Section 36(1)(iii) proviso — the law in short
What the courts have decided on section 36(1)(iii) proviso, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Osho Forge Ltd v DCIT
ITATCuts both waysNo later treatment found
The Assessing Officer has disallowed interest on plant under erection at a flat 12 per cent. I say I funded it out of cash accruals. Who has to prove what?
The assessee has to prove it. The Tribunal held that where the assessee says the asset was funded out of internal accruals beyond the identified borrowing, but has not supported that through its financials or documentation before any authority, the contention fails and the proviso to section 36(1)(iii) applies. It accepted, however, that where borrowed funds enter a common pool the disallowance must be computed at the average rate of interest on the assessee's borrowings, not at a rate picked by the Assessing Officer, and remanded on that footing.
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Ceebros Hotels P Ltd v DCIT
ITATHelps taxpayer
I am a developer. I borrowed to buy land for the next project and the Assessing Officer has capitalised the interest because the project has not started. Does the proviso to section 36(1)(iii) apply to land held as stock?
On this reasoning it does not. The Tribunal held that the expression "put to use" in the proviso applies to a capital asset, an income earning apparatus that facilitates the business activity, in contradistinction to inventory; the purchase and holding of inventory is itself a business activity, so interest on a borrowing used to buy land held as stock in trade cannot be disallowed under the proviso.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
