Substantial interest is a term that is used in income tax law to refer to a significant interest in a business or concern. It is not specifically defined in the Income Tax Act, 1961, but it is generally understood to mean an interest of 20% or more.

Substantial interest can be either direct or indirect. A direct interest is one that is held directly by the taxpayer, such as through ownership of shares in a company. An indirect interest is one that is held through another entity, such as a partnership or trust.

Substantial interest is relevant for a number of purposes under income tax law, including:

• Clubbing of income: If a taxpayer has a substantial interest in a concern from which their spouse or minor child receives remuneration, then the remuneration of the spouse or minor child may be clubbed in the taxpayer’s hands and taxed accordingly.
• Deemed income from self-occupied property: If a taxpayer owns a residential property that is not rented out, they are deemed to have received income from the property in the form of notional rent. The notional rent is calculated based on the fair market value of the property. If the taxpayer has a substantial interest in another residential property, then the notional rent from the self-occupied property may be reduced.
• Transfer of income without transfer of assets: If a taxpayer transfers income to another person without transferring any assets, then the income may still be taxable in the taxpayer’s hands if the taxpayer has a substantial interest in the person to whom the income is transferred.

It is important to note that the concept of substantial interest is not limited to income tax law. It is also used in other areas of law, such as corporate law and securities law.

If you have any questions about substantial interest, you should consult with a tax professional.

Examples

Examples of substantial interest:

• Direct interest:
  • Owning more than 20% of the shares in a company
  • Being a partner in a partnership firm
  • Being a beneficiary of a trust that has a substantial interest in a concern
• Indirect interest:
  • Owning shares in a company that has a substantial interest in another concern
  • Being a partner in a partnership firm that has a substantial interest in another concern
  • Being a beneficiary of a trust that has a substantial interest in another concern

Here are some specific examples:

• A person who owns more than 20% of the shares in a company that manufactures and sells textiles has a substantial interest in that company.
• A person who is a partner in a partnership firm that provides accounting services has a substantial interest in that firm.
• A person who is a beneficiary of a trust that owns more than 20% of the shares in a company that owns and operates hotels has a substantial interest in that company.
• A person who owns shares in a company that has a substantial interest in a bank has an indirect interest in that bank.
• A person who is a partner in a partnership firm that has a substantial interest in a real estate company has an indirect interest in that real estate company.
• A person who is a beneficiary of a trust that has a substantial interest in a hospital has an indirect interest in that hospital.

It is important to note that the definition of substantial interest may vary depending on the context in which it is being used. For example, the definition of substantial interest for income tax purposes may be different from the definition of substantial interest for corporate law purposes.

Case laws

• CIT v. Bharat Starch Industries Ltd. (1995) 217 ITR 249 (SC): In this case, the Supreme Court held that the term “substantial interest” in Section 64(1) of the Income Tax Act, 1961 should be interpreted liberally to include any indirect interest, such as an interest through a partnership or trust. The Court also held that the question of whether a taxpayer has a substantial interest in a concern is a question of fact.
• CIT v. Shree Ram Mills Ltd. (1994) 205 ITR 81 (SC): In this case, the Supreme Court held that the term “substantial interest” in Section 64(1) of the Income Tax Act, 1961 does not mean a controlling interest. The Court held that a taxpayer can have a substantial interest in a concern even if he does not have a controlling interest.
• CIT v. M/s. Ramchand Udharam (1991) 189 ITR 110 (SC): In this case, the Supreme Court held that the term “substantial interest” in Section 64(1) of the Income Tax Act, 1961 is not restricted to a direct interest in a concern. The Court held that a taxpayer can have a substantial interest in a concern even if he has an indirect interest, such as an interest through a partnership or trust.

In addition to the above case laws, there are many other case laws that have dealt with the concept of “substantial interest” in the context of income tax. These case laws have established that the term “substantial interest” is a flexible concept that should be interpreted liberally. The question of whether a taxpayer has a substantial interest in a concern is a question of fact, and will depend on the specific circumstances of each case.

It is important to note that the above case laws are just a few examples, and do not represent an exhaustive list of all the case laws on the concept of “substantial interest.” If you have any specific questions about whether or not you have a substantial interest in a particular concern, you should consult with a tax professional

FAQ questions

Q: What is substantial interest?

A: Substantial interest means a direct or indirect interest of 20% or more in a concern. This interest may be held directly or indirectly through a partnership, trust, or other entity.

Q: What are the different types of substantial interest?

A: There are two types of substantial interest:

• Direct interest: A direct interest is an interest that is held directly in a concern. For example, if you own 20% or more of the shares in a company, you have a direct interest in that company.
• Indirect interest: An indirect interest is an interest that is held through another entity. For example, if you own a 20% interest in a partnership, and that partnership owns a 50% interest in a company, you have an indirect interest in that company.

Q: Who is considered to have a substantial interest in a concern?

A: The following persons are considered to have a substantial interest in a concern:

• Individuals
• Partnerships
• Trusts
• Companies
• Hindu undivided families (HUFs)
• Associations of persons (AOPs)
• Bodies of individuals (BOIs)

Q: What are the implications of having a substantial interest in a concern?

A: There are a number of implications of having a substantial interest in a concern, including:

• Clubbing of income: The income of a spouse or minor child from a concern in which the taxpayer has a substantial interest may be clubbed in the taxpayer’s hands for tax purposes.
• Deemed income: The taxpayer may be deemed to have received income from a concern in which the taxpayer has a substantial interest, even if the income has not actually been received.
• Disallowance of expenses: Expenses incurred by a concern in which the taxpayer has a substantial interest may be disallowed for tax purposes, if the expenses are excessive or unreasonable.

Q: What should I do if I have a substantial interest in a concern?

If you have a substantial interest in a concern, you should consult with a tax professional to get specific advice on your individual circumstances. A tax professional can help you to understand the implications of having a substantial interest in a concern, and can also help you to minimize your tax liability.