INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Advancement of interest-free loan to sister concern -

Assessee claimed deduction under section 36(1)(iii). AO disallowed assessee's claim proportionately on the ground of assessee having advanced interest free loan to its subsidiary company. Assessee's case was that assessee had sufficient own funds extending advance to its sister concerns. Further, assessee had, in fact, transferred a Division of Unit of assessee-company viz., Sodium Perborate Division to its Subsidiary Company, for a sale consideration of Rs. 14.17 crores, against which Rs. 1.97 crores of receivable of Subsidiary Company was transferred to assessee-company but, remaining sale consideration was not paid to assessee-company and which was said to be still outstanding. Further more that loan outstanding liability of Rs. 7.88 crores of said subsidiary company was also taken over by assessee and a small amount of Rs. 0.18 crores was the balance of amounts from various loans given by assessee-company to its sister concerns and no interest was charged from Subsidiary Company on such outstanding amount of unpaid consideration for transfer of its Sodium Perborate Division. Held: Matter was remanded back to AO for holding enquiry into the matter as to whether interest bearing borrowed funds were used for advancing loan to Subsidiary Company or Surplus Funds of the Company were so diverted. Prima facie, it appeared that it was a case of unpaid sale price for transfer of Sodium Perborate Division made by assessee Company to its Subsidiary Company and the outstanding loan liability of Rs. 7.88 crores was also taken over by the assessee Company. Therefore, even though borrowed funds might have been diverted, but the fact remains that assessee did not charge any interest on such unpaid price from Subsidiary Company and even took over another loan liability of Subsidiary Company. AO merely worked out disallowance under section 36(1)(iii) vide afore-quoted portion from assessment order on the basis of Average Interest free loan and Interest bearing Secured Funds from assessee-company. He had not gone into the aspect of unpaid sale price by subsidiary company. The said enquiry was necessary before making any disallowance under section 36(1)(iii).

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2012-13

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