substantial commercial purpose a location has to serve
Clause (c) deems an arrangement to lack commercial substance where it involves the location of an asset, of a transaction or of a party's residence without any substantial commercial purpose other than obtaining a tax benefit. The taxpayer's argument is that choosing a jurisdiction is a commercial decision like any other, that regulatory regime, investor familiarity, the pooling of capital from several countries, enforceability of contracts and access to a neutral forum are substantial commercial purposes even where tax is among the reasons, and that the clause asks only whether a substantial purpose other than tax exists, not which purpose predominates. The Revenue's argument is that the purposes usually advanced are attributes of the jurisdiction rather than reasons for routing this transaction through it, that an entity with no employees, no decisions taken in the jurisdiction and no function beyond holding shares demonstrates the absence the clause describes, and that reading substantial down to any non-tax reason at all would empty the limb. How much activity, and of what kind, makes a location's commercial purpose substantial has not been settled.
What has to return, and to whom, for round tripping
Sub-section (2) removes the three answers most readily given to a round tripping allegation, that the funds cannot be traced, that the transfers were far apart, and that different instruments were used. The taxpayer's argument is that something must still be shown to have come back, so the Revenue cannot simply point to money moving among connected entities and call it round tripping, and that the second element, the absence of any substantial commercial purpose, is a separate finding the order has to make. The Revenue's argument is that the disregard of traceability exists precisely so that it need not follow the money, and that a requirement to identify the returning funds would reinstate what the sub-section removes. Where the funds said to have returned did so at a different level in the structure, in a different amount or to a different person, the point is genuinely open.
Transactions on an exchange
Where shares are listed and the trades are on a recognised exchange at market prices, the taxpayer's argument is that the price is set by the market and not by the parties, that the counterparty is unknown and so cannot be an accommodating party, and that nothing about the value, location, source, ownership or control of the funds is concealed by a trade executed on a public platform, so the deeming tests in clause (b) are not met. The Revenue's answer is that clause (b) is not the whole of section 97, that clauses (a), (c) and (d) are untouched by the mode of execution, and that section 97 in any event reaches only clause (c) of the four clauses in section 96(1), with the main purpose test sitting on top of all of them, so execution on an exchange answers the commercial substance limb and not the section as a whole. The reported outcomes have so far divided along that line: the writs were allowed in Anvida Bandi (22 August 2025) and in EKGE Retail LLP (13 October 2026), both involving listed shares traded on the exchange, and dismissed in Ayodhya Rami Reddy Alla (7 June 2024), which involved unlisted shares sold to a related entity and against which leave has been granted, the appeal being Civil Appeal No. 9790 of 2024. None of the decisions states the venue of the trade as the reason, and until one does the pattern is an observation rather than a principle either side can rely on.