Interest deduction on borrowed business capital cannot be cut down on a reasonableness test when statutory conditions are satisfied.

Under the income-tax provision allowing deduction of interest on capital borrowed for business, the only requirements were genuine borrowing, business purpose, and actual payment of interest. Once those conditions were met, the revenue could not import a separate reasonableness test or reduce the deduction because it considered the agreed rate excessive or unsupported by business considerations. The court held that fiscal statutes must be applied strictly, and where the law permitted the amount actually paid, no partial disallowance could be made by analogy to other allowance provisions. The assessee was therefore entitled to deduction of the full interest paid.

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Issues: Whether, under section 10(2)(iii) of the Indian Income-tax Act, 1922, the income-tax authorities could scale down the interest actually paid on borrowed capital merely because the agreed rate was considered unreasonable or unsupported by business considerations.

Analysis: The allowance under section 10(2)(iii) depended on three factual elements: borrowing of capital, borrowing for business purposes, and payment of interest on such capital. Once those conditions were satisfied, the provision did not contain any further standard of reasonableness. The court held that the genuineness of the borrowing and payment of interest was not in dispute, and the disallowance proceeded only on the view that a lower rate would have been sufficient. The language of the provision, unlike other allowance provisions in the Act, did not permit the authorities to substitute their own view of a reasonable rate of interest. Fiscal statutes had to be construed strictly, and where the statute allowed the amount of interest paid, no further reduction could be made by implication or analogy. The retention of the same language in section 36(1)(iii) of the new Act reinforced this construction.

Conclusion: The authorities had no power to reduce the interest deduction on the ground of reasonableness or non-business considerations; the question was answered against the Revenue and in favour of the assessee.

Final Conclusion: The references succeeded, and the assessee was entitled to deduction of the full interest actually paid on the borrowed capital, subject to the statutory conditions being satisfied.

Ratio Decidendi: Where a taxing provision allows deduction of interest paid on capital borrowed for business purposes, and the borrowing and payment are genuine, the revenue cannot import a reasonableness test and cannot disallow part of the interest merely because the agreed rate appears excessive.

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