Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1977-78 - Assessee-company claimed various deductions while filing its return - ITO disallowed assessee's claim of expenditure on payment of interest on capital borrowed on ground that assessee had made interest-free advances to its subsidiary company - Commissioner (Appeals) deleted amount of disallowance - Whether Tribunal was justified in holding that assessee was entitled to deletion of addition of amount out of its interest claim - Held, no FACTS The assessee, a public limited company, filed a return of its income declaring the total taxable income while claiming various deductions under Chapter VI-A. The ITO disallowed the assessee's claim of expenditure on account of payment of interest on loans raised on the ground that the assessee had made interest-free advances to its subsidiary company. The ITO was of the view that it looked illogical that, on one hand, the assessee should have raised heavy interest-bearing loans and, on the other hand, should give interest-free loans to various societies/subsidiary companies. The IAC out of large number of disallowances proposed in draft assessment order, deleted some disallowances and confirmed the others. The Commissioner (Appeals), on appeal, deleted the entire amount of disputed disallowance. The Tribunal, while upholding the findings recorded by the Commissioner (Appeals), held that the assessee was entitled to the deletion of addition of the amount out of its interest claim. On reference : HELD The question as to whether advance to the subsidiary company was given out of the sale proceeds or out of the funds from the depositors from the banks might be essentially a question of fact, but such question of fact must be determined on the basis of the materials, which might be placed by the parties. Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon an assessee, as the facts are within its special knowledge. However, a presumption was raised in the instant case as to why an assessee who for the purpose of running its business was required to borrow money…

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