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[2007] 294 ITR 540 (BOM.) HIGH COURT OF BOMBAY Commissioner of Income-tax v. Samarth Sahakari Sakhar Karkhana Ltd. F.I. REBELLO AND J.P. DEVADHAR, JJ. IT APPEAL NO. 273 OF 2007 SEPTEMBER 17, 2007 Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital â–  Interest paid by assessee-sugar-factory on borrowing could not be disallowed on ground that it had advanced some money to harvesting and transport contractors who transported sugarcane to its factory, as amount advanced had ultimately been adjusted against amount payable to such contractors under transport agreement [Assessment year 1995-96] The assessee was running a sugar factory. It had borrowed certain funds on which it claimed interest. The Assessing Officer made disallowance of the notional interest on the ground that the respondent-society had diverted the interest-bearings funds to harvesting and transport contractors at a lower rate of interest than the rate of interest paid by it on the borrowed funds. Held that as per the tripartite agreement, H and T contractors transported the harvested sugarcane to the factory at the rate of commission mutually agreed, between the parties. During the year, as the H and T contractors, due to some financial difficulty, sought loan, the assessee advanced some amount to them at a nominal rate of interest. The amount so advanced was ultimately adjusted from the amount payable to H and T contractors under the tripartite agreement. The fact that the assessee had given such advances to the H and T contractors at a lower rate of interest could not be a ground to hold that the borrowed funds had been diverted for non-business purposes. The assessee had not advanced any amount in excess of the amount payable to the H and T contractors under the tripartite agreement. The amount advanced to the H and T contractors was in fact adjusted from the total amount payable by the assessee to H and T contractors. The amounts, that too on interest, were advanced to ensure that the H and T contractors supplied harvested sugarcane promptly and efficiently. Once it was held that advancing some amounts to the H and T contractors was in the business interest of the…

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