2012 (8) TMI 1161 - HC - Income Tax

Summary

Issues involved:
The issue involves the deduction disallowed under section 36(1)(iii) of the Income Tax Act, 1961, and the applicability of the decision in the case of S.A. Builders v. CIT [2007] 288 ITR 1.

Summary:

Issue 1: Deduction disallowed under section 36(1)(iii):
The appellant-Revenue challenged the order of the Income Tax Appellate Tribunal directing the allowance of deduction of Rs. 7,97,83,057/- disallowed under section 36(1)(iii). The Assessing Officer disallowed the claim of interest on borrowed funds utilized for interest-free advances. The appellant relied on the decision in the case of S.A. Builders v. CIT [2007] 288 ITR 1 to argue for commercial expediency in incurring the expenditure. The CIT (Appeals) and ITAT concurred with the appellant's position, emphasizing the availability of sufficient funds with the assessee-firm and the nexus between the expenditure and the purpose of the business.

Issue 2: Applicability of Munjal Sales Corporation case:
The ITAT upheld the order of CIT (Appeals) based on the decision in Munjal Sales Corporation v. CIT [2008] 298 ITR 298, which requires the assessee to establish the allowability of interest paid on borrowings under section 36(1)(iii). The ITAT found that the profits of the assessee-firm were substantial enough to cover the loans given to a sister concern, indicating that the loans were from the assessee's own funds. The Tribunal, considering the precedents and identical facts from previous years, concluded that there was no need for interference and dismissed the appeal.

In conclusion, the judgment upheld the allowance of the deduction disallowed under section 36(1)(iii) based on the principles of commercial expediency and the sufficiency of funds available with the assessee-firm. The decision in Munjal Sales Corporation case further supported the position that the loans were from the assessee's own funds.