Law:

Section:

Section 36(1)(iii) of Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1962-63 to 1965-66 - Assessee-company carried on business of manufacture and sale of beer - It had several subsidiaries including 'R' Co. which had same business as that of assessee - Assessee gave and received certain funds to its subsidiaries on which assessee neither charged interest nor paid any interest - Assessee however paid interest on borrowing from outsiders - ITO took view that since interest was not charged by assessee on advances made to its subsidiaries but interest was paid on its borrowing, part of interest was not deductible as interest and, accordingly, disallowed part of interest claimed by assessee as deduction - Whether since subsidiaries companies in question were a separate legal entities, there was no material for Tribunal to come to conclusion that assessee carried on its business through agency of its subsidiaries and business carried on by subsidiaries was not their own but of assessee - Held, yes - Whether, therefore, part of interest paid by assessee on capital borrowed by it as attributable to advances given by it to its subsidiaries free of interest was not admissible as deduction under section 36(1)(iii) - Held, yes FACTS The assessee-company carried on the business of manufacture and sale of beer. It had several subsidiaries. The balance-sheets of the assessee for the relevant years showed funds due by the subsidiary companies to the assessee and also the funds due to the subsidiary companies by the assessee. The assessee neither charged interest to subsidiaries on the funds due to it nor paid any interest on the funds due by it. The assessee had borrowed funds from outsiders on which it had paid interest from year to year. The ITO took the view that since interest was not charged by the assessee on the advances made to its subsidiaries but interest was paid by the assessee on its borrowings, part of the interest paid on its borrowings was for non-business purposes and interest attributable for non-business purposes was not admissible as deduction. The AAC allowed the assessee's appeal in part. The Tribunal held that when the…

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