Guide to .. Tax Management ,Tax Planning and Tax Saving

[Section-36(1)(iii)] : Interest on Borrowed Capital


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.


More Topics .... " Business or Profession"
Definition of the Head ' Business or Profession'-[Sec.-28]
Compensation Received as Business Income(Section-28(ii))]
Income of a Trade or Professional Association [Section 28(iii)]
Income from Export Incentives is chargeable to Income Tax
Any Amount Received Under certain Agreement for not to Carry on Business [Section 28(va)]
Speculation Business [Explanation to Section 28]
Profit Earned from an Illegal Business
Transfer of certain Assets Specified u/s 35AD in certain circumstances [Section 28(vii)]
Certain Incomes relating to business but not taxable under the head ‘Profits Gains of Business or Profession .
Computation of Income of Business or Profession - General Important Points
General Principles - for Deductions Allowed from Gross Income of Business and Professions
Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]
Expressly Admissible Deductions from Gross Income from Business or Profession [Section 30-36]
Expenditure Incurred in the Field of Scientific Research [Section 35]
Expenses on Research Activities carried on by the assessee himself
Contribution to Approved Institutions to carry on Research is Allowed as Weighted Deductions for Calculating Profits and Gains of Business or Professions.
Expenditure incurred on the acquisition of Patents Rights or Copy Rights [Section 35A] [Applicable for expenditure incurred before 1-4-1998]
Expenditure on know-how [Section 35 AB] [Applicable for expenditure incurred before 1-4-1998]
Expenditure for obtaining License to operate Telecommunication Services [Section 35 ABB]
Expenditure on eligible projects or schemes [Section 35 AC]
Deduction in respect of expenditure incurred on setting up of a Specified Business [Sec. 35AD]
Any amount given to an institution or association [Section-35CCA]
Expenditure on Notified Agricultural Extension Project [Section-35 CCC] [w.e.f. A.Y. 2013-14]
Expenditure on Notified Skill development project [Section-35 CCD] [w.e.f. A.Y. 2013-14]
Amortisation of Certain Preliminary Expenses [Section 35D]
Expenditure on demerger or amalgamation [Section 35DD]
Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme [Section 35DDA]
Expenditure on Prospecting etc., for certain Minerals [Section 35E]
Other Deductions Allowed to Compute Income from Business or Profession   [Section-36]
Interest on Borrowed Capital [Sec. 36(1)(iii)].
Deduction of discount on Zero Coupon Bond [Section 36(iiia)]
Contribution to Provident and Superannuation Fund [Sec. 36(1)(iv)].
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]
Bad debts [Sec. 36(1)(vii)]
Bad debts of Banks, financial institution and industrial investment corporation etc. [Section 36(1)(viia)]
Special Reserve Created and Maintained by Financial Corporation [Section 36(1)(viii)].
Expenditure on Family Planning [Section-36(1)(ix)].
General Or Allowable Deductions [Section 37]
Commission earned by the agents of Life Insurance Corporation, Unit Trust of India, Post Office or Mutual Funds
Legal Expenses in the Interest of Business are Allowable Expenses
Losses incidental to Business Allowed to be Debited.
Expenses Expressly Disallowed In the Case of any ‘Assessee’ [ Section-40a]
Expenses Expressly Disallowed In the Case of any Firm [Section 40(b)]
Expenses Expressly Disallowed In General Cases [Section 40(b)]
Disallowing of certain Expenses under certain circumstances like ‘Payments to Relatives’
Payments exceeding ` 20,000 by cash/bearer cheque [Section 40A (3)].
Provision for the Payment of Gratuity – [Section-40A(7)]
DEEMED PROFITS Under Profits and Gains of Business or Professions [Section 41]
VALUATION OF STOCK for Profit and Gains of Business or Professions
Deduction Of Certain Payments Only If Actually Paid [Section 43B]
Maintenance Of Accounts By Certain Persons Carrying On Profession Or Business. [Sec. 44AA]
Compulsory Audit For The Non-Corporate Assessees [Section-44 AB]
Computation of Income on Estimated Basis [Section 44AD]
Profit from the business of carriage of goods for truck owners [Section 44 AE]
Special provision for computation of income from royalties in case of nonresidents [Section 44DA]
Partly Agricultural and Partly Business Income
Adjustment In The Profit And Loss A/C Prepared By The Assessee
Computation of Profits and Gains of a Non-Resident from Shipping Business— [Section 44B]
Computation of Profits and Gains of business of Oil Exploration [Section 44BB]
Computation of Profits and Gains of the Business of operation of Aircrafts by Non-Resident [Section 44 BBA]
Computation of Profits of Foreign Enterprises [Section 44BBB]
Ceiling Limits in respect of Head Office Expenses [Section 440]
Special Provisions in case of Income of Public Financial Institutions etc. [Section 43D]
Get.. Tally.ERP9 Book + GST Practical Assignment @ Rs.550 Tally.ERP9 Book Online Order Tally.ERP9 Book Content
© 2018 : IncomeTaxManagement.Com