ICDS IX - Borrowing cost: An Analysis

Deductibility of interest on borrowing cost has been subject matter of litigations in the past on several accounts, viz., deductibility of borrowing cost for purchase of capital asset, deductibility of commitment charges, interest on capital borrowed for earning exempt income, interest on borrowed capital for circular trading, etc.

Income Computation and Disclosure Standard ('ICDS') has been designed to provide clarity on various contentious tax issues at the time of computing taxable income. ICDS IX contains authoritative guidance on situations that require capitalization of borrowing cost. Accordingly, the treatment of not all types of borrowing costs is iterated in ICDS IX. On the contrary, the scope of ICDS IX is limited to the issue of capitalization of borrowing cost in certain cases. The treatment of borrowing cost for the purposes of deductibility from profit and loss account continues to be governed by section 36(1)(iii) and section 57(iii).

Definition of Borrowing cost as per ICDS and section 2(28A) of the Income Tax Act, 1961 The definition of interest as per section 2(28A) of the Act states as follows 'interest payable in any manner in respect of any moneys borrowed or debt incurred'. However, as per ICDS IX, the definition of borrowing cost as contained in para 2(1)(a) is as follows: "Borrowing costs" are interest and other costs incurred by a person in connection with the borrowing of funds and include:

(i) commitment charges on borrowings;

(ii) amortised amount of discounts or premiums relating to borrowings

(iii) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings;

(iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements."

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