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 - Assessee failed to prove business expediency

AO made disallowance of interest claimed under section 36(1)(iii) on the ground that loans raised by assessee-company were given as interest free advances to its holding company for non-business purposes. Assessee stated that the transaction was in the nature of current account and the advances were made for acquiring the land on behalf of the assessee for construction of a project. It was further stated that profit and loss arising on account of the said project would be shared equally between the assessee and its holding company as per the joint development agreement entered into by the assessee and its holding company. Held: On perusal of the joint development agreement entered between assessee and its holding company, it was found that there was no stipulation that the assessee had to pay interest-free advances to the said company. Furthermore, the said joint development agreement was not a registered document. Thus, the assessee failed to establish the business expediency in advancing the money to its holding company. It is settled that the onus is always on the assessee to satisfy the AO that the loans raised by him were used for the business purposes and failure to discharge such onus would result into the disallowance of interest claim. Therefore, as the assessee failed to discharge the onus of proving that loans raised by it were used only for business purposes, the disallowance of interest under section 36(1)(iii) was justified.

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

REFERRED : CIT v. Abhishek Industries Ltd. (2006) 156 Taxman 256 (P&H) : 2006 TaxPub(DT) 1778 (P&H-HC)

FAVOUR : Against the assessee

A.Y. : 2009-10

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