Deductibility of interest on advance tax shortfall rejected as a statutory tax liability, not a business expense or trading loss.

Interest payable under section 18A(6) of the Indian Income-tax Act, 1922 for short payment of advance tax was not deductible in computing business profits. The liability arose because the assessee paid advance tax on its own estimate and the amount fell below the statutory threshold, so the sum was not interest on borrowed capital under section 10(2)(iii). It was also not an outgoing incurred for the purposes of business under section 10(2)(xv), because the obligation was a statutory tax liability and not a business expenditure. Nor did it amount to a trading loss under section 10(1), as it did not arise directly or incidentally from business operations. The deduction claim was therefore rejected.

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Issues: Whether interest paid under section 18A(6) of the Indian Income-tax Act, 1922 on shortfall in advance tax was allowable as a deduction in computing business profits under section 10(2)(iii), section 10(2)(xv), or section 10(1).

Analysis: The interest arose because the assessee chose to pay advance tax on its own estimate and the amount paid fell below eighty per cent of the tax determined on regular assessment. It was not interest on capital borrowed, since the assessee had merely retained its own money by paying less advance tax. The liability was a statutory obligation attaching to the assessee as a taxpayer, not an outgoing incurred for the purposes of the business. It was also not a trading loss, because the liability did not spring directly from the carrying on of the business and was not incidental to business operations.

Conclusion: The interest was not deductible under section 10(2)(iii), section 10(2)(xv), or section 10(1) of the Indian Income-tax Act, 1922, and the answer to the referred question was in the negative.

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