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)

Deloitte Touche Tohmatsu India LLP (Sucessor of Delotte Touche Tohmatsu India Pvt. Ltd, Mumbai vs. ACIT -Cir 6(2) (1), Mumbai

In the result, the appeal of the assessee is allowed for statistical purposes

ITA 9/MUM/2022[2012-13]Status: DisposedITAT Mumbai31 May 2022AY 2012-13

Bench: Shri Aby T. Varkey, Jm & Shri S. Rifaur Rahman, Am आयकर अपील सं/ I.T.A. No.09/Mum/2022 (निर्धारण वर्ा / Assessment Years: 2012-13) Deloitte Touche Tohmatsu बिधम/ Acit-Circle 6(2)(1) India Llp (Successor Of Room No.504, 5Th Floor, Vs. Delotte Touche Tohmatsu Aayakar Bhavan, India Pvt. Ltd.) Maharshi Karve Road, One International Centre, Churchgate, Mumbai- Tower-3, 32Nd Floor, 400020. Senapati Bapat Marg, Elphinstone Road (W), Mumbai-400013. स्थधयी लेखध सं./जीआइआर सं./Pan/Gir No. : Aalfd7157J (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) Assessee By: Shri Ketan Ved Revenue By: Ms. R. M. Madhavi (Dr) सुनवाई की तारीख / Date Of Hearing: 23/05/2022 घोषणा की तारीख /Date Of Pronouncement: 09/05/2022 आदेश / O R D E R Per Aby T. Varkey, Jm: This Is An Appeal Preferred By The Assessee Against The Order Of The Ld. Commissioner Of Income Tax (Appeals) (Nfac), Delhi Dated 15.11.2021 For The Assessment Year 2012-13. 2. At The Outset, The Ld. Ar Of The Assessee Drew Our Attention To The Fact That The First Appellate Authority (Nfac) Has Passed The Order Without Giving Proper Opportunity To The Assessee. According To The Ld. Ar, The Assessee Had Filed All The Documents Sought For By The Cit(A) As Well As Had Filed Application Dated 23.01.2019 For Admission Of Additional Evidences (Refer Page No. 5 To 8 Of The Paper Book) As Well As Copy Of Letter Dated 25.10.2021 Uploaded On Income Tax E- Filing Portal On 09.10.2021 In Response To The Notices Dated 01.10.2021 & 11.10.2021 Respectively (Page No. 1 To 4 Of The Paper Book)

For Appellant: Shri Ketan VedFor Respondent: Ms. R. M. Madhavi (DR)
Section 36(1)(iii)