Notional interest deduction denied after advance was converted into shares and no longer remained an interest-bearing debt.

Notional interest on an advance was not deductible where the advance, after earlier taxation on a mercantile basis, was converted into shares of the debtor company and later sold at a loss. The conversion changed the character of the outstanding debt into a capital investment, so it no longer retained the nature of an interest-bearing loan. The claim was also not one for bad debt, because there was no ordinary write-off of an unrecovered debt. Deduction of the notional interest was therefore disallowed.

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Issues: Whether notional interest on an advance, which had been brought to tax in earlier years but was not realised and the loan was later converted into shares of the debtor company, could be deducted in computing the assessee's income.

Analysis: The assessee had advanced money to a sister concern and had not credited interest on that advance despite following the mercantile system. The outstanding amount was subsequently converted into shares, and the shares were later sold at a loss. Once the debt was employed to acquire shares in the debtor company, the advance ceased to retain its character as a debt carrying notional interest. The claim was also not one of bad debt, because there was no write-off of an unrecovered debt in the ordinary sense; instead, the debt had been transformed into a capital investment.

Conclusion: The claim for deduction of the notional interest was not allowable and the question was answered against the assessee.

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