Section 97 of Income Tax Act for AY 2023-24

Section 97 of Income Tax Act 1961 as amended by the Finance Act 2022 and Income-tax Rules, 1962. Arrangement to lack commercial substance.

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Amended and updated notes on section 97 of Income Tax Act 1961 as amended by the Finance Act 2022 and Income-tax Rules, 1962. Detail discussion on provisions and rules related to arrangement to lack commercial substance.

Chapter XA (Sections 95 to 102) of the Income Tax Act 1961 deals with the provisions related to General Anti-Avoidance Rule. Section 97 of IT Act 1961-2020 provides for arrangement to lack commercial substance.

Recently, we have discussed in detail section 96 (Impermissible avoidance arrangement) of IT Act 1961. Today, we learn the provisions of section 97 of Income-tax Act 1961. The amended provision of section 97 is effective for financial year 2022-23 relevant to the assessment year 2023-24.

In this article, you will learn detail of the provisions of section 97 of the Income Tax Act, 1961 Bare Act read with the Income-tax Rules, 1962, regulations, notifications, circulars, orders and Press Release by CBDT, Income Tax Department and the Ministry of Law and Justice, Government of India.

Section-97: Arrangement to lack commercial substance

Section 97(1) of Income Tax Act

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).

Section 97(2) of Income Tax Act

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.

Section 97(3) of Income Tax Act

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.

Section 97(4) of Income Tax Act

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.


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