Section 36(1)(iii) — Interest on Borrowed Capital

Section 36(1)(iii) of the Income-tax Act, 1961 allows for the deduction of interest paid on capital borrowed for the purposes of the business or profession. This section is significant as it provides relief to businesses by allowing them to deduct interest expenses from their taxable income, thereby reducing their overall tax liability. The deduction is available only if the borrowed capital is used for business purposes, and not for personal use. The statutory test requires that the interest must be paid on capital that is borrowed and used for the business. The burden of proof lies with the taxpayer to demonstrate that the borrowed funds were indeed used for business purposes. In practice, this section is crucial for businesses that rely on borrowed funds for expansion or operational needs, as it helps in managing cash flow and tax planning.

Common Litigation Flashpoints

1. Whether the borrowed funds were used for business purposes
2. Interest on funds borrowed for personal use being claimed as a deduction
3. Disallowance of interest due to delay in commencement of business
4. Interest on funds borrowed for acquiring a capital asset

Judgments on Section 36(1)(iii) — Interest on Borrowed Capital

• C.I.T., Ahmedabad vs Reliance Petroproducts Pvt. Ltd. — SC, 2010
  A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee.
• S. A. Builders Ltd. vs Commissioner of Income Tax (Appeals) Chandigarh & Anr. — SC,
  Interest on borrowed funds advanced to a sister concern should be allowed if the advance was made as a measure of commercial expediency.
• Maxopp Investment Ltd vs Commissioner of Income Tax, New Delhi — SC,
  Section 14A mandates the disallowance of expenditure incurred in relation to exempt income, applying the principle of apportionment.
• Munjal Sales Corporation vs Commissioner of Income Tax, Ludhiana & Anr — SC,
  Section 40(b) is not a stand-alone section but a limitation on deductions under Sections 30 to 38.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Hero Cycles (P) Ltd. vs Commissioner of Income Tax (Central), Ludhiana — SC,
  Interest on borrowed funds can be claimed as a business expenditure if the advance is made for commercial expediency.
• Cheminvest Limited vs Commissioner of Income Tax-VI — HC,
  Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.