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Section 36(1)(iii) of the Income-tax Act, 1961 [Corresponding to section 10(2)(iii) of the Indian Income-tax Act, 1922] - Interest on borrowed capital - Assessment year 1960-61 - Whether when once it is accepted that capital was borrowed for purpose of business, payment of interest on such borrowed capital could not be disallowed on ground that interest charged on lending was at a lower rate than interest paid on borrowing and that lending was in favour of persons who were connected with assessee - Held, yes FACTS The assessee company was carrying on the business on money lending. For the relevant assessment year the assessee claimed deduction under section 10(2)(iii) of 1922 Act in respect of the interest paid on its borrowed funds. The ITO found that the assessee had paid interest on its borrowings at an average rate of 6.01 per cent, it had charged interest only at the rate of 4.92 per cent, on its lendings. The ITO sought to disallow the difference of interest between 6.01 per cent and 4.92 per cent. The reason given by the ITO for disallowing this amount was that the interest charged on the lending was at a lower rate than that on the borrowing and that the lending was in favour of persons who were intimately connected with the assessee. On second appeal the Tribunal held that there was no justification for disallowing interest payment. On reference : HELD Once it was found that the capital was borrowed for the purpose of the business, the assessee was entitled to deduct the interest paid for the borrowed capital. It might also be mentioned that the ITO himself accepted that the capital was borrowed for the purpose of the business because he had permitted a deduction of 4.92 per cent though the borrowing was on 6.01 per cent. The scaling down of the interest was not permitted when once the ITO accepted that the capital was borrowed for the purpose of the business. The Tribunal therefore, justified in holding that there was no justification for disallowing interest payment. Note : The case has been decided in favour of the assessee. CASE REFERRED TO Birla Gwalior P. Ltd. v. CIT [1962] 44 ITR 847 (MP). JUDGMENT V. Ramaswami, J.-This is a reference under…

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