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| The Tax Publishers2019 TaxPub(DT) 1386 (Del-Trib) INCOME TAX ACT, 1961
Section 36(1)(iii)
Where it was not in dispute that due to contractual restrictions and liquidation damages/pre-payment charges, it was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments, even if the assessee had its own interest free funds as such, no disallowance under section 36(1)(iii) would be made.
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Business deduction under section 36(1)(iii) - Interest on borrowed capital - Diversion of borrowed fund allegedly for non-business purposes -
AO disallowed the interest expenditure on the ground that assessee had used the borrowed funds for non-business purpose. Assessee contended that the company had used the borrowed funds for the purposes of business only. The borrowed funds were used by the assessee for investment in fixed assets which was entirely for the purposes of business, He further contended that investments in mutual funds started only after the assessee company had started earning operating income from the business of transmission of electricity; and till that time, investments in mutual funds had not even started. In any case, there is presumption that investments were made out of interest free funds generated or available with the company including the share capital and reserves. CIT(A) deleted the addition made by the AO on account of disallowance of interest under section 36(1)(iii). Held: It was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments even if the assessee had its own interest free funds. It was further not in dispute that the assessee had adequate interest free funds of its own for making investments in mutual funds. In these specific and peculiar facts and circumstances, there was no case for any disallowance of interest under section 36(1)(iii). Moreover, DR failed to bring any material facts to notice to distinguish the facts of the assessee with the facts of the judicial precedents on which the CIT(A) relied upon and on which the counsel for assessee relied upon during appellate proceedings in ITAT. The DR thus failed to make out any case for any interference by Tribunal with the order of CIT(A) on this issue.
Relied:Reliance Utility and power Limited (2009) 313 ITR 340 (Bom-HC) : 2009 TaxPub(DT) 1275 (Bom-HC) and Woolcoombers of India Limited (1982) 134 ITR 219 (Cal-HC) : 1982 TaxPub(DT) 389 (Cal-HC), East India Pharmaceuticals (1997) 224 ITR 627 (SC) : 1997 TaxPub(DT) 1152 (SC), DD Industrial Ltd. (2015) 57 taxmann.com 310 (Del) and Tin Box Co. 135 taxman 145 (Del) and Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) : 1979 TaxPub(DT) 1021 (SC)..
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