By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants
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Section 36(1)(iii) – In a case where assessee has substantial profits which are deposited in cash credit account and the debit balance in cash credit account is not on account of purchase of assets, interest on funds utilised from such cash credit account for acquiring capital assets cannot be disallowed under proviso to section 36(1)(iii).
Facts :
The assessee made a payment of Rs. 98.98 lakh to SIDCUL from an overdraft account. There was a debit balance in the said account on the date of making the payment. The assessee thereby incurred interest liability. The industrial plot which was allotted to the assessee was not put to use for business purposes by the assessee during the previous year relevant to the assessment year under consideration.
The Assessing Officer (AO) disallowed a sum of Rs. 10,52,537 on account of interest liability by invoking the proviso to section 36(1)(iii).
Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the appeal by observing that the profit generated during the year and recoveries from the debtors, etc. are more than the investment so made in the assets.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held :
The Tribunal noted that a similar addition made by the AO in the assessee’s own case was deleted by CIT(A) for assessment year 2005-06, whose order, has been upheld by ITAT. It noted the conclusion recorded by the ITAT in the said order which was as under – “17. With the assistance of the learned representative, we have gone through the record carefully. The assessee has placed on record copy of CC account and demonstrated that the debit balance was not on account of purchase of assets. It has deposited a sum of Rs. 113.98 lakh in this account before making payment of Rs. 56 lakh. The assessee has a substantial profit which was deposited in this very account. Thus, it has substantial surplus fund which can enable it to acquire the capital assets. Learned CIT(A) has observed that the assessee has declared an income of Rs. 3.55 crore which suggest that it has excess interest free funds, than the investment made in the acquisition of the assets. Considering these aspects, we are of the view that proviso to section 36(1)(iii) is not applicable on the facts of the present case. Hence, this ground of appeal is rejected.”
Following the above mentioned order, the Tribunal dismissed this ground of appeal filed by the Revenue.
