Arrangement to lack commercial substance
[Section-180 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 180(1) of Income Tax Act 2025
180(1) An arrangement shall be deemed to lack commercial substance, if––
- 180(1)(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
- 180(1)(b) it involves or includes—
- (i) round trip financing; or
- (ii) an accommodating party; or
- (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
- 180(1)(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
- 180(1)(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).
Section 180(2) of Income Tax Act 2025
180(2) In 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.
Section 180(3) of Income Tax Act 2025
180(3) The following may be relevant but shall not be sufficient for determining whether an arrangement lacks commercial substance or not:—
- (a) the period of time for which the arrangement (including operations therein) exists;
- (b) the fact of payment of taxes, directly or indirectly, under the arrangement;
- (c) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.
FAQs on Section 180 of Income Tax Act 2025
What does it mean if an arrangement “lacks commercial substance” under Section 180(1)?
It means the arrangement is structured primarily to gain a tax benefit and not for any substantial business purpose. This may involve inconsistency between the arrangement’s form and substance, round trip financing, or disguising key financial details.
When is an arrangement considered inconsistent in form and substance under clause 180(1)(a)?
If the overall effect or substance of the arrangement differs significantly from how its steps are formally structured, it may be deemed to lack commercial substance.
What are examples of elements that indicate lack of commercial substance under clause 180(1)(b)?
These include round trip financing, use of an accommodating party, transactions that offset each other, or those disguising the value, location, source, ownership, or control of funds.
What is meant by “round trip financing” under this Act?
It refers to arrangements where funds circulate among the parties without substantial commercial purpose except to achieve tax benefits, regardless of timing, tracing, or method of transfer.
Who is an “accommodating party” in such arrangements?
An accommodating party is someone involved in the transaction solely to give it a form or appearance of legitimacy, without any actual business involvement or risk.
What does Section 180(1)(c) refer to in terms of asset location or residence?
If an asset, transaction, or party’s residence is located in a specific place solely for obtaining a tax benefit, with no substantial commercial purpose, the arrangement may lack substance.
How is “disguising the control or ownership of funds” treated under this Section?
If a transaction is structured through intermediaries to conceal true control, value, or ownership of funds, it is considered as lacking commercial substance.
What does Section 180(1)(d) imply regarding business risks or cash flows?
If an arrangement doesn’t significantly affect any party’s business risks or cash flows—apart from gaining a tax benefit—it may be deemed to lack commercial substance.
Does the presence of tax payments make an arrangement valid under Section 180(3)(b)?
No. Even if taxes are paid under the arrangement, this alone does not prove the arrangement has commercial substance.
Can the duration of the arrangement justify its commercial substance under Section 180(3)(a)?
No. The time period of the arrangement does not, by itself, establish commercial substance.
Is providing an exit route enough to show commercial substance under Section 180(3)(c)?
No. Just because the arrangement includes an exit strategy, it doesn’t necessarily mean it has commercial substance.
What factors are ignored while determining round trip financing under Section 180(2)?
Tracing of funds, sequence and timing of transfers, and the manner or medium of fund movement are all irrelevant when identifying round trip financing.
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