Deductibility of compound interest under income tax law is limited to interest on the original capital charge, not interest on interest.

Under section 9(1)(iv) of the Indian Income-tax Act, 1922, the deductible amount is confined to interest payable on the original mortgage, charge or borrowed capital. Where unpaid interest is capitalised under the contract and further interest is charged on that accumulated amount, the additional sum is treated as interest on interest, not interest on the capital charge itself. Compound interest therefore falls outside the statutory allowance, and only simple interest at the contractual rate is deductible.

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Issues: Whether, under section 9(1)(iv) of the Indian Income-tax Act, 1922, the assessee was entitled to deduct compound interest payable on a capital charge, or only simple interest at the contractual rate.

Analysis: The allowance under the provision is confined to the amount of interest payable on the mortgage, charge, or borrowed capital itself. Where unpaid interest becomes part of the principal under the contract and further interest is charged on that accumulated amount, the additional amount is not interest on the original capital charge but interest on interest. Such compound interest does not fall within the statutory allowance.

Conclusion: The assessee was not entitled to deduct compound interest. Only simple interest at the contractual rate was allowable, and the issue was decided against the assessee.

Ratio Decidendi: Under section 9(1)(iv) of the Indian Income-tax Act, 1922, only interest payable on the original capital charge is deductible; interest charged on unpaid interest is not deductible as interest on capital.

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