2017 (10) TMI 1627 - HC - Income Tax

Interest on Secured Promissory Notes - admittedly the said interest was in respect of the capital borrowed for the purposes of the business of the assessee - HELD THAT - We may notice that in case of this very assessee 2017 (11) TMI 63 - GUJARAT HIGH COURT Assessee's claim of deduction arises out of section 36(1)(iii) of the Act under which while computing the income u/s 28 of the Act, the deduction of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession would be a deductible expenditure. The first objection of the Revenue is squarely covered by the judgment in case of Core health Care ltd 2008 (2) TMI 8 - SUPREME COURT While confirming the decision of this Court, it was held that for the said deduction, all that was necessary was that the money i.e. capital must have been borrowed by the assessee, that it must have been borrowed for the purpose of business and lastly, that the assessee must have paid interest on the borrowed amount. All that is germane is whether the borrowing was, or was not, for the purpose of the business. It was held that the provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. Decided in favour of the assessee.

Summary

Issues involved:
1. Validity of reopening of assessment
2. Disallowance of interest on Secured Promissory Notes

Analysis:

Validity of reopening of assessment:
The Tax Appeal was filed challenging the judgment of the Income Tax Appellate Tribunal regarding the validity of the reopening proceedings. The first substantial question of law raised was whether the Tribunal was correct in holding that the reopening proceedings were valid, legal, and within the jurisdiction of the respondent. The appellant's counsel decided not to press this question during the proceedings.

Disallowance of interest on Secured Promissory Notes:
The second substantial question of law revolved around the disallowance of interest on Secured Promissory Notes. The High Court referred to a previous judgment in a related case where it was observed that the interest on capital borrowed for the business purposes of the assessee was allowable as a deduction under section 36(1)(iii) of the Income Tax Act. The court highlighted that the key consideration was whether the borrowing was for the purpose of the business, without distinguishing between capital assets or revenue assets. The court ruled in favor of the assessee on this issue, stating that the interest on the borrowed capital for business purposes was deductible. Consequently, the second question was answered in favor of the assessee, and the Tax Appeal was disposed of accordingly.

In conclusion, the High Court's judgment addressed the issues of the validity of reopening assessment and the disallowance of interest on Secured Promissory Notes. The court clarified the legal principles regarding the deduction of interest on capital borrowed for business purposes, ultimately ruling in favor of the assessee on the second issue.