CIT Vs Shriram Investments (Supreme Court of India)
The Supreme Court of India dismissed the Revenue’s Special Leave Petition challenging the Madras High Court’s judgment, which upheld the orders of the Income Tax Appellate Tribunal (ITAT) regarding the assessment year 2015-16. The Revenue had contested the deletion of disallowances made under Section 36(1)(iii) of the Income Tax Act, particularly concerning interest-bearing loans advanced by the assessee, an investment company, to its associated concerns without charging interest. The Revenue also raised questions regarding the applicability of the matching principle of accounting for determining allowable deductions under Sections 36 and 37 of the Act.
Read High Court Order: Matching Principle Not applies to Cash Accounting – Section 36(1)(iii) Disallowance Deleted
The assessee had declared a loss of Rs.16,64,50,745/- for AY 2015-16. Subsequently, the case was reopened under Section 147, and the Assessing Officer made additions of Rs.23,26,10,491/- under Section 36(1)(iii) for unpaid interest and Rs.1,03,840/- under Section 14A. The Commissioner of Income Tax (Appeals) partly allowed the appeal, deleting the disallowance under Section 36(1)(iii) while confirming the Section 14A addition. On appeal, the ITAT upheld the deletion, finding the Revenue’s arguments untenable, which the Madras High Court later affirmed.
The High Court examined whether the disallowance under Section 36(1)(iii) could be sustained when the assessee followed the cash system of accounting, recording actual interest paid and received. It observed that applying the matching principle was inapplicable under the cash basis of accounting. The Court noted that the assessee’s disparity between interest receipts and payments arose from prior-year losses rather than selective charging of interest. It relied on precedents, including CIT vs. Shriram Investments (Firm) (2015) 54 taxmann.com 15, which held that interest paid on borrowed capital used for business or investment purposes is allowable under Section 36(1)(iii), irrespective of whether the capital was used for revenue or capital assets.
