Deductible and Non-deductible Expenses (Interest Expense & Leasing…
Sec 33(1)(a), allow sum payable for the relevant period/any part of period by way of interest upon any money borrowed by that person:
Employed in that period in the production of gross income from that sources
Laid out on asset used/held in that period for the production of gross income from that sources.
• incurred in production of gross income.
• expensed for accounting purpose
• for capitalized and absorbed as cost
10.6.1.2 Restriction of Interest Expense
Sec 33(2) ITA, the deductibility of interest on borrowed money obtained for business purpose but also use in non-business purposes.
For non-business purposes will be allowed to be deducting in relevant income derived from loan or an investment.
Restriction is computed on monthly basic
• When no investment , the whole interest in that month will be deductible.
• income derived from the investment like dividend, so the interest will be deducted from the income.
• Monthly interest deemed to accrue over the period.
• If amount loan/investment exceed the amount of borrowings outstanding, then monthly interest will be fully disallowed.
✘ Interest to be deducted there must be an income from the source example : the share portfolio income
Interest Expense & Leasing
• Cost incurred by an entity for amount of borrowed funds.
• For company : it is deductible
• For an individual’s case : it depends on his or her jurisdiction and also on the loan’s purpose
10.6.2.2 Some guidance to deductible and Non-deductible interest disbursement
Allowable & deductible
• 5) Interest on money borrowed to purchase property
• 4) Interest expenses paid on the breach of an agreement
• 3) Interest incurred on debentures issued by the company
-Hire purchase interest payable will be deductible
• 2) Loan to purchase fixed asset (plant & machinery use to business)
For example: Dividends
• 1) Borrowing money to purchase shares (generate income)
Not allowable & not deductible
• 1) Loans raised specifically to pay dividends
• 2) Interest on monies raised to finance pre-production or pre-commencement expenses
• 3) Interest on monies borrowed to buy shares in the company in which the taxpayer is employed cannot be allowed where the interest is claimed against the employment income
• 4) On money secured to buy a private asset or property
• 5) Interest paid on money borrowed to pay overdue taxes
• 6) On money borrowed to pay the shareholders on capital contribution by them.
• 7) On amounts paid by the surviving partners to ex-partners on the dissolution of the partnership
• 8) Interest paid on financing tax free investment
• 9) Interest where it was paid to the non-resident without deduction of tax under Sec. 109
• 10) Interest paid for the breach of the law