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March 2024

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

By Ajay R. Singh, Advocate
Reading Time 3 mins

30 Principal Commissioner of Income Tax-7 vs. ESSEL Infra Projects Ltd. (Former PAN India Paryatan Ltd.)

Income Tax Appeal No. 927 of 2018 (Bom.) (HC)

Date of Order: 31st January, 2024

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

The Respondent-Assessee is engaged in the business of operating amusement parks, infrastructure development management and finance activities. Assessee had given a sum of ₹25 crores to PAN India Infrastructure Private Limited, its subsidiary. The Assessing Officer took the view that Assessee had diverted the interest bearing fund by giving interest-free advance and, therefore, the entire interest claim of ₹1,48,10,695 needs to be disallowed. There were also certain other disallowances made by AO.

The Commissioner of Income Tax (Appeals) held that the investment made by Assessee in its subsidiary was in the course of carrying on its business and the interest expenditure is not required to be disallowed. It was held that under Section 36(1)(iii) of the Act, interest paid in respect of capital borrowed for the purpose of business is a permissible deduction in the computation of profits and gains of business or profession and the investment made b

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