Income Tax Act 1961 – s.36(1)(iii) – Deduction in respect of amount of the interest paid in respect of capital borrowed for the purposes of business or profession – Assessee, if eligible for deduction of interest paid to the bank u/s.36(1)(iii) – Assessee borrowed loan from the Bank and paid interest in order to invest the same in its share business – Said sum transferred to a group company by the assessee, who in turn advanced it to one to purchase shares of a company on his behalf – Assessing Officer took the view that the assessee not entitled to claim deduction u/s.36(1)(iii) and the interest paid on the loan was disallowed – In appeal, the deduction was disallowed – However, the ITAT allowed the deduction – Thereagainst, appeal by the Revenue, allowed by the High Court upholding the order passed by the Assessing Officer that the assessee not entitled to claim deduction u/s.36(1)(iii) and disallowed the interest paid on the loan – Correctness:
Held: Assessee entitled to seek deduction of the amount of the interest paid in respect of the capital borrowed for the purposes of the business – For s.36(1)(iii), “interest” is restricted to that on money borrowed and not on debt incurred – Essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal – It may be regarded either as representing the profit he might have made if he had had the use of his money, or conversely, the loss he suffered because he had not that use – Legislature has, u/s.36(1)(iii) permitted as an allowance interest paid on capital borrowed for the purposes of the business; and the capital, in this context, means money and not any other asset purchased on credit – It appears on a plain reading of the impugned order that according to the High Court, the business of the subsidiary company cannot be considered in law as the business of the assessee – High Court took the view that the finding of the tribunal based on commercial expediency not correct, and that the amount borrowed was ultimately utilised for the benefit of the subsidiary company of the assessee and not for the business of the assessee as such – High Court erred in taking the said view – Impugned judgment and order passed by the High Court set aside. [Paras 14-18, 20, 22-24]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Nidhi Jain. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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