Interest deduction under income tax law is limited to borrowed capital; capitalised unpaid interest is excluded.

Deduction under section 9(1)(iv) of the Indian Income-tax Act, 1922 is confined to interest payable on the borrowed capital used for the property, and the phrase "such capital" refers only to that original capital. Interest on unpaid interest, even if capitalised by agreement, is treated as interest on an additional sum created by capitalisation rather than interest on the borrowed capital itself. The contractual form of compound interest does not expand the statutory allowance, so deduction is not available for capitalised unpaid interest.

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Issues: Whether, for purposes of allowance under section 9(1)(iv) of the Indian Income-tax Act, 1922, interest claimed on capitalised unpaid interest formed part of "interest payable on such capital".

Analysis: The allowance under section 9(1)(iv) is confined to interest payable on the borrowed capital used for acquisition, construction, repair, renewal, or reconstruction of the property. The expression "such capital" refers to that capital alone. Interest on unpaid interest, even when capitalised by agreement, is not interest on such capital but interest on an additional sum created by the capitalisation of accrued interest. A provision granting deduction of interest on such capital must be construed strictly, and the contractual character of compound interest does not enlarge the statutory allowance.

Conclusion: The allowable deduction was confined to interest on the original capital alone. The claim for deduction of interest on capitalised unpaid interest was not allowable.

Ratio Decidendi: Under section 9(1)(iv) of the Indian Income-tax Act, 1922, deduction is allowable only for interest on the borrowed capital itself and not for interest on capitalised unpaid interest.

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