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Interest on borrowed capital [section 36(1)(iii)]

Ishan Bhateja (proprieotor) (29 Points)

24 January 2015

If A Pvt. Ltd. having borrowed capital ( for Business purposes) of Rs. 26 CR (interest their on Rs. 2.26 CR ), give loan (Rs. 11 CR) to its sister concern B Pvt. ltd. , will the interest on proportionate loan given to B Pvt. Ltd. be disallowed u/s 36(1)(iii) of income tax act, 1961 in the hands of A Pvt. Ltd. ????

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2 Replies

Z ( ) (2960 Points)
Replied 24 January 2015

It should not be disallowed if it was provided on account of commercial expediency

Refer S.A Builders Ltd. V CIT [2007] SC

In that case the loan which was given to the sister concern was carrying nil rate and yet there was no disallowance

Member (Management) (325 Points)
Replied 25 January 2015

SA Builders case is not to be taken as if any loans given to sister concerns will be allowed without any interest disallowance. Courts are now taking a more specific view in this regard. If it is a subsidiary company, then SA Builders might help, but sister concerns are different. There are some instances in which such disallowance has been upheld inspite of SA Builders case.