Few Points on SA Builder case law.

 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) 

Ø ACIT vs. Tulip Star Hotels Ltd (Supreme Court)

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.