1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.2130 OF 2009 The Commissioner of Income Tax ..Appellant. V/s. M/s. Alphacon Containers Pvt. Ltd. ..Respondent. Ms. Suchitra Kamble for appellant. Dr. K. Shivram with Paras S. Savla for respondent. CORAM : DR. D.Y.CHANDRACHUD AND J.P.DEVADHAR, JJ. DATED : 11TH JANUARY, 2010 P.C. :- 1. The issue involved in this appeal under section 260A of the Income Tax Act, 1961 pertains to assessment year 1999-2000. The revenue has formulated the following questions of law in support of the appeal:- a) Whether on the facts and circumstances of the case and in law, the ITAT is justified in deleting the addition of Rs.14,38,841/- on account of disallowance of interest u/s.36(1)(iii) of the Income Tax Act, 1961 holding that even loan granted in the course of business for no interest or reduced rate of interest cannot be a basis for disallowance of interest payable on borrowings when the assessee failed to collect payment from its sister concern, but paid interest on borrowed funds constituting diversion of funds ? b) Whether on the facts and circumstances of the case and in law, the ITAT is justified in deleting the said addition of Rs.14,38,841/- on account of disallowance of interest u/s.36(1) (iii) of the Income Tax Act, 1961 ignoring the decision of Madras High Court in the case of K. Somsundaram Bros. Vs. Commissioner of Income Tax (238 ITR 939 Madras) wherein it was held that section 36(1)(iii) cannot be construed as enabling the assessee to burden the business with interest when the amount borrowed is initially invested in the business but subsequently taken out of the business, implying thereby that capital borrowed should not only be invested in the business but should continue to remain in the business and the sale proceeds to the extent 2 they are not crystallized into profits are diverted elsewhere, the interest would not be allowable u/s.36(1) (iii) ? 2. Basically, the issue involved in the appeal relates to the disallowance of interest under section 36(1) (iii) of the Income Tax Act, 1961 by the assessing officer, which is deleted in appeal by the Tribunal. 3. During the course of the assessment year, the assessee had supplied goods to a company by the name Clear Plastic Pvt. Ltd., described as a sister concern. The sale consideration was not realised during the course of assessment year 1999-2000. During the course of the submission, counsel appearing on behalf of the assessee has informed the Court that the price was realised in the subsequent year. The Tribunal held that an unpaid price for the sale of goods does not involve the grant of a loan and hence it cannot be asserted that any of the borrowings of the assessee have been diverted for a loan to a sister concern, in the circumstances. The Tribunal relied upon the judgment of the Division Bench of this Court in Commissioner of Income Tax, Bombay City II V/s. Bombay Samachar Ltd. [(1969) 74 ITR 723] and held that the fact that the assessee had sold goods on credit or has not realised money from the sale consideration did not mean that the borrowings of the assessee have been diverted for non business purposes. Consequently, the tax payable by the assessee on the borrowed funds was allowable under section 36(1)(iii ) and no part thereof should be disallowed. 4. In Bombay Samachar (supra), the Division Bench of this Court while construing the earlier provisions of section 10(2)(iii) of the Income Tax Act, 1922 held that the only conditions required to be satisfied in order to 3 enable the assessee to claim a deduction in respect of interest under section 10(2)(iii) are that (1) the money must have been borrowed by the assessee; (2) The money must have been borrowed for the purpose of business; and (3) the assessee must have paid interest on the amount and claimed it as deduction. These conditions were fulfilled in the present case. Counsel for the revenue relied upon the judgment of the Madras High Court in K. Somasundaram and Brothers V/s. Commissioner of Income Tax [(1999) 238 ITR 939]. The judgment of the Madras High Court holds that where the amount borrowed is not invested in business at all, but diverted for other purposes, the interest paid on such borrowed funds is not allowable under section 36(1)(iii). In other words, the assessee is not entitled to the benefit of the amount of interest paid on the borrowed funds which are diverted for purposes other than business. The principle laid down by the Madras High Court would not be applicable to the facts of this case since there is no finding that there was a diversion of borrowed funds. The mere fact that the consideration payable on account of a contract for sale of goods entered into by the assessee has not been received during the assessment year, does not necessarily lead to the conclusion that there has been a diversion of borrowed funds. The Tribunal is justified in holding, as a matter of fact, that there was no diversion of borrowed funds in this case. Consequently, the disallowance of interest on borrowed funds by the assessing officer was not proper. The decision of the Tribunal in correcting in the error cannot be faulted. The appeal, therefore, does not raise any substantial question of law and is accordingly dismissed. (J.P.DEVADHAR, J.) (DR. D.Y.CHANDRACHUD, J.)