Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed Capital - Assessment years 1996-97 and 1997-98 Before disallowing deduction of interest amount pertaining to interest-free loan advanced to sister concerns or its directors, it is incumbent on authorities to record a finding as to whether interest free loan was given by assessee to their sister concerns or their directors as a measure of commercial expediency [Case remanded] The assessee-company had advanced an amount of Rs. 17,45,000 to the family members of its directors. No interest was charged from any of them, though the assessee-company itself paid interest of Rs. 6,30,108 on certain borrowings. The Assessing Officer, by calculating the interest on the aforesaid amount at 14 per cent, disallowed interest to the extent of Rs. 2,44,317, while holding that the advances made to those persons were for non-business purposes. On appeal the Commissioner (Appeals) deleted the said addition holding that Assessing Officer could not establish any nexus between advances given to the directors and their family members and to the CC limits availed of by the assessee-company, as the advances had been out of non-interest bearing credits available to the company. Held that, it has been held in S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) that when the assessee borrowed the fund from the bank and lent some of it to its sister concern as an interest free loan, then the real test to allow the interest as deduction under section 36(1)(iii) is whether this was done as a measure of commercial expediency. It is not necessary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business. The Appellate Tribunal had not examined, considered and decided the matter in accordance with the aforesaid principle of law. In none of these cases, a finding had been recorded as to whether the interest free loan was given by the assessee to their sister concerns or their directors as a measure of commercial expediency or not. Before disallowing the question of deduction of interest amount pertaining to the interest free loan advanced to the sister…

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