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Interest on capital borrowed.

CA Unnikrishnan Nair N (Chartered Accountant) (2083 Points)

03 November 2011

A manufacturing company has leased out it's existing factory. A new factory has been set-up in the same line of business at a different location. Interest has been incurred on capital borrowed for setting-up new factory. Is the interest attributable to setting -up period is allowable as revenue expenditure ? Thanks in advance.

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4 Replies

ashish gupta ( student) (1922 Points)
Replied 03 November 2011

Sir we can take help of Accounting Standard 16 Borrowing Cost. So if there is a substantial time involved in setting up the factory then the interest should be capitalised and depreciation should be claimed.

CA Unnikrishnan Nair N (Chartered Accountant) (2083 Points)
Replied 03 November 2011

Thank you Ashish. But the question is whether such interest is of revenue nature under Income Tax.

ACCOUNTANT (Student) (559 Points)
Replied 03 November 2011

Sir i think i would be allowed...

And these would be helpful.......

CIT V Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj.) –Interest on capital borrowed would be allowed as a deduction even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset. However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed and the deduction is to be allowed.

India Cements Ltd. V. CIT (1966) 60 ITR 52 – The Supreme Court held that the act of borrowing money was incidental to the carrying on of the business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. The amount spent was not in the nature of capital expenditure and was allowable as a deductible revenue expenditure.

However, AS 16 requires incidental costs to be amortised over the Loan period.

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