Law Point : Interest paid on borrowed funds becomes an allowable deduction under Section 36(i)(iii) of the IT Act, if utilized for business purpose
Case Title : Great White Hardware Pvt. Ltd. Vs. Respondent: ACIT, Circle-7(1)(1) – Income Tax Appellate Tribunal, Mumbai Bench
Brief of the Case : Present appeal arises out of the order by the learned Commissioner of Income Tax (Appeals). The ground raised by the assessee is with regard to challenging the disallowance of proportionate interest under Section 36(1)(iii) of the Income Tax Act, 1961 (IT Act). Assessee is a domestic company engaged in the business of giving loans and advances for general financing.
The return of income for the A.Y. 2013-14 was filed by the assessee company declaring total income of Rs. 1,50,32,287. It is not in dispute that, assessee has borrowed term loan from HDFC bank during F.Y. 2010-11 relevant to A.Y. 2011-12 and has advanced loan/interoperate deposit (ICD) to Jogindra Exports Ltd., and Anchor Leasing Pvt. Ltd. during the same year. These advances were made by the assessee in its ordinary course of business of financing. The assessee had received interest income on advances given by it and had interest paid on borrowings made by it.
It is not in dispute that, the borrowed funds from HDFC Bank had been utilized by the assessee for advancing monies to Jogindra Exports Ltd., in the ordinary course of its business of financing. Once the borrowed funds were indeed utilized by the assessee company for the purpose of its business, the interest paid on such borrowings becomes an allowable deduction under Section 36(i)(iii) of the IT Act. Merely because the shareholder of the assessee company is also a shareholder of holding company of Jogindra Exports Ltd., the same would not make any difference for the recovery of the dues by the assessee company. This is one of the main allegation leveled by the Revenue on the assessee for non-recovery of dues from Jogindra Exports Ltd., and for disallowance of interest paid on loans in the hands of the assessee company on a proportionate basis.
The facts stated by the assessee company with regard to Borrower Company becoming sick were not disputed by the Revenue. Once it is held that, borrowings are used for the purpose of business, interest paid on such borrowing becomes an allowable deduction under Section 36(1)(iii) of the IT Act.
The Apex Court in the case of Veecumsees vs. CIT had an occasion to address the similar issue. In view of the judicial precedent, it is held that the learned CIT(A) was not justified in confirming the disallowance of interest in the sum of Rs. 3,07,46,100. The learned AO is directed to allow the same as deduction under Section 36(1)(iii) of the IT Act. Appeal allowed.
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