Legal Question in Tax Law in India

If the assessee has sufficient interest-free funds, such as capital, accumulated profits, reserves etc., advancing money to a sister concern without interest will not have any tax implication. In CIT vs Abhishek Industries Ltd (2006 286 ITR 1 P&H) it was held that where the borrowed capital is meant for business purposes and where the loan is advanced without interest to a sister concern, the interest on borrowing is eligible for disallowance.

Availability of share capital and accumulated profits are not sufficient enough to justify the advancing of money to an allied concern, with or without interest, if a borrowal is made subsequently.

Clause (iii) of Section 36(1) deals with such deduction. In this context, a controversial area is allowance of interest on monies borrowed before or after advancing interest-free funds to a sister concern.