Deduction allowable on Interest Paid on Borrowings for Acquisition of Capital Assets: Gujarat HC grants Relief to Vodafone [Read Order]

The Gujarat High Court has held that the interest paid in respect of borrowings for the acquisition of capital assets is an allowable deduction under S.36(1)(iii) of the Income Tax Act.

The assessee-company is engaged in providing outsourcing services for finance, accounts, human resources and supply chain management and data centre to Vodafone India Limited and its Indian subsidiaries.

In the course of the assessment, the Assessing Officer (AO) inter alia noticed that the assessee-company (VSSL) has shown a total addition to computers on account of computer software amounting to Rs.15,54,31,008/-.

The Assessing Officer (AO) noticed that the assessee has claimed depreciation @ 60% on such computer software. It was observed by the Assessing Officer(AO) that the aforesaid purchases were made mainly on SAP product which is a customized product having software just a minor component of it.

This product was stated to be delivered to the assessee along with loads of other technical services and know-how to operate and utilize such specialized product for enduring benefits to its business.

The Assessing Officer(AO) thus disputed the eligibility of claim of higher depreciation @ 60% eligible to computer or computer software and opined that the aforesaid software of Rs.15.54 crores should be dealt with as ‘licence’ in the nature of intangible assets under the provisions of s.32(1)(ii) of the Act where the depreciation allowance is set out @ 25%.

The Assessing Officer (AO) accordingly recomputed the depreciation on expenses incurred towards the purchase of SAP products amounting to Rs.15,54,31,008/- @ 25% in place of 60% claimed by the assessee applicable to block ‘computer and computer software.

The assessed income of the assessee was accordingly increased by an amount of Rs.5,44,00,853/- owing to the reversal of alleged excess claim of depreciation.

The division bench comprising of Justices J.B.Pardiwala and Bhargav D Karia pronounced the judgment based on an appeal against Vodafone Shared Services Limited.

Section 36(1)(iii) allows the deduction of the amount of interest paid in respect of capital borrowed for the purposes of business. The deduction is granted 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 High Court observed that the Capital borrowed resulted in the acquisition of asset without resulting in the extension of existing business per se, the deterrence embodied in proviso was not applicable and consequently the claim was governed by the main provision of section 36(1)(iii) of the Act.

While relying upon the judgement in Vardhman Polytex Ltd. vs. CIT wherein the  Supreme Court also referred to another decision of Supreme Court in the case of Care Healthcare Ltd. and answered the issue in favour of assessee.

While dismissing the appeal by Revenue the Court also said that the interest paid in respect of borrowings for the acquisition of capital assets is an allowable deduction under S.36(1)(iii) of the Income Tax Act.