Business Expenditure – Interest paid in respect of borrowings for acquisition of capital assets not put to use in the concerned financial year is allowable as a deduction u/s. 36(1)(iii).

The assessee, who was engaged in the business of yarn, filed its return of income for the assessment year 1992-93 declaring its taxable income at Rs. 3,59,86,359/-. A revised return thereafter was filed declaring taxable income of Rs. 3,48,09,071/-. In the computation of income filed alongwith the revised return, the assessee claimed additional deduction amount of Rs. 1,97,290/- and Rs. 9,80,000/- on account of interest u/s. 36(1)(iii) and up front fees respectively. The claim was made on account of loans raised for set up of a new unit at Baddi (HP). The Assessing Officer, in view of the fact, that the loan was raised for setting up a new unit for creating a capital asset which was yet to come into production, disallowed the interest, relying upon Explanation 8 to section 43(1).

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee and the Tribunal rejecting the appeal of the Revenue approved the order passed by the Commissioner of Income Tax (Appeals).

The Full Bench of the Punjab and Hariyana High Court reversed the order of the Tribunal [CIT vs. Vardhaman Polytex Ltd. – 299 ITR 152 (P & H) (FB)] holding that the loan was not raised for the purpose of running of the business for its day to day requirements, but for the purpose of creating additional assets, new capacity at a new location and as such the interest on the loan was not deductible u/s. 36.

The Supreme Court reversed the order of the High Court following its judgement in Deputy CIT vs. Core Healthcare Ltd. reported in (2008) 298 ITR 194(SC).