Interest deduction on borrowed capital remains allowable where business advances and mixed funds satisfy the statutory test despite later interest waiver.

Deductibility of interest under section 10(2)(iii) depended on whether the borrowed capital was used for the assessee's business. Where the advances were made in the ordinary course of business and the borrowed moneys formed part of mixed general funds, the later waiver of interest on one debtor's account did not alter the character of the original borrowing or the advances. The waiver therefore did not defeat the statutory test for interest deduction, and the entire interest payment was treated as allowable.

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Issues: Whether the assessee was entitled to deduct the interest paid on borrowed capital under section 10(2)(iii) of the Income-tax Act where some of the borrowed funds had been advanced in the ordinary course of business and interest on one debtor's account had been waived during the year.

Analysis: The decisive inquiry under section 10(2)(iii) was whether the capital had been borrowed for the purposes of the assessee's business. The advances to the debtor were made in the normal course of the assessee's business, and the borrowed moneys were part of its mixed general funds. The later decision not to charge or enforce interest on one debtor did not change the character of the original advances or the borrowing itself. The department's attempt to treat the waiver of interest as affecting the deductibility of the interest paid on the borrowed capital was not the issue before the Tribunal and did not defeat the statutory requirement.

Conclusion: The entire interest payment satisfied the requirements of section 10(2)(iii), and the assessee was entitled to deduct the full amount.

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