Business interest deduction cannot be reduced merely because the assessee charged lower rates on its own advances.

Interest on borrowed capital used for business was deductible once the borrowing for business purposes was established under section 10(2)(iii) of the Income-tax Act, 1922. The fact that the assessee charged a lower rate of interest on its own advances, including to connected persons, did not justify reducing the statutory deduction for interest actually paid on the borrowed funds. The partial disallowance was therefore not warranted, and the issue was answered in favour of the assessee.

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Issues: Whether interest paid on borrowed capital used for the business could be disallowed in part merely because the assessee charged a lower rate of interest on its lendings than the rate at which it borrowed funds.

Analysis: The capital was found to have been borrowed for the purpose of the business. Once that finding stood, the assessee was entitled to deduct the interest actually paid on such borrowed capital under section 10(2)(iii) of the Income-tax Act, 1922. The mere circumstance that the assessee charged a lower rate on its advances, including advances to persons connected with it, did not justify scaling down the statutory deduction.

Conclusion: The disallowance of part of the interest payment was not justified, and the question was answered in favour of the assessee.

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