Interest u/s 36(1)(iii) allowed as deduction even for purchase of Capital Asset.

[Vivek Jalan]

Section 36(1)(iii) of The IT Act provides as under-

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset  (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction….

This section was amended twice viz: by Finance Act 2003 and Finance Act 2015. Before the amendments, a deduction was allowed in respect of interest on capital borrowed for the purposes of business or profession. The said provision has been prone to litigation on the issue of allowability of interest on borrowings for acquisition of assets for extension of business for the period during which the asset was not yet put to use. It was therefore, provided that with effect from assessment year 2004-05, no deduction will be allowed in respect of any amount of interest paid, in respect of capital borrowed for acquisition of asset for the period beginning from the date on which the capital was borrowed for the acquisition of the asset till the date on which such asset was first put to use.

By the Finance Act 2015, the words "for extension of existing business or profession" in proviso was omitted. The provisions of proviso to clause (iii) of sub-section (1) of section 36 of the Income-tax Act had been amended so as to provide that the borrowing cost incurred for acquisition of an asset shall be capitalised up to the date the asset is put to use without making any distinction as to whether an asset is acquired for extension of existing business or not.

The question is whether interest on Borrowing for Purchase of land is allowed Section 36(1)(iii) of the Act. The same was taken up in the case of ACIT, CIRCLE-3 (1) (2) MUMBAI VERSUS M/S. FRONTLINE REALTY PVT. LTD. - 2023 (2) TMI 1071 - ITAT MUMBAI While adjudicating claim for deduction under Section 36(1)(iii), the nature of expense was held irrelevant, as Section itself says that interest paid by assessee on capital borrowed was an item of deduction. It was held that where an assessee claims deduction of interest paid on capital borrowed, assessee had to show that capital which was borrowed was used for business purpose in relevant year and it did not matter either capital was borrowed in order to acquire a revenue asset or a capital asset. Only disallowance can be as per provisio to Section 36(1)(iii) i.e. for the period beginning from the date on which the capital was borrowed for the acquisition of the asset till the date on which such asset was first put to use.