1991 (10) TMI 40 - HC - Income Tax

Interest deduction under section 36(1)(iii) denied where assessee fails to prove advances came from own funds (1)(iii)

HC held that for deduction of interest under section 36(1)(iii), the assessee bears the burden to prove that investments or advances to its subsidiary ... Scope of section 36(1)(iii) - entitlement to the deduction of interest, while computing its income from business - Burden Of Proof - HELD THAT:- To earn the exemption, the assessee has to establish that his case clearly and squarely falls within the ambit of the exempting provisions of the Act. The principles equally apply in cases of deductions claimed. Therefore, the assessee was required to show that the amounts invested in or advanced to the subsidiary company came out of the assessee's own funds. The Tribunal, with reference to the factual aspects, came to hold that the money utilised was from the borrowed funds. This essentially is an inference from factual aspects. Reliance was placed on a decision of the Mysore High Court in CIT v. United Breweries [1972 (1) TMI 6 - MYSORE HIGH COURT], by the assessing authority and the appellate authorities. In that case, the court was primarily concerned with the question whether the subsidiary company was an agent of the parent company and whether there was in addition to capitalist control, functional control by the parent company over its subsidiary company. It was held that the parent company exercised functional control over the subsidiary and the existence of such subsidiary company as a separate legal entity did not prevent the business of the subsidiary being treated as that of the parent company. Ultimately, the conclusion was that if the parent company had both functional and capitalist control over the subsidiary company, the business of the subsidiary was to be treated as that of the parent company. In the said case, plea was raised stating that the subsidiary company was a part and parcel of the parent company and, therefore, the principles of agency applied and the interest as claimed was entitled to deduction under section 36(1)(iii). In the instant case, the subsidiary company had agreed to pay interest and, therefore, the functional and capitalist control aspect is not very relevant. Tribunal was justified in holding that the assessee was not entitled to deduction of interest in respect of investments in, and advances made to, the subsidiary company. The reference is, accordingly, answered in favour of the Revenue and against the assessee. Issues Involved: The issue involves the interpretation of section 36(1)(iii) of the Income-tax Act, 1961 regarding the deduction of interest while computing income from business.Judgment Summary:Factual Background: The assessee, a limited company engaged in the manufacture and sale of ferro-silicon, invested in equity shares and advanced loans to a subsidiary company. The Assessing Officer disallowed a portion of the interest claimed by the assessee, stating it was not wholly and exclusively laid out for the business. The Commissioner of Income-tax (Appeals) reversed this decision, but the Tribunal restored the disallowance, leading to the reference question.Legal Interpretation: The Court examined the concept of 'borrowed money' and the burden of proof on the assessee to establish the source of investments or advances. Section 36(1)(iii) allows deduction of interest paid on capital borrowed for business purposes, with the onus on the assessee to prove entitlement to the deduction.Decision Rationale: The Tribunal's inference that the investments and advances were made from borrowed funds was upheld, as the assessee failed to demonstrate that the amounts came from its own funds. The Court emphasized the need for the assessee to establish the financial position at the relevant date, rather than relying solely on subsequent profits to justify the investments.Conclusion: The Court ruled in favor of the Revenue, denying the deduction of interest on investments and advances to the subsidiary company. The judgment was unanimous, with no costs awarded.This judgment clarifies the requirements for claiming deductions under section 36(1)(iii) of the Income-tax Act, emphasizing the importance of proving the source of funds for investments and advances in business activities.