Interest on borrowing to pay income-tax is not deductible absent express statutory allowance

Interest on money borrowed to pay earlier years' income-tax is not deductible against the assessee's taxable income, because the borrowing is directed to discharge a tax liability rather than to earn income. The claimed deduction could not be brought within provisions for interest on capital borrowed for business, expenditure wholly and exclusively for business, or expenditure incurred solely for earning income from other sources. In the absence of a specific statutory allowance and any shown nexus between the interest payment and income production, the burden of proving deductibility was not met.

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Issues: Whether interest paid on money borrowed to meet income-tax liability for earlier years was an allowable deduction against the assessee's share of income from the firm.

Analysis: The assessee claimed the deduction under provisions relating to interest on capital borrowed for business, expenditure wholly and exclusively for business, and expenditure incurred solely for earning income from other sources. The borrowing was, however, made to pay income-tax, and no statutory provision was shown that permitted deduction of interest on such borrowing. Income-tax was treated as an application of profits after they were earned and not as expenditure incurred in earning income. Since no nexus existed between the claimed interest payment and any statutory allowance, the burden of establishing deductibility was not discharged.

Conclusion: The interest payment was not an allowable deduction and the question was answered against the assessee.

Final Conclusion: The reference was decided in favour of the revenue, holding that interest on borrowing to pay income-tax does not reduce taxable income in the absence of a specific statutory allowance.

Ratio Decidendi: Interest on money borrowed for payment of income-tax is not deductible unless the statute expressly permits such deduction; a liability incurred for discharge of tax is not expenditure incurred in earning taxable income.

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