INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Funds utilized for extending interest-free loans and advances, investments and capital work -

Assessee-company borrowed interest bearing funds, which were further utilized for extending interest free loans and advances, investments and capital work. AO made disallowance of interest under section 36(1)(iii) on the ground that the interest bearing funds initially borrowed for the business were subsequently taken out of the business by diverting them as interest free loans or loans on lower rate of interest. Held: In case of interest bearing loans taken and interest free advances given, what is to be looked into is the measure of “commercial expediency” and “for the purpose of the business”. In instant case, assessee was in business of real estate, entertainment and power generation and the loans and advances included investments in the property business of the assessee, thus, it could be said that the advances recoverable included the advances, which were business advances on which no interest was disallowable. Further, in respect of remaining advances, interest was charged by the assessee. Hence, the disallowance made under section 36(1)(iii) would not be sustainable.

REFERRED : Taparia Tools Ltd. v. Joint CIT CA No. 6366 of 2003: 2015 TaxPub(DT) 1438 (SC) and SA Builders Ltd. v. CIT (2007) 289 ITR 0026 (SC): 2007 TaxPub(DT) 0834 (SC)

FAVOUR : In assessee's favour

A.Y. : 2012-13

INCOME TAX ACT, 1961

Section 14A Read with Rule 8D

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