INCOME TAX ACT, 1961

Section 36(1)(iii) Section 40(b)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Netting of interest on overdrawn capital by partner from assessee-firm, whether permissible -

Assessee-firm was a builder and a developer, grievance of the assessee was that the lower authorities had erred in assessing the interest received by the assessee firm on the capital overdrawn by one of its partner, viz., Shrenik Siroya (SS), as its income under the head 'Other sources'. After netting the interest received/paid, the assessee firm reduced the net balance amount of interest received of Rs. 41,18,600 (Cr.) from the total interest of Rs. 2,32,99,308 (Dr.) that was paid by it on the interest bearing funds borrowed from third parties. AO was not persuaded to subscribe to the aforesaid claim of netting of the interest received/paid by the assessee firm from/to its partners, and adjusting of the net balance of interest received against the interest paid on borrowed funds. The interest of Rs. 53,73,413 was received on the capital overdrawn by the partner, viz. Shrenik Siroya, was assessed by AO as the income of the assessee-firm from 'Other sources'. On appeal, CIT(A) confirmed the view taken by the AO. Held: In sum and substance, the interest expenditure correlating to the interest paid by assessee firm on the funds borrowed was to be disallowed under section 36(1)(iii), to the extent, the same were advanced to the partner, viz., SS by way of overdrawing of his capital, and it is only the excess interest so received by the firm from him, if any, which would be assessed under the head 'Other sources'.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2009-10

INCOME TAX ACT, 1961

Section 145(1) Section 145A

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