INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - No nexus of borrowed funds with capital advances made by assessee - Assessee having sufficient own funds to make investments

Assessee-company was engaged in import, export and polishing of diamonds. It advanced some amount for purchase of certain premises. AO noticed that none of the said premises was put to use during the year, accordingly, he made proportionate disallowance under section 36(1)(iii) out of interest expenditure. Assessee submitted that no specific borrowings were taken to make the said payment and it had sufficient own funds in the shape of share capital, share premium and accumulated reserves besides unsecured interest free loans at year end. It was further submitted that the interest expenses were incurred only in respect of packing credit or post-shipment credit, which was not meant for funding the payment made for purchase of those premises. Held: On perusal of assessee's financial statements, it was found that the assessee had own funds in the shape of share capital and reserves aggregating to Rs. 225.28 crores at year end as against opening funds of Rs. 153.15 crores. Besides the said funds, the assessee had interest-free unsecured loans of Rs. 58.72 crores at its disposal at year end. Further, the capital advances at year end stood at Rs. 20.23 crores as against opening balance of Rs. 19.83 crores, which showed that there was only a marginal increase of Rs. 40 lakhs during the year. Furthermore, the interest-bearing secured loans obtained by the assessee were meant only for specific purposes, i.e., packing credit or post-shipment credit. Therefore, it would be concluded that there was no nexus of borrowed funds with the capital advances made by the assessee and the assessee had sufficient own funds to make the said investments. Without establishing any direct nexus of borrowed funds vis-à-vis capital advances, no disallowance of interest under section 36(1)(iii) could have been made by Revenue and hence, the disallowance made under section 36(1)(iii) was deleted.

REFERRED : CIT-2 v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom) : 2014 TaxPub(DT) 3351 (Bom-HC) The CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom) : 2009 TaxPub(DT) 1275 (Bom-HC)

FAVOUR : In assessee's favour

A.Y. : 2010-11

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