Capital asset purchase interest is not deductible as business expense when it forms part of acquisition cost.

Interest paid on the unpaid purchase price of capital assets was held to be capital in nature and not deductible under section 10(2)(iii), section 10(2)(xv), or section 10(1) of the Indian Income-tax Act, 1922. The court reasoned that the payment related to the deferred acquisition cost of the assets, not to borrowed capital, so it could not qualify as interest on borrowings. As part of the cost of acquiring a capital asset, it was also not expenditure laid out wholly and exclusively for business, and it could not be treated as a permissible revenue deduction. The reference was answered in the negative and against the assessee.

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Issues: Whether interest paid on the unpaid balance of the purchase price of capital assets was deductible under section 10(2)(iii), section 10(2)(xv), or section 10(1) of the Indian Income-tax Act, 1922.

Analysis: The payment was made not on account of any borrowing of capital but on the outstanding purchase price of assets acquired under the agreement. Interest on a long-term credit arrangement for purchase of a capital asset does not amount to interest on borrowed capital within section 10(2)(iii). The amount was part of the cost of acquiring the capital asset and was therefore capital in nature, not an expenditure laid out wholly and exclusively for the purposes of business within section 10(2)(xv). The same character prevented it from being treated as a permissible commercial deduction under section 10(1), because amounts paid for acquisition of capital assets cannot be charged to revenue.

Conclusion: The deduction was not allowable under any of the three provisions. The answer to the reference was in the negative and against the assessee.

Final Conclusion: Interest paid on the deferred purchase price of capital assets is not deductible as business expenditure where it forms part of the acquisition cost and is not attributable to borrowed capital.

Ratio Decidendi: Interest paid on the unpaid purchase price of a capital asset is a capital payment and cannot be deducted as interest on borrowed capital or as revenue expenditure merely because the asset was acquired on credit.

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