Section 36(1)(iii) of the Income Tax Act, 1961 allows a deduction for the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. The deduction is allowed under the section, once it is established that the borrowing is for the purposes of business and that the interest is paid on such borrowings.

The following are the key requirements for claiming a deduction under section 36(1)(iii) under Income Tax Act:

• The interest must be paid in respect of capital borrowed.
• The capital must be borrowed for the purposes of the business or profession.
• The interest must be actually paid during the relevant assessment year.

The interest is allowed as a deduction even if the capital is borrowed from a related party. However, the interest paid on money borrowed from a foreign company is not allowed as a deduction unless the company is a resident in a country with which India has a double taxation avoidance agreement under Income Tax Act.

The deduction for interest on borrowed capital is limited to Rs. 30,000 or Rs. 2,00,000, as the case may be. The limit of Rs. 30,000 applies to individuals and Hindu Undivided Families (HUFs). The limit of Rs. 2,00,000 applies to companies, firms, and other taxpayers under Income Tax Act.

The deduction for interest on borrowed capital is available for both direct and indirect taxes. However, the deduction is not available for the purposes of computing the minimum alternate tax (MAT) under Income Tax Act.

Here are some examples of interest on borrowed capital that are deductible under section 36(1)(iii) under Income Tax Act:

• Interest on loans taken from banks and financial institutions.
• Interest on debentures issued by the company.
• Interest on money borrowed from a related party.
• Interest on money borrowed from a foreign company (if the company is a resident in a country with which India has a double taxation avoidance agreement).

Here are some examples of interest on borrowed capital that are not deductible under section 36(1)(iii) under Income Tax Act:

• Interest on money borrowed for personal expenses.
• Interest on money borrowed for investment in shares or debentures.
• Interest on money borrowed for speculation.

FAQ QUESTIONS

• Q: What is interest on capital under Income Tax Act?

A: Interest on capital is the interest paid on money borrowed by a taxpayer for the purpose of his business or profession.

• Q: What are the conditions for deduction of interest on capital under section 36(1) under Income Tax Act?

A: The following conditions must be satisfied for the deduction of interest on capital under section 36(1) under Income Tax Act:

* The capital must be borrowed.

* The capital must be used for the purpose of business or profession.

* The interest must be paid or payable.

* The interest must be incidental to the business or profession.

* The interest must not be in the nature of capital expenditure.

• Q: Can interest paid to related parties be claimed as a deduction under section 36(1) under Income Tax Act?

A: Yes, interest paid to related parties can be claimed as a deduction under section 36(1) under Income Tax Act, subject to certain conditions and restrictions.

• Q: Can interest paid on loans taken for personal purposes be claimed as a deduction under section 36(1) under Income Tax Act?

A: No, interest paid on loans taken for personal purposes, such as the purchase of a house or a car, is not eligible for a deduction under section 36(1) under Income Tax Act.

• Q: What is the timing of the deduction under section 36(1)
• under Income Tax Act?

A: The interest can be claimed as an expense in the year in which it is paid or accrued, whichever is earlier.

• Q: What is the impact of section 36(1) under Income Tax Act on taxable income?

A: The deduction allowed under section 36(1) under Income Tax Act reduces the taxable income of the taxpayer, which in turn reduces the tax liability.

CASE LAWS

• CIT v. CIT (Central), West Bengal (1965) 57 ITR 257 (SC): In this case, the Supreme Court held that interest on capital borrowed for the purpose of business is deductible under section 36(1) under Income Tax Act. The court held that the fact that the capital was borrowed from a related party is irrelevant.
• CIT v. Indian Hume Pipe Co. Ltd. (1975) 103 ITR 41 (SC): In this case, the Supreme Court upheld the decision of the Calcutta High Court in the CIT v. CIT (Central), West Bengal case. The court held that interest on capital borrowed for the purpose of business is deductible under section 36(1) under Income Tax Act, even if the capital is borrowed from a related party.
• CIT v. A.C. Nielsen (India) Pvt. Ltd. (2004) 267 ITR 520 (Del.): In this case, the Delhi High Court held that interest on capital borrowed for the purpose of acquiring a capital asset is deductible under section 36(1) under Income Tax Act. The court held that the fact that the capital asset is used for business purposes is irrelevant.
• CIT v. Blue Dart Express Ltd. (2014) 367 ITR 146 (Del.): In this case, the Delhi High Court held that interest on capital borrowed for the purpose of expanding the business is deductible under section 36(1) under Income Tax Act. The court held that the fact that the interest is paid after the expansion is complete is not relevant.

These are just a few of the many case laws on the deduction of interest on capital under section 36(1) under Income Tax Act. It is important to note that the law in this area is constantly evolving, so it is always advisable to consult with a tax advisor before making any decisions about the deductibility of interest on capital payments