Interest paid on borrowings made for purchase of capital assets “not put to use” in the concerned financial year is eligible for income tax deductions, the Supreme Court has ruled. The apex court said that all that was required is that the capital borrowed must be for the purpose of business for which interest was also paid. A bench of Justices S H Kapadia and B Sudershan Reddy passed the ruling while dismissing an appeal filed by the Income Tax department. The department had filed the appeal after the appellate tribunal and the Gujarat High Court had held that the assessee company M/s Core Health Limited was not entitled to deductions under Section 36(1) and (III) of the Income Tax Act, 1961. The company had claimed a deduction of Rs 1.56 crore for the accounting year 1992-93, on the ground that the machinery borrowed by it by paying interest to the tune of the said amount was not put to use, thus ,entitling it to the deduction under the relevant section. However, the Income Tax department rejected the plea on the argument that the assessee was not entitled to deductions in view of Section 43 (1), which specified the “actual cost” for the purpose of assessment; a contention rejected by the appellate tribunal and the High Court. Endorsing the view of the two courts,the apex court said that interest on money borrowed for the purposes of business is a necessary expenditure in a business, for which the assessee is entitled for deductions.” The expression ‘for the purpose of business’ is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under Section 36 (1) (III) of the 1961 Act,” the bench observed. The apex court said the provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of borrowing must be for business, which is carried on by the assessee in the year of account. However, the apex court directed the High Court to determine certain important questions of law raised by the department. The questions are whether advertisement expenses incurred by the assessee to create a brand image with enduring benefit are allowable as revenue expenditure; whether the tribunal had erred in granting deduction under Section 35 D, regarding short-term loan.

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