Business purpose test for overdraft interest deduction where remitted profits were used for dividend payments abroad

Interest on bank overdrafts was treated as deductible where the borrowing was for business purposes under section 10(2)(iii) of the Indian Income-tax Act, 1922. The note explains that remitting profits to the United Kingdom for payment of dividends of a non-resident company remained part of the business purpose, and the later existence of a residue in the overseas bank earning interest did not change the character of the borrowing. It also states that the taxing authorities could not apply the stricter language of section 10(2)(xv) or split the overdraft into business and non-business portions. On the facts found, full interest deduction was allowed.

---

---

Issues: Whether interest paid on bank overdrafts was deductible under section 10(2)(iii) of the Indian Income-tax Act, 1922, where the overdraft funds were remitted to the United Kingdom for payment of dividends and any residue earned interest there.

Analysis: The relevant test under section 10(2)(iii) is whether the capital was borrowed for the purposes of the business. The Court held that remittance of profits to the United Kingdom for payment of dividends of a non-resident company was part of the business purpose. The subsequent fact that a residue remained in the overseas bank and earned interest did not alter the original business purpose of the borrowing. The Court further held that the taxing authorities had wrongly imported the stricter language of section 10(2)(xv) and had impermissibly divided the borrowing into business and non-business portions. On the facts found, the Tribunal was justified in concluding that the remittances came out of profits earned in India and that the overdrafts were used in carrying on the assessee's business.

Conclusion: The deduction of the full interest on the overdrafts was allowable, and the reference was answered in favour of the assessee.

---