Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1997-98 - Assessee-company was engaged in project development activities - It claimed deduction of interest on borrowed capital - Assessing Officer noticed that assessee had utilized funds borrowed for giving interest-free advances and disallowed interest to extent of sum advanced interest-free - Assessee's case was that even though loans advanced by assessee to third parties as part of project finance arrangement were interest-free, that would not necessarily imply any nexus between moneys borrowed by it for business purposes and advances given by it - Whether since assessee was relying on certain agreements, those would have to be examined in order to determine whether onus on assessee, to show that funds borrowed were for business purposes and not utilized for making advances for non-business purposes, stood discharged - Held, yes - Whether, therefore, matter was to be remanded to Assessing Officer to examine matter afresh - Held, yes FACTS The assessee-company was engaged in the project development activities. The assessee claimed deduction of interest on borrowed capital under section 36(1)(iii). During the course of the assessment proceedings, the Assessing Officer noticed that the assessee had utilized the funds bor-rowed for giving interest free advances and disallowed the interest to the extent of sum advanced interest-free. On appeal, the Commissioner (Appeals) observed that the assessee-company was engaged in project development activities and in the course thereof had received and given the project finance from and to various companies under project finance-ing arrangements, without any fixed rate of interest and held that in those circumstances, it could not be stated that the assessee utilized the interest bearing funds for giving interest-free advances and, accordingly, deleted the disallowance. On revenue's appeal, the Tribunal upheld the order of the Commissioner (Appeals). In appeal, the assessee's case was that even though the loans advanced by the assessee to third parties as part of the project finance arrangement were interest-free, that would…

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