Unless there is a findings that assessee’s investments is not business activity and the funds are not utilized for the purpose of business, disallowance u/s. 36(1)(iii) does not arise

Unless there is a finding that assessee’s investment is not business activity and the funds are not utilized for the purpose of business, dis allowance under section 36(1)(iii) does not arise. There is no dis allowance under section 14A in this year as the dividend income was taxable. Therefore, the interest dis allowance has to be considered under section 36(1)(iii). If there is income or loss under the head “capital gains”, the interest dis allowance under section 36(1)(iii) pertaining to the investment activity is also to be considered as deduction, while working out the capital gain. Accordingly, the Assessing Officer is directed to examine the nexus with borrowed funds on which interests was claimed to the utilization of funds either in investment activity or in business activity and disallow amount accordingly under section 36(1)(iii) and consider whether it is allowable while working out capital gain etc. In the case of advances to Mr. Rishikumar Chakrapani and also to MPCC, consistent with the stand taken in the earlier years, the interest dis allowance on the above amount has to be disallowed as there are already findings that the amounts are advanced for non business purposes. To that extent, the dis allowance of interest stands confirmed. With these directions the issue in this ground is restored to the file of the Assessing Officer for fresh consideration after examining the facts and to decide according to law.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 933/Mum/2006 & ITA No. 1912/Mum/2008

(Assessment Years: 1999- 2000 & 2004- 05)

Churu Trading Co. (P) Ltd Vs Income Tax Officer

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