Interest on delayed trade liabilities is not interest on borrowed capital unless a true borrowing relationship exists.

Amounts paid for delayed payment of hundi liabilities and purchase consideration were held not to constitute interest on borrowed capital, because no true borrower-lender relationship existed for those deferred trade payments. The Tribunal was therefore justified in excluding that sum from the pool used for proportionate disallowance under the Income-tax Act. The additional payment under the Gujarat Sales Tax Act was treated as payable for infraction of law, as that point was already covered by an earlier decision and required no fresh reasoning. The reference was answered partly in favour of the assessee and partly in favour of the Revenue.

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Issues: (i) Whether interest paid for late payment of hundi loans and delayed payment of purchase price could be excluded from interest on borrowed capital for the purpose of disallowance under the Income-tax Act, 1961. (ii) Whether the additional payment under the Gujarat Sales Tax Act was rightly treated as payable for infraction of law.

Issue (i): Whether interest paid for late payment of hundi loans and delayed payment of purchase price could be excluded from interest on borrowed capital for the purpose of disallowance under the Income-tax Act, 1961.

Analysis: The amount paid for delayed payment of hundi liabilities and purchase consideration was not a payment on borrowed capital in the sense required by the statutory provision governing deduction of interest on borrowed funds. The relation of borrower and lender was absent in respect of such deferred payments, and such amounts could not be mechanically included in the pool of borrowed capital for proportionate disallowance. The Tribunal was therefore justified in excluding that sum while directing a fresh proportionate working.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Issue (ii): Whether the additional payment under the Gujarat Sales Tax Act was rightly treated as payable for infraction of law.

Analysis: This question stood covered by an earlier decision and no separate reasoning was recorded in the judgment.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered partly in favour of the assessee and partly in favour of the Revenue, with the principal relief relating to exclusion of the disputed interest component being accepted.

Ratio Decidendi: Amounts paid for delayed payment of trade liabilities do not constitute interest on borrowed capital unless they arise from a true borrowing relationship with a lender.

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