INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Disallowance of interest expenses - Allowability -

Assessee was engaged in the business of manufacture of resins and chemicals with the help of credit purchases bearing interest and largely selling its finished products to its sister concern. AO disallowed the interest expenditure claimed by assessee on the ground that assessee had deliberately adopted artificial and colourable device for reducing the income and tax thereon through arrangement of letter of credit discounting in respect of sale bills raised in the name of the sister concern. CIT(A) dismissed the appeal of assessee which was upheld by Tribunal. Held: On perusal of the books of account, it was held that against the supply of finished products, the assessee firm does not directly collect the sale proceeds from the sister concern. CIT(A) held that assessee had tried to give the whole arrangement a colour of business expediency falling within the purpose and nexus to business. But on a close scrutiny, it was evident that it was nothing but shouldering the interest burden on itself, thereby diverting the benefit in favour of the sister concern. No prudent businessman pays interest on the payment to his creditors and at the same time does not charge corresponding interest on the delayed payment from its debtor. All the authorities have assigned cogent reasons for rejecting the claim of assessee under section 36(1)(iii).

REFERRED : Asstt. CIT v. Micro Labs Ltd. (2015) 380 ITR 1 (SC) : 2015 TaxPub(DT) 5221 (SC) S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 0833 (SC) McDowell & Co. Ltd. v. CTO (1985) 154 ITR 0148 (SC) : 1985 TaxPub(DT) 1186 (SC) CITv. Shriram Investments [in TCA No. 166/2019, dt. 21-2-2019] : 2019 TaxPub(DT) 2277 (Mad-HC) Hotel Roopa v. CIT (2015) 231 Taxman 425 (Karn) : 2015 TaxPub(DT) 2441 (Karn-HC)

FAVOUR : Against the assessee

A.Y. :

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