[2021] 124 taxmann.com 357 (Gujarat)

HIGH COURT OF GUJARAT

B. Nanji & Co.

Short Overview:

Section 36(1)(iii), read with section 57(iii), of the Income-tax Act, 1961

 Interest on borrowed capital (For purposes of business)

 Assessment year 1996-97

Whether interest paid on capital borrowed for purpose of business is to be allowed as a deduction in computing taxable income

Held, yes

 Issue was as to whether expression ‘commercial expediency’ is of wide import and once it is established that there was a nexus between interest paid and claimed as expenditure and business of assessee, deduction under section 36(1)(iii) is to be allowed on such interest payment and revenue cannot assume role of a businessman to decide whether expenditure was reasonable or not

 Held, yes

Assessee, company was engaged in business of real estate

 During year, it borrowed, funds and utilised same far acquiring a housing finance company, namely, IHFC by purchasing its shares

 Assessee claimed deduction on account of interest paid on such capital borrowed – Assessing Officer disallowed same

 It was noted that assessee had acquired said finance company so as to make funds readily available when required for development of a housing project or to fund any acquisition of real estate

Thus, investment in share was for expansion of real estate business of assessee

Whether, on facts, said interest paid by assessee on capital borrowed was to be allowed as deduction under section 36(1)(iii)

Held, yes

Conclusions : 

Where assessee company, engaged in business of real estate, borrowed capital for acquiring a housing finance company by purchasing its shares so as to make funds readily available when required for development of a housing project or to fund any acquisition of real estate, since such investment in shares by assessee was for expansion of its real estate business, interest paid on such capital borrowed was to be allowed as deduction under section 36(1)(iii)