INCOME TAX ACT, 1961

Section 37(1) Section 36(2)(iii), Expln. 8

Capital or revenue expenditure - Interest on capital borrowed - Borrowed capital utilized to set up Argon Gas Plant -

Respondent/assessee was a company engaged in manufacture of fertilizers and cement. Insofar as interest on the loan for capital borrowed for setting up of Argon Gas Plant was concerned, the assessee claimed the interest paid on such borrowings as a revenue expenditure. The AO did not agree with the claim and held that such interest on borrowed capital was part of the actual cost as defined in section 43(1) Expln. 8. The CIT(A) allowed the expenditure incurred on interest on borrowings for setting up of Argon Gas Plant as revenue expenditure.As regards the issue of interest on borrowings, the ITAT upheld the order of CIT(A).Held: The Apex Court in its decision in core Health Care Ltd. had held that the legislature has made no distinction in section 36(1)(iii) between capital borrowed for a revenue purpose and capital borrowed for capital purpose. The Explanation 8 to section 43(1) as well as the concept of actual cost has no application to section 36(1)(iii). It can thus be seen that once it was shown that the borrowing was for business purpose, the interest paid on such borrowing would be an allowable deduction. Thus, no exception can be taken to the finding recorded by the ITAT on the issue of interest on borrowings. The substantial question of law was answered against the appellant and in favour of the assessee.

Followed:Dy. CIT v. Core Health Care Ltd. (2008) 167 Taxman 206 (SC) : 2008 TaxPub(Dt) 1621 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 1995-96

INCOME TAX ACT, 1961

Section 37(1)

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