Interest on Borrowed Funds for Advance Tax is not deductible because borrowing discharges a statutory tax duty, not earning income.

Interest on money borrowed solely to make advance income-tax payments under the statutory advance payment mechanism is not deductible under the business expenditure test because such borrowing serves to discharge a statutory tax obligation rather than to make or earn taxable income; statutory interest received under the advance mechanism is incidental to the statutory regime and does not convert the borrowing into revenue expenditure. Consequently interest paid on loans taken for advance tax payments is disallowed as an allowable business deduction, favouring the Revenue over the taxpayer.

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

Analysis: Section 12(2) permits deduction of expenditure incurred solely for the purpose of making or earning taxable income. Section 10(4) excludes allowance of sums paid on account of any tax levied on profits or gains. Interest received under section 18A(5) by way of statutory interest on advance tax is incidental to the statutory mechanism, whereas the advance payment obligation under section 18A(1) is a statutory duty. Prior authorities establish that income-tax is an application of profits and not an expenditure for earning profits; therefore borrowing to meet tax liability is to discharge a statutory obligation and is not incurred for the purpose of making or earning the incidental interest or any business income. Consequently interest on money borrowed for payment of advance tax (including interest under section 18A(7) when applicable) does not fall within allowable business expenditure under section 12(2).

Conclusion: The interest paid on money borrowed for payment of advance income-tax under section 18A is not an allowable deduction; issue answered against the assessee and in favour of the Revenue.

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