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TMI Blog2003 (9) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... 's sister concern. Appearing in support of the appeal, Mr. J.P. Khaitan, learned counsel, submitted that the assessee was a manufacturer of drugs, medicines, chemicals and other pharmaceutical products and was marketing the same prior to the month of February, 1986, throughout India by its own efforts and through its own organisation. However, finding it difficult to look after both the manufacture and marketing of the aforesaid goods, the assessee entered into an agreement on February 20, 1986, with its sister concern, M/s. Caldern (Marketing) Pvt. Ltd., whereunder the assessee awarded the responsibilities for assessing the sale of its products and marketing activities all over India to its sister concern on the terms and conditions set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such borrowing it had to pay interest which was claimed as deductible under section 36(l)(iii) of the Income-tax Act, 1961. Mr. Khatian pointed out that the said provision provided for deduction of the amount of interest paid in respect of capital borrowed for the purpose of the business or profession. The Assessing Officer disallowed the claim on the ground that the assessee had wilfully and deliberately chosen not to collect its outstanding dues from the sister concern in order to accommodate the sister concern and had, on the other hand, borrowed capital from the market and paid interest thereon for which deduction had been claimed. The Assessing Officer was of the view that this amounted to diversion of funds by the assessee to its sis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was nobody's case that the capital borrowed from the market had not been used by the assessee for its business or that it had been used to benefit the sister concern in any way. Mr. Khaitan urged that questions identical to those raised in this appeal had fallen for the consideration of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723. On almost identical facts the Bombay High Court held that the conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital are: firstly, that money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business, and thirdly, the assessee must have paid in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charging interest upon the failure of the sister concern to pay the dues had forfeited its right to claim any deduction under section 36(1)(iii) of the aforesaid Act. Mr. Chowdhury urged that the assessee had benefited its sister concern by making an accommodation beyond the stipulated period and by not changing interest on the outstandings, had, in fact, reduced its capital for the purpose of investment of its own business. Mr. Chowdhury urged that this was not a case of the assessee applying the borrowed capital for its business out for the purposes of accommodating its sister concern as had been held by the Tribunal and the other authorities. Mr. Chowdhury submitted that no interference was called for with the order of the Appellate Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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