INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Interest on borrowed capital - Own funds and borrowed funds are inextricably mixed up -

The assessee, doing business of civil construction, debited interest/processing fees as finance charges on Overdraft Limit. He also advanced interest free loan to two entities in which he was shareholder and director. On considering the fact that the assessee had mixed funds, AO disallowed interest claimed under section 36(1)(iii). On appeal, CIT(A) sustained the disallowance by the AO, having disagreed with the assessee that the latter was having sufficient own fund to provide interest-free loan to its other business entitities for business purpose only.Held: In such a case where both borrowed and own funds are available for investment, unless nexus between the borrowed funds vis-a-vis investment made by the assessee is established by the AO, a presumption is to be drawn in assessee's favour that the investments were sourced out of own funds. Further, the investment in these entities was for business purpose and out of commercial expediency only. Thus, it is established that there was nexus between the expenditure and purposes of business and hence, deduction under section 36(1)(iii) is to be allowed. Besides, where own funds and borrowed funds are inextricably mixed up in such a way that it is impossible to delineate which funds were advanced to other business entities, no disallowance under section 36(1)(iii) would be called for.

Followed:SA Builders Ltd. Vs. CIT (2007) 288 ITR 1(SC) : 2007 TaxPub(DT) 833 (SC) and CIT v. Hotel Savera (1999) 239 ITR 795 (Mad-HC) : 1999 TaxPub(DT) 266 (Mad-HC).

REFERRED :

FAVOUR : In favour of assessee.

A.Y. : 2016-17

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