Interest on industrial unit allotment instalments qualifies as business expenditure when incurred during ongoing business operations.

Interest paid to the State Government on instalments linked to allotment of an industrial unit was held deductible as business expenditure under section 37(1) of the Income-tax Act, 1961. The assessee had already commenced business, and the liability arose during the course of carrying on that business rather than as interest on capital borrowed for acquisition of money. The payment was treated as a business outgo, and not as capital or personal expenditure, because it was laid out wholly for business purposes. The question was answered in favour of the assessee and against the Revenue.

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Issues: Whether interest paid to the State Government for instalments relating to allotment of an industrial unit was deductible as business expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The assessee had already commenced business before the industrial unit was allotted. The liability to pay interest arose in the course of the business and was not interest on capital borrowed for acquisition of money. The governing principle was that interest is allowable as a deduction only where it is paid in respect of capital borrowed, but expenditure incurred during the currency of the business and wholly for business purposes may still qualify under section 37(1) if it is not capital or personal expenditure. On the facts, the interest paid on the instalments for the unit allotment was treated as part of the business outgo incurred while carrying on the business.

Conclusion: The interest payment was allowable as a business expenditure under section 37(1), and the question referred was answered in the affirmative, in favour of the assessee and against the Revenue.

Ratio Decidendi: Interest liability incurred during the continuance of business, though connected with an acquisition arrangement, is deductible as business expenditure under section 37(1) if it is not capital expenditure and is laid out wholly and exclusively for business purposes.

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