Non Capitalisation of Disallowed interest expense on borrowing as per Income tax Act

Hi Sanjay,

Let's break down your question about non-capitalisation of disallowed interest expense and its treatment under Income Tax Act and ICDS.

Facts Recap:

• Asset cost: ₹10 crore

• Loan taken: 01.01.2020

• Interest on loan: ₹50 lakhs

• Interest not paid before due date of filing return (31.10.2021)

• Interest disallowed u/s 36(1)(iii) read with 43B in AY 2021-22

• Asset put to use on 01.12.2021

• Interest paid on 03.12.2021 (after asset put to use)

• Question: Can interest paid on 03.12.2021 be capitalized as per ICDS? Is deduction allowed under 43B for FY 2021-22?

1. Disallowance under Section 43B:

• Section 43B allows deduction for certain expenses only on actual payment.

• Since interest was not paid before the due date of filing return (31.10.2021), interest of ₹50 lakhs was disallowed for AY 2021-22.

• When the interest was paid on 03.12.2021 (in FY 2021-22), it will be allowed as a deduction in the year in which payment is made i.e. FY 2021-22 or AY 2022-23 (depending on the accounting year of the assessee).

2. Capitalization of interest under ICDS:

• ICDS (Income Computation and Disclosure Standards) requires borrowing costs directly attributable to acquisition or construction of asset be capitalized as part of cost of asset.

• The borrowing cost should be capitalized until the asset is ready for its intended use.

• In this case, the asset was put to use on 01.12.2021.

• Interest paid on 03.12.2021 is after the asset was put to use, hence cannot be capitalized as per ICDS.

• Interest related to period after asset use should be charged to revenue (profit and loss account).

3. Summary:

Final points:

• Interest paid after due date but before asset put to use can be capitalized.

• Interest paid after asset put to use must be expensed (not capitalized).

• Disallowed interest under 43B will be allowed as deduction in year of payment.