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The Supreme Court has ruled that the interest paid on borrowings for the purchase of capital assets but “not put to use” in the concerned financial year is also eligible for income-tax deduction.

Dismissing the plea of Income-Tax Department, a bench comprising Justice SH Kapadia and Justice BS Reddy said that the capital borrowed must be for the purpose of business for which interest has also been paid. The Income-Tax Department had appealed to the apex court against the verdicts of Income-Tax Appellate Tribunal and the Gujarat High Court who held that the assessee company M/s Core Health Limited was entitled to deductions under Section 36(1) and (III) of the Income-Tax Act, 1961. The company had claimed a deduction of Rs 1.56 crore for the accounting year 1992-93, on the ground that the machinery borrowed by it by paying interest to the tune of the said amount was not put to use, thus, entitling it to the deduction under the relevant section. However, the I-T Department rejected the plea on the argument that the assessee was not entitled to deductions in view of Section 43 (1), which specified the “actual cost” for the purpose of assessment — a contention rejected by the tribunal and the high court.

Endorsing the view of the two courts, the apex court said that interest on money borrowed for the purposes of business is a necessary expenditure in a business, for which the assessee is entitled for deductions. “The expression ‘for the purpose of business’ is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under Section 36 (1) (III) of the 1961 Act,” the apex court said.

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