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

Sharma Textiles Ltd routes Rs 5 crore through three related entities, which return the funds to it within the same year. The steps have no substantial commercial purpose other than obtaining a tax benefit. Sharma argues that the returned funds cannot be traced to the amount originally sent. Under the Act, what is the position on this argument?

The argument fails. Round trip financing is determined without regard to whether the funds can be traced to funds transferred or received, to the time or sequence of the transfers, or to the mode used. Lack of traceability therefore does not save the arrangement.

  1. AThe argument succeeds because tracing of funds is essential for round trip financing
  2. BThe argument succeeds because the funds were returned within the same year
  3. CThe argument fails because traceability of the funds is to be disregarded in deciding round trip financingCorrect
  4. DThe argument fails only if the transfers were made by cash

Explanation

Round trip financing is determined without regard to whether the funds can be traced to funds transferred or received in the arrangement, the time or sequence of transfers, or the mode of transfer. Hence the tracing argument does not help the assessee.

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