Interest on Amount Borrowed for declaring Dividend is Deductible from Income Tax even in the Absence of Profit Reserve: Madras HC [Read Judgment]

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In a recent Judgment, a division bench of Madras High Court has held that, the interest on the amount borrowed for declaring dividend was allowable as deduction under section 36(1)(iii) of the Income Tax Act, even in the absence of profits/reserves and the treatment of such dividend as loans in the books of the assessee company.

The Commissioner of Income Tax, Coimbatore has filed an appeal against single bench decision in favour of M/s. Sakthi Auto Components Limited.

The assessee pointed out that there had been adequate cash profits on the dates of declaration of dividend and in any event, the declaration of dividend was itself for the purpose of business. Thus, according to the assessee, expenditure incurred in connection therewith constituted an allowable deduction in terms of Section 36(1)(iii) of the Income Tax Act.

While dismissing the appeal, the division bench comprising of Justice Nooty Ramamohana Rao and Justice Anita Sumanth has observed that, “in any event, even if borrowed funds had been utilized for the purposes of declaration of dividend, the payment of interest on such borrowings constitutes expenditure ‘for the purpose of the business’ of the assessee and is an allowable deduction in terms of Section 36(1)(iii) of the Income Tax Act”.

Read the full text of the Judgment below.