Interest deduction on borrowed capital fails where funds are used only outside British India and lack nexus to taxable income.

Interest on borrowed capital was deductible under section 10(2)(iii) of the Indian Income-tax Act, 1922 only where the borrowing related to a business capable of yielding taxable profits chargeable in British India. Borrowed funds used entirely outside British India to invest in securities kept and managed outside British India did not satisfy that requirement, because the connection with taxable Indian income was absent. Mere borrowing for business purposes was insufficient without a nexus to income assessable under the Act. On that basis, the interest deduction was held not allowable against income accruing and arising in British India.

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Issues: Whether interest on capital borrowed for investment in securities outside British India was deductible under section 10(2)(iii) of the Indian Income-tax Act, 1922 from income accruing and arising in British India.

Analysis: The allowance for interest on borrowed capital under section 10(2)(iii) was read in the context of the Act as a whole. The business contemplated by the provision was held to be a business capable of yielding taxable profits or gains chargeable in British India. Where the borrowed money was employed entirely outside British India, the securities were retained outside British India, and the income from them was dealt with outside British India, the borrowing was not for a business in respect of which taxable Indian profits could be earned. The court therefore rejected the contention that the mere fact of borrowing for business purposes was sufficient, irrespective of the connection between that business and taxable income.

Conclusion: The deduction was not allowable, and the interest on the borrowed sum could not be deducted from the assessee's income accruing and arising in British India.

Ratio Decidendi: A deduction for interest on borrowed capital under section 10(2)(iii) is allowable only when the borrowing is for a business carried on in a manner capable of yielding taxable profits chargeable under the Act.

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