Hindustan Vacuum Glass (P) Ltd. v. Dy. CIT

INCOME TAX ACT, 1961

--Business deduction under section 36(1)(iii)--Interest on borrowed capitalReduction in disallowance accepted by revenue in preceding year--During the assessment proceedings, the AO noticed that there was interest-free advance as per assessee's balance- sheet at Rs. 1,17,38,186. He also noticed that the assessee had paid interest amounting to Rs. 33,61,815. Hence, proportionate amount of Rs. 26,78,282 was disallowed under section 36(1)(iii). The CIT(A) restricted the disallowance of interest to Rs. 1,36,234, i.e., only in respect of interest-free advance given to M/s. H. Held: Similar issue came up before the CIT(A) in the immediately preceding year, i.e., for assessment year 2008-09, wherein the AO had disallowed the interest amounting to Rs. 16,75,588 in respect of interest-free advance of Rs. 125.36 lakhs. The CIT(A) had deleted the addition.The finding of the CIT(A) with regard to the deletion of disallowance under section 36(1)(iii) was accepted by the revenue in that year. Inter-corporate loan in the case of M/s. H was the opening balance, which was paid by them during the year under consideration. There was no closing balance at the end of the year and no amount was receivable from them. The Commissioner (Appeals) sustained the disallowance in respect of advances made to M/s. H. However, the CIT(A) in assessment year 2008-09 had recorded the finding that the interest-free advance to M/s. H. was out of appellant's own fund. This finding of the CIT(A) was accepted by the revenue. During the year under consideration, no new advance was given to M/s. H. In view of above, the CIT(A) was not justified in upholding the disallowance of interest in respect of advance given to M/s. H. With regard to other advances, the CIT(A) in the year under consideration recorded similar finding that all other advances were for the purpose of business. In view of above, there was no infirmity in the finding of CIT(A) with regard to advance to other parties, namely, Starlite and MMPL, which was similar to the finding recorded by the CIT(A) in the immediately preceding year, which was accepted by the revenue. The revenue was not justified in agitating the reduction in the disallowance of interest in the year under consideration on the same facts, which was accepted by them in the immediately preceding year. In view of above, ground raised by revenue in its appeal was rejected, while ground raised by the assessee in its appeal was allowed.

Income Tax Act, 1961, Section 36(1)(iii)

Applied:CIT v. Excel Industries Ltd. vide Civil Appeal No. 125 of 2013.

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