Law:

Section:

Section 36(1)(iii) of the income-tax act, 1961-Interest on borrowed capital-Assessee deposited consideration received for proposed sale of its shares in its overdraft account in bank-Later, when transaction fell through, it refunded the consideration with interest-Whether interest so paid is deductible under section 36(1)(iii)-Held, no Facts The assessee-company sold its shareholding in another company and deposited the consideration received in a bank where it had an overdraft account. Before the shares could be transferred in the names of the purchasers, the assessee and the transferees agreed not to put through the transfers and cancelled the applications for transfer. Later, the assessee refunded the sums paid to it by the transferees with interest and claimed the interest paid as a deduction in computing its business income. The ITO negatived the claim on the ground that the amounts were not borrowed by the assessee for its business and the circumstance that the amounts received were deposited by it in the overdraft account would not make any difference. The AAC sustained the ITO's order, but the Tribunal held that interest for the period from date of cancellation of the transfer to the date of refund was allowable. On reference: Held Under section 36(1)(iii), the following conditions have to be satisfied by the assessee before it can claim a deduction in respect of payment of interest on borrowed capital: (1) there should have been a borrowing of money (capital) by the assessee; (2) such borrowing should have been for the purpose of the business of the assessee; and (3) the assessee must have paid interest on the said borrowing and claimed it as a deduction. In the instant case, there was no borrowing by the assessee as the positive act of lending by one and the acceptance thereof by the other coupled with an element of refund or repayment inherent in a transaction, was totally absent. At best a mere liability to refund the consideration paid by the purchasers was fastened on the assessee when the transaction did not go through, but that was not referable to any act of borrowing by the assessee. The receipt of the amount was not for purposes of business…

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