INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Allowability - Interest paid to partners -

Assessee challenged disallowance made by AO under section 36(1)(iii) contending that interest to partners was allowed under section 40(b), therefore, no disallowance of interest could be made under section 36(1)(iii). Held: Entire fund of assessee- firm was interest bearing fund and there was no interest free own fund of the partnership firm. Assessee had not disputed that capital of partners in firm was interest bearing fund and therefore, interest free advance given by assessee were utilizing the interest bearing funds of firm. Accordingly, when interest rate at 12% was not in dispute then the disallowance made by the assessing officer by applying the said rate of interest was justified. Section 40(b) is not an enabling section for allowing the interest but it is a restrictive section giving the outer limit of payment of interest to the partners. Therefore, the disallowance of interest on interest free advance cannot be considered in the light of section 40(b) and AO rightly disallowed the said interest by considering the provisions of section 36(1)(iii). Even otherwise amount which was used by the assessee for interest free advances then the corresponding interest expenditure would not be considered as the expenditure incurred wholly and exclusively for the business of the assessee.

REFERRED :

FAVOUR : Against the assessee

A.Y. : 2014-15

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