Business expenditure : Interest on borrowed capital: Section 36(1)(iii) of Income-tax Act, 1961: A.Y. 1997-1998 : Interest on loans borrowed to settle liability of sister concern to retain business premises of assessee: Interest has to be allowed.

51 Business expenditure : Interest on borrowed capital: Section 36(1)(iii) of Income-tax Act, 1961: A.Y. 1997-1998 : Interest on loans borrowed to settle liability of sister concern to retain business premises of assessee: Interest has to be allowed.

[CIT v. Neelakanth Synthetics and Chemicals P. Ltd., 330 ITR 463 (Bom.)]

The assessee-company had taken a business premises on lease from its sister concern for a period of 12 years on a lease rent of Rs.20,000 per month. The assessee-company had sub-leased the said business premises to a bank for Rs.2,26,800 per month, inclusive of water charges and taxes. The said business premises was offered as collateral security for raising finance from the bank by a sister concern. Due to heavy losses incurred, the sister concern could not repay that loan and accordingly the premises was liable to be disposed off by the bank for realisation of the loan amount. In such circumstances a settlement was reached between the assessee-company and the bank whereby a loan was advanced by the bank in the name of the assessee-company and the same was used to settle the liability of the sister concern. The assessee did not charge any interest from its sister concern. For the A.Y. 1997-1998, the Assessing Officer disallowed the amount of interest on the said loan on the ground that the said loan was not utilised for the purposes of the business of the assessee-company. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“(i) Both the authorities below concurrently proceeded on the footing that any expenditure incurred for protecting the business asset held by an assessee for its business or any expenditure incurred for the protection and maintenance of the business premises would be an allowable expenditure. It was only to retain the business premises that the assessee had to borrow the funds from the bank and as such, interest payable on the borrowing for retaining the premises would be an allowable deduction u/s.36(1)(iii) of the Income-tax Act, 1961, because the loan was used for the purpose of retaining the business premises which was necessary to carry on the business activities of the assessee.

(ii) The Assessing Officer accepted the income received by the assessee from the leased premises as rental income and assessed it as income from other sources. In such circumstances, the finding was that in order to safeguard the interest of the lease premises and also to bail out its sister concern, the loan was obtained from the bank. The findings were reasonable and could not be said to be perverse.”