The Tax Publishers2019 TaxPub(DT) 2656 (Del-Trib)

INCOME TAX ACT, 1961

Section 36(1)(iii)

No disallowance out of interest expenditure would be made to the extent the funds were advanced from the non-interest bearing funds i.e. own funds available.

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Interest free advance to sister concern out of own funds -

AO made disallowance of notional interest on interest free advance given by the assessee to its sister concern. Assessee contended that funds were advanced for business exigency from own funds and not from cash credit account; hence no disallowance could be made. Held: Since assessee had availed cash credit facility long back and that the sums were advanced during the relevant previous year, as such there was no nexus between sums borrowed with funds advanced to sister concern. Further, only to the extent the funds were available in the partner's Capital account would be considered as non-interest bearing funds and no disallowance out of interest expenditure would be made if the advance was made out of such funds. Therefore, disallowance of interest on funds not advanced from own funds was valid.

Relied on:Munjal Sales Corporation v. CIT (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC),The CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) : 2009 TaxPub(DT) 1275 (Bom-HC)

REFERRED :

FAVOUR : Against the assessee

A.Y. : 2010-11



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