C.R. Auluck & Sons (P.) Ltd. v. CIT

INCOME TAX ACT, 1961

--Business deduction under section 36(1)(iii)--Interest on borrowed capitalInterest-free advances to sister concern--Assessee was engaged in the business of manufacturing of sewing machines and technical consultancy. Return of assessee was processed under section 143(1)(a) and later on notice under sections 143(2) and 142(1) was issued to the assessee. Assessee submitted that it had taken loan from the bank and advanced the interest-free loan to its sister concern. AO disallowed the interest under section 36(1)(iii) being the proportionate interest attributable to interest-free loans given by assessee to its sister concern, out of interest bearing borrowed funds. This disallowance was upheld by the CIT(A) as well as Tribunal. Held: There was no commercial expediency and the interest-free borrowed funds had been advanced for non-business purposes and, therefore, there was disallowance of interest, being interest attributable to the interest-free advances made by the assessee to its sister concern, out of interest bearing borrowed funds. Hence, AO, CIT(A) and Tribunal were justified in disallowing the claim of assessee as interest-free borrowed funds had been advanced for non-business purposes.