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Income tax

ARVIND KUMAR (business) (29 Points)

01 October 2016

whether payment of interest paid on loans taken which were further invested else where to earn more interest. please clarify

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4 Replies

ANKUR TAH (Teacher Consultant and CA finalist.) (543 Points)
Replied 02 October 2016

What clarifications you wanted for?

CA Harshal Totla (Chartered Accountant) (2229 Points)
Replied 02 October 2016

can you please further clarify your question

ARVIND KUMAR (business) (29 Points)
Replied 06 October 2016

suppose one borrow some money & he further invest it in some securities to earn some extra interest. in that case whether the interest paid on borrowed funds is a deductible expense. pl clarify

CA Harshal Totla (Chartered Accountant) (2229 Points)
Replied 06 October 2016

As per section 36(1)(iii) Any interest paid on borrowed capital is an allowable 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.
It is essential that the money should have been utilised in the assessee’s business or profession.
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.
Thus, for allowance of a claim for deduction of interest under this provision following three conditions are there:
(i) capital must have been borrowed by the assessee
(ii) It must have been borrowed for the purpose of business.
(iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure.