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Issues: (i) Whether interest on borrowings taken directly for payment of income tax was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961. (ii) Whether interest on borrowings taken directly for payment of dividend was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961.
Issue (i): Whether interest on borrowings taken directly for payment of income tax was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961.
Analysis: Borrowings used for payment of taxes were held not to be for the purpose of business within the meaning of section 36(1)(iii), and the earlier binding decision of the Court was followed on this point.
Conclusion: The interest attributable to borrowings taken for payment of income tax was not allowable as a deduction and this issue was decided against the assessee.
Issue (ii): Whether interest on borrowings taken directly for payment of dividend was allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961.
Analysis: Payment of dividend was treated as part of the business of the company and, therefore, interest on moneys borrowed for that purpose fell within the expression "for the purpose of business" under section 36(1)(iii).
Conclusion: The interest attributable to borrowings taken for payment of dividend was allowable as a deduction and this issue was decided in favour of the assessee.
Final Conclusion: The reference was answered partly in favour of the assessee by allowing deduction for interest on borrowings used to pay dividend, while denying deduction for interest on borrowings used to pay income tax.
Ratio Decidendi: Interest on borrowings is deductible under section 36(1)(iii) only where the borrowing is for the purpose of business; borrowings used to pay dividend satisfy that test, but borrowings used to pay income tax do not.
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