Posts tagged S. 36(1)(iii)

No disallowance of interest, if interest-free unsecured loans are sufficient to meet interest-free advances – Guj HC

CIT v KAJAL EXPORTS [Tax Appeal No. 756 of 2013 dated 23.01.2014] (Gujarat High Court)

Background:

Assessee is engaged in business of export activities. During the course of assessment proceedings, the AO observed that the assessee had made borrowings throughout the year under the banner of business necessity and on review of the purchases and the sales patterns of the assessee, held that the funds borrowed were utilised for purposes other than business. The AO further noted that the assessee had advanced money to close relatives/ sister concerns without charging the interest. Accordingly, the AO disallowed the interest expenditure.

CIT(Appeals) concluded that the borrowed funds were not used for the business purposes in the AY 2003-04 and the AO was justified in disallowing the expenditure on such borrowed funds to the extent it is claimed in the P&L account. The Tribunal deleted the entire amount except Rs.21,900/-, i.e. 15% of Rs.1.46 lakhs.  (more…)

Where interest-free advances are made out of owned funds, no disallowance of interest can be made – Mum ITAT

M/s GOLDEN TOBACCO LTD v Addln CIT ITA No.3198/Mum/2011; ITA No.5213/Mum/2010 dtd 26.06.2013 – Mum ITAT

Background: 

Assessee has given interest-free advances to various sister concerns or other concerns totalling to Rs.2,68,61,882. Assessee during the course of assessment proceedings these advances are for business expediency or given out of its own funds. 

The AO did not accept the explanation of the assessee and observed that no explanation has been given in respect of Luster Print Media Limited and Dalmia Fresenius Limited. The AO considered these interest free loans as given for the purpose other than business. In respect of other parties also the A.O. noticed that the assessee has not given satisfactory reply in respect of interest free advances / loans. Therefore, he disallowed at the rate of 20% on the interest-free loans. (more…)

Interest can’t be disallowed if investment is made from mixed funds (presuming sufficient own funds) – Bom HC

CIT v M/s Mahanagar Gas Limited [Income Tax Appeal No. 1978 of 2011] Dated : June 10, 2013 – Bombay High Court

Background:

Assessee filed its return of income for assessment year 2004-05 declaring a total income of Rs.100.76 crores. The Assessing officer noticed that the assessee had borrowed a sum of Rs.30 crores during the year and had paid total interest of Rs.613.26 lacs on the same. During the year, the assessee had invested an amount of Rs.4147 lacs in mutual funds. The Assessing Officer held that the borrowed funds were utilised for the purpose of investment in mutual funds and disallowed expenditure on account of interest under Section 36(1) (iii) on the ground that the above interest was not attributable to business carried on by the assessee. (more…)

Interest on borrowings for investment in group company cannot allowed u/s 36(1)(iii) – Mum ITAT

Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT)

Background:

The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business.

AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.

(more…)

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