Genuine business liability treated as capital borrowed, making related interest deductible for business purposes.

A genuine business liability created by crediting Karachi creditors against a corresponding business debit was treated as capital borrowed for the assessee-firm's business. The entries were not mere book adjustments: the matching debit created an equivalent business asset, the transaction was commercially real, and the later substitution of the partners' capital account did not change its character. On that basis, the related interest fell within the statutory allowance as a deductible business expense, and the remaining question was unnecessary to decide because it would not affect the result.

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Issues: Whether interest on sums credited in favour of the Karachi creditors, arising from the transfer entries, was allowable as a deduction as capital borrowed for the purposes of the assessee-firm's business.

Analysis: The credited amounts were not isolated book entries but were matched by a corresponding debit to the Karachi firm, creating an equivalent business asset in the assessee-firm's favour. The genuineness of the entries was not in dispute, and the transaction was treated as a business arrangement made to support the assessee-firm's commercial operations and to earn corresponding income from the Karachi firm. The later substitution of the partners' capital account for the Karachi debt did not alter the business character of the original transaction. On that basis, the amount represented capital borrowed for business purposes, and the related interest fell within the statutory allowance.

Conclusion: The answer on this issue was in the affirmative and in favour of the assessee; the interest was deductible.

Final Conclusion: The reference was substantially answered on the deductibility question, and the remaining question was not required to be decided because it would not affect the result.

Ratio Decidendi: Where a business creates a genuine liability by crediting creditors against a corresponding business debit and the arrangement serves the business purpose of the assessee, the resulting amount is capital borrowed for the purposes of the business and interest thereon is deductible.

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