Law:

Section:

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 1952-53 - From 1943 onwards assessee financed firms and charged and collected interest up to 31-3-1950 - During relevant year no interest was charged on ground that firms was financially embarrassed - Assessee borrowed funds and paid interest which was disallowed by ITO as also by Tribunal - Whether to decide whether advances made by assessee were in course of business, what was relevant was circumstances under which advances were made and not circumstance under which interest was not charged even though borrowed capital had been utilised to advance loans to firms - Held, yes - Whether since assessee was not shown to have borrowed funds for express purpose of advancing to firms and they were made in normal course of its business, requirements of section 10(2)(iii) were satisfied and assessee was entitled to deduct whole amount of interest paid - Held, yes FACTS The assessee-company had borrowed capital for its business, and that in the year of account ending with 31-3-1952, it paid certain amount as interest on those loans. Neither the genuineness of the loans nor that of the payment of interest thereon was ever in issue. It was equally common ground that from 1943 onwards the assessee- financed firm, whose line of business was that of share-brokers. The directors of the two firms were the same. Up to 31-3-1950, the assessee-company charged and collected interest on the advances to firms, and the interest collections were included in computing the business income of the assessee. On the ground that firms was financially embarrassed, no interest was charged on the outstanding advances during the account years 1950-51 and 1951-52. If during 1951-52 firms had been charged interest on the outstanding advances, as had been done in the past-it was estimated by the ITO, it would have been exceeded what the assessee paid to its creditors. The ITO therefore disallowed whole of the payment of interest under section 10(2)(iii), the disallowance was upheld on appeal by the Tribunal. On reference : HELD What…

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