Case Note & Summary
The case involves two appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961, against a common order of the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, relating to the assessment year 2006-07. The assessee, M/s. Saravana Developers, is a firm engaged in the business of formation and development of residential layouts and sale of sites. The assessee follows the project completion method of accounting. During the assessment, the assessee claimed deduction of interest paid on borrowed capital used for business purposes. The Assessing Officer disallowed the deduction, holding that since the assessee follows the project completion method, the interest cannot be allowed as a deduction until the project is completed. The Commissioner of Income Tax (Appeals) confirmed the disallowance. However, the ITAT allowed the deduction, relying on the principle that interest on borrowed capital is a permissible deduction under Section 36(1)(iii) of the Act, irrespective of the method of accounting, as long as the capital is used for business purposes. The Revenue appealed to the High Court. The High Court, after hearing both sides, upheld the ITAT order, holding that the interest paid on borrowed capital is an allowable deduction under Section 36(1)(iii) and that the method of accounting does not affect the allowability of such deduction. The court dismissed the appeals, confirming the ITAT order.
Headnote
A) Income Tax - Deduction of Interest on Borrowed Capital - Section 36(1)(iii) of the Income Tax Act, 1961 - Allowability of interest paid on borrowed capital used for business purposes - The assessee, a real estate developer following project completion method, claimed deduction of interest paid on loans taken for business. The Revenue disallowed the deduction, but the ITAT allowed it. The High Court held that interest on borrowed capital is a permissible deduction under Section 36(1)(iii) irrespective of the method of accounting, as long as the capital is used for business purposes. The court upheld the ITAT order, dismissing the Revenue's appeal. (Paras 1-10)
Issue of Consideration
Whether the interest paid on borrowed capital is allowable as deduction under Section 36(1)(iii) of the Income Tax Act, 1961, when the assessee follows the project completion method of accounting.
Final Decision
The High Court dismissed the appeals, upholding the ITAT order allowing deduction of interest paid on borrowed capital under Section 36(1)(iii) of the Income Tax Act, 1961.
Law Points
- Interest on borrowed capital
- deduction under Section 36(1)(iii)
- project completion method
- business expenditure
- income tax
