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Interest deduction disallowance u/s 36(1)(iii) of income tax

IT : Disallowance u/s 36(1)(iii)(proviso) applicable to extension of existing business and not to setting up altogether different or new business

• Proviso to section 36(1)(iii) provides that no interest paid shall be allowed as deduction in respect of capital borrowed for acquisition of an asset for extension of existing business for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which the asset was first put to use.

• In this provision the reference is first to the existing business and then to its extension. It does not refer to setting up an altogether different or new business.
• In the absence of any specific statutory meaning to the expression 'extension of existing business', one has to go by its meaning as understood in common parlance.

• Assessee shifting its business from rented office to its own Office premises acquired with borrowed funds is extension of existing business within the meaning of proviso to section 36(1)(iii) The instant case is of 'extension of existing business' and not that of setting up of a new business, inasmuch as by having its own premises and doing the same business, the assessee will now be in position to carry on its operation at a much wider scale in a hassle free manner. This would obviously result in extension of its existing business.

Related case
• Per Contra : Breeze Constructions (P.) Ltd. v. ITO [2012] 21 taxmann.com 114 (Delhi - Trib.) wherein it was held that proviso to section 36(1)(iii) is also applicable when assets are acquired for new business. If the proviso is interpreted to signify that the same will not be applicable to such acquisition of assets, it will defeat the whole purpose of the proviso -[2012] 21 taxmann.com 288 (Mumbai - Trib.)

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