INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Interest-free advances to sister concerns - AO failed to consider interest-free funds available with assessee

AO found that assessee-company extended interest-free advances to its sister concerns. He opined that proportionate interest on such interest-free advances had to be disallowed as per section 36(1)(iii) and accordingly, he made disallowance of interest under section 36(1)(iii). Assessee submitted that it had own funds in the form of capital and reserves, which were more than the amount advanced to its sister concerns as interest-free loans and thus, addition could not be made invoking the provisions of section 36(1)(iii). Held: Interest free loans given by assessee to its sister concerns aggregated to Rs. 7,81,85,990, whereas the interest free funds owned by the assessee at the end of the year were only Rs. 2,42,89,044. Thus, the claim of the assessee that it extended interest free loans out of its non-interest-bearing funds, was only partially correct. Further, AO had not considered the interest-free funds available with the assessee during the period of interest-free loans extended to its sister concerns. Therefore, in the interest of justice, the matter was remanded to AO to compute proportionate interest with respect to the interest-bearing funds extended to the assessee's sister concerns and thereafter pass appropriate order in accordance with law.

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2013-14

INCOME TAX ACT, 1961

Section 37(1)

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