Substance over form: If tax authorities can invoke it, why can't the common taxpayer?

Mint

4 days ago

The 'substance over form' principle in tax law means that what really happens in a transaction matters more than how it looks on paper. It empowers tax authorities to look past legal documents to understand the true purpose and effect of a deal.
Tax authorities often invoke this doctrine when it helps them deny benefits, disregard sham transactions or expose tax avoidance. However, when it comes to the taxpayer—who may miss a form, a checkbox, or falter on minor procedural compliance—the same tax authorities often rigidly insist on 'form over substance'.
This inequity is starkly evident in several recent compliance frameworks. Consider Form 10-IEA, which taxpayers engaged in a business or profession are required to file in order to opt out of the default new personal tax regime. The legislature offers taxpayers a choice between a lower tax rate regime without exemptions and the traditional regime with deductions. Yet, a delay or omission in filing Form 10-IEA, even if the tax computation and return filing clearly reflect the taxpayer's intention, is deemed fatal. The Centralised Processing Centre routinely defaults such taxpayers to the regime not opted for, disregarding the economic substance of the filing and enforcing strict adherence to the procedural form.
A similar rigidity is seen in the treatment of Form 67, which is required for claiming a foreign tax credit. Many resident taxpayers having foreign income like dividends, interest or freelancing fees, pay taxes on such incomes in foreign jurisdictions and are entitled to relief in India. However, technical issues such as failure to upload Form 67 within the return filing timeline—even where all tax has been paid abroad and disclosed in the return—lead to denial of credit and consequent double taxation. Courts have begun to intervene in such cases, but the department's stance remains largely formalistic, prioritizing portal-driven validations over genuine tax neutrality.
The issue extends to the income tax return forms itself. In several cases, tax authorities have issued notices or denied exemptions on the grounds of procedural omissions such as missing disclosures in exempt income schedules, unreported asset schedules even when such assets are otherwise declared fully accounted for, or unchecked declaration boxes. These are instances where the taxpayer has not suppressed any income or wilfully violated the law, yet substantive compliance is ignored in favour of hyper-technical scrutiny.
Take another example of Forms 15G and 15H. Senior citizens and small investors are permitted to submit these self-declarations to avoid tax deducted at source (TDS) if their income falls below the taxable limits. But if these are not submitted on time, or the deductor fails to process them despite receipt, TDS is still deducted. The taxpayer then goes through the hassle of filing a return and waiting months for a refund. Isn't this a classic example where form trumps substance?
In the realm of joint investments—whether in immovable property, mutual funds or securities—tax departments often insist on procedural proof of PAN linkage or nominee declarations. Even where ownership is legally shared and income attributable to each co-owner is proportionate and disclosed, revenue authorities have, in practice, demanded conformity with form-based validations, ignoring the substantive evidence available.
The Goods and Service Tax (GST) framework presents another dimension. While GST rightly taxes supplies of goods and services, it does so on expenditure made from already taxed income. This creates an indirect double taxation, especially for individuals and small businesses, with no real relief available. Here again, the economic substance—that the expenditure is out of post-income-tax resources—is overlooked in favour of a transactional, form-based levy.
The fundamental concern is this: if the tax department routinely invokes substance over form to protect revenue and curb abuse, is it not equitable to permit taxpayers the same benefit to claim reliefs, exemptions or credits where their intent and substance are compliant, even if procedural lapses exist?
Tax policy must balance administrative convenience with fairness. Procedural forms serve a purpose, but they must not override substantive rights. The taxpayer's intent, supported by documentation, should matter more than their navigation of a labyrinth of forms. Particularly in a digital and artificial intelligence-driven tax ecosystem, where technical errors are increasingly common and often unintentional, a more nuanced and equitable approach is needed. Taxpayers' substantive reliefs shouldn't be sacrificed at the altar of technicality. After all, tax compliance should be about paying what is due—not more, not less—and certainly not losing relief for ticking the wrong box.
Mayank Mohanka is founder, TaxAaram India, and a partner at S.M. Mohanka & Associates.