INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest paid by assessee on short-term borrowings used for paying share application money - Nature of business activities undertaken by assessee as a NBFC -

Assessee was NBFC debited a sum on account of interest expenditure. During the course of assessment proceedings, it was noticed by AO that said interest was paid by assessee on Short Term Borrowings. He also noticed that the said Short Term Borrowings were utilised by assessee for payment of share application money. Since the said utilisation, according to AO, was not for the purpose of assessee's business, he required assessee to explain as to why interest expenditure on Short Term Borrowings to the extent attributable to payment of share application money should not be disallowed under section 36(1)(iii). Not satisfied with this explanation of the assessee, AO made a disallowance being the interest attributable to the Short Term Borrowings to the extent utilised for payment of share application money. Held: Once the capital had been borrowed for the purpose of business, it was immaterial as to how the borrowed money had been applied and interest payment would be deductible under section 36(1)(iii). Interest paid by assessee on loan borrowed for the purpose of making investment in shares was allowable as deduction under section 36(1)(iii). Madras High Court in the case of CIT v. Shriram Investments (Firm) Moogambika Complex 229 Taxman 179 (Mad) was cited by assessee wherein it was held that where borrowed capital was invested in shares and debentures for the purpose of business, interest paid thereon would be allowable under section 36(1)(iii). Share application money was paid by assessee company in the ordinary course of its business of making investment in shares and, therefore, interest expenditure incurred on the borrowed fund utilised for making the payment of share application money was deductible under section 36(1)(iii) as claimed by the assessee.

Relied:S.A. Builders Ltd. v. CIT(A) (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 833 (SC), Punjab Stainless Steel Inds. v. CIT (2010) 324 ITR 396 (Del) : 2010 TaxPub(DT) 1928 (Del-HC), CIT v. Peninsular Investment Ltd. (2013) 213 Taxman 327 (AP) : 2013 TaxPub(DT) 692 (AP-HC) and CIT v. Shriram Investments (Firm) Moogambika Complex 229 Taxman 179.