In a far-reaching judgement on intra-corporate advances, the Supreme Court held that tax cannot be levied on a corporate if it transfers borrowed money to its subsidiary or any other entity, if the transaction is driven by commercial reasons.
The Supreme Court was ruling on the issue of whether interest on borrowed fund can be deducted in the computation of taxable income, even if the borrowed fund is transferred to a subsidiary company.
The apex court held that the only factor the income-tax department should consider is that borrowing and advancing to a sister company is driven by commercial expediency. If the transaction is driven by objectives other than commercial, such deals cannot claim exemption from tax.
The Supreme Court added that if the directors of the sister concern utilise the money advanced to it for their personal benefit, it cannot be said that such money has been given for commercial purpose.