ITAT Chennai allows deduction of interest paid under Income Tax Act section 36(1)(iii)

The Appellate Tribunal ITAT Chennai allowed the appeal filed by the assessee, directing the Assessing Officer to delete the disallowance of interest paid under section 36(1)(iii) of the Income Tax Act. The Tribunal held that once the asset is ready for use in the business, even if revenue is not generated immediately, the interest on borrowed capital should be allowed as a deduction. The disallowance under section 36(1)(iii) was deemed unjustified, leading to its deletion by the Tribunal.

---

---

Issues involved:
The issues involved in the judgment are the disallowance of interest paid on a loan borrowed for the construction of a new mandapam under section 36(1)(iii) of the Income Tax Act, and the applicability of provisions related to commercial expediency under section 37(1) of the Act.

Disallowance of Interest under Section 36(1)(iii):
The assessee had borrowed a loan for constructing a new mandapam and claimed interest paid on the loan as a deduction. The Assessing Officer disallowed the interest amount of Rs. 64,25,874 under section 36(1)(iii) as the building was inaugurated in February 2016 and bookings started from the financial year 2016-17. The CIT(A) upheld this disallowance, stating that interest on capital borrowed for the acquisition of a new asset cannot be allowed until the asset is put to use. The assessee argued that since the new asset was ready for use in the business, the interest should be allowed. The Tribunal held that once the asset is ready for use in the business, even if revenue is not generated immediately, the interest on borrowed capital should be allowed as a deduction. The Tribunal set aside the CIT(A) order and directed the Assessing Officer to delete the disallowance.

Commercial Expediency under Section 37(1):
The assessee also contended that the expenditure qualifies for consideration on the grounds of commercial expediency under section 37(1) of the Income Tax Act. However, the Tribunal did not delve into this issue as the disallowance under section 36(1)(iii) was found to be unjustified and was consequently deleted.

In conclusion, the Appellate Tribunal ITAT Chennai allowed the appeal filed by the assessee, directing the Assessing Officer to delete the disallowance of interest paid under section 36(1)(iii) of the Income Tax Act.

---