INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Interest-free advances to holding company - No business expediency

AO found that assessee-company had given interest-free advances to its holding company. Accordingly, the AO made disallowance of interest under section 36(1)(iii) alleging it was diversion of borrowed funds for non-business purposes. Assessee contented that the said transaction was in the nature of current account and the advances were made for acquiring land on behalf of the assessee for construction of a project. In that regard, the assessee referred to a Joint Development Agreement entered into by it with the holding company. It further, contended that the Revenue failed to note the factual position and did not properly appreciate the terms and conditions of the said Joint Development Agreement. Held: Assessee's case was that interest free advances were paid to the holding company for the investments made by them for securing land to be developed by the assessee. On perusal of Joint Development Agreement entered into by assessee with its holding company, it was found that the assessee and the holding Company agreed to share profits at the rate of 50% each. However, within about two months another agreement was entered into by modifying certain clauses in the Joint Development Agreement, where under, the holding company would get 75% of the book profits. Further, it was found that the holding company borrowed loans from banks and there was no occasion rather need for the holding company to take advances from the assessee for the purpose of purchase of the land. Apart from that, the assessee was paying certain amount toward operational expenses and in the ledger account; such amount was shown as Joint Venture Share of the holding company. Thus, there was no necessity for the assessee to give any advance to its holding company. Hence, the disallowance of interest under section 36(1)(iii) was upheld.

REFERRED : SA Builders Ltd. v. CIT (2007) 288 ITR 01 (SC) : 2007 TaxPub(DT) 0833 (SC)

FAVOUR : Against the assessee

A.Y. : 2009-10

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