INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Disallowance under section 36(1)(iii) on account of diversion of interest-bearing fund - Allowability -

Assessee was engaged in the wholesale business. AO during assessment proceedings found that the assessee had diverted its interest-bearing fund for the purpose of making interest-free loans and advances to certain parties. Accordingly, he was of the view that the amount of interest corresponding to such interest-free loan and advances needed to be disallowed under the provisions of section 36(1)(iii). Thus AO worked out the average cost of assessee on the money borrowed by him at Rs. 11.45 %.Held: Assessee agreed for the disallowance of the amount of interest on the amount diverted as interest-free loans and advances. As such, the issue was limited to the extent of the rate of interest which needs to be applied on such interest-free loans and advances. As per the revenue the average rate of interest is 11.45% whereas the assessee claims the same to be at 8.73%. From the order of AO it was found that assessee in most of cases had borrowed money on interest at the rate of 12% and in very few cases at the rate of 15% and 10.5 %. Admittedly, the assessee has borrowed more amount on interest at the rate of 10.50%. AO had worked out average cost of the borrowed funds at the rate of 11.45% which appeared very reasonable and logical. Hence, the ground of appeal of assessee was dismissed.

Relied:D & H. Secheron Electrodes Pvt. Ltd. v. CIT (1983) 142 ITR 528 (MP) : 1983 TaxPub(DT) 826 (MP-HC).

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2009-10

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