Deductibility of interest on statutory arrears rejected where liability arose from breach of a statutory obligation, not business expediency.

Interest paid on arrears of cane cess arising from delayed compliance with a statutory levy was held not deductible as revenue expenditure. The court reasoned that the liability did not arise from borrowed capital or any consensual lending arrangement, so it fell outside interest on borrowed capital under section 10(2)(iii) of the Indian Income-tax Act, 1922. It also was not an outgoing laid out wholly and exclusively for business, or otherwise deductible in computing business profits, because it resulted from breach of a statutory obligation and was not incidental to carrying on the business. The interest was therefore not allowable as a business deduction.

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Issues: Whether interest paid on arrears of cane cess, arising from delayed payment under the statutory levy, was deductible as revenue expenditure under the Income-tax Act, 1922.

Analysis: The liability to pay the interest did not arise from any borrowing of capital or consensual lending arrangement. The payment was made because the assessee failed to deposit the cess within time and had challenged the levy as unconstitutional. Such interest was therefore not interest on borrowed capital within the scope of section 10(2)(iii). Nor could it be treated as expenditure laid out wholly and exclusively for the purposes of business under section 10(2)(xv) or as an item deductible in computing business profits under section 10(1), because the outgoing sprang from breach of a statutory obligation and was not incidental to the carrying on of the business. The expenditure was not incurred for business necessity or commercial expediency in the legal sense applicable to deductible business outgoings.

Conclusion: The interest paid on arrears of cess was not allowable as revenue expenditure and the question was answered in the negative, in favour of the Revenue.

Ratio Decidendi: Interest paid for default in discharging a statutory liability is not deductible as business expenditure unless it is shown to arise from capital borrowed or to be incidental to the carrying on of the business.

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