Substance over form doctrine

Under the substance-over-form principle, tax authorities may look past how a transaction is labelled and instead assess what the arrangement actually accomplishes in economic terms. If a structure is crafted to appear legitimate but is designed mainly to secure an unintended tax advantage, officials may disregard the label applied by the parties and tax the transaction according to its real commercial effect. This approach is intended to curb arrangements that are engineered solely for tax savings rather than genuine business purposes.

Example: Consider a situation where a company provides ₹50 lakh to a related entity and documents it as a “security deposit.” Although the paperwork uses that terminology, the recipient makes periodic payments that effectively resemble interest. Despite the formal label, the arrangement operates like a loan with an interest component, and tax authorities may treat it accordingly.