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Issues: (i) Whether interest paid on unpaid purchase consideration for acquisition of property was deductible as interest on borrowed capital under section 24(b). (ii) Whether disallowance under section 14A could exceed the exempt income earned. (iii) Whether disallowance computed under section 14A could be added back while computing book profit under section 115JB.
Issue (i): Whether interest paid on unpaid purchase consideration for acquisition of property was deductible as interest on borrowed capital under section 24(b).
Analysis: The unpaid purchase price payable to the seller was treated as borrowed capital. The allowance of the claim was supported by the view that interest on such unpaid consideration is akin to interest on capital borrowed for the purpose of acquiring the property. Earlier allowance in assessment years did not by itself conclude the issue, but the deduction was examined independently on facts and law.
Conclusion: The interest was held allowable as deduction under section 24(b), in favour of the assessee.
Issue (ii): Whether disallowance under section 14A could exceed the exempt income earned.
Analysis: The settled legal position applied was that a disallowance made for expenditure relating to exempt income cannot be greater than the exempt income itself.
Conclusion: The disallowance was restricted to the amount of exempt income, in favour of the assessee.
Issue (iii): Whether disallowance computed under section 14A could be added back while computing book profit under section 115JB.
Analysis: Disallowance under section 14A was treated as a notional disallowance. On that basis, the amount could not be added back under clause (f) of Explanation 1 to section 115JB for computation of book profit.
Conclusion: The addition back to book profit was disallowed, in favour of the assessee.
Final Conclusion: The Revenue's appeals failed on all contested issues and the assessee's claims were sustained, resulting in dismissal of the appeals.
Ratio Decidendi: Unpaid purchase consideration can constitute borrowed capital for section 24(b), disallowance under section 14A cannot exceed exempt income, and a notional section 14A disallowance cannot be added back to book profit under section 115JB.
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