I borrowed to buy machinery for my existing factory and the machine was not commissioned by 31 March. Can I still claim the interest under section 36(1)(iii)?
Yes, for years before 1 April 2004. The Supreme Court held that section 36(1)(iii) asks only three things: capital was borrowed, it was borrowed for the purpose of the business, and interest was paid on it. Whether the asset bought with the money was put to use in that year is irrelevant, and Explanation 8 to section 43(1) does not cut down the deduction because it belongs to the depreciation provisions. Interest of Rs 1.56 crore on borrowings used to install three new machines was allowed for assessment years 1992-93 onwards.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J) on 2008-02-08, reported as Civil Appeal Nos. 3952-3955 of 2002 with Civil Appeal Nos. 8509-8510 of 2002. It bears on section 36(1)(iii), section 43(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the case that settles that section 36(1)(iii) is a code by itself. Two arguments the Department used for years die here: that Explanation 8 to section 43(1) forces interest on an uncommissioned asset into actual cost, and that Challapalli Sugars requires capitalisation whenever the asset has not gone into production. The Court confined Challapalli to its facts, where no business had commenced at all, and drew the line that still governs: borrowing for a running business is deductible, borrowing before any business exists is capitalised. It also holds that the proviso inserted by the Finance Act 2003 operates prospectively from 1 April 2004, which decides every pending pre-2004 assessment on the point.
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The assessee manufactured and sold intravenous solutions. For assessment year 1992-93 it filed a nil return, then a revised return showing a loss of Rs 1,11,68,543. Its claimed expenses of Rs 2,12,05,459 included Rs 1,56,76,000 of interest on borrowings. During the year it installed three additional machines for producing intravenous injectibles, on which production had not started. The Assessing Officer disallowed the interest on 30 March 1995, relying on Challapalli Sugars Ltd v CIT (1975) 98 ITR 167, because the new machinery had not gone into production. The Commissioner (Appeals) confirmed the addition. The Tribunal deleted it, and the Gujarat High Court dismissed the Department's appeals under section 260A on 25 April 2001. The Department appealed. It was not the Department's case that a new business had been set up; the machines were additions to a running business. Similar appeals for assessment years 1993-94, 1995-96 and 1997-98 were heard together. A separate ground concerned the High Court's refusal to allow the Department to amend its memorandum of appeal.
The Assessing Officer was not justified in disallowing Rs 1,56,76,000 of interest on borrowings used to buy machines, and the question was answered in favour of the assessee. Interest on capital borrowed for the purposes of a business already being carried on is deductible under section 36(1)(iii) whether the asset acquired is a capital or a revenue asset, and whether or not it has been put to use in the year. Explanation 8 to section 43(1) has no application to section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act 2003 operates prospectively from 1 April 2004 and did not govern these years. On the second limb the Court went the other way: the High Court had erred in summarily rejecting the Department's applications to amend its memorandum of appeal, because the three questions raised there were substantial questions of law. Those three questions were remitted to the High Court. The Department's appeals were accordingly partly allowed, with no order as to costs.
The Court took section 36(1)(iii) on its own terms. Three conditions and no more: capital borrowed, borrowed for the purpose of business, interest paid. Following Calico Dyeing and Printing Works v CIT (1958) 34 ITR 265, all that is germane is whether the borrowing was for the purpose of business. The section makes no distinction between capital borrowed for a revenue purpose and capital borrowed for a capital purpose, and unlike section 37 it does not exclude expenditure of a capital nature. What the clause emphasises is the user of the capital, not the user of the asset that the capital produces. On Explanation 8, the Court read section 43(1) as a definition section opening with the words unless the context otherwise requires. Actual cost matters to sections 32, 32A, 33 and 41, which turn on depreciation; the phrase does not appear in section 36(1)(iii) and depreciation has no part in it, so Explanation 8 is irrelevant to the claim. The Court also separated borrowing from investment: a borrowing does not by itself bring an enduring asset into existence, it is the later investment of the money that does, and it is the borrowing that section 36(1)(iii) addresses. Challapalli Sugars was confined to its facts, a company that had not started production at all, so that its borrowing could not be for the purpose of business; India Cements Ltd v CIT (1966) 60 ITR 52 was the apt authority for a running business. On that reading the earlier decisions are consistent. The 2003 proviso was read prospectively because the same Finance Act made its other insertions operative from 1 April 2004. Explanation 8 was itself inserted retrospectively with effect from 1 April 1974, and it attaches to the provisions in which actual cost does the work - depreciation under section 32, investment allowance under section 32A, development rebate under section 33 and the balancing charge under section 41 - and not to section 36(1)(iii).
What sub-section (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital.
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Handle my notice → Ask a CA on WhatsAppYes, for years before 1 April 2004. The Supreme Court held that section 36(1)(iii) asks only three things: capital was borrowed, it was borrowed for the purpose of the business, and interest was paid on it. Whether the asset bought with the money was put to use in that year is irrelevant, and Explanation 8 to section 43(1) does not cut down the deduction because it belongs to the depreciation provisions. Interest of Rs 1.56 crore on borrowings used to install three new machines was allowed for assessment years 1992-93 onwards. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J) and bears on section 36(1)(iii), section 43(1) of the Income Tax Act 1961. It is reported as Civil Appeal Nos. 3952-3955 of 2002 with Civil Appeal Nos. 8509-8510 of 2002. This is the case that settles that section 36(1)(iii) is a code by itself. Two arguments the Department used for years die here: that Explanation 8 to section 43(1) forces interest on an uncommissioned asset into actual cost, and that Challapalli Sugars requires capitalisation whenever the asset has not gone into production. The Court confined Challapalli to its facts, where no business had commenced at all, and drew the line that still governs: borrowing for a running business is deductible, borrowing before any business exists is capitalised. It also holds that the proviso inserted by the Finance Act 2003 operates prospectively from 1 April 2004, which decides every pending pre-2004 assessment on the point. If it applies to you, the first step is this: Show that the borrowing was for a business already being carried on in the year of account, not for setting up a new one; that is the whole test and evidence of it belongs in your reply.
The assessee manufactured and sold intravenous solutions. For assessment year 1992-93 it filed a nil return, then a revised return showing a loss of Rs 1,11,68,543. Its claimed expenses of Rs 2,12,05,459 included Rs 1,56,76,000 of interest on borrowings. During the year it installed three additional machines for producing intravenous injectibles, on which production had not started. The Assessing Officer disallowed the interest on 30 March 1995, relying on Challapalli Sugars Ltd v CIT (1975) 98 ITR 167, because the new machinery had not gone into production. The Commissioner (Appeals) confirmed the addition. The Tribunal deleted it, and the Gujarat High Court dismissed the Department's appeals under section 260A on 25 April 2001. The Department appealed. It was not the Department's case that a new business had been set up; the machines were additions to a running business. Similar appeals for assessment years 1993-94, 1995-96 and 1997-98 were heard together. A separate ground concerned the High Court's refusal to allow the Department to amend its memorandum of appeal. The matter was decided on 2008-02-08 by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J). On those facts the Supreme Court held as follows. The Assessing Officer was not justified in disallowing Rs 1,56,76,000 of interest on borrowings used to buy machines, and the question was answered in favour of the assessee. Interest on capital borrowed for the purposes of a business already being carried on is deductible under section 36(1)(iii) whether the asset acquired is a capital or a revenue asset, and whether or not it has been put to use in the year. Explanation 8 to section 43(1) has no application to section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act 2003 operates prospectively from 1 April 2004 and did not govern these years. On the second limb the Court went the other way: the High Court had erred in summarily rejecting the Department's applications to amend its memorandum of appeal, because the three questions raised there were substantial questions of law. Those three questions were remitted to the High Court. The Department's appeals were accordingly partly allowed, with no order as to costs.
The Court took section 36(1)(iii) on its own terms. Three conditions and no more: capital borrowed, borrowed for the purpose of business, interest paid. Following Calico Dyeing and Printing Works v CIT (1958) 34 ITR 265, all that is germane is whether the borrowing was for the purpose of business. The section makes no distinction between capital borrowed for a revenue purpose and capital borrowed for a capital purpose, and unlike section 37 it does not exclude expenditure of a capital nature. What the clause emphasises is the user of the capital, not the user of the asset that the capital produces. On Explanation 8, the Court read section 43(1) as a definition section opening with the words unless the context otherwise requires. Actual cost matters to sections 32, 32A, 33 and 41, which turn on depreciation; the phrase does not appear in section 36(1)(iii) and depreciation has no part in it, so Explanation 8 is irrelevant to the claim. The Court also separated borrowing from investment: a borrowing does not by itself bring an enduring asset into existence, it is the later investment of the money that does, and it is the borrowing that section 36(1)(iii) addresses. Challapalli Sugars was confined to its facts, a company that had not started production at all, so that its borrowing could not be for the purpose of business; India Cements Ltd v CIT (1966) 60 ITR 52 was the apt authority for a running business. On that reading the earlier decisions are consistent. The 2003 proviso was read prospectively because the same Finance Act made its other insertions operative from 1 April 2004. Explanation 8 was itself inserted retrospectively with effect from 1 April 1974, and it attaches to the provisions in which actual cost does the work - depreciation under section 32, investment allowance under section 32A, development rebate under section 33 and the balancing charge under section 41 - and not to section 36(1)(iii). In the words reproduced by the source cited on this page: "What sub-section (iii) emphasizes is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital."
It was decided by the Supreme Court on 2008-02-08 and is reported as Civil Appeal Nos. 3952-3955 of 2002 with Civil Appeal Nos. 8509-8510 of 2002. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 36(1)(iii), section 43(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The Assessing Officer was not justified in disallowing Rs 1,56,76,000 of interest on borrowings used to buy machines, and the question was answered in favour of the assessee. Interest on capital borrowed for the purposes of a business already being carried on is deductible under section 36(1)(iii) whether the asset acquired is a capital or a revenue asset, and whether or not it has been put to use in the year. Explanation 8 to section 43(1) has no application to section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act 2003 operates prospectively from 1 April 2004 and did not govern these years. On the second limb the Court went the other way: the High Court had erred in summarily rejecting the Department's applications to amend its memorandum of appeal, because the three questions raised there were substantial questions of law. Those three questions were remitted to the High Court. The Department's appeals were accordingly partly allowed, with no order as to costs. It arises in Deductions & Disallowances matters, on section 36(1)(iii), section 43(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Answer any Explanation 8 or actual cost argument by pointing out that the words actual cost do not appear in section 36(1)(iii) and that section 43(1) opens with unless the context otherwise requires. For years from assessment year 2004-05 onwards, check the proviso to section 36(1)(iii) yourself before relying on this case, because it disallows interest on capital borrowed to acquire an asset for extension of an existing business until the asset is first put to use. Do not argue that the machine was in fact used; the case is that use of the asset does not matter, and arguing use concedes the Department's premise. Avoid arguing the claim on the footing that a new business was set up during the year; that puts you in the Challapalli Sugars line instead.
Still good law. The reasoning on section 36(1)(iii) and Explanation 8 is undisturbed on the face of the judgment and is widely followed. But the judgment itself records that a proviso was inserted in section 36(1)(iii) by the Finance Act 2003 with effect from 1 April 2004, disallowing interest on capital borrowed to acquire an asset for extension of an existing business until the asset is first put to use. For years from assessment year 2004-05 the statute, not this case, decides that situation. I have not checked the later history of the section or any subsequent Supreme Court treatment beyond what this judgment says. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line carried no reporter citations, so the reported field gives the Supreme Court appeal numbers from the judgment's own first page instead. The three questions on advertisement expenditure, section 35D and sections 80-HH and 80-I were remitted, so the judgment does not decide them and this record says nothing about them. I have not traced what the Gujarat High Court did on the remand, nor checked amendments to the proviso to section 36(1)(iii) after 2003. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Assessing Officer was not justified in disallowing Rs 1,56,76,000 of interest on borrowings used to buy machines, and the question was answered in favour of the assessee. Interest on capital borrowed for the purposes of a business already being carried on is deductible under section 36(1)(iii) whether the asset acquired is a capital or a revenue asset, and whether or not it has been put to use in the year. Explanation 8 to section 43(1) has no application to section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act 2003 operates prospectively from 1 April 2004 and did not govern these years. On the second limb the Court went the other way: the High Court had erred in summarily rejecting the Department's applications to amend its memorandum of appeal, because the three questions raised there were substantial questions of law. Those three questions were remitted to the High Court. The Department's appeals were accordingly partly allowed, with no order as to costs.
TaxSphere, “DCIT v Core Health Care Ltd”, https://taxnotice.vittsphere.com/caselaw/case/dcit-v-core-health-care-interest-on-borrowed-capital/ (validity last checked 2026-08-29)
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