2015 (1) TMI 822 - HC - Income Tax

Entitlement to deduction of interest u/s 36(1)(iii) - funds borrowed for the purpose of setting up new units for the manufacturing of corrugated boxes - Held that - Considering the decisions of Core Health Care case(2008 (2) TMI 8 - SUPREME COURT OF INDIA) as well as this Court in the case of Gujarat State Fertilizer and Chemical ltd. (2008 (8) TMI 313 - GUJARAT HIGH COURT) question is answered in the affirmative as Tribunal is right in law and on facts in holding that the assessee was entitled to deduction of interest amounting to 26, 02, 575/- made u/s 36(1)(iii) of the Act incurred by the assessee in respect of funds borrowed for the purpose of setting up new units for the manufacturing of corrugated boxes. - Decided in favour of assessee.

Summary

Issues:
Interpretation of Section 36(1)(iii) of the Income Tax Act - Deduction of interest on borrowed capital for business purpose.

Analysis:
1. The appellant challenged the order of the Income Tax Appellate Tribunal regarding the deduction of interest amounting to Rs. 26,02,575 under Section 36(1)(iii) of the Act for the Assessment Year 1996-97. The Tribunal directed the Assessing Officer to allow the deduction, which was contested by the revenue in the present Tax Appeal.

2. The Assessing Officer initially rejected the claim of the assessee for deduction of interest paid on capital borrowed for setting up new units for manufacturing corrugated boxes. The CIT (Appeals) upheld this decision. However, the Tribunal reversed this decision and allowed the deduction to the assessee, leading to the revenue's appeal.

3. The Supreme Court's decision in Deputy Commissioner of Income Tax vs. Core Health Care Ltd. clarified that interest on borrowed capital used for business purposes is deductible under Section 36(1)(iii) irrespective of the outcome of using the capital. The actual cost of an asset is irrelevant in this context.

4. The Gujarat High Court in Gujarat State Fertilizer and Chemicals Ltd v. ACIT also supported the deduction of interest on borrowed capital if it was used for business purposes, relying on the Core Health Care case. The court emphasized that as long as the capital borrowed was utilized for the business, the interest would be deductible under Section 36(1)(iii).

5. The appellant's counsel could not present any contrary decision to challenge the above interpretations. Considering the precedents set by the Apex Court and the High Court, the question of law was answered in favor of the assessee, confirming the entitlement to the deduction of interest on borrowed capital for business purposes.

6. The Court upheld the Tribunal's decision, dismissing the Tax Appeal and confirming that the assessee was entitled to the deduction of interest incurred for setting up new units for manufacturing corrugated boxes under Section 36(1)(iii) of the Act. The judgment was based on established legal principles and precedents, leading to the affirmation of the Tribunal's order.