Business deduction for interest on borrowed capital does not depend on direct taxable income where the business is indivisible.

Interest on borrowed capital used in an indivisible banking business remained deductible as business expenditure, even where part of the borrowed funds related to tax-free securities. The statute was applied according to its language, without importing an additional requirement that the borrowing must be traceable only to taxable income. The securities were treated as part of the same banking business, and profits and losses from their dealings were included in assessment. The deduction was therefore allowable because the expenditure was incurred wholly and exclusively for the purposes of the business, and the reference question was answered in favour of the assessee.

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Issues: Whether the assessee bank was entitled to deduct the entire interest paid on fixed deposits under section 10(2)(iii) of the Indian Income-tax Act, 1922, notwithstanding that part of the borrowed funds was used to acquire tax-free securities.

Analysis: The allowance under section 10 is governed by the language of the statute, and there is no basis for implying an extra condition that the borrowed capital must be traceable only to taxable income. The Court held that the business was one indivisible banking business, the securities formed part of that business, and the profits and losses from their sale and purchase were brought into the assessment. On that footing, interest paid on borrowed capital used in the business remained a deductible business expenditure even if the securities yielded exempt income. The Court also relied on the principle that expenditure laid out wholly and exclusively for the purposes of business is deductible without requiring a direct nexus with taxable receipts.

Conclusion: The deduction was allowable, and the answer to the referred question was in favour of the assessee.

Final Conclusion: The appeal failed because the interest liability was an admissible business deduction in computing the taxable profits of the banking business, even though the related securities produced exempt income.

Ratio Decidendi: Interest on borrowed capital used in an indivisible business is deductible under the business deduction provision if it is incurred wholly and exclusively for the purposes of that business, and its allowance does not depend on whether the expenditure directly produces taxable income.

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