Court allows deduction for interest paid on borrowed funds used for business under Income-tax Act section 36(1)(iii)

The High Court of Allahabad ruled in favor of the assessee, allowing the interest payment of Rs. 97,289.52 as deductible under section 36(1)(iii) of the Income-tax Act for computing business income. The court emphasized that the borrowed funds were utilized for business activities, supporting the assessee's position that the interest was for capital borrowed for business purposes. The decision referenced relevant case law and dismissed the reference with costs, upholding the Tribunal's decision in favor of the assessee.

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Issues involved: Interpretation of section 36(1)(iii) of the Income-tax Act, 1961 regarding the allowability of interest payment for capital borrowed for business purposes.

Summary:
The High Court of Allahabad addressed a reference under section 256(1) of the Income-tax Act, 1961, regarding the allowability of interest payment of Rs. 97,289.52 in the computation of business income. The assessee, a government-owned company engaged in seed processing, borrowed funds for business operations. The dispute arose as the authorities initially disallowed the interest payment as capital in nature. The assessee contended that the borrowed funds were for business purposes and thus should be allowed as per section 36(1)(iii) of the Act. The Tribunal supported the assessee's position, emphasizing that the borrowed capital was utilized for business activities, regardless of whether the expenditure was capital or revenue in nature.

The Tribunal's decision was based on the understanding that the assessee was extending its existing business by setting up a new factory, and the borrowed funds were essential for business operations. The court referred to the Supreme Court's decision in India Cements Ltd. case, highlighting that interest paid for capital borrowed for business purposes is deductible under section 36(1)(iii). The court distinguished the Revenue's reliance on Ritz Continental Hotels Ltd. case, stating it was not applicable to the present scenario. Additionally, the court cited a previous judgment in Prem Spinning and Weaving Mills Co. Ltd. case, supporting the allowance of interest under similar circumstances.

Conclusively, the High Court ruled in favor of the assessee, affirming that the interest payment of Rs. 97,289.52 was allowable under clause (iii) of section 36(1) of the Income-tax Act for computing business income. The reference was dismissed with costs, upholding the Tribunal's decision in favor of the assessee.

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