INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Use of borrowed funds for business purpose -

Assessee borrowed inter-corporate deposits (ICD) from another entity, namely, M/s. Star India Private Limited (SIPL) and also availed of bank overdraft from the bank for the purposes of carrying out of its business. Accordingly, the interest on ICDs and Bank-overdraft was claimed as deduction under section 36(1)(iii). AO alleged that SGL, M/s. SIPL and assessee were part of the same Newscorp group. Assessee was expected to take sufficient advance from its principal and manage its liquidity concerns. Instead of doing the same, it took loan from alleged non-section 40A (2) concern to ensure that no income was taxed in the hands of Indian companies. Further, transactions were not declared in Form 3CEB as per TP Regulations. Therefore, interest payment aggregating to Rs. 448 lakhs was held to be not in business expediency and not mandated by business exigencies. Finally, the same was disallowed. Held: Funds were borrowed from SIPL for business purpose. Star India (P) Ltd. was not coming within the purview of section 40A(2), therefore, it could not be said that interest was paid to a related party so as to avoid burden of tax on assessee. Financial statements of assessee evidenced utilization of borrowed funds for procuring rights in respect of various genres of films from third parties for sale to SGL Entertainment. As such borrowed funds on which interest had been paid, were utilized for purpose or business entitling assessee to claim deduction under section 36(1)(iii).

Relied:Dy. CIT v. Core Health Care Ltd.(2008) 298 TR 194 (SC) : 2008 TaxPub(DT) 1621 (SC), S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 833 (SC), CIT v. Panipat Woollen & General Mills Co. Ltd. (1966) 103 ITR 66 (SC) : 1976 TaxPub(DT) 652 (SC), Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) : 1969 TaxPub(DT) 379 (Bom-HC), CIT v. Sales Magnesite (P) Ltd. (1995) 214 ITR 1 (Bom) : 1995 TaxPub(DT) 0796 (Bom-HC), CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) : 1960 TaxPub(DT) 130 (SC), Bombay Steam Navigation Co. (P) Ltd. v. CIT (1965) 56 ITR 52 (SC) : 1965 TaxPub(DT) 200 (SC), Calcutta Landing & Shipping Co. Ltd. v. CIT (1967) 65 ITR 1 Cal) : 1967 TaxPub(DT) 0276 (Cal-HC), J.K. Commercial Corpn. Ltd. v. CIT (1969) 72 ITR 296 (All) : 1969 TaxPub(DT) 0249 (All-HC), CIT v. Dalmia Cement (B.) Ltd. (2002) 254 ITR 377 (Del.) : 2002 TaxPub(DT) 0625 (Del-HC), DCIT v. M/s. Parry and Company Ltd. 2008-TIOL-555-ITAT-MAD, Hatiwala Silk Mills v. Assessing Officer (2002) 19 TTJ 284 (Ahm.) : 1984 TaxPub(DT) 1124 (Ahd-Trib), CIT v. Walchand and Co. (P) Ltd. (1967) 65 ITR 381 (SC) : 1967 TaxPub(DT) 323 (SC) and CIT v. Rajararn Bandekar (1994) 208 ITR 503 (Bom) : 1994 TaxPub(DT) 1084 (Bom-HC)

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2002-03 to 2004-05

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