Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1978-79 to 1980-81 - Whether where it was found that borrowed money on which assessee was liable to pay interest to its creditors had not been diverted towards interest-free loans by it to debtors, proportionate disallowance of interest paid by it on borrowed capital could be made - Held, no FACTS The assessee had obtained import licence for importing certain machines for running a tannery. She had raised loans from her close relations and the entire borrowing were more or less utilized for the purchase of aforesaid machines in the accounting period ending on 30-4-1975. She entered into an agreement with firm 'T' to construct a building to be used as the tannery of the assessee on a plot of land which was with the said firm on lease. The assessee also entered into another agreement with firm 'M'. In terms of the said agreements, the assessee started advancing funds to firm 'T' and firm 'M'. For the assessment years 1978-79 to 1980-81, the ITO held that the assessee had paid huge interest to the parties from whom the loans were raised but had given advances to other parties without interest. He, therefore, disallowed the interest payment under section 36(1)(iii). For the assessment year 1978-79 and 1979-80, the Tribunal reversed the disallowance of the proportionate amount of interest on ground that the advances were made for business purposes. In respect of the assessment year 1980-81, the Tribunal confirmed the disallowance by relying upon clause of the agreement, which provided charging of interest from firms if the project was not completed within a specified period. On reference : HELD The factual position was that the borrowed money on which the assessee was liable to pay the interest to its creditors had not been diverted towards interest-free loans by it to the aforesaid two firms on which interest had not been charged. It was not the case of the revenue that as the assessee was following the mercantile system of accounting and under the agreement, the interest even though not actually charged had accrued as income and, therefore, liable to pay tax. On the…

Deprecated: trim(): Passing null to parameter #1 ($string) of type string is deprecated in /home/digixyei/sldsystempk.com/view/master-layout/view_case.php on line 492