Recently, we have witnessed the ICC Men’s Cricket World Cup 2023. Often in the game of cricket, it is said that form is temporary and class is permanent. It essentially means that the form of a player may sometimes down but it is his class that is always permanent because of his natural instincts. The Doctrine of “Substance over form” is also somewhat similar to this concept which recognizes the substance of a transaction over its forms. It is the substance of a transaction that is permanent in nature and thus it prevails over its legal form. This doctrine is one of the important doctrines in taxation matters.

Concept & Meaning of Substance over form:

Accounting Concept

Substance over form in accounting refers to a concept that transactions recorded in the financial statements and accompanying disclosures of an entity must reflect their ‘economic substance’ rather than their ‘legal form’. At certain times the ‘legal form’’ of a transaction may not provide its true image. At times, the legal form can be of importance, but it may be ignored to present more relevant knowledge to the users of financial statements, who should not be misled.

Substance over form is an accounting principle used “to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events”. If an entity practices the ‘substance over form’ concept, then the financial statements will show the overall financial reality of the entity (economic substance), rather than the legal form of transactions (form). In accounting for business transactions and other events, the measurement and reporting is for the economic impact of an event, instead of its legal form. Substance overt form is critical for reliable financial reporting.


If a Company buys an asset on a Hire Purchase System by making a certain amount as advance payment and the remaining amount over a certain period of time say, a 10-year period. Now, despite legally owning the asset from an ‘economic point of view’ the Company will not be recognized as the ‘legal owner’ until it pays the final installment at the end of the tenth year.

Taxation Concept

Under Taxation, the Doctrine of Substance over form allows the tax authorities to ignore the legal form of an arrangement and to look to its actual substance in order to prevent artificial structures from being used for tax avoidance purposes.

The ultimate purpose is to prevent taxpayers from employing artificial or manufactured structures solely to avoid or minimize taxes. Under the substance over form doctrine, tax authorities have the power to re-characterize or reclassify a transaction if they believe that the form adopted by the taxpayer does not reflect the underlying economic substance. If a transaction is found to be improperly structured or lacks economic substance, tax authorities also have the authority to impose penalties and interest on the tax liability associated with the re-characterized transaction. This serves as a deterrent to discourage taxpayers from engaging in tax avoidance schemes.

The doctrine implies that a tax benefit or exemption from liability that cannot be achieved directly, cannot be achieved indirectly either. Its application is based on the rationale that entities in the same economic position should bear the same tax burden. It challenges the legal form of transaction and substitutes it with economic form i.e. commercial reality to tax it accordingly. It is to be applied only when the authorities can establish that the transaction is a sham.

Often tax authorities use this doctrine to curb tax avoidance to serve the overall importance of faithful representation and to give effect to the main objects of tax statutes and treaties.

Example: –

  • Co-ownership formed between three brothers to get rental income from their ancestral immovable property. The amount was credited to the common Bank account of the Co-owners and after meeting all the expenses the rental income was divided among the three brothers equally. Such an arrangement is often considered by the tax department as the ‘Association of Persons (AOP)’ and separate threshold benefits under the indirect tax law are denied to the individual co-owners.
  • Auto /Tempo fares reported under the head ‘freight’ in the Profit & Loss will not ipso facto be considered as chargeable to GST under reverse charge mechanism. Mere presentation as ‘freight’ in the P & L account will not give jurisdiction to the tax department to tax a transaction until and unless exact the nature thereof is ascertained supported by documentary evidence. Thus it is not the legal form or presentation but the real or actual substance of transaction is important for the levy.

Applications of substance over form:

There have been instances where the Courts have relied on the substance of the transaction and held that the said transaction/scheme/arrangement etc. have not been entered into with a contrived objective.

  • The Supreme Court in the case of CIT v. A Raman Co. [1968] 67 ITR 11 observed that avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. Taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Act.
  • The most important case in respect of ‘substance over form’ is McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230/ CTO (1985) 154 ITR 148 (SC) as it had imported the ‘substance over form’ doctrine by diffusing the distinction between tax avoidance and tax evasion and holding them in a similar light. Supreme Court said tax planning is legitimate, however if the colourable devices are used to plan your affairs so as to reduce the tax liability, the officer has the right to disregard those colourable devices and to make the addition. It pressed on an individual’s duty of paying their tax liabilities without resorting to any subterfuge, thereby narrowing down the definition of legal tax planning. The case was about mitigation of sales tax by having the buyers separately pay the excise tax such that this is not covered in the taxable basis of sales tax to be paid by the company. The court held that the excise duty did not become part of the circulating turnover of the Mcdowell’s distillery as the same was paid directly to the excise authorities by the buyers thus not becoming part of the sales tax over the turnover of the company. The assessee thus lost the case in the Supreme Court. There was no scope for discussing tax avoidance or tax evasion in the case of the assessee.
  • In the year 2012, the Supreme Court delivered a landmark decision in the case of Vodafone International Holdings BV v. Union of India [2012] 17 202/204 Taxman 408/341 ITR 1, which dealt with the taxability of capital gains arising on transfer of shares between two non-residents where the shares were deriving value from its subsidiaries from India. The Supreme Court, on the facts of the case, observed that one should keep in mind the following factors such as: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus is on the Revenue to identify the scheme and its dominant purpose. Thus, a corporate business purpose must exist to evidence the fact that the impugned transaction is not undertaken as a colourable or artificial device. The Apex Court, in this case, ruled that the Department must employ the ‘look at’ test by looking at the transaction holistically rather than the ‘look through’ test by splitting/dissecting the transaction.
  • Further, in case of Super Poly Fabriks Ltd. v. Commissioner of Central Excise, Punjab (2008) 217 CTR (SC) 107 / (2008) 16 VST 115 (SC) the Supreme Court held that a contract or an agreement has to be read as a whole to understand the purpose and object of the parties agreeing to the laid down terms and conditions. Moreover, if the terms used in the agreement are not conclusive one has to look at the substance of the transaction over form such that it is not always possible that the name given to a transaction would depict the real nature of the transaction to ascertain valid taxes.
  • In the case of Bhopal Sugar Industries limited v. STO Bhopal (1977) (3 SCC 147) the issue was in relation to the terms used in an agreement i.e whether the use of words agent, buyer, seller etc. would be sufficient to depict the status of the concerned parties? The court held that it is well settled that while interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. The mere fact that the word ‘agent’ or ‘agency’ is used or the words ‘buyer’ and ‘seller’ are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent.
  • Hon’ble Supreme Court in the case of Moped India Limited v. Assistant Collector of Central Excise Nellore and Others [1986 (23) E.L.T. 8 (S.C.) / (1986) 1 SCC 125], held that the amount allowed to the dealer has been referred to in the agreement as commission was a trade discount and the label given by the parties would not be a determinative factor to call it as a trade discount or a commission. The court observed that in any commercial transaction the substance must be recognized rather than its form. The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. Thus while determining the liability in a taxing statute the court has to decide according to the real nature of the transaction as it is not the name of the tax but the real nature of its transaction to decide which category the event falls into to be taxed.
  • The Madras High Court in the case of CIT v. High Energy Batteries (India) Ltd. [2012] 22 242/208 Taxman 213/348 ITR 574 held that sale and lease back transaction is not a sham transaction. The High Court relied on the decision of the Supreme Court in Vodafone International Holdings B.V. (supra) where the Supreme Court had observed that to ascertain the legal nature of the transaction, the Courts have to “look at” the entire transaction as a whole and not to adopt a dissecting approach.
  • In Nilkantha Narayan Singh v. CIT (1951) 20 ITR 8 (Patna), it is well settled that an agreement has to be read as a whole and the intention of the parties is to be gathered from it. Moreover, if the terms used in the agreements are not conclusive and one has to look at the substance rather than the form. In addition, it is equally well settled that a name given to a transaction by the parties does not necessarily decide the nature of the transaction. Thus, it is the substance of the contract that has to be regarded.
  • In a very recent case of C., C.E. & S.T., Bangalore (Adjudication) v. M/s Northern Operating Systems Private Limited in civil Appeal Nos.2289-2293 of 2021, decided on 19-05-2022/2022 (61) G.S.T.L.129 (S.C.) the Hon’ble Apex Court has applied the principle of substance over form and held that employees under secondment arrangement are technically not the real employees of the Indian Company. The form and style of employee secondment agreement was “not decisive of its nature” and re-characterize the relationship between the parties as of “manpower supply services” by one to another. The foreign entity continues to qualify as the employer of such seconded employees and the arrangement is in the nature of “manpower recruitment or supply agency service” provided by the foreign entity to the Indian entity, and therefore leviable to services. The aforesaid decision has re-emphasized that every secondment arrangement’s facts and substance need to be evaluated in detail to determine the secondee’s real employer and the transaction’s nature. Though this judgement was in the context of Service Tax law but the principal will equally hold good in GST regime as well.

Limitations or Restrictions on use of this doctrine:

The doctrine of ‘Substance over form’ is also distinguished by the Courts in several cases. Thus the doctrine is not of universal application under all circumstances. There are certain limitations to the operation of this doctrine. Over the years, several Courts rejected pleas of substance over form on different grounds. Let us try to understand those situations with some judicial precedents wherein this doctrine was not appreciated.

  • In ‘State of Rajasthan v. Basant Agrotech (India) Ltd. AIR 2014 SC 487 the Apex Court quoted with approval the opinion of the Privy Council in the celebrated Bank of Chettinad case and other leading decisions to conclude that taxation based on ‘substance of the matter’ was adversative to the settled jurisprudential norms. The court observes –

“14. The said passage, as has been stated in the said pronouncement, was quoted with approval by the Privy Council in Bank of Chettinad v. CIT AIR 1940 PC 183 and the Privy Council had registered its protest against the suggestion that in revenue cases “the substance of the matter” may be regarded as distinguished from the strict legal position. Proceeding further the learned Judge stated that:

“It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provision of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.”[Emphasis supplied]”

  • The Apex Court in case of Larsen & Toubro Limited and anr v. State of Karnataka and anr. (2013-TIOL-46-SC-CT-LB), wherein the legal test of a works contract as defined under clause (29A)(b) of Article 366 had been analyzed, and the Supreme Court had held that a single and indivisible contract for supply and labour was allowed to be split. The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative.
  • The larger (5-Judge) bench of the Apex court, on a writ petition in Kone Elevator India Pvt. Ltd v. State of Tamil Nadu and ors (2014-TIOL-57-SC-CT-CB), held that the contract for manufacture, supply and installation of lifts in a building is a “works contract” and not a “contract for sale”. The decision has been taken by majority rule with four members ruling in favour of the decision versus one against. The larger bench has overruled the earlier decision of a 3-member bench of the Apex Court in State of AP v. Kone Elevator India Pvt. Ltd (2005-TIOL-30-SC-CTLB), wherein it had been held that the main object of the contract was to sell the lifts, and that the works done for installation was incidental to the sale of lifts.

The Apex Court in the instant case held that the “dominant nature test” or “overwhelming component test” were not applicable to the transaction in hand. After the lifts were assembled and installed with skill and labour at site, it became a permanent fixture of the building, and hence it was not a case of sale of chattel or a chattel being attached to another chattel.

  • Similarly, a Three-Judge Bench in BSNL v. Union of India (2006) 3 SCC 1 reversed a Two-Judge Bench decision in State of U.P. v. Union of India (2003) 130 STC 1 (SC)/ (2003) 3 SCC 239 which had stressed upon the substance test stating that the terminology employed to describe an activity as sale or service is not conclusive in itself. By calling sale as service or vice versa, the substance of the transaction will not get altered. The question has to be determined, by discerning the substance of the transaction in the context of the contract between the parties or in a case of statutory contract in the light of the relevant provisions of the Act and the Rules. Thus before determining the taxes which could be imposed in relation to an agreement the intention of the parties and nature of transaction is to be determined as per law laid down by the Apex court. Thus clearly, the substance over form debate has generally been rejected in its application in the realm of indirect taxes.
  • In case of CCE v. Acer India Ltd., (2004) 8 SCC 173, 24-09-2004 Three-Judge Bench of Supreme Court while determining the valuation of supply categorically ruled out the application of the substance over form test in this sphere of tax laws. Explaining the relevant propositions in the decision, under the heading “principles of interpretation of a taxing/fiscal statute”, the Supreme Court, inter alia, culled out the following rules governing the interpretation –

“33. It is also a well-settled rule of construction of a charging section that before taxing a person it must be shown that he falls within the ambit thereof by clear words used as no one can be taxed by implication. It is further well settled that a transaction in a fiscal legislation cannot be taxed only on any doctrine of “the substance of the matter” as distinguished from its legal signification, for a subject is not liable to tax on supposed “spirit of the law” or “by inference or by analogy.” The taxing authorities cannot ignore the legal character of the transaction and tax it on the basis of what may be called “substance of the matter.” One must find the true nature of the transaction.”

Codification of Substance over form (GAAR):

The Central Government keeping in view the aggressive tax planning with the use of sophisticated structures felt that there is a need for statutory provisions so as to codify the doctrine of “substance over form”. The real intention of the parties and effect of transactions and purpose of an arrangement is to be taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to camouflage the real intent and purpose. The net effect of the GAAR provisions is to disregard the legal form of these transactions and look only at the substance, that is the ‘Commercial Reality/Economic substance’ and tax the entity accordingly.

Finally, the Finance Bill of 2012 introduced the statutory General Anti-Avoidance Rules (GAAR). The Memorandum to the Finance Bill, 2012 stated that the question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, anti-avoidance principles are based on various judicial pronouncements where judicial decisions have varied. While some courts in certain circumstances had held that legal forms of transactions can be dispensed with and the real substance of the transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity.

The GAAR provisions after getting deferred for some time finally came into effect from Assessment Year 2018-19 (Financial Year 2017-18). GAAR provisions are applicable if the transaction is an impermissible avoidance arrangement. The term ‘impermissible avoidance arrangement’ has been defined in these provisions. Under the provisions of GAAR, it is important to prove that the main purpose of a transaction is to obtain the tax benefit. Further one of the additional conditions is to justify that the transaction lacks commercial substance or is deemed to lack commercial substance.

Since then the action on the anti-avoidance front (domestic or international) has been only growing. Though GAAR is a domestic anti-avoidance measure, it is provided in Section 90(2A) of the Act that provisions of GAAR shall apply to the taxpayer even if such provisions are not beneficial to him. In other words, once the provisions of GAAR are invoked, it will have an overriding effect on the beneficial tax treaties.

Substance over form in Indirect Tax/GST:

The application of Doctrine of Substance over form is not much seen in the Indirect Tax law. Under Indirect Tax law, the tax authorities usually do not disregard the legal structure and recharacterize the transaction until and unless there is fraud or some other compelling circumstances demonstrated. The reason is possibly that unlike Direct Tax law the Government has not yet introduced any “general anti-avoidance rules” under the Indirect Tax law. So one may argue that in the absence of anti-avoidance rules the taxpayer’s choice of form of a transaction should continue to hold good.

However, the recent judgement of Apex Court in the case of Northern Operating Systems Private Limited has ignited the debate on the Substance Over Form in indirect tax law. Under GST law also the author feels that there may be certain areas where judicial authorities may perhaps apply this doctrine to ascertain the true character and form of transactions. The matters may be related to Valuation, Transactions between related parties, Holding and Subsidiary transactions, Circular Trading, Reversal of output tax reported as an Input tax credit, Sales and leaseback transactions, Schedule-I transactions, etc. are some of the key areas where we may witness the application of this doctrine in future.


There is no straight jacket formula to judge substance over form. Merely because a particular transaction results in a tax benefit cannot be a parameter to frame that the transaction is a colorable device for tax avoidance. The business consideration and commerciality of transactions are often recognized by the Courts. Therefore, each case has to be examined based on the facts and circumstances and applying the important principles laid down by the Courts.


Disclaimer: Views expressed here-in-above are purely personal views of the author. The possibility of other views on the subject matter cannot be ruled out. So, the readers are requested to refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up.

The author is a practicing Chartered Accountant at Guwahati and can be reached at:


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February 2024