Any interest paid on borrowed capital is an llowable deduction. The borrowed capital must be used in the business/profession of the assessee. The borrowing must, however, be genuine and not bogus and the assessee must have paid as interest the amount claimed as deduction under this category.
Ailahabad High Court has held in a case [Banarsi Dass Gupta v. C.I. T. (1977) Tax I.R. 65] that in case interest paid is not genuine or is on illusory borrowings made for assessee’s business, any interest paid on such borrowings shall not be allowed as deduction.
The Income-tax department cannot disallow this item on the ground that borrowing of money was not required and the rate of interest could be scaled down. The borrowed money may be used in the acquiring of capital assets or stock-in-trade or expansion of the business. It is essential that the money should have been utilised in the assessee’s business or profession.
If the money is borrowed for the purpose of a business which is not at all assessable under the Act, no deduction can be claimed under this clause. Deduction on borrowed money will not be allowed if the borrowing was for the purposes of a business discontinued before the commencement of the accounting year.
Interest liable to tax but payable outside India, will not be allowed as deduction unless tax has been deducted at source from such interest and in respect of which there is no person in India, who may be treated as an agent. It means interest paid to a non-resident shall be allowable as deduction if tax on such interest is paid or deducted at source or there is a person in India who can be treated as an agent of such a non-resident person.
In case interest is paid to a person outside India without deductions of tax, full such interest is disallowed. But, if, in a subsequent year tax is paid on such interest, assessee can claim deduction of interest disallowed earlier.
In the explanation given in this clause of section 36, it is said that recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed as borrowed capital within the meaning of this clause.
The amount of interest on loan taken for acquisition of new asset or for extension of existing business or profession for the period between the date of taking loan and the date on which asset is first put into use (whether capitalized or not) shall not be allowed to be debited.
Interest on delayed payments under “The Interest on Delayed payment to Small Scale and Ancillary Industrial Undertaking Act, 1993”
(a) In case supplier supplies any goods or services to any buyer, the buyer must make the payment within stipulated time.
(b) In case payment is not made in this stipulated time, the buyer shall pay interest @ 5% above the highest of the minimum lending rates charged by scheduled banks.
(c) This interest will not be allowed to be debited to the P & L A/c with effect from assessment year 1993-94.