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| The Tax Publishers2020 TaxPub(DT) 0753 (Mum-Trib) INCOME TAX ACT, 1961
Section 36(1)(iii)
As originally the amount was borrowed Interest free, there was no interest liability; and hence, same could not be accounted for in earlier years. Liability to pay interest from 1-4-1992 @ 24% per annum had arisen on 7-6-1995 only as per order of Special Court; and hence, same was allowable in full in the year under consideration.
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Business deduction under section 36(1)(iii) - Interest on borrowed capital - Interest pertaining to earlier years became payable only during concerned year -
Assessee claimed deduction under section 36(1)(iii). AO noticed that interest liability consisted of interest @ 20% p.a. from 25-3-1992 to 31-3-995 of Rs. 1,73,00,000 and only Rs. 57,60,000 pertained to the relevant financial year under consideration. On show-caused, assessee explained that it has received interest free loan of Rs. 2.88 crore from M/s Kenilworth Investment in 1991. M/s Kenilworth had received almost identical amount from Dhanraj Mills Pvt. Ltd. a company belonging to Killic Nikson/BR Ruia group, M/s Dhanraj Mills Pvt. Ltd. was declared a notified entity in Security Scam of 1992. Special Court constituted for trial of scam related matters passed order directing the assessee to make payment of interest amounting to Rs. 2.88 crore to Dhanraj Mills Pvt. Ltd. with 20% interest thereon with effect from 25-3-1992 to 31-3-1996. AO allowed only 20% interest on Rs. 2.88 crore for relevant period i.e. 1-4-1995 to 31-3-1996 and remaining claim of Rs. 1,73,00,000 was disallowed holding that expenses did not relate to the year under consideration.Held: There is nothing in section, 36(1)(iii) which would impose a condition that in order to be allowable as a deduction, expenditure must have been incurred in order to earn income of the relevant previous year or must relate to income of the previous year. Similarly, the requirement is that interest should be payable in respect of capital borrowed for the purpose of business. It was not the case of AO that amount was not borrowed for the purpose of business because interest relatable to the concerned year had been allowed and disallowance was made only of that portion which pertained to earlier years. As originally the amount was borrowed Interest free, there was no interest liability; and hence, same could not be accounted for in earlier years. Liability to pay interest from 1-4-1992 @ 24% per annum had arisen on 7-6-1995 only as per order of Special Court; and hence, same was allowable in full in the year under consideration.
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