INCOME TAX ACT, 1961

Section 36(1)(iii)

Business disallowance under section 36(1)(iii) - Interest on borrowed capital - Borrowed funds, whether utilized for business purposes -

Issue was as regards disallowance under section 36(1)(iii) for interest-free advances given by assessee-proprietor to his close relatives and to an associate concern. Assessee had incurred interest expenditure, on bank borrowings, thus, AO disallowed interest on borrowed capital under section 36(1)(iii) to that extent by inferring application of borrowed capital toward said interest-free advances. Held: Issue under reference was wholly factual, i.e., whether borrowed funds, on which interest was claimed as a business expense, was utilized by assessee in whole for purpose/s of his business during relevant year, and if not, extent of non-utilization? Revenue went off tangent, questioning commercial expediency of interest-free advances, without there being any claim by the assessee toward the same. Not only that, it made part disallowance of bank commission, i.e., on proportionate basis, even as it, being unrelated to the interest on borrowed capital, was deductible under section 37(1) and not under section 36(1)(iii). There was no examination, much less appreciation of facts. Disallowance is not to be made for the sake of it, but based on clear and definite findings of fact based on the evidences on record, which was completely missing, accordingly, i.e., in view of the foregoing, matter was remitted to AO to allow the assessee opportunity to present his case.

REFERRED :

FAVOUR : Matter remanded

A.Y. : 2009-10

INCOME TAX ACT, 1961

Section 145A

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