High Court rules interest on money borrowed for business assets as revenue expenditure

The High Court of Karnataka ruled in favor of the assessee, a private limited company engaged in manufacturing, allowing the interest amount of Rs. 96,170 paid on money borrowed for purchasing new machinery and land as a revenue expenditure under section 36(1)(iii) of the Income Tax Act, 1961. The Court emphasized that if borrowed capital is used for the business, the benefit of the provision should be granted, regardless of whether the asset purchased with the borrowed capital was utilized, rejecting the Revenue's argument based on conflicting court decisions.

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Issues involved: Whether interest on money borrowed for the purpose of purchasing new machinery and land is allowable as a revenue expenditure u/s 36(1)(iii) of the Income Tax Act, 1961.

Summary:
The High Court of Karnataka addressed the issue of whether the interest amount of Rs. 96,170 paid on money borrowed for the purpose of purchasing new machinery and land is allowable as a revenue expenditure u/s 36(1)(iii) of the Income Tax Act, 1961. The assessee, a private limited company engaged in manufacturing, imported automatic machinery and purchased land during the relevant assessment years. The Income Tax Officer (ITO) disallowed the claim of interest deduction, stating that the machinery purchased was not used for production in the accounting year, relying on a Supreme Court decision. The assessee appealed to the Appellate Authority Commissioner (AAC), who allowed the claim based on a Bombay High Court decision. The Revenue challenged this decision before the Income-tax Appellate Tribunal, which ruled in favor of the assessee, emphasizing that the borrowed capital was used for purchasing machinery and land for the running concern. The High Court rejected the Revenue's argument that the Supreme Court decision overruled the Bombay High Court decision, stating that the nature of the expenses incurred by the assessee differed in the two cases. The Court held that if the borrowed capital is used for the business, the benefit of u/s 36(1)(iii) should be granted, irrespective of whether the asset purchased with the borrowed capital was utilized.

In conclusion, the High Court answered the question in the affirmative, ruling in favor of the assessee. The parties were directed to bear their own costs.

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