Interest Deductibility: borrowed capital used abroad disqualifies interest deduction if income is not brought into the taxing territory.

Whether interest on capital borrowed and invested outside the taxing territory is deductible: the document clarifies that an interest deduction is confined to capital borrowed for the purposes of a business carried on so as to earn profits chargeable to tax within the territory; capital borrowed and employed abroad, producing income not brought into the territory, does not form part of a business capable of earning taxable profits domestically and therefore disqualifies the interest deduction under section 10(2)(iii). The conclusion: deduction not allowable on the facts presented.

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Issues: Whether interest on capital of Rs. 32,74,134 borrowed in 1926 and employed in purchase of securities outside British India, the income from which was not brought into British India, is deductible from taxable profits under section 10(2)(iii) of the Income-tax Act.

Analysis: Section 4 and section 6 of the Income-tax Act limit taxation to income accruing, arising or received in British India or brought into British India within the prescribed period, and section 10 deals with computation of business profits for taxable purposes. An allowance under section 10(2)(iii) for interest on capital borrowed is confined to capital borrowed for the purposes of a business which is carried on in such a way as to earn or be capable of earning profits chargeable to tax in British India. Capital borrowed and employed outside British India, where the income derived therefrom is retained and dealt with outside British India, does not, on the facts, form part of a business capable of earning taxable profits in British India. Prior authority holding deduction not allowable where borrowed capital was applied to business outside the taxing territory supports this interpretation. The statutory context requires that the business, for which the capital is borrowed, be of a character that produces profits chargeable to tax in British India; mere carrying on of finance operations abroad through agents or brokers does not suffice to bring such out-of-territory investments within the allowance.

Conclusion: The claim for deduction of interest on the sum of Rs. 32,74,134 borrowed in 1926 and invested in sterling securities outside British India is not allowable under section 10(2)(iii) of the Income-tax Act.

Ratio Decidendi: An interest deduction under section 10(2)(iii) is allowable only where the borrowed capital is used for the purposes of a business that is carried on so as to earn profits chargeable to tax in British India; borrowed capital employed and retained outside the taxing territory, producing income not brought into the territory, does not qualify for the deduction.

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