Business interest deduction upheld where borrowed funds were used for business and sister-concern balances did not show diversion.

Interest on borrowed capital is allowable as a business deduction where the borrowing was for business purposes and interest was actually paid. The fact that the assessee had outstanding balances from sister concerns, or could have reduced borrowings by recovering those amounts, was held irrelevant when there was no showing that the borrowed funds were diverted as loans to those concerns. The Bombay HC applied the test under section 10(2)(iii) and upheld deduction of the interest, rejecting the departmental disallowance.

---

---

Issues: Whether interest paid on borrowed capital was allowable as a deduction where the assessee had outstanding balances due from sister concerns on which no interest was charged.

Analysis: The balance due from the sister concern was found not to represent loans advanced by the assessee, but common business expenditure adjusted through a joint account. The borrowed capital from outsiders was admitted to have been used for the assessee's business, and it was not shown that any part of that borrowing had been diverted as loans to the sister concern or to the other party. The governing test under section 10(2)(iii) was whether money was borrowed, whether it was borrowed for business, and whether interest was paid thereon. The existence of outstanding recoveries, or the possibility that the assessee could have reduced borrowings by collecting them, was held to be irrelevant.

Conclusion: The interest was an admissible deduction under section 10(2)(iii), and the disallowance by the departmental authorities was unsustainable.

Ratio Decidendi: Interest on borrowed capital is deductible where the borrowing was for business purposes and interest was ly paid, and the deduction cannot be denied merely because the assessee had outstanding amounts or could have reduced borrowings by realising them.

---