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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Corporate Tax Planning

Sunrise Textiles Ltd borrows funds from a bank to buy a new machine. Under the interest deduction rule in the official text (section 32(b)), which statement is correct about interest for the period from the date of borrowing until the machine is first put to use?

Interest on money borrowed to acquire an asset, for the period from borrowing until the asset is first put to use, is excluded from the deductible interest. It makes no difference whether the company capitalises that interest in its books or not.

  1. AIt is deductible as business interest only if capitalised in the books
  2. BIt is not included in the deductible interest, whether or not it is capitalised in the booksCorrect
  3. CIt is deductible in full because the capital was borrowed for business
  4. DIt is deductible only for the first 12 months after borrowing

Explanation

Section 32(b)(i) says deductible interest does not include interest on capital borrowed for acquiring an asset, whether capitalised or not, from the borrowing date until the asset is first put to use. So the books treatment is irrelevant. The option that links deductibility to capitalisation is wrong for that reason.

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