Deductibility of interest on borrowings for advance income-tax rejected for lack of nexus with income

Interest paid on money borrowed to meet advance income-tax liability under section 18A is not an allowable deduction under section 12(2). The advance tax payment discharges a statutory obligation rather than an expenditure laid out to earn income by commercial expediency, and income-tax is treated as a charge on profits after they are earned, not as an outgoing incurred to produce those profits. The statutory bar against allowing sums paid on account of tax on profits supports the conclusion that the borrowing lacks the required nexus with income. Any statutory interest received on advance tax is merely incidental and does not change the character of the borrowing or make the interest deductible.

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Issues: Whether interest paid on money borrowed for payment of advance income-tax under section 18A of the Income-tax Act is an allowable deduction under section 12(2).

Analysis: The advance payment of tax was made to discharge a statutory obligation and not to earn income by commercial expediency. Interest paid to borrow funds for paying income-tax is not expenditure incurred solely for earning income, because income-tax is a charge on profits after they are earned and not an outgoing incurred to earn those profits. The statutory scheme, including the bar against allowing sums paid on account of tax on profits, confirms that such interest is not deductible. The statutory interest received on advance tax is merely incidental and does not alter the character of the borrowing or create a deductible nexus with income.

Conclusion: The interest paid on money borrowed for payment of advance income-tax is not an allowable deduction; the issue is answered against the assessee and in favour of the Revenue.

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