2014 (2) TMI 369 - AT - Income Tax

Disallowance of interest on borrowed capital - Held that - Relying upon the decision in D & H Secheron Electrodes Pvt. Ltd v. CIT 1982 (7) TMI 59 - MADHYA PRADESH High Court - Under s. 36(1)(iii), to sustain a claim for deduction of the amount of interest, all that is necessary is that the capital must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of the business or profession of the assessee and, thirdly, that the assessee should have paid that amount by way of interest - The assessee has fulfilled all the three conditions laid down u/s 36(1)(iii) to avail allowance of interest on borrowed capital - The AO was not justified in disallowing the interest debited to P&L A/c by 15% on adhoc basis - Decided against Revenue.

Summary

Issues:
- Disallowance of interest under section 36(1)(iii) of the Income Tax Act.

Analysis:
1. The appeal filed by the Revenue challenged the order of the CIT (A) regarding the disallowance of interest under section 36(1)(iii) of the Act.
2. The assessee, engaged in various business activities, had advanced amounts for the purchase of capital assets. The AO disallowed interest on these advances, amounting to Rs.23,72,716.
3. The CIT (A) deleted the disallowance, stating that the borrowed funds were utilized for the business purpose, fulfilling the conditions of section 36(1)(iii) of the Act.
4. The Revenue contended that interest on capital borrowed for acquiring capital assets should not be allowed as a deduction until the assets are put to use. They argued that the advances were made out of borrowed funds and assets were not utilized during the relevant year.
5. The AR argued that most advances were made in earlier years for business purposes, and interest should not be disallowed. Case laws were cited to support the argument.
6. The Tribunal found that all conditions of section 36(1)(iii) were met, and the AO lacked documentary evidence to justify the disallowance. Judicial precedents were analyzed to support the decision.
7. Relying on legal principles and considering the facts, the Tribunal upheld the CIT (A)'s decision to delete the addition made by the AO.
8. Consequently, the Revenue's appeal was dismissed, affirming the deletion of the disallowance of interest under section 36(1)(iii) of the Income Tax Act.