INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Interest and other expenses incurred to consortium of banks - Allowability -

Assessee was a Government undertaking incorporated primarily to create industrial development in the State. Assessee had obtained substantial loans from consortium of banks and the same were passed on to the Government for acquisition of land and payment of compensation. AO alleged that interest charged by assessee to the State Government was substantially lower than the interest amount paid by assessee to the consortium of banks. Thus, AO disallowed the balance amount of interest holding that it did not constitute the expenditure incurred for the purpose of its business.Held: The loan availed from the consortium of four Nationalised Banks was partly invested by assessee in FDRs and the balance amount was provided to the State Government as per the mutual understanding. It was, thus, a case wherein the surplus funds available from the loan taken from the consortium of Banks were parked by the assessee with the State Government. Thus, the disallowance made by AO on account of interest was not sustainable.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

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