Question Whether it is not necessary that any income should have been earned as a result of expenditure to claim expenses under section 57(iii)?
Answer : No ,It is not necessary that any income should in fact have been earned as a result of expenditure. Therefore, interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible under section 57(iii).
[1978] 115 ITR 519 (SC)
SUPREME COURT OF INDIA
Commissioner of Income-tax
v.
Rajendra Prasad Moody
P.N. BHAGWATI, V.D. TULZAPURKAR AND R.S. PATHAK, JJ.
TAX REFERENCE CASE NOS. 1 AND 2 OF 1971
OCTOBER 4, 1978
Facts of the case :-
The assessees were brothers and each of them had borrowed monies for the purpose of making investment in shares of certain companies. During the relevant assessment year, they paid interest on the monies borrowed but did not receive any dividend on the shares purchased with those monies. Both of them made a claim for deduction of the amount of interest paid on the borrowed monies but this claim was negatived by the ITO and on appeal by the AAC on the ground that during the relevant assessment year the shares did not yield any dividend and, therefore, interest paid on the borrowed monies could not be regarded as expenditure laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head ‘Income from other sources’, so as to be allowable as a permissible deduction under section. 57(iii). The Tribunal, however, on further appeal, disagreed with the view taken by the taxing authorities and upheld the claim of each of the two assessees for deduction under section 57(iii).
HELD :
What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii ) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.
Moreover when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil, whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. The expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of section. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.
It is true that the language of section 37(1) is a little wider than that of section 57(iii), but that can make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that section 57(iii ) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language.
Therefore, the interest on money borrowed for investment in shares, which had not yielded any dividend was admissible under section 57(iii ).