Deferred purchase-price interest is not borrowing cost, but it can qualify as business expenditure when wholly and exclusively incurred for business.

Interest paid on deferred consideration for the purchase of business assets was not interest on capital borrowed, because a vendor's unpaid purchase price does not by itself create a borrowing within section 10(2)(iii) of the Indian Income-tax Act, 1922. That deduction was therefore unavailable. The same interest was, however, allowable as business expenditure under section 10(2)(xv), since it was incurred after business commencement, was wholly and exclusively connected with the business, and was not capital or personal in nature. The Court thus treated the payment as part of the business arrangement rather than as borrowing cost, and the assessee succeeded on the residuary deduction issue.

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Issues: (i) Whether interest paid on the unpaid balance of the purchase price was allowable as a deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922; (ii) Whether the same interest was deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue (i): Whether interest paid on the unpaid balance of the purchase price was allowable as a deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922.

Analysis: The allowance under clause (iii) applies only where interest is paid in respect of capital borrowed for business purposes. A liability arising from unpaid purchase price is not, by itself, borrowing of capital. A debt may arise from several sources, and every creditor is not a lender. On the facts, the balance due to the vendor represented deferred consideration for assets purchased, not capital borrowed.

Conclusion: The deduction was not admissible under section 10(2)(iii), and this issue was decided against the assessee.

Issue (ii): Whether the same interest was deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: Interest is expenditure, and if it is not covered by clause (iii), it may still be deductible under clause (xv) if it is not capital or personal expenditure and is laid out wholly and exclusively for business. The expenditure arose after the business had commenced and was closely connected with acquisition of the assets needed to carry on the business. It formed an integral part of the business arrangement and was incurred for the purpose of the business, not for acquiring a permanent asset in its own right.

Conclusion: The deduction was admissible under section 10(2)(xv), and this issue was decided in favour of the assessee.

Final Conclusion: Interest on the unpaid purchase price was not deductible as interest on borrowed capital, but it was allowable as business expenditure; accordingly, the appeals succeeded.

Ratio Decidendi: Interest on deferred consideration for the purchase of business assets is not interest on capital borrowed within section 10(2)(iii), but it may be allowed under the residuary business expenditure provision if it is wholly and exclusively incurred for the purposes of the business and is not capital in nature.

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