Borrowing costs for tax payment and statutory annuity deposits were treated as non-deductible expenditure.

Interest on borrowings used to discharge income-tax liability is described as not deductible in computing total income, because the borrowing was applied to tax payment rather than income production. Interest on borrowings used for statutory annuity deposits is also described as not deductible, since the deposit scheme was treated as a tax-adjustment mechanism and the expenditure was not laid out wholly and exclusively to earn the instalments received on repayment. On both issues, the claimed deduction was disallowed and the Revenue's position was upheld.

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Issues: (i) Whether interest paid on borrowings utilised for payment of income-tax was an allowable deduction in computing the assessee's total income; (ii) Whether interest paid on borrowings utilised for payment of annuity deposit was an allowable deduction in computing the assessee's total income.

Issue (i): Whether interest paid on borrowings utilised for payment of income-tax was an allowable deduction in computing the assessee's total income.

Analysis: The borrowings were specifically taken for payment of income-tax. The circular relied upon by the assessee was held inapplicable because it dealt with a different situation. The issue was governed by the earlier binding view that interest on money borrowed for payment of income-tax was not deductible, and the later decision reiterating that interest on overdrafts used for payment of taxes was not allowable as a deduction before the introduction of the relevant statutory provision.

Conclusion: The deduction was not allowable and the question was answered in favour of the Revenue.

Issue (ii): Whether interest paid on borrowings utilised for payment of annuity deposit was an allowable deduction in computing the assessee's total income.

Analysis: Annuity deposits formed part of a special statutory scheme under which deposits were made out of adjusted total income and refunded in instalments, the instalments being treated as income from other sources on receipt. The expenditure claimed on borrowings used to make the deposits was not expenditure incurred wholly and exclusively for earning the refunded instalments, because the relevant income was already generated when the deposit was made and no further expenditure was incurred to earn the instalments on repayment. The scheme was therefore treated as one for tax adjustment, not income-earning.

Conclusion: The deduction was not allowable and the question was answered in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee on both questions, and the Tribunal's disallowance of the claimed interest deductions was sustained.

Ratio Decidendi: Interest on borrowings used to discharge income-tax liability is not deductible, and interest on borrowings used to make statutory annuity deposits is not deductible where the expenditure is not laid out wholly and exclusively for earning the income taxed on repayment of those deposits.

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