Deductibility of debenture interest from securities income denied where borrowing was for business, not investment in securities.

Interest on debentures was held not deductible from interest earned under the head "Interest on Securities" because the borrowing was for the company's business, not for the purpose of investing in securities. The condition imposed by the Controller of Capital Issues, requiring the raised funds to be invested in Government securities, did not change the real character of the borrowing. A new ground based on the memorandum of association was also not permitted to be introduced at the reference stage. The referred question was answered in the negative.

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Issues: Whether interest paid on debentures issued by the assessee could be deducted from interest earned under the head "Interest on Securities" under the first proviso to Section 8 of the Income-tax Act, 1922.

Analysis: The claim originally rested on the contention that, because the Controller of Capital Issues compelled investment of the raised funds in Government securities, the borrowing for debentures should be treated as borrowing for investment in securities. That contention was not accepted before the reference court, and a new ground based on the memorandum of association was not allowed to be introduced at this stage. On the facts, the borrowing was for the company's business and not for the purpose of investing in securities, and the condition imposed by the Controller did not alter the real character of the borrowing.

Conclusion: The debenture interest was not deductible from the interest earned on securities, and the answer to the referred question was in the negative.

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