2013 (3) TMI 168 - HC - Income Tax

Deduction of Interest paid in respect of capital borrowed for the projects - distinction between capital borrowed for acquiring capital assets or revenue assets - held that - The Apex Court in the decision of the Core Health Care (2008 (2) TMI 8 - SUPREME COURT OF INDIA) thus has recognized the assessee s entitlement of deduction of interest under Section 36(1)(iii) for borrowed capital by holding that all that Section requires is that the assessee must utilize such amount for the purpose of business which is carried on by the assessee in the accounting year and regardless of result of use of such capital. Based on ratio, Tribunal also held that no distinction can be made between the money borrowed for acquiring capital asset or revenue asset as Legislature has not made such distinction of use of capital on the basis of capital purpose or revenue purpose. - Decided in favor of assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding interest paid in respect of capital borrowed for projects.

Analysis:
The Revenue challenged the order of the Income Tax Appellate Tribunal (the Tribunal) regarding the allowance of interest paid in respect of capital borrowed for projects. The primary question raised was whether the Tribunal was correct in allowing the interest paid in such circumstances. The Assessing Officer had disallowed the interest on capital borrowings for two power projects, considering it as part of the actual cost of acquiring capital assets. However, the CIT (Appeals) deleted the addition, stating that the expenditure was not for setting up a new project but for an integrated venture in the same line of business. The Tribunal upheld the findings of CIT (Appeals) based on the decision of the Apex Court in a similar case. The Apex Court's decision recognized the assessee's entitlement to deduction of interest for borrowed capital under Section 36(1)(iii) for business purposes, irrespective of the nature of assets acquired. The Tribunal found no error in applying this ratio to the case at hand, dismissing the Revenue's appeal.

In summary, the judgment revolves around the interpretation of Section 36(1)(iii) regarding the deduction of interest on borrowed capital for business purposes. The key issue was whether the interest paid in relation to capital borrowed for projects could be allowed as a deduction. The courts considered the nature of the expenditure, the purpose for which the borrowing was made, and the integration of the venture within the existing business. The decision was based on the principle that the purpose of borrowing for business activities, rather than the specific use of the borrowed capital, determines the eligibility for deduction. The judgment clarifies that the distinction between capital and revenue assets does not affect the allowance of interest on borrowed capital, as long as the funds are utilized for the business carried on by the assessee.