By K. B. Bhujle Advocate
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J. K. Synthetics Ltd. vs. CIT; 369 ITR 310 (All):
The assessee was engaged in the manufacture and sale of synthetic yarn and cement. It had a subsidiary company. The subsidiary company incurred heavy losses and as a result, it became a defaulter in paying its debts. The assessee was also a guarantor to the loans taken by the subsidiary company for the purpose of protecting its own business interest. Since the subsidiary company could not adhere to the repayment of its liabilities, the assessee repaid instalments of the loans. It claimed deduction of the interest on the amounts advanced for such payments. The claim was rejected by the Assessing Officer and this was upheld by the Tribunal.
On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:
“i) Three conditions must be established by an assessee for getting the benefit u/s. 36(1)(iii) of the Income-tax Act, 1961. They are (i) interest should have been payable, (ii) there should be a borrowing, and (iii) capital must have been borrowed or taken for business purposes.
ii) In Madhav Prasad Jatia vs. CIT [1979] 118 ITR 200 (SC), the Supreme Court held that the expression “for the purpose of business” occurring u/s. 36(1)(iii) of the Act is wider in scope than the expression “for the purpose of earning income, profits or gains”. Where a holding company has a deep interest in its subsidiary company and advances money to the subsidiary company and the money is used by the subsidiary company for its business purposes, the assessee would be entitled to deduction of interest on its borrowed loans.
iii) The assessee had deep business interest in the existence of its subsidiary company and discharged its legal obligation by repaying the instalments of loan to the financial institutions. Such loans were given for the purpose of business. The assessee was entitled to deduction of interest.”
