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| The Tax Publishers2020 TaxPub(DT) 0730 (Coch-Trib) INCOME TAX ACT, 1961
Section 36(1)(iii)
Where amendment to Finance Act, 2003 with effect from 01-04-2004 was inserted proviso to section 36(1)(iii) which clearly states that interest on borrowed funds in respect of capital borrowed for acquisition of an asset should not be allowed as deduction till the date on which the said asset was put to use for purpose of business and since land was not put to use by assessee, interest expenditure for acquiring the same could not be allowed as a deduction.
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Business deduction under section 36(1)(iii) - Disallowance of interest expenses - Allowability -
AO noticed that assessee had purchased land out of the OD account of assessee. AO issued a show cause notice to the assessee proposing to disallow proportionate interest used for the purchase of land. Assessee stated that amounts were advanced for purchase of land which was intended to be assessee's asset. It was submitted that purchase of a property in firm's name, utilizing the firm's funds could not be considered as diversion of funds. However, AO held that advance given for acquiring the land from the enhanced CC limit was nothing but diversion of funds and the same could not be treated as wholly and exclusively for the purpose of business. Department further held that by virtue of amendment by Finance Act, 2003 with effect from 01-04-2004, proviso to section 36(1)(iii) was introduced, whereby the interest on borrowed funds till asset was to be used could not be allowed as deduction Held: Amendment to Finance Act, 2003 with effect from 01-04-2004 was inserted proviso to section 36(1)(iii) which clearly states that interest on borrowed funds in respect of capital borrowed for acquisition of an asset should not be allowed as deduction till the date on which the said asset was put to use for the purpose of business. Therefore, going by proviso to section 36(1)(iii), interest expenses on capital borrowed for purchase of asset could not be allowed as deduction. Admittedly, proviso to section 36(1)(iii) was applicable during the relevant assessment year and since land was not put to use by assessee, interest expenditure for acquiring the same could not be allowed as a deduction.
REFERRED : Dy. CIT v. Core Health Care Ltd. (2008) 298 ITR 194 (SC) : 2008 TaxPub(DT) 1621 (SC) S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 0833 (SC) Punjab Stainless Steel Inds. v. CIT & Anr. (2010) 324 ITR 396 (Del) : 2010 TaxPub(DT) 1928 (Del-HC) CIT v. Vadilal Dairy International Ltd. (2008) 328 ITR 544 (Guj.) : 2008 TaxPub(DT) 2019 (Guj-HC) CIT v. Abhishek Industries Ltd. (2006) 286 ITR 1 (P&H) : 2006 TaxPub(DT) 1778 (P&H-HC)
FAVOUR : Against the assessee
A.Y. :
IN THE ITAT, COCHIN BENCH
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