Law:

Section:

Section 36(1)(iii), read with section 37(1) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1997-98 - Whether assessee-company had two directors who were also trustees of two trusts - These two trusts had purchased some property independently and thereafter, given them on lease to assessee - By a further agreement these two premises were sub-leased to a bank for Rs. 2,26,800 per month inclusive of water charges and taxes - Prior to agreement entered into between assessee and bank both these premises had been offered as collateral security for raising finance from bank by a sister concern of assessee - Due to heavy losses incurred by sister concern, they could not repay loan and thus two premises were liable to be disposed of by bank for realization of loan amount - In those circumstances, a settlement was reached between assessee and bank whereby a loan was advanced by bank in name of assessee which was partly used to settle liability of sister concern and balance amount of loan was allowed to assessee to be withdrawn at interest rate of 22.25 per cent per annum - Assessee did not charge any interest from its sister concern - Assessing Officer held that amount received from bank had not been utilized for purpose of business of assessee and, accordingly, interest paid on this amount to bank was disallowed and added to income of assessee - Whether as assessee had to borrow funds for purpose of retaining business premises which was necessary for carrying on its business activities, interest payable on such borrowings would be an allowable deduction under section 36(1)(iii) - Held, yes FACTS The assessee-company had two directors. These two directors were also the trustees of two trusts. These two trusts had purchased some property independently and thereafter given them on lease to the assessee. However, no lease rent was paid by the assessee to the trusts nor was it provided for in the books of account. It was the case of the assessee that there was an oral understanding that no rent was to be paid. By a further agreement dated, these two premises were sub-leased to bank for Rs. 2,26,800 per month inclusive of water charges and taxes.…

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