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Interpretation of Indian Income-tax Act regarding deduction for interest on borrowed capital used outside British India. Analysis: The judgment addresses the issue of whether a company can claim a deduction for interest on borrowed capital used outside British India for investments. The company, a finance company, borrowed a significant sum and invested it in sterling securities outside British India. The key question was whether the interest on the borrowed amount could be deducted from taxable profits in British India, even though the profits derived from the borrowed money were not brought into India. The company relied on section 10(2)(iii) of the Indian Income-tax Act, which allows for an allowance in respect of capital borrowed for business purposes. The court considered the context of the Act, emphasizing that tax is payable on profits or gains of a business carried on by the assessee. The deduction for interest on borrowed capital is permissible only if the business is capable of earning taxable profits, regardless of whether actual profits are realized. The judgment referred to a previous decision by the High Court of Madras, which held that interest on money borrowed for a separate business outside India could not be deducted from profits in India. The court distinguished the case by highlighting that the current assessee had only one business, albeit conducted in various parts of the world through investments. The court analyzed the nature of the company's business to determine if it was carried out in a manner capable of earning taxable profits. Ultimately, the court concluded that the deduction claimed by the company was not allowable. The borrowed capital was used outside India, the profits were retained abroad, and the income derived was managed outside India, leading to the finding that the company was not conducting a business eligible for a deduction under section 10(2)(iii). The judgment acknowledged the complexity of the issue and suggested that legislative amendments might be necessary to address such scenarios effectively. The court highlighted potential difficulties in cases where investments outside India fail to generate income, emphasizing the importance of legislative intervention. Despite recognizing the need for potential legislative changes, the court ruled against the company, stating that the interest on the borrowed capital used for investments outside India should not be deducted from the company's income in India. The judgment concluded by ordering the company to pay the costs of the Commissioner on the Original Side Scale, with both judges concurring on the decision.
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