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2016 (11) TMI 964 - KERALA HIGH COURT

2016 (11) TMI 964 - KERALA HIGH COURT - [2016] 386 ITR 338 - Deduction under section 36(1)(iii) - Interest expenses relatable to interest-free advances - ITAT allowed the claim - Held that:- In the judgment in CIT v. V. I. Baby and Co. [2001 (10) TMI 58 - KERALA High Court] this court considered this provision and held that in a case where interest-free advance was given by the assessee and deduction is claimed, the question to be considered is what is the benefit that is derived by the assessee .....

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(1)(iii) is made, the authorities should enquire as to whether the interest-free loan was given as a measure of commercial expediency and on facts if it is so found, deduction is liable to be allowed. The court also explained that the expression "commercial expediency" is an expression of wide import and includes such expenditure that a prudent businessman incurs for the purpose of business and that such expenditure may not have been incurred under any legal obligation. - Reading of the orde .....

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e cases. Answering the questions of law in favour of the Revenue - I. T. A. Nos. 1341 and 1344 of 2009 - Dated:- 6-6-2016 - Antony Dominic And Dama Seshadri Naidu, JJ. For the Appellant : P. K. R. Menon, Senior Counsel, Government of India and Jose Joseph, Standing Counsel for Income-tax For the Respondent : Anil D. Nair and Smt. Nivedita A. Kamath, Advocates JUDGMENT Antony Dominic, J. 1. These appeals are filed by the Revenue challenging the orders passed by the Income-tax Appellate Tribunal, .....

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eals before the Tribunal and by the impugned annexure C orders, the Tribunal dismissed the appeals. It is in this context, these appeals are filed and the main question of law raised is whether the Tribunal was right in allowing the deduction under section 36(1)(iii) of the Income-tax Act. 2. We heard the senior counsel for the Revenue and the learned counsel appearing for the assessee. 3. Learned counsel appearing for the assessee questioned the maintainability of these appeals placing reliance .....

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e Supreme Court itself has clarified in the judgment in CIT v. Surya Herbal Ltd. [2011] 15 SCC 482 ; [2013] 350 ITR 300 (SC) that the High Court shall not dismiss the appeals merely with reference to the Circular and particularly cases involving issues having cascading effect. We also find that referring to Circular No. 3 of 2011, which preceded Circular No. 21 of 2015 (supra), the Karnataka High Court in the judgment in CIT v. Ranka and Ranka [2013] 352 ITR 121 (Karn) took the view that it is f .....

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Therefore, we reject the preliminary objection raised by the counsel for the assessee. 4. Section 36(1) of the Income-tax Act provides that, in computing the income referred to in section 28 the deductions provided for in the various clauses of the said section shall be allowed. One of the matters dealt with in clause (iii) is the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. This section came up for consideration before this court, variou .....

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, their relatives and the sister concerns from out of the interest free advances, the Assessing Officer is perfectly justified in disallowing interest in proportion to the advances made. Subsequently, the honourable Supreme Court also had occasion to consider the provisions of section 36(1)(iii) in the judgment in S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC). In that case, after a detailed examination of the provisions, the Supreme Court held that when a claim for deduction under s .....

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ing thus understood the scope of section 36(1)(iii), we shall now turn to the orders impugned before us. Annexure A is the assessment order. Reading of this order shows that in response to the notice that was issued, the assessee had produced the books of account and claimed the benefit of deduction. Without adverting to the facts that were urged by the assessee or examining whether the assessee had derived any benefit from the advances made or whether such advances were made on commercial exped .....

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