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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Location of Business

Gangotri Textiles Ltd routes funds through three related entities in a series of transactions. The funds return to Gangotri, and the only purpose of the transfers is to obtain a tax benefit. Under section 180 of the Income-tax Act, 2025, which statement about this round trip financing is correct?

Such an arrangement can be round trip financing regardless of traceability, sequence or mode of transfer. Section 180(2) applies where funds move among parties through a series of transactions lacking substantial commercial purpose beyond the tax benefit, expressly disregarding tracing, timing and the means used.

  1. AIt is round trip financing only if the funds can be traced to funds originally received by a party
  2. BIt is round trip financing only if the transfers happen in a prescribed sequence
  3. CIt is round trip financing only if the transfers are made through banking channels
  4. DIt can be round trip financing regardless of traceability of funds, sequence of transfers or mode of transferCorrect

Explanation

Section 180(2) defines round trip financing as funds transferred among parties through a series of transactions with no substantial commercial purpose other than the tax benefit. This applies without regard to whether funds can be traced, the time or sequence of transfers, or the means or mode used. So the options requiring traceability, sequence or banking channels add conditions the section expressly rules out.

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