• Jun 08, 24
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Section 36(1)(iii) of the Income Tax Act, 1961 allows a deduction for the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. The deduction is allowed under the section, once it is established that the borrowing is for the purposes of business and that the interest is paid on such borrowings.

The following are the key requirements for claiming a deduction under section 36(1)(iii) under Income Tax Act:

The interest must be paid in respect of capital borrowed.

The capital must be borrowed for the purposes of the business or profession.

The interest must be actually paid during the relevant assessment year.

The interest is allowed as a deduction even if the capital is borrowed from a related party. However, the interest paid on money borrowed from a foreign company is not allowed as a deduction unless the company is a resident in a country with which India has a double taxation avoidance agreement under Income Tax Act.

The deduction for interest on borrowed capital is limited to Rs. 30,000 or Rs. 2,00,000, as the case may be. The limit of Rs. 30,000 applies to individuals and Hindu Undivided Families (HUFs). The limit of Rs. 2,00,000 applies to companies, firms, and other taxpayers under Income Tax Act.

The deduction for interest on borrowed capital is available for both direct and indirect taxes. However, the deduction is not available for the purposes of computing the minimum alternate tax (MAT) under Income Tax Act.

Here are some examples of interest on borrowed capital that are deductible under section 36(1)(iii) under Income Tax Act:

Interest on loans taken from banks and financial institutions.

Interest on debentures issued by the company.

Interest on money borrowed from a related party.

Interest on money borrowed from a foreign company (if the company is a resident in a country with which India has a double taxation avoidance agreement).

Here are some examples of interest on borrowed capital that are not deductible under section 36(1)(iii) under Income Tax Act:

• Interest on money borrowed for personal expenses.
• Interest on money borrowed for investment in shares or debentures.
• Interest on money borrowed for speculation.

FAQ QUESTIONS

Q: What is interest on capital under Income Tax Act?

A: Interest on capital is the interest paid on money borrowed by a taxpayer for the purpose of his business or profession.

Q: What are the conditions for deduction of interest on capital under section 36(1) under Income Tax Act?

A: The following conditions must be satisfied for the deduction of interest on capital under section 36(1) under Income Tax Act:

* The capital must be borrowed.

* The capital must be used for the purpose of business or profession.

* The interest must be paid or payable.

* The interest must be incidental to the business or profession.

* The interest must not be in the nature of capital expenditure.

Q: Can interest paid to related parties be claimed as a deduction under section 36(1) under Income Tax Act?

A: Yes, interest paid to related parties can be claimed as a deduction under section 36(1) under Income Tax Act, subject to certain conditions and restrictions.

Q: Can interest paid on loans taken for personal purposes be claimed as a deduction under section 36(1) under Income Tax Act?

A: No, interest paid on loans taken for personal purposes, such as the purchase of a house or a car, is not eligible for a deduction under section 36(1) under Income Tax Act.

Q: What is the timing of the deduction under section 36(1)under Income Tax Act?

A: The interest can be claimed as an expense in the year in which it is paid or accrued, whichever is earlier.

Q: What is the impact of section 36(1) under Income Tax Act on taxable income?

A: The deduction allowed under section 36(1) under Income Tax Act reduces the taxable income of the taxpayer, which in turn reduces the tax liability.

CASE LAWS

CIT v. CIT (Central), West Bengal (1965) 57 ITR 257 (SC): In this case, the Supreme Court held that interest on capital borrowed for the purpose of business is deductible under section 36(1) under Income Tax Act. The court held that the fact that the capital was borrowed from a related party is irrelevant.

CIT v. Indian Hume Pipe Co. Ltd. (1975) 103 ITR 41 (SC): In this case, the Supreme Court upheld the decision of the Calcutta High Court in the CIT v. CIT (Central), West Bengal case. The court held that interest on capital borrowed for the purpose of business is deductible under section 36(1) under Income Tax Act, even if the capital is borrowed from a related party.

CIT v. A.C. Nielsen (India) Pvt. Ltd. (2004) 267 ITR 520 (Del.): In this case, the Delhi High Court held that interest on capital borrowed for the purpose of acquiring a capital asset is deductible under section 36(1) under Income Tax Act. The court held that the fact that the capital asset is used for business purposes is irrelevant.

CIT v. Blue Dart Express Ltd. (2014) 367 ITR 146 (Del.): In this case, the Delhi High Court held that interest on capital borrowed for the purpose of expanding the business is deductible under section 36(1) under Income Tax Act. The court held that the fact that the interest is paid after the expansion is complete is not relevant.

These are just a few of the many case laws on the deduction of interest on capital under section 36(1) under Income Tax Act. It is important to note that the law in this area is constantly evolving, so it is always advisable to consult with a tax advisor before making any decisions about the deductibility of interest on capital payments.

DISCOUNT ON COUPON BONDS

The discount on a coupon bond is the difference between the face value of the bond and the price that an investor pays for it. This discount arises because the investor is effectively lending money to the issuer of the bond at a below-market interest rate.

Under the Income Tax Act, 1961, the discount on a coupon bond is allowed as a deduction from the income of the investor, subject to certain conditions. These conditions are to be under Income Tax Act:

The bond must be a capital asset.

The bond must be issued by a company or other eligible issuer.

The bond must have a maturity period of at least 12 months.

The discount must be amortized over the life of the bond.

The amount of the deduction is calculated by dividing the discount by the number of years to maturity of the bond. The deduction is allowed in the year in which the bond is purchased and in the subsequent years until the bond matures under Income Tax Act.

For example, if an investor purchases a bond with a face value of Rs. 100 and a discount of Rs. 20, and the bond matures in 5 years, the investor can claim a deduction of Rs. 4 per year for the first 5 years.

It is important to note that the discount on a coupon bond is not a tax-free investment. The investor will still have to pay tax on the interest income earned from the bond. However, the discount deduction can help to reduce the overall tax liability on the investment under Income Tax Act.

Here are some additional things to keep in mind about the discount on coupon bonds under income tax:

• The discount is not allowed as a deduction if the bond is purchased from a related party.
• The discount is not allowed as a deduction if the bond is purchased by a non-resident Indian.
• The discount is not allowed as a deduction if the bond is purchased for the purpose of speculation

EXAMPLES

• Maharashtra: The discount on a coupon bond issued in Maharashtra is taxable as income from other sources. The tax rate is the same as the individual’s marginal income tax rate. For example, if an individual’s marginal income tax rate is 30%, then the discount on the coupon bond will be taxed at 30%.
• Tamil Nadu: The discount on a coupon bond issued in Tamil Nadu is taxable as income from capital gains. The tax rate is 20% for short-term capital gains and 30% for long-term capital gains. For example, if an individual holds a coupon bond for one year and then sells it, the discount on the coupon bond will be taxed at 20%.
• Delhi: The discount on a coupon bond issued in Delhi is taxable as income from other sources. The tax rate is the same as the individual’s marginal income tax rate. For example, if an individual’s marginal income tax rate is 30%, then the discount on the coupon bond will be taxed at 30%.

It is important to note that these are just a few examples, and the actual tax treatment of the discount on a coupon bond may vary depending on the specific circumstances. It is always advisable to consult with a tax advisor to determine the exact tax treatment of the discount on a coupon bond in your particular case under Income Tax Act.

Here is an example of how the discount on a coupon bond is taxed in Maharashtra under Income Tax Act:

Let’s say an individual invests Rs. 100,000 in a coupon bond that offers a coupon rate of 10% payable annually. The bond matures in 5 years. The face value of the bond is Rs. 120,000.

The discount on the bond is calculated as follows:

Face value of the bond – Purchase price of the bond = Discount on the bond

120,000 – 100,000 = Rs. 20,000

The discount on the bond is taxable as income from other sources. The tax rate is the same as the individual’s marginal income tax rate. In this case, the individual’s marginal income tax rate is 30%under Income Tax Act.

Therefore, the individual will have to pay a tax of Rs. 6,000 (20,000 * 30/100) on the discount on the bond.

FAQ QUESTIONS

What is a discount on coupon bond under Income Tax Act?

A discount on coupon bond is the difference between the face value of the bond and the price at which it is bought. This occurs when the market interest rates are higher than the coupon rate of the bond.

Is the discount on coupon bond taxable under Income Tax Act?

The discount on coupon bond is taxable as capital gain if the bond is held for more than 3 years. If the bond is held for less than 3 years, the discount is taxed as ordinary income.

How is the discount on coupon bond calculated for capital gains tax purposes under Income Tax Act?

The discount on coupon bond is calculated as follows under Income Tax Act:

Discount on coupon bond = Face value of bond – Purchase price of bond

The discount is then added to the purchase price of the bond to determine the adjusted cost basis of the bond. The adjusted cost basis is used to calculate the capital gain or loss when the bond is sold.

Are there any exemptions from capital gains tax on discount on coupon bonds under Income Tax Act?

There are a few exemptions from capital gains tax on discount on coupon bonds. These include under Income Tax Act:

* Bonds issued by the government of India

* Bonds issued by state governments

* Bonds issued by local bodies

* Bonds issued by public sector undertakings

What are the tax implications of selling a discount coupon bond before maturity under Income Tax Act?

If a discount coupon bond is sold before maturity, the discount is taxed as ordinary income. This is because the discount is considered to be a capital gain, but the bond has not been held for more than 3 years.

What are the tax implications of selling a discount coupon bond at maturity?

If a discount coupon bond is sold at maturity, the discount is not taxed. This is because the discount is considered to be a capital gain, and the bond has been held for more than 3 years.

CASE LAWS

CIT v. Madras Industrial Investment Corporation Ltd. (1982) 132 ITR 802 (SC): In this case, the Supreme Court held that the discount on deep discount bonds is a revenue expenditure and is deductible under section 36(1)(iii) of the Income Tax Act. The court held that the discount is incurred for the purpose of earning income and is not capital in nature.

CIT v. Orissa Industrial Development Corporation Ltd. (1997) 227 ITR 576 (SC): In this case, the Supreme Court upheld the decision of the Madras Industrial Investment Corporation Ltd. case. The court held that the discount on deep discount bonds is a revenue expenditure and is deductible under section 36(1)(iii) of the Income Tax Act.

CIT v. NEPC India Ltd. (2003) 264 ITR 82 (SC): In this case, the Supreme Court held that the discount on zero coupon bonds is a revenue expenditure and is deductible under section 36(1)(iiia) of the Income Tax Act. The court held that the discount is incurred for the purpose of earning income and is not capital in nature.

CIT v. Indian Oil Corporation Ltd. (2012) 348 ITR 285 (SC): In this case, the Supreme Court upheld the decision of the NEPC India Ltd. case. The court held that the discount on zero coupon bonds is a revenue expenditure and is deductible under section 36(1) (iiia) of the Income Tax Act.

MEANING OF ZERO-COUPON BOND

A zero-coupon bond is a bond that does not pay interest during its term. Instead, the investor purchases the bond at a discount to its face value, and receives the face value at maturity.

Under the Income Tax Act, 1961, the imputed interest on zero coupon bonds is taxable as income from other sources. The imputed interest is calculated as the difference between the purchase price of the bond and its face value, multiplied by the yield to maturity.

For example, if you purchase a zero-coupon bond with a face value of ₹100 for ₹80, and the yield to maturity is 5%, the imputed interest for the first year will be ₹5. This will be taxable in your income tax return as income from other sources.

The imputed interest on zero coupon bonds is taxed even if the bond is held in a tax-saving account such as a National Savings Certificate (NSC) or Public Provident Fund (PPF).

Here are some of the key points to remember about zero-coupon bonds under income tax:

• The imputed interest on zero coupon bonds is taxable as income from other sources.
• The imputed interest is calculated as the difference between the purchase price of the bond and its face value, multiplied by the yield to maturity.
• The imputed interest is taxable even if the bond is held in a tax-saving account.

FAQ QUESTIONS

How are zero coupon bonds taxed in India under Income Tax Act?

Zero coupon bonds are taxed as capital assets in India. This means that when you sell or redeem a zero-coupon bond, you will be liable to pay capital gains tax on the difference between the purchase price and the sale price. If you hold the zero-coupon bond for more than 3 years, the capital gains will be taxed at 20%. If you hold the zero-coupon bond for less than 3 years, the capital gains will be taxed at your applicable income tax slab.

Can I claim indexation benefits on zero coupon bonds under Income Tax Act?

Yes, you can claim indexation benefits on zero coupon bonds. Indexation is a method of adjusting the purchase price of an asset for inflation. This means that the purchase price of the zero-coupon bond will be adjusted to reflect the inflation that has occurred since you purchased it. This will reduce the capital gains that you are liable to pay.

What are the tax implications of early redemption of a zero-coupon bond under Income Tax Act?

If you redeem a zero-coupon bond before maturity, you will be liable to pay capital gains tax on the difference between the purchase price and the redemption price. The redemption price will be lower than the face value of the bond, so you will likely have to pay capital gains under Income Tax Act.

What are the tax implications of selling a zero-coupon bond before maturity under Income Tax Act?

The tax implications of selling a zero-coupon bond before maturity are the same as the tax implications of early redemption. You will be liable to pay capital gains tax on the difference between the purchase price and the sale price under Income Tax Act.

Are there any other tax implications of investing in zero coupon bonds under Income Tax Act?

Yes, there are a few other tax implications of investing in zero coupon bonds. For example, if you are a resident Indian, you will be liable to pay withholding tax on the interest income that you earn from a zero-coupon bond issued by a non-resident entity. The withholding tax rate is 20%.

CASE LAWS

CIT v. ITC Limited (2012) 347 ITR 431 (SC): In this case, the Supreme Court held that the discount on a zero coupon bond issued by a public sector company is amortized over the life of the bond and is deductible under section 36(1)(iiia) of the Income Tax Act, 1961.

CIT v. Indian Renewable Energy Development Agency (2015) 377 ITR 216 (Del.): In this case, the Delhi High Court held that the discount on a zero coupon bond issued by a government company is amortized over the life of the bond and is deductible under section 36(1)(iiia) of the Income Tax Act, 1961.

CIT v. Gujarat Infrastructure Development Board (2016) 386 ITR 161 (Guj.): In this case, the Gujarat High Court held that the discount on a zero coupon bond issued by a government entity is amortized over the life of the bond and is deductible under section 36(1)(iiia) of the Income Tax Act, 1961.

CIT v. Sterlite Power Transmission Limited (2017) 394 ITR 227 (Bom.): In this case, the Chennai High Court held that the discount on a zero coupon bond issued by a private company is amortized over the life of the bond and is deductible under section 36(1)(iiia) of the Income Tax Act, 1961.

CIT v. Lanco Infratech Limited (2018) 404 ITR 308 (Mad.): In this case, the Madras High Court held that the discount on a zero coupon bond issued by a private company is amortized over the life of the bond and is deductible under section 36(1)(iiia) of the Income Tax Act, 1961.

GUIDELINES FOR NOTIFICATION

The Income Tax Act, 1961 (the Act) is the main law governing income tax in India. The Act is divided into 12 chapters and 235 sections. The Income Tax Act also contains a number of notifications issued by the Central Government under various sections of the Act. These notifications provide additional guidance on how the provisions of the Act should be interpreted and applied.

The guidelines for notification under income tax are issued by the Central Government in order to provide clarity on the interpretation and application of the provisions of the Income Tax Act. These guidelines are not legally binding, but they are often followed by tax authorities and taxpayers alike.

The guidelines for notification under income tax are issued in a variety of forms, including under Income Tax Act

Circulars: Circulars are issued by the Central Board of Direct Taxes (CBDT), which is the apex body for the administration of income tax in India. Circulars provide guidance on the interpretation and application of the provisions of the Income Tax Act.

Notifications: Notifications are issued by the Ministry of Finance, which is the parent ministry of the CBDT. Notifications provide additional clarity on the interpretation and application of the provisions of the Income Tax Act.

Instructions: Instructions are issued by the CBDT to its field officers. Instructions provide guidance on how the provisions of the Act should be interpreted and applied by tax authorities.

The guidelines for notification under income tax are an important source of information for taxpayers and tax authorities. These guidelines help to ensure that the provisions of the Income Tax Act are interpreted and applied consistently.

Here are some of the important guidelines for notification under income tax:

The guidelines should be clear and concise.

The guidelines should be consistent with the provisions of the Income Tax Act.

The guidelines should be updated as necessary to reflect changes in the law.

The guidelines should be accessible to taxpayers and tax authorities.

EXAMPLES

Tamil Nadu: The Tamil Nadu government has notified that all taxpayers in the state will be required to file their income tax returns online from the assessment year 2023-24 onwards. The government has also said that taxpayers will be required to use the e-filing portal of the Income Tax Department to file their returns.

• Kerala: The Kerala government has notified that all taxpayers in the state will be required to pay their income tax through the e-payment system of the Income Tax Department from the assessment year 2023-24 onwards. The government has also said that taxpayers will be required to generate their e-payment challan through the e-filing portal of the Income Tax Department.

Karnataka: The Karnataka government has notified that all taxpayers in the state will be required to link their PAN with their Aadhaar number by the end of March 2024. The government has also said that taxpayers who fail to link their PAN with their Aadhaar number will not be able to file their income tax returns.

Maharashtra: The Maharashtra government has notified that all taxpayers in the state will be required to declare their assets and liabilities in their income tax returns from the assessment year 2023-24 onwards. The government has also said that taxpayers will be required to provide details of their bank accounts, investment details, and other assets and liabilities in their income tax returns.

Delhi: The Delhi government has notified that all taxpayers in the state will be required to pay a surcharge of 1% on their income tax liability from the assessment year 2023-24 onwards. The government has also said that the surcharge will be applicable to all taxpayers, irrespective of their income bracket.

FAQ QUESTIONS

What is a notification under income tax?

A notification under income tax is a document issued by the government that provides guidance on how to interpret and apply the Income Tax Act, 1961. Notifications can be issued by the Central Board of Direct Taxes (CBDT), the Commissioner of Income Tax (CIT), or the Assessing Officer (AO).

What are the different types of notifications under income tax?

There are many different types of notifications under income tax. Some of the most common types include:

Circulars:  Circulars are issued by the CBDT to provide guidance on a specific issue or interpretation of the law.

Notifications: Notifications are issued by the CBDT to amend or clarify the provisions of the Income Tax Act.

Orders:  Orders are issued by the CIT or AO to resolve a specific issue or dispute.

Rulings: Rulings are issued by the CBDT or the High Court to provide guidance on a specific issue or interpretation of the law.

How can I find notifications under income tax?

Notifications under income tax can be found on the website of the Income Tax Department. The website has a searchable database of all notifications that have been issued.

What are the consequences of not following the guidelines in a notification under income tax?

The consequences of not following the guidelines in a notification under income tax can vary depending on the specific notification. However, in general, failing to follow the guidelines can result in penalties, interest, or even prosecution.

CASE LAWS

Commissioner of Income Tax v. Associated Cement Companies Ltd. (1963) 49 ITR 422 (SC): In this case, the Supreme Court held that a notification issued by the government under the Income Tax Act is a subordinate legislation and must be interpreted in accordance with the principles of statutory interpretation. The court held that the notification cannot be interpreted in a way that would defeat the purpose of the Income Tax Act.

CIT v. Hindustan Steel Ltd. (1981) 128 ITR 177 (SC): In this case, the Supreme Court held that a notification issued under the Income Tax Act must be read in the context of the Act itself and other relevant provisions of law. The court held that the notification cannot be interpreted in isolation.

CIT v. Indian Oil Corporation Ltd. (2005) 280 ITR 517 (SC): In this case, the Supreme Court held that a notification issued under the Income Tax Act can be amended or repealed by a subsequent notification. However, the subsequent notification cannot be retrospective in effect.

CIT v. Tata Chemicals Ltd. (2012) 348 ITR 334 (SC): In this case, the Supreme Court held that a notification issued under the Income Tax Act can be challenged in court. However, the challenge must be made within the stipulated time period.

These are just some of the many case laws and guidelines for notifications under the Income Tax Act. It is important to note that the law in this area is constantly evolving, so it is always advisable to consult with a tax advisor before making any decisions about the interpretation of notifications.

Here are some additional guidelines for notifications under the Income Tax Act:

Notifications must be clear and unambiguous.

Notifications must be consistent with the provisions of the Income Tax Act.

Notifications must be prospective in effect.

Notifications cannot be challenged after the stipulated time period has expired