Section 36(1)(iii) of the Income Tax Act

Income-tax Act, 2025: ss.29, 30, 31, 32

Section 36(1)(iii) falls under section 36 of the Income-tax Act, 1961, which corresponds to section 29 (Deductions related to employee welfare), section 30 (Deduction on certain premium), section 31 (Deduction for bad debt and provision for bad and doubtful debt) and section 32 (Other deductions) of the Income-tax Act, 2025.

Read section 29 of the 2025 ActRead section 30 of the 2025 ActRead section 31 of the 2025 ActRead section 32 of the 2025 Act

Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.

The decision most relied on for Section 36(1)(iii) is CIT v. Reliance Utilities & Power Ltd. (313 ITR 340), cited in 2,118 of the 3,665 judgments on BharatTax that turn on this section.

Leading authorities on Section 36(1)(iii)

CIT v. Reliance Utilities & Power Ltd.
313 ITR 340 · 2009 · High Court
2,118
citing judgments

Where an assessee claims that investments were made out of own funds, interest disallowance under Section 14A read with Rule 8D may not apply if the assessee demonstrates the availability of sufficient interest-free funds to cover such investments.

S.A. Builders Ltd. v. CIT
288 ITR 1 · 2007 · Supreme Court
1,484
citing judgments

Interest paid on borrowed funds cannot be disallowed merely because the assessee made interest-free advances, provided those advances were made for business purposes and commercial expediency. The Revenue cannot dictate a businessman's commercial decisions, but the assessee bears the onus to prove the business expediency.

CIT v. HDFC Bank Ltd.
366 ITR 505 · 2014 · High Court
1,261
citing judgments

When an assessee possesses interest-free funds sufficient to cover investments yielding tax-free income, it is presumed that such investments were made from these interest-free funds, precluding disallowance of interest expenditure under Section 14A.

Maxopp Investment Ltd. v. CIT
347 ITR 272 · 2012 · High Court
516
citing judgments

Disallowance under Section 14A cannot exceed the exempt income earned. The Assessing Officer must record satisfaction regarding the assessee's accounts before making any disallowance.

South Indian Bank Ltd. v. CIT
438 ITR 1 · 2021 · Supreme Court
508
citing judgments

The mixed fund theory is affirmed, holding that no disallowance of interest expenditure under Section 14A can be made if the assessee possesses sufficient non-interest bearing funds, such as capital and reserves, to cover investments made in tax-free securities.

CIT v. Reliance Industries Ltd.
410 ITR 466 · 2019 · Supreme Court
501
citing judgments

When mixed funds are available, interest-free advances are presumed to be made from the assessee's own interest-free funds, preventing disallowance of interest expenditure under section 36(1)(iii). This principle also applies to section 14A disallowance, where interest expenditure is not disallowed if surplus funds are available and no direct nexus is established with borrowed funds for investments earning exempt income.

CIT v. Dalmia Cement (Bharat) Ltd.
254 ITR 377 · 2002 · High Court
417
citing judgments

When there is a nexus between an expenditure and the purpose of business, incurred on grounds of commercial expediency, the Revenue cannot question its reasonableness or assume the role of the businessman to compel profit maximization. This principle applies even if the business is not that of the assessee itself.

HDFC Bank Ltd. v. DCIT
383 ITR 529 · 2016 · High Court
408
citing judgments

Where an assessee has sufficient interest-free funds, investments yielding exempt income are presumed to be made out of such funds, precluding disallowance of related interest expenditure under section 14A.

CIT v. Rajendra Prasad Moody
115 ITR 519 · 1978 · Supreme Court
386
citing judgments

For deductions under Section 57(iii) relating to "Income from Other Sources," an expenditure is allowable if it is laid out wholly and exclusively for the purpose of making or earning such income, even if no income is actually earned in that previous year.

Hero Cycles Pvt. Ltd. v. CIT
379 ITR 347 · 2015 · Supreme Court
361
citing judgments

The Revenue cannot substitute its judgment for that of a businessman regarding the necessity or reasonableness of an expenditure. If an expense is incurred wholly and exclusively for business purposes, it is deductible, and the Revenue cannot question its commercial expediency.

Judgments on Section 36(1)(iii)

M/S. Rachna Enterprise, Surat vs. The Dy. Commissioner of Income Tax, Central Circle-1, Surat

In the result, the appeal of the assessee is allowed

ITA 1889/AHD/2016[2014-15]Status: DisposedITAT Surat30 Apr 2019AY 2014-15

Bench: Shri.Ram Lal Negi & Shri O.P.Meenaआ.अ.सं./I.T.A. No.1889/Ahd/2016 िनधा"रणवष"/Assessment Year : 2014-15 M/S. Rachna Enterprise, Vs. Dcit, Central Circle-1, Aaykar T.P No. 31, F.P. No. 31, Adajan Main Road, Bhavan, Majura Gate, Surat Surat-395009. [Pan: Aaofr 0215 L] अपीलाथ" Appellant ""यथ"/Respondent िनधा"रतीक"ओरसे /Assessee By Shri Rasesh Shah, Ca Shri Dilip Kumar, Sr. D.R. राज"वक"ओरसे /Revenue By सुनवाईक"तारीख/ Date Of Hearing : 26.03.2019 30.04.2019 उ"ोषणाक"तारीख/Pronouncement On : आदेश /O R D E R Per O. P. Meena Am: 1. This Appeal Filed By The Assessee Is Directed Against The Order Of The Ld. Commissioner Of Income Tax (Appeals)-4, Surat [In Short “The Cit(A)], Dated 28.06.2016 Pertaining To The Assessment Year 2014-15. 2. The Grounds Raised By The Assessee As Under: “1. On The Facts & Circumstances Of The Case As Well As Law On The Subject, The Ld. Cit(As) Has Erred In Enhancing The Assessment By Disallowing The Interest To The Extent Of Rs.46,36,800/- By Erroneously Holding That It Is Required To Be Capitalized To The Work In Progress. 2. It Is Therefore Prayed That Enhancement Made By Ld. Cit(Appeals) May Please Be Deleted.”

Section 133ASection 143(3)

DCIT Cir 6(2)(1), Mumbai vs. City Centre Mall Nashik P.Ltd, Mumbai

In the result, appeals filed by the revenue are hereby ordered to be dismissed

ITA 745/MUM/2018[2013-14]Status: DisposedITAT Mumbai24 Apr 2019AY 2013-14

Bench: Shri Rajesh Kumar, Am & Shri Amarjit Singh, Jm आयकर अपील सं/ I.T.A. Nos.745 & 746 /Mum/2018 (निर्धारण वर्ा / Assessment Years: 2013-14 & 2014-15) बिधम/ Acit Cir 6(2)(1) M/S. City Centre Mall Nashik Pvt. Ltd. 5Th R. No. 504, Floor, Vs. Room No.62, Plot No. 8-9, Aayakar Bhavan, M.K. Parekh Mahal, Lady Road, Mumbai-400020. Jamshedji Road, Sakharam Keer Marg, Mahim, Mumbai-400016. स्थायी लेखा सं./जीआइआर सं./Pan/Gir No. : Aaccc6422B (अपीलाथी /Appellant) (प्रत्यथी / Respondent) .. Revenue By: Shri Abi Rama Kartikiyen Assessee By: Shri Rajendra Daga/ Abdul Gani सुनवाई की तारीख / Date Of Hearing: 06.03.2019 घोषणा की तारीख /Date Of Pronouncement: 24/04/019 आदेश / O R D E R Per Amarjit Singh, Jm: The Above Mentioned Appeals Have Been Filed By The Revenue Against The Order Dated 23.11.2017 Passed By The Commissioner Of Income Tax (Appeals)-12, Mumbai [Hereinafter Referred To As The “Cit(A)”] Relevant To The A.Y.2013-14 & 2014-15. Ita. No.745/M/2018:- 2. The Revenue Has Filed The Present Appeal Against The Order Dated 23.11.2017 Passed By The Commissioner Of Income Tax (Appeals)-12

For Appellant: Shri Rajendra Daga/ Abdul GaniFor Respondent: Shri Abi Rama Kartikiyen
Section 2Section 24Section 36(1)(iii)

M/S Mfar Developers Pvt Ltd, Bangalore vs. The Deputy Commissioner of Income Tax Circle-4(1)(2), Bangalore

In the result, the assessee’s appeal for assessment year 2012-13 is partly allowed

ITA 731/BANG/2018[2014-15]Status: DisposedITAT Bangalore24 Apr 2019AY 2014-15

Bench: Shri B.R. Baskaran & Shri Pavan Kumar Gadale1. Ita Nos.1649/Bang/2017 (Assessment Year: 2012-13) 2. Ita No.730/Bang/2018 (Assessment Year: 2013-14) & 3. Ita No.731/Bang/2018 (Assessment Year; 2014-15) M/S.Mfar Developers Pvt. Ltd. No.3, Lavelle Road, Bengaluru-560 001. … Appellant Pan:Aafcm 6271 M Vs. 1-2. Assistant Commissioner Of Income-Tax, Circle 4(1)(2), Bengaluru. 3. Deputy Commissioner Of Income-Tax, Circle 4(1)(2), Bengaluru. … Respondent Appellant By : Shri K.K.Chythanya, Advocate. Respondent By : Dr. P.V.Pradeep Kumar, Addl.Cit(Dr) Date Of Hearing: 22/03/2019 Date Of Pronouncement: 24/04/2019 O R D E R Per Pavan Kumar Gadale, Jm: The Assessee Has Filed Appeals Against Different Orders Of The Cit(A) For Assessment Years 2012-13, 2013-14 & 2014- 15. Ita Nos.1649/Bang/2017 & 730 & 731/Bang/2018 Page 2 Of 16 2. As Far As Ground No.2 In Respect Of Disallowance Of Proportionate Interest U/S 24(B) Of The Income-Tax Act,1961 ['The Act' For Short], The Assessee Has Raised Similar Grounds Of Appeal For Assessment Years 2012-13, 2013-13 & 2014-15. Similarly, For The Assessment Year 2012-13, The Assessee Has Raised An Alternative Plea To Allow Interest U/S 36(1)(Iii) Which Is Also Ground Of Appeal In Assessment Years 2013-14 & 2014-15. For The Assessment Year 2012-13, The Assessee Raised Ground For Allowance Of Deduction Towards Processing Fees & Pre-Payment Charges U/S 24(B) Of The Act. For The Assessment Year 2013-14, The Assessee Has Raised A Ground For Disallowance Of Rs.25,77,78/- Under The Provisions Of Section 14A Of The Act.

For Appellant: Shri K.K.Chythanya, AdvocateFor Respondent: Dr. P.V.Pradeep Kumar, Addl.CIT(DR)
Section 14ASection 24Section 36Section 36(1)(iii)

M/S Mfar Developers Pvt Ltd, Bangalore vs. The Assistat Commissioner of Income Tax Circle-4(1)(2), Bangalore

In the result, the assessee’s appeal for assessment year 2012-13 is partly allowed

ITA 730/BANG/2018[2013-14]Status: DisposedITAT Bangalore24 Apr 2019AY 2013-14

Bench: Shri B.R. Baskaran & Shri Pavan Kumar Gadale1. Ita Nos.1649/Bang/2017 (Assessment Year: 2012-13) 2. Ita No.730/Bang/2018 (Assessment Year: 2013-14) & 3. Ita No.731/Bang/2018 (Assessment Year; 2014-15) M/S.Mfar Developers Pvt. Ltd. No.3, Lavelle Road, Bengaluru-560 001. … Appellant Pan:Aafcm 6271 M Vs. 1-2. Assistant Commissioner Of Income-Tax, Circle 4(1)(2), Bengaluru. 3. Deputy Commissioner Of Income-Tax, Circle 4(1)(2), Bengaluru. … Respondent Appellant By : Shri K.K.Chythanya, Advocate. Respondent By : Dr. P.V.Pradeep Kumar, Addl.Cit(Dr) Date Of Hearing: 22/03/2019 Date Of Pronouncement: 24/04/2019 O R D E R Per Pavan Kumar Gadale, Jm: The Assessee Has Filed Appeals Against Different Orders Of The Cit(A) For Assessment Years 2012-13, 2013-14 & 2014- 15. Ita Nos.1649/Bang/2017 & 730 & 731/Bang/2018 Page 2 Of 16 2. As Far As Ground No.2 In Respect Of Disallowance Of Proportionate Interest U/S 24(B) Of The Income-Tax Act,1961 ['The Act' For Short], The Assessee Has Raised Similar Grounds Of Appeal For Assessment Years 2012-13, 2013-13 & 2014-15. Similarly, For The Assessment Year 2012-13, The Assessee Has Raised An Alternative Plea To Allow Interest U/S 36(1)(Iii) Which Is Also Ground Of Appeal In Assessment Years 2013-14 & 2014-15. For The Assessment Year 2012-13, The Assessee Raised Ground For Allowance Of Deduction Towards Processing Fees & Pre-Payment Charges U/S 24(B) Of The Act. For The Assessment Year 2013-14, The Assessee Has Raised A Ground For Disallowance Of Rs.25,77,78/- Under The Provisions Of Section 14A Of The Act.

For Appellant: Shri K.K.Chythanya, AdvocateFor Respondent: Dr. P.V.Pradeep Kumar, Addl.CIT(DR)
Section 14ASection 24Section 36Section 36(1)(iii)

M/S Mfar Developers Pvt Ltd, Bangalore vs. The Assistant Commissioner of Income Tax Circle-4(1)(2), Bangalore

In the result, the assessee’s appeal for assessment year 2012-13 is partly allowed

ITA 1649/BANG/2017[2012-13]Status: DisposedITAT Bangalore24 Apr 2019AY 2012-13

Bench: Shri B.R. Baskaran & Shri Pavan Kumar Gadale1. Ita Nos.1649/Bang/2017 (Assessment Year: 2012-13) 2. Ita No.730/Bang/2018 (Assessment Year: 2013-14) & 3. Ita No.731/Bang/2018 (Assessment Year; 2014-15) M/S.Mfar Developers Pvt. Ltd. No.3, Lavelle Road, Bengaluru-560 001. … Appellant Pan:Aafcm 6271 M Vs. 1-2. Assistant Commissioner Of Income-Tax, Circle 4(1)(2), Bengaluru. 3. Deputy Commissioner Of Income-Tax, Circle 4(1)(2), Bengaluru. … Respondent Appellant By : Shri K.K.Chythanya, Advocate. Respondent By : Dr. P.V.Pradeep Kumar, Addl.Cit(Dr) Date Of Hearing: 22/03/2019 Date Of Pronouncement: 24/04/2019 O R D E R Per Pavan Kumar Gadale, Jm: The Assessee Has Filed Appeals Against Different Orders Of The Cit(A) For Assessment Years 2012-13, 2013-14 & 2014- 15. Ita Nos.1649/Bang/2017 & 730 & 731/Bang/2018 Page 2 Of 16 2. As Far As Ground No.2 In Respect Of Disallowance Of Proportionate Interest U/S 24(B) Of The Income-Tax Act,1961 ['The Act' For Short], The Assessee Has Raised Similar Grounds Of Appeal For Assessment Years 2012-13, 2013-13 & 2014-15. Similarly, For The Assessment Year 2012-13, The Assessee Has Raised An Alternative Plea To Allow Interest U/S 36(1)(Iii) Which Is Also Ground Of Appeal In Assessment Years 2013-14 & 2014-15. For The Assessment Year 2012-13, The Assessee Raised Ground For Allowance Of Deduction Towards Processing Fees & Pre-Payment Charges U/S 24(B) Of The Act. For The Assessment Year 2013-14, The Assessee Has Raised A Ground For Disallowance Of Rs.25,77,78/- Under The Provisions Of Section 14A Of The Act.

For Appellant: Shri K.K.Chythanya, AdvocateFor Respondent: Dr. P.V.Pradeep Kumar, Addl.CIT(DR)
Section 14ASection 24Section 36Section 36(1)(iii)