Business deduction for overdraft interest denied where borrowing was used to pay income-tax, and new facts were not entertained.

Interest on money borrowed through an overdraft to discharge income-tax liability was not allowable as a business deduction under section 37(1), because payment of income-tax is a statutory and personal obligation rather than expenditure laid out wholly and exclusively for business. The Court also refused to entertain a fresh factual contention that tax had in substance been paid out of profits credited to the overdraft account, since that basis had not been raised before the Tribunal or the High Court and lay outside the scope of the referred question. Earlier Calcutta decisions were distinguished on their different factual settings and questions. The answer in favour of the Revenue was therefore maintained.

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Issues: Whether interest paid on money borrowed through an overdraft for payment of income-tax was allowable as a deduction under section 37(1) of the Income-tax Act, 1961, and whether a fresh factual contention based on the source of payment could be entertained at the appellate stage.

Analysis: The appeal arose from a reference confined to the allowability of interest on borrowed funds used to discharge income-tax liability. The contention advanced before the Supreme Court proceeded on a factual premise that the assessee had deposited sufficient profits into the overdraft account and that tax was effectively paid out of such profits. The Court held that this factual foundation had not been urged before the Tribunal or the High Court and did not fall within the scope of the question referred. It further noted that the allowability of the interest depended on the borrowing being for the purpose of business, whereas payment of income-tax is a statutory and personal obligation and interest incurred to discharge such liability does not constitute expenditure laid out wholly and exclusively for business. The Court also distinguished earlier Calcutta decisions on the basis that they proceeded on different questions and factual settings.

Conclusion: The interest on the overdraft taken to pay income-tax was not allowable as a business deduction, and the new factual contention could not be entertained; the answer given by the High Court was upheld against the assessee.

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