2013 (2) TMI 553 - AT - Income Tax

Interest expenses - whether the action of the assessee of providing 6% interest on the unspent amount of grant is allowable whether u/s.36(1)(iii) of IT Act or u/s.37(1) of IT Act. - held that - since the amount in question was not in the nature of borrowings or loans, therefore the provisions of section 36(1)(iii) do not apply on these facts. Regarding deduction u/s 37(1) - held that - On one hand the assessee has earned interest income on investment of the surplus fund and on the other hand made the provisions of interest, hence such a claim does fall under the provisions of section 37(1) of IT Act. We have been informed that the unspent surplus funds have been invested as per the guidelines and thereupon interest was earned by the assessee. On the other hand, the assessee has to pay interest that too as per the directions of the Government, hence the provisions made by the assessee is, therefore, meant for the purpose of the business, hence qualify for claim u/s.37(1) of the IT Act. - Decided in favor of assessee.

Summary

Issues:
- Allowability of expenditure amounting to Rs.1,87,61,273 u/s.36(1)(iii) and u/s.37(1) of IT Act.

Analysis:
1. The Revenue challenged the allowance of expenditure by the CIT(A) under sections 36(1)(iii) and 37(1) of the IT Act. The AO disallowed the provision for interest made by the assessee, considering it as interest on unspent grants received, not qualifying as borrowed capital for business purposes.

2. The assessee, a Government company, argued before the CIT(A) that the provision of interest was in compliance with Government regulations and was a contractual liability. The CIT(A) found the provision to be an allowable expenditure under section 37(1) as it was a contractual and ascertainable liability, even though section 36(1)(iii) did not apply due to the absence of borrowings.

3. The Revenue contended that the unutilized grant was not borrowed capital and hence not deductible under section 36(1)(iii) or section 37(1). The assessee justified the provision as a business expense incurred as per Government directives, eligible for deduction under section 37(1).

4. The ITAT reviewed the facts and legal arguments, acknowledging that the provision of interest was not a borrowing, thus section 36(1)(iii) did not apply. Upholding the CIT(A)'s decision, the ITAT confirmed the allowance of the expenditure under section 37(1) as it was incurred for business purposes and in compliance with Government instructions.

5. The ITAT dismissed the Revenue's appeal and the assessee's cross objection, upholding the CIT(A)'s decision to allow the expenditure under section 37(1) while emphasizing that the provision did not fall under section 36(1)(iii) due to the nature of the transaction not involving borrowings.