INCOME TAX ACT, 1961

Section 36(1)(iii)

Business deduction under section 36(1)(iii) - Disallowance of proportionate interest on capital advances provided by assessee - Allowability -

Assessee was engaged in business as the authorized dealers and service of Motor Cars. On perusal of financial statements, AO found that assessee had made capital advances. Whereas, assessee had obtained huge borrowed funds and interest on loan funds are debited to profit and loss account. AO observed that assessee had advanced interest free funds to its sister concerns and at the same time paying interest on borrowed funds. Therefore, AO was of the opinion that the proportionate interest amount, considering the advances and interest on the borrowed funds, had to be disallowed and accordingly made disallowance under section 36(1)(iii). Held: Out of total amount disclosed under short-term loans and advances in the note to financial accounts, part amount pertained to VAT, service tax, TDS and income-tax refund receivables. Whereas AO was of the opinion that these were the advances provided to sister concerns. Thus, advances disclosed in financial statements are with the statutory authorities and the action of AO to disallow proportionate interest considering such advances was not acceptable. Accordingly, AO was directed to delete the addition and allow the grounds of appeal in favour of the assessee.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2014-15

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