Deferred purchase-price interest was not deductible as business expenditure or interest on borrowed capital under the Income-tax Act.

Amounts payable as interest on deferred purchase price under a lease deed and consent decree were treated as part of the consideration for acquisition of land, not as interest on borrowed capital. The liability arose from default in paying the purchase price and from the agreed instalment arrangement, rather than from borrowing for business purposes. The High Court held that the printing and publishing business was not so inseparably linked to the land acquisition that the expenditure could be regarded as wholly and exclusively laid out for business. The deduction was therefore disallowed under both the interest-on-borrowed-capital provision and the business expenditure provision.

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Issues: Whether the interest amounts payable on deferred purchase price under the lease deed and consent decree were deductible as business expenditure under section 10(2)(xv) of the Income-tax Act, 1922, or as interest on borrowed capital under section 10(2)(iii) of that Act.

Analysis: The liability to pay interest arose not from borrowing capital for the business, but from the assessee's default in paying the purchase price when it became due and from the terms of the consent decree granting time for payment by instalments. The amounts payable were part of the consideration for acquisition of the land and formed an addition to the purchase price. The business of printing and publishing could not be treated as so inseparably linked with the acquisition of the land as to make the interest expenditure wholly and exclusively laid out for the business. The transaction was therefore distinguishable from cases where interest on borrowed funds used in an integrated business acquisition was held to be revenue expenditure.

Conclusion: The amounts were neither interest on borrowed capital within section 10(2)(iii) nor expenditure wholly and exclusively for the purpose of business within section 10(2)(xv); the deduction was not allowable.

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