Business-purpose borrowing test governs interest deductibility even when the acquired asset was not yet used in the year.

Interest on borrowed capital is deductible where the borrowing is for the purposes of the assessee's business, even if the asset acquired from the borrowing was not used during the relevant year of account. The test is the business purpose of the borrowing, not the immediate operational use or profitability of the asset created with those funds. The provision does not distinguish between borrowing for capital or revenue assets, and deduction cannot be denied merely because the borrowing had not yet generated income or the asset was still non-operational. The allowance was therefore held admissible in favour of the assessee.

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Issues: Whether interest paid on borrowed capital is deductible under section 10(2)(iii) where the capital was borrowed for business expansion but the asset acquired out of such borrowing was not used in the year of account.

Analysis: The allowance under section 10(2)(iii) depends on whether the capital was borrowed for the purposes of the business carried on by the assessee, not on whether the asset created out of the borrowing was actually used in the relevant year. The provision makes no distinction between borrowing for a capital asset and borrowing for a revenue asset. The focus is on the user of the borrowed capital for business purposes, and the deduction cannot be denied merely because the borrowing did not immediately yield profit or because the asset acquired was not yet operational. The construction is supported by the general scheme of business deductions and by analogous principles governing expenditure incurred for business purposes, including expenditure undertaken on grounds of commercial expediency.

Conclusion: Interest on borrowed capital was allowable as a deduction if the borrowing was for the purposes of the assessee's business, notwithstanding that the asset acquired from the borrowing was not used in the year of account. The question was answered in the affirmative, in favour of the assessee.

Ratio Decidendi: For deduction of interest under the business allowance provision, the test is the business purpose of the borrowing, not the actual use or profitability of the asset acquired with the borrowed funds in the same accounting year.

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