Commercial expediency supports deduction of compensatory interest paid to restore provident fund propriety after business use of fund monies.

Interest credited on provident fund monies earlier diverted for the assessee's own business was treated as deductible business expenditure because the payment was compensatory, aimed at restoring propriety, preserving employee goodwill, and protecting business interests. The court noted that the assessee had benefited from use of the fund and was required to compensate it for that use; the liability became ascertained only when the board quantified and approved the credit in the relevant accounting year. The disallowance was therefore unsustainable and the deduction was allowed.

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Issues: Whether the assessee was entitled to deduct, as business expenditure on grounds of commercial expediency, the interest credited in one accounting year on the portion of provident fund monies earlier utilised for its own business.

Analysis: The fund was required to be separately held and administered, and the assessee had in fact utilised a part of it in its own business instead of placing it in fixed deposits or otherwise preserving its separate character. The later decision of the board, prompted by the audit note, to credit interest on the misapplied amount was not confined to the routine interest obligation under the fund regulations, but was a compensatory step taken to restore propriety, prevent employee discontent, and protect the business interest of the corporation. Such payment was treated as commercially expedient and also consistent with the notion that the assessee had benefited from the use of the fund monies and ought to compensate the fund for that use. The liability became ascertained only when the board quantified and resolved to credit the amount during the relevant accounting year.

Conclusion: The assessee was entitled to deduction of the entire interest amount claimed, and the disallowance was unsustainable.

Ratio Decidendi: A payment made to compensate a fund for business use of its monies, and to preserve employee goodwill and business propriety, is deductible as business expenditure when the liability is ascertained in the year of board quantification and is incurred on grounds of commercial expediency.

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