Interest on expansion borrowings stayed deductible under the unamended tax provision, despite new assets not yet being put to use.

Interest on borrowed funds used for business expansion remained deductible under section 36(1)(iii) of the Income-tax Act, 1961 because the assessment year preceded the proviso inserted with effect from 1 April 2004, so the amendment had no application. Under the unamended provision, borrowings for expansion of a continuing or composite business attracted interest deductibility, and the deduction could not be denied merely because the new assets had not yet been put to use.

---

---

Issues: Whether interest paid on borrowed funds used for expansion of business was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961 for the assessment year 1991-92, and whether the proviso inserted with effect from 1 April 2004 affected the claim.

Analysis: The assessment year in question preceded the effective date of the proviso inserted in section 36(1)(iii), so that amendment had no application to the dispute. The deduction claim was therefore governed by the unamended provision. Relying on the principle that borrowings used for business expansion attract deductibility of interest where the business is treated as a continuing/composite business, the interest on the money borrowed for expansion could not be disallowed merely because the new assets were not yet put to use.

Conclusion: The interest paid on the borrowed funds was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, and the assessee succeeded.

---