Interest on borrowed capital - Section 36(1)(iii) - Income Tax - Ready Reckoner - Income Tax

Interest on borrowed capital - Section 36(1)(iii) Amount of Interest paid in respect of capital borrowed for the purposes of business and profession is allowed as deduction (Subject to section 43B ). However, any amount of the interest paid in respect of capital borrowed for acquisition of new asset (Whether capitalized in the books of accounts 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. Hence such interest shall be added to the cost of asset. Conditions for claiming deduction under this section: For allowance of a claim for deduction of interest under this provision following three conditions are there: The money, that is capital, must have been borrowed by the assessee It must have been borrowed for the purpose of business. The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. Other Relevant Information - Disallowance in case of interest paid is more than interest received on advances is not relevant for the purpose of allowance of expenses of interest u/s 36(1)(iii) . M/s Brahmaputra Finlease Pvt. Ltd. Versus ACIT, Central Circle- 15, New Delhi 2023 (5) TMI 541 - ITAT Delhi . Following case interest expenditure allowed or not Allowed Interest paid to wife and daughters on money allotted to them on partition is deductible. Where the assessee firm created in favour of creditors of an erstwhile firm , it amounted to capital borrowed for business purposes and thus interest paid thereon was to be allowed as deduction. Interest on loan taken for payment to a retiring partner is allowable expenditure u/s 36(1)(iii). Not allowed Interest credited to a trust which was by mere book entries and there was no divestiture of properties by the settlor was not deductible. Interest on Own Capital not deductible interest on own capital is not deductible. Interest paid to one unit to another units is not deductible. An element of refund or repayment is a must in the concept of borrowing. If there is no obligation to refund the capital provided. Interest paid on such capital is not deductible u/s 36(1)(iii). Guarantee Interest paid to shareholder on paid-up capital is not deductible. Interest on advance tax or late filling of return is not allowable as deduction. Interest is not allowable as deduction unless tax has been paid or the tax has been deducted at source u/s 40(a)(i)/(ia). Where interest is paid for meeting tax liability of partner , such interest is not deductible. Brokerage or commission paid to an agent for arranging a loan for the purpose of business is not allowable under this section but is allowable as deduction u/s 37(1).