I bought the assets of my business and left part of the price outstanding on interest. Is that interest deductible as interest on borrowed capital?
Not as interest on borrowed capital, but yes as business expenditure. The Supreme Court held that an agreement to pay the unpaid balance of the purchase price does not give rise to a loan: a loan produces a debt, but not every debt involves a loan, and capital borrowed in the interest clause means money lent. So the claim under section 10(2)(iii) of the 1922 Act failed. The Court then allowed the whole interest under section 10(2)(xv). Acquiring the assets was closely related to the commencement and carrying on of the business, so the interest was expenditure laid out wholly and exclusively for that business and was not capital expenditure.
Decided by the Supreme Court (Supreme Court of India; J.C. Shah, K. Subba Rao and S.M. Sikri JJ. Judgment of Shah and Sikri JJ delivered by Shah J; Subba Rao J agreed with the conclusion but preferred not to express a view on the construction of section 10(2)(iii)) on 1964-10-21, reported as AIR 1965 SC 1201; (1965) 1 SCR 770; 1965 AIR 1201; 1965 SCR (1) 770; AIR 1965 Supreme Court 1201. It bears on section 37(1), section 36(1)(iii) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the source of the test practitioners use to decide whether an outgoing is on revenue account: if it is so related to the carrying on or conduct of the business that it can be regarded as an integral part of the profit-earning process, and is not for the acquisition of an asset or a right of a permanent character, it is revenue expenditure. That formulation, applied later in Empire Jute and a long line of cases, comes from this judgment. The case is equally important for the narrower point that deferred purchase consideration is not borrowed capital, which decides many disputes over interest on unpaid consideration, on statutory dues and on credit purchases. It also shows the two clauses working in sequence: failing the specific interest clause does not end the claim, because the general clause is available so long as the payment is not of the nature described in the earlier clauses. And it rejects two arguments of principle, that a composite transaction may be split into a notional loan and a payment, and that expenditure is revenue merely because a creditor could otherwise seize the business assets.
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The old Bombay Steam Navigation Company was amalgamated with the Scindia Steam Navigation Company with effect from 30 June 1952 under a scheme sanctioned by the Bombay High Court, which authorised the Scindias to float a company to take over the Konkan coast and Bombay harbour passenger and ferry services. The assessee company was incorporated on 10 August 1953 for that purpose and, by agreement of 12 August 1953, bought steamers, launches, boats, barges, buildings, furniture, fixtures and vehicles from the Scindias for a price provisionally put at Rs 80 lakhs. Part was satisfied by allotting 29,900 fully paid shares of Rs 100 each, and the balance was originally to be treated as a loan secured by a promissory note and hypothecation of movables, carrying simple interest at 6 per cent. On final valuation the price came to about Rs 81.55 lakhs, and a supplemental agreement of 16 September 1953 substituted, with retrospective effect, a clause under which the balance of about Rs 51.56 lakhs was simply payable on completion, still carrying 6 per cent interest and secured by hypothecation. For assessment years 1955-56 and 1956-57 the assessee claimed the interest of Rs 2,74,610 and Rs 2,86,823 as a deduction. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal disallowed it, and the Bombay High Court answered the reference against the assessee on all three limbs.
The appeals were allowed with costs. The claim under section 10(2)(iii) of the 1922 Act failed: there was in truth no capital borrowed. The parties had agreed a price, part was paid in shares, and the balance remained unpaid with interest for the deferment. An agreement to pay the balance of consideration does not give rise to a loan. Capital in that clause means money, since interest is payable on money lent and not on any other asset acquired under a contract, and every creditor entitled to a debt is not a lender. That the assessee could have borrowed the money from a stranger and paid the whole price, in which case the interest would have been allowable, was held irrelevant. The claim under section 10(2)(xv) succeeded. The payment was expenditure, it was not an allowance of the nature described in clauses (i) to (xiv), it was incurred after the business commenced, it was not personal or domestic, and it was made in the capacity of a person carrying on business. It was not capital expenditure, because the acquisition of the assets was closely related to the commencement and carrying on of the business, so the interest on the unpaid balance was expended wholly and exclusively for the business. Having allowed the deduction, the Court did not consider whether the interest was a necessary outgoing in computing income under section 10(1).
On the first clause, the Court fixed the meaning of capital borrowed by reference to the relationship it presupposes, that of borrower and lender. It followed Metro Theatre, where a purchase of a capital asset on long-term credit with interest on the reducing balance was held not to be borrowing, and Ramaswami Ayyangar, where interest on death duty payable to a foreign government could not be interest on borrowed capital because no lending relationship existed. Ramsay Ungar was distinguished as a case where, on the facts, the transaction was in substance a borrowing. The assessee's argument that the sale should be read as a composite transaction comprising a loan of the unpaid balance and a payment of the whole price was rejected as an impermissible way of ascertaining the true nature of what the parties did, particularly since the parties themselves had removed the word loan from the contract by the supplemental agreement. On the general clause, the Court declined to lay down a universal test for capital or revenue, saying it depends on the facts, the nature and ordinary course of the business, and the objects for which the expenditure is incurred. It rejected the assessee's argument from apprehended danger to the business, pointing out that a creditor on a liability wholly unrelated to the business could equally seize its assets, so that cannot make an outgoing revenue in nature; and it added that a liability's connection with the business does not by itself make expenditure on satisfying it deductible. The governing question is one of business necessity or expediency judged by principles of commercial trading. Drawing on Coelho, decided on a similarly worded provision of the Madras plantations tax, where interest on money borrowed to buy a plantation was held deductible when the purchase and the working of the plantation were viewed as an integrated whole, the Court held that expenditure under a transaction so closely related to the business that it may be viewed as an integral part of the conduct of the business is revenue expenditure. Here the company existed to take over and run the services, needed the assets to do so, and pledged its credit to get them.
An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan.
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Handle my notice → Ask a CA on WhatsAppNot as interest on borrowed capital, but yes as business expenditure. The Supreme Court held that an agreement to pay the unpaid balance of the purchase price does not give rise to a loan: a loan produces a debt, but not every debt involves a loan, and capital borrowed in the interest clause means money lent. So the claim under section 10(2)(iii) of the 1922 Act failed. The Court then allowed the whole interest under section 10(2)(xv). Acquiring the assets was closely related to the commencement and carrying on of the business, so the interest was expenditure laid out wholly and exclusively for that business and was not capital expenditure. This was decided by the Supreme Court (Supreme Court of India; J.C. Shah, K. Subba Rao and S.M. Sikri JJ. Judgment of Shah and Sikri JJ delivered by Shah J; Subba Rao J agreed with the conclusion but preferred not to express a view on the construction of section 10(2)(iii)) and bears on section 37(1), section 36(1)(iii) of the Income Tax Act 1961. It is reported as AIR 1965 SC 1201; (1965) 1 SCR 770; 1965 AIR 1201; 1965 SCR (1) 770; AIR 1965 Supreme Court 1201. This is the source of the test practitioners use to decide whether an outgoing is on revenue account: if it is so related to the carrying on or conduct of the business that it can be regarded as an integral part of the profit-earning process, and is not for the acquisition of an asset or a right of a permanent character, it is revenue expenditure. That formulation, applied later in Empire Jute and a long line of cases, comes from this judgment. The case is equally important for the narrower point that deferred purchase consideration is not borrowed capital, which decides many disputes over interest on unpaid consideration, on statutory dues and on credit purchases. It also shows the two clauses working in sequence: failing the specific interest clause does not end the claim, because the general clause is available so long as the payment is not of the nature described in the earlier clauses. And it rejects two arguments of principle, that a composite transaction may be split into a notional loan and a payment, and that expenditure is revenue merely because a creditor could otherwise seize the business assets. If it applies to you, the first step is this: Where interest is paid on deferred consideration, plead section 37(1) as the primary ground and treat section 36(1)(iii) as the alternative; do not stake the claim on characterising the vendor as a lender.
The old Bombay Steam Navigation Company was amalgamated with the Scindia Steam Navigation Company with effect from 30 June 1952 under a scheme sanctioned by the Bombay High Court, which authorised the Scindias to float a company to take over the Konkan coast and Bombay harbour passenger and ferry services. The assessee company was incorporated on 10 August 1953 for that purpose and, by agreement of 12 August 1953, bought steamers, launches, boats, barges, buildings, furniture, fixtures and vehicles from the Scindias for a price provisionally put at Rs 80 lakhs. Part was satisfied by allotting 29,900 fully paid shares of Rs 100 each, and the balance was originally to be treated as a loan secured by a promissory note and hypothecation of movables, carrying simple interest at 6 per cent. On final valuation the price came to about Rs 81.55 lakhs, and a supplemental agreement of 16 September 1953 substituted, with retrospective effect, a clause under which the balance of about Rs 51.56 lakhs was simply payable on completion, still carrying 6 per cent interest and secured by hypothecation. For assessment years 1955-56 and 1956-57 the assessee claimed the interest of Rs 2,74,610 and Rs 2,86,823 as a deduction. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal disallowed it, and the Bombay High Court answered the reference against the assessee on all three limbs. The matter was decided on 1964-10-21 by the Supreme Court (Supreme Court of India; J.C. Shah, K. Subba Rao and S.M. Sikri JJ. Judgment of Shah and Sikri JJ delivered by Shah J; Subba Rao J agreed with the conclusion but preferred not to express a view on the construction of section 10(2)(iii)). On those facts the Supreme Court held as follows. The appeals were allowed with costs. The claim under section 10(2)(iii) of the 1922 Act failed: there was in truth no capital borrowed. The parties had agreed a price, part was paid in shares, and the balance remained unpaid with interest for the deferment. An agreement to pay the balance of consideration does not give rise to a loan. Capital in that clause means money, since interest is payable on money lent and not on any other asset acquired under a contract, and every creditor entitled to a debt is not a lender. That the assessee could have borrowed the money from a stranger and paid the whole price, in which case the interest would have been allowable, was held irrelevant. The claim under section 10(2)(xv) succeeded. The payment was expenditure, it was not an allowance of the nature described in clauses (i) to (xiv), it was incurred after the business commenced, it was not personal or domestic, and it was made in the capacity of a person carrying on business. It was not capital expenditure, because the acquisition of the assets was closely related to the commencement and carrying on of the business, so the interest on the unpaid balance was expended wholly and exclusively for the business. Having allowed the deduction, the Court did not consider whether the interest was a necessary outgoing in computing income under section 10(1).
On the first clause, the Court fixed the meaning of capital borrowed by reference to the relationship it presupposes, that of borrower and lender. It followed Metro Theatre, where a purchase of a capital asset on long-term credit with interest on the reducing balance was held not to be borrowing, and Ramaswami Ayyangar, where interest on death duty payable to a foreign government could not be interest on borrowed capital because no lending relationship existed. Ramsay Ungar was distinguished as a case where, on the facts, the transaction was in substance a borrowing. The assessee's argument that the sale should be read as a composite transaction comprising a loan of the unpaid balance and a payment of the whole price was rejected as an impermissible way of ascertaining the true nature of what the parties did, particularly since the parties themselves had removed the word loan from the contract by the supplemental agreement. On the general clause, the Court declined to lay down a universal test for capital or revenue, saying it depends on the facts, the nature and ordinary course of the business, and the objects for which the expenditure is incurred. It rejected the assessee's argument from apprehended danger to the business, pointing out that a creditor on a liability wholly unrelated to the business could equally seize its assets, so that cannot make an outgoing revenue in nature; and it added that a liability's connection with the business does not by itself make expenditure on satisfying it deductible. The governing question is one of business necessity or expediency judged by principles of commercial trading. Drawing on Coelho, decided on a similarly worded provision of the Madras plantations tax, where interest on money borrowed to buy a plantation was held deductible when the purchase and the working of the plantation were viewed as an integrated whole, the Court held that expenditure under a transaction so closely related to the business that it may be viewed as an integral part of the conduct of the business is revenue expenditure. Here the company existed to take over and run the services, needed the assets to do so, and pledged its credit to get them. In the words reproduced by the source cited on this page: "An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan."
It was decided by the Supreme Court on 1964-10-21 and is reported as AIR 1965 SC 1201; (1965) 1 SCR 770; 1965 AIR 1201; 1965 SCR (1) 770; AIR 1965 Supreme Court 1201. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37(1), section 36(1)(iii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed with costs. The claim under section 10(2)(iii) of the 1922 Act failed: there was in truth no capital borrowed. The parties had agreed a price, part was paid in shares, and the balance remained unpaid with interest for the deferment. An agreement to pay the balance of consideration does not give rise to a loan. Capital in that clause means money, since interest is payable on money lent and not on any other asset acquired under a contract, and every creditor entitled to a debt is not a lender. That the assessee could have borrowed the money from a stranger and paid the whole price, in which case the interest would have been allowable, was held irrelevant. The claim under section 10(2)(xv) succeeded. The payment was expenditure, it was not an allowance of the nature described in clauses (i) to (xiv), it was incurred after the business commenced, it was not personal or domestic, and it was made in the capacity of a person carrying on business. It was not capital expenditure, because the acquisition of the assets was closely related to the commencement and carrying on of the business, so the interest on the unpaid balance was expended wholly and exclusively for the business. Having allowed the deduction, the Court did not consider whether the interest was a necessary outgoing in computing income under section 10(1). It arises in Deductions & Disallowances matters, on section 37(1), section 36(1)(iii) of the Income Tax Act 1961, and was decided by Supreme Court of India; J.C. Shah, K. Subba Rao and S.M. Sikri JJ. Judgment of Shah and Sikri JJ delivered by Shah J; Subba Rao J agreed with the conclusion but preferred not to express a view on the construction of section 10(2)(iii). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not recast a credit purchase as a borrowing plus a payment, however similar the economics; the Court refused that approach as impermissible in finding the true nature of a transaction. To show the outgoing is on revenue account, tie it to the conduct of the business as part of the profit-earning process, and show it did not buy an asset or a permanent right. Avoid the argument that the payment had to be made because the creditor could otherwise enforce a charge and stop the business; the Court held that is no test at all, since it would equally cover liabilities unrelated to the business. Check that both the payment and the source of the liability fall in a year in which the business was carried on, since section 37(1) operates only in computing the profits of a business carried on in that year.
Still good law. The source page records the decision as cited in more than two hundred later cases and its citator lists it as relied on by the Supreme Court itself repeatedly, including in 1980 in Empire Jute. It remains the leading statement of the integral part of the profit-earning process test and of the proposition that deferred purchase consideration is not borrowed capital. It construes sections 10(2)(iii) and 10(2)(xv) of the 1922 Act, whose successors are sections 36(1)(iii) and 37(1) of the 1961 Act in substantially the same terms, subject to the later proviso to section 36(1)(iii) on interest for acquiring an asset until it is put to use. Its later history was not otherwise traced in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/bombay-steam-navigation-v-cit-interest-on-unpaid-purchase-price/, which asked: I bought the assets of a business, left part of the price unpaid and pay interest on the balance. Can I deduct that interest? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The batch line gave the year as 1965; the judgment was delivered on 21 October 1964 and 1965 is the year of the AIR report. The judgment decides sections 10(2)(iii) and 10(2)(xv) of the Indian Income-tax Act, 1922, whose 1961 Act equivalents are sections 36(1)(iii) and 37(1). The alternative claim under section 10(1), corresponding to section 28, was expressly left undecided. Subba Rao J reserved his opinion on the construction of the interest clause, so that part of the reasoning carries the weight of two judges. The text has transcription errors, including the consideration printed once as Rs 31,55,000 against Rs 81,55,000 elsewhere, the second year's interest printed as Rs 2,86,823 in one place and Rs 2,96,823 in the referred question, and a garbled sentence in the extract from Coelho. The judgment does not deal with how the interest would be treated if it had been paid before the business commenced, and the Revenue's argument on that footing was left unexamined as having no basis in fact. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed with costs. The claim under section 10(2)(iii) of the 1922 Act failed: there was in truth no capital borrowed. The parties had agreed a price, part was paid in shares, and the balance remained unpaid with interest for the deferment. An agreement to pay the balance of consideration does not give rise to a loan. Capital in that clause means money, since interest is payable on money lent and not on any other asset acquired under a contract, and every creditor entitled to a debt is not a lender. That the assessee could have borrowed the money from a stranger and paid the whole price, in which case the interest would have been allowable, was held irrelevant. The claim under section 10(2)(xv) succeeded. The payment was expenditure, it was not an allowance of the nature described in clauses (i) to (xiv), it was incurred after the business commenced, it was not personal or domestic, and it was made in the capacity of a person carrying on business. It was not capital expenditure, because the acquisition of the assets was closely related to the commencement and carrying on of the business, so the interest on the unpaid balance was expended wholly and exclusively for the business. Having allowed the deduction, the Court did not consider whether the interest was a necessary outgoing in computing income under section 10(1).
TaxSphere, “Bombay Steam Navigation Co (1953) Pvt Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/bombay-steam-navigation-v-cit-interest-on-unpaid-purchase-price/ (validity last checked 2026-08-29)
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