Government capital without repayment obligation is not borrowed capital, so interest deduction under business expenditure rules fails.

Interest paid on capital supplied by the Central and State Governments under the Road Transport Corporations Act, 1950 was held not deductible under section 36(1)(iii) of the Income-tax Act, 1961 because such capital was not "capital borrowed" for business purposes. The statutory scheme distinguished government capital "provided" from money "borrowed," and borrowing was understood to require a lending transaction with an enforceable obligation to repay. The mere liability to pay interest under the Act did not convert the governmental contribution into borrowed capital, and the liquidation provisions also indicated a capital subscription rather than a loan. The deduction was therefore denied.

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Issues: Whether interest paid on capital provided by the Central Government and the State Government under the Road Transport Corporations Act, 1950 qualified as interest paid in respect of capital borrowed for the purposes of business within section 36(1)(iii) of the Income-tax Act, 1961.

Analysis: The statutory scheme distinguished between capital "provided" under section 23 and money "borrowed" under section 26. The concept of borrowing imports a lending transaction and an obligation to repay the amount advanced. The Act contained no provision requiring repayment of the capital supplied by the Governments, and the liability to pay interest under section 28 did not convert the capital provided into borrowed capital. The liquidation provision also showed that the governmental contribution was treated as capital subscription rather than a loan.

Conclusion: The interest payment was not allowable under section 36(1)(iii) because the capital supplied under section 23 was not capital borrowed; the answer was against the assessee and in favour of the Revenue.

Ratio Decidendi: Capital supplied under a statutory provision, without an enforceable obligation of repayment, is not "capital borrowed" for the purpose of claiming interest deduction under section 36(1)(iii) of the Income-tax Act, 1961.

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