We have another interesting case for you today:

By Vijay Kumar

We are so flooded with case law that we can't even wait till tomorrow. So we bring you this important case today.

Income Tax : SC rules Sec 36(1)(iii) is a code by itself and does not contain concept of depreciation - interest paid on capital borrowed for business purpose is allowable expenditure; Sec 36 makes no distinction between fund borrowed to buy capital or revenue asset

THE much-disputed question of interest on borrowings has finally gone against the interest of revenue. The question before the Apex Court was whether such interest is allowable expenditure under Sec 36(1 )( iii) of the Income Tax Act? And, 'yes' is the answer. The rationale lucidly elaborated by the Bench is that the expression "for the purpose of business" occurring in Section 36(1)(iii) indicates that once the test of "for the purpose of business" is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under Section 36(1)(iii). This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. What sub- section (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike Section 37 which expressly excludes an expense of a capital nature. The legislature has, therefore, made no distinction in Section 36(1 )( iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed.

Further, the words "actual cost" do not find place in Section 36(1 )( iii) of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961 Act. The expression "actual cost" is defined in Section 43(1) which is essentially a definition section which is subject to the context to the contrary, added the Bench.