Capital liability interest on deferred betterment charges is not deductible as revenue expenditure.

Interest paid on instalments of betterment charges was treated as part of a capital liability, because the charges were levied on the enhanced value of land and gave the assessee an enduring advantage. The option to discharge the amount in instalments under section 74(1) of the Bombay Town Planning Act, 1954 did not alter that character, and the statutory interest attached to deferred payment lacked a direct nexus with ordinary business operations. The borrowing-expense principle did not apply, as the payment was not analogous to a business loan. The interest was therefore not allowable as a revenue deduction.

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Issues: Whether interest paid on instalments of betterment charges payable to the municipal corporation was allowable as a deduction in computing the assessee's taxable profits.

Analysis: The betterment charges were held to be capital in nature because they were levied against the increased potential value of the land and conferred an enduring advantage on the assessee. The option under section 74(1) of the Bombay Town Planning Act, 1954 to pay the net amount in instalments did not change the character of the outgoing. Interest charged on those instalments formed part of the statutory liability attached to payment of the capital amount, and it had no direct nexus with the day-to-day carrying on of the business. The principle relating to borrowing expenses was held inapplicable because payment of betterment charges was not comparable to obtaining a loan for business purposes.

Conclusion: The interest on instalments of betterment charges was not an allowable deduction; the question was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: Where an expenditure is intrinsically linked to a capital liability and does not arise from the ordinary operations of the business, any statutory interest charged on deferred payment of that liability retains the same capital character and is not deductible as revenue expenditure.

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