Business borrowings stay deductible despite later personal withdrawals, if the original loan was taken for business purposes.

Interest on capital borrowed for business remained deductible under section 10(2)(iii) of the Indian Income-tax Act, 1922 because the statutory test depended on the purpose of the borrowing, not on later withdrawals from the business for personal expenses. The assessee had borrowed funds for carrying on the Hindu undivided family business, and subsequent personal use of withdrawn amounts did not alter the character of the original borrowing. In the absence of any specific borrowing made for household expenses, the required link to deny the deduction was not established, so the disallowance was unjustified.

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Issues: Whether interest paid on borrowings made for the business remained deductible under section 10(2)(iii) of the Indian Income-tax Act, 1922 when part of the borrowed funds was later withdrawn by the assessee for personal expenses.

Analysis: The borrowings were made for carrying on the business of the Hindu undivided family. The fact that the assessee subsequently withdrew amounts from the business for personal expenses did not change the character of the original borrowings. The statutory allowance turns on whether the capital was borrowed for the purposes of the business, not on the later use made of withdrawn funds. Since there was no case of a specific borrowing being taken for household expenses, the link required to deny the deduction was absent.

Conclusion: The interest remained allowable as a deduction and the disallowance of Rs. 13,500 was not justified, in favour of the assessee.

Final Conclusion: The reference was answered by holding that subsequent personal withdrawals did not defeat the deduction of interest on capital borrowed for business purposes.

Ratio Decidendi: Interest on capital borrowed for the purposes of business is deductible even if the assessee later withdraws funds from the business for personal use, so long as the borrowing itself was not for non-business purposes.

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