Statutory interest on delayed tax payment is not business expenditure and is not deductible as borrowed-capital interest.

Interest paid for delay in discharging income-tax, advance tax, surtax, or tax on voluntarily disclosed income is a statutory liability linked to the tax obligation itself, not expenditure incurred wholly and exclusively for business purposes. It is therefore not deductible under section 37 of the Income-tax Act, 1961. The same character applies to interest under the Voluntary Disclosure of Income and Wealth Act, 1976, because delay in payment does not convert the amount into business expenditure. Deduction under section 36(1)(iii) is also unavailable unless the interest is shown to relate to capital borrowed from an outside source for business purposes.

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Issues: Whether interest paid for delay in payment of advance tax, income-tax, surtax, or tax on voluntarily disclosed income is deductible as business expenditure under section 37 of the Income-tax Act, 1961, or as interest on borrowed capital under section 36(1)(iii) of the Income-tax Act, 1961.

Analysis: Interest levied for failure to discharge a statutory tax obligation arises only after income is determined or declared, and is intrinsically linked to the assessee's tax liability rather than to the conduct of business. Such payment does not represent expenditure laid out wholly and exclusively for the purposes of business. It is not comparable to expenditure incurred for protecting business interests or to interest on capital borrowed from a third party for business purposes. The same principle applies to interest payable under the Voluntary Disclosure of Income and Wealth Act, 1976, because that interest also represents a statutory consequence of delayed tax payment and does not acquire a business character. Section 80V does not assist where no borrowing from an outside source is shown.

Conclusion: The claim for deduction was not allowable under either section 37 or section 36(1)(iii), and the answer was against the assessee and in favour of the Revenue.

Ratio Decidendi: Interest paid on delayed discharge of income-tax liability is a statutory liability unconnected with the earning or carrying on of business and is not deductible as business expenditure unless it is shown to be interest on capital borrowed for business purposes.

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