Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1987-88 - Assessee-company was engaged in construction of buildings - It undertook a project and obtained certain loan for work-in-progress - Whether project obtained constituted stock-in-trade and, therefore, interest paid on borrowed capital was an allowable deduction - Held, yes - Whether while adjudicating claim for deduction under section 36(1)(iii), nature of expenses - Whether expenses are on capital account or revenue account is irrelevant - Held, yes FACTS The assessee-company was engaged in the business of construction of building. It followed mercantile system of accounting. The assessee had undertaken the project of construction of flats and obtained certain loan for work-in-progress. For the assessment year 1987-88, the assessee claimed deduction of certain amount as interest on money borrowed under section 36(1)(iii). The Assessing Officer allowed the deduction claimed by the assessee. However, the Commissioner, exercising authority under section 263, disallowed the deduction concluding that it was not a revenue expenditure because it was a loan raised for acquiring a capital asset and, therefore, the interest incurred would form part of capital expenditure. On appeal by the assessee, the Tribunal allowed the deduction. On reference : HELD In the instant case, it was clear that the assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under section 28. The assessee had undertaken the project of construction of flats. Therefore, the loan was obtained for obtaining stock-in-trade. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. Since the assessee had received loan for obtaining stock-in-trade, it was entitled to deduction under section 36(1)(iii). While adjudicating the claim for deduction under section 36(1)(iii), the nature of expenses - whether the expenses are on capital account or revenue account is irrelevant as the section itself…

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