CIVIL APPEAL NOS. 5811 AND
5812 OF 2006
ØDECEMBER 14, 2006
Ø Section
36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital -
Assessment years 1990-91 and 1991-92 - Whether borrowed fund advanced to a
third party should be for commercial expediency, if it is sought to be allowed
under section 36(1)(iii) - Held, yes - Assessee borrowed
fund from bank and
advanced part of it to its sister concern (a subsidiary) as interest-free loan
- Assessing Officer disallowed interest under section 36(1)(iii) on borrowings
to extent those were advanced to subsidiary - Tribunal as well as High Court
upheld order of Assessing Officer - Whether since neither High Court nor
Tribunal and other authorities had examined whether amount advanced to sister
concern was by way of commercial expediency, matter was to be remanded to
Tribunal for a fresh decision in accordance with law - Held, yes
Section 37(1) of the Income-tax Act,
1961 - Business expenditure - Allowability of - Assessment years 1990-91 and
1991-92 - Whether expenditure may not have been incurred under any legal
obligation, yet it is allowable as a business expenditure if it was incurred on
grounds of commercial expediency - Held, yes
2007] 158 taxman 74 (Sc)
S.
36(1)(iii): S. A. Builders 288 ITR 1 (SC) to be reconsidered
The assessee borrowed funds and used it to
subscribe to the equity capital of its subsidiary company. The subsidiary company used the
said funds for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai.
The assessee paid interest on the borrowed money and claimed that a deduction
u/s 36(1)(iii). The AO rejected the claim though the CIT (A), Tribunal &
High Court (338 ITR 482) allowed it by relying on S.
A. Builders Ltd vs. CIT 288 ITR 1 (SC). It was held that as the assessee,
being a holding company had a deep interest in its subsidiary, and hence if the
holding company advanced borrowed money to a subsidiary and the same is used by
the subsidiary for some business purposes, the assessee would be entitled to
deduction of interest on its borrowed loans. On appeal by the department, HELD
by the Supreme Court:
Issue notice on the applications for
condonation of delay as also on the special leave petitions. In our view, S.A.
Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and Another, reported in 288 ITR 1, needs
reconsideration.
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