Deductibility of overdraft interest: borrowing used to pay income-tax was held not allowable as a tax deduction.

Interest on overdrafts used to meet income-tax liabilities was not deductible under section 12(2) of the Indian Income-tax Act, 1922. The Tribunal had treated the borrowing as one made to avoid immediate liquidation of investments, but the Court followed earlier binding authority holding that interest on borrowings applied to payment of income-tax cannot be allowed in computing taxable income. The decision in Eastern Investments was distinguished because it did not concern borrowing to discharge income-tax dues. The deduction claim was therefore disallowed and the Revenue's position was upheld.

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Issues: Whether interest paid on overdrafts obtained and utilised for meeting income-tax liabilities was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922.

Analysis: The Tribunal had treated the overdrafts as borrowed to avoid immediate liquidation of investments and had therefore allowed the interest as deductible. The Court held that the controversy was governed by earlier binding decisions which had ruled that interest on borrowings used for payment of income-tax was not deductible in computing the assessee's income. The reliance placed on Eastern Investments was distinguished because that case did not involve borrowing for discharge of income-tax dues.

Conclusion: The claim for deduction of interest on the overdrafts was not allowable and the reference was answered against the assessee and in favour of the Revenue.

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