Interest on borrowing for acquisition of Assets

[aksrivastava]

The Apex Court on 8th February pronounced its judgement in case of Core Health Care holfing that intererst paid on borrowings for acquisition of assets is allowable deduction. The insertion of Proviso to sec 36 (1)(iii) has also been referred to and held as prospective.

Athough the Proviso to Sec. 36(1)(iii) inserted by F A 2003 has been commented upon that it is prospective, We need to delibrate as to what is the meaning and import of the word "extension of existing business".

Does it mean that the Proviso shall be attracted only if the new asset increases production or it shall also be applicable if new assets in the form of office equipment are purchased with borrowed capital.?

I look forward to views of members.

[ddshah]

Another question that may arise that does the above decision of Supreme Court also prove that the decision of Lokhandwala Construction on interest deduction to builders is correct?

[probal_shome]

The proviso to s. 36(1)(iii) reads as follows:

"Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction."

The question whether there is an extension of an existing business or not would have to be determined by applying the tests of common management, common fund etc as laid down in B.R. Ltd 113 ITR 647 (SC), Standard Refinery 79 ITR 589 (SC) etc.

If the conclusion is that the business is "new", then on first principles, the deduction is not allowable because the moneys are not borrowed "for purposes of business". If the business is "existing", then the Proviso kicks in.

In my view, the question whether the asset "increases production" or is merely "office equipment" is not relevant. A distinction is not drawn on the basis whether the asset has a role to paly in production or not. The only test is whether or not it is part of the existing business and whether the interest relates to a period prior to the date when "such asset was first put to use".

As regards Lokhandwala 260 ITR 579 (Bom), I agree that the principle laid down therein i.e. that it makes no difference whether the borrowing is for purposes of acquiring a capital or a revenue asset has been affirmed by the SC. (Incidentally both judgements i.e. Core and Lokhandwala were delivered by S.H. Kapadia J). Of course, this principle is now superceded by the Proviso.

Regards,

Probal.