INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Disallowance of interest on funds borrowed in earlier years -

AO observed that assessee-company had shown loans of Rs. 71,07,76,698 as on 31-3-2010 as against the opening balances of Rs. 34,43,38,788 as on 1-4-2009. Further, he also observed that the assessee had shown other advances at Rs. 5,79,37,770 as on 31-3-2010 as against Rs. 8,19,38,063 as on 1-4-2009. Accordingly, he came to the prima facie conclusion that the interest bearing funds were diverted by the assessee for non-business purposes by giving interest free loans/advances and thus, made proportionate disallowance of interest under section 36(1)(iii). Assessee contended that no disallowance of interest could be made on the funds borrowed in earlier years and lying in opening balance as on 1-4-2009 when the said borrowings and utilization thereon were accepted as meant for business purposes in earlier years. Held: It was not disputed that the borrowings were made in earlier years and no disallowance of interest was made in earlier years with regard to the said borrowings and utilization thereon. Further, it was found that the amounts advanced by assessee to a party named 'N' alone increased during the relevant year and in case of amounts advanced to all other parties except 'N', the closing balance only reduced when compared to the opening balance, thus there could not be any disallowance of interest on the opening balance of loans advanced to the said parties as the borrowings and utilization thereon were accepted as meant for business purposes in earlier years. Further, with regard to loan given to 'N', it was found that the assessee was having sufficient own funds in the form of current year profits before depreciation, therefore, it could be reasonably presumed that the amounts to N were advanced interest free out of own funds available with the assessee and hence, there could not be any disallowance of interest under section 36(1)(iii) on a proportionate basis even for the same.

Relied:Virendra R. Gandhi v. Asstt. C.I.T [Tax Appeal No. 20 of 2004 with Tax Appeal No. 124 of 2005, dated 27-11-2014], CIT v. Sridev Enterprises (1991) 192 ITR 165 (Kar): 1991 TaxPub(DT) 1071 (Karn-HC)

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2010-11

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