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October 2022

S. 36(1)(iii) – Where interest free funds had been lent by the Assessee to its wholly owned subsidiary for business, no disallowance of interest will be made u/s 36(1)(iii) of the Act.

By Jagdish Punjabi, Chartered Accountant
Devendra Jain, Advocate
Reading Time 3 mins
32 Moonrock Hospitality (P.) Ltd vs. Assistant Commissioner of Income-tax
[2022] 94 ITR(T) 185 (Delhi - Trib.)
ITA No.: 5895 (Delhi) of 2019
A.Y.: 2016-17
Date of order: 22nd September, 2021

S. 36(1)(iii) - Where interest free funds had been lent by the Assessee to its wholly owned subsidiary for business, no disallowance of interest will be made u/s 36(1)(iii) of the Act.

FACTS

The Assessee company had investments in wholly owned subsidiaries, and had also advanced loans to these companies out of borrowed funds. During the A.Y., the Asssessee company had advanced an interest free loan to one of its wholly owned subsidiaries. Based on the same, the Assessee was asked to explain as to why no disallowance of interest expenses should be made as per section 36(1)(iii) of the Act.

The Assessee furnished an explanation stating that the said funds were advanced for the purpose of business. Not satisfied with the same, the Assessing Officer contended that the said arrangement was a diversion of interest bearing funds towards interest free advances to related parties. A disallowance of interest at 9 per cent (being the rate of interest on loans taken by the Assessee) on such interest free deposits was made u/s 36(1)(iii) of the Act.

Aggrieved, the Assessee filed an appeal before the CIT(A), however, the appeal was dismissed. Aggrieved, the assessee filed furt
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