Capitalised interest in overdraft accounts is not always treated as interest paid for deduction under agricultural tax law.

Interest debited and capitalised in an overdraft or cash credit account is not automatically "interest paid" for deduction under section 5(e) or 5(f) of the Agricultural Income-tax Act, 1950. Deduction under clause (e) is confined to interest paid on borrowed amounts actually applied to capital expenditure for the benefit of the land, while clause (f) applies only to interest paid on a mortgage or capital charge. Where the facility is fully drawn and the interest is capitalised beyond the sanctioned limit, the entry merely increases liability and does not amount to payment. Only an undrawn balance within the facility may support a notional payment treatment.

---

---

Issues: Whether interest debited and capitalised in an overdraft or cash credit account amounts to "interest paid" so as to qualify for deduction under clauses (e) and (f) of section 5 of the Agricultural Income-tax Act, 1950.

Analysis: The deduction under clause (e) is confined to interest paid on borrowed amounts actually spent on capital expenditure for the benefit of the land, and clause (f) applies only to interest paid in respect of a mortgage or capital charge. Where interest is merely debited in an account and capitalised, the legal effect depends on the nature of the facility and the extent of the available credit. In the case of a lump sum loan or where the overdraft limit is already fully drawn and the capitalised interest lies outside the available facility, capitalisation only enhances the borrower's liability and does not amount to payment. Only where an undrawn balance within the sanctioned facility remains available and the debit operates as a notional withdrawal within the limit can the amount be treated as paid. On the facts, the assessee had fully drawn the facility and the interest was debited over and above the sanctioned limit.

Conclusion: The capitalised interest did not amount to interest paid within the meaning of section 5(e) or section 5(f), and the deduction was rightly disallowed.

---